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
|
5
|
2.01
|
The
Merger
|
5
|
2.02
|
Effective
Date and Effective Time
|
6
|
ARTICLE
III The
Bank Merger
|
6
|
3.01
|
The
Bank Merger
|
6
|
3.02
|
Effective
Date and Effective Time
|
6
|
ARTICLE
IV Consideration;
Exchange Procedures
|
6
|
4.01
|
Merger
Consideration
|
6
|
4.02
|
Rights
as Stockholders; Stock Transfers
|
7
|
4.03
|
Fractional
Shares
|
7
|
4.04
|
Exchange
Procedures
|
8
|
4.05
|
Options
|
8
|
4.06
|
Warrants
|
9
|
4.07
|
Dissenters’
Rights
|
9
|
ARTICLE
V Actions
Pending the Effective Time
|
9
|
5.01
|
Forebearances
of GAFC
|
9
|
5.02
|
Forebearances
of Summit
|
10
|
ARTICLE
VI Representations
and Warranties
|
11
|
6.01
|
Disclosure
Schedules
|
11
|
6.02
|
Standard
|
11
|
6.03
|
Representations
and Warranties of GAFC
|
11
|
6.04
|
Representations
and Warranties of Summit
|
17
|
ARTICLE
VII Covenants
|
22
|
7.01
|
Reasonable
Best Efforts
|
22
|
7.02
|
Stockholder
Approval
|
22
|
7.03
|
Registration
Statement
|
22
|
7.04
|
Press
Releases
|
23
|
7.05
|
Access;
Information
|
23
|
7.06
|
Acquisition
Proposals
|
24
|
7.07
|
Affiliate
Agreements
|
24
|
7.08
|
Takeover
Laws
|
24
|
7.09
|
Certain
Policies
|
24
|
7.10
|
Regulatory
Applications
|
24
|
7.11
|
Indemnification
|
25
|
7.12
|
Benefit
Plans
|
25
|
7.13
|
Notification
of Certain Matters
|
25
|
7.14
|
Current
Public Information
|
25
|
7.15
|
Contractual
Rights of Current Employees |
26 |
7.16 |
GAFC
Trust Preferred
Securities |
26
|
7.17 |
Transition |
26 |
ARTICLE
VIII Conditions
to Consummation of the Merger
|
26
|
8.01
|
Conditions
to Each Party’s Obligation to Effect the Merger
|
26
|
8.02
|
Conditions
to Obligation of GAFC
|
27
|
8.03
|
Conditions
to Obligation of Summit
|
27
|
ARTICLE
IX Termination
|
28
|
9.01
|
Termination
|
28
|
9.02
|
Effect
of Termination and Abandonment
|
28
|
9.03
|
Fees
and Expenses
|
28
|
ARTICLE
X Miscellaneous
|
29
|
10.01
|
Survival
|
29
|
10.02
|
Waiver;
Amendment
|
29
|
10.03
|
Counterparts
|
29
|
10.04
|
Governing
Law
|
29
|
10.05
|
Expenses
|
29
|
10.06
|
Notices
|
29
|
10.07
|
Entire
Understanding; No Third Party Beneficiaries
|
30
|
10.08
|
Interpretation;
Effect
|
30
|
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.
Blue Sky
Approvals. All permits and other authorizations under state
securities laws necessary to consummate the t(e) ransactions
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: ________________________
Title: President
and Chief Executive Officer
SUMMIT
FINANCIAL GROUP, INC.
By
__________________________
Name:
|
H.
Charles Maddy, III
|
Title:
|
President
and
|
Chief
Executive Officer
|
AMENDMENT
TO AGREEMENT AND PLAN OF REORGANIZATION
THIS
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this “Amendment”), dated as
of December 6, 2007, is made and entered into by and among SUMMIT FINANCIAL
GROUP, INC., a West Virginia corporation (“Summit”), GREATER ATLANTIC
FINANCIAL CORP., a Delaware corporation (“Greater Atlantic”) and SFG II, INC., a
West Virginia corporation (“SFG”).
WHEREAS,
Summit and Greater Atlantic entered into an Agreement and Plan of Reorganization
dated as of April 12, 2007 (the “Agreement”); and
WHEREAS,
SFG became a party to the Agreement by executing that certain Supplement for
Merger Sub Accession to Merger Agreement dated October 22, 2007;
and
WHEREAS,
pursuant to the terms of the Agreement Greater Atlantic will be merged into SFG
with SFG surviving the merger (the “Merger”); and
WHEREAS,
the Agreement provides that the Board of Directors of Greater Atlantic or Summit
may terminate the Agreement in the event the Merger is not consummated by
December 31, 2007; and
WHEREAS,
pursuant to Section 10.02 of the Agreement, Summit, Greater Atlantic and SFG
have agreed to amend Section 9.01(c) of the Agreement to extend the date on
which the Agreement may be terminated if the Merger is not consummated to March
31, 2008.
NOW
THEREFORE, for valid consideration, the parties hereto agree as
follows:
1. Amendment to the
Agreement. Effective as of the date of this Amendment, Section
9.01(c) of the Agreement is amended to read as follows:
“(c) Delay. At
any time prior to the Effective Time, by Summit or GFAC, 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 March 31, 2008,
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).”
2. Enforceable
Documents. Except as modified herein, all terms and conditions
of the Agreement, and any and all other documents executed or delivered by or on
behalf of Summit, Greater Atlantic or SFG in connection with the Agreement, as
the same may be supplemented, modified, amended or extended from time to time,
are and shall remain in full force and effect.
3. Counterparts. This
Amendment may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument, any party hereto may
execute this Amendment by signing any such counterpart.
IN
WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Amendment as of the date first written above.
SUMMIT
FINANCIAL GROUP, INC.
By: /s/ H. Charles Maddy,
III_________
Name: H.
Charles Maddy, III
Title: President
and Chief Executive Officer
GREATER
ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E.
Amos_______________
Name: Carroll
E. Amos
Title: President
and Chief Executive Officer
SFG II,
INC.
By:
/s/ H. Charles Maddy,
III_________
Name: H.
Charles Maddy, III
Title: President
|
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
(2008)
§ 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.
ANNEX C
February
15, 2008
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, as amended on December 6, 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 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. 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 years ending December 31,
2007 and 2008 prepared by and reviewed with management of Greater Atlantic and
growth and performance projections for Greater Atlantic for the years ending
December 31, 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. 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. We do not express any
opinion as to the fairness of the amount or nature of the compensation to be
received in the Merger by the company’s officers, directors, or employees, or
class of such persons, relative to the compensation to be received in the Merger
by any other shareholders of the company. This opinion was approved
by Sandler O’Neill’s fairness opinion committee.
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,
/s/ Sandler
O’Neill + Partners, L.P.
ANNEX D
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, 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
egistrant’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 21, 2007, there were 3,024,220 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
|
|
Proposed
Acquisition
|
3
|
|
Market Area and
Competition
|
3
|
|
Market
Risk
|
3
|
|
Lending
Activities
|
4
|
|
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
|
23
|
Item 1A.
|
Risk
Factors
|
24
|
Item 1B.
|
Unresolved Staff
Comments
|
26
|
Item 2.
|
Properties
|
27
|
Item 3.
|
Legal
Proceedings
|
27
|
Item 4.
|
Submission of
Matters to a Vote of Security
Holders
|
27
|
PART II
|
|
|
Item 5.
|
Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
28
|
Item 6.
|
Selected Financial
Data
|
29
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operation
|
31
|
Item 7A.
|
Quantitative and
Qualitative Disclosures About Market
Risk
|
49
|
Item 8.
|
Consolidated
Financial Statements and Supplementary
Data
|
50
|
Item 9.
|
Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
|
50
|
Item 9A.
|
Controls and
Procedures
|
50
|
Item 9B.
|
Other
Information
|
51
|
PART III
|
|
|
Item 10.
|
Directors and
Executive Officers of the
Registrant
|
51
|
Item 11.
|
Executive
Compensation
|
53
|
Item 12.
|
Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
|
56
|
Item 13.
|
Certain
Relationships and Related
Transactions
|
59
|
Item 14.
|
Principal Accountant
Fees and
Services
|
59
|
PART IV
|
|
|
Item 15.
|
Exhibits and
Financial Statement
Schedules
|
59
|
|
|
|
Signatures
|
|
60
|
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 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.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the Pasadena branch office was established as a
condition to the completion of the pending merger of the company with and into
Summit Financial
Group, Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, 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 paid the bank an 8.5%
premium on the balance of deposits assumed at closing. At August 24,
2007, the closing date of that transaction, the deposits at our Pasadena branch
office on which the deposit premium would apply totaled approximately $51.5
million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
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 16 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, 2007 were $176.1 million, a decrease of $17.2
million or 8.90% from the $193.3 million held at September 30,
2006. The decrease in loans consisted of real estate loans secured by
consumer loans, construction and land loans, first mortgages on residential
properties and commercial business loans, offset in part by an increase in
commercial real estate loans and multi-family loans. Because the
bank’s single family and consumer loan portfolios consist primarily of
adjustable-rate loans, and with the current yield curve, where short-term rates
are only slightly lower than rates for longer terms, customers are able to
refinance and 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. 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.
The following table shows the bank's loan originations, purchases,
sales and principal repayments during the periods indicated:
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Total loans at
beginning of period (1)
|
|
$ |
201,971 |
|
|
$ |
224,733 |
|
|
$ |
262,598 |
|
Originations of
loans for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
residential
|
|
|
5,169 |
|
|
|
12,559 |
|
|
|
6,624 |
|
Multifamily
|
|
|
3,215 |
|
|
|
625 |
|
|
|
- |
|
Commercial
real estate
|
|
|
5,781 |
|
|
|
9,210 |
|
|
|
9,977 |
|
Construction
|
|
|
6,449 |
|
|
|
13,089 |
|
|
|
19,991 |
|
Land
loans
|
|
|
240 |
|
|
|
8,494 |
|
|
|
10,530 |
|
Second
trust
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
business
|
|
|
28,967 |
|
|
|
21,170 |
|
|
|
21,083 |
|
Consumer
|
|
|
29,604 |
|
|
|
39,048 |
|
|
|
44,205 |
|
Total
originations and purchases for investment
|
|
|
79,425 |
|
|
|
104,195 |
|
|
|
112,410 |
|
Loans originated for
resale by Greater Atlantic Bank
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans originated for
resale by Greater Atlantic Mortgage
|
|
|
-
|
|
|
|
91,477 |
|
|
|
276,038 |
|
Total originations
|
|
|
79,425 |
|
|
|
195,672 |
|
|
|
388,448 |
|
Repayments
|
|
|
(98,921 |
) |
|
|
(117,440 |
) |
|
|
(154,263 |
) |
Sale of loans
originated for resale by Greater Atlantic Mortgage
|
|
|
-
|
|
|
|
(100,994 |
)
|
|
|
(272,050 |
)
|
Net
activity in loans
|
|
|
(19,496 |
)
|
|
|
(22,762 |
)
|
|
|
(37,865 |
)
|
Total loans at end
of period (1)
|
|
$
|
182,475 |
|
|
$ |
201,971 |
|
|
$ |
224,733 |
|
(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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
(1)
|
|
$ |
37,972 |
|
|
|
20.81 |
% |
|
$ |
43,473 |
|
|
|
21.52 |
% |
|
$ |
41,434 |
|
|
|
19.25 |
% |
|
$ |
74,620 |
|
|
|
29.02 |
% |
|
$ |
95,818 |
|
|
|
38.20 |
% |
Multi-family
|
|
|
3,983 |
|
|
|
2.18 |
|
|
|
813 |
|
|
|
0.40 |
|
|
|
751 |
|
|
|
0.35 |
|
|
|
1,074 |
|
|
|
0.42 |
|
|
|
1,445 |
|
|
|
0.58 |
|
Construction
|
|
|
9,939 |
|
|
|
5.45 |
|
|
|
14,245 |
|
|
|
7.05 |
|
|
|
24,273 |
|
|
|
11.28 |
|
|
|
16,696 |
|
|
|
6.49 |
|
|
|
11,996 |
|
|
|
4.78 |
|
Commercial
real estate
|
|
|
34,984 |
|
|
|
19.17 |
|
|
|
28,403 |
|
|
|
14.06 |
|
|
|
25,531 |
|
|
|
11.86 |
|
|
|
23,023 |
|
|
|
8.95 |
|
|
|
20,533 |
|
|
|
8.19 |
|
Land
|
|
|
8,097 |
|
|
|
4.44 |
|
|
|
13,829 |
|
|
|
6.86 |
|
|
|
18,421 |
|
|
|
8.55 |
|
|
|
20,668 |
|
|
|
8.04 |
|
|
|
17,258 |
|
|
|
6.88 |
|
Total
mortgage loans
|
|
|
94,975 |
|
|
|
52.05 |
|
|
|
100,763 |
|
|
|
49.89 |
|
|
|
110,410 |
|
|
|
51.29 |
|
|
|
136,081 |
|
|
|
52.92 |
|
|
|
147,050 |
|
|
|
58.63 |
|
Commercial business
and consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
34,844 |
|
|
|
19.09 |
|
|
|
39,794 |
|
|
|
19.70 |
|
|
|
35,458 |
|
|
|
16.47 |
|
|
|
47,654 |
|
|
|
18.53 |
|
|
|
39,043 |
|
|
|
15.57 |
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
52,262 |
|
|
|
28.64 |
|
|
|
61,031 |
|
|
|
30.22 |
|
|
|
69,006 |
|
|
|
32.06 |
|
|
|
72,814 |
|
|
|
28.32 |
|
|
|
63,888 |
|
|
|
25.47 |
|
Automobile
|
|
|
48 |
|
|
|
.03 |
|
|
|
81 |
|
|
|
.04 |
|
|
|
100 |
|
|
|
.05 |
|
|
|
271 |
|
|
|
0.11 |
|
|
|
428 |
|
|
|
0.17 |
|
Other
|
|
|
346
|
|
|
|
.19
|
|
|
|
302
|
|
|
|
.15
|
|
|
|
274
|
|
|
|
.13
|
|
|
|
315
|
|
|
|
0.12 |
|
|
|
409
|
|
|
|
0.16 |
|
Total
commercial business and
consumer
loans
|
|
|
87,500 |
|
|
|
47.95 |
|
|
|
101,208 |
|
|
|
50.11 |
|
|
|
104,838 |
|
|
|
48.71 |
|
|
|
121,054 |
|
|
|
47.08 |
|
|
|
103,768 |
|
|
|
41.37 |
|
Total loans
|
|
|
182,475 |
|
|
|
100.00 |
%
|
|
|
201,971 |
|
|
|
100.00 |
%
|
|
|
215,248 |
|
|
|
100.00 |
%
|
|
|
257,135 |
|
|
|
100.00 |
%
|
|
|
250,818 |
|
|
|
100.00 |
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(2,305 |
) |
|
|
|
|
|
|
(1,330 |
) |
|
|
|
|
|
|
(1,212 |
) |
|
|
|
|
|
|
(1,600 |
) |
|
|
|
|
|
|
(1,550 |
) |
|
|
|
|
Loans
in process
|
|
|
(4,947 |
) |
|
|
|
|
|
|
(8,517 |
) |
|
|
|
|
|
|
(20,386 |
) |
|
|
|
|
|
|
(10,453 |
) |
|
|
|
|
|
|
(8,394 |
) |
|
|
|
|
Unearned
premium
|
|
|
885
|
|
|
|
|
|
|
|
1,183 |
|
|
|
|
|
|
|
1,270 |
|
|
|
|
|
|
|
1,305 |
|
|
|
|
|
|
|
1,379 |
|
|
|
|
|
Loans
receivable, net
|
|
$
|
176,108 |
|
|
|
|
|
|
$
|
193,307 |
|
|
|
|
|
|
$
|
194,920 |
|
|
|
|
|
|
$
|
246,387 |
|
|
|
|
|
|
$
|
242,253 |
|
|
|
|
|
(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, net of loans-in-process (LIP) at September
30, 2007. 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,
2007
|
|
|
|
One- to
Four-
Family
|
|
|
Multi-
Family and
Commercial
Real Estate
|
|
|
Commercial
Business
and
Consumer
|
|
|
Total Loans, (net of
LIP)
|
|
(In
Thousands)
|
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
20,377 |
|
|
$ |
11,762 |
|
|
$ |
73,608 |
|
|
$ |
105,747 |
|
After
one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than one year to three years
|
|
|
8,185 |
|
|
|
9,881 |
|
|
|
3,047 |
|
|
|
21,113 |
|
More
than three years to five years
|
|
|
1,103 |
|
|
|
12,547 |
|
|
|
3,351 |
|
|
|
17,001 |
|
More
than five years to 15 years
|
|
|
5,692 |
|
|
|
5,526 |
|
|
|
4,192 |
|
|
|
15,410 |
|
More
than 15 years
|
|
|
12,980 |
|
|
|
1,974 |
|
|
|
3,303 |
|
|
|
18,257 |
|
Total
amount due
|
|
$
|
48,337 |
|
|
$
|
41,690 |
|
|
$
|
87,501 |
|
|
$
|
177,528 |
|
The following table sets forth, at September 30, 2007, the dollar
amount of loans contractually due after September 30, 2008, identifying whether
such loans have fixed interest rates or adjustable interest
rates. The risk of default on ARMs the industry is experiencing
should not affect our portfolio because it is a seasoned
portfolio. At September 30, 2007, the bank had $13.7 million of
construction, acquisition and development, land and commercial business loans
that were contractually due after September 30, 2008.
|
|
Due After September
30, 2008
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
(In
Thousands)
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
$ |
18,155 |
|
|
$ |
9,805 |
|
|
$ |
27,960 |
|
Multi-family
and commercial
|
|
|
14,944 |
|
|
|
14,984 |
|
|
|
29,928 |
|
Total
real estate loans
|
|
|
33,099 |
|
|
|
24,789 |
|
|
|
57,888 |
|
Commercial business
and consumer loans
|
|
|
8,431 |
|
|
|
5,462 |
|
|
|
13,893 |
|
Total
loans
|
|
$
|
41,530 |
|
|
$
|
30,251 |
|
|
$
|
71,781 |
|
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, 2007, the
bank's one- to four-family mortgage loans totaled $38.0 million, or 20.81% of
total loans. Of the one- to four-family mortgage loans outstanding at
that date, 47.96% were fixed-rate loans and 52.04% 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, 2007,
construction and development loans (including land loans) totaled $18.0 million,
or 9.89%, of the bank’s total loans, of which, land loans totaled $8.1 million
or 4.44% 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, 2007 was $39.0
million, or 21.35% of total loans. The largest multi-family or
commercial real estate loan in the bank’s portfolio at September 30, 2007,
consisted of a $3.9 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 $6.0 million note to another bank.
Commercial Business
Lending. At September 30, 2007, the bank had $34.8 million in
commercial business loans which amounted to 19.09% 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
with some being payable on demand, and all 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, 2007 amounted to
$52.7 million or 28.86% 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, 2007, those loans
totaled $52.3 million or 28.64% of the bank's total loans. Other
types of consumer loans consisted primarily of secured and unsecured personal
loans and loans on new and used automobiles, totaling $394,000, or 0.22% of the
bank's total loans and 0.45% of commercial business and consumer loans at
September 30, 2007.
Mortgage Banking Activities
The bank’s mortgage banking activities primarily consisted of
originating mortgage loans secured by single-family properties and were
conducted in Greater Atlantic Mortgage Corporation, a subsidiary of the
bank. That activity was discontinued effective March 29, 2006,
because it was unprofitable, and 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 the
mortgage banking subsidiary’s originations had been declining, resulting in
losses from mortgage banking 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 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 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, 2007, the
bank had $4.7 million of loans designated as Substandard which consisted of one
residential loan, three commercial business loans, two construction development
and one land loan. At that same date, the bank had $675,000 of assets
classified as Doubtful, consisting of one commercial business loan and one
construction development loan. At September 30, 2007, the bank had no
loans classified as Loss and one $887,000 construction loan classified as
Special Mention.
The following table sets forth delinquencies in the bank’s loans as
of the dates indicated.
|
|
At September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
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 |
|
|
$ |
19 |
|
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
835 |
|
|
|
2 |
|
|
$ |
168 |
|
|
|
4 |
|
|
$ |
10 |
|
Home
equity
|
|
|
2 |
|
|
|
347 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
229 |
|
Construction
& Land
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
1,330 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
31 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
233 |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
25 |
|
Commercial
business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
216 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
1,105 |
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
Total
|
|
|
2
|
|
|
$
|
347
|
|
|
|
4
|
|
|
$
|
1,349 |
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7
|
|
|
$
|
1,110 |
|
|
|
2
|
|
|
$
|
168
|
|
|
|
13
|
|
|
$
|
1,604 |
|
Non-Performing
Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and real estate owned. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans accounted for
on a non-accrual basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
16 |
|
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
563 |
|
|
$ |
637 |
|
Home
equity
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
|
|
96 |
|
|
|
- |
|
Commercial
real estate
|
|
|
- |
|
|
|
25 |
|
|
|
25 |
|
|
|
29 |
|
|
|
31 |
|
Construction
and Land
|
|
|
1,330 |
|
|
|
31 |
|
|
|
233 |
|
|
|
31 |
|
|
|
34 |
|
Commercial
business
|
|
|
- |
|
|
|
216 |
|
|
|
1,105 |
|
|
|
228 |
|
|
|
716 |
|
Consumer
|
|
|
-
|
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
|
-
|
|
Total non-accrual
loans
|
|
|
1,346 |
|
|
|
275 |
|
|
|
1,604 |
|
|
|
953 |
|
|
|
1,418 |
|
Accruing loans which
are contractually past due 90 days or more
|
|
|
3
|
|
|
|
835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
Total of non-accrual
and 90 days past due loans
|
|
|
1,349 |
|
|
|
1,110 |
|
|
|
1,604 |
|
|
|
953 |
|
|
|
1,446 |
|
Foreclosed real
estate, net
|
|
|
-
|
|
|
|
-
|
|
|
|
232
|
|
|
|
-
|
|
|
|
-
|
|
Total non-performing
assets
|
|
$
|
1,349 |
|
|
$
|
1,110 |
|
|
$
|
1,836 |
|
|
$
|
953
|
|
|
$
|
1,446 |
|
Non-accrual loans as
a percentage of loans
held for
investment, net
|
|
|
0.76 |
%
|
|
|
0.14 |
%
|
|
|
0.82 |
%
|
|
|
0.39 |
%
|
|
|
0.59 |
%
|
Non-accrual and 90
days or more past due loans
as a
percentage of loans held for investment, net
|
|
|
0.77 |
%
|
|
|
0.57 |
%
|
|
|
0.82 |
%
|
|
|
0.39 |
%
|
|
|
0.60 |
%
|
Non-accrual and 90
days or more past due loans
as a
percentage of total assets
|
|
|
0.55 |
%
|
|
|
0.36 |
%
|
|
|
0.47 |
%
|
|
|
0.22 |
%
|
|
|
0.29 |
%
|
Non-performing
assets as a percentage of total assets
|
|
|
0.55 |
%
|
|
|
0.36 |
%
|
|
|
0.54 |
%
|
|
|
0.22 |
%
|
|
|
0.29 |
%
|
During the year ended September 30, 2007, 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 $110,000.
The company considers a loan to be impaired if it is probable that
the company 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 alternative, 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 September 30, 2007 was $2.5 million and the related allowance associated with
impaired loans was $627,000. There were no impaired loans in the
comparable period one year ago. At September 30, 2007, all impaired
loans had a related allowance.
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, 2007, the bank's
allowance for loan losses amounted to $2.3 million or 1.26% of total
loans. The allowance for loan losses to total non-performing loans at
September 30, 2007 was 170.87%; as a percentage of total loans, the allowance
was increased 60 basis points when compared to September 30, 2006. A
$685,000 provision for loan losses was recorded during the year ended September
30, 2007, compared to a provision of $126,000 during the year ended September
30, 2006. The $559,000 increase in the provision for loan losses from
the year ago period resulted from the increase in non-performing assets, an
increase in the outstanding balance of the bank’s commercial real estate loans
and an increase of $3.9 million in loans classified as substandard each of which
requires an additional allocation of the bank’s overall
provision. Those were coupled with an increase of $356,000 in loans
classified as doubtful. That increase in provision for those loans
was offset 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 had 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 evaluating 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. However, because we entered into a
definitive agreement for the company to merge with Summit, and based on the due
diligence performed by Summit, it was deemed unnecessary to enter into such a
contract for the fiscal year ended September 30, 2007.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
|
$ |
1,600 |
|
|
$ |
1,550 |
|
|
$ |
1,699 |
|
Provisions
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
|
209 |
|
|
|
855 |
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
128 |
|
|
|
- |
|
|
|
33 |
|
|
|
20 |
|
|
|
162 |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
Commercial business
|
|
|
210 |
|
|
|
78 |
|
|
|
584 |
|
|
|
177 |
|
|
|
828 |
|
Consumer
|
|
|
15
|
|
|
|
2
|
|
|
|
8
|
|
|
|
3
|
|
|
|
8
|
|
Total charge-offs
|
|
|
353 |
|
|
|
80 |
|
|
|
625 |
|
|
|
200 |
|
|
|
1,020 |
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
8 |
|
|
|
2 |
|
|
|
2 |
|
|
|
29 |
|
|
|
6 |
|
Commercial
real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial business
|
|
|
635 |
|
|
|
69 |
|
|
|
15 |
|
|
|
10 |
|
|
|
4 |
|
Consumer
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
6
|
|
Total recoveries
|
|
|
643 |
|
|
|
72 |
|
|
|
18 |
|
|
|
41 |
|
|
|
16 |
|
Net
charge-offs (recoveries)
|
|
|
(290 |
)
|
|
|
8
|
|
|
|
607
|
|
|
|
159
|
|
|
|
1,004 |
|
Balance at end of
period
|
|
$
|
2,305 |
|
|
$
|
1,330 |
|
|
$
|
1,212 |
|
|
$
|
1,600 |
|
|
$
|
1,550 |
|
Ratio of net
charge-offs (recoveries) during the period
to
average loans outstanding during the period
|
|
|
(0.16 |
)%
|
|
|
0.00 |
%
|
|
|
0.28 |
%
|
|
|
0.06 |
%
|
|
|
0.36 |
%
|
Allowance for loan
losses to total non-performing
loans
at end of period
|
|
|
170.87 |
%
|
|
|
119.82 |
%
|
|
|
75.56 |
%
|
|
|
167.89 |
%
|
|
|
109.31 |
%
|
Allowance for loan
losses to total loans
|
|
|
1.26 |
%
|
|
|
0.66 |
%
|
|
|
0.56 |
%
|
|
|
0.62 |
%
|
|
|
0.62 |
%
|
The
following table sets forth the bank's allowance for loan losses in each of the
categories listed and the percentage of loans in each category 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,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
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
|
|
$ |
21 |
|
|
|
20.81 |
% |
|
$ |
177 |
|
|
|
21.52 |
% |
|
$ |
35 |
|
|
|
19.25 |
% |
|
$ |
110 |
|
|
|
29.02 |
% |
|
$ |
141 |
|
|
|
38.20 |
% |
Multi-family
|
|
|
30 |
|
|
|
2.18 |
|
|
|
6 |
|
|
|
0.40 |
|
|
|
6 |
|
|
|
0.35 |
|
|
|
8 |
|
|
|
0.42 |
|
|
|
11 |
|
|
|
0.58 |
|
Construction
|
|
|
177 |
|
|
|
5.45 |
|
|
|
67 |
|
|
|
7.05 |
|
|
|
72 |
|
|
|
11.28 |
|
|
|
78 |
|
|
|
6.49 |
|
|
|
80 |
|
|
|
4.78 |
|
Commercial
real estate
|
|
|
350 |
|
|
|
19.17 |
|
|
|
286 |
|
|
|
14.06 |
|
|
|
328 |
|
|
|
11.86 |
|
|
|
233 |
|
|
|
8.95 |
|
|
|
208 |
|
|
|
8.19 |
|
Land
|
|
|
562
|
|
|
|
4.44 |
|
|
|
109
|
|
|
|
6.86 |
|
|
|
155
|
|
|
|
8.55 |
|
|
|
175
|
|
|
|
8.04 |
|
|
|
132
|
|
|
|
6.88 |
|
Total
mortgage loans
|
|
|
1,140 |
|
|
|
52.05 |
|
|
|
645
|
|
|
|
49.89 |
|
|
|
596
|
|
|
|
51.29 |
|
|
|
604
|
|
|
|
52.92 |
|
|
|
572
|
|
|
|
58.63 |
|
Commercial and
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
959 |
|
|
|
19.09 |
|
|
|
525 |
|
|
|
19.70 |
|
|
|
407 |
|
|
|
16.47 |
|
|
|
515 |
|
|
|
18.53 |
|
|
|
770 |
|
|
|
15.57 |
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
131 |
|
|
|
28.64 |
|
|
|
152 |
|
|
|
30.22 |
|
|
|
195 |
|
|
|
32.06 |
|
|
|
213 |
|
|
|
28.32 |
|
|
|
159 |
|
|
|
25.47 |
|
Automobile
|
|
|
6
|
|
|
|
0.22 |
|
|
|
6
|
|
|
|
0.19 |
|
|
|
5
|
|
|
|
0.18 |
|
|
|
9
|
|
|
|
0.23 |
|
|
|
13
|
|
|
|
0.33 |
|
Total
commercial and
consumer
loans
|
|
|
1,096 |
|
|
|
47.95 |
|
|
|
683
|
|
|
|
50.11 |
|
|
|
607
|
|
|
|
48.71 |
|
|
|
737
|
|
|
|
47.08 |
|
|
|
942
|
|
|
|
41.37 |
|
Unallocated
|
|
|
69
|
|
|
|
N/A
|
|
|
|
2
|
|
|
|
N/A
|
|
|
|
9
|
|
|
|
N/A
|
|
|
|
259
|
|
|
|
N/A
|
|
|
|
36
|
|
|
|
N/A
|
|
Total
|
|
$
|
2,305 |
|
|
|
100.00 |
%
|
|
$
|
1,330 |
|
|
|
100.00 |
%
|
|
$
|
1,212 |
|
|
|
100.00 |
%
|
|
$
|
1,600 |
|
|
|
100.00 |
%
|
|
$
|
1,550 |
|
|
|
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. The bank
does not hold any securities bought and held principally for sale in the near
term, which would be, classified as held for trading.
At September 30,
2007, the bank had invested $16.5 million in mortgage-backed securities, or
6.71% of total assets, of which $16.3 million were classified as
available-for-sale and $207,000 were classified as
held-to-maturity. This portfolio is seasoned with no purchases during
fiscal year 2007. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
$ |
7,300 |
|
|
$ |
6,748 |
|
|
$ |
7,280 |
|
|
$ |
7,142 |
|
|
$ |
6,736 |
|
|
$ |
6,736 |
|
CMOs
|
|
|
7,191 |
|
|
|
7,087 |
|
|
|
9,735 |
|
|
|
9,755 |
|
|
|
14,446 |
|
|
|
14,454 |
|
U.S.
Government SBA’s
|
|
|
19,395 |
|
|
|
18,754 |
|
|
|
27,629 |
|
|
|
27,199 |
|
|
|
30,239 |
|
|
|
29,781 |
|
FHLMC
MBS’s
|
|
|
2,961 |
|
|
|
2,920 |
|
|
|
5,549 |
|
|
|
5,463 |
|
|
|
9,044 |
|
|
|
8,969 |
|
FNMA
MBS’s
|
|
|
8,357 |
|
|
|
8,141 |
|
|
|
18,350 |
|
|
|
17,986 |
|
|
|
35,548 |
|
|
|
34,947 |
|
GNMA
MBS’s
|
|
|
5,382 |
|
|
|
5,260 |
|
|
|
8,133 |
|
|
|
7,916 |
|
|
|
13,097 |
|
|
|
12,942 |
|
Total
available-for-sale
|
|
|
50,586 |
|
|
|
48,910 |
|
|
|
76,676 |
|
|
|
75,461 |
|
|
|
109,110 |
|
|
|
107,829 |
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
|
1,020 |
|
U.S.
Government SBA’s
|
|
|
2,846 |
|
|
|
2,742 |
|
|
|
4,461 |
|
|
|
4,230 |
|
|
|
6,531 |
|
|
|
6,213 |
|
FHLMC
MBS’s
|
|
|
104 |
|
|
|
102 |
|
|
|
128 |
|
|
|
125 |
|
|
|
236 |
|
|
|
235 |
|
FNMA
MBS’s
|
|
|
103
|
|
|
|
101
|
|
|
|
107
|
|
|
|
105
|
|
|
|
202
|
|
|
|
198
|
|
Total
held-to-maturity
|
|
|
3,053 |
|
|
|
2,945 |
|
|
|
4,696 |
|
|
|
4,460 |
|
|
|
7,969 |
|
|
|
7,666 |
|
Total
investment securities
|
|
$
|
53,639 |
|
|
$
|
51,855 |
|
|
$
|
81,372 |
|
|
$
|
79,921 |
|
|
$
|
117,079 |
|
|
$
|
115,495 |
|
Investment
securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rates
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
1,020 |
|
Adjustable
rates
|
|
|
36,732 |
|
|
|
35,331 |
|
|
|
49,105 |
|
|
|
48,326 |
|
|
|
57,952 |
|
|
|
57,184 |
|
Mortgage-backed
securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rates
|
|
|
174 |
|
|
|
168 |
|
|
|
243 |
|
|
|
236 |
|
|
|
393 |
|
|
|
376 |
|
Adjustable
rates
|
|
|
16,733 |
|
|
|
16,356 |
|
|
|
32,024 |
|
|
|
31,359 |
|
|
|
57,734 |
|
|
|
56,915 |
|
Total
|
|
$
|
53,639 |
|
|
$
|
51,855 |
|
|
$
|
81,372 |
|
|
$
|
79,921 |
|
|
$
|
117,079 |
|
|
$
|
115,495 |
|
As of September 30,
2007, the bank held investments in available for sale with unrealized holding
losses totaling $1.7 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
|
|
$ |
2,048 |
|
|
$ |
149 |
|
|
$ |
4,700 |
|
|
$ |
403 |
|
|
$ |
6,748 |
|
|
$ |
552 |
|
CMOs
|
|
|
4,124 |
|
|
|
108 |
|
|
|
1,934 |
|
|
|
28 |
|
|
|
6,058 |
|
|
|
136 |
|
U.S. Government
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
3,196 |
|
|
|
38 |
|
|
|
15,558 |
|
|
|
603 |
|
|
|
18,754 |
|
|
|
641 |
|
GNMA
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
|
|
122 |
|
|
|
5,260 |
|
|
|
122 |
|
U.S. Government
agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
41 |
|
|
|
2,920 |
|
|
|
41 |
|
FNMA
MBS’s
|
|
|
-
|
|
|
|
-
|
|
|
|
8,141 |
|
|
|
216
|
|
|
|
8,141 |
|
|
|
216
|
|
Total
|
|
$
|
9,368 |
|
|
$
|
295
|
|
|
$
|
38,513 |
|
|
$
|
1,413 |
|
|
$
|
47,881 |
|
|
$
|
1,708 |
|
The table
below sets forth certain information regarding the carrying value, weighted
average yields and contractual maturities of the bank's investment securities
and mortgage-backed securities available-for-sale.
|
|
At September 30,
2007
|
|
|
|
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
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
7,087 |
|
|
|
6.52 |
% |
|
$ |
7,087 |
|
|
|
6.52 |
% |
Corporate
debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,760 |
|
|
|
5.08 |
|
|
|
3,988 |
|
|
|
6.83 |
|
|
|
6,748 |
|
|
|
6.12 |
|
U.S.
Government SBA’s
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
485
|
|
|
|
7.54 |
|
|
|
18,269 |
|
|
|
4.86 |
|
|
|
18,754 |
|
|
|
4.92 |
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,245 |
|
|
|
5.45 |
|
|
|
29,344 |
|
|
|
5.53 |
|
|
|
32,589 |
|
|
|
5.52 |
|
MBS’s available for
sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
6.95 |
|
|
|
2,920 |
|
|
|
6.95 |
|
FNMA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,995 |
|
|
|
5.77 |
|
|
|
7,995 |
|
|
|
5.77 |
|
GNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,260 |
|
|
|
5.57 |
|
|
|
5,260 |
|
|
|
5.57 |
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,175 |
|
|
|
6.01 |
|
|
|
16,175 |
|
|
|
6.01 |
|
MBS’S
fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
7.00 |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
7.00 |
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
7.00 |
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
7.00 |
|
Total
mortgage-backed securities available-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
7.00 |
|
|
|
-
|
|
|
|
-
|
|
|
|
16,175 |
|
|
|
6.01 |
|
|
|
16,321 |
|
|
|
6.02 |
|
Total investment
portfolio
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
146
|
|
|
|
7.00 |
%
|
|
$
|
3,245 |
|
|
|
5.45 |
%
|
|
$
|
45,519 |
|
|
|
5.70 |
%
|
|
$
|
48,910 |
|
|
|
5.69 |
%
|
The table
below sets forth certain information regarding the carrying value, weighted
average yields and contractual maturities of the bank's investment securities
and mortgage-backed securities held to maturity.
|
|
At September 30,
2007
|
|
|
|
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
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
380 |
|
|
|
6.62 |
% |
|
$ |
2,466 |
|
|
|
4.32 |
% |
|
$ |
2,846 |
|
|
|
4.63 |
% |
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total investment
securities held-to-maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
6.62 |
|
|
|
2,466 |
|
|
|
4.32 |
|
|
|
2,846 |
|
|
|
4.63 |
|
MBS’s
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
104 |
|
|
|
7.23 |
|
|
|
104 |
|
|
|
7.23 |
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
7.26 |
|
|
|
81
|
|
|
|
7.26 |
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
7.24 |
|
|
|
185
|
|
|
|
7.24 |
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
6.50 |
|
|
|
22
|
|
|
|
6.50 |
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
6.50 |
|
|
|
22
|
|
|
|
6.50 |
|
Total
mortgage-backed securities
held-to-maturity-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
207
|
|
|
|
7.16 |
|
|
|
207
|
|
|
|
7.16 |
|
Total
held-to-maturity investments
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-0
|
|
|
|
-
|
%
|
|
$
|
380
|
|
|
|
6.62 |
%
|
|
$
|
2,673 |
|
|
|
4.54 |
%
|
|
$
|
3,053 |
|
|
|
4.80 |
%
|
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,
2007, $107.7 million, or 85.70% 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
Percent of
Total
Deposits
|
|
|
Rate
Paid
|
|
|
Balance
|
|
|
Percent of
Total
Deposits
|
|
|
Rate
Paid
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
2,468 |
|
|
|
1.25 |
% |
|
|
0.97 |
% |
|
$ |
3,679 |
|
|
|
1.60 |
% |
|
|
0.98 |
% |
Now
and money market accounts
|
|
|
60,625 |
|
|
|
30.62 |
|
|
|
3.61 |
|
|
|
73,334 |
|
|
|
31.86 |
|
|
|
3.51 |
|
Certificates of
deposit
|
|
|
125,717 |
|
|
|
63.49 |
|
|
|
5.00 |
|
|
|
127,939 |
|
|
|
55.58 |
|
|
|
4.55 |
|
Noninterest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
9,181 |
|
|
|
4.64 |
|
|
|
-
|
|
|
|
25,222 |
|
|
|
10.96 |
|
|
|
-
|
|
Total
deposits
|
|
$
|
197,991 |
|
|
|
100.00 |
%
|
|
|
4.29 |
%
|
|
$
|
230,174 |
|
|
|
100.00 |
%
|
|
|
3.67 |
%
|
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,
2007
|
|
|
|
Amount
|
|
|
Rate
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
Balance maturing:
|
|
|
|
|
|
|
Three months or less
|
|
$ |
52,127 |
|
|
|
5.04 |
% |
Three months to one
year
|
|
|
55,609 |
|
|
|
5.04 |
|
One
year to three years
|
|
|
15,098 |
|
|
|
4.70 |
|
Over three years
|
|
|
2,883 |
|
|
|
4.97 |
|
Total
|
|
$
|
125,717 |
|
|
|
5.00 |
%
|
At September
30, 2007, the bank had $43.1 million in certificate accounts in amounts of
$100,000 or more maturing as follows:
Maturity Period
|
|
Amount
|
|
|
Weighed
Average
Rate
|
|
|
|
|
|
|
|
|
Three months or less
|
|
$ |
20,526 |
|
|
|
5.13 |
% |
Over 3 through 6
months
|
|
|
10,372 |
|
|
|
5.13 |
|
Over 6 through 12
months
|
|
|
7,664 |
|
|
|
5.08 |
|
Over 12 months
|
|
|
4,542 |
|
|
|
4.71 |
|
Total
|
|
$
|
43,104 |
|
|
|
5.07 |
%
|
The following
table sets forth the deposit activity of the bank for the periods indicated.
|
|
At or For the Year
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Balance at beginning
of period
|
|
$ |
230,174 |
|
|
$ |
237,794 |
|
|
$ |
288,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deposits (withdrawals) before interest credited
|
|
|
(41,514 |
) |
|
|
(15,329 |
) |
|
|
(57,499 |
) |
Interest credited
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
6,337 |
|
Net
increase (decrease) in deposits
|
|
|
(32,183 |
)
|
|
|
(7,620 |
)
|
|
|
(51,162 |
)
|
Ending
balance
|
|
$
|
197,991 |
|
|
$
|
230,174 |
|
|
$
|
237,794 |
|
Borrowings. At
September 30, 2007, borrowings consisted of FHLB advances and reverse repurchase
agreements totaling $27.2 million. FHLB advances amounted to $25.0
million at September 30, 2007, a decrease from the $36.0 million outstanding at
September 30, 2006, and other borrowings (reverse repurchase agreements)
amounted to $2.2 million, a decrease of $16.4 million compared to
$18.6 million at September 30, 2006. During the fiscal year
ended September 30, 2007, 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
|
Average balance
outstanding
|
|
$ |
33,064 |
|
|
$ |
44,894 |
|
|
$ |
44,422 |
|
Maximum amount
outstanding at any month-end during the period
|
|
|
39,000 |
|
|
|
51,000 |
|
|
|
49,200 |
|
Balance outstanding
at end of period
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
Weighted average
interest rate during the period
|
|
|
5.46 |
% |
|
|
5.05 |
% |
|
|
4.47 |
% |
Weighted average
interest rate at end of period
|
|
|
5.92 |
% |
|
|
5.28 |
% |
|
|
4.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
outstanding
|
|
|
15,264 |
|
|
|
31,624 |
|
|
|
58,837 |
|
Maximum amount
outstanding at any month-end during the period
|
|
|
10,857 |
|
|
|
35,641 |
|
|
|
62,846 |
|
Balance outstanding
at end of period
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
Weighted average
interest rate during the period
|
|
|
5.61 |
% |
|
|
4.21 |
% |
|
|
4.37 |
% |
Weighted average
interest rate at end of period
|
|
|
2.52 |
% |
|
|
4.65 |
% |
|
|
3.69 |
%
|
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 20 to the financial
statements.
Personnel
As of September 30, 2007, we had 54 full-time
employees and 9 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, an insured federal
savings association, 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, and elsewhere in this document does not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the company and is qualified in its entirety by reference to the actual laws and
regulations.
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 factors
such as 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 effects.
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 regulatory capital requirements or specific restrictions on the
payment of dividends or other capital distributions, federal regulations do
prescribe such restrictions on subsidiary savings associations. The bank must
notify the Office of Thrift Supervision (30) days before declaring any dividend
to the company and comply with the additional restrictions described
below. 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. On October 4, 2007, Summit filed an application with
the Federal Reserve Bank of Richmond to acquire the company and thereby,
indirectly, to acquire the bank pursuant to Section 4 of the Bank Holding
Company Act and Federal Reserve Regulation Y. The Reserve Bank referred the
application to the Board because action under delegated authority was not
appropriate. Accordingly, the application is being processed by the
Division of Banking Supervision and Regulation of the Board of Governors in
Washington, D.C. Summit was notified that, based on the staff’s
review of the record, additional information was being
requested. Subsequently, in order to respond to the request from the
Board of Governors and comply with internal application processing guidelines,
Summit requested that processing of the application be suspended until such time
as the staff of the Board of Governors and Summit consent to the continuation of
processing.
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 business 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 associations to meet three minimum capital
standards: a 1.5% tangible capital to total assets ratio, a 4% tier 1
capital to total assets 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 associations requires the
maintenance of Tier 1 (core) capital and total capital (which is defined as core
capital and supplementary capital less certain specified deductions from total
capital such as reciprocal holdings of depository institution capital,
instruments and equity investments) 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 activities, 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 generally 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 (Tier 2) currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible debt
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, 2007, the
bank met each of its capital requirements.
The following table presents the bank's capital position at September
30, 2007.
|
|
|
|
|
|
Excess
(Deficiency)
Amount
|
|
Capital
|
|
|
Actual
Capital
|
|
Required
Capital
|
|
|
Actual
Percent
|
|
Required
Percent
|
(Dollars in
Thousands)
|
|
|
Tangible
|
|
$18,830
|
|
$ 3,684
|
|
$15,146
|
|
7.67%
|
|
1.50%
|
Core (Leverage)
|
|
18,830
|
|
9,825
|
|
9,005
|
|
7.67
|
|
4.00
|
Risk-based
|
|
20,874
|
|
13,630
|
|
7,244
|
|
12.25
|
|
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 associations with the
highest examination rating) is considered to be "undercapitalized." A
association 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 association is deemed to have received notice that it
is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any
parent holding company in the amount of up to the lesser of 5% of the savings
association’s total assets when it was deemed to be undercapitalized or the
amount necessary to achieve compliance with applicable capital
requirements. 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 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. No institution may pay a dividend if in default of its FDIC
assessment.
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, credits could be
used beginning in 2007 to offset assessments until exhausted. The
bank’s one-time credit approximated $65,529. 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 a predecessor deposit insurance
fund. That payment is established quarterly and during fiscal 2007,
Financing Corporation payments for savings associations approximated 1.18 basis
points of assessable deposits.
The Reform Act provided the Federal Deposit Insurance Corporation
with authority to adjust the Deposit Insurance Fund ratio to insured deposits
within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed
ratio of 1.25%. The ratio, which is viewed by the Federal Deposit
Insurance Corporation as the level that the fund should achieve, has been
established by the agency at 1.25% for 2008, which was unchanged from 2007.
The bank's total assessment paid for this period (including the FICO
assessment) was $204,021. The Federal Deposit Insurance Corporation
has authority to increase insurance assessments. A significant
increase in 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. Generally, subject to certain exceptions, a savings
association 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, 2007,the bank’s limit on loans to one borrower was $3.2 million, and the
bank’s largest aggregate outstanding loan to one borrower was $4.0
million. Part of that 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. Federal law 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 but also defined to include education, credit card and small business
loans) 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, 2007, Greater Atlantic maintained
71% of its portfolio assets in qualified thrift investments and, therefore, met
the qualified thrift lender test.
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
and Community Reinvestment Act 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 the bank, it is a subsidiary of a holding
company. In the event the bank’s capital fell below its regulatory
requirements or the Office of Thrift Supervision notified it that it was in need
of increased 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
Office of Thrift Supervision that it 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). The amount accrued at September 30,
2007, totaled $644,000.
Assessments. Savings
associations 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 association’s total
assets, including consolidated subsidiaries, its financial condition and
complexity of its portfolio. The assessments paid by the bank for the
fiscal year ended September 30, 2007, totaled $139,095.
Transactions with
Related Parties. The bank’s authority to engage in
transactions with “affiliates” (e.g., any company that
controls or is under common control with an institution, including the company)
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 association. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings association’s
capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type specified 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 associations are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings association 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 a depository institution 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. Loans to executive
officers are subject to additional limitations based on the type of loan
involved.
Enforcement. The
Office of Thrift Supervision has primary enforcement responsibility over savings
associations 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. 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 in
various areas such as internal controls and information systems, internal audit,
loan documentation and credit underwriting, interest rate exposure, asset growth
and quality, earnings and compensation, fees and benefits.. 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
The bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home
Loan Bank provides a central credit facility primarily for member
institutions. As a member of the Federal Home Loan Bank,
the 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. The bank was in compliance with
this requirement with an investment in Federal Home Loan Bank stock at September
30, 2007 of $1.7 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 $43.9 million; for a 10% ratio is applied above $43.9
million. The first $9.3 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) is 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 2007 fiscal year, except for the AMT,
they have not recorded 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, 2007, our loan portfolio consisted of $35.0 million,
or 19.17% of commercial real estate loans, $18.0 million, or 9.89% of
construction and land development loans and $34.8 million, or 19.10% of
commercial business 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.
A Downturn in the Washington D.C.
Metropolitan Area Economy, a Decline in Real Estate Values or Disruptions in the
Secondary Mortgage Markets Could Reduce Our Earnings and Financial Condition.
Most of our loans are secured by real estate. As a result, a downturn
in this market area could cause significant increases in nonperforming loans,
which would reduce our profits. Additionally, a decrease in asset quality could
require additions to our allowance for loan losses through increased provisions
for loan losses, which would also reduce our profits. In prior years, there had
been significant increases in real estate values in our market area. As a result
of rising home prices, our loans have been well collateralized. However, a
decline in real estate values could cause some of our mortgage loans to become
inadequately collateralized, which would expose us to a greater risk of loss.
The secondary mortgage markets are experiencing disruptions resulting
from reduced investor demand for mortgage loans and mortgaged-backed securities
and increased investor yield requirements for those loans and
securities. These conditions may continue or worsen in the
future. As a result, a prolonged period of secondary market
illiquidity could have an adverse impact on our future earnings and financial
condition.
Consequences if merger with Summit
doesn’t occur.
The company entered into an agreement, to merge with and into
Summit. In approving the merger agreement, the board of directors
consulted with Sandler O’Neill regarding the fairness of the transaction to the
company’s stockholders from a financial point of view and with the company’s
legal counsel regarding its legal duties and the terms of the merger agreement
and ancillary documents. The understanding of the board of directors
of the options available to the company and the assessment of those options with
respect to the prospects and estimated results of the implementation by the
company of its business plan as an independent entity under various scenarios,
and the determination that none of those options or the realization of the
business plan under the best case scenarios were likely to create greater
present value for the company’s stockholders than the value to be paid by
Summit. On the other hand, if the merger is not consummated the
company’s ability to achieve consistent profitability by selling a number of
branches to increase capital and reduce overall operating cost would be the next
option and, if that option was not successful, the prospects for regulatory
action would be the most likely.
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 of September 30, 2007, the bank was considered a well capitalized
institution. Should the bank be classified as an adequately
capitalized institution, the bank could not issue brokered certificates of
deposit without the permission of the Office of Thrift Supervision or the
Federal Deposit Insurance Corporation. At September 30, 2006, the
bank was classified as an adequately capitalized institution and the Office of
Thrift Supervision limited the payment of dividends from the bank to the
company. Without the payment of a dividend from the bank, the company was unable
to make a distribution on the cumulative convertible trust preferred
securities. When, on December 13, 2006, the bank was advised by the
Office of Thrift Supervision that it would not approve the bank’s application to
pay a cash dividend to the company, the company exercised its right to defer the
scheduled quarterly distributions 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, 2007.
During fiscal year 2007, we conducted our business from five
full-service banking offices and our administrative office. The
following table sets forth certain information concerning the bank’s offices as
of September 30, 2007.
Location
|
|
Leased or
Owned
|
|
Original
Year
Leased or
Acquired
|
|
Date of
Lease
Expiration
|
|
Net Book Value
of Property or
Leasehold
Improvements
at
September 30, 2007
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
Administrative
offices:
|
|
|
|
|
|
|
|
|
10700 Parkridge
Boulevard
Reston, Virginia
20191
|
|
Leased
|
|
1998
|
|
01-31-11
|
|
$ 65
|
Branch
offices:
|
|
|
|
|
|
|
|
|
11834 Rockville Pike
Rockville, Maryland
20852
|
|
Leased
|
|
1998
|
|
06-30-09
|
|
4
|
10700 Parkridge
Boulevard
Reston, Virginia
20191
|
|
Leased
|
|
2004
|
|
01-31-11
|
|
303
|
43086 Peacock Market
Plaza
South Riding,
Virginia 20152
|
|
Leased
|
|
2000
|
|
06-30-15
|
|
201
|
1
South Royal Avenue
Front Royal,
Virginia 22630
|
|
Owned
|
|
1977
|
|
|
|
687
|
9484 Congress Street
New
Market, Virginia 22844
|
|
Owned
|
|
1989
|
|
|
|
405
|
Loan
Offices:
2200 Defense Highway
Crofton, Maryland
21114
|
|
Leased
|
|
2002
|
|
11-30-08
|
|
1
|
12530 Parklawn
Drive, Suite 170
Rockville, Maryland
20852
|
|
Leased
|
|
2005
|
|
06-30-10
|
|
36
|
Total
|
$1,702
|
The total net book value of the company’s furniture, fixtures and
equipment at September 30, 2007 was $2.3 million. The properties are
considered by management to be in good condition.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
The company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the company’s financial condition,
results of operations or cash flows.
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, 2007, 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 Pink Sheets report
trades of the company’s stock under the symbol GAFC.PK. At September
30, 2007, there were approximately 278 stockholders of
record. The following table sets forth the range of reported
high and low bid quotations as reported in the Pink Sheets for the common stock
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 2007
|
|
|
|
|
High
|
5.10
|
4.26
|
5.05
|
5.35
|
Low
|
4.26
|
2.25
|
2.25
|
4.69
|
|
|
|
|
|
Fiscal Year 2006
|
|
|
|
|
High
|
5.41
|
5.95
|
5.76
|
5.35
|
Low
|
4.84
|
4.60
|
5.00
|
4.60
|
|
|
|
|
|
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,
2007.
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,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
18,421 |
|
|
$ |
18,794 |
|
|
$ |
16,958 |
|
|
$ |
18,085 |
|
|
$ |
19,361 |
|
Interest
expense
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
10,013 |
|
|
|
11,970 |
|
|
|
12,277 |
|
Net
interest income
|
|
|
6,428 |
|
|
|
7,211 |
|
|
|
6,945 |
|
|
|
6,115 |
|
|
|
7,084 |
|
Provision
for loan losses
|
|
|
685
|
|
|
|
126
|
|
|
|
219
|
|
|
|
209
|
|
|
|
791
|
|
Net
interest income after provision for loan losses
|
|
|
5,743 |
|
|
|
7,085 |
|
|
|
6,726 |
|
|
|
5,906 |
|
|
|
6,293 |
|
Noninterest
income
|
|
|
615 |
|
|
|
917 |
|
|
|
1,695 |
|
|
|
547 |
|
|
|
766 |
|
Gain
on branch sales
|
|
|
4,255 |
|
|
|
- |
|
|
|
945 |
|
|
|
- |
|
|
|
- |
|
Noninterest
expense
|
|
|
9,626 |
|
|
|
11,085 |
|
|
|
9,889 |
|
|
|
10,370 |
|
|
|
10,014 |
|
Income
(loss) from continuing operations before taxes
|
|
|
987 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
Provision
for income taxes
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
951 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
-
|
|
|
|
(2,488 |
)
|
|
|
(1,107 |
)
|
|
|
428
|
|
|
|
4,898 |
|
Net
income (loss)
|
|
$
|
951
|
|
|
$
|
(5,571 |
)
|
|
$
|
(1,630 |
)
|
|
$
|
(3,489 |
)
|
|
$
|
1,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.65 |
|
Diluted
|
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.44 |
|
Book
value
|
|
|
3.17 |
|
|
|
2.93 |
|
|
|
4.76 |
|
|
|
5.29 |
|
|
|
6.79 |
|
Tangible
book value
|
|
|
3.29 |
|
|
|
2.96 |
|
|
|
4.80 |
|
|
|
5.22 |
|
|
|
6.38 |
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,023,407 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
|
|
3,012,434 |
|
|
|
3,012,434 |
|
Diluted
|
|
|
4,395,008 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
|
|
3,012,434 |
|
|
|
4,413,462 |
|
Shares outstanding
|
|
|
3,024,220 |
|
|
|
3,020,934 |
|
|
|
3,020,934 |
|
|
|
3,012,434 |
|
|
|
3,012,434 |
|
Consolidated
Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
245,994 |
|
|
$ |
305,219 |
|
|
$ |
339,542 |
|
|
$ |
433,174 |
|
|
$ |
498,456 |
|
Total
loans receivable, net
|
|
|
176,108 |
|
|
|
193,307 |
|
|
|
194,920 |
|
|
|
246,387 |
|
|
|
242,253 |
|
Allowance
for loan losses
|
|
|
2,305 |
|
|
|
1,330 |
|
|
|
1,212 |
|
|
|
1,600 |
|
|
|
1,550 |
|
Mortgage-loans
held for sale
|
|
|
- |
|
|
|
- |
|
|
|
9,517 |
|
|
|
5,528 |
|
|
|
6,554 |
|
Investment
securities (1)
|
|
|
35,435 |
|
|
|
48,557 |
|
|
|
58,502 |
|
|
|
60,285 |
|
|
|
138,049 |
|
Mortgage-backed
securities
|
|
|
16,528 |
|
|
|
31,600 |
|
|
|
57,296 |
|
|
|
92,722 |
|
|
|
86,735 |
|
Total
deposits
|
|
|
197,991 |
|
|
|
230,174 |
|
|
|
237,794 |
|
|
|
288,956 |
|
|
|
297,876 |
|
FHLB
advances
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
|
|
51,200 |
|
|
|
86,800 |
|
Other
borrowings
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
|
|
64,865 |
|
|
|
77,835 |
|
Guaranteed
convertible preferred securities of subsidiary trust
|
|
|
9,374 |
|
|
|
9,388 |
|
|
|
9,378 |
|
|
|
9,369 |
|
|
|
9,359 |
|
Total
stockholders’ equity
|
|
|
9,571 |
|
|
|
8,850 |
|
|
|
14,375 |
|
|
|
15,944 |
|
|
|
20,442 |
|
Tangible
capital
|
|
|
9,939 |
|
|
|
8,943 |
|
|
|
14,514 |
|
|
|
15,379 |
|
|
|
19,228 |
|
SELECTED
FINANCIAL DATA - (continued)
At
or For the Years Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Consolidated
Statements of Financial Condition Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
284,136 |
|
|
$ |
315,133 |
|
|
$ |
370,729 |
|
|
$ |
504,039 |
|
|
$ |
477,882 |
|
Investment
securities(1)
|
|
|
64,011 |
|
|
|
66,789 |
|
|
|
70,633 |
|
|
|
123,198 |
|
|
|
161,161 |
|
Mortgage-backed
securities(1)
|
|
|
23,848 |
|
|
|
43,979 |
|
|
|
77,424 |
|
|
|
111,016 |
|
|
|
51,046 |
|
Total
loans
|
|
|
184,570 |
|
|
|
193,688 |
|
|
|
210,152 |
|
|
|
253,772 |
|
|
|
251,386 |
|
Allowance
for loan losses
|
|
|
1,559 |
|
|
|
1,264 |
|
|
|
1,609 |
|
|
|
1,498 |
|
|
|
1,696 |
|
Total
deposits
|
|
|
214,118 |
|
|
|
210,311 |
|
|
|
245,518 |
|
|
|
275,636 |
|
|
|
279,469 |
|
Total
stockholders’ equity
|
|
|
7,871 |
|
|
|
12,164 |
|
|
|
13,830 |
|
|
|
15,236 |
|
|
|
15,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
0.33 |
% |
|
|
(1.77 |
)% |
|
|
(0.44 |
)% |
|
|
(0.69 |
)% |
|
|
0.41 |
% |
Return
on average equity
|
|
|
12.08 |
|
|
|
(45.80 |
) |
|
|
(11.79 |
) |
|
|
(22.90 |
) |
|
|
12.83 |
|
Equity
to assets
|
|
|
3.89 |
|
|
|
2.90 |
|
|
|
4.23 |
|
|
|
3.68 |
|
|
|
4.10 |
|
Net
interest margin
|
|
|
2.36 |
|
|
|
2.37 |
|
|
|
1.94 |
|
|
|
1.68 |
|
|
|
1.53 |
|
Efficiency
ratio(3)
|
|
|
85.20 |
|
|
|
136.38 |
|
|
|
103.17 |
|
|
|
155.66 |
|
|
|
127.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
assets to total assets, at period end
|
|
|
0.55 |
|
|
|
0.36 |
|
|
|
0.54 |
|
|
|
0.22 |
|
|
|
0.28 |
|
Non-performing
loans to total loans, at period end
|
|
|
0.74 |
|
|
|
0.55 |
|
|
|
0.75 |
|
|
|
0.37 |
|
|
|
0.57 |
|
Net
charge-offs (recoveries) to average total loans
|
|
|
(0.16 |
) |
|
|
0.00 |
|
|
|
0.28 |
|
|
|
0.06 |
|
|
|
0.36 |
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
1.26 |
% |
|
|
0.66 |
% |
|
|
0.56 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
Non-performing
loans
|
|
|
170.87 |
|
|
|
119.82 |
|
|
|
75.56 |
|
|
|
167.89 |
|
|
|
109.31 |
|
Non-performing
loans
|
|
$ |
1,349 |
|
|
$ |
1,110 |
|
|
$ |
1,604 |
|
|
$ |
953 |
|
|
$ |
1,418 |
|
Non-performing
assets
|
|
|
1,349 |
|
|
|
1,110 |
|
|
|
1,836 |
|
|
|
953 |
|
|
|
1,446 |
|
Allowance
for loan losses
|
|
|
2,305 |
|
|
|
1,330 |
|
|
|
1,212 |
|
|
|
1,600 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios of
the Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio
|
|
|
7.67 |
% |
|
|
5.51 |
% |
|
|
6.66 |
% |
|
|
5.59 |
% |
|
|
5.68 |
% |
Tier
1 risk-based capital ratio
|
|
|
11.00 |
|
|
|
8.59 |
|
|
|
10.25 |
|
|
|
9.81 |
|
|
|
12.08 |
|
Total
risk-based capital ratio
|
|
|
12.25 |
|
|
|
9.11 |
|
|
|
10.75 |
|
|
|
10.42 |
|
|
|
12.70 |
|
(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
|
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.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, subject to regulatory and shareholder
approvals. Immediately following the merger, the bank intends to
merge with and into Summit Community Bank.
General
The profitability of the company depends primarily on its
net-interest income and non-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.
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 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, 2007, the company
had deferred tax assets of $2.1 million, which is net of a valuation allowance
of $3.5 million.
Recent Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. For financial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15, 2008. We do not believe
the adoption of SFAS 157 will have a material impact on the consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS 159).This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
of this Statement is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. The company
is in the process of evaluating the impact SFAS 159 may have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations”, to create greater consistency in the accounting and financial
reporting of business combinations. SFAS 141 (R) requires a company
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquired entity to be measured at their fair
values as of the acquisition date. SFAS 141 (R) also requires companies to
recognize and measure goodwill acquired in a business combination or a gain from
a bargain purchase and how to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies to fiscal years
beginning after December 15, 2008 and is adopted
prospectively. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51”, to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
requires company to clearly identify and present ownership interests in
subsidiaries held by parties other than the company in the consolidated
financial statements within the equity section but separate from the company’s
equity. It also requires the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income;
changes in ownership interest be accounted for similarly, as equity
transactions; and when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary and the gain or loss
on the deconsolidation of the subsidiary be measured at fair
value. SFAS No. 160 applies to fiscal years beginning after December
15, 2008. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
Discontinued mortgage banking
operations
On March 29, 2006, we began the process of discontinuing the
operations of the bank’s subsidiary, Greater Atlantic Mortgage
Corporation. It was determined that, because it was unprofitable,
this business no longer fit our strategy.
Due to the unprofitable operations of Greater Atlantic Mortgage
Corporation, 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 related to Greater Atlantic
Mortgage Corporation of $996,000 was recorded and also included in discontinued
operations in the consolidated statements of operations for fiscal 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
Greater Atlantic Mortgage Corporation business. The table below
summarizes Greater Atlantic Mortgage Corporation results which were treated as
discontinued operations for the periods indicated.
|
|
Year Ended September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(Dollars in
Thousands, Except Per Share Data
|
|
|
|
|
|
|
Interest income
|
|
$ |
280 |
|
|
$ |
478 |
|
Interest expense
|
|
|
256 |
|
|
|
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
2007 Compared to 2006
At September 30, 2007 the company’s total assets were $246.0 million,
compared to the $305.2 million held at September 30, 2006, representing a
decrease of 19.40%. The decrease resulted primarily from a decrease
in investment securities, loans receivable and 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 the bank’s assets and liabilities to
maintain the bank in a well capitalized position.
Net loans receivable at September 30, 2007 were $176.1 million, a
decrease of $17.2 million or 8.90% from the $193.3 million held at September 30,
2006. The decrease in loans consisted primarily of a $5.5 million decline in the
bank’s single-family loan portfolio, coupled with a decrease of $8.8 million in
the Bank’s consumer loan portfolio. Because the Bank’s single family
and consumer loan portfolios consist primarily of adjustable-rate loans, and
with the yield curve that existed throughout our fiscal 2007 period, reflecting
short-term rates only slightly lower than rates for longer terms, customers were
able to extend the terms of their mortgages. Customers were 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 $6.6 million during the period. Those increases were offset in
part by decreases of $10.0 million in construction and land loans and $5.0
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 September 30, 2007, investment securities were $52.0 million, a
decrease of $28.2 million or 35.17% 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, and to retain cash for the
sale of our Pasadena branch office which occurred on August 24, 2007.
Deposits at September 30, 2007 were $198.0 million, a decrease of
$32.2 million from the $230.2 million held at September 30,
2006. Total deposits decreased primarily due the sale of our Pasadena
branch office and our reduced reliance on brokered deposits and wholesale
deposits, both of which have a higher cost. The combination of the
branch sale and the elimination of brokered deposits and wholesale deposits
contributed to a $75.6 million decrease in deposits since September 30, 2006
while total retail deposits increased $40.4 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, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, 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 paid the bank an 8.5%
premium on the balance of deposits assumed at closing. At August 24,
2007, the closing date of that transaction, the deposits at our Pasadena branch
office on which the deposit premium would apply totaled approximately $51.5
million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
Results of Operations
2007 Compared to 2006
Net
Income. For the fiscal year ended September 30, 2007,
the company had a net income from continuing operations of $951,000 or $0.31 per
diluted share compared to a loss from continuing operations of $3.1 million or
$1.02 per diluted share for fiscal year 2006. The $4.0 million
improvement in earnings over the comparable period one-year ago was primarily
the result of an increase in non-interest income and a decrease in non-interest
expense. That increase in non-interest income and decrease in
non-interest expense were partially offset by a decrease in net interest income
and increases in the provision for loan losses and the provision for income
taxes. 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 gain
arising from the sale of the bank’s Pasadena branch office in August of this
year, the bank is currently managing its assets and liabilities to maintain a
well capitalized status. Because of the bank’s loans to one borrower
limit it cannot aggressively expand its commercial loan portfolio and 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, during 2007, the company entered into an agreement to
merge with and into Summit. In approving the merger agreement, the
board of directors consulted with Sandler O’Neill regarding the fairness of the
transaction to the company’s stockholders from a financial point of view and
with the company’s legal counsel regarding its legal duties and the terms of the
merger agreement and ancillary documents. The understanding of the
board of directors of the options available to the company and the assessment of
those options with respect to the prospects and estimated results of the
implementation by the company of its business plan as an independent entity
under various scenarios, and the determination that none of those options or the
realization of the business plan under the best case scenarios were likely to
create greater present value for the company’s stockholders than the value to be
paid by Summit. On the other hand, the board of directors considered
the company’s ability to achieve consistent profitability by selling a number of
branches to increase capital and reduce overall operating cost and the prospects
for regulatory action if it failed to do so.
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
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars in
thousands)
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
14,173 |
|
|
$ |
13,866 |
|
|
$ |
307 |
|
|
|
2.21 |
% |
Investments
|
|
|
4,248 |
|
|
|
4,928 |
|
|
|
(680 |
)
|
|
|
(13.80 |
)
|
Total
|
|
|
18,421 |
|
|
|
18,794 |
|
|
|
(373 |
)
|
|
|
(1.98 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
1,622 |
|
|
|
21.04 |
|
Borrowings
|
|
|
2,662 |
|
|
|
3,874 |
|
|
|
(1,212 |
)
|
|
|
(31.29 |
)
|
Total
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
410 |
|
|
|
3.54 |
|
Net
interest income
|
|
$
|
6,428 |
|
|
$
|
7,211 |
|
|
$
|
(783 |
)
|
|
|
(10.86 |
)%
|
The decrease in net interest income for fiscal year 2007, from the
comparable period one year ago, resulted primarily from a $32.0 million decrease
in the bank’s interest-earning assets coupled with average interest-earning
assets declining by $7.6 million more than the decline in average
interest-bearing liabilities. That decrease was coupled with a 1
basis point decrease in net interest margin (net interest income divided by
average interest-earning assets) from 2.37% for fiscal year 2006 to 2.36% for
fiscal year 2007. The decrease in net interest margin was offset by
the average yield on interest-earning assets increasing by 6 basis point 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. 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 bank’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 fiscal year ended September
30, 2007 decreased $373,000 compared to fiscal year 2006, primarily as a result
of a $32.0 million decrease in the average balances of outstanding loans and
investment securities. The decreases in those balances were partially
offset by an increase of 59 basis points in the average yield earned on interest
earning assets.
Interest
Expense. The $410,000 increase in interest expense for fiscal
year 2007 compared to the 2006 period was principally the result of an 53 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 $24.4 million decrease in average deposits and borrowings. The
increase in interest expense on deposits was primarily due to a 69 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 $3.8 million in average deposits from $210.3 million for fiscal 2006 to
$214.1 million for fiscal 2007. The increase in rates was primarily
due to market rates requiring higher rates on interest-bearing demand deposits,
savings accounts and certificates and increased pricing on new and renewed time
deposits.
The decrease in interest expense on borrowings for fiscal 2007, when
compared to the 2006 period, was principally the result of a $28.2 million
decrease in average borrowed funds and was partially offset by a 45 basis point
increase in the cost of borrowed funds. Components accountable for
the decrease of $1.2 million in interest expense on borrowings were a $1.4
million decrease relating to average volume, offset in part by a $217,000
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
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
|
|
$ |
91,132 |
|
|
$ |
6,693 |
|
|
|
7.34 |
% |
|
$ |
93,390 |
|
|
$ |
6,699 |
|
|
|
7.17 |
% |
|
$ |
98,217 |
|
|
$ |
6,379 |
|
|
|
6.49 |
% |
Consumer
loans
|
|
|
55,420 |
|
|
|
4,353 |
|
|
|
7.85 |
|
|
|
65,338 |
|
|
|
4,701 |
|
|
|
7.19 |
|
|
|
71,817 |
|
|
|
3,748 |
|
|
|
5.22 |
|
Commercial
business
loans
|
|
|
38,018 |
|
|
|
3,127 |
|
|
|
8.23 |
|
|
|
34,960 |
|
|
|
2,466 |
|
|
|
7.05 |
|
|
|
40,118 |
|
|
|
2,303 |
|
|
|
5.74 |
|
Total
loans
|
|
|
184,570 |
|
|
|
14,173 |
|
|
|
7.68 |
|
|
|
193,688 |
|
|
|
13,866 |
|
|
|
7.16 |
|
|
|
210,152 |
|
|
|
12,430 |
|
|
|
5.91 |
|
Investment
securities
|
|
|
64,011 |
|
|
|
3,184 |
|
|
|
4.97 |
|
|
|
66,789 |
|
|
|
3,353 |
|
|
|
5.02 |
|
|
|
70,633 |
|
|
|
2,414 |
|
|
|
3.42 |
|
Mortgage-backed
securities
|
|
|
23,848 |
|
|
|
1,064 |
|
|
|
4.46 |
|
|
|
43,979 |
|
|
|
1,575 |
|
|
|
3.58 |
|
|
|
77,424 |
|
|
|
2,114 |
|
|
|
2.73 |
|
Total
interest-earning
assets
|
|
|
272,429 |
|
|
|
18,421 |
|
|
|
6.76 |
|
|
|
304,456 |
|
|
|
18,794 |
|
|
|
6.17 |
|
|
|
358,209 |
|
|
|
16,958 |
|
|
|
4.73 |
|
Non-earning assets
|
|
|
11,707 |
|
|
|
|
|
|
|
|
|
|
|
10,677 |
|
|
|
|
|
|
|
|
|
|
|
12,520 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
284,136 |
|
|
|
|
|
|
|
|
|
|
$
|
315,133 |
|
|
|
|
|
|
|
|
|
|
$
|
370,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$ |
2,969 |
|
|
|
27 |
|
|
|
0.91 |
|
|
$ |
5,190 |
|
|
|
48 |
|
|
|
0.92 |
|
|
$ |
10,202 |
|
|
|
94 |
|
|
|
0.92 |
|
Now
and money market
accounts
|
|
|
77,997 |
|
|
|
2,791 |
|
|
|
3.58 |
|
|
|
73,485 |
|
|
|
2,430 |
|
|
|
3.31 |
|
|
|
64,723 |
|
|
|
1,197 |
|
|
|
1.85 |
|
Certificates
of deposit
|
|
|
133,152 |
|
|
|
6,513 |
|
|
|
4.89 |
|
|
|
131,636 |
|
|
|
5,231 |
|
|
|
3.97 |
|
|
|
170,593 |
|
|
|
5,046 |
|
|
|
2.96 |
|
Total
deposits
|
|
|
214,118 |
|
|
|
9,331 |
|
|
|
4.36 |
|
|
|
210,311 |
|
|
|
7,709 |
|
|
|
3.67 |
|
|
|
245,518 |
|
|
|
6,337 |
|
|
|
2.58 |
|
FHLB
advances
|
|
|
33,064 |
|
|
|
1,806 |
|
|
|
5.46 |
|
|
|
44,894 |
|
|
|
2,266 |
|
|
|
5.05 |
|
|
|
44,422 |
|
|
|
1,985 |
|
|
|
4.47 |
|
Other
borrowings
|
|
|
15,264 |
|
|
|
856
|
|
|
|
5.61 |
|
|
|
31,624 |
|
|
|
1,608 |
|
|
|
5.08 |
|
|
|
51,388 |
|
|
|
1,691 |
|
|
|
3.29 |
|
Total
interest-bearing
liabilities
|
|
|
262,446 |
|
|
|
11,993 |
|
|
|
4.57 |
|
|
|
286,829 |
|
|
|
11,583 |
|
|
|
4.04 |
|
|
|
341,328 |
|
|
|
10,013 |
|
|
|
2.93 |
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
deposits
|
|
|
11,595 |
|
|
|
|
|
|
|
|
|
|
|
14,993 |
|
|
|
|
|
|
|
|
|
|
|
14,138 |
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
1,147 |
|
|
|
|
|
|
|
|
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
276,265 |
|
|
|
|
|
|
|
|
|
|
|
302,969 |
|
|
|
|
|
|
|
|
|
|
|
356,899 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
7,871 |
|
|
|
|
|
|
|
|
|
|
|
12,164 |
|
|
|
|
|
|
|
|
|
|
|
13,830 |
|
|
|
|
|
|
|
|
|
Total liabilities
and
stockholders'
equity
|
|
$
|
284,136 |
|
|
|
|
|
|
|
|
|
|
$
|
315,133 |
|
|
|
|
|
|
|
|
|
|
$
|
370,729 |
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
6,428 |
|
|
|
|
|
|
|
|
|
|
$
|
7,211 |
|
|
|
|
|
|
|
|
|
|
$
|
6,945 |
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.19 |
%
|
|
|
|
|
|
|
|
|
|
|
2.13 |
%
|
|
|
|
|
|
|
|
|
|
|
1.80 |
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.36 |
%
|
|
|
|
|
|
|
|
|
|
|
2.37 |
%
|
|
|
|
|
|
|
|
|
|
|
1.94 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
Compared to Year
Ended September 30,
2006
Change Attributable
to
|
|
|
Year Ended September
30, 2006
Compared to Year
Ended September 30,
2005
Change Attributable
to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$ |
(162 |
) |
|
$ |
156 |
|
|
$ |
(6 |
) |
|
$ |
(314 |
) |
|
$ |
634 |
|
|
$ |
320 |
|
Consumer loans
|
|
|
(714 |
) |
|
|
366 |
|
|
|
(348 |
) |
|
|
(338 |
) |
|
|
1,291 |
|
|
|
953 |
|
Commercial business
loans
|
|
|
216
|
|
|
|
445
|
|
|
|
661
|
|
|
|
(296 |
)
|
|
|
459
|
|
|
|
163
|
|
Total
loans
|
|
|
(660 |
) |
|
|
967 |
|
|
|
307 |
|
|
|
(948 |
) |
|
|
2,384 |
|
|
|
1,436 |
|
Investments
|
|
|
(139 |
) |
|
|
(30 |
) |
|
|
(169 |
) |
|
|
(131 |
) |
|
|
1,070 |
|
|
|
939 |
|
Mortgage-backed
securities
|
|
|
(721 |
)
|
|
|
210
|
|
|
|
(511 |
)
|
|
|
(913 |
)
|
|
|
374
|
|
|
|
(539 |
)
|
Total
interest-earning assets
|
|
$
|
(1,520 |
)
|
|
$
|
1,147 |
|
|
$
|
(373 |
)
|
|
$
|
(1,992 |
)
|
|
$
|
3,828 |
|
|
$
|
1,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
(21 |
) |
|
$ |
- |
|
|
$ |
(21 |
) |
|
$ |
(46 |
) |
|
$ |
- |
|
|
$ |
(46 |
) |
Now
and money market accounts
|
|
|
149 |
|
|
|
212 |
|
|
|
361 |
|
|
|
162 |
|
|
|
1,071 |
|
|
|
1,233 |
|
Certificates of
deposit
|
|
|
60
|
|
|
|
1,222 |
|
|
|
1,282 |
|
|
|
(1,152 |
)
|
|
|
1,337 |
|
|
|
185
|
|
Total
deposits
|
|
|
188 |
|
|
|
1,434 |
|
|
|
1,622 |
|
|
|
(1,036 |
) |
|
|
2,408 |
|
|
|
1,372 |
|
FHLB advances
|
|
|
(597 |
) |
|
|
137 |
|
|
|
(460 |
) |
|
|
21 |
|
|
|
260 |
|
|
|
281 |
|
Other borrowings
|
|
|
(832 |
)
|
|
|
80
|
|
|
|
(752 |
)
|
|
|
(650 |
)
|
|
|
567
|
|
|
|
(83
|
)
|
Total
interest-bearing liabilities
|
|
$
|
(1,241 |
)
|
|
$
|
1,651 |
|
|
$
|
410
|
|
|
$
|
(1,665 |
)
|
|
$
|
3,235 |
|
|
$
|
1,570 |
|
Change in net
interest income
|
|
$
|
(279 |
)
|
|
$
|
(504 |
)
|
|
$
|
(783 |
) |
|
$ |
(327 |
) |
|
$ |
593 |
|
|
$ |
266 |
|
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 had 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. However, because we entered into a
definitive agreement for the company to merge with Summit, and based on the due
diligence performed by Summit, it was deemed unnecessary to enter into such a
contract for the fiscal year ended September 30, 2007.
Non-performing assets were $1.3 million or 0.55% of total assets at
September 30, 2007, compared to non-performing assets of $1.1 million or 0.36%
of total assets at September 30, 2006. At September 30, 2007, assets
of $4.7 million were classified as substandard and $675,000 classified as
doubtful. A $685,000 provision for loan losses was recorded during
the year ended September 30, 2007, compared to a provision of $126,000 during
the year ended September 30, 2006. The increase in the provision for
loan losses of $559,000 from the year ago period resulted from the increase in
non-performing assets, an increase in the outstanding balance of the bank’s
commercial real estate loan’s which require a larger allocated allowance
provision and an increase of $3.9 million in loans classified as substandard
which also require an additional allocation of the bank’s overall provision
coupled with an increase of $356,000 in loans classified as
doubtful. That increase in provision for those loans was offset with
an overall decline in the size of the bank’s loan portfolio.
Non-interest
income. Non-interest income
increased $4.0 million during fiscal 2007, over fiscal 2006. That
increase was primarily the result of increases in other operating income and
service fees on deposits. Those increases were partially offset by
losses on derivatives, real estate owned and service fees on
loans. The increase in other operating income reflects the $4.3 gain
recognized from the sale of the bank’s Pasadena, Maryland
branch. 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 sale of the Pasadena branch office was a condition to
the completion of the pending merger of GAFC with and into Summit Financial
Group, Inc.
The following table presents a comparison of the components of
non-interest income.
|
Years Ended
September 30,
|
|
Difference
|
|
2007
|
|
2006
|
|
Amount
|
|
%
|
(Dollars in
Thousands)
|
|
Noninterest income:
|
|
Service
fees on loans
|
$ 169
|
|
$
186
|
|
$ (17)
|
|
(9.14)%
|
Service
fees on deposits
|
444
|
|
424
|
|
20
|
|
4.72
|
Gain
(loss) on derivatives
|
(21)
|
|
212
|
|
(233)
|
|
(107.89)
|
Gain
on sale of real estate owned
|
-
|
|
65
|
|
(65)
|
|
(100.00)
|
Other
operating income
|
23
|
|
30
|
|
(7)
|
|
(23.33)
|
Gain
on branch sale
|
4,255
|
|
-
|
|
4,255
|
|
n/a
|
Total
noninterest income
|
$
4,870
|
|
$
917
|
|
$
3,953
|
|
431.08%
|
Non-interest
expense. Noninterest expense for fiscal 2007 amounted to $9.6
million, a decrease of $1.5 million or 13.16% from the $11.1 million incurred in
fiscal 2006. The decrease was distributed over various non-interest
expense categories with the contributors being compensation, professional
services, advertising, deposit insurance premiums, furniture, fixtures and
equipment, data processing and other operating expense. The decreases in those
categories of expense were offset by an increase of $57,000 in occupancy
expense. The decrease in other operating expense is the result of a
settlement offer which required a $500,000 payment by the company during fiscal
2006.
The following table presents a comparison of the components of
noninterest expense.
|
|
Years Ended
September 30,
|
|
|
Difference
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
(Dollars in
Thousands)
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
$ |
4,446 |
|
|
$ |
4,718 |
|
|
$ |
(272 |
) |
|
|
(5.77 |
)% |
Occupancy
|
|
|
1,394 |
|
|
|
1,337 |
|
|
|
57 |
|
|
|
4.26 |
|
Professional
services
|
|
|
1,128 |
|
|
|
1,227 |
|
|
|
(99 |
) |
|
|
(8.07 |
) |
Advertising
|
|
|
130 |
|
|
|
628 |
|
|
|
(498 |
) |
|
|
(79.30 |
) |
Deposit
insurance premium
|
|
|
69 |
|
|
|
101 |
|
|
|
(32 |
) |
|
|
(31.68 |
) |
Furniture,
fixtures and equipment
|
|
|
516 |
|
|
|
554 |
|
|
|
(38 |
) |
|
|
(6.86 |
) |
Data
processing
|
|
|
877 |
|
|
|
919 |
|
|
|
(42 |
) |
|
|
(4.57 |
) |
Other
operating expense
|
|
|
1,066 |
|
|
|
1,601 |
|
|
|
(535 |
)
|
|
|
(33.42 |
)
|
Total noninterest
expense
|
|
$
|
9,626 |
|
|
$
|
11,085 |
|
|
$
|
(1,459 |
)
|
|
|
(13.16 |
)%
|
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 recorded a provision for income taxes for
fiscal 2007 of $36,000 which was due to the alternative minimum
tax. 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 through earnings and branch sales, 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, 2007 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)
|
|
$ |
25,000 |
|
|
$ |
- |
|
|
$ |
25,000 |
|
|
$ |
- |
|
|
$ |
- |
|
Reverse repurchase
agreements
|
|
|
2,192 |
|
|
|
2,192 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Subordinated debt
securities (2)
|
|
|
25,982 |
|
|
|
655 |
|
|
|
1,310 |
|
|
|
1,310 |
|
|
|
22,707 |
|
Operating leases
|
|
|
3,779 |
|
|
|
1,062 |
|
|
|
1,858 |
|
|
|
469
|
|
|
|
390
|
|
Total
obligations
|
|
$
|
56,953 |
|
|
$
|
3,909 |
|
|
$
|
28,168 |
|
|
$
|
1,779 |
|
|
$
|
23,097 |
|
(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
|
|
|
|
|
Less Than
|
|
|
Two-Three
|
|
|
Four-Five
|
|
|
After Five
|
|
|
|
Total
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
deposit maturities (1)
|
|
$ |
125,717 |
|
|
$ |
111,990 |
|
|
$ |
10,922 |
|
|
$ |
2,712 |
|
|
$ |
93 |
|
Loan originations
|
|
|
9,527 |
|
|
|
9,527 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unfunded lines of
credit (2)
|
|
|
111,815 |
|
|
|
111,815 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Standby letter of
credit
|
|
|
310
|
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
247,369 |
|
|
$
|
233,642 |
|
|
$
|
10,922 |
|
|
$
|
2,712 |
|
|
$
|
93
|
|
(1)
|
The company expects
to retain maturing deposits or replace amounts maturing with
comparable certificates of deposit based on current market interest rates.
|
(2)
|
Revolving lines of
credit secured by one-to-four dwelling units and commercial lines that
remain unfunded. The committed amount of these lines total
$174.1 million.
|
Asset-Liability Management
The primary objective of asset/liability management is to ensure the
steady growth of the company’s primary earnings component, net interest income,
and the maintenance of reasonable levels of capital independent of fluctuating
interest rates. Interest rate risk can be defined as the
vulnerability of an institution’s financial condition and/or results of
operations to movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities. Management endeavors to structure the balance sheet so
that repricing opportunities exist for both assets and liabilities in roughly
equivalent amounts at approximately the same time intervals to maintain interest
rate risk at an acceptable level.
Management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for the
company. The asset mix of the balance sheet is continually evaluated
in terms of several variables: yield, credit quality, appropriate funding
sources and liquidity. Management of the liability mix of the balance
sheet focuses on expanding the company's various funding sources. At
times, depending on the 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, 2007. 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
|
|
$ |
23,647 |
|
|
$ |
3,042 |
|
|
$ |
7,709 |
|
|
$ |
12,385 |
|
|
$ |
7,697 |
|
|
$ |
151 |
|
|
$ |
54,631 |
|
Fixed-rate
|
|
|
700 |
|
|
|
703 |
|
|
|
1,881 |
|
|
|
8,169 |
|
|
|
5,765 |
|
|
|
15,708 |
|
|
|
32,926 |
|
Commercial
business
|
|
|
22,734 |
|
|
|
431 |
|
|
|
1,163 |
|
|
|
7,526 |
|
|
|
1,540 |
|
|
|
1,704 |
|
|
|
35,098 |
|
Consumer
|
|
|
52,362 |
|
|
|
93 |
|
|
|
164 |
|
|
|
427 |
|
|
|
188 |
|
|
|
154 |
|
|
|
53,388 |
|
Investment
securities
|
|
|
36,444 |
|
|
|
4,755 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41,199 |
|
Mortgage-backed
securities
|
|
|
3,833 |
|
|
|
12,546 |
|
|
|
37 |
|
|
|
48 |
|
|
|
8 |
|
|
|
10 |
|
|
|
16,482 |
|
Total
|
|
|
139,720 |
|
|
|
21,570 |
|
|
|
10,954 |
|
|
|
28,555 |
|
|
|
15,198 |
|
|
|
17,727 |
|
|
|
233,724 |
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
|
709 |
|
|
|
505 |
|
|
|
363 |
|
|
|
410 |
|
|
|
223 |
|
|
|
258 |
|
|
|
2,468 |
|
NOW
accounts
|
|
|
2,336 |
|
|
|
1,802 |
|
|
|
1,772 |
|
|
|
1,974 |
|
|
|
1,040 |
|
|
|
1,286 |
|
|
|
10,210 |
|
Money
market accounts
|
|
|
16,091 |
|
|
|
10,957 |
|
|
|
8,496 |
|
|
|
8,379 |
|
|
|
3,597 |
|
|
|
2,907 |
|
|
|
50,427 |
|
Certificates
of deposit
|
|
|
52,130 |
|
|
|
30,140 |
|
|
|
25,476 |
|
|
|
15,097 |
|
|
|
2,803 |
|
|
|
93 |
|
|
|
125,739 |
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
- |
|
|
|
25,000 |
|
Other
borrowings
|
|
|
2,192 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,374 |
|
|
|
11,566 |
|
Total
|
|
|
73,458 |
|
|
|
43,404 |
|
|
|
36,107 |
|
|
|
25,860 |
|
|
|
32,663 |
|
|
|
13,918 |
|
|
$
|
225,410 |
|
GAP
|
|
$
|
66,262 |
|
|
$
|
(21,834 |
)
|
|
$
|
(25,153 |
)
|
|
$
|
2,695 |
|
|
$
|
(17,465 |
)
|
|
$
|
3,809 |
|
|
$
|
8,314 |
|
Cumulative GAP
|
|
$
|
66,262 |
|
|
$
|
44,428 |
|
|
$
|
19,275 |
|
|
$
|
21,970 |
|
|
$
|
4,505 |
|
|
$
|
8,314 |
|
|
|
|
|
Ratio of Cumulative
GAP
to
total interest earning assets
|
|
|
28.35 |
%
|
|
|
19.01 |
%
|
|
|
8.25 |
%
|
|
|
9.40 |
%
|
|
|
1.93 |
%
|
|
|
3.56 |
%
|
|
|
|
|
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
$19.3 million at September 30, 2007.
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 200 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 200 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 Office of Thrift Supervision 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,
2007:
Net Interest Income
Sensitivity Analysis
|
Changes in Rate by
Basis Point
|
|
Net Interest Margin
|
|
Basis Point Change
From Base
|
|
Percent Change From
Base
|
+200
|
|
3.15%
|
|
0.14%
|
|
4.65%
|
+100
|
|
3.08%
|
|
0.07%
|
|
2.33%
|
+0
|
|
3.01%
|
|
-
|
|
-
|
-100
|
|
2.90%
|
|
(0.11)%
|
|
(3.65)%
|
-200
|
|
2.75%
|
|
(0.26)%
|
|
(8.64)%
|
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 14 basis points or 4.65% and, if interest
rates decrease 200 basis points, net interest margin, as a percent of total
assets, would decrease by 26 basis points or 8.64%.
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 those assumptions including how customer preferences or competitor
influences might change.
Presented
below is an analysis of our interest rate risk, as of September 30, 2007, as
measured by changes in net portfolio value for parallel shifts of up 200 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)
|
|
|
|
|
+200
|
|
$ (2,054)
|
|
(8.46)%
|
|
8.97%
|
|
(0.67)%
|
+100
|
|
(976)
|
|
(4.02)
|
|
9.33
|
|
(0.31)
|
+0
|
|
-
|
|
-
|
|
9.64
|
|
-
|
-100
|
|
282
|
|
1.16
|
|
9.69
|
|
0.06
|
-200
|
|
308
|
|
1.27
|
|
9.66
|
|
0.02
|
The
decline in net portfolio value of $2.0 million or 8.46% 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, 2007 and
currently is within the limits established by the board of
directors. The foregoing increase in net portfolio value, in the
event of a decrease 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 and cap 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
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
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
|
|
|
3,874 |
|
|
|
3,676 |
|
|
|
198
|
|
|
|
5.39 |
|
Total
|
|
|
11,583 |
|
|
|
10,013 |
|
|
|
1,570 |
|
|
|
15.68 |
|
Net
interest income
|
|
$
|
7,211 |
|
|
$
|
6,945 |
|
|
$
|
266
|
|
|
|
3.83 |
%
|
Our
increase in net interest income for fiscal year 2006, resulted primarily from a
43 basis point increase in net interest margin (net interest income divided by
average interest-earning assets) from 1.94% for fiscal year 2005 to 2.37% for
fiscal year 2006, offset in part by a $53.8 million decrease in the bank’s
interest-earning assets. The increase in net interest margin also
resulted from the average yield on interest-earning assets increasing by 33
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 $1.6 million increase in interest expense for
fiscal year 2006 compared to the 2005 period was principally the result of an
111 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 122 basis point increase in the
cost of borrowed funds. Components accountable for the increase of
$198,000 in interest expense on borrowings were a $629,000 decrease relating to
average volume, offset in part by a $827,000 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
|
|
|
2004
|
|
|
|
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 |
|
|
|
1,608 |
|
|
|
5.08 |
|
|
|
51,388 |
|
|
|
1,691 |
|
|
|
3.29 |
|
|
|
78,979 |
|
|
|
1,373 |
|
|
|
1.74 |
|
Total
interest-bearing
liabilities
|
|
|
286,829 |
|
|
|
11,583 |
|
|
|
4.04 |
|
|
|
341,328 |
|
|
|
10,013 |
|
|
|
2.93 |
|
|
|
470,770 |
|
|
|
9,903 |
|
|
|
2.10 |
|
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
|
|
|
|
|
|
$
|
7,211 |
|
|
|
|
|
|
|
|
|
|
$
|
6,945 |
|
|
|
|
|
|
|
|
|
|
$
|
8,182 |
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.13 |
%
|
|
|
|
|
|
|
|
|
|
|
1.80 |
%
|
|
|
|
|
|
|
|
|
|
|
1.61 |
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
2.37 |
%
|
|
|
|
|
|
|
|
|
|
|
1.94 |
%
|
|
|
|
|
|
|
|
|
|
|
1.68 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
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
|
|
|
(650 |
)
|
|
|
567
|
|
|
|
(83
|
)
|
|
|
(480 |
)
|
|
|
798
|
|
|
|
318
|
|
Total
interest-bearing liabilities
|
|
$
|
(1,665 |
)
|
|
$
|
3,235 |
|
|
$
|
1,570 |
|
|
$
|
(2,747 |
)
|
|
$
|
2,857 |
|
|
$
|
110
|
|
Change in net
interest income
|
|
$
|
(327 |
)
|
|
$
|
593
|
|
|
$
|
266
|
|
|
$
|
(1,739 |
)
|
|
$
|
502
|
|
|
$
|
(1,237 |
)
|
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
|
|
|
212 |
|
|
|
303 |
|
|
|
(91 |
) |
|
|
(30.03 |
) |
Gain
on sale of real estate owned
|
|
|
65 |
|
|
|
- |
|
|
|
65 |
|
|
|
n/a |
|
Other
operating income
|
|
|
30
|
|
|
|
1,011 |
|
|
|
(981 |
)
|
|
|
(97.03 |
)
|
Total
noninterest income
|
|
$
|
917
|
|
|
$
|
2,640 |
|
|
$
|
(1,723 |
)
|
|
|
(65.27 |
)%
|
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. 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, Greater Atlantic Mortgage
Corporation, and Carroll E. Amos, President and Chief Executive Officer of the
company and the bank. The increase in other operating expense is the
result of a settlement offer which required 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
was executed and as a result, the company established a liability for the
settlement and charged $500,000 as other operating expense in fiscal 2006.
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 through earnings and branch sales, to
assure utilization of a certain portion of the existing net operating losses.
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 regulations of the Office of Thrift
Supervision. 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, 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, 2007,
cash and cash equivalents, interest bearing deposits and securities
available-for-sale totaled $56.5 million, or 22.99% 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, 2007, the bank’s loan
originations and purchases totaled $79.4 million. The bank did not
purchase any United States Treasury or agency securities, mortgage-backed and
mortgage related securities or other investment securities during the year ended
September 30, 2007. All of our investment securities are classified
as either available for sale or held to maturity and for the period ended
September 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 September 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 $18.3 million at that date. Depending on
market conditions, the pricing of deposit products and FHLB advances, the bank
may continue to rely on FHLB borrowings to fund asset growth.
At September 30, 2007, 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 $121.3
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, 2007,
totaled $107.7 million. Based upon experience, management believes
the majority of maturing certificates of deposit will remain with the
bank. In addition, management of the bank believes that it can adjust
the rates offered on certificates of deposit to retain deposits in changing
interest rate environments. In the event that a significant portion
of these deposits are not retained by the bank, the bank would be able to
utilize FHLB advances and reverse repurchase agreements to fund deposit
withdrawals, which would result in an increase in interest expense to the extent
that the average rate paid on such borrowings exceeds the average rate paid on
deposits of similar duration.
Capital
Resources. At September 30, 2007, the bank exceeded minimum
regulatory capital requirements with a tangible capital level of $18.8 million,
or 7.67% of total adjusted assets, which exceeds the required level of $3.7
million, or 1.50%; core capital of $18.8 million, or 7.67% of total adjusted
assets, which exceeds the required level of $9.8 million, or 4.00%; and
risk-based capital of $20.9 million, or 12.25% of risk-weighted assets, which
exceeds the required level of $13.6 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 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 announced 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, would 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).
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.
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. 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 61 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
An evaluation of the company's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as
of September 30, 2007, was carried out under the supervision and with the
participation of the company's Chief Executive Officer, Chief Financial Officer
and several other members of the company's senior management. The company's
Chief Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures currently in effect are effective in ensuring
that the information required to be disclosed by the company in the reports it
files or submits under the Act is: (i) accumulated and communicated to the
company's management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner and (ii) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. In
addition, there have been no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the
quarter ended September 30, 2007, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
The company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all error
and all fraud. A control procedure, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls may be circumvented by the individual
acts of some persons, by collusion of two or more people, or by override of the
control. The design of any control procedure also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be detected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and annually report on their systems of internal control over financial
reporting. In addition, our independent accountants must report on management's
evaluation for the fiscal year ending September 30, 2010. We are in the process
of evaluating, documenting and testing our system of internal control over
financial reporting to provide the basis for our report that will, for the first
time, be a required part of our annual report on Form 10-K for the fiscal year
ending September 30, 2008. Due to the ongoing evaluation and testing of our
internal controls, there can be no assurance that if any control deficiencies
are identified they will be remediated before the end of the 2008 fiscal year,
or that there will not be significant deficiencies or material weaknesses that
would be required to be reported.
ITEM 9B. OTHER
INFORMATION
During the quarter ended September 30, 2007, 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
|
|
60
|
|
Director, President
and Chief Executive Officer
|
|
1997
|
|
2008
|
Sidney M. Bresler
|
|
53
|
|
Director
|
|
2003
|
|
2010
|
Charles W. Calomiris
|
|
50
|
|
Director, Chairman
of the Board of Directors
|
|
2001
|
|
2008
|
Jeffrey W. Ochsman
|
|
55
|
|
Director
|
|
1999
|
|
2009
|
James B. Vito
|
|
82
|
|
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
|
|
59
|
|
Senior Vice
President and Chief Operating Officer of the Bank and Corporate Secretary
of the Company and the Bank
|
Justin R. Golden
|
|
57
|
|
Senior Vice
President, Consumer Lending, of the Bank
|
Gary L. Hobert
|
|
58
|
|
Senior Vice
President, Commercial Business Lending, of the Bank
|
Robert W. Neff
|
|
60
|
|
Senior Vice
President, Commercial Real Estate Lending, of the Bank
|
David E. Ritter
|
|
57
|
|
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.
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 2007.
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 year ended
September 30, 2007, to the Chief Executive Officer, and for each of the other
executive officers of the company who received salary and bonus in excess of
$100,000 (collectively, the "Named Executive Officers").
Name and Principal
Position
|
Fiscal Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Non-Equity Incentive
Plan Compen-sation
($)
|
|
|
Change in Pension
Value and Nonqual-ified Deferred Compen-sation Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Carroll E. Amos
|
2007
|
|
$ |
182,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
182,000 |
|
President
and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward C. Allen
|
2007
|
|
$ |
121,320 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
121,320 |
|
Senior
Vice President, Chief Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Officer
and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Ritter
|
2007
|
|
$ |
114,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
114,000 |
|
Senior
Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at Fiscal
Year-End
The following table sets forth certain information concerning option
awards held by the named executive officers that were outstanding as of
September 30, 2007. There were no other equity awards held by the
named executive officers at September 30, 2007. All of the option
awards set forth in the table below were immediately exercisable by the
recipient upon grant.
Name and Principal
Position
|
|
Number of Securities
Underlying Unexercised Options
(#) Exercisable
|
|
|
Number of Securities
Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Option Exercise
Price
|
|
Option Expiration
Date
|
Carroll E. Amos
|
|
|
16,667 |
|
|
|
-
|
|
|
$ |
7.50 |
|
10/01/07
|
President
and Chief
|
|
|
16,667 |
|
|
|
- |
|
|
|
8.37 |
|
10/29/08
|
Executive
Officer
|
|
|
3,000 |
|
|
|
- |
|
|
|
6.00 |
|
12/01/09
|
|
|
|
8,666 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
|
|
|
20,000 |
|
|
|
- |
|
|
|
9.00 |
|
01/01/12
|
|
|
|
10,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward C. Allen
|
|
|
2,000 |
|
|
|
- |
|
|
$ |
6.00 |
|
12/01/09
|
Senior
Vice President, Chief Operating
|
|
|
9,000 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
Officer
and Secretary
|
|
|
4,000 |
|
|
|
- |
|
|
|
7.00 |
|
01/01/12
|
|
|
|
3,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Ritter
|
|
|
3,000 |
|
|
|
- |
|
|
$ |
6.00 |
|
12/01/09
|
Senior
Vice President and
|
|
|
8,000 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
Chief
Financial Officer
|
|
|
4,000 |
|
|
|
- |
|
|
|
7.00 |
|
01/01/12
|
|
|
|
3,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
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 will conduct a performance
appraisal of Mr. Amos and may extend the employment agreement for an additional
year so that the remaining term shall be three years, unless the board of
directors determines that there is no basis upon which to extend the employment
agreement, it will be extended for an additional year. 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 he
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) the 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, or a material reduction in the benefits and perquisites to Mr. Amos from
those being provided as of the effective date of the employment agreement ; (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 equal to the greater of (i)
the remaining base salary and bonus payments that would have been paid to Mr.
Amos during the remaining term of the employment agreement or (ii) thirty-six
(36) times the highest monthly base salary received by Mr. Amos during the 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
for any reason other than a change in control, 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 equal to the greater of: (i) the payments due for
the remaining term of the employment agreement; 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.
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 21, 2007.
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)
|
14.30%
|
Common Stock
|
The
Ochsman Children Trust
1650 Tysons
Boulevard
McLean, VA 22102
|
238,597 shares(1)(4)
|
7.89%
|
Common Stock
|
George W. Calomiris
4848 Upton Street,
N.W.
Washington,
DC 20016
|
199,715 shares(5)
|
6.40%
|
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)
|
6.12%
|
_________________
(1)
|
Does not include
warrants exercisable at September 30, 2007 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 warrants
exercisable at September 30, 2007 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 warrants
exercisable at September 30, 2007 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 warrants
exercisable at September 30, 2007 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 21, 2007, 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 21, 2007 by each director and all directors and executive officers as a
group as of the December 21, 2007.
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.
|
50
|
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.
|
60
|
1997
|
2008
|
44,060(4)
|
1.46%
|
James B. Vito is
Managing General
Partner, James
Properties, engaged in the sale and management of property.
|
82
|
1998
|
2008
|
79,042(2)
|
2.61%
|
|
|
|
|
|
|
Jeffrey W. Ochsman
is an attorney and partner of the law firm of Friedlander, Misler, Sloan,
Kletzkin & Ochsman, PLLC.
|
55
|
1999
|
2009
|
500
|
*
|
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.
|
53
|
2003
|
2010
|
500
|
*
|
Name
and Principal
Occupation
at Present and
for Past Five Years
|
|
Shares
of
Common
Stock
|
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.
|
59
|
550(4)
|
*
|
David E. Ritter
joined the bank and the company as a Senior Vice President and Chief
Financial Officer in 1998.
|
57
|
300(4)
|
*
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (seven persons)(3)
|
|
301,759
|
9.98%
|
(1)
|
Each person
effectively exercises sole voting or dispositive power as to shares
reported.
|
(2)
|
Does not include
warrants exercisable at September 30, 2007 to purchase 9,166 and 2,000
shares, respectively, held by Messrs. Calomiris and Vito under the Greater
Atlantic Financial Corp. 1997 Stock Option Plan, or shares of preferred
securities presently convertible into 114,841, 34,970, and 6,431 shares of
common stock held, respectively, by Messrs. Calomiris, Vito, 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, 2007.
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
|
333,516
|
$6.93
|
91,000
|
Equity compensation
plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
Total
|
333,516
|
$6.93
|
91,000
|
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, 2007, one of the bank's directors had
loans with the bank which had outstanding balances totaling
$73,000. 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 $106,703 and
$225,076 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, 2007 and 2006, 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, 2007 or 2006.
Tax Fees
BDO Seidman billed the company $30,358 and $35,600 for tax services
for the fiscal year ended September 30, 2007 and 2006,
respectively. Tax fees represented 22.15% of the fees paid to BDO
Seidman, LLP in fiscal year 2007 and 13.66% in fiscal year 2006.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
See Index to Consolidated Financial Statements on page 61
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
23.1
Consent of BDO Seidman, LLP
|
31.1
Certification of Chief Executive Officer
|
|
31.2
Certification of Chief Financial Officer
|
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350
32.2 Certification 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:
December 28, 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
|
December 28, 2007
|
/s/ Carroll
E. Amos
Carroll E. Amos
|
Chief Executive
Officer,
And
President and Director
|
December 28, 2007
|
/s/ Sidney
M. Bresler
Sidney M. Bresler
|
Director
|
December 28, 2007
|
/s/ Jeffrey
W. Ochsman
Jeffrey W. Ochsman
|
Director
|
December 28, 2007
|
/s/ James
B. Vito
James B. Vito
|
Director
|
December 28, 2007
|
/s/ David
E. Ritter
David E. Ritter
|
Senior Vice President
and
Chief Financial
Officer
|
December 28, 2007
|
Consolidated Financial Statements
of
Greater Atlantic Financial Corp.
Index
|
|
|
Page
|
Report of
Independent Registered Public Accounting Firm
|
62
|
Consolidated
Statements of Financial Condition as of September 30, 2007 and 2006
|
63
|
Consolidated
Statements of Operations for the Years Ended September 30, 2007, 2006 and
2005
|
64
|
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended
September 30, 2007,
2006 and 2005
|
65
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended September 30, 2007,
2006 and 2005
|
65
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2007,
2006 and 2005
|
66
|
Notes to
Consolidated Financial Statements
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
and 2006, 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, 2007. 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, 2007 and 2006
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2007 in conformity with accounting
principles generally accepted in the United States of America.
/s/
BDO Seidman,
LLP
Richmond, Virginia
December 17, 2007
Greater Atlantic Financial Corp. and
Subsidiaries
Consolidated Statements of Financial
Condition
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
3,146 |
|
|
$ |
2,516 |
|
Interest bearing
deposits
|
|
|
4,486 |
|
|
|
17,288 |
|
Investment
securities
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
48,910 |
|
|
|
75,461 |
|
Held-to-maturity
|
|
|
3,053 |
|
|
|
4,696 |
|
Loans receivable,
net
|
|
|
176,108 |
|
|
|
193,307 |
|
Accrued interest and
dividends receivable
|
|
|
1,675 |
|
|
|
2,073 |
|
Deferred income
taxes
|
|
|
2,096 |
|
|
|
1,928 |
|
Federal Home Loan
Bank stock, at cost
|
|
|
1,731 |
|
|
|
2,388 |
|
Premises and
equipment, net
|
|
|
2,285 |
|
|
|
2,764 |
|
Goodwill
|
|
|
956 |
|
|
|
956 |
|
Prepaid expenses and
other assets
|
|
|
1,548 |
|
|
|
1,842 |
|
Total Assets
|
|
$
|
245,994 |
|
|
$
|
305,219 |
|
Liabilities and
stockholders’ equity
|
|
Liabilities
|
|
|
|
|
|
|
Deposits
|
|
$ |
197,991 |
|
|
$ |
230,174 |
|
Advance payments
from borrowers for taxes and insurance
|
|
|
229 |
|
|
|
270 |
|
Accrued expenses and
other liabilities
|
|
|
1,601 |
|
|
|
1,963 |
|
Income taxes payable
|
|
|
36 |
|
|
|
- |
|
Advances from the
FHLB and other borrowings
|
|
|
27,192 |
|
|
|
54,574 |
|
Junior subordinated
debt securities
|
|
|
9,374 |
|
|
|
9,388 |
|
Total liabilities
|
|
|
236,423 |
|
|
|
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 and 3,020,934 shares outstanding
|
|
|
30 |
|
|
|
30 |
|
Additional
paid-in capital
|
|
|
25,273 |
|
|
|
25,228 |
|
Accumulated
deficit
|
|
|
(14,408 |
) |
|
|
(15,359 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,324 |
)
|
|
|
(1,049 |
)
|
Total stockholders’
equity
|
|
|
9,571 |
|
|
|
8,850 |
|
Total liabilities
and stockholders’ equity
|
|
$
|
245,994 |
|
|
$
|
305,219 |
|
See
accompanying notes to consolidated financial statements.
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Operations
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
14,173 |
|
|
$ |
13,866 |
|
|
$ |
12,430 |
|
Investments
|
|
|
4,248 |
|
|
|
4,928 |
|
|
|
4,528 |
|
Total interest
income
|
|
|
18,421 |
|
|
|
18,794 |
|
|
|
16,958 |
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
6,337 |
|
Borrowed
money
|
|
|
2,662 |
|
|
|
3,874 |
|
|
|
3,676 |
|
Total interest
expense
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
10,013 |
|
Net interest income
|
|
|
6,428 |
|
|
|
7,211 |
|
|
|
6,945 |
|
Provision for loan
losses
|
|
|
685
|
|
|
|
126
|
|
|
|
219
|
|
Net interest income
after provision for loan losses
|
|
|
5,743 |
|
|
|
7,085 |
|
|
|
6,726 |
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and
service charges
|
|
|
613 |
|
|
|
610 |
|
|
|
734 |
|
Gain
(loss) on sale of loans
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
Gain
(loss)on sale of investment securities
|
|
|
- |
|
|
|
- |
|
|
|
539 |
|
Gain
(loss) on derivatives
|
|
|
(21 |
) |
|
|
212 |
|
|
|
303 |
|
Gain on
sale of real estate owned
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
Gain on
branch sales
|
|
|
4,255 |
|
|
|
- |
|
|
|
945 |
|
Other
operating income
|
|
|
23
|
|
|
|
30
|
|
|
|
66
|
|
Total noninterest
income
|
|
|
4,870 |
|
|
|
917
|
|
|
|
2,640 |
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
4,446 |
|
|
|
4,718 |
|
|
|
4,213 |
|
Occupancy
|
|
|
1,394 |
|
|
|
1,337 |
|
|
|
1,337 |
|
Professional
services
|
|
|
1,128 |
|
|
|
1,227 |
|
|
|
969 |
|
Advertising
|
|
|
130 |
|
|
|
628 |
|
|
|
301 |
|
Deposit
insurance premium
|
|
|
69 |
|
|
|
101 |
|
|
|
100 |
|
Furniture,
fixtures and equipment
|
|
|
516 |
|
|
|
554 |
|
|
|
641 |
|
Data
processing
|
|
|
877 |
|
|
|
919 |
|
|
|
1,054 |
|
Other
operating expenses
|
|
|
1,066 |
|
|
|
1,601 |
|
|
|
1,274 |
|
Total noninterest
expense
|
|
|
9,626 |
|
|
|
11,085 |
|
|
|
9,889 |
|
Income (loss) from
continuing operations before income taxes
|
|
|
987 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
Provision for income
taxes
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
951 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
-
|
|
|
|
(2,488 |
)
|
|
|
(1,107 |
)
|
Net
income (loss)
|
|
$
|
951
|
|
|
$
|
(5,571 |
)
|
|
$
|
(1,630 |
)
|
Earnings (loss) per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations basic
|
|
$ |
0.31 |
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
Discontinued
operations basic
|
|
|
-
|
|
|
|
(0.82 |
)
|
|
|
(0.37 |
)
|
|
|
$
|
0.31 |
|
|
$
|
(1.84 |
)
|
|
$
|
(0.54 |
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations basic
|
|
$ |
0.31 |
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
Discontinued
operations basic
|
|
|
- |
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
|
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
Weighted average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,023,407 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
Diluted
|
|
|
4,395,008 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
See
accompanying notes to consolidated financial statements.
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Comprehensive Income (Loss)
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
951
|
|
|
$
|
(5,571 |
)
|
|
$
|
(1,630 |
)
|
Other comprehensive
(loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) income on securities
|
|
|
(275 |
) |
|
|
46 |
|
|
|
(16 |
) |
Other comprehensive
(loss) income
|
|
|
(275 |
)
|
|
|
46
|
|
|
|
(16
|
)
|
Comprehensive (loss)
income
|
|
$
|
676
|
|
|
$
|
(5,525 |
)
|
|
$
|
(1,646 |
)
|
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
|
Balance at September
30, 2004
|
|
$ |
- |
|
|
$ |
30 |
|
|
$ |
25,152 |
|
|
$ |
(8,158 |
) |
|
$ |
(1,079 |
) |
|
$ |
15,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,630 |
)
|
|
|
-
|
|
|
|
(1,630 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September
30, 2005
|
|
|
- |
|
|
|
30 |
|
|
|
25,228 |
|
|
|
(9,788 |
) |
|
|
(1,095 |
) |
|
|
14,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,571 |
)
|
|
|
-
|
|
|
|
(5,571 |
)
|
Balance at September
30, 2006
|
|
|
- |
|
|
|
30 |
|
|
|
25,228 |
|
|
|
(15,359 |
) |
|
|
(1,049 |
) |
|
|
8,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of trust
preferred securities
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(275 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
951
|
|
|
|
-
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September
30, 2007
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
25,273 |
|
|
$
|
(14,408 |
)
|
|
$
|
(1,324 |
)
|
|
$
|
9,571 |
|
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Cash flow from
operating activities
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
Adjustments to
reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided
(used) by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
Amortization
of deferred loan acquisition costs, net
|
|
|
38 |
|
|
|
(50 |
) |
|
|
(27 |
) |
Depreciation
and amortization
|
|
|
445 |
|
|
|
658 |
|
|
|
930 |
|
Gain on
branch sale
|
|
|
(4,255 |
) |
|
|
- |
|
|
|
(945 |
) |
(Gain)
loss on disposal of fixed assets
|
|
|
- |
|
|
|
(26 |
) |
|
|
91 |
|
Option
compensation
|
|
|
- |
|
|
|
- |
|
|
|
42 |
|
Realized
gain on sale of mortgaged-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
(539 |
) |
Loss
(gain) on derivatives
|
|
|
21 |
|
|
|
(212 |
) |
|
|
(303 |
) |
Amortization
of other investment securities premiums
|
|
|
862 |
|
|
|
753 |
|
|
|
853 |
|
Amortization
of mortgage-backed security premiums
|
|
|
397 |
|
|
|
662 |
|
|
|
937 |
|
Amortization
of deferred fees
|
|
|
(325 |
) |
|
|
(496 |
) |
|
|
(635 |
) |
Discount
accretion net of premium amortization
|
|
|
287 |
|
|
|
(277 |
) |
|
|
(361 |
) |
Amortization
of convertible preferred stock costs
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
Conversion
of Trust Preferred Securities
|
|
|
(23 |
) |
|
|
- |
|
|
|
- |
|
(Gain)
loss on sale of foreclosed real estate
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
Gain on
sale of loans held for sale
|
|
|
- |
|
|
|
(1,522 |
) |
|
|
(4,720 |
) |
(Increase) decrease
in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Disbursements
for origination of loans
|
|
|
- |
|
|
|
(91,477 |
) |
|
|
(276,038 |
) |
Proceeds
from sales of loans
|
|
|
- |
|
|
|
102,518 |
|
|
|
276,770 |
|
Accrued
interest and dividend receivable
|
|
|
399 |
|
|
|
(327 |
) |
|
|
193 |
|
Prepaid
expenses and other assets
|
|
|
177 |
|
|
|
1,156 |
|
|
|
360 |
|
Deferred
loan fees collected, net of deferred costs incurred
|
|
|
435 |
|
|
|
431 |
|
|
|
172 |
|
Increase (decrease)
in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
(265 |
) |
|
|
649 |
|
|
|
(451 |
) |
Income
taxes payable
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by
(used in) operating activities
|
|
$
|
(126 |
)
|
|
$
|
6,939 |
|
|
$
|
(5,073 |
)
|
(Continued)
Greater
Atlantic Financial Corp. and Subsidiaries
Consolidated
Statements of Cash Flows – (Continued)
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Cash flow from
investing activities
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in loans
|
|
$ |
16,079 |
|
|
$ |
1,879 |
|
|
$ |
51,867 |
|
Disposal
(purchases) of premises and equipment
|
|
|
34 |
|
|
|
792 |
|
|
|
2,055 |
|
Proceeds
from sales of foreclosed real estate
|
|
|
- |
|
|
|
297 |
|
|
|
- |
|
Purchases
of investment securities
|
|
|
- |
|
|
|
(7,707 |
) |
|
|
(21,684 |
) |
Proceeds
from repayments of investment securities
|
|
|
11,528 |
|
|
|
17,105 |
|
|
|
21,841 |
|
Purchases
of mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
(24,224 |
) |
Proceeds
from sale of mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
21,921 |
|
Proceeds
from repayments of mortgage-backed securities
|
|
|
14,963 |
|
|
|
25,198 |
|
|
|
37,548 |
|
Purchases
of FHLB stock
|
|
|
(742 |
) |
|
|
(3,015 |
) |
|
|
(5,169 |
) |
Proceeds
from sale of FHLB stock
|
|
|
1,399 |
|
|
|
3,130 |
|
|
|
6,751 |
|
Net cash provided by
investing activities
|
|
|
43,261 |
|
|
|
37,679 |
|
|
|
90,906 |
|
Cash flow from
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in deposits
|
|
|
(27,928 |
) |
|
|
(7,620 |
) |
|
|
(50,217 |
) |
Net
(repayments) advances from FHLB
|
|
|
(11,000 |
) |
|
|
(2,000 |
) |
|
|
(13,200 |
) |
Net
borrowings (repayments) on reverse repurchase agreements and other
borrowings
|
|
|
(16,383 |
) |
|
|
(19,905 |
) |
|
|
(26,386 |
) |
Increase
(decrease) in advance payments by borrowers for taxes and insurance
|
|
|
(41 |
) |
|
|
2 |
|
|
|
(37 |
) |
Conversion
of trust preferred securities
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
Exercise
of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
Net cash (used in)
financing activities
|
|
|
(55,307 |
)
|
|
|
(29,523 |
)
|
|
|
(89,806 |
)
|
Increase (decrease)
in cash and cash equivalents
|
|
|
(12,172 |
)
|
|
|
15,095 |
|
|
|
(3,973 |
)
|
Cash and cash
equivalents, at beginning of year
|
|
|
19,804 |
|
|
|
4,709 |
|
|
|
8,682 |
|
Cash and cash
equivalents, at end of year
|
|
$
|
7,632 |
|
|
$
|
19,804 |
|
|
$
|
4,709 |
|
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 is the ownership and management of
Greater Atlantic Bank (“GAB” or the “Bank”). 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.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, 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 paid the bank
an 8.5% premium on the balance of deposits assumed at closing. At
August 24, 2007, the closing date of that transaction, the deposits at our
Pasadena branch office on which the deposit premium would apply totaled
approximately $51.5 million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
Principles of Consolidation
The consolidated financial statements include the accounts of GAFC
and its wholly owned subsidiaries, the bank 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, 2007 and
September 30, 2006, 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 12.
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, 2007.
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, 2007.
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 currently includes
interest rate caps. 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 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.
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 sells loans and participation interests in loans on which
it retains servicing.
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, 2007
and September 30, 2006. 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 10).
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. 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. There were no stock options granted in 2007; however, 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. 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. 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 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
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
Net
(loss) income as reported
|
|
$ |
(1,630 |
) |
Deduct: Total
stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects
|
|
|
(239 |
)
|
Pro
Forma net income (loss)
|
|
$
|
(1,869 |
)
|
Basic income (loss)
per common share:
|
|
|
|
|
As
reported
|
|
$ |
(0.54 |
) |
Pro
Forma
|
|
|
(0.62 |
)
|
Diluted income
(loss) per common share:
|
|
|
|
|
As
reported
|
|
$ |
(0.54 |
) |
Pro
Forma
|
|
|
(0.62 |
)
|
Reclassifications
Certain
immaterial reclassifications related to interest expense and derivative gains
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. Discontinued
operations
On March
29, 2006, we began the process of discontinuing the operations of the Bank’s
subsidiary, Greater Atlantic Mortgage Corporation. 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
financial statements, as we completed the closing of the Greater Atlantic
Mortgage Corporation business. The table below summarizes Greater
Atlantic Mortgage Corporation results which were treated as discontinued
operations for the periods indicated.
|
|
Year Ended September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(Dollars in
Thousands, Except Per Share Data
|
|
|
|
|
|
|
Interest income
|
|
$ |
280 |
|
|
$ |
478 |
|
Interest expense
|
|
|
256 |
|
|
|
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 |
)
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
3. Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale,
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA notes
|
|
$ |
19,395 |
|
|
$ |
- |
|
|
$ |
641 |
|
|
$ |
18,754 |
|
CMOs
|
|
|
7,191 |
|
|
|
32 |
|
|
|
136 |
|
|
|
7,087 |
|
Corporate debt
securities
|
|
|
7,300 |
|
|
|
-
|
|
|
|
552
|
|
|
|
6,748 |
|
|
|
|
33,886 |
|
|
|
32
|
|
|
|
1,329 |
|
|
|
32,589 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
8,357 |
|
|
|
- |
|
|
|
216 |
|
|
|
8,141 |
|
GNMA notes
|
|
|
5,382 |
|
|
|
- |
|
|
|
122 |
|
|
|
5,260 |
|
FHLMC notes
|
|
|
2,961 |
|
|
|
- |
|
|
|
41 |
|
|
|
2,920 |
|
|
|
|
16,700 |
|
|
|
-
|
|
|
|
379
|
|
|
|
16,321 |
|
|
|
$
|
50,586 |
|
|
$
|
32
|
|
|
$
|
1,708 |
|
|
$
|
48,910 |
|
Held-to-Maturity,
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA notes
|
|
$ |
2,846 |
|
|
$ |
- |
|
|
$ |
104 |
|
|
$ |
2,742 |
|
Corporate debt
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,846 |
|
|
|
-
|
|
|
|
104
|
|
|
|
2,742 |
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
104 |
|
|
|
- |
|
|
|
2 |
|
|
|
102 |
|
FHLMC notes
|
|
|
103
|
|
|
|
-
|
|
|
|
2
|
|
|
|
101
|
|
|
|
|
207
|
|
|
|
-
|
|
|
|
4
|
|
|
|
203
|
|
|
|
$
|
3,053 |
|
|
$
|
-
|
|
|
$
|
108
|
|
|
$
|
2,945 |
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
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 notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
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 |
|
The
weighted average interest rate on investments was 5.47% and 5.03% for the years
ended September 30, 2007 and 2006, respectively.
Trading
Activities
There
were no net gains (losses) on trading activities included in earnings for the
years ended September 30, 2007, 2006 and 2005.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
Proceeds from the sale of
available for sale securities were zero, zero and $21.9 million for the years
ended September 30, 2007, 2006 and 2005, respectively. Gross realized
gains were zero, zero and $539,000 for the years ended September 30, 2007, 2006
and 2005, respectively.
As of
September 30, 2007, the Bank held investments in available for sale securities
with unrealized holding losses totaling $1.7 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
|
|
$ |
2,048 |
|
|
$ |
149 |
|
|
$ |
4,700 |
|
|
$ |
403 |
|
|
$ |
6,748 |
|
|
$ |
552 |
|
CMOs
|
|
|
4,124 |
|
|
|
108 |
|
|
|
1,934 |
|
|
|
28 |
|
|
|
6,058 |
|
|
|
136 |
|
U.S. Government
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
3,196 |
|
|
|
38 |
|
|
|
15,558 |
|
|
|
603 |
|
|
|
18,754 |
|
|
|
641 |
|
GNMA
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
|
|
122 |
|
|
|
5,260 |
|
|
|
122 |
|
U.S. Government
agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
41 |
|
|
|
2,920 |
|
|
|
41 |
|
FNMA
MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
8,141 |
|
|
|
216 |
|
|
|
8,141 |
|
|
|
216 |
|
Total
|
|
$
|
9,368 |
|
|
$
|
295
|
|
|
$
|
38,513 |
|
|
$
|
1,413 |
|
|
$
|
47,881 |
|
|
$
|
1,708 |
|
As of
September 30, 2007, the Bank held investments in held-to-maturity with
unrealized holding losses totaling $108,000, 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
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,742 |
|
|
$ |
104 |
|
|
$ |
2,742 |
|
|
$ |
104 |
|
U.S. Government
agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
101 |
|
|
|
2 |
|
|
|
101 |
|
|
|
2 |
|
FNMA
MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
102 |
|
|
|
2 |
|
|
|
102 |
|
|
|
2 |
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,945 |
|
|
$
|
108
|
|
|
$
|
2,945 |
|
|
$
|
108
|
|
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 2007 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, 2007
The
amortized cost and estimated fair value of securities at September 30, 2007 and
2006, by contractual maturity, are as follows:
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
After five years
through ten years
|
|
|
3,499 |
|
|
|
3,245 |
|
|
|
3,891 |
|
|
|
3,753 |
|
After ten years
|
|
|
30,387 |
|
|
|
29,344 |
|
|
|
40,704 |
|
|
|
40,310 |
|
Mortgage-backed
securities
|
|
|
16,700 |
|
|
|
16,321 |
|
|
|
32,032 |
|
|
|
31,365 |
|
|
|
|
50,586 |
|
|
|
48,910 |
|
|
|
76,676 |
|
|
|
75,461 |
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
After one year
through five years
|
|
|
- |
|
|
|
- |
|
|
|
110 |
|
|
|
94 |
|
After five years
through ten years
|
|
|
380 |
|
|
|
366 |
|
|
|
553 |
|
|
|
534 |
|
After ten years
|
|
|
2,466 |
|
|
|
2,376 |
|
|
|
3,798 |
|
|
|
3,602 |
|
Mortgage-backed
securities
|
|
|
207 |
|
|
|
203 |
|
|
|
235 |
|
|
|
230 |
|
|
|
|
3,053 |
|
|
|
2,945 |
|
|
|
4,696 |
|
|
|
4,460 |
|
Total investment
securities
|
|
$
|
53,639 |
|
|
$
|
51,855 |
|
|
$
|
81,372 |
|
|
$
|
79,921 |
|
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. All investment securities currently considered liquid.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
Loans
receivable consists of the following:
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In Thousands)
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
Single-family
|
|
$ |
37,972 |
|
|
$ |
43,473 |
|
Multi-family
|
|
|
3,983 |
|
|
|
813 |
|
Construction
|
|
|
9,939 |
|
|
|
14,245 |
|
Commercial
real estate
|
|
|
34,984 |
|
|
|
28,403 |
|
Land
loans
|
|
|
8,097 |
|
|
|
13,829 |
|
Total mortgage loans
|
|
|
94,975 |
|
|
|
100,763 |
|
Commercial
loans
|
|
|
34,844 |
|
|
|
39,794 |
|
Consumer
loans
|
|
|
52,656 |
|
|
|
61,414 |
|
Total loans
|
|
|
182,475 |
|
|
|
201,971 |
|
Less:
|
|
|
|
|
|
|
|
|
Due
borrowers on loans-in process
|
|
|
(4,947 |
) |
|
|
(8,517 |
) |
Deferred
loan fees origination costs
|
|
|
832 |
|
|
|
944 |
|
Allowance
for loan losses
|
|
|
(2,305 |
) |
|
|
(1,330 |
) |
Unearned
(discounts) premium
|
|
|
53
|
|
|
|
239 |
|
|
|
$
|
176,108 |
|
|
$
|
193,307 |
|
The
activity in allowance for loan losses is summarized as follows:
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Balance, beginning
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
|
$ |
1,600 |
|
Provision for loan
losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
Charge-offs
|
|
|
(353 |
) |
|
|
(80 |
) |
|
|
(625 |
) |
Recoveries
|
|
|
643 |
|
|
|
72
|
|
|
|
18
|
|
Balance, ending
|
|
$
|
2,305 |
|
|
$
|
1,330 |
|
|
$
|
1,212 |
|
The
amount of loans serviced for others totaled $32.0 million and $34.4 million as
of September 30, 2007 and September 30, 2006, respectively.
The
allowance for uncollected interest, established for mortgage loans which are
delinquent for a period of 90 days or more, amounted to $110,000, $204,000 and
$134,000 as of September 30, 2007, 2006 and 2005, 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
$1.3 million, $274,000 and $1.6 million as of September 30, 2007, 2006, and
September 30, 2005, respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
5.
Accrued Interest and Dividends Receivable
Accrued
interest and dividends receivable consist of the following:
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In Thousands)
|
|
|
|
|
|
|
Investments
|
|
$ |
491 |
|
|
$ |
751 |
|
Loans receivable
|
|
|
1,159 |
|
|
|
1,282 |
|
Accrued dividends on
FHLB stock
|
|
|
25
|
|
|
|
40
|
|
|
|
$
|
1,675 |
|
|
$
|
2,073 |
|
6.
Premises and Equipment
Premises
and equipment consists of the following:
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In Thousands)
|
|
|
|
|
|
|
Furniture, fixtures
and equipment
|
|
$ |
2,283 |
|
|
$ |
2,621 |
|
Leasehold
improvements
|
|
|
2,804 |
|
|
|
2,835 |
|
Land
|
|
|
377 |
|
|
|
377 |
|
|
|
|
5,464 |
|
|
|
5,833 |
|
Less: Allowances for
depreciation and amortization
|
|
|
3,179 |
|
|
|
3,069 |
|
|
|
$
|
2,285 |
|
|
$
|
2,764 |
|
7.
Foreclosed Real Estate
There
was no activity in the allowance for losses on foreclosed real estate in fiscal
2007, 2006 or 2005.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
8.
Deposits
Deposits
are summarized as follows:
September
30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Ranges of
Contractual
Interest Rates
|
|
|
%
of Total
|
|
(In Thousands)
|
|
|
|
Savings accounts
|
|
$ |
2,468 |
|
|
|
0.00 – 1.09
|
% |
|
|
1.3 |
% |
NOW/money market
accounts
|
|
|
60,625 |
|
|
|
0.00 – 4.40
|
% |
|
|
30.6 |
|
Certificates of
deposit
|
|
|
125,717 |
|
|
|
0.94 – 9.00
|
% |
|
|
63.5 |
|
Non-interest bearing
demand deposits
|
|
|
9,181 |
|
|
|
0.00 |
%
|
|
|
4.6 |
|
|
|
$
|
197,991 |
|
|
|
|
|
|
|
100.0 |
%
|
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 |
%
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
Certificates of deposit as
of September 30, 2007 mature as follows:
Year ending
September 30,
|
|
Amount
|
|
(In Thousands)
Thousands
|
|
|
|
2008
|
|
$ |
107,736 |
|
2009
|
|
|
12,079 |
|
2010
|
|
|
3,019 |
|
2011
|
|
|
985 |
|
2012 and after
|
|
|
1,898 |
|
|
|
$
|
125,717 |
|
Interest expense on
deposit accounts consists of the following:
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
NOW/money market
accounts
|
|
$ |
2,791 |
|
|
$ |
2,430 |
|
|
$ |
1,197 |
|
Savings accounts
|
|
|
27 |
|
|
|
48 |
|
|
|
94 |
|
Certificates of
deposit
|
|
|
6,513 |
|
|
|
5,231 |
|
|
|
5,046 |
|
|
|
$
|
9,331 |
|
|
$
|
7,709 |
|
|
$
|
6,337 |
|
Deposits, including
certificates of deposit, with balances in excess of $100,000 totaled $68.0
million and $85.2 million at September 30, 2007, and September 30, 2006,
respectively.
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
9. Advances
from Federal Home Loan Bank and Other Borrowings
The
Bank has $43.3 million credit availability as of September 30, 2007 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
FHLB advances:
|
|
|
|
|
|
|
|
|
|
Average balance
outstanding
|
|
$ |
33,064 |
|
|
$ |
44,894 |
|
|
$ |
44,422 |
|
Maximum amount
outstanding at any month-end during the period
|
|
|
39,000 |
|
|
|
51,000 |
|
|
|
49,200 |
|
Balance outstanding
at end of period
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
Weighted average
interest rate during the period
|
|
|
5.46 |
% |
|
|
5.05 |
% |
|
|
4.47 |
% |
Weighted average
interest rate at end of period
|
|
|
5.92 |
% |
|
|
5.28 |
% |
|
|
4.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
outstanding
|
|
|
15,264 |
|
|
|
31,624 |
|
|
|
51,388 |
|
Maximum amount
outstanding at any month-end during the period
|
|
|
10,857 |
|
|
|
35,641 |
|
|
|
62,846 |
|
Balance outstanding
at end of period
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
Weighted average
interest rate during the period
|
|
|
5.61 |
% |
|
|
4.21 |
% |
|
|
4.33 |
% |
Weighted average
interest rate at end of period
|
|
|
2.52 |
% |
|
|
4.65 |
% |
|
|
3.69 |
%
|
The Bank
has pledged certain investments with carrying values of $24.9 million at
September 30, 2007, to collateralize advances from the FHLB.
First
mortgage loans in the amount of $18.4 million are also available to be pledged
as collateral for the advances at September 30, 2007.
10. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Federal tax
provision (benefit)
|
|
$ |
335 |
|
|
$ |
(1,894 |
) |
|
$ |
(554 |
) |
State tax provision
(benefit)
|
|
|
39 |
|
|
|
(223 |
) |
|
|
(65 |
) |
Changes in provision
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation changes
|
|
|
(313 |
) |
|
|
1,867 |
|
|
|
613 |
|
Other
|
|
|
(25 |
)
|
|
|
250 |
|
|
|
6
|
|
Income tax provision
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
(In
Thousands)
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
4,398 |
|
|
$ |
5,039 |
|
Unrealized
(gains) losses on derivatives
|
|
|
141 |
|
|
|
178 |
|
Allowance
for loan losses
|
|
|
876 |
|
|
|
505 |
|
Available
for sale securities
|
|
|
648 |
|
|
|
433 |
|
Core
deposit intangible
|
|
|
- |
|
|
|
65 |
|
Deferred
loan fees
|
|
|
108 |
|
|
|
125 |
|
Other
|
|
|
79
|
|
|
|
86
|
|
Total deferred tax
assets
|
|
|
6,250 |
|
|
|
6,431 |
|
Deferred tax
liabilities
|
|
|
|
|
|
|
|
|
Tax
over book depreciation
|
|
|
410 |
|
|
|
478 |
|
Other
|
|
|
172 |
|
|
|
140 |
|
Total deferred tax
liabilities
|
|
|
582 |
|
|
|
618 |
|
Net
deferred tax assets
|
|
|
5,668 |
|
|
|
5,813 |
|
Less: Valuation
allowance
|
|
|
3,572 |
|
|
|
3,885 |
|
Total
|
|
$
|
2,096 |
|
|
$
|
1,928 |
|
Management has provided a valuation allowance for net deferred tax
assets, due to the timing of the generation of future taxable
income. 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.
At September 30, 2007, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $11.5 million,
which expire in the years 2008 to 2026. 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
$114,000. In addition certain additional limitations will exist
should the merger with Summit occur.
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
11. 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. Those 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.
In the event of nonperformance by the other party to financial
instrument for commitments to extend credit, for standby letters of credit or
for written financial guarantees the Company's exposure to credit loss 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, 2007, the Company had outstanding commitments to
originate loans and undisbursed construction mortgages aggregating approximately
$9.5 million. Fixed rate commitments are at market rates as of the
commitment dates and generally expire within 60 days. In addition,
the Company was contingently liable under unused lines of credit for
approximately $111.8 million and standby letters of credit for approximately
$310,000.
Rental Commitments
The Company has entered into lease agreements for the rental of
certain properties expiring on various dates through October 31,
2015. The future minimum rental commitments as of September 30, 2007,
for all non-cancelable lease agreements, are as follows:
Years ending
September 30,
|
|
Rental
Commitments
|
|
(In Thousands)
|
|
|
|
2008
|
|
$ |
1,062 |
|
2009
|
|
|
1,003 |
|
2010
|
|
|
855 |
|
2011
|
|
|
344 |
|
2012
|
|
|
125 |
|
Thereafter
|
|
|
390 |
|
Total
|
|
$
|
3,779 |
|
Net rent expense for the years ended September 30, 2007, 2006 and
2005 was $1.1 million, $1.1 million and $1.0 million, respectively.
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
12. 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, 2007, 2006 or 2005.
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, 2007 the
Bank was classified as a well capitalized financial institution and was
classified as an adequately capitalized financial institution at September 30,
2006.
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,
2007 and September 30, 2006:
At September 30,
2007
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus
|
|
(Dollars in
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
$ |
3,684 |
|
|
|
1.50 |
% |
|
$ |
18,830 |
|
|
|
7.67 |
% |
|
$ |
15,146 |
|
Core
|
|
$ |
9,825 |
|
|
|
4.00 |
% |
|
$ |
18,830 |
|
|
|
7.67 |
% |
|
$ |
9,005 |
|
Risk-based
|
|
$
|
13,630 |
|
|
|
8.00 |
%
|
|
$
|
20,874 |
|
|
|
12.25 |
%
|
|
$
|
7,244 |
|
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 |
|
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 (unaudited).
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In
Thousands)
|
|
|
|
|
|
|
GAAP capital
|
|
$ |
11,661 |
|
|
$ |
10,161 |
|
Guaranteed
convertible preferred securities
|
|
|
8,000 |
|
|
|
8,000 |
|
Unrealized losses on
available for sale securities
|
|
|
1,324 |
|
|
|
1,049 |
|
Excluded deferred
tax asset
|
|
|
(1,199 |
) |
|
|
(1,516 |
) |
Goodwill
|
|
|
(956 |
)
|
|
|
(956 |
)
|
Tangible capital
|
|
|
18,830 |
|
|
|
16,738 |
|
Adjustments
|
|
|
-
|
|
|
|
-
|
|
Core capital
|
|
|
18,830 |
|
|
|
16,738 |
|
Allowance
for general loss reserves
|
|
|
2,132 |
|
|
|
1,011 |
|
Adjustments
to arrive at Risk-Weighted Assets
|
|
|
(88 |
)
|
|
|
(113 |
)
|
Risk-based capital
|
|
$
|
20,874 |
|
|
$
|
17,636 |
|
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.
13. 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, 2007, 88,016
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, 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 |
|
|
|
|
|
Options expired
|
|
|
(7,500 |
)
|
|
$
|
6.75 |
|
|
|
|
|
Balance outstanding
and exercisable at September 30, 2007
|
|
|
245,500 |
|
|
$
|
6.72 |
|
|
|
|
|
Fair
value of options issued in 2006 was $22,000 net of related tax effects.
A
summary of the stock options outstanding and exercisable as of September 30,
2007 is as follows:
Options Outstanding
|
|
Options Exercisable
|
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining Life
(years)
|
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
|
$7.50
|
16,667
|
0.2
|
|
$7.50
|
16,667
|
|
$8.38
|
16,667
|
1.2
|
|
$8.38
|
16,667
|
|
$6.00
|
13,000
|
2.2
|
|
$6.00
|
13,000
|
|
$4.00
|
41,666
|
3.2
|
|
$4.00
|
41,666
|
|
$5.31
|
10,000
|
3.2
|
|
$5.31
|
10,000
|
|
$7.00
|
17,000
|
4.3
|
|
$7.00
|
17,000
|
|
$9.00
|
20,000
|
4.3
|
|
$9.00
|
20,000
|
|
$8.50
|
30,000
|
6.1
|
|
$8.50
|
30,000
|
|
$6.75
|
68,500
|
7.1
|
|
$6.75
|
68,500
|
|
$6.00
|
12,000
|
8.5
|
|
$6.00
|
12,000
|
|
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
14. 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, 2007, 2006
and 2005:
|
For the Year Ended
September 30,
|
|
2007
|
|
2006
|
|
2005
|
|
Income
|
Shares
|
Per
Share Amount
|
|
Income (loss)
|
Shares
|
Per
Share Amount
|
|
Income (loss)
|
Shares
|
Per
Share Amount
|
(Dollars in
Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
$951
|
3,023,407
|
$0.31
|
|
$(5,571)
|
3,020,934
|
$(1.84)
|
|
$(1,630)
|
3,015,509
|
$(0.54)
|
Effect of conversion
of preferred securities
|
405
|
1,368,143
|
-
|
|
-
|
-
|
-
|
|
-
|
-
|
-
|
Effect of dilutive
stock options
|
-
|
3,458
|
-
|
|
-
|
-
|
-
|
|
-
|
-
|
-
|
Diluted
|
$1,356
|
4,395,008
|
$0.31
|
|
$(5,571)
|
3,020,934
|
$(1.84)
|
|
$(1,630)
|
3,015,509
|
$(0.54)
|
The effect of the conversion of preferred securities and stock
options of 1,381,079 and 1,386,030 were excluded in 2006 and 2005, respectively,
as they would have been anti-dilutive.
15. 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 $181,000 and $263,000 as of September 30, 2007 and
September 30, 2006, respectively.
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
16. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying value
|
|
|
Estimated fair value
|
|
|
Carrying value
|
|
|
Estimated fair value
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
interest bearing deposits
|
|
$ |
7,632 |
|
|
$ |
7,632 |
|
|
$ |
19,804 |
|
|
$ |
19,804 |
|
Investment
securities
|
|
|
51,963 |
|
|
|
51,855 |
|
|
|
80,157 |
|
|
|
79,921 |
|
Loans
receivable
|
|
|
176,108 |
|
|
|
176,833 |
|
|
|
193,307 |
|
|
|
193,049 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
197,991 |
|
|
|
198,368 |
|
|
|
230,174 |
|
|
|
229,818 |
|
Borrowings
|
|
|
27,192 |
|
|
|
27,980 |
|
|
|
54,574 |
|
|
|
55,333 |
|
Off-balance sheet
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
10
|
|
17. 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, 2007, 2006 and 2005.
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
18. Supplemental Cash
Flow Information
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Cash paid during
period for interest on deposits and borrowings
|
|
$
|
3,318 |
|
|
$
|
5,331 |
|
|
$
|
5,861 |
|
19. Segment Reporting and
discontinued operations
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.
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 related to GAMC of $996,000 was
recorded and also included in discontinued operations in the consolidated
statements of operations for fiscal 2006.
20. 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 announced 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, would 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). At September 30,
2007, the quarterly distribution amount that is unpaid and accrued totals
$644,000.
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.
Greater Atlantic Financial Corp.
and Subsidiaries
Notes to Consolidated Financial
Statements
21. 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 $20 million in notional
principal with terms between eight and ten years that limit the float between a
floor of 2.00%, and capped between 6.50% - 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 $21,000 in
fiscal 2007, a gain of $212,000 in fiscal 2006 and a gain of $303,000 in fiscal
2005 related to its derivatives.
22. Recent Accounting
Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. For financial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15, 2008. We do not believe
the adoption of SFAS 157 will have a material impact on the consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS 159).This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
of this Statement is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. The Company
is in the process of evaluating the impact SFAS 159 may have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations”, to create greater consistency in the accounting and financial
reporting of business combinations. SFAS 141 (R) requires a company
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquired entity to be measured at their fair
values as of the acquisition date. SFAS 141 (R) also requires companies to
recognize and measure goodwill acquired in a business combination or a gain from
a bargain purchase and how to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies to fiscal years
beginning after December 15, 2008 and is adopted
prospectively. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
23. Parent Company – Only Financial
Statements
Parent Company – Only Condensed Statements of Financial Condition
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
(In
Thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
13 |
|
|
$ |
60 |
|
Loans receivable
|
|
|
- |
|
|
|
- |
|
Investment in
subsidiary
|
|
|
21,167 |
|
|
|
19,423 |
|
Prepaid expenses and
other assets
|
|
|
316 |
|
|
|
309 |
|
Total assets
|
|
$
|
21,496 |
|
|
$
|
19,792 |
|
Liabilities and
stockholders’ equity
|
|
|
|
|
|
|
|
|
Accrued interest
payable on subordinated debt
|
|
$ |
644 |
|
|
$ |
- |
|
Other liabilities
|
|
|
117 |
|
|
|
8
|
|
Total liabilities
|
|
|
761 |
|
|
|
8
|
|
Subordinated debt
|
|
|
9,905 |
|
|
|
9,928 |
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
30 |
|
|
|
30 |
|
Additional
paid-in capital
|
|
|
25,208 |
|
|
|
25,185 |
|
Accumulated
deficit
|
|
|
(14,408 |
)
|
|
|
(15,359 |
)
|
Total stockholders’
equity
|
|
|
10,830 |
|
|
|
9,856 |
|
Total liabilities
and stockholders’ equity
|
|
$
|
21,496 |
|
|
$
|
19,792 |
|
|
|
|
|
|
|
|
|
|
Greater
Atlantic Financial Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
Parent
Company – Only Condensed Statements of Operations
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
- |
|
Other
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total interest
income
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Interest
expense
|
|
|
644 |
|
|
|
645 |
|
|
|
645 |
|
Total
interest expense
|
|
|
644 |
|
|
|
645 |
|
|
|
645 |
|
Net
interest income (expense)
|
|
|
(643 |
)
|
|
|
(644 |
)
|
|
|
(645 |
)
|
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
|
|
|
169 |
|
|
|
149 |
|
|
|
142 |
|
Total noninterest
expense
|
|
|
169 |
|
|
|
149 |
|
|
|
142 |
|
Loss before income
from subsidiaries
|
|
|
(793 |
)
|
|
|
(774 |
)
|
|
|
(768 |
)
|
Equity in income
(loss) from subsidiaries
|
|
|
1,744 |
|
|
|
(4,797 |
)
|
|
|
(862 |
)
|
Net
income (loss)
|
|
$
|
951 |
|
|
$
|
(5,571 |
)
|
|
$
|
(1,630 |
)
|
Parent
Company – Only Condensed Statements of Cash Flows
|
|
Year Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
Adjustments to
reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
loss from subsidiaries
|
|
|
(1,744 |
) |
|
|
4,797 |
|
|
|
862 |
|
(Increase)
decrease in assets
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
Increase
(decrease) in other liabilities
|
|
|
753 |
|
|
|
18
|
|
|
|
(12 |
)
|
Net
cash used in operating activities
|
|
|
(47 |
)
|
|
|
(761 |
)
|
|
|
(781 |
)
|
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 |
|
Stock
options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
755 |
|
|
|
833 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(47 |
) |
|
|
(6 |
) |
|
|
52 |
|
Cash and cash
equivalents at beginning of year
|
|
|
60
|
|
|
|
66
|
|
|
|
14
|
|
Cash and cash
equivalents at end of year
|
|
$
|
13
|
|
|
$
|
60
|
|
|
$
|
66
|
|
Greater Atlantic Financial Corp. and
Subsidiaries
Notes to Consolidated Financial
Statements
24.
|
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 Forms 10-Q, for the fiscal
years ended September 30, 2007 and 2006.
|
|
For Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
September 30, 2007
|
|
|
Fourth Quarter
|
|
|
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
Interest income
|
|
$ |
18,421 |
|
|
$ |
4,338 |
|
|
|
|
|
$ |
4,684 |
|
|
$ |
4,594 |
|
|
$ |
4,805 |
|
Interest expense
|
|
|
11,993 |
|
|
|
3,017 |
|
|
|
|
|
|
3,076 |
|
|
|
2,899 |
|
|
|
3,001 |
|
Net
interest income
|
|
|
6,428 |
|
|
|
1,321 |
|
|
|
|
|
|
1,608 |
|
|
|
1,695 |
|
|
|
1,804 |
|
Provision
(recapture) for loan losses
|
|
|
685
|
|
|
|
396
|
|
|
|
|
|
|
(4
|
)
|
|
|
145
|
|
|
|
148
|
|
Net
interest income, after provision for loan losses
|
|
|
5,743 |
|
|
|
925 |
|
|
|
|
|
|
1,612 |
|
|
|
1,550 |
|
|
|
1,656 |
|
Noninterest income
|
|
|
4,870 |
|
|
|
4,398 |
|
|
|
(1 |
) |
|
|
186 |
|
|
|
148 |
|
|
|
138 |
|
Noninterest expense
|
|
|
9,626 |
|
|
|
2,112 |
|
|
|
|
|
|
|
2,306 |
|
|
|
2,522 |
|
|
|
2,686 |
|
Income (loss) before
income taxes
|
|
|
987 |
|
|
|
3,211 |
|
|
|
|
|
|
|
(508 |
) |
|
|
(824 |
) |
|
|
(892 |
) |
Provision for income
taxes
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
951
|
|
|
$
|
3,175 |
|
|
|
|
|
|
$
|
(508 |
)
|
|
$
|
(824 |
)
|
|
$
|
(892 |
)
|
Basic and diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31 |
|
|
$ |
1.05 |
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.30 |
) |
Diluted
|
|
$
|
0.31 |
|
|
$
|
0.74 |
|
|
|
|
|
|
$
|
(0.17 |
)
|
|
$
|
(0.27 |
)
|
|
$
|
(0.30 |
)
|
(1)
Includes effect of gain on sale of Pasadena branch of $4.3 million
Greater Atlantic Financial Corp. and
Subsidiares
Notes to Consolidated Financial
Statements
|
|
For Fiscal Year 2006
|
|
|
|
For the Year Ended
September 30, 2006
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
Interest income
|
|
$ |
18,794 |
|
|
$ |
4,851 |
|
|
$ |
4,753 |
|
|
$ |
4,600 |
|
|
$ |
4,590 |
|
Interest expense
|
|
|
11,583 |
|
|
|
3,021 |
|
|
|
2,941 |
|
|
|
2,839 |
|
|
|
2,782 |
|
Net
interest income
|
|
|
7,211 |
|
|
|
1,830 |
|
|
|
1,812 |
|
|
|
1,761 |
|
|
|
1,808 |
|
Provision for loan
losses
|
|
|
126
|
|
|
|
39
|
|
|
|
13
|
|
|
|
3
|
|
|
|
71
|
|
Net
interest income, after provision for loan losses
|
|
|
7,085 |
|
|
|
1,791 |
|
|
|
1,799 |
|
|
|
1,758 |
|
|
|
1,737 |
|
Noninterest income
|
|
|
917 |
|
|
|
(63 |
) |
|
|
307 |
|
|
|
330 |
|
|
|
343 |
|
Noninterest expense
|
|
|
11,085 |
|
|
|
3,217 |
|
|
|
2,722 |
|
|
|
2,626 |
|
|
|
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 |
)
|
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 December 17, 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, 2007.
/s/ BDO Seidman, LLP
Richmond,
Virginia
December
28, 2007
Exhibit
31.1
CERTIFICATION
I, Carroll E. Amos, Chief Executive
Officer of Greater Atlantic Financial Corp., certify that:
1.I have
reviewed this annual report on Form 10-K of Greater Atlantic Financial
Corp.;
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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;
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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;
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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:
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(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;
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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):
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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
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b)
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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.;
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Date: December
28, 2007
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/s/ Carroll E.
Amos
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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.;
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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;
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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;
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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:
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(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;
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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):
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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
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b)
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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.
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Date: December
28, 2007
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/s/ David E.
Ritter
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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, 2007 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
December
28, 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, 2007 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
December
28, 2007