|
As
filed with the Securities and Exchange Commission on ______ ___,
2008
|
Registration
No. 33-______
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
----------
FORM
S-4
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
----------
SUMMIT
FINANCIAL GROUP, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
West
Virginia
|
6711
|
55-0672148
|
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.
R. S. Employer
Identification
Number)
|
300
North Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
----------
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
H.
Charles Maddy, III
Summit
Financial Group, Inc.
300
N. Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
----------
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
with
copies to:
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|
Sandra
M. Murphy, Esq.
|
George
W. Murphy, Jr., Esq.
|
|
Bowles Rice McDavid Graff & Love LLP
|
Victor
L. Cangelosi, Esq.
|
|
|
600
Quarrier Street
|
Kilpatrick
Stockton LLP
|
|
|
P.
O. Box 1386
|
607
14th
Street, N.W., Suite 900
|
|
Charleston, West Virginia 25325-1386
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Washington,
D.C. 20005-2018
|
|
|
(304)
347-1131
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(202)
508-5800
|
Approximate
date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. o
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o Accelerated
filer X
Non-accelerated
filer o (Do not
check if a smaller reporting
company) Smaller
reporting company o
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of
Securities
to Be Registered
|
Amount
to Be
Registered(1)
|
Proposed
Maximum
Offering
Price Per Unit
|
Proposed
Maximum
Aggregate
Offering Price(2)
|
Amount
of
Registration
Fee(3)
|
|
Common
Stock,
par
value $ 2.50 per share
|
949,207
shares
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$7,134,397.40
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$280.38
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
|
(1)
|
The
number of shares of common stock, par value $2.50 per share of Summit
Financial Group, Inc. to be registered pursuant to this Registration
Statement represents the maximum number of shares issuable by Summit
Financial Group, Inc. upon consummation of the merger with Greater
Atlantic Financial Corp.
|
|
(2)
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The
proposed maximum aggregate offering price is estimated solely to determine
the registration fee and reflects the market price of Greater Atlantic
Financial Corp. common stock to be exchanged for Summit Financial Group,
Inc. common stock in connection with the merger, computed in accordance
with Rule 457(c) and Rule 457(f) under the Securities Act of 1933, as
amended, based upon the average high and low sales prices ($2.47) of
Greater Atlantic Financial Corp. common stock as reported on the Pink
Sheets on July 8, 2008.
|
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(3)
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Summit
Financial Group, Inc. has previously paid $354.18 of the filing fee in
connection with the filing of a Registration Statement filed on Form S-4
on February 11, 2008 (File No. 33-146882) that was deregistered on July 3,
2008.
|
Prospectus
of Summit Financial Group,
Inc. Proxy
Statement of Greater Atlantic Financial Corp.
MERGER
PROPOSAL - YOUR VOTE IS VERY IMPORTANT
You are
cordially invited to attend the special meeting of the shareholders of Greater
Atlantic Financial Corp. (“Greater Atlantic”) to be held on________, ________,
2008, at ____ __.m., Eastern Standard Time, at the
____________________________________________. At the special meeting,
you will be asked to approve the proposed merger of Greater Atlantic and Summit
Financial Group, Inc. (“Summit”). In the merger, for each share of
Greater Atlantic common stock that you own, subject to the following limitations
and adjustments described more fully below, you will receive the number of
shares of Summit common stock equal to $4.00 divided by the average closing
price of Summit’s common stock as reported on the NASDAQ Capital Market for the
twenty (20) trading days before the closing of the merger (the “Merger
Consideration”). The number of shares of Summit common stock that you
will receive for each share of Greater Atlantic common stock you own will be
determined by the exchange ratio at closing.
At the
closing, we will determine the exchange ratio by dividing $4.00 by the average
closing price of Summit common stock reported on the NASDAQ Capital Market for
the twenty (20) trading days prior to closing (the “Average Closing
Price”). The exchange ratio is subject to a ceiling, which sets the
maximum number of shares that Summit will issue. Under this ceiling,
each share of Greater Atlantic common stock will be exchanged for no more than
0.328625 of a share of Summit common stock. Cash will be paid instead
of issuing fractional shares of Summit common stock.
The
Merger Consideration and exchange ratio may be further adjusted based on the
value of Greater Atlantic’s shareholders’ equity adjusted at
closing. If, at closing, Greater Atlantic’s shareholders’ equity, as
adjusted to exclude (a) accumulated other comprehensive income or loss and (b)
the effect of removing the benefit of net operating loss carryforwards from the
net deferred tax assets (the “Adjusted Shareholders’ Equity”), is less than
$4,213,617 (which equals Greater Atlantic’s Adjusted Shareholders’ equity at
March 31, 2008 and is referred to as the “Benchmark Equity”), then the aggregate
value of the merger consideration will be reduced one dollar for each dollar
that the Adjusted Shareholders’ equity is less than the Benchmark
Equity. For purposes of determining Adjusted Shareholders’ equity at
closing, the Adjusted Shareholders’ Equity will be increased by the actual
monthly operating losses, up to $250,000 per month, incurred by Greater Atlantic
after March 31, 2008 and before September 1, 2008, the fees accrued or paid to
Greater Atlantic’s financial advisor, and the fees accrued or paid to Greater
Atlantic’s legal counsel up to $150,000. As of the mailing of this proxy
statement/prospectus, Greater Atlantic's Adjusted Shareholders' Equity is
$_____.
The
Merger Consideration and exchange ratio will also be adjusted based on any
additional provisions to Greater Atlantic’s loan loss allowance. If
Summit’s due diligence results in a determination by Summit, with the
concurrence of independent accountants retained by Greater Atlantic to review
this determination, that additional provisions should be made to Greater
Atlantic’s allowance for loan losses, then the Merger Consideration will be
reduced dollar for dollar by the amount of the additional
provisions. In calculating the amount of the Merger Consideration
reduction, specific reserve reductions may be used to offset losses from other
loans to determine the amount of provisions needed to the allowance for loan
losses.
Because
of the uncertainties relating to value of Greater Atlantic’s shareholders equity
at closing and whether any adjustments will be required to be made to Greater
Atlantic’s loan loss allowance, there can be no guarantee that you will receive
shares of Summit stock equal to $4.00 for each share of Greater Atlantic common
stock.
We expect
the merger to be tax-free with respect to the shares of Summit common stock that
you receive. You may have to recognize income or gain for tax
purposes for the cash in lieu of fractional shares of Summit common stock you
receive in the merger.
The
merger proposal is described in this proxy statement/prospectus. We
encourage you to read this entire document carefully, including the “Risk Factors” section
beginning on page ___.
Your
board of directors recommends that you vote for the merger. We need your vote to complete the
merger. Whether or not you plan to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. If you neither return your card nor vote in
person or if you abstain from voting, the effect will be to vote against the
merger.
You
should obtain current market quotations on shares of Summit common stock, which
is listed on the NASDAQ Capital Market under the symbol
“SMMF.” Greater Atlantic common stock is quoted on the Pink Sheets
under the symbol “GAFC.PK.”
___________________________
Carroll
E. Amos
President
and Chief Executive Officer
Greater
Atlantic Financial Corp.
An
investment in Summit common stock in connection with the merger involves certain
risks and uncertainties. See “Risk Factors” beginning on
page ___ of this proxy statement/prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of the securities to be issued in the merger or
determined if this proxy statement/prospectus is truthful or
complete. It is illegal to tell you otherwise.
The securities to be issued in the
merger are not savings or deposit accounts, deposits or other obligations of any
bank or banking association, and are not insured by the Federal Deposit
Insurance Corporation or any other federal or state governmental
agency.
This
proxy statement/prospectus is dated _____________, 2008, and is expected to be
first mailed to shareholders on or about _______________, 2008.
ADDITIONAL
INFORMATION
This
document incorporates important business and financial information about Summit
from other documents filed with the Securities and Exchange Commission that have
not been included in or delivered with this document. You may read
and copy these documents at the SEC’s public reference
facilities. Please call the SEC at 1-800-SEC-0330 for information
about these facilities. This information is also available at the
Internet site the SEC maintains at http://www.sec.gov. See
“Where You Can Find More
Information” on page 82.
You also
may request copies of these documents from Summit. Summit will
provide you with copies of these documents, without charge, upon written or oral
request to:
Summit
Financial Group, Inc.
300 North
Main Street
Moorefield,
West Virginia 26836
Attention:
Teresa D. Sherman
Telephone: (304)
530-1000
To
ensure timely delivery before the special meeting, you should make any requests
for these documents by _______________, 2008.
GREATER
ATLANTIC FINANCIAL CORP.
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
TO
BE HELD ON _____________
YOU ARE
HEREBY NOTIFIED of and invited to attend the special meeting of shareholders of
Greater Atlantic Financial Corp., a Delaware corporation, to be held on
________, ______ ___, 2008, at _____ _.m. at
_________________________________________________, for the purpose of
considering and voting upon the following:
|
|
1.
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A
proposal to approve and adopt the Agreement and Plan of Reorganization
dated as of June 9, 2008, by and among Greater Atlantic Financial Corp.
(“Greater Atlantic”), Summit Financial Group, Inc. (“Summit”) and SFG II,
Inc., and the transactions contemplated thereby. In this proxy
statement/prospectus, we refer to the Agreement and Plan of
Reorganization, as amended, as the merger agreement. The merger
agreement provides that Greater Atlantic will merge with and into SFG II,
Inc., a subsidiary of Summit, upon the terms and subject to the conditions
set forth in the merger agreement, as more fully described in the
accompanying proxy statement/prospectus. In the merger, among
other things, each share of Greater Atlantic common stock will be
converted into and become the right to receive shares of Summit common
stock equal to $4.00 based on an exchange ratio, subject to adjustment as
further described in the accompanying proxy
statement/prospectus. Cash will be paid instead of issuing
fractional shares of Summit common
stock.
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2.
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A
proposal to adjourn the meeting to a later date or dates, if necessary, to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to approve the matters to be
considered by the shareholders at the meeting, as more fully described in
the accompanying proxy statement
prospectus.
|
Our board
of directors has determined that the terms of the merger are advisable and in
the best interests of Greater Atlantic and our shareholders, has approved and
adopted the merger agreement, and unanimously recommends that our shareholders
vote “FOR” the approval
and adoption of the merger agreement and the transactions contemplated
thereby.
Our board
of directors has fixed the close of business on _________________, 2008, as the
record date for determination of our shareholders entitled to receive
notice of and to vote at the special meeting. A list of shareholders
entitled to vote will be available at 10700 Parkridge Boulevard, Suite P50,
Reston, Virginia 20191, for ten (10) days before the meeting and will
also be available for inspection at the meeting. The meeting may be
adjourned or postponed from time to time upon approval of our shareholders
without any notice other than by announcement at the special meeting of the
adjournment or postponement thereof, and any and all business for which notice
is hereby given may be transacted at such adjourned or postponed special
meeting.
The
affirmative vote of the holders of a majority of the outstanding shares of our
common stock entitled to vote at the special meeting is required to approve and
adopt the merger agreement. Please complete, date, sign and promptly
return the enclosed proxy card, which is solicited by your board of directors,
in the enclosed envelope, whether or not you expect to attend the special
meeting. You may revoke the proxy at any time before its exercise by
delivering to us a written notice of revocation, by delivering to us a duly
executed proxy card bearing a later date or by voting in person at the special
meeting. Failure to return a properly executed proxy card, or to vote
at the special meeting, or abstaining from voting, will have the same effect as
a vote against the merger agreement and the transactions contemplated
thereby.
By Order
of the Board of Directors
Edward C.
Allen
Secretary
Reston,
Virginia
________________,
2008
EACH STOCKHOLDER, WHETHER OR NOT HE OR
SHE PLANS TO ATTEND THE SPECIAL MEETING, IS REQUESTED TO SIGN, DATE, AND RETURN
THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
Page
|
QUESTIONS
AND ANSWERS ABOUT THE MERGER
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1
|
|
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SUMMARY
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5
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RISK
FACTORS
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14
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FORWARD-LOOKING
STATEMENTS
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18
|
|
| CEASE AND DESIST ORDER APPLICABLE TO GREATER ATLANTIC BANK | 19 | |
|
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
|
20
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|
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UNAUDITED
COMPARATIVE PER SHARE DATA
|
22
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|
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UNAUDITED
PRO FORMA FINANCIAL INFORMATION
|
24
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|
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SUMMARY
SELECTED FINANCIAL DATA
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30
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|
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INFORMATION
ABOUT THE MEETING AND VOTING
|
33
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|
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General
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33
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|
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Matters
Relating to the Special Meeting of Greater Atlantic's
Shareholders
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33
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Proxies
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33
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|
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Solicitation
of Proxies
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34
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Record
Date and Voting Rights
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34
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Vote
Required
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34
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Recommendation
of the Greater Atlantic Board of Directors
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35
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|
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Appraisal
Rights for Greater Atlantic Stockholders
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35
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THE
MERGER
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36
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|
|
Merger
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36
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|
|
Merger
Consideration
|
36
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|
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Surrender
of Stock Certificates
|
37
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No
Fractional Shares
|
38
|
|
|
Treatment
of Greater Atlantic Stock Options and Warrants
|
38
|
|
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Dissenters’
or Appraisal Rights
|
38
|
|
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Background
of the Merger; Board Recommendations and Reasons for the
Merger
|
42
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|
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Greater
Atlantic's Reasons for the Merger
|
49
|
|
|
Summit's
Reasons for the Merger
|
51
|
|
|
Opinion
of Greater Atlantic’s Financial Advisor
|
51
|
|
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Interests
of Certain Persons in the Merger
|
60
|
|
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Conditions
of the Merger
|
61
|
|
|
Representations
and Warranties
|
63
|
|
|
Termination
of the Merger Agreement
|
64
|
|
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Effect
of Termination; Termination Fee
|
64
|
|
-i-
Page
|
Waiver
and Amendment
|
65
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||
|
Indemnification
|
65
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||
|
Acquisition
Proposals
|
65
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||
|
Closing
Date; Effective Time
|
66
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||
|
Regulatory
Approvals
|
66
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||
|
Conduct
of Business Pending the Merger
|
67
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||
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Accounting
Treatment
|
69
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||
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Management
and Operations after the Merger
|
69
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||
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Resales
of Summit Common Stock
|
69
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||
|
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
|
70
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||
|
General
|
70
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||
|
The
Merger
|
70
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||
|
Consequences
to Shareholders
|
70
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||
|
Backup
Withholding and Reporting Requirements
|
71
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||
|
INFORMATION
ABOUT SUMMIT FINANCIAL GROUP, INC. AND
GREATER
ATLANTIC FINANCIAL CORP.
|
73
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||
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Summit
Financial Group, Inc.
|
73
|
||
|
Greater
Atlantic Financial Corp.
|
73
|
||
|
DESCRIPTION
OF SUMMIT FINANCIAL GROUP COMMON STOCK
|
74
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||
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General
|
74
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||
|
Common
Stock
|
74
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||
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Preemptive
Rights
|
75
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||
|
Certain
Provisions of the Bylaws
|
75
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||
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Shares
Eligible for Future Sale
|
75
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||
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COMPARATIVE
RIGHTS OF SHAREHOLDERS
|
76
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||
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ADJOURNMENT
OF THE MEETING
|
85
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||
|
LEGAL
MATTERS
|
85
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||
|
EXPERTS
|
85
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||
|
WHERE
YOU CAN FIND MORE INFORMATION
|
85
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||
|
OTHER
MATTERS
|
87
|
||
|
Annex
A
|
Agreement
and Plan of Reorganization dated as of June 9, 2008,among
Greater
Atlantic Financial Corp., Summit Financial Group, Inc. and SFG II,
Inc.
|
||
|
Annex
B
|
Section
262 of the Delaware General Corporation Law
|
||
|
Annex
C
|
Opinion
of Sandler O’Neill & Partners, L.P., dated June 9, 2008, to
the
board
of directors of Greater Atlantic Financial Corp.
|
||
-ii-
|
Annex
D-1
|
Greater
Atlantic Financial Corp. Form 10-K for the year ended September 30,
2007
|
|
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Annex
D-2
|
Greater
Atlantic Financial Corp. Form 10-Q for the period ended December 31,
2007
|
|
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Annex
D-3
|
Greater
Atlantic Financial Corp. Form 10-Q for the period ended March 31,
2008
|
|
QUESTIONS
AND ANSWERS ABOUT THE MERGER
|
Q:
|
What
will shareholders be voting on at the special
meeting?
|
|
A:
|
Shareholders
will be voting on a proposal to approve and adopt the merger agreement
between Greater Atlantic and Summit and the transactions contemplated
thereby.
|
Shareholders
will also consider any other matters that may properly come before the
meeting.
|
Q:
|
Why
is Greater Atlantic proposing the
merger?
|
|
A:
|
We
believe the proposed merger is in the best interests of Greater Atlantic
and its shareholders. Our board of directors believes that
combining with Summit provides significant value to our shareholders and
provides those shareholders the option to participate in the opportunities
for growth offered by the combined
company.
|
You
should review the reasons for the merger described in greater detail under the
caption “The Merger -
Background of the Merger; Board Recommendations and Reasons for the
Merger” beginning on page ___.
|
Q:
|
When
and where is the shareholder
meeting?
|
|
A:
|
The
special meeting is scheduled to take place on _____________,
_____________, 2008, at _________ _.m., local time, at
_________________________________________.
|
|
Q:
|
What
does the Greater Atlantic board of directors
recommend?
|
|
A:
|
The
Greater Atlantic board of directors has approved the merger
agreement. The Greater Atlantic board unanimously recommends
that shareholders vote “FOR” the proposal to approve the merger agreement
and the transactions contemplated
thereby.
|
Q: What
will Greater Atlantic shareholders receive for their stock?
|
|
A:
|
For
each share of Greater Atlantic common stock that you own, you will receive
shares of Summit common stock equal to $4.00 divided by the average
closing price of Summit Stock reported on the NASDAQ Capital Market for
the twenty (20) trading days prior to the closing. This
exchange ratio is subject to a “ceiling” or a limit on the maximum number
of shares Summit will issue. Under that ceiling, each share of
Greater Atlantic common stock will be exchanged for no more than 0.328625
of a share of Summit common stock. The amount of shares of
Summit common stock that you will receive is also subject to adjustment
based on the value of Greater Atlantic’s shareholders’ equity at the time
of closing and whether any adjustments will be required to be made to
Greater Atlantic’s loan loss allowance. These adjustments are
described more fully below.
|
The
Merger Consideration and exchange ratio may be further adjusted based on the
value of Greater Atlantic’s shareholders’ equity adjusted at
closing. If, at closing, Greater Atlantic’s shareholders’ equity, as
adjusted to exclude (a) accumulated other comprehensive income or loss and (b)
the effect of removing the benefit of net operating loss carryforwards from the
net deferred tax assets (the “Adjusted Shareholders’ Equity”), is less than
$4,213,617 (which equals Greater Atlantic’s Adjusted Shareholders’ Equity at
March 31, 2008 and is referred to as the “Benchmark
Equity”),
then the aggregate value of the merger consideration will be reduced one dollar
for each dollar that the Adjusted Shareholders’ equity is less than the
Benchmark Equity. For purposes of determining Adjusted Shareholders’
equity at closing, the Adjusted Shareholders’ Equity will be increased by the
actual monthly operating losses, up to $250,000 per month, incurred by Greater
Atlantic after March 31, 2008 and before September 1, 2008, the fees accrued or
paid to Greater Atlantic’s financial advisor, and the fees accrued or paid to
Greater Atlantic’s legal counsel up to $150,000. As of the mailing of this
proxy statement/prospectus, Greater Atlantic's Adjusted Shareholders' Equity is
$_____.
The
Merger Consideration and exchange ratio will also be adjusted based on
additional provisions to Greater Atlantic’s loan loss allowance. If
Summit’s due diligence results in a determination by Summit, with the
concurrence of independent accountants retained by Greater Atlantic to review
this determination, that additional provisions should be made to Greater
Atlantic’s allowance for loan losses, then the Merger Consideration will be
reduced dollar for dollar by the amount of the additional
provisions. In calculating the amount of the Merger Consideration
reduction, specific reserve reductions may be used to offset losses from other
loans to determine the amount of provisions needed to the allowance for loan
losses.
Because
of the uncertainties relating to value of Greater Atlantic’s shareholders equity
at closing and whether any adjustments will be required to be made to Greater
Atlantic’s loan loss allowance, there can be no guarantee that you will receive
shares of Summit stock equal to $4.00 per share.
Cash will
be paid instead of issuing fractional shares of Summit common
stock. A chart on page ____ under “The Merger - Merger
Consideration” provides examples of the value of the transaction to
shareholders of Greater Atlantic at selected Average Closing Prices of Summit
common stock. This chart includes assumptions regarding the value of
Greater Atlantic’s shareholders’ equity at closing and whether any adjustments
will be made to Greater Atlantic’s allowance for loan losses.
Q: How
will I receive my shares of Summit common stock and cash in lieu of fractional
shares?
|
A:
|
The
exchange agent will mail transmittal forms to each Greater Atlantic
shareholder within five (5) business days after completion of the
merger. You should complete the transmittal form and return it
to the exchange agent as soon as possible. Once the exchange
agent has received the proper documentation, it will forward to you the
shares of Summit common stock to which you are
entitled.
|
Shareholders
will not receive any fractional shares of Summit common
stock. Instead, they will receive cash, without interest, for any
fractional share of Summit common stock that they might otherwise have been
entitled to receive based on the market value of the Summit common stock on the
date that the merger occurs.
Q: How
do I exchange my Greater Atlantic stock certificates?
|
A:
|
If
the merger is completed, the exchange agent will send Greater Atlantic
shareholders written instructions for exchanging their stock
certificates. You will be asked to return your Greater Atlantic
stock certificates, and shortly after the merger, the exchange agent will
allocate cash and Summit common stock among Greater Atlantic
shareholders. In any event, you should not
forward your Greater Atlantic certificates with your proxy
card.
|
Q: What
should I do if my shares of Greater Atlantic are held by my broker or otherwise
in “street name?”
|
A:
|
If
you hold your shares of Greater Atlantic common stock in “street name”
(i.e., your bank
or broker holds your shares for you), you should receive instructions
regarding exchange procedures directly from your bank or
broker. If you have any questions regarding these procedures,
you should contact your bank or broker directly, or you may contact Summit
or Greater Atlantic at the addresses or telephone numbers listed on
page __.
|
Q: When
will we complete the merger?
|
A:
|
We
intend to complete the merger as soon as possible after shareholder
approval is received, all regulatory approvals have been obtained, and all
other conditions to the closing have been satisfied or
waived.
|
|
|
The
regulatory approvals are described under “The Merger – Regulatory
Approvals” beginning on
page ___.
|
Q: What
should I do now?
|
A:
|
Mail
your signed and dated proxy card in the enclosed return envelope as soon
as possible so that your shares may be represented at the special
meeting. It is important that the proxy card be received as
soon as possible and in any event before the special
meeting.
|
Q: Can
I change my vote after I mail my proxy card?
|
A:
|
Yes. You
can change your vote at any time before your proxy is voted at the special
meeting. You can do this in one of three
ways:
|
|
·
|
First,
you can send a written notice stating that you revoke your
proxy.
|
|
·
|
Second,
you can complete, sign, date and submit a new proxy
card.
|
|
·
|
Third,
you can attend the special meeting and vote in person. Simply
attending the special meeting, however, will not revoke your
proxy.
|
If you
choose either of the first or second methods, you must submit your notice of
revocation or your new proxy card to Greater Atlantic prior to the special
meeting. Your submissions must be mailed to the Secretary of Greater
Atlantic at the address listed on page ___.
|
Q:
|
Who
will be soliciting proxies?
|
|
A:
|
In
addition to solicitation of proxies by officers, directors and employees
of Greater Atlantic, Greater Atlantic has engaged a professional proxy
solicitation firm to assist it in soliciting
proxies.
|
|
Q:
|
What
if I do not vote or I abstain from
voting?
|
|
A:
|
If
you do not vote or you abstain from voting, your failure to vote or
abstention will count as a “NO” vote on the proposal
to approve and adopt the merger
agreement.
|
|
Q:
|
If
my shares are held by my broker in “street name,” will my broker vote my
shares for me?
|
|
A:
|
Your
broker will vote your shares on the proposal to approve and adopt the
merger agreement only if you provide instructions on how to
vote. You should follow the directions provided by your broker
to vote your shares. If you do not provide your broker with
instructions on how to vote your shares held in “street name,” your broker
will not be permitted to vote your shares on the proposal to approve and
adopt the merger agreement, which will have the effect of a “NO” vote on the items
being considered.
|
|
Q:
|
Will
I be able to sell the shares of Summit common stock that I receive in the
merger?
|
|
A:
|
Yes. The
shares of Summit common stock to be issued in the merger will be
registered under the Securities Act of 1933 (the “Securities Act”) and
listed on the NASDAQ Capital
Market.
|
Q: What
are the tax consequences of the merger to me?
|
A:
|
Your
tax consequences will depend on whether you received solely shares of
Summit stock or received cash in lieu of fractional shares or pursuant to
an exercise of dissenters’ rights. For greater detail, see
“Certain Federal Income
Tax Consequences of the Merger” beginning on
page ___.
|
Q: Who
should shareholders call with questions?
A: If
you have more questions about the merger, you should contact:
Carroll
E. Amos
President
and Chief Executive Officer
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Telephone: (703)
391-1300
|
|
SUMMARY
|
This
brief summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. We urge you to carefully read the entire proxy
statement/prospectus and the other documents to which this proxy
statement/prospectus refers to fully understand the merger. See
“Where You Can Find More Information” on page ___. Each item in
this summary includes a page reference directing you to a more complete
description of that item.
|
|
The
Merger (page ___)
|
We have
attached the merger agreement, as amended, to this proxy statement/prospectus as
Annex
A. Please read the merger agreement. It is the
legal document that governs the merger.
In the
merger, Summit will acquire Greater Atlantic by means of the merger of Greater
Atlantic into SFG II, Inc., a subsidiary of Summit formed to facilitate the
merger.
Each
share of Greater Atlantic common stock outstanding will be converted in the
merger into shares of Summit common stock as further described
below. We expect to complete the merger in the fourth quarter of
2008, although there can be no assurance in this regard.
|
|
Our
Reasons for the Merger
(page ___)
|
The terms
of the merger agreement were the results of arm’s length negotiations between
representatives of Greater Atlantic and Summit. In deciding to enter
into the merger agreement, Greater Atlantic’s board of directors considered a
number of factors including:
|
·
|
The
understanding of the board of directors of the strategic options available
to Greater Atlantic and the board of directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of those
options or the execution of the business plan under the best case
scenarios was likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the board of directors considered Greater Atlantic’s ability
to achieve consistent profitability as an independent entity, the
prospects for profitable operations under the cease and desist order,
which became effective on April 25, 2008, and prospects for further
adverse regulatory action if it failed to do so. See “CEASE AND
DESIST ORDER” APPLICABLE TO GREATER ATLANTIC
BANK”.
|
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common stock,
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
|
·
|
Sandler
O’Neill’s written opinion that, as of June 9, 2008, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
|
·
|
The
wider array of financial products and services that would be available to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
|
|
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the merger
is intended to qualify as a transaction that is generally tax-free for
U.S. federal income tax purposes.
|
|
·
|
The
results of the due diligence review of
Summit.
|
|
·
|
The
Greater Atlantic employees to be retained after the merger would have
opportunities for career advancement in a larger
organization.
|
|
·
|
The
likelihood of receiving timely regulatory approval and the approval of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could be
triggered upon termination of or failure to consummate the
merger.
|
In
deciding to enter into the merger agreement, Summit’s board of directors
considered a number of factors, including the opportunity the merger presented
to expand its presence in attractive markets in Virginia. Summit
believes the acquisition of Greater Atlantic’s operations is consistent with its
plan to have operations, offices and distinct capabilities in every market of
its choice within its region.
|
|
What
Shareholders Will Receive
(page ____)
|
If the
merger is completed, Greater Atlantic stockholders will receive shares of Summit
common stock based on the number of shares of Greater Atlantic common stock he
or she owns at closing.
At the
closing, we will determine the exchange ratio by dividing $4.00 by the average
closing price of Summit common stock reported on the NASDAQ Capital Market for
the twenty (20) trading days prior to closing (the “Average Closing
Price”). The exchange ratio is subject to a ceiling which provides
that each share of Greater Atlantic common stock will be exchanged for no more
than 0.328625 of a share of Summit common stock. The amount of shares
of Summit common stock that you will receive is also subject to adjustment based
on the amount of Greater Atlantic’s shareholders’ equity at the time of closing
and whether any adjustments will be required to be made to Greater Atlantic’s
loan loss allowance. These adjustments are described more fully
below.
The
Merger Consideration and exchange ratio may be further adjusted based on the
amount of Greater Atlantic’s shareholders’ equity adjusted at
closing. If, at closing, Greater Atlantic’s shareholders’ equity, as
adjusted to exclude (a) accumulated other comprehensive income or loss and (b)
the effect of removing the benefit of net operating loss carryforwards from the
net deferred tax assets (the “Adjusted Shareholders’ Equity”), is less than
$4,213,617 (which equals Greater Atlantic’s Adjusted Shareholders’ Equity at
March 31, 2008 and is referred to as the “Benchmark Equity”), then the aggregate
value of the merger consideration will be reduced one dollar for each dollar
that the Adjusted Shareholders’ equity is less than Benchmark
Equity. For purposes of determining Adjusted Shareholders’ equity at
closing, the Adjusted Shareholders’ Equity will be increased by the actual
monthly operating losses, up to $250,000 per month, incurred by Greater Atlantic
after March 31, 2008 and before September 1, 2008, the fees accrued or paid to
Greater Atlantic’s financial advisor, and the fees accrued or paid to Greater
Atlantic’s legal counsel up to $150,000. As of the mailing of this proxy
statement/prospectus, Greater Atlantic's Adjusted Shareholders' Equity is
$____.
The
Merger Consideration and exchange ratio will also be adjusted in the event that
additional provisions are made to Greater Atlantic’s loan loss
allowance. If Summit’s due diligence results in a determination by
Summit, with the concurrence of independent accountants retained by Greater
Atlantic to review this determination, that additional provisions should be made
to Greater Atlantic’s allowance for loan losses, then the Merger Consideration
will be reduced dollar for dollar by the amount of the additional
provisions. In calculating the amount of the Merger Consideration
reduction, specific reserve reductions may be used to offset losses from other
loans to determine the amount of provisions needed to the allowance for loan
losses.
Because
of the uncertainties relating to the amount of Greater Atlantic’s shareholders
equity at closing and whether any adjustments will be required to be made to
Greater Atlantic’s loan loss allowance, there can be no guarantee that you will
receive shares of Summit stock equal to $4.00 per share.
A chart
on page ___ under “The Merger
- Merger Consideration” provides examples of the value of the transaction
to shareholders of Greater Atlantic at selected Average Closing Prices of Summit
common stock. This chart includes assumptions regarding the value of
Greater Atlantic’s shareholders’ equity at closing, and whether any adjustments
will be made to Greater Atlantic’s allowance for loan losses.
Summit
will not issue any fractional shares in the merger. Instead, you will
receive cash for any fractional share of Summit common stock owed to
you. The amount of cash that you will receive for any such fractional
share will be calculated by multiplying the fractional share interest by the
closing price of Summit common stock on the NASDAQ Capital Market on the
effective date of the merger.
Dissenters’
or Appraisal Rights (page ___)
Under
Delaware law, Greater Atlantic stockholders may object to the merger and demand
to be paid the fair value of their shares. Under Delaware law, you should know
that in determining the fair value of your shares, any appreciation or
depreciation resulting from the accomplishment or expectation of the merger will
not be considered. To properly exercise your appraisal rights and
avoid a waiver of such rights, you must not vote your shares in favor of the
merger and you must follow the exact procedures required by Delaware law (see
Annex
B).
Resale
of Summit Shares Received in the Merger (page ___)
Summit
has registered the shares of its common stock to be issued in the merger under
the federal securities laws. Therefore, you may sell shares that you
receive in the merger without restriction even if you are considered an
affiliate of Greater Atlantic or you become an affiliate of Summit. A
director, executive officer or stockholder who beneficially owns 10% or more of
the outstanding shares of a company is generally deemed to be an affiliate of
that company.
|
|
Our
Recommendation (page ___)
|
The
Greater Atlantic board of directors believes that the merger is advisable and in
the best interests of Greater Atlantic’s shareholders. Greater
Atlantic’s board unanimously recommends that shareholders vote “FOR” the proposal to approve and
adopt the merger agreement and the transactions contemplated
thereby.
Risk
Factors (page ___)
The
merger is subject to risks, some of which are summarized below. You
should carefully consider these risk factors and others discussed in more detail
on pages __ through ___ in deciding whether to vote for approval of the merger
agreement.
|
·
|
Summit
may be unable to effectively integrate the operations of Greater
Atlantic;
|
|
·
|
changes
in interest rates may adversely affect Summit’s
business;
|
|
·
|
loss
of Summit’s CEO or other executive officers could adversely affect its
business;
|
|
·
|
Summit
and its subsidiaries operate in highly competitive
markets;
|
|
·
|
dividend
payments by Summit’s subsidiaries to Summit and by Summit to its
stockholders could be restricted;
|
|
·
|
Summit’s
business is concentrated in the Eastern Panhandle and South Central
regions of West Virginia and in the Shenandoah Valley and Northern
Virginia, and a downturn in the local economies may adversely affect its
business;
|
|
·
|
determination
of the adequacy of the allowance for loan losses is based upon estimates
that are inherently subjective and dependent on the outcome of future
events. Ultimate losses may differ from current
estimates. As a result, such losses may increase
significantly.
|
|
|
Opinion
of Financial Advisor
(page ___)
|
In
approving the merger, Greater Atlantic’s board considered the opinion of its
financial advisor, Sandler O’Neill & Partners, L.P., as to the fairness from
a financial point of view of the consideration to be paid by Summit in the
merger as of June 9, 2008. We have attached this opinion to this
proxy statement/prospectus as Annex C. You
should read this opinion completely to understand the assumptions made, matters
considered and limitations of the review undertaken by Sandler O’Neill &
Partners, L.P. in providing its opinion.
|
|
Accounting
Treatment (page __)
|
The
merger will be accounted for under the purchase method of
accounting.
Certain
Federal Income Tax Consequences (page __)
A holder
of Greater Atlantic common stock who exchanges his or her Greater Atlantic
common stock actually owned for shares of common stock of Summit generally will
not recognize gain or loss with respect to the shares of Greater Atlantic common
stock exchanged if they only receive shares of Summit common stock in the
exchange, except with respect to any cash received instead of a fractional share
or pursuant to the exercise of dissenters’ rights.
Shareholders
will be required to file certain information with their federal income tax
returns and to retain certain records with regard to the merger.
The
discussion of United States federal income tax consequences set forth above is
for general information only and does not purport to be a complete analysis or
listing of all potential tax effects that may apply to a holder of Greater
Atlantic common stock. Shareholders of Greater Atlantic are strongly
urged to consult their tax advisors to determine the particular tax consequences
to them of the merger, including the application and effect of federal, state,
local, foreign and other tax laws.
|
|
The
Companies (page ___)
|
Summit
Financial Group, Inc.
300
North Main Street
Moorefield,
West Virginia 26836
(304)
530-1000
Summit is
a $1.5 billion financial holding company headquartered in Moorefield, West
Virginia, at 300 North Main Street. Summit provides commercial and
retail banking services primarily in the Eastern Panhandle and South Central
regions of West Virginia and the Northern region of Virginia. Summit
provides these services through its community bank subsidiary, Summit Community
Bank. Summit also operates Summit Insurance Services, LLC in
Moorefield, West Virginia and Leesburg, Virginia.
As of
March 31, 2008, Summit had total assets of $1.5 billion, net loans of $1.1
billion, total deposits of $836.9 million, and shareholders’ equity of $92.0
million.
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard, Suite P50
Reston,
Virginia 20191
(703)
391-1300
Greater
Atlantic is organized under the laws of the State of Delaware and is registered
as a savings and loan holding company under the Home Owners’ Loan
Act. It has one subsidiary, Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
bank makes are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
Effective
April 25, 2008, Greater Atlantic Bank consented to the issuance of a Cease and
Desist Order by the office of Thrift Supervision. See “CEASE AND
DESIST ORDER APPLICABLE TO GREATER ATLANTIC BANK.”
As of
March 31, 2008, Greater Atlantic reported total assets of $230.4 million, net
loans of $159.7 million, deposits of $188.8 million and shareholders’ equity of
$3.3 million.
The
Special Meeting and Required Vote (page __)
Greater
Atlantic is holding a special shareholders’ meeting on __________, ____________,
2008, at ____ _.m. at _____________________________________. The
purpose of the meeting is for Greater Atlantic Financial Corp. stockholders to
consider and vote on the merger agreement. The record date for the
meeting is the close of business on ____________, 2008. On that date,
Greater Atlantic had _________shares of common stock outstanding and entitled to
vote. Only stockholders of record at the close of business on the
record date will be entitled to vote at the meeting and any
adjournment. You can cast one vote for each share of Greater Atlantic
common stock that you owned on that date.
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting. As of
_________, 2008, Greater Atlantic’s directors and executive officers, and their
affiliates, held _________ shares of Greater Atlantic common stock, which
represents approximately _____% of the total outstanding shares of Greater
Atlantic common stock entitled to vote at the special meeting. The
Greater Atlantic directors intend to vote the shares of Greater Atlantic common
stock that they own for approval of the merger agreement and the transactions
contemplated thereby.
Conditions
to Completion of the Merger (page ___)
The
obligations of Summit and Greater Atlantic to complete the merger depend on a
number of conditions being met. These include:
|
·
|
Greater
Atlantic’s shareholders’ approval of the merger
agreement;
|
|
·
|
approval
of the merger by the necessary federal and state regulatory
authorities;
|
|
·
|
authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger;
|
|
·
|
absence
of any law or court order prohibiting the
merger;
|
|
·
|
receipt
of an opinion from counsel to Summit that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
|
|
·
|
the
balance of Greater Atlantic Bank’s core deposits (as defined in the merger
agreement) being not less than $144
million;
|
|
·
|
Greater
Atlantic and its subsidiary, Greater Atlantic Bank, must have minimum
regulatory capital ratios of: Tier 1 (core) capital equal to
4.0%, Tier 1 risk-based capital equal to 4.0% and total risk-based capital
equal to 8.0%;
|
|
·
|
Greater
Atlantic Bank’s ratio of the sum of non-performing loans, other real
estate owned and net loans charged off after March 31, 2008, to total
consolidated assets must not exceed
2.78%;
|
|
·
|
Greater
Atlantic’s allowance for loan losses must be adequate in accordance with
generally accepted accounting principles and applicable regulatory
guidance, as determined by Summit with the concurrence of independent
accountants retained by Greater Atlantic to review this
determination;
|
|
·
|
All consents or approvals of any third party required to be made or obtained by Greater Atlantic or Greater Atlantic Bank in connection with the assignment of any real property lease must be obtained and satisfactory to Summit; |
|
·
|
No
regulatory authority shall have issued any order, decree, agreement,
memorandum of understanding, administrative action or similar arrangement
with, or commitment letter or similar submission to, or extraordinary
supervisory letter from such regulatory authority relating to Greater
Atlantic or its subsidiaries that remains in effect after the closing of
the merger;
|
|
·
|
If
Summit must obtain shareholder approval of an amendment to its Articles of
Incorporation in order to assume Greater Atlantic’s trust preferred
securities, then the merger is conditioned on receipt of such approval;
and
|
|
·
|
the
continued accuracy of certain representations and
warranties.
|
Where the
law permits, either of us could choose to waive a condition to our obligation to
complete the merger although that condition has not been
satisfied. We cannot be certain when, or if, the conditions to the
merger will be satisfied or waived, or that the merger will be
completed.
|
|
Regulatory
Approvals (page ___)
|
We cannot
complete the merger unless it is approved by the Board of Governors of the
Federal Reserve System. On __________, 2008, Summit filed an
application to obtain approval of the merger with the Federal Reserve Bank of
Richmond. The Division of Banking Supervision and Regulation of the
Board of Governors in Washington, D.C. is responsible for processing the
application. A discussion of the status of the application filed with the
Federal Reserve is set forth on page ____.
Following
the closing of the merger, Summit will file notices of closing with the Federal
Reserve Bank of Richmond.
As of the
date of this proxy statement/prospectus, we have not yet received the required
approvals. While we do not know of any reason why we would not be
able to obtain the necessary approvals in a timely manner, we cannot be certain
when or if we will receive them.
Termination
of the Merger Agreement (page ___)
Greater
Atlantic and Summit may mutually agree to terminate the merger at any
time.
Either
Greater Atlantic or Summit may terminate the merger agreement if any of the
following occurs:
|
|
•
|
either
party breaches any of its representations or obligations under the merger
agreement, and does not cure the breach within 30 days and provided that
with respect to any breach of the covenants and agreements relating to (i)
the filing of the registration statement on Form S-4 with the
SEC, (ii) the issuance of press releases relating to the
merger, (iii) benefit plans and (iv) contractual rights of Greater
Atlantic’s and its subsidiaries’ employees, if such breach individually or
in the aggregate with other breaches results in a material adverse
effect;
|
|
|
•
|
the
conditions to the consummation of the merger (other than receipt of
regulatory approvals and the approval of Greater Atlantic’s shareholders
and Summit’s shareholders, if the
|
|
|
assumption
of Greater Atlantic’s trust preferred securities by Summit requires Summit
to obtain shareholder approval to amend Summit’s Articles of
Incorporation) have not been fulfilled by September 30, 2008, unless the
failure of the fulfillment of the conditions arises out of or results from
the knowing action or inaction of the party seeking to
terminate;
|
|
|
•
|
the
merger is not completed by December 31, 2008, unless the failure of the
merger to be consummated arises out of or results from the knowing action
or inaction of the party seeking to terminate;
or
|
|
|
•
|
the
approval of any governmental entity required for consummation of the
merger is denied, the shareholders of Greater Atlantic do not approve the
merger agreement or the shareholders of Summit do not approve an amendment
to Summit’s Articles of Incorporation (if required by Summit for the
assumption of Greater Atlantic’s trust preferred
securities).
|
Summit
may terminate the merger agreement if Greater Atlantic’s board fails to
recommend approval of the merger agreement, withdraws its recommendation or
modifies its recommendation in a manner adverse to Summit before the special
meeting.
Greater
Atlantic may terminate the merger agreement in order to enter into an agreement
with respect to an unsolicited proposal that if consummated would result in a
transaction more favorable to Greater Atlantic’s shareholders from a financial
point of view, provided that Summit does not make a counteroffer that is at
least as favorable to the other proposal and Greater Atlantic pays the
termination fee described below.
Termination
Fee (page ____)
In the
event the merger agreement is terminated (i) due to failure to obtain Greater
Atlantic’s shareholder approval and prior to such time a competing acquisition
proposal for Greater Atlantic has been made public and not withdrawn or (ii) by
Greater Atlantic in order to enter into an agreement with respect to a superior
proposal, then in either case Greater Atlantic must pay Summit a termination fee
of $550,000 according to the following schedule: (i) $150,000 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) $200,000 on the
date that is three (3) years after the termination date.
In the
event the merger agreement is terminated (i) because Greater Atlantic’s board
fails to recommend, withdraws, modifies, or changes its recommendation of the
merger before Greater Atlantic’s shareholder meeting, or (ii) by Summit due to a
breach by Greater Atlantic of any representation, warranty, covenant or other
agreement, then in either of those cases Greater Atlantic must pay Summit a cash
termination fee of $250,000 no later than two (2) business days after the
termination date.
|
|
Waiver
and Amendment (page ___)
|
We may
jointly amend the merger agreement, and each of us may waive our right to
require the other party to adhere to the terms and conditions of the merger
agreement. However, we may not do so after Greater Atlantic’s
shareholders approve the merger agreement if the amendment or waiver would
violate the Delaware General Corporation Law or the West Virginia Business
Corporation Act.
Interests
of Directors and Officers in the Merger that Differ from Your Interests
(page __)
Some of the directors and officers of Greater Atlantic have interests in the
merger that differ from, or are in addition to, their interests as shareholders
of Greater Atlantic. These interests exist because of, among other
things, employment or severance agreements that the officers entered into with
Greater Atlantic, and rights that these officers and directors have under
Greater Atlantic’s benefit plans. These employment and severance
agreements provide certain officers with severance benefits if their employment
is terminated following the merger. Further, certain officers and
employees of Greater Atlantic will benefit from accelerated vesting of stock
options.
The
members of the Greater Atlantic board of directors knew about these additional
interests and considered them when they approved the merger
agreement.
|
|
Stock
Options (page ___)
|
If the
merger is completed, each outstanding option to purchase shares of Greater
Atlantic common stock under any and all plans of Greater Atlantic under which
stock options have been granted and are outstanding shall vest and holders of
Greater Atlantic stock options shall be entitled to receive cash in an amount
equal to the difference between the value of (a) the merger consideration and
(b) the applicable exercise price (rounded to the nearest cent) for each
outstanding Greater Atlantic stock option.
Comparative
Rights of Summit Shareholders and Greater Atlantic Shareholders
(page ___)
The
rights of Summit’s shareholders are governed by West Virginia law and by
Summit’s articles of incorporation and bylaws. The rights of Greater
Atlantic’s shareholders are governed by Delaware law and by Greater Atlantic’s
certificate of incorporation and bylaws. Upon completion of the
merger, the rights of the Summit shareholders, including former shareholders of
Greater Atlantic, will be governed by West Virginia law and the articles of
incorporation and bylaws of Summit.
|
|
RISK FACTORS
|
You
should carefully read and consider the following risk factors concerning Summit,
Greater Atlantic and the merger before you decide whether to vote to approve the
merger and/or the other matters to be considered and voted upon at the
shareholder meeting.
Risks
Associated with the Merger
Fluctuations
in the trading price of Summit common stock will change the value of the shares
of Summit common stock you receive in the merger.
The
number of shares of Summit common stock that you will receive for each share of
Greater Atlantic common stock will be calculated at closing based on the
exchange ratio. At the closing, we will determine the exchange ratio
by dividing the average closing price of Summit common stock reported on the
NASDAQ Capital Market for the twenty (20) trading days prior to closing (the
“Average Closing Price”) by $4.00. However, the exchange ratio is
subject to a ceiling, which sets the maximum number of shares that
Summit will issue. The ceiling provides that each share of Greater
Atlantic common stock will be exchanged for no more than 0.328625 of a share of
Summit common stock. As a result, the market value of the Summit
common stock that you receive in the merger will increase or decrease depending
on the direction of the price movement of the Summit common
stock. See chart on page ___ under the heading “The Merger - Merger
Consideration” for an illustration of what you will receive based on
Summit’s stock price. Also, after the merger, the market value of
Summit common stock may decrease and be lower than the market value of Summit
common stock that was used in calculating the exchange ratio in the
merger.
The
amount of Greater Atlantic’s shareholders’ equity at closing and any adjustments
to Greater Atlantic’s allowance for loan losses as required by the merger
agreement may reduce the value of the shares of Summit common stock you receive
in the merger.
The
Merger Consideration and exchange ratio may be adjusted based on the amount of
Greater Atlantic’s shareholders’ equity adjusted at closing. If, at
closing, Greater Atlantic’s shareholders’ equity, as adjusted to exclude (a)
accumulated other comprehensive income or loss and (b) the effect of removing
the benefit of net operating loss carryforwards from the net deferred tax assets
(the “Adjusted Shareholders’ Equity”), is less than $4,213,617 (which equals
Greater Atlantic’s Adjusted Shareholders’ Equity at March 31, 2008 and is
referred to as the “Benchmark Equity”), then the aggregate value of the merger
consideration will be reduced one dollar for each dollar that the Adjusted
Shareholders’ equity is less than $4,213,617. For purposes of
determining Adjusted Shareholders’ equity at closing, the Adjusted Shareholders’
Equity will be increased by the actual monthly operating losses, up to $250,000
per month, incurred by Greater Atlantic after March 31, 2008 and before
September 1, 2008, the fees accrued or paid to Greater Atlantic’s financial
advisor, and the fees accrued or paid to Greater Atlantic’s legal counsel up to
$150,000. As of the mailing of this proxy statement/prospectus, Greater
Atlantic's Adjusted Shareholders' Equity is $____.
The
Merger Consideration and exchange ratio may also be adjusted based on additional
provisions to Greater Atlantic’s loan loss allowance. If Summit’s due
diligence results in a determination by Summit, with the concurrence of
independent accountants retained by Greater Atlantic to review this
determination, that additional provisions should be made to Greater Atlantic’s
allowance for loan losses, then the Merger Consideration will be reduced dollar
for dollar by the amount of additional provisions. In calculating the
amount of the Merger Consideration reduction, specific reserve reductions may be
used to offset losses from other loans to determine the amount of provisions
needed to the allowance for loan losses.
Because
of the uncertainties relating to amount of Greater Atlantic’s shareholders
equity at closing and whether any adjustments will be required to be made to
Greater Atlantic’s loan loss allowance, there can be no guarantee that you will
receive shares of Summit stock equal to $4.00 for each share of Greater Atlantic
common stock.
The
integration of the operations of Summit and Greater Atlantic may be more
difficult than anticipated.
The
success of the merger will depend on a number of factors, including but not
limited to Summit’s ability to:
|
·
|
timely
and successfully integrate the operations of Summit and Greater
Atlantic;
|
|
·
|
maintain
existing relationships with depositors in Greater Atlantic to minimize
withdrawals of deposits subsequent to the
merger;
|
|
·
|
maintain
and enhance existing relationships with borrowers to limit unanticipated
losses of loan customers of Greater
Atlantic;
|
|
·
|
control
the incremental non-interest expense from Summit to maintain overall
operating efficiencies;
|
|
·
|
retain
and attract qualified personnel at Summit and Greater
Atlantic;
|
|
·
|
compete
effectively in the communities served by Summit and Greater Atlantic and
in nearby communities; and
|
|
·
|
manage
effectively its anticipated growth resulting from the
merger.
|
The
merger with Greater Atlantic may distract management of Summit from its other
responsibilities.
The
Merger of Greater Atlantic could cause the management of Summit to focus its
time and energies on matters related to the Merger that otherwise would be
directed to the business and operations of Summit. Any such
distraction on the part of management, if significant, could affect its ability
to service existing business and develop new business and adversely effect the
business and earnings of Summit.
Greater
Atlantic’s shareholders will have less influence as shareholders of Summit than
as shareholders of Greater Atlantic
Greater
Atlantic’s shareholders currently have the right to vote in the election of the
board of directors of Greater Atlantic and on other matters affecting Greater
Atlantic. After the merger, the shareholders of Greater Atlantic as a
group will own approximately ____% of the combined organization. When
the merger occurs, each shareholder that receives shares of Summit common stock
will become a shareholder of Summit with a percentage ownership of the combined
organization much smaller than such shareholder’s percentage ownership of
Greater Atlantic. Consequently, Greater Atlantic’s shareholders will
have less influence on the management and policies of Summit than they now have
on the management and policies of Greater Atlantic.
Directors
and officers of Greater Atlantic have interests in the merger that differ from
the interests of non-director or non-management shareholders.
Some of
the directors and officers of Greater Atlantic have interests in the merger that
differ from, or are in addition to, their interests as shareholders of Greater
Atlantic, generally. These interests exist because of, among other
things, employment or severance agreements that certain officers entered into
with Greater Atlantic, rights that Greater Atlantic officers and directors have
under Greater Atlantic’s benefit plans (including the treatment of their stock
options and warrants following the merger) and rights
to indemnification following the merger. Although the members of each of Summit’s and Greater Atlantic’s board of directors knew about these additional interests and considered them when they approved the merger agreement and the merger, you should understand that some of the directors and officers of Greater Atlantic will receive benefits or other payments in connection with the merger that you will not receive. See “The Merger – Interests of Certain Persons in the Merger” on page ___.
Risks
Associated with Summit
Changes
in interest rates may adversely affect Summit’s business.
Summit’s
earnings, like most financial institutions, depend significantly on its net
interest income. Net interest income is the difference between the
interest income Summit earns on loans and other assets which earn interest and
the interest expense incurred to fund those assets, such as on savings deposits
and borrowed money. Therefore, changes in general market interest
rates, such as a change in the monetary policy of the Board of Governors of the
Federal Reserve System or otherwise beyond those which are contemplated by
Summit’s interest rate risk model and policy, could have an effect on net
interest income.
Our
success depends on key personnel.
Summit
depends, and for the foreseeable future will depend, on the services of H.
Charles Maddy, III, the President and Chief Executive Officer of Summit, Robert
S. Tissue, the Senior Vice President and Chief Financial Officer of Summit,
Patrick N. Frye, the Senior Vice President and Chief Credit Officer of Summit,
Scott C. Jennings, the Senior Vice President and Chief Operating Officer of
Summit, Ronald F. Miller, the President and Chief Executive Officer of Summit
Community Bank, C. David Robertson, the Chairman of the Board of Summit
Community Bank and Doug A. Mitchell, the Senior Vice President, Retail Banking
of Summit. Summit’s board of directors will continue to rely on the
expertise and management abilities of Messrs. Maddy, Tissue, Frye, Jennings,
Miller, Robertson and Mitchell, and the other principal officers of
Summit. If Summit loses the services of one or more of these key
personnel, it could have a negative impact on its business because of their
skills, years of industry experience and the difficulty of promptly finding
qualified replacement personnel.
Summit faces strong
competition.
Summit
engages in highly competitive activities. Each activity and market
served involves competition with other banks and savings institutions, as
well as with non-banking and non-financial enterprises that offer financial
products and services that compete directly with Summit’s products and
services. Summit actively competes with other banks, mortgage
companies and other financial service companies in its efforts to obtain
deposits and make loans, in the scope and types of services offered, in
interest rates paid on deposits and charged on loans, and in
other aspects of banking.
In
addition to competing with other banks and mortgage companies, Summit competes
with other financial institutions engaged in the business of making loans
or accepting deposits, such as savings and loan associations, credit
unions, industrial loan associations, insurance companies, small loan
companies, finance companies, real estate investment trusts, certain
governmental agencies, credit card organizations and other enterprises.
In recent years, competition for money market accounts from
securities brokers has also intensified. Additional competition for
deposits comes from government and private issues of debt obligations and
other investment alternatives for depositors such as money market
funds. Summit takes an aggressive competitive posture, and intends to
continue vigorously competing for market share within our service areas by
offering competitive rates and terms on both loans and
deposits.
Summit’s ability to pay dividends is
subject to regulation.
Summit’s ability to pay dividends on its common stock is subject
to its profitability and to government regulations that limit the aggregate
amount of cash dividends paid to shareholders based on
retained
earnings and then-current income levels. There can be no assurance
that Summit’s future earnings will support dividend payments in the
future. See “Price
Range of Common Stock and Dividends’ beginning on page ___.
There is a concentration of ownership
of Summit’s common stock.
Summit’s
directors and executive officers beneficially own approximately 24.22% of
Summit’s outstanding common stock. Accordingly, such persons
effectively have the ability to control Summit and direct its affairs and
business, which may include taking actions that may be inconsistent with the
interests of non-affiliated shareholders.
Common Stock is not
Insured.
Summit’s common
stock is not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
Risk
Factors Relating to Summit’s Growth.
Summit
may not be able to maintain and manage its growth, which may adversely affect
its results of operations and financial condition. Summit
has had significant growth during the past five years, and Summit plans to
continue to grow and expand. Summit’s ability to continue to grow
depends on its ability to open new branch offices, attract deposits to those
locations, and identify loan and investment opportunities. Summit’s
ability to manage growth successfully also will depend on whether it can
maintain capital levels adequate to support its growth and maintain cost
controls and asset quality. Summit expects to remain well-capitalized
upon the acquisition of Greater Atlantic. It is possible that Summit
may need to raise additional capital to support future growth. Summit
cannot provide any assurance that additional capital would be available on terms
satisfactory to all shareholders. This could force Summit to limit
its growth strategy. If Summit is unable to sustain its growth, its
earnings could be adversely affected. If Summit grows too quickly,
however, and is not able to control costs and maintain asset quality, rapid
growth also could adversely affect its financial performance.
Summit depends on local economic
conditions, over which it has no control.
Summit’s
success depends to a certain extent upon the general economic conditions in the
geographic markets in which it operates. Although Summit anticipates
that economic conditions in these markets will continue to be favorable, no
assurance can be given that these economic conditions will
continue. Adverse changes in economic conditions in the geographic
markets in which Summit’s subsidiaries are located would likely impair their
ability to collect loans and could otherwise have a negative effect on Summit’s
financial condition. In addition, Summit’s deposit balances may
fluctuate due to economic conditions or other conditions over which it has no
control.
There
are no assurances as to the adequacy of the allowance for credit
losses.
Summit
believes that its allowance for credit losses is maintained at a level adequate
to absorb probable losses in its loan portfolio given the current information
known to management.
Management
establishes the allowance based upon many factors, including, but not limited
to:
|
·
|
historical
loan loss experience;
|
|
·
|
industry
diversification of the commercial loan
portfolio;
|
|
·
|
the
effect of changes in the local real estate market on collateral
values;
|
|
·
|
the
amount of nonperforming loans and related collateral
security;
|
|
·
|
current
economic conditions that may affect the borrower’s ability to pay and
value of collateral;
|
|
·
|
sources
and cost of funds;
|
|
·
|
volume,
growth and composition of the loan portfolio;
and
|
|
·
|
other
factors management believes are
relevant.
|
These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events, so ultimate losses may
differ from current estimates. Depending on changes in economic,
operating and other conditions, including changes in interest rates, that are
generally beyond its control, Summit’s actual loan losses could increase
significantly. As a result, such losses could exceed Summit’s current allowance
estimates. Summit can provide no assurance that its allowance is
sufficient to cover actual loan losses should such losses differ substantially
from our current estimates.
In
addition, federal and state regulators, as an integral part of their respective
supervisory functions, periodically review Summit’s allowance for credit
losses. Summit’s independent auditors also review the allowance as a
part of their audit. Any increase in its allowance required by either
the regulatory agencies or independent auditors would reduce Summit’s pre-tax
earnings.
|
|
FORWARD-LOOKING
STATEMENTS
|
This
proxy statement/prospectus contains data and information that constitute
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding, among other things, the anticipated
closing date of the merger, the expected pro forma effect of the merger, and
plans and objectives of Summit’s management for future operations of the
combined organization following consummation of the merger. You can
identify these forward-looking statements because they may include terms such as
“believes,” “anticipates,” “intends,” “expects,” or similar
expressions and may include discussions of future strategy. Each of
Summit and Greater Atlantic caution you not to rely unduly on any
forward-looking statements in this proxy statement/prospectus. These
forward-looking statements are based on current expectations that involve a
number of risks and uncertainties. Actual results may differ
materially from the results expressed in these forward-looking
statements.
Factors
that might cause such a difference include the following:
|
·
|
the
ability of Greater Atlantic to obtain the required shareholder approval or
the ability of Summit to obtain the required regulatory approvals for the
merger;
|
|
·
|
the
ability of the companies to consummate the
merger;
|
|
·
|
Summit’s
ability to successfully integrate Greater Atlantic into Summit following
the merger;
|
|
·
|
a
material adverse change in the financial condition, results of operations
or prospects of either Summit or Greater
Atlantic;
|
|
·
|
Summit’s
ability to fully realize any cost savings and revenues or the ability to
realize them on a timely basis;
|
|
·
|
the
risk of borrower, depositor and other customer attrition after the merger
is completed;
|
|
·
|
a
change in general business and economic
conditions;
|
|
·
|
changes
in the interest rate environment, deposit flows, loan demand, real estate
values, and competition;
|
|
·
|
changes
in accounting principles, policies or
guidelines;
|
|
·
|
changes
in legislation and regulation;
|
|
·
|
other
economic, competitive, governmental, regulatory, geopolitical, and
technological factors affecting the companies’ operations, pricing, and
services; and
|
|
·
|
other
risk factors described on pages ___ to ___ of this proxy
statement/prospectus.
|
CEASE
AND DESIST ORDER APPLICABLE TO GREATER ATLANTIC BANK
Effective
April 25, 2008, Greater Atlantic Bank consented to the issuance of a Cease and
Desist Order (the “Order”) by the Office of Thrift Supervision (the
“OTS”).
The Order
requires Greater Atlantic Bank, among other things, to:
|
·
|
report,
within prescribed time periods to the OTS Regional Director for the
Southeast Region (the “Regional Director”) on the status of the then
ongoing negotiations with Summit;
|
|
·
|
have,
at June 30, 2008, and maintain a Tier One (Core) Capital Ratio of at least
6% and a total risk based capital ratio of at least
12%;
|
|
·
|
develop
a comprehensive long term operating strategy to be implemented if the
proposed merger with Summit is not
consummated;
|
|
·
|
incorporate
the long term operating strategy into a three-year business plan
containing at a minimum the requirements set forth in the
Order;
|
|
·
|
cease,
as of the effective date of the Order, making commercial real estate
loans, commercial loans and loans on raw land without the prior written
approval of the Regional Director, except for such loans as to which
Greater Atlantic Bank has a legally binding written commitment to lend as
of the effective date of the Order;
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|
·
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cease,
as of the effective date of the Order; accepting brokered deposits;
and
|
|
·
|
refrain
from the payment of dividends or other capital
distributions.
|
In
addition, the Order requires the board of directors of Greater Atlantic Bank to
take action with respect to credit administration, classified assets and
accounting system controls and to establish a regulatory compliance committee of
three or more non-employee directors to monitor and coordinate compliance with
the provisions of the Order and provide the board of directors with progress
reports on compliance, which reports are to be transmitted by the board of
directors of the bank to the Regional Director.
The Order
provides that it will remain in effect until terminated, modified, or suspended
in writing by the OTS, acting through the Regional Director or other authorized
representative.
As of the
date of this proxy statement/prospectus, Greater Atlantic Bank believes that it
has complied with the terms of the Order applicable to it as of that
date.
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
Summit
common stock is traded on the NASDAQ Capital Market (formerly known as the
NASDAQSmallCap Market) under the symbol “SMMF”. The closing sale
price reported for Summit common stock on June 9, 2008, the last trading date
preceding the public announcement of the merger agreement, was
$13.05. Since February 22, 2007, Greater Atlantic common stock has
been quoted on the Pink Sheets under the symbol “GAFC.PK.” Before
that date, Greater Atlantic common stock was quoted on the NASDAQ Capital
Market. The closing sale price reported for Greater Atlantic common
stock on June 9, 2008, the last trading date preceding the public announcement
of the merger agreement, was $1.25.
The
following table sets forth for the periods indicated the high and low prices per
share of Summit common stock and Greater Atlantic common stock as reported on
their respective market, along with the semi-annual cash dividends per share
declared. The per share prices do not include adjustments for
markups, markdowns or commissions.
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|||||||||||||||||||||||
|
Sales Price
|
Cash
Dividend Declared
|
Sales Price
|
Cash
Dividend Declared
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|||||||||||||||||||||
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High
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Low
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High
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Low
|
|||||||||||||||||||||
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2006
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||||||||||||||||||||||||
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First
Quarter
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$ | 25.09 | $ | 19.90 | $ | - | $ | 6.05 | $ | 4.60 | $ | - | ||||||||||||
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Second
Quarter
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$ | 24.52 | $ | 19.10 | $ | 0.16 | $ | 5.90 | $ | 5.04 | $ | - | ||||||||||||
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Third
Quarter
|
$ | 24.18 | $ | 17.95 | $ | - | $ | 5.36 | $ | 4.75 | $ | - | ||||||||||||
|
Fourth
Quarter
|
$ | 20.16 | $ | 17.50 | $ | 0.16 | $ | 5.20 | $ | 4.30 | $ | - | ||||||||||||
|
2007
|
||||||||||||||||||||||||
|
First
Quarter
|
$ | 21.51 | $ | 19.49 | $ | - | $ | 4.30 | $ | 2.35 | $ | - | ||||||||||||
|
Second
Quarter
|
$ | 21.20 | $ | 19.80 | $ | 0.17 | $ | 5.10 | $ | 2.25 | $ | - | ||||||||||||
|
Third
Quarter
|
$ | 19.65 | $ | 18.28 | $ | - | $ | 5.50 | $ | 5.00 | $ | - | ||||||||||||
|
Fourth
Quarter
|
$ | 18.96 | $ | 13.60 | $ | 0.17 | $ | 5.35 | $ | 4.69 | $ | - | ||||||||||||
|
2008
|
||||||||||||||||||||||||
|
First
Quarter
|
$ | 16.25 | $ | 13.51 | $ | - | $ | 4.95 | $ | 3.85 | $ | - | ||||||||||||
|
Second Quarter
|
$ | 14.47 | $ | 12.50 | $ | 0.18 | $ |
3.00
|
$ | 1.17 | $ | - | ||||||||||||
The
shareholders of Summit are entitled to receive dividends when and as declared by
its board of directors. Dividends have been paid
semi-annually. Dividends were $0.34 per share in 2007 and $0.32 per
share in 2006. The payment of dividends is subject to the
restrictions set forth in the West Virginia Business Corporation Act and the
limitations imposed by the Federal Deposit Insurance Corporation.
Payment
of dividends by Summit depends upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s state non-member banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (“FDIC”)
and the West Virginia Division of Banking and generally, the prior approval of
the FDIC is required if the total dividends declared by a state non-member bank
in any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two
years. Additionally, prior approval of the FDIC is required when a
state non-member bank has deficit retained earnings but has sufficient current
year’s net income, as defined, plus the retained net profits of the two
preceding years. The FDIC may prohibit dividends if it deems the
payment to be an unsafe or unsound banking practice. The FDIC has
issued guidelines for dividend payments by state non-member banks emphasizing
that proper dividend size depends on the bank’s earnings and
capital.
The
following table sets forth historical per share market values for Summit common
stock and Greater Atlantic common stock (i) on June 9, 2008, the last
trading day prior to public announcement of the merger agreement, and
(ii) on June 30, 2008, the most recent practicable date before the printing
and mailing of this proxy statement/prospectus. The table also shows
the equivalent pro forma market value of Greater Atlantic common stock on June
9, 2008, and June 30, 2008.
The
equivalent pro forma market value per share of Greater Atlantic common stock is
the result obtained by multiplying the historical market price of Summit common
stock by the applicable exchange ratio. For purposes of determining
the equivalent pro forma market value and the applicable exchange ratio, we have
assumed that the average closing price of a share of Summit common stock is
equal to the historical market price on June 9, 2008, and on June 30,
2008. Accordingly, the pro forma market value of Greater Atlantic
common stock (i) on June 9, 2008, is determined by multiplying $13.05 by
the exchange ratio of 0.3065, and (ii) on June 30, 2008, is determined by
multiplying $12.50 by the exchange ratio of 0.3200.
The
historical market prices represent the last sale prices on June 9, 2008, and
June 30, 2008(June 26, 2008 with respect to Greater Atantic). The
average closing price of Summit common stock used to determined the exchange
ratio and the market price may be higher or lower than the closing prices of
Summit common stock on the dates shown in the table and, therefore, the market
value of the Summit common stock that you receive may be higher or lower than
the equivalent pro forma market value shown in the table.
Historical Market Price Per
Share Greater
Atlantic
Greater
Equivalent Pro Forma
Summit Atlantic
Market Value Per
Share
June 9,
2008
$ 13.05 $ 1.25
$ 4.00
June 30,
2008 $ 12.50 $ 2.47
$ 4.00
Once the
merger is completed, there will be no further public market for Greater Atlantic
common stock.
UNAUDITED
COMPARATIVE PER SHARE DATA
We have
summarized below historical earnings, dividend and book value per share
information for Summit and Greater Atlantic and additional similar information
as if the companies had been combined for the periods shown, which we refer to
as “pro forma” information. The pro forma and pro forma equivalent
per share information gives effect to the merger as if the transaction had been
effective at the year end dates presented, in the case of book value data, and
as if the transaction had been effective at the beginning of each period
presented, in the case of the earnings and dividend data.
The pro
forma combined and pro forma equivalent per share information below assume that
Summit will pay consideration totaling $4.00 per share for each outstanding
share of Greater Atlantic common stock, 100% in the form of Summit common
stock. For purposes of valuing Summit’s common stock paid, a price
per share of $13.05 was assumed, which represents the average closing price of
Summit’s common stock on the last trading day preceding the public announcement
of the merger and which results in an exchange ratio 0.3065 shares of
Summit common stock for each share of Greater Atlantic common
stock.
The
Greater Atlantic pro forma equivalent per share amounts below are calculated by
multiplying the Summit pro forma combined earnings per share and book value per
share by the exchange ratio of 0.3065 so that the per share amounts equate to
the respective values for one share of Greater Atlantic common
stock.
We expect
that both Summit and Greater Atlantic will incur merger and integration costs as
a result of the merger. We also anticipate that the merger will
provide the combined company with financial benefits that may include reduced
operating expenses. The information set forth below, while helpful in
illustrating the financial characteristics of the combined company under one set
of assumptions, may not reflect all of these anticipated financial expenses and
does not reflect any of these anticipated financial benefits and, accordingly,
does not attempt to predict or suggest future results. It also does
not necessarily reflect what the historical results of the combined company
would have been had our companies been combined during the periods
presented.
Summit
reports on a calendar year basis while Greater Atlantic reports on a fiscal year
ending on September 30. Accordingly for purposes of the below
earnings per share data, Summit’s statements of income for the three months
ended March 31, 2008, and the year ended December 31, 2007, have been
combined with Greater Atlantic’s statements of income for the three months ended
December 31, 2007, and the year ended September 30, 2007,
respectively.
The
information in the following table is based on, and you should read it together
with, the historical financial information and the notes thereto for Summit and
Greater Atlantic contained in this proxy statement/prospectus.
|
For
the Three Months Ended 3/31/08-Summit & 12/31/07-Greater
Atlantic
|
||||||||||||||||
|
Greater
|
||||||||||||||||
|
Greater
|
Atlantic
|
|||||||||||||||
|
Summit
|
Atlantic
|
Pro
Forma
|
Pro
Forma
|
|||||||||||||
|
Historical
|
Historical
|
Combined
|
Equivalent
|
|||||||||||||
|
Basic
earnings (loss) per share
|
$ | 0.52 | $ | (0.28 | ) | $ | 0.42 | $ | 0.13 | |||||||
|
Diluted
earnings (loss) per share
|
$ | 0.51 | $ | (0.28 | ) | $ | 0.40 | $ | 0.12 | |||||||
|
Dividends
declared per share
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Book
value per share (at 3/31/2008)
|
$ | 12.41 | $ | 1.08 | $ | 12.48 | $ | 3.83 | ||||||||
|
For
the Year Ended 12/31/07-Summit & 9/30/07-Greater
Atlantic
|
||||||||||||||||
|
Greater
|
||||||||||||||||
|
Greater
|
Atlantic
|
|||||||||||||||
|
Summit
|
Atlantic
|
Pro
Forma
|
Pro
Forma
|
|||||||||||||
|
Historical
|
Historical
|
Combined
|
Equivalent
|
|||||||||||||
|
Basic
earnings (loss) per share
|
||||||||||||||||
|
from
continuing operations
|
$ | 1.87 | $ | 0.31 | $ | 1.84 | $ | 0.56 | ||||||||
|
Diluted
earnings (loss) per share
|
||||||||||||||||
|
from
continuing operations
|
$ | 1.85 | $ | 0.31 | $ | 1.74 | $ | 0.53 | ||||||||
|
Dividends
declared per share
|
$ | 0.34 | $ | - | $ | 0.30 | $ | 0.10 | ||||||||
|
Book
value per share (at 12/31/2007)
|
$ | 12.07 | $ | 2.86 | $ | 12.17 | $ | 3.73 | ||||||||
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The
following unaudited pro forma condensed combined consolidated balance sheet as
of March 31, 2008, and unaudited pro forma condensed combined consolidated
statements of income for the three months ended March 31, 2008, and the year
ended December 31, 2007, combine the historical financial statements of
Summit and Greater Atlantic. The unaudited pro forma financial
statements give effect to the proposed merger of Greater Atlantic with and into
Summit as if the merger occurred on March 31, 2008, with respect to the balance
sheet, and on January 1, 2008, and January 1, 2007, with respect to the
statements of income for the three months ended March 31, 2008, and the year
ended December 31, 2007, respectively. The unaudited pro forma
financial statements give effect to the proposed merger under the purchase
method of accounting using an acquisition price of $4.00 per share for Greater
Atlantic common stock.
Summit
reports on a calendar year basis while Greater Atlantic reports on a fiscal year
ending on September 30. Accordingly, for purposes of the
unaudited pro forma condensed combined consolidated statements of income,
Summit’s statements of income for the three months ended March 31, 2008, and the
year ended December 31, 2007, have been combined with Greater Atlantic’s
statements of income for the three months ended December 31, 2007, and the year
ended September 30, 2007, respectively.
The
purchase method of accounting requires that all of Greater Atlantic’s assets and
liabilities be adjusted to their estimated fair market values as of the date of
merger. For purposes of the unaudited pro forma financial statements,
fair market value of assets and liabilities as of March 31, 2008, has been
estimated by management of Summit using market information available on
March 31, 2008. Accordingly, these adjustments are only
approximations. This information may not necessarily be indicative of
the financial position or results of operations that would have occurred if the
merger had been consummated on the date or at the beginning of the periods
indicated or which may be obtained in the future. Upon consummation
of the merger, Summit will make adjustments as of the date of consummation based
on appraisals and estimates.
The
unaudited pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
reflect benefits of expected cost savings or opportunities to earn additional
revenue and, accordingly, does not attempt to predict or suggest future
results. It also does not necessarily reflect what the historical
results of the combined company would have been had our companies been combined
during this period.
|
Actual
|
Pro
Forma
|
||||||
|
Greater
|
|||||||
|
Summit
|
Atlantic
|
||||||
|
Financial
|
Financial
|
||||||
|
Group, Inc.
|
Corp.
|
Adjustments
|
Combined
|
||||
|
ASSETS
|
|||||||
|
Cash
and due from banks
|
$ 21,912
|
$ 2,408
|
$ -
|
$ 24,320
|
|||
|
Interest
bearing deposits with other banks
|
103
|
14,874
|
(478)
|
(1)
|
14,149
|
||
|
(350)
|
(2)
|
||||||
|
Federal
funds sold
|
1,514
|
-
|
-
|
1,514
|
|||
|
Securities
available for sale
|
302,029
|
43,841
|
(693)
|
(1)
|
345,177
|
||
|
Securities
held to maturity
|
-
|
2,720
|
-
|
2,720
|
|||
|
Loans
held for sale, net
|
489
|
-
|
-
|
489
|
|||
|
Loans,
net
|
1,079,223
|
159,724
|
1,400
|
(3)
|
1,240,347
|
||
|
Premises
and equipment, net
|
22,055
|
2,093
|
-
|
24,148
|
|||
|
Accrued
interest receivable
|
6,851
|
1,319
|
-
|
8,170
|
|||
|
Identifiable
intangibles
|
3,770
|
-
|
1,244
|
(3)
|
5,014
|
||
|
Goodwill
|
6,198
|
956
|
7,706
|
(3)
|
14,860
|
||
|
Other
assets
|
20,966
|
2,485
|
(390)
|
(3)
|
26,850
|
||
|
2,900
|
(3)
|
||||||
|
____________
|
___________
|
889
|
(3)
|
____________
|
|||
|
Total
assets
|
$ 1,465,110
|
$ 230,420
|
$ 12,228
|
$ 1,707,758
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Liabilities
|
|||||||
|
Deposits
|
$ 836,944
|
$ 188,805
|
$ 641
|
(3)
|
$ 1,026,390
|
||
|
Short-term
borrowings
|
93,950
|
1,732
|
-
|
95,682
|
|||
|
Long-term
borrowings
|
412,329
|
25,000
|
976
|
(3)
|
438,305
|
||
|
Subordinated
debentures owed to
|
|||||||
|
unconsolidated
subsidiary trusts
|
19,589
|
9,379
|
28,968
|
||||
|
Other
liabilities
|
10,343
|
2,223
|
1,000
|
(3)
|
14,904
|
||
|
418
|
(3)
|
||||||
|
____________
|
___________
|
920
|
(3)
|
___________
|
|||
|
Total
liabilities
|
1,373,155
|
227,139
|
3,955
|
1,604,249
|
|||
|
Shareholders'
Equity
|
|||||||
|
Common
stock and related surplus
|
24,394
|
25,303
|
11,554
|
(1)
|
35,948
|
||
|
(25,303)
|
(4)
|
||||||
|
Retained
earnings
|
68,901
|
(20,260)
|
(350)
|
(2)
|
68,901
|
||
|
20,610
|
(4)
|
||||||
|
Accumulated
other comprehensive (loss)
|
(1,340)
|
(1,762)
|
1,762
|
(4)
|
(1,340)
|
||
|
Total
shareholders' equity
|
91,955
|
3,281
|
8,273
|
103,509
|
|||
|
Total
liabilities and shareholders' equity
|
$ 1,465,110
|
$ 230,420
|
$ 12,228
|
$ 1,707,758
|
|||
|
See
Notes to Unaudited Pro Forma Financial Statements
|
|||||||
|
SUMMIT
AND GREATER ATLANTIC
|
||||||||||||||||||||
|
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Income
|
||||||||||||||||||||
|
(dollars
in thousands, except per share amounts)
|
||||||||||||||||||||
|
Actual
|
Pro
Forma
|
|||||||||||||||||||
|
Three Months Ended
|
||||||||||||||||||||
|
March
31,
|
December
31,
|
|||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||
|
Greater
|
||||||||||||||||||||
|
Summit
|
Atlantic
|
|||||||||||||||||||
|
Financial
|
Financial
|
|||||||||||||||||||
|
Group, Inc.
|
Corp.
|
Adjustments
|
Combined
|
|||||||||||||||||
|
Interest
income
|
$ | 23,859 | $ | 3,878 | 114 | (6 | ) | $ | 27,851 | |||||||||||
|
Interest
expense
|
12,920 | 2,600 | (282 | ) | (7 | ) | 15,238 | |||||||||||||
|
Net
interest income
|
10,939 | 1,278 | 12,613 | |||||||||||||||||
|
Provision
for loan losses
|
1,000 | 102 |
___________
|
1,102 | ||||||||||||||||
|
Net
interest income after
|
||||||||||||||||||||
|
provision
for loan losses
|
9,939 | 1,176 |
___________
|
11,511 | ||||||||||||||||
|
Noninterest
income
|
||||||||||||||||||||
|
Service
fees
|
743 | 139 | 882 | |||||||||||||||||
|
Other
|
2,105 | (2 | ) |
___________
|
2,103 | |||||||||||||||
|
Total
noninterest income
|
2,848 | 137 |
___________
|
2,985 | ||||||||||||||||
|
Noninterest
expense
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
4,395 | 943 | 5,338 | |||||||||||||||||
|
Net
occupancy expense
|
476 | 324 | 800 | |||||||||||||||||
|
Equipment
expense
|
534 | 105 | 639 | |||||||||||||||||
|
Other
|
1,684 | 785 | 44 | (8 | ) | 2,513 | ||||||||||||||
|
Total
noninterest expense
|
7,089 | 2,157 | 9,290 | |||||||||||||||||
|
Income
(loss) before income taxes
|
5,698 | (844 | ) | 5,206 | ||||||||||||||||
|
Income
tax expense
|
1,874 | - | (320 | ) | (9 | ) | 1,688 | |||||||||||||
| 134 | (10 | ) | ||||||||||||||||||
|
Net
income (loss)
|
$ | 3,824 | $ | (844 | ) | $ | 538 | $ | 3,518 | |||||||||||
|
Basic
earnings (loss) per share
|
$ | 0.52 | $ | (0.28 | ) | $ | 0.42 | |||||||||||||
|
Diluted
earnings (loss) per share
|
$ | 0.51 | $ | (0.28 | ) | $ | 0.40 | |||||||||||||
|
Dividends
per common share
|
$ | - | $ | - | $ | - | ||||||||||||||
|
See
Notes to Unaudited Pro Forma Financial Statements
|
||||||||||||||||||||
|
SUMMIT
AND GREATER ATLANTIC
|
||||||||||||||||||||
|
Unaudited
Pro Forma Condensed Combined Consolidated Statement of
Income
|
||||||||||||||||||||
|
(dollars
in thousands, except per share amounts)
|
||||||||||||||||||||
|
Actual
|
Pro
Forma
|
|||||||||||||||||||
|
Year Ended
|
||||||||||||||||||||
|
December
31,
|
September
30,
|
|||||||||||||||||||
|
2007
|
2007
|
|||||||||||||||||||
|
Greater
|
||||||||||||||||||||
|
Summit
|
Atlantic
|
|||||||||||||||||||
|
Financial
|
Financial
|
|||||||||||||||||||
|
Group, Inc.
|
Corp.
|
Adjustments
|
Combined
|
|||||||||||||||||
|
Interest
income
|
$ | 91,384 | $ | 18,421 | $ | (2,225 | ) | (5 | ) | $ | 108,036 | |||||||||
| 456 | (6 | ) | ||||||||||||||||||
|
Interest
expense
|
52,317 | 11,993 | (1,692 | ) | (5 | ) | 61,489 | |||||||||||||
| (1,129 | ) | (7 | ) | |||||||||||||||||
|
Net
interest income
|
39,067 | 6,428 | 46,547 | |||||||||||||||||
|
Provision
for loan losses
|
2,055 | 685 |
|
|
2,740 | |||||||||||||||
|
Net
interest income after
|
||||||||||||||||||||
|
provision
for loan losses
|
37,012 | 5,743 |
|
|
43,807 | |||||||||||||||
|
Noninterest
income
|
||||||||||||||||||||
|
Service
fees
|
3,004 | 613 | (40 | ) | (5 | ) | 3,577 | |||||||||||||
|
Other
|
4,353 | 4,257 | 8,610 | |||||||||||||||||
|
Total
noninterest income
|
7,357 | 4,870 | 12,187 | |||||||||||||||||
|
Noninterest
expense
|
||||||||||||||||||||
|
Salaries
and employee benefits
|
14,608 | 4,446 | (256 | ) | (5 | ) | 18,798 | |||||||||||||
|
Net
occupancy expense
|
1,758 | 1,394 | (102 | ) | (5 | ) | 3,050 | |||||||||||||
|
Equipment
expense
|
2,004 | 516 | (24 | ) | (5 | ) | 2,496 | |||||||||||||
|
Other
|
6,728 | 3,270 | (62 | ) | (5 | ) | 10,113 | |||||||||||||
| 177 | (8 | ) | ||||||||||||||||||
|
Total
noninterest expense
|
25,098 | 9,626 |
|
|
34,457 | |||||||||||||||
|
Income
(loss) from continuing operations
|
||||||||||||||||||||
|
before
income taxes
|
19,271 | 987 | 21,537 | |||||||||||||||||
|
Income
tax expense
|
5,734 | 36 | 339 | (9 | ) | 6,595 | ||||||||||||||
| 486 | (10 | ) | ||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 13,537 | $ | 951 | $ | 454 | $ | 14,942 | ||||||||||||
|
Basic
earnings (loss) per share
|
||||||||||||||||||||
|
from
continuing operations
|
$ | 1.87 | $ | 0.31 | $ | 1.84 | ||||||||||||||
|
Diluted
earnings (loss) per share
|
||||||||||||||||||||
|
from
continuing operations
|
$ | 1.85 | $ | 0.31 | $ | 1.74 | ||||||||||||||
|
Dividends
per common share
|
$ | 0.34 | $ | - | $ | 0.30 | ||||||||||||||
|
See
Notes to Unaudited Pro Forma Financial Statements
|
||||||||||||||||||||
SUMMIT
AND GREATER ATLANTIC
Notes
to Unaudited Pro Forma Financial Statements
(1) Effect
of stock consideration paid by Summit to Greater Atlantic's shareholders in
conjunction with the merger and record cash paid by Summit for its estimated
direct transaction costs. Under the terms of the Greater Atlantic
transaction, Summit will pay total consideration of $4.00 per share for each of
the 3,024,220 outstanding common shares of Greater Atlantic, less the 135,800
shares of Greater Atlantic previously acquired by Summit. Such
consideration will be paid 100% in the form of Summit common stock.
(a) Stock
consideration: Issuance of 809,081 shares of Summit common stock to
Greater Atlantic shareholders assuming that Summit's average stock price for the
20 trading days preceding March 31, 2008 is $14.28.
(b) Estimated
direct transactions costs and costs of Greater Atlantic shares previously
acquired: Summit's estimated direct transaction costs of $478,000 and
cost for Greater Atlantic shares previously acquired by Summit for
$693,000.
(2) Effect
of Greater Atlantic's estimated direct transaction costs.
(3) Adjust
acquired assets and liabilities of Greater Atlantic to fair value and record
related tax effects as follows (in thousands):
|
Purchase
price, estimated transaction costs and cost of Greater Atlantic shares
previously acquired ($12,725) paid by Summit in excess of Greater
Atlantic's shareholders' equity at March 31, 2008 ($2,931) adjusted for
the direct transaction costs paid by Greater Atlantic.
|
$ | 9,794 | ||||||
|
Estimated
fair value purchase accounting adjustments:
|
||||||||
|
Loans
|
$ | 1,400 | ||||||
|
Deposits
|
(641 | ) | ||||||
|
Borrowings
|
(976 | ) | ||||||
|
Core
deposit intangible
|
1,244 | |||||||
|
Net
deferred tax liabilities on purchase accounting
adjustments
|
(390 | ) | ||||||
|
Tax
benefit of purchased net operating loss carryforwards
|
2,900 | |||||||
| $ | 3,537 | (3,537 | ) | |||||
|
Purchase
price and estimated transaction costs in excess of fair value of net
assets acquired
|
6,257 | |||||||
|
Estimated
exit and other restructuring costs expected to be incurred in connection
with the acquisition of Greater Atlantic:
|
||||||||
|
Employee
severance costs
|
$ | 1,000 | ||||||
|
EDP
contracts cancellation costs
|
418 | |||||||
|
Lease
termination costs
|
920 | |||||||
|
Net
deferred tax asset on exit and restructuring costs
|
(889 | ) | ||||||
| $ | 1,449 | 1,449 | ||||||
|
Goodwill
|
$ | 7,706 | ||||||
|
(4)
|
Reflect
elimination of Greater Atlantic’s equity
accounts.
|
|
(5)
|
Estimated
reductions to interest income, interest expense, non-interest income and
non-interest expense as result of sale of Greater Atlantic's Pasadena,
Maryland branch office in August
2007.
|
SUMMIT
AND GREATER ATLANTIC
Notes
to Unaudited Pro Forma Financial Statements (continued)
|
(6)
|
Other
pro forma adjustments to interest income, as follows (in
thousands):
|
|
Three
Months Ended
March
31, 2008
|
Year
Ended
December
31, 2007
|
|||||||
|
Estimated
accretion of fair value adjustment to securities over portfolio’s
estimated 4 year average life to maturity
|
$ | 149 | $ | 596 | ||||
|
Estimated
amortization of fair value adjustment to Loans over portfolio’s
estimated 10 year average Life to maturity
|
(35 | ) | (140 | ) | ||||
| $ | 114 | $ | 456 | |||||
|
(7)
|
Other
proforma adjustments to interest expense, as follows (in
thousands):
|
|
Three
Months Ended March 31, 2008
|
Year
Ended
December
31, 2007
|
|||||||
|
Estimated
amortization of fair value adjustment to deposits over the estimated 1
year average remaining maturity of the deposits
|
$ | (160 | ) | $ | (641 | ) | ||
|
Estimated
amortization of fair value adjustment to borrowings over the estimated 2
year average remaining maturity of the borrowings
|
(122 | ) | (488 | ) | ||||
| $ | (282 | ) | $ | (1,129 | ) | |||
|
(8)
|
Amortization
of core deposit intangible over estimated 7 year average
life.
|
|
(9)
|
Tax
expense (benefit), previously unrecognized, of Greater Atlantic’s income
(loss) from continuing operations before income taxes at a 38% effective
tax rate.
|
|
(10)
|
Tax effect of pro forma
adjustments at a 38% effective tax
rate.
|
SUMMARY SELECTED
FINANCIAL DATA
The
following table sets forth certain summary historical consolidated financial
information for Summit and Greater Atlantic. The balance sheet data
and income statement data of Summit as of and for the five years in the period
ended December 31, 2007 and for Greater Atlantic as of and for the five years in
the period ended September 30, 2007 are derived from the audited consolidated
financial statements of Summit and Greater Atlantic,
respectively. The balance sheet data and income statement data of
Summit for the three months ended March 31, 2008, and March 31, 2007, are
derived from the unaudited consolidated financial statements of
Summit. You should not rely on the three-month information as being
indicative of the results that may be expected for the entire year or for any
future interim period.
The
following information should be read in conjunction with the audited and
unaudited consolidated financial statements and the related notes of Summit,
which are incorporated by reference into this proxy statement/prospectus, and
the audited consolidated financial statements of Greater Atlantic, which are
attached to this proxy statement/prospectus.
|
SUMMIT
FINANCIAL GROUP, INC.
Summary
Consolidated Financial Data
|
||||||||||||||||||||||||||||
|
Dollars
in thousands,
except
per share amounts
|
For
the
Three
months
ended
March
31 2008
|
For
the
Three
months
ended
March 31,
2007
|
For
the Year Ended
December
31,
|
|||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||
|
Summary of
Operations
|
||||||||||||||||||||||||||||
|
Interest income
|
$ | 23,859 | $ | 21,842 | $ | 91,384 | $ | 80,278 | $ | 56,653 | $ | 45,041 | $ | 41,154 | ||||||||||||||
|
Interest
expense
|
12,920 | 12,639 | 52,317 | 44,379 | 26,503 | 18,663 | 17,827 | |||||||||||||||||||||
|
Net interest
income
|
10,939 | 9,203 | 39,067 | 35,899 | 30,150 | 26,378 | 23,327 | |||||||||||||||||||||
|
Provision for loan
losses
|
1,000 | 390 | 2,055 | 1,845 | 1,295 | 1,050 | 915 | |||||||||||||||||||||
|
Net interest income after
provision for loan losses
|
9,939 | 8,813 | 37,012 | 34,054 | 28,856 | 25,328 | 22,412 | |||||||||||||||||||||
|
Noninterest
income
|
2,848 | 1,056 | 7,357 | 3,634 | 1,605 | 3,263 | 3,275 | |||||||||||||||||||||
|
Noninterest
expense
|
7,089 | 5,649 | 25,098 | 21,610 | 19,264 | 16,919 | 14,218 | |||||||||||||||||||||
|
Income (loss) before income
taxes
|
5,698 | 4,220 | 19,271 | 16,078 | 11,197 | 11,672 | 11,469 | |||||||||||||||||||||
|
Income tax
expense
|
1,874 | 1,286 | 5,734 | 5,018 | 3,033 | 3,348 | 3,414 | |||||||||||||||||||||
|
Income (loss) from continuing
operations
|
3,824 | 2,934 | 13,537 | 11,060 | 8,164 | 8,324 | 8,055 | |||||||||||||||||||||
|
Discontinued
operations:
|
||||||||||||||||||||||||||||
|
Exit costs and impairment
of
long-lived
assets
|
- | 80 | (312 | ) | (2,480 | ) | - | - | - | |||||||||||||||||||
|
Operating income
(loss)
|
- | (372 | ) | (10,347 | ) | (1,750 | ) | 3,862 | 2,913 | (44 | ) | |||||||||||||||||
|
Income (loss) from
discontinuedoperations before tax
|
- | (292 | ) | (10,659 | ) | (4,230 | ) | 3,862 | 2,913 | (44 | ) | |||||||||||||||||
|
Income tax expense
(benefit)
|
- | (97 | ) | (3,578 | ) | (1,427 | ) | 1,339 | 1,004 | (15 | ) | |||||||||||||||||
|
Income (loss) from
discontinuedoperations
|
- | (195 | ) | (7,081 | ) | (2,803 | ) | 2,523 | 1,909 | (29 | ) | |||||||||||||||||
|
Net income
|
$ | 3,824 | $ | 2,739 | $ | 6,456 | $ | 8,257 | $ | 10,687 | $ | 10,233 | $ | 8,206 | ||||||||||||||
|
Balance Sheet Data (at
period end)
|
||||||||||||||||||||||||||||
|
Assets
|
$ | 1,465,110 | $ | 1,254,528 | $ | 1,435,536 | $ | 1,235,519 | $ | 1,110,214 | $ | 889,830 | $ | 791,577 | ||||||||||||||
|
Securities
|
302,029 | 258,173 | 300,066 | 247,874 | 223,772 | 211,362 | 235,409 | |||||||||||||||||||||
|
Loans
|
1,079,223 | 930,769 | 1,052,489 | 916,045 | 793,452 | 602,728 | 498,340 | |||||||||||||||||||||
|
Deposits
|
836,944 | 877,225 | 828,687 | 888,688 | 673,887 | 524,596 | 511,801 | |||||||||||||||||||||
|
Short-term
borrowings
|
93,950 | 79,886 | 172,055 | 60,428 | 182,028 | 120,629 | 49,714 | |||||||||||||||||||||
|
Long-term borrowings
and
subordinated
debentures
|
431,918 | 203,408 | 335,327 | 195,698 | 172,295 | 173,101 | 168,549 | |||||||||||||||||||||
|
Shareholders
equity
|
91,955 | 81,950 | 89,420 | 78,752 | 72,691 | 65,150 | 57,005 | |||||||||||||||||||||
|
Per Share
Data
|
||||||||||||||||||||||||||||
|
Earnings
per share - continuing operations
|
||||||||||||||||||||||||||||
|
Basic earnings
|
$ | 0.52 | $ | 0.41 | $ | 1.87 | $ | 1.55 | $ | 1.15 | $ | 1.18 | $ | 1.14 | ||||||||||||||
|
Diluted
earnings
|
0.51 | 0.41 | 1.85 | 1.54 | 1.13 | 1.17 | 1.14 | |||||||||||||||||||||
|
Earnings
per share – discontinued operations
|
||||||||||||||||||||||||||||
|
Basic earnings
(loss)
|
- | (0.03 | ) | (0.98 | ) | (0.39 | ) | 0.35 | 0.27 | - | ||||||||||||||||||
|
Diluted earnings
(loss)
|
- | (0.03 | ) | (0.97 | ) | (0.39 | ) | 0.35 | 0.27 | - | ||||||||||||||||||
|
Earnings
per share
|
||||||||||||||||||||||||||||
|
Basic earnings
|
0.52 | 0.39 | 0.89 | 1.16 | 1.51 | 1.46 | 1.14 | |||||||||||||||||||||
|
Diluted
earnings
|
0.51 | 0.38 | 0.88 | 1.15 | 1.48 | 1.44 | 1.14 | |||||||||||||||||||||
|
Shareholders’
equity (at period end)
|
12.41 | 11.57 | 12.07 | 11.12 | 10.20 | 9.25 | 8.12 | |||||||||||||||||||||
|
Cash dividends
|
- | - | 0.34 | 0.32 | 0.30 | 0.26 | 0.215 | |||||||||||||||||||||
|
Performance
Ratios
|
||||||||||||||||||||||||||||
|
Return on average
equity
|
16.55 | % | 13.40 | % | 7.34 | % | 10.44 | % | 15.09 | % | 16.60 | % | 14.69 | % | ||||||||||||||
|
Return on average
assets
|
1.06 | % | 0.88 | % | 0.50 | % | 0.70 | % | 1.10 | % | 1.22 | % | 1.11 | % | ||||||||||||||
|
Dividend payout
|
0.0 | % | 0.0 | % | 38.1 | % | 27.6 | % | 20.0 | % | 17.9 | % | 18.8 | % | ||||||||||||||
|
Equity to
assets
|
6.3 | % | 6.5 | % | 6.2 | % | 6.4 | % | 6.5 | % | 7.3 | % | 7.2 | % | ||||||||||||||
|
GREATER
ATLANTIC FINANCIAL CORP.
Summary
Consolidated Financial Data
|
||||||||||||||||||||||||||||
|
Dollars
in thousands,
except
per share amounts
|
For
the Six Months Ended March 31, 2008
|
For
the Six Months Ended March 31, 2007
|
For
the Year Ended
September
30,
|
|||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||
|
Summary of
Operations
|
||||||||||||||||||||||||||||
|
Interest income
|
$ | 7,303 | $ | 9,399 | $ | 18,421 | $ | 18,794 | $ | 16,794 | $ | 18,085 | $ | 19,361 | ||||||||||||||
|
Interest
expense
|
5,004 | 5,900 | 11,993 | 11,583 | 10,013 | 11,970 | 12,277 | |||||||||||||||||||||
|
Net interest
income
|
2,299 | 3,499 | 6,428 | 7,211 | 6,945 | 6,115 | 7,084 | |||||||||||||||||||||
|
Provision for loan
losses
|
2,790 | 293 | 685 | 126 | 219 | 209 | 791 | |||||||||||||||||||||
|
Net interest income (loss)
after provision for loan losses
|
(491 | ) | 3,206 | 5,743 | 7,085 | 6,726 | 5,906 | 6,293 | ||||||||||||||||||||
|
Noninterest
income
|
263 | 285 | 4,870 | 917 | 2,640 | 547 | 766 | |||||||||||||||||||||
|
Noninterest
expense
|
4,739 | 5,207 | 9,626 | 11,085 | 9,889 | 10,370 | 10,014 | |||||||||||||||||||||
|
Income (loss) before income
taxes
|
(4,967 | ) | (1,716 | ) | 987 | (3,083 | ) | (523 | ) | (3,917 | ) | (2,955 | ) | |||||||||||||||
|
Income tax
expense
|
885 | - | 36 | - | - | - | - | |||||||||||||||||||||
|
Income (loss) from continuing
operations
|
(5,852 | ) | (1,716 | ) | 951 | (3,083 | ) | (523 | ) | (3,917 | ) | (2,955 | ) | |||||||||||||||
|
Discontinued
operations:
|
- | - | ||||||||||||||||||||||||||
|
Exit costs and impairment
of
long-lived
assets
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Operating income
(loss)
|
- | - | - | (2,488 | ) | (1,107 | ) | 428 | 4,898 | |||||||||||||||||||
|
Income (loss) from
discontinuedoperations before tax
|
- | - | - | (2,488 | ) | (1,107 | ) | 428 | 4,898 | |||||||||||||||||||
|
Income tax expense
(benefit)
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Income (loss) from
discontinuedoperations
|
- | - | - | (2,488 | ) | (1,107 | ) | 428 | 4,898 | |||||||||||||||||||
|
Net income
(loss)
|
$ | (5,852 | ) | (1,716 | ) | $ | 951 | $ | (5,571 | ) | $ | (1,630 | ) | $ | (3,489 | ) | $ | 1,943 | ||||||||||
|
Balance Sheet Data (at
period end)
|
||||||||||||||||||||||||||||
|
Assets
|
$ | 230,420 | $ | 284,003 | $ | 245,994 | $ | 305,219 | $ | 339,542 | $ | 433,174 | $ | 498,456 | ||||||||||||||
|
Securities
|
44,921 | 65,414 | 51,963 | 80,157 | 115,798 | 153,007 | 224,784 | |||||||||||||||||||||
|
Loans, net
|
159,724 | 182,941 | 173,803 | 191,977 | 193,708 | 244,787 | 240,703 | |||||||||||||||||||||
|
Deposits
|
188,805 | 226,627 | 197,991 | 230,174 | 237,794 | 288,956 | 297,876 | |||||||||||||||||||||
|
Short-term
borrowings
|
1,732 | 2,954 | 2,192 | 18,574 | 38,479 | 64,865 | 77,835 | |||||||||||||||||||||
|
Long-term borrowings
and
subordinated
debentures
|
34,379 | 45,392 | 34,374 | 45,388 | 47,378 | 60,569 | 96,159 | |||||||||||||||||||||
|
Shareholders
equity
|
3,281 | 7,212 | 9,571 | 8,850 | 14,375 | 15,944 | 20,442 | |||||||||||||||||||||
|
Per Share
Data
|
||||||||||||||||||||||||||||
|
Earnings
per share - continuing operations
|
||||||||||||||||||||||||||||
|
Basic earnings
|
$ | (1.93 | ) | $ | (0.57 | ) | $ | 0.31 | $ | (1.02 | ) | $ | (0.17 | ) | $ | (1.30 | ) | $ | (0.98 | ) | ||||||||
|
Diluted
earnings
|
(1.93 | ) | (0.57 | ) | 0.31 | (1.02 | ) | (0.17 | ) | (1.30 | ) | (0.67 | ) | |||||||||||||||
|
Earnings
per share – discontinued operations
|
||||||||||||||||||||||||||||
|
Basic earnings
(loss)
|
- | - | - | (0.82 | ) | (0.37 | ) | 0.14 | 1.63 | |||||||||||||||||||
|
Diluted earnings
(loss)
|
- | - | - | (0.82 | ) | (0.37 | ) | 0.14 | 1.11 | |||||||||||||||||||
|
Earnings
per share
|
||||||||||||||||||||||||||||
|
Basic earnings
|
(1.93 | ) | (0.57 | ) | 0.31 | (1.84 | ) | (0.54 | ) | (1.16 | ) | 0.65 | ||||||||||||||||
|
Diluted
earnings
|
(1.93 | ) | (0.57 | ) | 0.31 | (1.84 | ) | (0.54 | ) | (1.16 | ) | 0.44 | ||||||||||||||||
|
Shareholders’
equity (at period end)
|
1.08 | 2.38 | 3.17 | 2.93 | 4.76 | 5.29 | 6.79 | |||||||||||||||||||||
|
Cash dividends
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Performance
Ratios
|
||||||||||||||||||||||||||||
|
Return on average
equity
|
-131.13 | % | -41.31 | % | 12.08 | % | -45.80 | % | -11.79 | % | -22.90 | % | 12.83 | % | ||||||||||||||
|
Return on average
assets
|
-4.90 | % | -1.20 | % | 0.33 | % | -1.77 | % | -0.44 | % | -0.69 | % | 0.41 | % | ||||||||||||||
|
Dividend payout
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||
|
Equity to
assets
|
1.4
|
% | 2.5 | % | 3.9 | % | 2.9 | % | 4.2 | % | 3.7 | % | 4.1 | % | ||||||||||||||
INFORMATION
ABOUT THE MEETING AND VOTING
General
This
section contains information about the Greater Atlantic special shareholder
meeting that has been called to vote upon the matters described
below. We expect to mail this proxy statement/prospectus to you, as a
Greater Atlantic shareholder, on or about ____________, 2008.
In this
proxy statement/prospectus, we refer to the Agreement and Plan of Reorganization
dated as of , among Summit, SFG II, Inc. and Greater Atlantic as the “merger
agreement.” Proxies may be voted on other matters that may properly
come before the Greater Atlantic meeting, if any, at the discretion of the proxy
holders. Greater Atlantic’s board knows of no such other matters
except those incidental to the conduct of the meeting. A copy of the
merger agreement is attached as Annex A.
Matters
Relating to the Special Meeting of Greater Atlantic’s Stockholders
|
|
Time and
Place:
|
_________, __________,
2008
|
|
|
________
__.m., Eastern Time
|
|
|
_________________________
|
|
|
__________________________
|
|
|
________________________
|
|
|
Purpose of
Meeting:
|
To
vote on the proposed merger of Greater Atlantic and Summit pursuant to
which Greater Atlantic will merger with SFG II, Inc., a wholly-owned
subsidiary of Summit formed to facilitate the
merger.
|
|
|
To
vote on the proposal to adjourn the special meeting to a later date, if
necessary, to permit further solicitation of proxies in the event there
are not sufficient votes at the time of the special meeting to approve the
matters to be considered by the shareholders at the special
meeting.
|
Proxies
The
accompanying form of proxy is for use at the special meeting if you are unable
or do not desire to attend in person. You may attend the meeting even
if you have previously delivered a proxy to us. You can revoke your
proxy at any time before the vote is taken at the special meeting by submitting
to the Greater Atlantic corporate secretary written notice of revocation or a
properly executed proxy of a later date, or by attending the special meeting and
voting in person. Written notices of revocation and other
communications about revoking your proxy should be addressed to:
Greater Atlantic Financial
Corp.
10700
Parkridge Boulevard, Suite P50
Reston,
Virginia 20191
Attention: Edward
C.
Allen
Telephone: (703)
391-1300
All
shares represented by valid proxies that we receive through this solicitation,
and not revoked before they are exercised, will be voted in the manner specified
in such proxies. If you make no specification on your returned,
signed and dated proxy card, your proxy will be voted “FOR” the
matters to be considered at the special meeting as described above.
Solicitation
of Proxies
Greater Atlantic will bear the entire cost of soliciting proxies from you, except that Summit has agreed to pay half the cost of the printing of this proxy statement/prospectus. In addition to solicitation of proxies by mail, we will request banks, brokers and other record holders to send proxies and proxy material to the beneficial owners of the stock and secure their voting instructions, if necessary. Greater Atlantic will reimburse those record holders for their reasonable expenses in taking those actions. If necessary, we also may use several of our regular employees, who will not be specially compensated, to solicit proxies from our shareholders, either personally or by telephone, the Internet, fax, letter or special delivery letter. Finally, Greater Atlantic has retained a professional proxy solicitation firm to assist in soliciting proxies. We will pay a fee in the amount of $_____ to ______________ for its services, and we will also reimburse them for all costs and expenses, which we expect to be approximately $________, in connection with this solicitation.
Record
Date and Voting Rights
In
accordance with Delaware law and Greater Atlantic’s certificate of incorporation
and bylaws, we have fixed _____________, 2008, as the record date for
determining the shareholders entitled to notice of and to vote at the special
meeting. Accordingly, you are only entitled to notice of, and to vote
at, the special meeting if you were a record holder of Greater Atlantic common
stock at the close of business on the record date. At that time,
____________ shares of Greater Atlantic common stock were outstanding, held by
___ holders of record. To have a quorum that permits us to conduct
business at the special meeting, we require the presence, whether in person or
through the prior submission of a proxy, of the holders of Greater Atlantic
common stock representing a majority of the shares outstanding and entitled to
vote on the record date. You are entitled to one vote for each
outstanding share of Greater Atlantic common stock you held as of the close of
business on the record date.
Holders
of shares of Greater Atlantic common stock present in person at the special
meeting but not voting, and shares of Greater Atlantic common stock for which we
have received proxies indicating that their holders have abstained, will be
counted as present at the special meeting for purposes of determining whether we
have a quorum for transacting business. Shares held in street name
that have been designated by brokers on proxy cards as not voted will not be
counted as votes cast for or against any proposal. These broker
non-votes, however, will be counted for purposes of determining whether a quorum
exists.
Vote
Required
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting.
Because
approval of the merger agreement and the transactions contemplated thereby
require the affirmative vote of the holders of a majority of the outstanding
shares of Greater Atlantic common stock entitled to vote at the special meeting,
abstentions and broker non-votes will have the same effect as votes against these
matters. Accordingly, the Greater Atlantic board of directors urges
you to complete, date and sign the accompanying proxy and return it promptly in
the enclosed, postage-paid envelope.
As of the
record date, directors and executive officers, and their affiliates, of Greater
Atlantic beneficially owned approximately _______ shares of Greater Atlantic
common stock, entitling them to exercise approximately ____% of the voting power
of the Greater Atlantic common stock entitled to vote at the special
meeting. Each
director and executive officer of Greater Atlantic intends to vote
each
share
of Greater Atlantic common stock that he owns “FOR” approval and adoption
of the merger agreement and the transactions contemplated thereby.
Recommendation
of the Greater Atlantic Board of Directors
The
Greater Atlantic board of directors has approved the merger agreement and the
transactions contemplated thereby, including the merger. The Greater
Atlantic board believes that the merger agreement and the transactions
contemplated thereby, including the merger, are advisable, and are in the best
interests of, Greater Atlantic and its shareholders and unanimously recommends
that shareholders vote “FOR”
approval of the merger agreement and the transactions contemplated
thereby.
Appraisal
Rights for Greater Atlantic Stockholders
If the
merger agreement is approved and adopted by the Greater Atlantic stockholders,
holders of Greater Atlantic common stock who delivered a written demand for
appraisal to Greater Atlantic prior to the vote on the merger agreement at
Greater Atlantic’s special meeting and did not vote in favor of the approval and
adoption of the merger agreement will be entitled to receive the fair value of
their shares under Section 262 of the Delaware General Corporation
Law. The text of this law is attached to this proxy
statement/prospectus as Annex B.
THE
MERGER
This
summary of the material terms and provisions of the merger agreement is
qualified in its entirety by reference to such document. The merger
agreement is attached as Annex A to this proxy
statement/prospectus. We incorporate this document into this
summary by reference.
Merger
Subject
to satisfaction or waiver of all conditions in the merger agreement, Greater
Atlantic will merge with and into SFG II, Inc., a wholly-owned subsidiary of
Summit. Upon completion of the merger, Greater Atlantic’s corporate
existence will terminate and SFG II, Inc. will continue as the surviving
corporation.
Merger
Consideration
In the
merger, the number of shares of Summit common stock that you will receive for
each share of Greater Atlantic common stock you own will be determined by the
exchange ratio at closing. At the closing, we will determine the
exchange ratio by dividing $4.00 by the average closing price of Summit common
stock reported on the NASDAQ Capital Market for the twenty (20) trading days
prior to closing (the “Average Closing Price”). The exchange ratio is
subject to a ceiling, which sets the maximum number of shares that Summit will
issue. The ceiling provides that each share of Greater Atlantic
common stock will be exchanged for no more than 0.328625 of a share of Summit
common stock. The amount of shares of Summit common stock that you
will receive is also subject to adjustment based on the amount of Greater
Atlantic’s shareholders’ equity at the time of closing and whether any
adjustments will be made to Greater Atlantic’s loan loss
allowance. The Merger Consideration and exchange ratio may be
adjusted based on the amount of Greater Atlantic’s shareholders’ equity adjusted
at closing. If, at closing, Greater Atlantic’s shareholders’ equity,
as adjusted to exclude (a) accumulated other comprehensive income or loss and
(b) the effect of removing the benefit of net operating loss carryforwards from
the net deferred tax assets (the “Adjusted Shareholders’ Equity”), is less than
$4,213,617 (which equals Greater Atlantic’s Adjusted Shareholders’ Equity at
March 31, 2008 and is referred to as the “Benchmark Equity”), then the aggregate
value of the merger consideration will be reduced one dollar for each dollar
that the Adjusted Shareholders’ equity is less than $4,213,617. For
purposes of determining Adjusted Shareholders’ equity at closing, the Adjusted
Shareholders’ Equity will be increased by the actual monthly operating losses,
up to $250,000 per month, incurred by Greater Atlantic after March 31, 2008 and
before September 1, 2008, the fees accrued or paid to Greater Atlantic’s
financial advisor, and the fees accrued or paid to Greater Atlantic’s legal
counsel up to $150,000. As of the mailing of this proxy
statement/prospectus, Greater Atlantic's Adjusted Shareholders' Equity is
$____.
The
Merger Consideration and exchange ratio will also be adjusted in the event
additional provisions are made to Greater Atlantic’s loan loss
allowance. If Summit’s due diligence results in a determination by
Summit, with the concurrence of independent accountants retained by Greater
Atlantic to review this determination, that additional provisions should be made
to Greater Atlantic’s allowance for loan losses, then the Merger Consideration
will be reduced dollar for dollar by the amount of additional
provisions. In calculating the amount of the Merger Consideration
reduction, specific reserve reductions may be used to offset losses from other
loans to determine the amount of provisions needed to the allowance for loan
losses.
Because
of the uncertainties relating to the amount of Greater Atlantic’s shareholders
equity at closing and whether any adjustments will be required to be made to
Greater Atlantic’s loan loss allowance, there can be no guarantee that you will
receive shares of Summit stock equal to $4.00 for each share of Greater Atlantic
common stock.
The
following chart provides examples of the value of the transaction to
shareholders of Greater Atlantic at selected Average Closing Prices of Summit’s
common stock. The chart illustrates deal value
per share
based on changes in the Average Closing Prices of Summit’s common
stock. The chart does not consider other changes in the merger
consideration described above.
|
SMMF
Average
Closing Price
|
Exchange
Ratio
|
Deal
Value
Per
Share
|
|
$16.25
|
0.246154x
|
$4.00
|
|
$15.93
|
0.251177x
|
$4.00
|
|
$15.60
|
0.256410x
|
$4.00
|
|
$15.28
|
0.261866x
|
$4.00
|
|
$14.95
|
0.267559x
|
$4.00
|
|
$14.63
|
0.273504x
|
$4.00
|
|
$14.30
|
0.279720x
|
$4.00
|
|
$13.98
|
0.286225x
|
$4.00
|
|
$13.65
|
0.293040x
|
$4.00
|
|
$13.33
|
0.300188x
|
$4.00
|
|
$13.00
|
0.307692x
|
$4.00
|
|
$12.68
|
0.315582x
|
$4.00
|
|
$12.35
|
0.323887x
|
$4.00
|
|
$12.17
|
0.328625x
|
$4.00
|
|
$12.03
|
0.328625x
|
$3.95
|
|
$11.70
|
0.328625x
|
$3.84
|
|
$11.38
|
0.328625x
|
$3.74
|
|
$11.05
|
0.328625x
|
$3.63
|
|
$10.73
|
0.328625x
|
$3.52
|
|
$10.40
|
0.328625x
|
$3.42
|
|
$10.08
|
0.328625x
|
$3.31
|
|
$9.75
|
0.328625x
|
$3.20
|
The
amount and nature of the merger consideration was established through
arm’s-length negotiations between Summit and Greater Atlantic and their
respective advisors, and reflects the balancing of a number of countervailing
factors. The total amount of the merger consideration reflects a
price both parties concluded was appropriate. See “Background of the Merger; Board
Recommendations and Reasons for the Merger” beginning on page ___
and “Summit’s Reasons for the
Merger” beginning on page ___. The parties have structured the
merger, in part, to have the favorable tax attributes of a “reorganization” for
federal income tax purposes. See “Certain Federal Income Tax
Consequences of the Merger” beginning on page ___.
We
cannot assure you that the current fair market value of Summit or Greater
Atlantic common stock will be equivalent to the fair market value of Summit or
Greater Atlantic common stock on the effective date of the merger.
Surrender
of Stock Certificates
Registrar
and Transfer Company will act as exchange agent in the merger and in that role
will process the exchange of Greater Atlantic stock certificates for cash and
Summit common stock. Within five (5) business days after completion
of the merger, the exchange agent will mail to each Greater Atlantic shareholder
of record a letter of transmittal and instructions for use in effecting the
surrender of their Greater Atlantic common stock for Summit common stock, if
any, that the holders of the Greater
Atlantic
common stock are entitled to receive, any cash in lieu of fractional shares and
any payment equal to any dividend or other distribution with respect to Summit
common stock with a record date prior to the effective time of the
merger.
After the
effective time of the merger, each certificate formerly representing Greater
Atlantic common stock, until so surrendered and exchanged, will evidence only
the right to receive the number of whole shares of Summit common stock that the
holder is entitled to receive in the merger, any cash payment in lieu of a
fractional share of Summit common stock and any dividend or other distribution
with respect to Summit common stock with a record date prior to the effective
time of the merger. The holder of such unexchanged certificate will
not be entitled to receive any dividends or distributions payable by Summit
until the certificate has been exchanged. Subject to applicable laws,
following surrender of such certificates, such dividends and distributions,
together with any cash payment in lieu of a fractional share of Summit common
stock, will be paid without interest.
After the
completion of the merger, there will be no further transfers of Greater Atlantic
common stock. Greater Atlantic stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged for
the merger consideration.
If your
Greater Atlantic stock certificates have been either lost, stolen or destroyed,
you will have to prove your ownership of these certificates and that they were
lost, stolen or destroyed before you receive any consideration for your
shares. Upon request, our exchange agent, Registrar and Transfer
Company, will send you instructions on how to provide evidence of
ownership.
No
Fractional Shares
Each
holder of shares of common stock exchanged pursuant to the merger who would
otherwise have been entitled to receive a fraction of a share of Summit common
stock shall receive, in lieu thereof, cash (without interest) in an amount equal
to the product of (i) such fractional part of a share of Summit common stock
multiplied by (ii) the closing price for a share of Summit common stock on the
NASDAQ Capital Market on the effective date of the merger.
Treatment
of Greater Atlantic Stock Options
At the
effective time, each outstanding and unexercised option granted by Greater
Atlantic to purchase shares of Greater Atlantic common stock shall vest and
holders of such options shall be entitled to receive cash in an amount equal to
the difference between the value of (a) the merger consideration and (b) the
applicable exercise price (rounded to the nearest cent) for each outstanding
option granted by Greater Atlantic to purchase shares of Greater Atlantic common
stock. At the effective time, Summit shall have no obligation to make
any additional grants or awards under the Greater Atlantic stock option
plans.
Dissenters’
or Appraisal Rights
Under the
Delaware General Corporation Law (DGCL), Greater Atlantic stockholders may
object to the merger and demand in writing to be paid the fair value of their
shares. Determination of fair value is based on all relevant factors,
but excludes any appreciation or depreciation resulting from the accomplishment
or expectation of the merger. Stockholders who elect to exercise
appraisal rights must comply with all of the procedures of Section 262 of the
DGCL to preserve those rights. A copy of Section 262 is attached as
Annex B to this
proxy statement/prospectus.
Section
262 sets forth the procedures to be followed by a stockholder electing to demand
appraisal of his or her shares. These
procedures are complicated and must be followed strictly. Failure to
comply with these procedures may cause you to lose your appraisal
rights. The following information is
only a
brief summary of the required procedures under Delaware law and is qualified in
its entirety by the provisions of Section 262.
Under
Section 262, Greater Atlantic is required to notify stockholders not less than
20 days before the special meeting to vote on the merger that appraisal rights
will be available. A copy of Section 262 must be included with that
notice. This proxy statement/prospectus constitutes Greater
Atlantic's notice to its stockholders of the availability of appraisal rights in
connection with the merger in compliance with the requirements of Section
262. If you wish to consider exercising your appraisal rights, you
should carefully review the text of Section 262 attached as Annex
B. If you fail to timely and properly comply with the
requirements of Section 262, your appraisal rights under Delaware law may be
lost.
Please
review Section 262 for the complete procedures. Neither Summit nor
Greater Atlantic will give you any notice of your appraisal rights other than as
described in this proxy statement/prospectus and as required by the
DGCL.
General
Requirements
If you
want to object to the merger and be paid the full value of your shares in cash,
Section 262 generally requires you to take the following actions:
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You
must deliver a written demand for appraisal to Greater Atlantic before the
vote is taken on the merger agreement at Greater Atlantic's special
meeting. This written demand for appraisal must be in addition
to and separate from any proxy or vote against the merger
agreement. Merely voting against, abstaining from voting or
failing to vote in favor of adoption of the merger agreement will not
constitute a demand for appraisal within the meaning of Section
262. See "Requirements for Written
Demand for Appraisal" below for more details on making a demand for
appraisal.
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You
must not vote in favor of approval and adoption of the merger
agreement. A failure to vote will satisfy this requirement, but
a vote in favor of the merger agreement will constitute a waiver of your
right of appraisal. Accordingly, if you want to maintain your
appraisal rights you must either check the "Against" box or the "Abstain"
box on the proxy card or refrain from executing and returning the enclosed
proxy card.
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You
must continuously hold your shares of Greater Atlantic stock from the date
you make the demand for appraisal through the effective date of the
merger.
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Requirements
for Written Demand for Appraisal
A written
demand for appraisal of Greater Atlantic stock is only effective if it is signed
by, or for, the stockholder of record who owns the shares at the time the demand
is made. The demand must be signed as the stockholder's name appears
on its Greater Atlantic stock certificate(s). If you are a beneficial
owner of Greater Atlantic stock but not a stockholder of record, you must have
the stockholder of record for your shares sign a demand for appraisal on your
behalf.
If you
own Greater Atlantic stock in a fiduciary capacity, such as a trustee, guardian
or custodian, you must disclose the fact that you are signing the demand for
appraisal in that capacity.
If you
own Greater Atlantic stock with one or more other persons, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed for
them, the demand for appraisal. An authorized agent, which could
include one or more of the owners, may sign the demand for appraisal for a
stockholder of record; however, the agent must expressly disclose who the
stockholder of record is and that he or she is signing the demand as that
stockholder's agent.
If you
are a record owner, such as a broker, who holds Greater Atlantic stock as a
nominee for others, you may exercise a right of appraisal with respect to the
shares held for one or more beneficial owners, while not exercising that right
for other beneficial owners. In such a case, you should specify in
the written demand the number of shares as to which you wish to demand
appraisal. If you do not specify the number of shares, it will be
assumed that your written demand covers all the shares of Greater Atlantic stock
that are in your name.
Greater
Atlantic stockholders who wish to exercise their appraisal rights should address
written demands to:
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Attention:
Corporate Secretary
Greater
Atlantic must receive all written demands for appraisal before the vote
concerning the merger agreement is taken. As explained above, this
written demand should be signed by, or on behalf of, the stockholder of
record. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of stock owned, and
that the stockholder is thereby demanding appraisal of such stockholder's
shares.
Written
Notice
Within 10
days after the effective date of the merger, Summit, as the surviving
corporation in the merger, must give written notice that the merger has become
effective to each Greater Atlantic stockholder who has properly sent a written
demand for appraisal and who did not vote in favor of the
merger. Except as required by law, Summit will not notify
stockholders of any dates by which appraisal rights must be
exercised.
Petition
With Chancery Court
Within
120 days after the effective date of the merger, either Summit or any
stockholder who has complied with the requirements of Section 262(a) and (d) may
file a petition in the Delaware Court of Chancery demanding a determination of
the value of the shares of all stockholders entitled to
appraisal. Summit does not presently intend to file a petition, and
if you seek to exercise appraisal rights you should not assume that Summit will
file a petition or that Summit will initiate any negotiations with respect to
the fair value of your shares. If you are a Greater Atlantic
stockholder and want to have your Greater Atlantic shares appraised you should
be prepared to initiate any petitions necessary for the perfection of your
appraisal rights within the time period and in the manner prescribed in Section
262. Since Summit has no obligation to file a petition, your failure
to file a petition within the period specified could result in the loss of your
appraisal rights.
Withdrawal
of Demand
If you
change your mind and decide you no longer want an appraisal, you may withdraw
your demand for appraisal at any time within 60 days after the effective date of
the merger. If you withdraw your demand for appraisal, your appraisal
rights will be terminated and you will receive the merger consideration provided
in the merger agreement.
Request
for Appraisal Rights Statement
If you
have complied with the conditions of Section 262, you are entitled, upon written
request, to receive from Summit a statement setting forth the aggregate number
of shares for which appraisal rights have been properly exercised and the
aggregate number of holders of such shares. Summit must mail this
statement to you within 10 days after receiving your written
request. In order to receive this statement, you must send your
request within 120 days after the effective date of the merger to Summit at the
following address:
Summit
Financial Group, Inc.
300 North
Main Street
Moorefield,
West Virginia 26836
Attention:
H. Charles Maddy, III
Chancery
Court Procedures
If you
properly file a petition for appraisal in the Court and deliver a copy of such
petition to Summit, Summit will then have 20 days to provide the Court with a
list of the names and addresses of all the stockholders who have demanded
payment for their shares and have not reached an agreement with Summit as to the
value of their shares. If the Court decides it is appropriate, it has
the power to conduct a hearing to determine which stockholders have complied
with Section 262 and have become entitled to appraisal. The Register
in Chancery, if ordered to do so by the Court, will then send notice of the time
and place of the hearing on the petition to all the stockholders who have
demanded appraisal. The Court may also require you to submit your
stock certificates to the Register in Chancery so that it can note on the
certificates that an appraisal proceeding is pending. If you do not
follow the Court's directions, you may be dismissed from the
proceeding.
Chancery
Court Appraisal of Greater Atlantic Shares
After the
Court determines which stockholders are entitled to an appraisal, the Court will
appraise the shares, determining their fair value by considering all relevant
factors except for any appreciation or depreciation resulting from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if the payment of interest is deemed appropriate by the
Court. After the Court determines the fair value of the shares, it
will direct Summit to pay that value to the stockholders who are entitled to
such payment. In order to receive the fair value for your shares, you
must surrender your stock certificates.
The Court
could determine that the fair value of shares of Greater Atlantic stock is more
than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration that
you would under the merger agreement.
Costs
and Expenses of Appraisal Proceeding
The costs
of the appraisal proceeding may be determined by the Court and assessed against
the parties as the Court deems equitable under the
circumstances. Upon application of a stockholder, the Court may also
order that all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all the shares entitled to an appraisal.
Loss
of Stockholders' Rights
If you
demand appraisal, after the effective date of the merger you will not be
entitled to:
• vote
your shares of stock, for any purpose, for which you have demanded
appraisal;
• receive
payment of dividends or other distributions with respect to your shares, except
for dividends or distributions, if any, that are payable to the holders of
record as of a record date before the effective date of the merger;
or
• receive
the payment of the consideration provided for in the merger
agreement.
However,
you can regain these rights if no petition for an appraisal is filed within 120
days after the effective date of the merger, or if you deliver to Summit a
written withdrawal of your demand for an appraisal and your acceptance of the
merger, either within 60 days after the effective date of the merger or with the
written consent of Summit. As explained above, these actions will
also terminate your appraisal rights. However, an appraisal
proceeding in the Court cannot be dismissed without the Court's
approval. The Court may condition its approval upon any terms that it
deems just.
If
you fail to comply strictly with these procedures you will lose your appraisal
rights. Consequently, if you wish to exercise your appraisal rights,
you are strongly urged to consult a legal advisor before attempting to exercise
your appraisal rights.
Periodically,
the management of Greater Atlantic has evaluated Greater Atlantic’s strategic
options, including continuing to operate as an independent entity. At
the time of the most recent strategic evaluation in early 2006, Greater Atlantic
had not achieved consistent profitable earnings, sustaining losses in fiscal
years 2002, 2004 and 2005, and had continued to suffer losses in the first
quarter of fiscal year 2006. This inability to achieve consistent
profitability and its potential implications for Greater Atlantic’s financial
condition has been and continues to be an item of supervisory note by the Office
of Thrift Supervision, Greater Atlantic’s primary regulator.
At a
meeting of the Board of Directors on September 28, 2005, the Board of Directors
authorized Charles W. Calomiris, Greater Atlantic’s Chairman of the Board, to
select and engage a qualified financial advisory firm to assist the Board of
Directors in its strategic planning process. Subsequently, the
Chairman of the Board, together with Carroll E. Amos, Greater Atlantic’s
President and Chief Executive Officer, met with representatives of financial
advisory firms, including with representatives of Sandler O’Neill &
Partners, L.P. (“Sandler O’Neill”). On January 30, 2006, Greater
Atlantic engaged Sandler O’Neill to serve as independent financial advisor to
the Board of Directors in connection with Greater Atlantic’s review of its
strategic options and to provide merger and acquisition analyses in connection
with a potential business combination transaction.
At a
meeting on March 8, 2006, the Board of Directors met with representatives of
Sandler O’Neill who made a presentation to the Board of Directors regarding
strategic options available to Greater Atlantic. The discussion
focused on the merits of engaging in a potential business combination
transaction (either a whole-bank merger or acquisition or sale of one or more
branch offices) versus remaining independent. In discussing those
options, the Board of Directors noted and assessed the various perceived risks,
including the perceived supervisory risk associated with remaining independent
given Greater Atlantic’s recent operating history. Sandler O’Neill’s
presentation also included an overview of the current merger and acquisitions
environment. The representatives of Sandler O’Neill presented a
listing of recent thrift merger and acquisition transactions with
characteristics that would be comparable to a potential transaction involving
Greater Atlantic, branch sales in the immediate and adjoining markets, a list of
potential acquirers, an overview of the equity market for bank and thrift stocks
and comparable group analyses on both nationwide and regional
bases. At the conclusion of the discussion, the Board of Directors
directed the Executive Committee of the Board of Directors, in consultation with
Greater Atlantic’s financial and legal advisors, to take all necessary and
appropriate action to conduct a process to determine what, if any, level of
interest other parties might have in engaging in a potential business
combination transaction with Greater Atlantic.
On March
29, 2006, Sandler O’Neill identified for Greater Atlantic 69 parties Sandler
O’Neill believed might have an interest in exploring a potential business
combination with Greater Atlantic. Over approximately the next month,
Sandler O’Neill, in consultation with Greater Atlantic’s senior management and
legal counsel, prepared a Confidential Information Memorandum containing
financial and other information regarding Greater Atlantic for distribution to
interested parties following their execution of confidentiality
agreements. The Confidential Offering Memorandum provided
instructions for interested parties to submit, by June 9, 2006, written
indications of interest for a whole-bank transaction, a branch purchase
transaction or an equity investment.
During
April and May 2006, 16 interested parties executed confidentiality agreements
and thereafter received a Confidential Offering Memorandum, including Summit
which executed a confidentiality agreement dated April 25, 2006.
On June
22, 2006, the Board of Directors met, together with representatives of Sandler
O’Neill and with representatives of legal counsel, to consider the 16
indications of interest that had been received: three for a
whole-bank transaction, 12 for a branch acquisition and one for an equity
investment. The representatives of Sandler O’Neill reviewed and
discussed the financial terms of each indication of interest with the Board of
Directors.
The
whole-bank indications of interest varied with Party “A” indicating a proposed
transaction value of approximately $12.2 million, and Party “B” and Summit each
indicating a proposed transaction value of approximately $18.2 million, or $6.00
per share. Parties “A” and “B” proposed all-cash transactions, and
Summit proposed a stock/cash transaction. Summit’s indication of
interest, however, was conditioned on Greater Atlantic Bank selling its branch
office in Pasadena, Maryland, before the closing of the proposed
transaction. Summit’s indication of interest, coupled with the sale
of the Pasadena branch office to Bay-Vanguard Federal Savings Bank, which
indicated the highest deposit premium for that branch (9.5%), would result in an
aggregate indicated value of approximately $23.2 million, or $7.67 per share,
compared to approximately $18.2 million, or $6.00 per share, indicated by Party
“B” and approximately $12.2 million, or $4.03 per share, indicated by Party
“A”. During its discussion, the Board of Directors noted that
engaging in a proposed transaction with Summit would require separate
applications for regulatory approval and incur additional cost and possibly a
longer approval process because it would entail the separate sale of the
Pasadena branch office. The representatives of Sandler O’Neill then
presented the Board with financial profiles, comparable peer analyses and
background on the three interested parties.
Following
the review of the whole-bank indications of interest, the Board reviewed and
discussed the indications of interest for the separate branch sales, noting that
Greater Atlantic had received indications of interest providing for deposit
premiums ranging from 5.0% to 9.5%, with both the high and the low being for the
Pasadena branch office. The representatives of Sandler O’Neill noted
that the median deposit premium for recently announced branch sales ranged from
4.5% to 8.1%. The highest indication of interest for the Pasadena
branch office, at a 9.5% deposit premium, was submitted by Bay-Vanguard Federal
Savings Bank.
The Board
of Directors then turned to the indication of interest submitted by the private
equity investor. The Board of Directors noted that while five private
equity investors had expressed interest when initially contacted by Sandler
O’Neill, and four had executed confidentiality agreements and received a
Confidential Offering Memorandum, only one of the private equity investors
submitted a written indication of interest. The indication of
interest received from the private equity investor proposed the sale of two
branch offices of Greater Atlantic Bank, a substantial loan sale, a capital
investment of approximately $7.5 million and a consulting contract for the
private equity group. In addition, the indication of interest provided that
Greater Atlantic negotiate exclusively with the private equity investor for four
weeks toward a definitive agreement. Given the whole-bank indications
of
interest
that had been received, the Board of Directors determined not to give
exclusivity to any interested party at this time.
Following
further discussion, the Board of Directors authorized Sandler O’Neill to contact
each of the parties that had submitted a whole-bank indication of interest and
communicate to them Greater Atlantic’s interest in pursuing a proposed
transaction and to contact both Summit and Bay-Vanguard Federal Savings Bank to
invite them to commence their respective due diligence reviews. The
Board of Directors also authorized Sandler O’Neill to contact Party “B” and
invite it to commence its due diligence review as soon as Summit and
Bay-Vanguard Federal Savings Bank had completed their reviews.
On June
22, 2006, Mr. Amos, Edward C. Allen, Chief Operating Officer of Greater Atlantic
Bank, and David E. Ritter, Greater Atlantic’s Senior Vice President and Chief
Financial Officer, met with H. Charles Maddy, III, Summit’s President and Chief
Executive Officer, and Robert S. Tissue, Summit’s Senior Vice President and
Chief Financial Officer, to discuss Summit’s indication of
interest.
On June
26, 2006, Summit began its due diligence review of Greater Atlantic at the main
offices of Greater Atlantic.
On June
30, 2006, Bay-Vanguard Federal Savings Bank began its due diligence review of
the Pasadena branch office. Also, on that date, Summit advised
Sandler O’Neill that its Board of Directors had authorized management to proceed
with negotiations toward a definitive agreement with Greater Atlantic, subject
to completion of its due diligence review.
On August
10, 2006, Greater Atlantic announced publicly that it was investigating an
unreconciled inter-company account between Greater Atlantic Bank and Greater
Atlantic Mortgage Corporation, Greater Atlantic Bank’s wholly-owned mortgage
banking subsidiary that had terminated operations earlier in the
year.
On
September 8, 2006, Greater Atlantic announced publicly that the former
management company of Greater Atlantic Mortgage Corporation and its principal
had initiated arbitration proceedings against Greater Atlantic, Greater Atlantic
Bank and Mr. Amos.
On
September 26, 2006, Greater Atlantic received from Party “C” an unsolicited
indication of interest to purchase the Rockville, Maryland, and South Riding,
Virginia, branch offices of Greater Atlantic Bank for a 4% deposit
premium.
Following
the public announcements of the internal accounting issue and the commencement
of the arbitration proceeding, various interested parties, including Summit,
informed Greater Atlantic that these outstanding issues would have to be
resolved before they could complete their due diligence review of Greater
Atlantic and confirm their continued interest in pursuing a proposed
transaction. In an effort to continue the process, on October 4,
2006, Greater Atlantic authorized Sandler O’Neill to contact Summit and the
other parties that expressed interest in pursuing a whole-bank transaction to
determine whether they would be interested in pursuing a purchase and assumption
transaction, which would permit them to acquire all of Greater Atlantic’s assets
and liabilities other than the liabilities associated with the internal
accounting issue and the arbitration proceeding.
On
December 7, 2006, Greater Atlantic was advised of the interest of Party “D” in
acquiring Greater Atlantic. Party “D” provided a confidentiality
agreement and information concerning itself on December 7,
2006. Subsequently, on February 8, 2007, Party “D”
submitted an indication of interest providing for an all-cash transaction
ranging from $15 million to $20 million, or an indicated range of $5.00 to $6.67
per share, subject to, among other things, settlement of the outstanding
arbitration and due diligence.
On
January 11, 2007, Greater Atlantic received an indication of interest letter
from Summit proposing a purchase and assumption transaction.
On
January 16, 2007, the Board of Directors held a special meeting. A
representative of Sandler O’Neill analyzed the financial terms of Summit’s
purchase and assumption proposal as compared to the branch purchase indications
of interest with the highest deposit premiums. The Board of Directors
noted that Greater Atlantic would lose the tax benefit of its net operating loss
carryforwards in a purchase and assumption transaction but would preserve it in
a whole-bank merger or acquisition transaction. Valuing the deferred
tax asset at approximately $1.98 million for purposes of evaluating a proposed
purchase and assumption transaction, the Board of Directors noted that Summit’s
purchase and assumption proposal indicated a net transaction value of
approximately $13.48 million, or $4.46 per share. Following a review
of the indications of interest received for branch office transactions, the
Board of Directors noted that the aggregate transaction value for those
transactions would amount to approximately $14.99 million, or $4.92 per
share. During its discussion, the Board of Directors also noted the
execution risk that would be involved in dealing with multiple acquirors, as
well as the regulatory risk that would be involved given that the Office of
Thrift Supervision may raise issue with a series of proposed purchase and
assumption transactions that would leave Greater Atlantic Bank a smaller
institution with substantial liabilities, including the potential liability
associated with the pending arbitration proceeding.
Following
further discussion, the Board of Directors instructed the representative of
Sandler O’Neill to advise Summit that Greater Atlantic has continued interest in
pursing a whole-bank transaction with Summit and that Summit was authorized to
continue its due diligence review of Greater Atlantic.
On
January 18, 2007, the representative of Sandler O’Neill advised Greater Atlantic
that Summit remained interested in proceeding with its due diligence review in
an effort to negotiate and execute a definitive merger agreement.
On
January 24, 2007, Party “E” executed a confidentiality agreement, and on January
25, 2007, Party “E” submitted an indication of interest.
On
January 25, 2007, the Board of Directors met to discuss the indication of
interest submitted by Party “E”. Party “E” proposed an all-cash
transaction valuing Greater Atlantic at $4.634 per share, subject to an
exclusivity period and other conditions.
On
January 25, 2007, Party “F” executed a confidentiality agreement.
On
January 29, 2007, Summit resumed its due diligence review of Greater
Atlantic.
On
February 7, 2007, Party “F” submitted an indication of interest for an all-cash
transaction that indicated a range of value from approximately $14.5 million to
$16.0 million, or a range of $4.79 to $5.30 per share, subject to due diligence
and other conditions.
On
February 8, 2007, an indication of interest for an all-cash, whole-bank
transaction was received from Party “D” indicating a transaction value ranging
from $15 million to $20 million, or $5.00 to $6.67, per share, subject to due
diligence and other conditions.
On
February 9, 2007, Summit submitted a revised indication of interest for a
whole-bank transaction, but with the exclusion of the Pasadena branch office and
with an indicated value of $4.60 per share.
On
February 9, 2007, Greater Atlantic announced publicly the resolution of the
arbitration proceeding.
On
February 13, 2007, Messrs. Calomiris and Amos, Sidney M. Bresler, a director of
Greater Atlantic, and Paul J. Cinquegrana, a director of Greater Atlantic now
deceased, met with Messrs. Maddy, III and Tissue. Messrs. Maddy, III
and Tissue provided background information about Summit and expressed Summit’s
interest in a transaction with Greater Atlantic.
On
February 14, 2007, the Board of Directors of Greater Atlantic met. A
representative of Sandler O’Neill and representatives of Greater Atlantic’s
legal counsel were also present. The representative of Sandler
O’Neill reviewed the terms of the various indications of interest that had been
received to date. The Board of Directors considered and discussed in
detail Greater Atlantic’s prospects as an independent entity and came to the
consensus that it would be in the best interests of Greater Atlantic and its
stockholders to pursue a merger transaction with Summit, as well as the sale of
the Pasadena branch office to Bay-Vanguard Federal Savings
Bank. Following all discussion, the Board of Directors determined to
pursue the proposals by Summit and Bay-Vanguard Federal Savings Bank and
instructed senior management, in consultation with Greater Atlantic’s legal and
financial advisors, to proceed to negotiate the terms of a definitive merger
agreement with Summit and the terms of a definitive purchase and assumption
agreement with Bay-Vanguard Federal Savings Bank, consistent with their
respective indications of interest, for presentation to and consideration by the
Board of Directors at the earliest practicable time.
On
February 20, 2007, representatives of Bay-Vanguard Federal Savings Bank
conducted a due diligence review of the Pasadena branch office.
On March
1 and 2, 2007, representatives of Greater Atlantic conducted a due diligence
review of Summit at its offices in Moorefield, West Virginia.
On March
21, 2007, Bay-Vanguard Federal Savings Bank informed Greater Atlantic, through a
representative of Sandler O’Neill, that its had revised its indication of
interest to reduce the deposit premium for the Pasadena branch office to
8.5%.
On March
28, 2007, the Board of Directors of Greater Atlantic met. Senior
management of Greater Atlantic advised the Board of Directors that
representatives of the Office of Thrift Supervision had inquired recently about
the status of the ongoing merger and acquisition discussions and the prospects
of negotiating and entering into a definitive agreement in the near
term. The Board of Directors then discussed the Bay-Vanguard Federal
Savings Bank’s revised indication of interest for the purchase of the Pasadena
branch office at a deposit premium of 8.5%. The representative of
Sandler O’Neill noted that the new proposed deposit premium, although reduced
from the 9.5% proposed initially, remained the highest proposal
obtained. Following discussion, the Board of Directors authorized
management, with the assistance of Greater Atlantic’s legal and financial
advisors, to negotiate a definitive purchase and assumption agreement for the
sale of the Pasadena branch office consistent with the terms of the revised
indication of interest of Bay-Vanguard Federal Savings Bank.
During
the balance of March and early April 2007, representatives of Greater Atlantic
and of Summit negotiated the terms of the definitive merger agreement and senior
management representatives of Greater Atlantic and of Summit were in periodic
contact to discuss transaction integration issues. During the same
period, representatives of Greater Atlantic Bank and of Bay-Vanguard Federal
Savings Bank negotiated the terms of the definitive purchase and assumption
agreement for the purchase of the Pasadena branch office.
On the
morning of April 12, 2007, a joint meeting of the Boards of Directors of Greater
Atlantic and Greater Atlantic Bank was held to consider and discuss the terms of
the definitive merger agreement as negotiated by Greater Atlantic and Summit and
the terms of the definitive purchase and assumption agreement as negotiated by
Greater Atlantic Bank and Bay-Vanguard Federal Savings Bank for the purchase the
Pasadena branch office. A representative of Sandler O’Neill and
representatives of Greater
Atlantic’s
legal counsel were present at the meeting. Following presentations by
Greater Atlantic’s legal counsel and financial advisor and members of senior
management, and discussion regarding the transactions, all of the directors
present determined that the merger agreement and the ancillary transactions and
the purchase and assumption agreement were advisable and in the best interests
of Greater Atlantic and its stockholders and authorized Mr. Amos to execute and
deliver the merger agreement and related documents and the purchase and
assumption agreement on behalf of Greater Atlantic and Greater Atlantic Bank and
to take all actions appropriate to effect the transactions contemplated by those
agreements. Later in the day, Greater Atlantic issued a press release
announcing the execution of the merger agreement with Summit and the execution
by Greater Atlantic Bank of the purchase and assumption agreement with
Bay-Vanguard Federal Savings Bank.
On August
24, 2007, Greater Atlantic Bank completed the sale of its Pasadena branch office
to Bay-Vanguard Federal Savings Bank.
On
December 6, 2007, Greater Atlantic and Summit amended the merger agreement to
extend the date (from December 31, 2007 to March 31, 2008) on which either party
could terminate the merger agreement under certain circumstances if the merger
was not consummated by that date.
On March
25, 2008, the stockholders of Greater Atlantic approved the merger agreement at
a special meeting of stockholders.
On April
4, 2008, Greater Atlantic received written notice from Summit that Summit had
exercised its right to terminate the merger agreement. Upon receipt
of the notice, the Chairman of the Board of Greater Atlantic called for a
special meeting of the board of directors that evening. Legal counsel
and a representative of Sandler O’Neill were in attendance. Following
extensive discussion of the possible courses of action available to Greater
Atlantic, the board of directors instructed the representative of Sandler
O’Neill to contact Summit to determine whether Summit still had an interest in
pursuing a merger with Greater Atlantic, and, if so, under what proposed terms
and conditions. The meeting was adjourned so that the representative
of Sandler O’Neill could contact Summit and report back to the board of
directors. At the reconvened meeting later that evening, the
representative of Sandler O’Neill reported that Summit would consider pursuing
the merger only if the price was reduced and Summit’s obligations to close the
transaction were contingent on Greater Atlantic satisfying certain financial
conditions at closing, including minimum capital ratios and asset quality ratios
acceptable to Summit. After discussing and assessing the strategic
options available to Greater Atlantic, particularly its prospects as an
independent entity and considering the increased likelihood of adverse
regulatory action if Greater Atlantic is unable to find an acceptable strategic
partner, the board of directors Greater Atlantic’s financial and legal advisors
to contact the appropriate parties at Summit to inform Summit of Greater
Atlantic’s interest in pursuing negotiations toward a new merger
agreement.
On April
5, 6 and 7, 2008, the board of directors of Greater Atlantic held informational
conference calls during which the participating directors discussed negotiating
points and strategy should Summit agree to enter into negotiations toward a new
merger agreement.
On April
9, 2008, Greater Atlantic issued a press release announcing that it had received
written notice from Summit that Summit had exercised its right to terminate the
merger agreement and that Summit and Greater Atlantic had initiated negotiations
towards entering into a new definitive merger agreement. Also, on
that date, Summit issued a similar press release and Greater Atlantic’s legal
counsel received a draft of a new merger agreement from Summit’s legal counsel
that provided for a price of $4.00 per share of Greater Atlantic common stock,
payable $1.20 in cash and $2.80 in shares of Summit common stock.
On April
10, 2008, representatives of Greater Atlantic conducted a due diligence review
of Summit at its main office in Moorefield, West Virginia.
On April
11, 2008, the Office of Thrift Supervision notified Greater Atlantic that, given
Greater Atlantic’s continuing adverse financial condition and results of
operations, it had determined to issue a cease and desist order against Greater
Atlantic Bank and requested that Greater Atlantic Bank execute a stipulation and
consent to the issuance of the order within 10 business days.
On April
14, 2008, the board of directors of Greater Atlantic met and reviewed in detail
the draft of the stipulation and consent to the issuance of the cease and desist
order. The board of directors instructed legal counsel to contact the
Office of Thrift Supervision to request certain modifications to the terms of
the cease and desist order. Over the following days, legal counsel
wrote to the Office of Thrift Supervision to outline the modifications requested
by the board of directors and legal counsel to the cease and desist
order. The Office of Thrift Supervision responded by advising which
of the modifications were acceptable to the Office of Thrift
Supervision.
On April
18, 2008, counsel for Greater Atlantic responded with comments on the draft of a
new definitive agreement provided by counsel for Summit on April 9,
2008.
On April
21, 2008, the board of directors of Greater Atlantic held an informational
conference call to review the status of the negotiations with Summit and the
status of the cease and desist order.
On April
23, 2008, at a meeting of the board of directors of Greater Atlantic Bank, the
board of directors unanimously approved a resolution agreeing to enter into the
stipulation and consent to the entry of the cease and desist order. On
April 25, 2008, the Office of Thrift Supervision accepted the stipulation and
consent and the cease and desist order became effective.
On April
26, 2008, the board of directors held an information conference call to review
the status of the negotiations with Summit.
On April
29, 2008, Summit’s counsel provided Greater Atlantic’s counsel with a revised
draft agreement.
On April
30, 2008, Summit’s chief executive officer contacted Greater Atlantic’s
financial adviser to inquire whether Greater Atlantic would consider an
all-stock transaction, also at $4.00 per share of Greater Atlantic common stock,
rather than the cash/stock transaction currently under
consideration. In a conference call on May 1, 2008, the
representative of Sandler O’Neill informed the Greater Atlantic board of
directors of Summit’s proposal to restructure the transaction as an all-stock
deal at the price of $4.00 per share. After discussing the proposal,
the board of directors instructed the representative of Sandler O’Neill to
inform Summit that an all-stock deal was acceptable, assuming that the remaining
terms and conditions, including the financial closing conditions imposed on
Greater Atlantic as required by Summit, could be negotiated to the satisfaction
of both parties.
On May 7,
2008, Summit’s counsel provided Greater Atlantic’s counsel with a revised draft
of a merger agreement providing for an all-stock transaction at a price of $4.00
per share of Greater Atlantic common stock, but with other material terms and
conditions still subject to negotiation.
On May
16, 2008, at a meeting of the board of directors of Greater Atlantic, Greater
Atlantic’s financial advisor reported on the status of negotiations with
Summit.
On June
6, 2008, Summit’s legal counsel provided Greater Atlantic’s legal counsel with a
final and complete draft of the merger agreement as negotiated by the
parties.
During
the period from April 9, 2008, when Greater Atlantic announced that it had
entered into negotiations with Summit towards entering into a new definitive
merger agreement, until June 9, 2008, neither Greater Atlantic nor its
investment adviser received an indication of interest in the acquisition of
Greater Atlantic from a third party.
On June
9, 2008, a meeting of the board of directors of Greater Atlantic was held to
consider and discuss the terms of the definitive merger agreement as negotiated
by Greater Atlantic and Summit. A representative of Sandler O’Neill
and of Greater Atlantic’s legal counsel were present at the
meeting. Copies of the merger agreement and ancillary documents were
sent to each director before the meeting. The representative of
Sandler O’Neill made a presentation regarding the fairness of the proposed
merger consideration to the holders of Greater Atlantic’s common stock from a
financial point of view and delivered the opinion of Sandler O’Neill
that, as of June 9, 2008, and subject to the limitations and qualifications set
forth in the opinion, the proposed merger consideration was fair from a
financial point of view to the holders of Greater Atlantic common
stock. The board of directors considered carefully the opinion of
Sandler O’Neill as well as Sandler O’Neill’s experience, qualifications and
interest in the proposed transactions. Representatives of Greater
Atlantic’s legal counsel reviewed in detail the terms of the merger agreement
and the ancillary documents and reviewed with the board of directors its
fiduciary duties in the context of the proposed transaction. In
evaluating the discharge of its fiduciary duties, the board of directors noted
that from April 9, 2008, when Greater Atlantic publicly announced that it had
entered into negotiations with Summit toward entering into a new merger
agreement, to June 9, 2008, Greater Atlantic did not solicit, nor did it receive
any unsolicited, business combination proposals from parties other than Summit
and considered those circumstances in the context of the process that the board
of directors undertook in connection with its decision to enter into the
definitive merger agreement with Summit back in April 2007. In
addition, senior management of Greater Atlantic, along with the representative
of Sandler O’Neill and of legal counsel, presented the findings of Greater
Atlantic’s due diligence review of Summit. In addition, the board
discussed the expected transaction costs including the value of severance
obligations under existing employment and change in control agreements with
members of management and other benefit arrangements. Following those
presentations, and discussion regarding the transactions, the directors
determined unanimously that the merger agreement and the transactions
contemplated thereby were advisable and in the best interests of Greater
Atlantic and its stockholders and authorized Mr. Amos to execute and deliver the
merger agreement and to take all actions appropriate to effect the transaction
contemplated by the merger agreement.
On June
10, 2008, Greater Atlantic and Summit issued separate press releases announcing
the execution of the merger agreement.
Greater
Atlantic’s Reasons for the Merger
At the
meeting at which the merger agreement was presented for consideration, Greater
Atlantic’s Board of Directors, by a unanimous vote of the directors present at
the meeting, approved the merger agreement and recommended that Greater
Atlantic’s stockholders vote “FOR” approval of the merger
agreement.
Greater
Atlantic’s Board of Directors has determined that the merger is advisable and in
the best interests of Greater Atlantic and its stockholders. In
approving the merger agreement, the Board of Directors consulted with Sandler
O’Neill regarding the fairness of the transaction to Greater Atlantic’s
stockholders from a financial point of view and with Greater Atlantic’s legal
counsel regarding its legal duties and the terms of the merger agreement and
ancillary documents. In determining to approve the merger agreement
and recommend that stockholders approve the merger, the Board of Directors, in
consultation with Greater Atlantic’s senior management and financial and legal
advisors, considered a number of factors, including the following material
factors:
|
·
|
The
understanding of the Board of Directors of the strategic options available
to Greater Atlantic and the Board of Directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of those
options or the execution of the business plan under the best case
scenarios were likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the Board of Directors
|
|
|
considered
Greater Atlantic’s ability to achieve consistent profitability as an
independent entity and the prospects for profitable operations under the
cease and desist order that became effective on April 25, 2008, and the
prospects for further adverse regulatory action if it failed to do
so.
|
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common stock
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
|
·
|
Sandler
O’Neill’s written opinion that, as of June 9, 2008, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
|
·
|
The
wider array of financial products and services that would be available to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the merger
is intended to qualify as a transaction that is generally tax-free for
U.S. federal income tax purposes.
|
|
·
|
The
results of the due diligence review of
Summit.
|
|
·
|
The
Greater Atlantic employees to be retained after the merger would have
opportunities for career advancement in a larger
organization.
|
|
·
|
The
likelihood of timely receiving regulatory approval and the approval of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could be
triggered upon termination of or failure to consummate the
merger.
|
The
foregoing information and factors considered by Greater Atlantic’s Board of
Directors is not exhaustive, but includes all material factors that the Board of
Directors considered and discussed in approving the merger agreement and
recommending that Greater Atlantic’s stockholders vote to approve the
merger. In view of the wide variety of factors considered and
discussed by the Board of Directors in connection with its evaluation of the
merger and the complexity of these factors, the Board of Directors did not
consider it practical to, nor did it attempt to, quantify, rank or otherwise
assign any specific or relative weights to the specific factors that it
considered in reaching its decision; rather it considered all of the factors as
a whole. The Board of Directors discussed and considered the
foregoing factors and reached general consensus that the merger was in the best
interests of Greater Atlantic and its stockholders. In considering
the foregoing factors, individual directors of Greater Atlantic may have
assigned different weights to different factors. The Board of
Directors relied on the experience and expertise of Sandler O’Neill for
quantitative analysis of the financial terms of the merger
agreement. See “The
Merger -- Opinion of Greater Atlantic’s Financial Advisor” and the
opinion letter of Sandler O’Neill attached to this proxy statement/ prospectus
as Annex
C. It should be noted that this explanation of the reasoning
of Greater Atlantic’s Board of Directors and all other information presented in
this section is forward-looking in nature and, therefore, should be read in
light of the factors discussed under “Forward-Looking Statements”
on page ___.
Summit’s Reasons
for the Merger
The
merger is consistent with Summit’s plan to have operations, offices and distinct
capabilities in every market of its choice within its region. The
merger will afford Summit the opportunity to further expand market share in the
Northern Virginia market. Summit believes that, in addition to expanding
Summit’s presence in very attractive markets, the merger provides an opportunity
to enhance Summit’s stockholder value with the prospects of positive long-term
performance of Summit’s common stock. Summit believes that the merger is a
strategic fit between Summit and Greater Atlantic given the compatibility of the
management and business philosophy of each company. Enhanced opportunities
should result from the merger by eliminating redundant or unnecessary costs and
enhancing revenue growth prospects.
|
Opinion
of Greater Atlantic’s Financial
Advisor
|
By letter
agreement dated January 30, 2006, Greater Atlantic retained Sandler O’Neill to
act as its financial advisor in connection with a possible business
combination. Sandler O’Neill is a nationally recognized investment
banking firm whose principal business specialty is financial
institutions. In the ordinary course of its investment banking
business, Sandler O’Neill is regularly engaged in the valuation of financial
institutions and their securities in connection with mergers and acquisitions
and other corporate transactions.
Sandler
O'Neill acted as financial advisor to Greater Atlantic in connection with the
proposed merger and participated in certain of the negotiations leading to the
merger agreement. At the June 9, 2008 meeting at which Greater
Atlantic’s board considered and approved the merger agreement, Sandler O’Neill
delivered to the board its oral opinion, subsequently confirmed in writing that,
as of such date, the merger consideration was fair to Greater Atlantic’s
shareholders from a financial point of view. The full text of Sandler O’Neill’s
opinion is attached as Annex C to this document. The opinion outlines the
procedures followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Sandler O’Neill in rendering its
opinion. The description of the opinion set forth below is qualified
in its entirety by reference to the opinion. Greater Atlantic
shareholders are urged to read the entire opinion carefully in connection with
their consideration of the proposed merger.
Sandler
O’Neill’s opinion speaks only as of the date of the opinion. The
opinion is directed to the Greater Atlantic board and speaks only to the
fairness from a financial point of view of the merger consideration to Greater
Atlantic shareholders. It does not address the underlying business
decision of Greater Atlantic to engage in the merger or any other aspect of the
merger and is not a recommendation to any Greater Atlantic shareholder as to how
such shareholder should vote at the special meeting with respect to the merger,
or any other matter.
In
connection with rendering its June 9, 2008 opinion, Sandler O’Neill reviewed and
considered, among other things:
|
(1)
|
the
merger agreement;
|
|
(2)
|
certain
publicly available financial statements and other historical financial
information of Greater Atlantic that Sandler O’Neill deemed
relevant;
|
|
(3)
|
certain
publicly available financial statements and other historical financial
information of Summit that Sandler O’Neill deemed
relevant;
|
|
(4)
|
internal
financial projections for Greater Atlantic for the years ending December
31, 2008 and 2009 prepared by and reviewed with senior management of
Greater Atlantic laying
|
|
|
out
how Greater Atlantic plans to obtain core profitability by using its
existing capital base and growth and performance projections
for the years ending December 31, 2010, 2011 and 2012 as provided by and
reviewed with senior management of Greater
Atlantic;
|
|
(5)
|
internal
financial projections for Summit for the year ending December 31, 2008
prepared by and reviewed with management of Summit and growth and
performance projections for the years ending December 31, 2009, 2010, 2011
and 2012 as provided by and reviewed with senior management of
Summit;
|
|
(6)
|
the
pro forma financial impact of the merger on Summit based on assumptions
relating to transaction expenses, purchase accounting adjustments and cost
savings determined by the senior managements of Greater Atlantic and
Summit;
|
|
(7)
|
the
publicly reported historical price and trading activity for Greater
Atlantic’s and Summit’s respective common stock, including a comparison of
certain financial and stock market information for Greater Atlantic and
Summit with similar publicly available information for certain other
companies the securities of which are publicly
traded;
|
|
(8)
|
the
financial terms of certain recent business combinations in the commercial
banking and thrift industries, to the extent publicly
available;
|
|
(9)
|
the
current market environment generally and the banking environment in
particular; and
|
|
|
(10)
|
such
other information, financial studies, analyses and investigations and
financial, economic and market criteria as Sandler O’Neill considered
relevant.
|
Sandler
O’Neill also discussed with certain members of Greater Atlantic’s senior
management the business, financial condition, results of operations and
prospects of Greater Atlantic and held similar discussions with certain members
of senior management of Summit regarding the business, financial condition,
results of operations and prospects of Summit.
In
performing its reviews and analyses, Sandler O’Neill relied upon the accuracy
and completeness of all of the financial and other information that was
available to it from public sources, that was provided by Greater Atlantic and
Summit or their respective representatives or that was otherwise available to
Sandler O’Neill and assumed such accuracy and completeness for purposes of
rendering its opinion. Sandler O’Neill further relied on the
assurances of senior management of Greater Atlantic and Summit that they were
not aware of any facts or circumstances that would make any of such information
materially inaccurate or misleading. Sandler O’Neill was not asked
to, and did not, undertake an independent verification of any of such
information and Sandler O’Neill did not assume any responsibility or liability
for the accuracy or completeness thereof. Sandler O’Neill did not
make an independent evaluation or appraisal of the specific assets, the
collateral securing assets or the liabilities (contingent or otherwise) of
Greater Atlantic or Summit or any of their subsidiaries, or the collectibility
of any such assets, nor was Sandler O’Neill furnished with any such evaluations
or appraisals. Sandler O’Neill is not an expert in the evaluation of
allowances for loan losses and it did not make an independent evaluation of the
adequacy of the allowance for loan losses of Greater Atlantic or Summit, nor did
Sandler O’Neill review any individual credit files relating to Greater Atlantic
or Summit. Sandler O’Neill assumed, with Greater Atlantic’s consent,
that the respective allowances for loan losses for both Greater Atlantic and
Summit were adequate to cover such losses and together will be adequate for the
combined company.
With
respect to the internal financial projections for Greater Atlantic and Summit
and the projections of transaction costs, purchase accounting adjustments and
expected cost savings prepared by and/or reviewed with the senior managements of
Greater Atlantic and Summit used by Sandler O’Neill in
its
analyses, senior management of Greater Atlantic and Summit confirmed that those
projections and the assumptions related thereto reflected the best currently
available estimates and judgments of the future financial performance of Greater
Atlantic and Summit. Sandler O’Neill assumed that the financial
performances reflected in all projections and estimates used by them in their
analyses would be achieved and expressed no opinion as to such projections or
estimates or the assumptions on which they were based. Those
estimates and projections, as well as the other estimates used by Sandler
O'Neill in its analysis, were based on numerous variables and assumptions which
are inherently uncertain and, accordingly, actual results could vary materially
from those set forth in such projections.
Sandler
O’Neill also assumed that there had been no material change in Greater
Atlantic’s and Summit’s assets, financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to them, that Greater Atlantic and Summit would remain as going
concerns for all periods relevant to its analyses, that all of the
representations and warranties contained in the merger agreement were true and
correct as set forth in the merger agreement, that each party to the merger
agreement would perform all of the covenants required to be performed by such
party under that agreement, that the conditions precedent in the merger
agreement will not be waived and that the merger will qualify as a tax-free
reorganization for federal income tax purposes. Sandler O’Neill, with
Greater Atlantic’s consent, relied on the advice Greater Atlantic received from
its legal, accounting, and tax advisors as to all legal, accounting, and tax
matters relating to the merger agreement and the merger.
In
rendering its June 9, 2008 opinion, Sandler O’Neill performed a variety of
financial analyses. Sandler O’Neill prepared its analyses solely for
purposes of rendering its opinion and provided such analyses to the Greater
Atlantic Board of Directors. The summary below is not a complete
description of the analyses underlying Sandler O’Neill’s opinion or the
presentation made by Sandler O’Neill to Greater Atlantic’s Board, but is instead
a summary of the material analyses performed and presented in connection with
its opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances. Also, no company included in Sandler O’Neill’s
comparative analyses described below is identical to Greater Atlantic or Summit
and no transaction is identical to the merger. Accordingly, an
analysis of comparable companies or transactions involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect their public trading values
or merger transaction values. The process, therefore, is not necessarily
susceptible to a partial analysis or summary description.
In
arriving at its opinion, Sandler O’Neill did not attribute any particular weight
to any analysis or factor that it considered. Rather, Sandler O’Neill
made its own qualitative judgments as to the significance and relevance of each
analysis and factor. The financial analyses summarized below include
information presented in tabular format. Sandler O’Neill did not form
an opinion as to whether any individual analysis or factor (positive or
negative) considered in isolation supported or failed to support its opinion;
rather Sandler O’Neill made its determination as to the fairness of the merger
consideration on the basis of its experience and professional judgment after
considering the results of all the analyses taken as a
whole. Accordingly, Sandler O’Neill believes that its analyses and
the summary of its analyses must be considered as a whole and that selecting
portions of its analyses or focusing on the information presented below in
tabular format, without considering all analyses and factors or the full
narrative description of the financial analyses, including methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the process underlying its analysis and opinion. The tables
alone do not constitute complete descriptions of the financial analyses
presented in such tables.
In
performing its analysis, Sandler also made numerous assumptions with respect to
industry performance, business and economic conditions and various other
matters, many of which cannot be predicted and are beyond the control of Greater
Atlantic, Summit and Sandler O’Neill. The analysis performed by
Sandler O’Neill is not necessarily indicative of actual values or future
results, both of which
may be
significantly more or less favorable than suggested by such
analysis. Estimates on the values of companies did not purport to be
appraisals or necessarily reflect the prices at which companies or their
securities might actually be sold. Such estimates are inherently
subject to uncertainty and actual values may be materially
different. Accordingly, Sandler O’Neill’s analysis does not
necessarily reflect the value of Greater Atlantic’s common stock or Summit’s
common stock or the prices at which Greater Atlantic’s or Summit’s common stock
may be sold at any time. The analysis of Sandler and its opinion were
among a number of factors taken into consideration by Greater Atlantic’s Board
in making its determination to adopt the merger agreement and the analysis
described below should not be viewed as determinative of the decision of Greater
Atlantic’s Board with respect to the fairness of the merger.
Summary of
Proposal. Sandler O’Neill
reviewed the financial terms of the proposed transaction. Pursuant to
the merger agreement, each share of Greater Atlantic common stock issued and
outstanding immediately prior to the merger will be converted into the right to
receive that number of shares of Summit common stock, $2.50 par value per share
(the “Summit Common Stock”), equal to $4.00 divided by the average closing price
of Summit Common Stock as reported on the NASDAQ Capital Market for
the twenty trading days prior to the closing of the Merger (the “Exchange
Ratio”). In no event will each share of GAFC Common Stock be
exchanged for more than 0.328625 of a share of Summit Common Stock. The
aggregate value of the merger consideration is subject to a dollar for dollar
adjustment if, at closing, Greater Atlantic’s shareholders’ equity is below an
amount, subject to certain adjustments, as specified in the merger agreement to
the closing of the merger. Sandler O’Neill calculated the aggregate
transaction value to be $12.1 million. Based upon financial
information for Greater Atlantic for the twelve months ended March 31, 2008,
Sandler O’Neill calculated the following ratios:
|
Transaction
Ratios
|
Transaction
price / Last twelve months’ earnings per
share NM
Transaction
price / Book value per
share 367%
Transaction
price / Tangible book value per
share
520%
Tangible book premium/Core Deposits
(1) 7.7%
Market premium as of June 5,
2008
220.0%
|
(1)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Stock Trading
History. Sandler O’Neill also reviewed the history of the
publicly reported trading prices of Greater Atlantic’s common stock for
three-year period ended June 5, 2008. Sandler O'Neill also reviewed the history
of the reported trading prices and volume of Summit’s common stock for the three
year period ended June 5, 2008. Sandler O’Neill then compared the relationship
between the movements in the price of Greater Atlantic’s common stock against
the movements in the prices of the Standard & Poor's 500 Index, the NASDAQ
Bank Index, the Standard & Poor’s Bank Index and the performance of a
composite peer group - a weighted average (by market capitalization) composite
of publicly traded comparable depository institutions selected by Sandler
O’Neill. Sandler O’Neill also compared the relationship between the movements in
the prices of Summit’s common stock to movements in the prices of the Nasdaq
Bank Index, S&P Bank Index, and S&P 500 Index and the performance of a
composite peer group - a weighted average (by market capitalization) composite
of publicly traded comparable depository institutions selected by Sandler
O’Neill. The composition of the peer group for Greater Atlantic
is discussed under the relevant section under “Comparable Company Analysis”
below. The composition of the peer group for Summit is discussed under the
relevant section under “Comparable Company Analysis” below.
The
relative performances were as follows:
|
Greater
Atlantic’s Stock Performance
|
|
|
Beginning Index
Value
|
Ending Index
Value
|
|
|
June 3,
2005
June
5, 2008
|
|
Greater
Atlantic
|
100.00%
|
21.7% |
|
S&P
500 Index
|
100.00
|
117.4
|
|
NASDAQ
Bank Index
|
100.00
|
82.8
|
|
S&P
Bank Index
|
100.00
|
68.3
|
|
Regional
Peer Group Index (1)
|
100.00
|
72.2
|
|
(1)
|
Refers
to the peer group outlined in the Comparable Group Analysis section
below.
|
|
Summit’s
Stock Performance
|
|
|
Beginning Index
Value
|
Ending
Index Value
|
|
|
June
3,
2005
June
5, 2008
|
|
Summit
|
100.00%
|
40.5%
|
|
S&P
500 Index
|
100.00
|
117.4
|
|
NASDAQ
Bank Index
|
100.00
|
82.8
|
|
S&P
Bank Index
|
100.00
|
68.3
|
|
Regional
Peer Group Index (1)
|
100.00
|
79.3
|
|
(1)
|
Refers
to the peer group outlined in the Comparable Group Analysis section
below.
|
Comparable
Company Analysis. Sandler O’Neill used
publicly available information to compare selected financial and market trading
information for Greater Atlantic and Summit to various peer groups selected by
Sandler O’Neill. The peer group for Greater Atlantic consisted of the
following companies:
|
Coddle
Creek Financial Corp.
|
SE
Financial Corp.
|
|
Community
Financial Corporation
|
South
Street Financial Corp.
|
|
First
Keystone Financial, Inc.
|
WVS
Financial Corp.
|
|
First
Star Bancorp, Inc.
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as of
June 5, 2008. The table below compares the data for Greater Atlantic with the
median data for the regional peer group.
|
Greater Atlantic Comparable Group Analysis
|
|||
|
Greater
Atlantic
|
Regional
Peer
Group
Median
|
||
|
Market
Capitalization (in
millions)
|
$4
|
$19
|
|
|
Total
assets (in
millions)
|
$230
|
$439
|
|
|
Tangible
equity/Tangible assets
|
1.01%
|
7.87%
|
|
|
Last
twelve months’ return on average assets
|
(1.22%)
|
0.37%
|
|
|
Last
twelve months’ return on average equity
|
(38.6%)
|
3.2%
|
|
|
Price/Tangible
book value per share
|
162%
|
71%
|
|
|
Price/Last
twelve months’ core earnings per share
|
NM
|
15.9x
|
|
The
“Regional Peer Group” for Summit consisted of the following
companies:
|
Burke
& Herbert Bank & Trust Co.
|
National
Bankshares, Incorporated
|
|
Cardinal
Financial Corporation
|
Old
Point Financial Corporation
|
|
Eastern
Virginia Bankshares, Inc.
|
Shore
Bancshares, Inc.
|
|
First
United Corporation
|
Virginia
Commerce Bancorp, Inc.
|
|
Middleburg
Financial Corporation
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as of
June 5, 2008. The table below compares the data for Summit with the
median data for the peer group.
|
Summit
Comparable Group Analysis
|
|||
|
Summit
|
Regional
Peer
Group
Median
|
||
|
Market
Capitalization (in
millions)
|
$96
|
$126
|
|
|
Total
assets (in
millions)
|
$1,465
|
$1,018
|
|
|
Tangible
equity/Tangible assets
|
5.63%
|
8.69%
|
|
|
Last
twelve months’ return on average assets
|
0.56
%
|
1.03%
|
|
|
Last
twelve months’ return on average equity
|
8.3%
|
11.3%
|
|
|
Price/Tangible
book value per share
|
117%
|
136%
|
|
|
Price/Last
twelve months’ core earnings per share
|
6.7x
|
11.5x
|
|
|
Price/Estimated
2008 earnings per share
|
6.6x
|
10.5x
|
|
Analysis of
Selected Merger Transactions. Sandler O’Neill reviewed 31
merger transactions announced from January 1, 2006 through June 5, 2008
involving acquisitions of banks and thrifts in the United States with announced
transaction value less than $30 million and the selling companies recorded
negative earnings for the last twelve month period and the prior two fiscal
years. Sandler O’Neill reviewed the multiples of transaction price at
announcement to stated book value per share, tangible book
value per
share, as well as tangible book premium to core deposits and current market
price premium, and computed high, low, mean and median multiples and premiums
for the transactions.
|
Comparable
Transactions Analysis
|
|
|
Selected
Merger Median Multiple
|
|
Transaction
price/ Book value per share
|
146%
|
|
Transaction
price / Tangible book value per share
|
150%
|
|
Tangible
book premium / Core deposits (1)
|
7.4%
|
|
Premium
to current market price
|
38.4%
|
|
(1)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Discounted Cash
Flow Analysis. Sandler O’Neill performed an analysis to
estimate the future stream of after-tax cash flows that Greater Atlantic would
provide to equity holders through 2012 on a stand-alone basis, assuming Greater
Atlantic performed in accordance with the earnings and growth projections
reviewed with Greater Atlantic’s senior management and assuming Greater Atlantic
can obtain core profitability by using its existing capital base. To
approximate the terminal value of Greater Atlantic common stock at December 31,
2012, Sandler O’Neill applied price/earnings multiples ranging from 8x to 13x
and multiples of tangible book value ranging from 60% to 110%. The
terminal values were then discounted to present values using discount rates
ranging from 11% to 17%, which were selected by Sandler O’Neill to reflect
different assumptions regarding required rates of return of holders or
prospective buyers of Greater Atlantic’s common stock. This analysis
resulted in the following reference ranges of indicated per share values for
Greater Atlantic’s common stock:
Terminal
Earnings Multiple
|
Discount
Rate
|
8x
|
9x
|
10x
|
11x
|
12x
|
13x
|
|
11.0%
|
$2.63
|
$2.96
|
$3.29
|
$3.61
|
$3.94
|
$4.27
|
|
12.0%
|
$2.51
|
$2.83
|
$3.14
|
$3.46
|
$3.77
|
$4.08
|
|
13.0%
|
$2.40
|
$2.71
|
$3.01
|
$3.31
|
$3.61
|
$3.91
|
|
14.0%
|
$2.30
|
$2.59
|
$2.88
|
$3.16
|
$3.45
|
$3.74
|
|
15.0%
|
$2.20
|
$2.48
|
$2.75
|
$3.03
|
$3.30
|
$3.58
|
|
16.0%
|
$2.11
|
$2.37
|
$2.64
|
$2.90
|
$3.16
|
$3.43
|
|
17.0%
|
$2.02
|
$2.27
|
$2.53
|
$2.78
|
$3.03
|
$3.28
|
Terminal
Tangible Book Multiple
|
Discount
Rate
|
60%
|
70%
|
80%
|
90%
|
100%
|
110%
|
|
11.0%
|
$2.08
|
$2.43
|
$2.78
|
$3.12
|
$3.47
|
$3.82
|
|
12.0%
|
$1.99
|
$2.32
|
$2.66
|
$2.99
|
$3.32
|
$3.65
|
|
13.0%
|
$1.91
|
$2.22
|
$2.54
|
$2.86
|
$3.18
|
$3.49
|
|
14.0%
|
$1.82
|
$2.13
|
$2.43
|
$2.73
|
$3.04
|
$3.34
|
|
15.0%
|
$1.75
|
$2.04
|
$2.33
|
$2.62
|
$2.91
|
$3.20
|
|
16.0%
|
$1.67
|
$1.95
|
$2.23
|
$2.51
|
$2.79
|
$3.06
|
|
17.0%
|
$1.60
|
$1.87
|
$2.13
|
$2.40
|
$2.67
|
$2.94
|
andler
O’Neill performed a similar analysis assuming Greater Atlantic’s 2012 net income
varied from 25% above to 25% below the estimates noted above. This
analysis resulted in the following reference ranges of indicated per share
values for Greater Atlantic’s common stock, using a discount rate of
14.20%:
Terminal
Earnings Multiple
|
EPS
Projection Change from Base Case
|
8x
|
9x
|
10x
|
11x
|
12x
|
13x
|
|
(25.0%)
|
$1.71
|
$1.92
|
$2.14
|
$2.35
|
$2.57
|
$2.78
|
|
(20.0%)
|
$1.82
|
$2.05
|
$2.28
|
$2.51
|
$2.74
|
$2.96
|
|
(15.0%)
|
$1.94
|
$2.18
|
$2.42
|
$2.67
|
$2.91
|
$3.15
|
|
(10.0%)
|
$2.05
|
$2.31
|
$2.57
|
$2.82
|
$3.08
|
$3.34
|
|
(5.0%)
|
$2.17
|
$2.44
|
$2.71
|
$2.98
|
$3.25
|
$3.52
|
|
0.0%
|
$2.28
|
$2.57
|
$2.85
|
$3.14
|
$3.42
|
$3.71
|
|
5.0%
|
$2.39
|
$2.69
|
$2.99
|
$3.29
|
$3.59
|
$3.89
|
|
10.0%
|
$2.51
|
$2.82
|
$3.14
|
$3.45
|
$3.76
|
$4.08
|
|
15.0%
|
$2.62
|
$2.95
|
$3.28
|
$3.61
|
$3.93
|
$4.26
|
|
20.0%
|
$2.74
|
$3.08
|
$3.42
|
$3.76
|
$4.11
|
$4.45
|
|
25.0%
|
$2.85
|
$3.21
|
$3.56
|
$3.92
|
$4.28
|
$4.63
|
Sandler
O’Neill also performed an analysis to estimate the future stream of after-tax
cash flows that Summit would provide to equity holders through 2012 on a
stand-alone basis, assuming Summit increased their annual dividend by $0.02
annually and that Summit performed in accordance with the earnings and growth
projections reviewed with Summit’s senior management. To approximate
the terminal value of Summit common stock at December 31, 2012, Sandler O’Neill
applied price/earnings multiples ranging from 8x to 18x and multiples of
tangible book value ranging from 100% to 200%. The dividend stream
and terminal values were then discounted to present values using discount rates
ranging from 11% to 17%, which were selected by Sandler O’Neill to reflect
different assumptions regarding required rates of return of holders or
prospective buyers of Summit’s common stock. This analysis resulted
in the following reference ranges of indicated per share values for Summit’s
common stock:
Terminal
Earnings Multiple
|
Discount
Rate
|
8x
|
10x
|
12x
|
14x
|
16x
|
18x
|
|
11.0%
|
$15.37
|
$18.86
|
$22.34
|
$25.82
|
$29.30
|
$32.79
|
|
12.0%
|
$14.73
|
$18.06
|
$21.39
|
$24.72
|
$28.05
|
$31.37
|
|
13.0%
|
$14.11
|
$17.30
|
$20.48
|
$23.67
|
$26.85
|
$30.04
|
|
14.0%
|
$13.53
|
$16.58
|
$19.62
|
$22.67
|
$25.72
|
$28.77
|
|
15.0%
|
$12.98
|
$15.89
|
$18.81
|
$21.73
|
$24.65
|
$27.56
|
|
16.0%
|
$12.45
|
$15.24
|
$18.04
|
$20.83
|
$23.63
|
$26.42
|
|
17.0%
|
$11.95
|
$14.63
|
$17.30
|
$19.98
|
$22.66
|
$25.33
|
Terminal
Tangible Book Multiple
|
Discount
Rate
|
100%
|
120%
|
140%
|
160%
|
180%
|
200%
|
|
11.0%
|
$14.10
|
$16.63
|
$19.16
|
$21.69
|
$24.22
|
$26.75
|
|
12.0%
|
$13.51
|
$15.93
|
$18.35
|
$20.76
|
$23.18
|
$25.60
|
|
13.0%
|
$12.94
|
$15.26
|
$17.57
|
$19.89
|
$22.20
|
$24.52
|
|
14.0%
|
$12.41
|
$14.63
|
$16.84
|
$19.06
|
$21.27
|
$23.49
|
|
15.0%
|
$11.91
|
$14.03
|
$16.15
|
$18.27
|
$20.39
|
$22.51
|
|
16.0%
|
$11.43
|
$13.46
|
$15.49
|
$17.52
|
$19.55
|
$21.58
|
|
17.0%
|
$10.97
|
$12.91
|
$14.86
|
$16.80
|
$18.75
|
$20.69
|
Sandler
O’Neill performed a similar analysis assuming Summit’s 2012 net income varied
from 25% above to 25% below the estimates noted above. This analysis
resulted in the following reference ranges of indicated per share values for
Summit’s common stock, using a discount rate of 14.20%:
Terminal
Earnings Multiple
|
EPS
Projection Change from Base Case
|
8x
|
10x
|
12x
|
14x
|
16x
|
18x
|
|
(25.0%)
|
$10.40
|
$12.66
|
$14.93
|
$17.19
|
$19.46
|
$21.72
|
|
(20.0%)
|
$11.00
|
$13.42
|
$15.83
|
$18.25
|
$20.67
|
$23.08
|
|
(15.0%)
|
$11.60
|
$14.17
|
$16.74
|
$19.31
|
$21.88
|
$24.44
|
|
(10.0%)
|
$12.21
|
$14.93
|
$17.65
|
$20.36
|
$23.08
|
$25.80
|
|
(5.0%)
|
$12.81
|
$15.68
|
$18.55
|
$21.42
|
$24.29
|
$27.16
|
|
0.0%
|
$13.42
|
$16.44
|
$19.46
|
$22.48
|
$25.50
|
$28.52
|
|
5.0%
|
$14.02
|
$17.19
|
$20.36
|
$23.54
|
$26.71
|
$29.88
|
|
10.0%
|
$14.62
|
$17.95
|
$21.27
|
$24.59
|
$27.92
|
$31.24
|
|
15.0%
|
$15.23
|
$18.70
|
$22.18
|
$25.65
|
$29.13
|
$32.60
|
|
20.0%
|
$15.83
|
$19.46
|
$23.08
|
$26.71
|
$30.33
|
$33.96
|
|
25.0%
|
$16.44
|
$20.21
|
$23.99
|
$27.77
|
$31.54
|
$35.32
|
In its
discussions with the Greater Atlantic Board, Sandler O’Neill noted that the
discounted cash flow analysis is a widely used valuation methodology, but the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, and the results thereof are not necessarily indicative of
actual values or future results.
Pro Forma Merger
Analysis. Sandler O’Neill analyzed certain potential pro forma
effects of the merger, assuming (1) a deal price per share of $4.00; (2) Greater
Atlantic would lose approximately $1.2 million per quarter prior to closing; (3)
Summit performs in accordance with the earnings projections and estimates
discussed above; (4) Greater Atlantic meets the adjusted equity minimum amount;
(5) Greater Atlantic meets all conditions to closing, including the minimum
amount of core deposits and the minimum regulatory capital ratios, and (6) the
merger closes during the fourth quarter of 2008. Sandler O’Neill also
assumed various purchase accounting adjustments (including amortizable
identifiable intangibles created in the merger), charges and transaction costs
associated with the merger, and cost savings resulting from the merger (100% of
which would be realized in 2009). Based on the assumptions listed
above, the analysis indicated that the merger would be dilutive to Summit’s
tangible book value per share at closing. The actual results achieved
by the combined company may vary from projected results and the variations may
be material.
Sandler O’Neill’s
Compensation and Other Relationships with Greater Atlantic and
Summit. Greater Atlantic has agreed to pay Sandler O’Neill a
monthly retainer of $10,000 each month (“General Advisory Services Fee”) and has
agreed to continue to do so until the closing of the
transaction. Sandler O’Neill will also be paid a transaction fee in
connection with the merger of $150,000. It is agreed that one-half of
the General Advisory Services Fee shall be credited against the $150,000
transaction fee. A fee of $100,000 has been paid to Sandler O’Neill
for rendering its April 12, 2007 fairness opinion, and an additional fee of
$100,000 has been paid to Sandler O’Neill for rendering its June 9, 2008
fairness opinion. In connection with the Pasadena, Maryland branch
sale, Greater Atlantic has paid Sandler O’Neill a fee of $77,281, which is equal
to 0.15% of the total deposits in the branch sale
transaction. Greater Atlantic has also agreed to reimburse certain of
Sandler O’Neill reasonable out-of-pocket expenses incurred in connection with
its engagement and to indemnify Sandler O’Neill and its affiliates
and their
respective partners, directors, officers, employees, agents and controlling
persons against certain expenses and liabilities, including liabilities under
the securities laws.
In the
ordinary course of its business as a broker-dealer, Sandler O’Neill may purchase
securities from and sell securities to Greater Atlantic and Summit and their
respective affiliates. Sandler O’Neill may also actively trade the
debt and/or equity securities of Greater Atlantic or Summit or their respective
affiliates for its own account or for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such
securities.
Interests
of Certain Persons in the Merger
Certain
members of Greater Atlantic’s management have interests in the merger in
addition to their interests as shareholders of Greater
Atlantic. These interests are described below. In each
case, the Greater Atlantic board of directors was aware of these potential
interests, and considered them, among other matters, in approving the merger
agreement and the transactions contemplated thereby.
Employment and Severance
Agreements.
After the
effective date of the merger, the employment of certain employees of Greater
Atlantic may be terminated in a manner which will entitle them to receive
termination benefits provided under existing employment agreements with Greater
Atlantic. The terms of such termination benefits for each employee
are set forth below.
Amos Employment
Agreement. Effective November 1, 1997, Greater
Atlantic Bank entered into an employment agreement with Carroll E. Amos,
President and Chief Executive Officer of Greater Atlantic Bank. Under
the employment agreement, if, following a change in control (as defined in the
employment agreement), Mr. Amos voluntarily resigns or his employment is
terminated involuntarily for reasons other than cause, Mr. Amos (or in the event
of his death, his beneficiary) would be entitled to a lump sum cash severance
payment equal to the greater of: (i) the remaining payments due for the term of
the employment agreement, or (ii) two times the average of Mr. Amos’ annual
compensation for the three years preceding the change in control. For
purposes of the employment agreement, the merger with Summit constitutes a
change in control. In addition to a cash severance payment, the
employment agreement provides that Greater Atlantic Bank or its successor will
cause to be continued Mr. Amos’ life, health, dental and disability insurance
coverage for thirty-six months following his termination of employment in
connection with a change in control. That insurance coverage is
required to be provided under terms substantially identical to the coverage
maintained by Greater Atlantic Bank prior to Mr. Amos’ termination
date. In the event Mr. Amos’ employment is voluntarily or
involuntarily terminated following the merger by and between Summit and Greater
Atlantic, Mr. Amos would be entitled to a lump sum cash payment and health and
welfare benefits equal to approximately $394,000.
Senior Officers’ Severance
Compensation Plan. Effective on December 1, 1999, Greater
Atlantic Bank implemented an Employee Severance Compensation
Plan (the “Officer Plan”), to provide severance benefits to the
following senior officers who are terminated, voluntarily or involuntarily from
employment with Greater Atlantic Bank within one year of a change in control (as
defined in the Officer Plan) of Greater Atlantic Bank or Greater
Atlantic: Edward C. Allen, Justin R. Golden, Gary L. Hobert, Robert
W. Neff and David E. Ritter. The severance benefits are paid in
a lump sum cash payment within thirty days after termination equal in amount to
the compensation paid to such participant during the twelve months immediately
preceding the date of termination. The merger would constitute a
change in control under the Officer Plan. Accordingly, if the
employment of the participants is terminated within one year of the merger, then
each Participant will receive the following severance benefits: Edward C. Allen
- $121,000, Justin R. Golden - $101,000, Gary L. Hobert - $135,000, Robert W.
Neff - $130,000 and David E. Ritter - $114,000.
Conversion of Stock
Options. The merger agreement provides that each stock option
granted to officers, employees and directors of Greater Atlantic under Greater
Atlantic’s stock option plan and outstanding prior to the effective date of the
merger will vest and holders of such options shall be entitled to receive cash
in an amount equal to the difference between the value of (a)
the merger consideration and (b) the applicable exercise price
(rounded to the nearest cent) for each outstanding option granted by Greater
Atlantic to purchase shares of Greater Atlantic common stock. The
following table sets forth the cash that will be paid to each executive officer
of Greater Atlantic upon consummation of the merger in accordance with the terms
of the merger agreement and assumes that the value for each share of stock of
Greater Atlantic that will be exchanged in the merger is $4.00.
|
GREATER
ATLANTIC FINANCIAL CORP.
|
||||||||||||||||
|
Option
Payouts at Merger
|
||||||||||||||||
|
Value
of
|
||||||||||||||||
|
|
Exercise
|
Merger
|
||||||||||||||
|
#
of
|
Price
|
Consideration
|
Cash
|
|||||||||||||
|
Employee
|
options
|
(per
share)
|
(per
share)
|
Payout
|
||||||||||||
|
Carroll
E. Amos
|
8,666 | $ | 4.00 | $ | 4.00 | $ | 0 | |||||||||
|
Robert
W. Neff
|
8,000 | 4.00 | 4.00 | $ | 0 | |||||||||||
|
David
E. Ritter
|
8,000 | 4.00 | 4.00 | $ | 0 | |||||||||||
|
Edward
C. Allen
|
9,000 | 4.00 | 4.00 | $ | 0 | |||||||||||
|
Justin
R. Golden
|
8,000 | 4.00 | 4.00 | $ | 0 | |||||||||||
|
Gary
L. Hobert
|
10,000 | 5.31 | 4.00 | $ | 0 | |||||||||||
Employee Benefit
Plans. Summit intends to provide the continuing employees of
Greater Atlantic with employee benefit plans substantially similar to those
provided to the employees of Summit. Employees of Greater Atlantic
will receive credit for their service to Greater Atlantic in determining their
eligibility and vesting in the benefit plans provided by Summit.
Conditions
of the Merger
The
respective obligations of Summit and Greater Atlantic to consummate the merger
are subject to the satisfaction of certain mutual conditions, including the
following:
|
·
|
The
shareholders of Greater Atlantic approve the merger agreement and the
transactions contemplated thereby at the special meeting of shareholders
for Greater Atlantic;
|
|
·
|
If
Summit must obtain shareholder approval of an amendment to its Articles of
Incorporation in order to assume Greater Atlantic’s trust preferred
securities, then the merger is conditioned on receipt of such
approval;
|
|
·
|
All
regulatory approvals required by law to consummate the transactions
contemplated by the merger agreement are obtained from the Federal Reserve
Board and any other appropriate federal and/or state regulatory agencies
without unreasonable conditions, and all waiting periods after such
approvals required by law or regulation
expire;
|
|
·
|
The
registration statement (of which this proxy statement/prospectus is a
part) registering shares of Summit common stock to be issued in the merger
is declared effective and not subject to a stop order or any threatened
stop order;
|
|
·
|
There
shall be no actual or threatened litigation, investigations or proceedings
challenging the validity of, or damages in connection with, the merger
that would have a material adverse effect with respect to the interests of
Summit or Greater Atlantic or impose a term or condition that shall be
deemed to materially adversely impact the economic or business benefits of
the merger;
|
|
·
|
The
absence of any statute, rule, regulation, judgment, decree, injunction or
other order being enacted, issued, promulgated, enforced or entered by a
governmental authority effectively prohibiting consummation of the
merger;
|
|
·
|
All
permits or other authorizations under state securities laws necessary to
consummate the merger and to issue the shares of Summit common stock to be
issued in the merger being obtained and remaining in full force and
effect; and
|
|
·
|
Authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger.
|
In
addition to the mutual covenants described above, the obligation of Summit to
consummate the merger is subject to the satisfaction, unless waived, of the
following other conditions:
|
·
|
The
representations and warranties of Greater Atlantic made in the merger
agreement are true and correct as of the date of the merger agreement and
as of the effective time of the merger and Summit receives a certificate
of the chief executive officer and the chief financial officer of Greater
Atlantic to that effect;
|
|
·
|
Greater
Atlantic performs in all material respects all obligations required to be
performed under the merger agreement prior to the effective time of the
merger and delivers to Summit a certificate of its chief executive officer
and chief financial to that effect;
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Summit
shall have received an opinion of Hunton & Williams, special counsel
to Summit, dated as of the effective time of the merger, that the merger
constitutes a “reorganization” under Section 368 of the Internal Revenue
Code;
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·
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Greater
Atlantic and its subsidiary, Greater Atlantic Bank, must have minimum
regulatory capital ratios of: Tier 1 (core) capital equal to
4.0%, Tier 1 risk-based capital equal to 4.0% and total risk-based capital
equal to 8.0%;
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·
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Greater
Atlantic Bank’s ratio of the sum of non-performing loans, other real
estate owned and net loans charged off after March 31, 2008, to total
consolidated assets must not exceed
2.78%;
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Greater
Atlantic’s allowance for loan losses must be adequate in accordance with
generally accepted accounting principles and applicable regulatory
guidance, as determined by Summit with the concurrence of independent
accountants retained by Greater Atlantic to review this
determination;
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All
consents or approvals of any third party required to be made or obtained
by Greater Atlantic or Greater Atlantic Bank in connection with the
assignment of any real property lease must be obtained and
satisfactory to Summit; and
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No
regulatory authority shall have issued any order, decree, agreement,
memorandum of understanding, administrative action or similar arrangement
with, or commitment letter or similar submission to, or extraordinary
supervisory letter from such regulatory authority relating to Greater
Atlantic or its subsidiaries that remains in effect after the closing of
the merger.
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In
addition to the mutual covenants described above, Greater Atlantic’s obligation
to complete the merger is subject to the satisfaction, unless waived, of the
following other conditions:
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·
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The
representations and warranties of Summit made in the merger agreement are
true and correct as of the date of the merger agreement and as of the
effective time of the merger and Greater Atlantic receives a certificate
of the chief executive officer and chief financial officer of Summit to
that effect; and
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·
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Summit
performs in all material respects all obligations required to be performed
under the merger agreement prior to the effective time of the merger and
delivers to Greater Atlantic a certificate of its chief executive officer
and chief financial officer to that
effect.
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Representations
and Warranties
The
merger agreement contains representations and warranties by Summit and Greater
Atlantic. These representations and warranties are qualified by a
materiality standard, which means that Summit or Greater Atlantic is not in
breach of a representation or warranty unless the existence of any fact, event
or circumstance, individually, or taken together with other facts, events or
circumstances has had or is reasonably likely to have a material adverse effect
on Summit or Greater Atlantic. These include, among other things,
representations and warranties by Summit and Greater Atlantic to each other as
to:
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organization
and good standing of each entity and its
subsidiaries;
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each
entity’s capital structure;
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·
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each
entity’s authority relative to the execution and delivery of, and
performance of its obligations under, the merger
agreement;
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absence
of material adverse changes since September 30, 2007, or December 31,
2007, for Greater Atlantic and Summit,
respectively;
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consents
and approvals required;
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regulatory
matters;
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accuracy
of documents, including financial statements and other reports, filed by
each company with the Securities and Exchange Commission (the
“SEC”);
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absence
of defaults under contracts and
agreements;
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absence
of environmental problems;
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absence
of conflicts between each entity’s obligations under the merger agreement
and its charter documents and contracts to which it is a party or by which
it is bound;
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litigation
and related matters;
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taxes
and tax regulatory matters;
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compliance
with the Sarbanes-Oxley Act and accounting
controls;
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absence
of brokerage commissions, except as disclosed for financial
advisors;
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employee
benefit matters;
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books
and records fully and accurately maintained and fairly present events and
transactions; and
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insurance
matters.
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In
addition, Greater Atlantic represents and warrants to Summit that, except as
disclosed to the other party, neither Greater Atlantic nor any of its
subsidiaries are parties to any interest rate swaps, caps, floors, option
agreements, futures and forward contract and other similar risk
management agreements. Summit represents and warrants to Greater
Atlantic that Summit has taken all action to exempt the merger agreement and the
merger from the requirements of takeover laws and has sources of capital to pay
the cash consideration and to effect the merger.
Termination
of the Merger Agreement
The
merger agreement may be terminated at any time prior to the closing in any of
the following ways.
The
merger agreement may be terminated by mutual written consent of Greater Atlantic
and Summit.
The
merger agreement may be terminated by either Greater Atlantic or Summit
if:
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•
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the
approval of any governmental entity required for consummation of the
merger is denied by a final nonappealable action of such governmental
entity;
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•
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the
conditions to the consummation of the merger (other than receipt of
regulatory approvals and the approval of Greater Atlantic’s shareholders
and Summit’s
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shareholders,
if the assumption of Greater Atlantic’s trust preferred securities by
Summit requires Summit to obtain shareholder approval to amend Summit’s
Articles of Incorporation) have not been fulfilled by September 30, 2008,
unless the failure of the fulfillment of such conditions arises out of or
results from the knowing action or inaction of the party seeking to
terminate;
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•
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the
merger has not been completed on or before December 31, 2008, unless the
failure of the merger to be consummated arises out of or results from the
knowing action or inaction of the party seeking to
terminate;
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•
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there
has been a breach by the other party of any of its obligations under the
merger agreement, which breach cannot be or has not been cured within 30
days following written notice to the breaching party of such breach and
provided that with respect to any breach of the covenants and agreements
relating to (i) the filing of the registration statement on Form S-4 with
the SEC, (ii) the issuance of press releases relating to the
merger, (iii) benefit plans and (iv) contractual rights of Greater
Atlantic’s and its subsidiaries’ employees, such breach individually or in
the aggregate with other breaches results in a material adverse effect;
or
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•
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the
merger agreement is not approved by the shareholders of Greater Atlantic
or the shareholders of Summit do not approve an amendment to Summit’s
Articles of Incorporation (if required by Summit for the assumption of
Greater Atlantic’s trust preferred
securities).
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The
merger agreement may be terminated by Summit if Greater Atlantic’s board of
directors fails to recommend the merger or withdraws, modifies or changes such
recommendation in a manner adverse to Summit.
The
merger agreement may be terminated by Greater Atlantic, if the Greater Atlantic
board of directors determines that Greater Atlantic has received an unsolicited
proposal that if consummated would result in a transaction more favorable to
Greater Atlantic’s shareholders from a financial point of view, provided
that Summit does not make a counteroffer that is at least as favorable to the
other proposal and Greater Atlantic pays the termination fee described
below.
Effect
of Termination; Termination Fee
The
provisions of the merger agreement relating to expenses and termination fees
will continue in effect not withstanding termination of the merger agreement.
If the merger agreement is validly terminated, the merger agreement will
become void without any liability on the part of any party except termination
will not relieve a breaching party from liability for any willful breach of the
merger agreement.
Greater
Atlantic has agreed to pay a cash termination fee to Summit equal to $550,000
if:
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the
merger agreement is terminated for failure to obtain the approval of
Greater Atlantic’s shareholders, and before such time a competing
acquisition proposal for Greater Atlantic has been made public and not
withdrawn; or
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·
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Greater
Atlantic terminates the merger agreement to accept a proposal by a third
party that it believes is superior to Summit’s offer set forth in the
merger agreement.
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This
termination fee would be payable as follows: (i) $150,000 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)
$200,000 on the date that is three (3) years after the termination
date.
Greater
Atlantic also has agreed to pay a cash termination fee to Summit equal to
$250,000 if:
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the
merger agreement is terminated because Greater Atlantic’s board fails to
recommend, withdraws, modifies, or changes its recommendation of the
merger before the special meeting;
or
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·
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Summit
terminates the merger agreement due to a breach by Greater Atlantic of any
representation, warranty, covenant or other
agreement.
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This
termination fee would be payable no later than two (2) business days after the
date of termination.
Waiver
and Amendment
Prior to
the effective time of the merger, any provision of the merger agreement may be
waived by the party benefiting by the provision or amended or modified by an
agreement in writing between the parties, except that, after the special
meeting, the merger agreement may not be amended if it would violate the
Delaware General Corporation Law or the West Virginia Business Corporation
Act.
Indemnification
Summit
has agreed to indemnify the directors, officers and employees of Greater
Atlantic for a period of three (3) years from the effective time of the merger
to the fullest extent that Greater Atlantic is permitted or required to
indemnify (and advance expenses to) its directors, officers and employees under
the laws of the State of Delaware and Greater Atlantic’s Articles of
Incorporation and Bylaws.
Acquisition
Proposals
Greater
Atlantic has agreed that it will not, and that it will cause its officers,
directors, agents, advisors, and affiliates not to: solicit or encourage
inquiries or proposals with respect to engage in any negotiations concerning, or
provide any confidential information to any person relating to
any proposal to acquire the stock or assets of Greater Atlantic or
other business combination transactions with Greater Atlantic, unless the
Greater Atlantic board of directors concludes in good faith, after consultation
with and consideration of the advice of outside counsel, that the failure to
enter into such discussions or negotiations or resolving to accept such
acquisition proposal, would constitute a breach of its fiduciary duties to
shareholders under applicable law. If the board of directors of
Greater Atlantic is obligated by its fiduciary duties to accept a third party
proposal that it believes is superior to Summit’s offer set forth in the merger
agreement, Greater Atlantic is obligated to pay to Summit the termination fee
equal to $550,000. See “Effect of Termination; Termination
Fee” beginning on page 61.
Closing
Date; Effective Time
The
merger will be consummated and become effective upon the issuance of a
certificate of merger by the West Virginia Secretary of State and the Delaware
Division of Corporations (or on such other date as may be specified in the
articles of merger to be filed with the West Virginia Secretary of State and the
Delaware Division of Corporations). Unless otherwise agreed to by
Summit or Greater Atlantic, the closing of the merger will take place on the
fifth business day to occur after the last of the conditions to the merger has
been satisfied or waived, or such other date to which Summit and Greater
Atlantic agree in writing.
Regulatory
Approvals
The
merger and the other transactions contemplated by the merger agreement require
the approval of the Federal Reserve Board. As a bank holding company,
Summit is subject to regulation under the Bank Holding Company Act of
1956. Greater Atlantic Bank is a federally-chartered savings bank,
regulated by the Office of Thrift Supervision. Summit Community Bank
is a West Virginia banking corporation, is a non-member bank and is subject to
the State Banking Code of West Virginia. Summit has filed all
required applications seeking approval of the merger with the Federal
Reserve.
Under the
Bank Holding Company Act, the Federal Reserve Board is required to examine the
financial and managerial resources and future prospects of the combined
organization and analyze the capital structure and soundness of the resulting
entity. The Federal Reserve Board has the authority to deny an
application if it concludes that the combined organization would have inadequate
capital. In addition, the Federal Reserve Board can withhold approval
of the merger if, among other things, it determines that the effect of the
merger would be to substantially lessen competition in the relevant
market. Further, the Federal Reserve must consider whether the
combined organization meets the requirements of the Community Reinvestment Act
of 1977 by assessing the involved entities’ records of meeting the credit needs
of the local communities in which they operate, consistent with the safe and
sound operation of such institutions. The Federal Reserve has ninety
(90) days from the date of filing the application to act on the
application.
On
October 2, 2007, Summit filed an application with the Federal Reserve seeking
approval of the merger agreement by and between Summit and Greater Atlantic
dated April 12, 2007, as amended on December 6, 2007 (the “2007 Merger
Agreement”). On December 18, 2007, Summit requested the Federal
Reserve to suspend processing of the application until the staff of the Federal
Reserve and Summit consented to the continuation of the processing of the
application. Summit made that request in order to gain sufficient
time to respond to the Federal Reserve’s request for additional information and
to provide sufficient time for the Federal Reserve to review the application
within the Federal Reserve’s established ninety (90) day processing
period.
On April
4, 2008, Summit terminated the 2007 Merger Agreement pursuant to Section 9.01(c)
which provides that either party may terminate the 2007 Merger Agreement if it
is not consummated by March 31, 2008. At the time of termination,
Summit had not received approval of the merger from the Federal
Reserve.
After
Summit entered into the new merger agreement with Greater Atlantic dated June 9,
2008, Summit contacted the Federal Reserve to determine whether Summit would be
permitted to amend its original application filed with the Federal
Reserve. The Federal Reserve advised Summit that it would be
permitted to amend its original application. The Federal Reserve by
letter dated July 2, 2008, has requested additional information to process the
application. Summit intends to provide the Federal Reserve with the
requested additional information prior to July 15, 2008, the deadline set by the
Federal Reserve. The
merger cannot be consummated prior to receipt of all required
approvals. There can be no assurance that required regulatory
approvals for the merger will be obtained and, if the merger is approved, as to
the date of such approvals or whether the approvals will contain any
unacceptable conditions. Summit and Greater Atlantic are not aware of
any governmental approvals or actions that may be required for consummation of
the merger other than as described above. Should any other approval
or action be required, it is presently contemplated that such approval or action
would be sought. There can be no assurance that any necessary
regulatory approvals or actions will be timely received or taken, that no action
will be brought challenging such approval or action or, if such a challenge is
brought, as to the result thereof, or that any such approval or action will not
be conditioned in a manner that would cause the parties to abandon the
merger.
The
approval of any application merely implies the satisfaction of regulatory
criteria for approval, which does not include review of the merger from the
standpoint of the adequacy of the cash consideration or the exchange ratio for
converting Greater Atlantic common stock to Summit common
stock. Furthermore, regulatory approvals do not constitute an
endorsement or recommendation of the merger.
Conduct
of Business Pending the Merger
The
merger agreement contains reciprocal forbearances made by Greater Atlantic and
Summit to each other. Greater Atlantic and Summit have agreed that,
until the effective time of the merger, each of them and each of their
subsidiaries, without the prior written consent of the other, will
not:
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·
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Conduct
business other than in the ordinary and usual course or fail to use
reasonable efforts to preserve intact their business organizations and
assets, or take any action reasonably likely to have an adverse effect
upon its ability to perform any of its material obligations under the
merger agreement;
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·
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Except
as required by applicable law or regulation, implement or adopt any
material change in its interest rate or other risk management policies,
practices or procedures, fail to follow existing policies or practices
with respect to managing exposure to interest
rate
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and
other risks, or fail to use commercially reasonable means to avoid any
material increase in its aggregate exposure to interest rate risk;
or
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·
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Take
any action while knowing that such action would, or is reasonably likely
to, prevent or impede the merger from qualifying as a merger within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
or knowingly take any action that is intended or is reasonably likely to
result in any of its representations and warranties set forth in the
merger agreement being or becoming untrue in any material respect at any
time at or prior to the effective time, any of the conditions to the
merger not being satisfied, or a material violation of any provision of
the merger agreement except, in each case, as may be required by
applicable law or regulation.
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Greater
Atlantic has also agreed that, prior to the effective time, without the prior
written consent of Summit, it will not:
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·
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Other
than pursuant to rights previously disclosed to Summit and outstanding on
the date of the merger agreement, issue, sell or otherwise permit to
become outstanding, or authorize the creation of, any additional shares of
Greater Atlantic common stock or any rights to purchase Greater Atlantic
common stock, enter into any agreement with respect to the foregoing, or
permit any additional shares of Greater Atlantic common stock to become
subject to new grants of employee or director stock options, other rights
or similar stock-based employee
rights;
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·
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Make,
declare, pay or set aside for payment any dividend on or in respect of, or
declare or make any distribution on, any shares of Greater Atlantic stock
or directly or indirectly adjust, split, combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital
stock;
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Enter
into or amend or renew any employment, consulting, severance or similar
agreements or arrangements with any director, officer or employee of
Greater Atlantic or its subsidiaries, or grant any salary or wage increase
or increase any employee benefit (including incentive or bonus payments),
except for (i) normal individual payments of incentives and bonuses to
employees in the ordinary course of business consistent with past
practice, not to exceed $10,000 in the aggregate, (ii) normal individual
payment of incentives and bonuses to employees under Greater Atlantic
Bank’s branch incentive plan, not to exceed $30,000 per quarter in the
aggregate, (iii) normal individual increases in compensation to employees
in the ordinary course of business consistent with past practices, (iv)
other changes required by applicable law, (v) to satisfy previously
disclosed contractual obligations, and (vi) grants of awards to newly
hired employees consistent with past
practices;
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·
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Enter
into, establish, adopt or amend (except as may be required by
applicable law or to satisfy previously disclosed contractual obligations
existing as of the date of the merger agreement) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement (or similar arrangement) related thereto, in respect of any
director, officer or employee of Greater Atlantic or its subsidiaries, or
take any action to accelerate the vesting or exercisability of stock
options, restricted stock or other compensation or benefits payable
thereunder;
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·
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Except
as previously disclosed to Summit, sell, transfer, mortgage, encumber or
otherwise dispose of or discontinue any of its assets, deposits, business
or properties
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except
in the ordinary course of business and in a transaction that is not
material to it and its subsidiaries taken as a
whole;
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·
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Except
as previously disclosed to Summit, 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;
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Amend
Greater Atlantic’s certificate of incorporation or bylaws or the
articles of incorporation or bylaws (or similar governing documents) of
any of Greater Atlantic’s
subsidiaries;
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·
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Implement
or adopt any change in its accounting principles, practices or methods,
other than as may be required by generally accepted accounting
principles;
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·
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Except
in the ordinary course of business consistent with past practice, enter
into or terminate any material contract or amend or modify in any material
respect any of its existing material
contracts;
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·
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Except
in the ordinary course of business consistent with past practice, settle
any claim, action or proceeding, except for any claim, action or
proceeding that does not involve precedent for other material claims,
actions or proceedings and that involve solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material to Greater Atlantic and its subsidiaries, taken as a
whole;
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·
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Make
any loans in a principal amount in excess of $750,000, or make any loans
outside the District of Columbia, Delaware, Maryland, Pennsylvania,
Virginia and West Virginia;
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·
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Incur
any indebtedness for borrowed money other than in the ordinary course of
business; or
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·
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Agree
or commit to do any of the
foregoing.
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Summit
has agreed that, prior to the effective time, without the prior written consent
of Greater Atlantic, it will not:
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Make,
declare, pay or set aside for payment any extraordinary dividend;
or
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·
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Agree
or commit to do any of the
foregoing.
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Accounting
Treatment
The
merger will be accounted for under the “purchase” method of
accounting. Under the purchase method of accounting, the tangible
assets and liabilities of Greater Atlantic, as of the completion of the merger,
will be recorded at their fair values as well as any identifiable intangible
assets. Any remaining excess purchase price will be allocated to
goodwill and will not be amortized. Instead, goodwill is evaluated
for impairment annually. Financial statements of Summit issued after
the consummation of the merger will reflect such values and will not be restated
retroactively to reflect the historical position or results of operations of
Greater Atlantic. The operating results of Greater Atlantic will be
reflected in Summit’s consolidated financial statements from and after the date
the merger is consummated.
Management and Operations after the
Merger
Board of
Directors. The current board of directors of Summit will
continue to serve as the board of directors after the merger.
Management. The
current executive officers of Summit will continue to serve as executive
officers after the Merger.
Resales
of Summit Common Stock
The
shares of Summit common stock to be issued to shareholders of Greater Atlantic
under the merger agreement have been registered under the Securities Act of 1933
and may be freely traded without restriction by holders, including holders
who were affiliates of Greater Atlantic on the date of the special
meeting. All directors and executive officers of Greater Atlantic are
considered affiliates of Greater Atlantic for this purpose.
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
General
The
following summary sets forth the material U.S. federal income tax consequences
of the merger to the holders of Greater Atlantic common stock who exchange such
stock for Summit common stock and cash in lieu of fractional shares or pursuant
to an exercise of dissenters’ rights. The tax consequences under
state, local and foreign laws are not addressed in this summary. The
following summary is based upon the Internal Revenue Code of 1986, as amended,
Treasury regulations, administrative rulings and court decisions in effect as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Such a change could affect the continuing validity of this
summary. No assurance can be given that the Internal Revenue Service
would not assert, or that a court would not sustain, a position contrary to any
of the tax consequences set forth below.
The
following summary addresses only shareholders who are citizens or residents of
the United States who hold their Greater Atlantic common stock as a capital
asset. It does not address all the tax consequences that may be
relevant to particular shareholders in light of their individual circumstances
or to shareholders that are subject to special rules, including, without
limitation: financial institutions; tax-exempt organizations; S corporations,
partnerships or other pass-through entities (or an investor in an S corporation,
partnership or other pass-through entities); trusts and estates; insurance
companies; mutual funds; real estate investment trusts; regulated investment
companies; dealers in stocks or securities, or foreign currencies; foreign
holders; United States expatriates; a trader in securities who elects the
mark-to-market method of accounting for the securities; persons that hold shares
as a hedge against currency risk, a straddle or a constructive sale or
conversion transaction; holders who acquired their shares pursuant to the
exercise of employee stock options or otherwise as compensation or through a
tax-qualified retirement plan; holders of Greater Atlantic stock options, stock
warrants or debt instruments; and holders subject to the alternative minimum
tax.
The
Merger
No ruling
has been, or will be, sought from the Internal Revenue Service as to the U.S.
federal income tax consequences of the merger. Consummation of the
merger is conditioned upon Summit’s receiving an opinion from Hunton &
Williams LLP to the effect that, based upon facts, representations and
assumptions set forth in such opinions, the merger constitutes a reorganization
within the meaning of Section 368 of the Internal Revenue Code. The
issuance of the opinion is conditioned on, among other things, such tax
counsel’s receipt of representation letters from each of Greater Atlantic
or Summit, in
each case
in form and substance reasonably satisfactory to such
counsel. Opinions of counsel are not binding on the Internal Revenue
Service.
Based
upon the above assumptions and qualifications, for U.S. federal income tax
purposes the merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code. Each of Greater Atlantic
and Summit will be a party to the merger within the meaning of Section
368(b) of the Internal Revenue Code, and neither of Greater Atlantic
or Summit will recognize any gain or loss as a result of the
merger.
Consequences
to Shareholders
Exchange of Greater Atlantic Common Stock for Summit Common Stock. A
holder of Greater Atlantic common stock who exchanges his or her Greater
Atlantic common stock actually owned solely for common stock of Summit pursuant
to the merger will not recognize gain or loss on the exchange (except with
respect to the receipt of cash in lieu of a fractional share of Summit common
stock). The holder’s aggregate tax basis in the Summit common stock
received (reduced by any amount allocable to fractional shares for which cash is
received) will be equal to the aggregate tax basis in the Greater Atlantic
common stock exchanged for such Summit common stock. The holding
period of the Summit common stock received by such holder in the merger will
include the period for which the Greater Atlantic common stock surrendered in
the exchange therefor was considered to be held, provided the Greater Atlantic
common stock surrendered is held as a capital asset at the time of the
merger.
Cash in Lieu of Fractional Shares.
Holders of Greater Atlantic common stock who receive cash in lieu of
fractional shares of Summit common stock in the merger generally will be treated
as if the fractional shares of Summit common stock had been distributed to them
as part of the merger, and then redeemed by Summit in exchange for the cash
actually distributed in lieu of the fractional shares, with the redemption
generally qualifying as an “exchange” under Section 302 of the Internal Revenue
Code. Consequently, those holders generally will recognize capital
gain or loss with respect to the cash payments they receive in lieu of
fractional shares measured by the difference between the amount of cash received
and the tax basis allocated to the fractional shares. Any capital
gain recognized by any holder of Greater Atlantic common stock as a result of
the receipt of cash in lieu of fractional shares of Summit common stock under
the above discussion will be long-term capital gain if the holder has held the
Greater Atlantic common stock for more than twelve months at the time of the
exchange. In the case of a non-corporate holder, that long-term
capital gain may be subject to a maximum federal income tax of
15%. The deductibility of capital losses by shareholders may be
limited.
Cash Pursuant to an Exercise of
Dissenters’ Rights. Holders of Greater Atlantic common stock
who receive cash pursuant to an exercise of dissenters’ rights will recognize
gain or loss with respect to the cash payments received measured by the
difference between the amount of cash received and the holder’s tax basis of the
Greater Atlantic common stock. Generally, this gain or loss will be
capital gain or loss. Any capital gain will be long-term capital gain
if the holder has held the Greater Atlantic common stock for more than twelve
months at the time of the exchange and, in the case of a non-corporate holder,
the long-term capital gain may be subject to a maximum federal income tax of
15%. The deductibility of capital losses by shareholders may be
limited.
Backup
Withholding and Reporting Requirements
Holders
of Greater Atlantic common stock, other than certain exempt recipients, may be
subject to backup withholding at a rate of 28% with respect to any cash payment
received in the merger. However, backup withholding will not apply to
any holder who either (a) furnishes a correct taxpayer identification
number and certifies that he or she is not subject to backup withholding by
completing the substitute Form W-9 that will be included as part of the election
form and the transmittal letter, or
(b) otherwise
proves to Summit and its exchange agent that the holder is exempt from backup
withholding.
In
addition, holders of Greater Atlantic common stock are required to retain
permanent records and make such records available to any authorized Internal
Revenue Service officers and employees. The records should include
the number of shares of Greater Atlantic stock exchanged, the number of shares
of Summit stock received, the fair market value of Greater Atlantic shares
exchanged, and the holder’s adjusted basis in the Summit common stock
received.
If a
holder of Greater Atlantic common stock who exchanges such stock for Summit
common stock is a “significant holder” with respect to Greater Atlantic, the
holder is required to include a statement with respect to the exchange on or
with the federal income tax return of the holder for the year of the
exchange. A holder of Greater Atlantic common stock will be treated
as a significant holder in Greater Atlantic if the holder’s ownership interest
in Greater Atlantic is five percent (5%) or more of Greater Atlantic’s issued
and outstanding common stock or if the holder’s basis in the shares of Greater
Atlantic stock exchanged is one million dollars ($1,000,000) or
more. The statement must be prepared in accordance with Treasury
Regulation Section 1.368-3 and must be entitled “STATEMENT PURSUANT TO §1.368-3
BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A
SIGNIFICANT HOLDER”. The statement must include the names and
employer identification numbers of Greater Atlantic and Summit, the date of the
merger, and the fair market value and tax basis of Greater Atlantic shares
exchanged (determined immediately before the merger).
The
discussion of U.S. federal income tax consequences set forth above is for
general information only and does not purport to be a complete analysis or
listing of all potential tax effects that may apply to a holder of Greater
Atlantic common stock. We strongly encourage shareholders of Greater
Atlantic to consult their tax advisors to determine the particular tax
consequences to them of the merger, including the application and effect of
federal, state, local, foreign and other tax laws.
INFORMATION
ABOUT
SUMMIT
FINANCIAL GROUP, INC. AND
GREATER
ATLANTIC FINANCIAL CORP.
Summit
Financial Group, Inc.
Summit is
a West Virginia corporation registered as a bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended. Summit was incorporated
on March 3, 1987, organized on March 5, 1987, and began conducting business on
March 5, 1987. At December 31, 2007, Summit has one banking
subsidiary “doing business” under the name of Summit Community
Bank. Summit Community Bank offers a full range of commercial and
retail banking services and products.
As a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, Summit’s present business is community banking. As of March 31,
2008, Summit’s consolidated assets approximated $1.5 billion and total
shareholders’ equity approximated $92.0 million. At March 31, 2008,
Summit’s loan portfolio, net of unearned income, was $1.1 billion million and
its deposits were $836.9 million.
The principal executive offices of
Summit are located in Moorefield, West Virginia at 300 North Main
Street. The telephone number for Summit’s principal executive offices
is (304) 530-1000. Summit operates 15 full service offices - 9
located throughout West Virginia and 6 throughout Northern Virginia and the
Shenandoah Valley.
Greater
Atlantic Financial Corp.
Greater
Atlantic is a savings and loan holding company organized under the laws of the
State of Delaware and is registered under the federal Home Owners’ Loan
Act. It has one subsidiary, Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
banks make are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
Effective
April 25, 2008, Greater Atlantic Bank consented to the issuance of a cease and
desist order by the Office of Thrift Supervision. See “CEASE AND
DESIST ORDER APPLICABLE TO GREATER ATLANTIC BANK.”
As of
March 31, 2008, Greater Atlantic reported, on a consolidated basis, total assets
of approximately $230.4 million, net loans of $159.7 million, deposits of $188.8
million and shareholders’ equity of $3.3 million.
The
principal executive offices of Greater Atlantic Financial Corp. are located at
10700 Parkridge Boulevard, Reston, Virginia 20191, telephone number
(703) 391-1300.
SUMMIT
FINANCIAL GROUP COMMON STOCK
General
The
authorized capital stock of Summit consists of 20 million shares of common
stock, par value $2.50 per share, and 250,000 shares of preferred stock, $1.00
par value per share. Summit has 7,084,941 shares of common stock
issued (including no shares held as treasury shares) and no shares of preferred
stock, as of March 31, 2008. The outstanding shares of common stock
are held by 1,302 shareholders of record, as well as 1,026 shareholders in
street name as of March 31, 2008. All outstanding shares of Summit
common stock are fully paid and nonassessable. The unissued portion
of Summit’s authorized common stock (subject to registration approval by the
SEC) and any treasury shares are available for issuance as the board of
directors of Summit determines advisable.
In 1998,
Summit has also established a stock option plan as incentive for certain
eligible officers. It had 337,580 stock options issued and
outstanding as of March 31, 2008. The plan expired in May
2008.
Common
Stock
Voting Rights. All
voting rights are vested in the holders of Summit common stock. On
all matters subject to a vote of shareholders, the shareholders of Summit will
be entitled to one vote for each share of common stock
owned. Shareholders of Summit have cumulative voting rights with
regard to election of directors.
Dividend
Rights. The shareholders of Summit are entitled to receive
dividends when and as declared by its board of directors. Dividends
have been paid semi-annually. Summit paid a dividend of $0.18 per
share in the first half of 2008. Dividends were $0.34 per
share in 2007, $0.32 per share in 2006, and $0.30 per share in
2005. The payment of dividends is subject to the restrictions set
forth in the West Virginia Corporation Act and the limitations imposed by the
Federal Reserve Board.
Payment
of dividends by Summit depends upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s state non-member banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (“FDIC”)
and the West Virginia Division of Banking and generally, the prior approval of
the FDIC is required if the total dividends declared by a state non-member bank
in any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two
years. Additionally, prior approval of the FDIC is required when a
state non-member bank has deficit retained earnings but has sufficient current
year’s net income, as defined, plus the retained net profits of the two
preceding years. The FDIC may prohibit dividends if it deems the
payment to be an unsafe or unsound banking practice. The FDIC has
issued guidelines for dividend payments by state non-member banks emphasizing
that proper dividend size depends on the bank’s earnings and
capital.
Liquidation
Rights. Upon any liquidation, dissolution or winding up of its
affairs, the holders of Summit common stock are entitled to receive pro rata all
of the assets of Summit for distribution to shareholders. There are
no redemption or sinking fund provisions applicable to the common
stock.
Assessment and
Redemption. Shares of Summit common stock presently
outstanding are validly issued, fully paid and nonassessable. There
is no provision for any voluntary redemption of Summit common
stock.
Transfer Agent and
Registrar. The transfer agent and registrar for Summit’s
common stock is Registrar and Transfer Company.
Preemptive Rights
No holder
of any share of the capital stock of Summit has any preemptive right to
subscribe to an additional issue of its capital stock or to any security
convertible into such stock.
|
Certain
Provisions of the Bylaws
|
|
Indemnification
and Limitations on Liability of Officers and Directors
As
permitted by the West Virginia Business Corporation Act, the articles of
incorporation of Summit contain provisions that indemnify its directors and
officers to the fullest extent permitted by West Virginia law. These
provisions do not limit or eliminate the rights of Summit or any shareholder to
seek an injunction or any other non-monetary relief in the event of a breach of
a director’s or officer’s fiduciary duty. In addition, these
provisions apply only to claims against a director or officer arising out of his
role as a director or officer and do not relieve a director or officer from
liability if he engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
In
addition, the articles of incorporation of Summit provide for the
indemnification of both directors and officers for expenses that they incur in
connection with the defense or settlement of claims asserted against them in
their capacities as directors and officers. This right of
indemnification extends to judgments or penalties assessed against
them. Summit has limited its exposure to liability for
indemnification of directors and officers by purchasing directors and officers
liability insurance coverage.
The
rights of indemnification provided in the articles of incorporation of Summit
are not exclusive of any other rights that may be available under any insurance
or other agreement, by vote of shareholders or disinterested directors or
otherwise.
Shares
Eligible for Future Sale
All of
the shares that will be exchanged for shares of Summit common stock upon
consummation of the merger will be freely tradable without restriction or
registration under the Securities Act.
Summit
cannot predict the effect, if any, that future sales of shares of its common
stock, or the availability of shares for future sales, will have on the market
price prevailing from time to time. Sales of substantial amounts of
shares of our common stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the shares.
COMPARATIVE
RIGHTS OF SHAREHOLDERS
The
rights of Summit’s shareholders are governed by the West Virginia Business
Corporation Act and the rights of Greater Atlantic’s shareholders are governed
by the Delaware General Corporation Law. The rights of shareholders
under both corporations are also governed by their respective
articles/certificate of incorporation and bylaws. Following the
merger, the rights of Greater Atlantic’s shareholders will be governed by the
articles of incorporation and bylaws of Summit and by the West Virginia Business
Corporation Act. This summary does not purport to be a complete
discussion of, and is qualified in its entirety by reference to, Greater
Atlantic’s articles of incorporation and bylaws, Summit’s articles of
incorporation and bylaws and West Virginia and Delaware law.
Authorized
Capital Stock
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
20,000,000
shares of common stock, $2.50 par value per share, and 250,000 shares of
preferred stock, $1.00 par value per share.
|
10,000,000
shares of common stock, $0.01 par value per share, and 2,500,000 shares of
preferred stock, no par value per
share.
|
Size
of Board of Directors
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
bylaws provide that the board of directors shall consist of at least 9 and
no more than 21 directors. Summit’s board of directors
currently consists of 16 individuals, and immediately following the merger
will consist of 16 individuals.
|
The
bylaws of Greater Atlantic provide that the number of directors shall be
such number as the majority of the whole board shall from time to time
have designated, and in the absence of such designation, shall be
5. The board currently consists of 5 directors.
|
Cumulative
Voting for Directors
Cumulative
voting entitles each shareholder to cast an aggregate number of votes equal to
the number of voting shares held, multiplied by the number of directors to be
elected. Each shareholder may cast all of his or her votes for one
nominee or distribute them among two or more nominees, thus permitting holders
of less than a majority of the outstanding shares of voting stock to achieve
board representation. Where cumulative voting is not permitted,
holders of all outstanding shares of voting stock of a corporation elect the
entire board of directors of the corporation, thereby precluding the election of
any directors by the holders of less than a majority of the outstanding shares
of voting stock.
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit
stockholders are allowed to cumulate their votes in the election of
directors. Each share of Summit stock may be voted for as many
individuals as there are directors to be elected. Directors are
elected by a plurality of the votes cast by the holders entitled to vote
at the meeting.
|
Greater
Atlantic stockholders may not cumulate their votes for the election of
directors. Directors are elected by a plurality of the votes
cast by the holders entitled to vote at the
meeting.
|
Classes
of Directors
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
articles of incorporation provide that the board of directors shall be
divided into three (3) classes, consisting of an equal number of directors
per class. The term of office of directors of one class shall
expire at each annual meeting of shareholders.
|
The
bylaws of Greater Atlantic provide that the board of directors shall be
divided into three classes, with one class elected at each annual
meeting.
|
Qualifications
of Directors
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
bylaws require that a person own a minimum of 2,000 shares of stock of
Summit to be qualified as a director.
|
None.
|
Filling
Vacancies on the Board
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
bylaws provide that each vacancy existing on the board of directors and
any directorship to be filled by reason of an increase in the number of
directors, unless the articles of incorporation or bylaws provide that a
vacancy shall be filled in some other manner, may be filled by the
affirmative vote of a majority of the remaining directors though less than
a quorum of the board of directors at a regular or special
meeting of the board of directors. Any directorship to be filled by reason
of a vacancy may be filled for the
unexpired term of his predecessor in office.
|
Greater
Atlantic’s bylaws provide that, unless the board of directors otherwise
determines, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, retirement, disqualify-cation, removal
from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have
been elected expires and until such director's successor shall have been
duly elected and qualified.
|
Removal
of Directors
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Under
West Virginia law, any member of the board may be removed, with or without
cause, by the affirmative vote of a majority of all the votes entitled to
be cast for the election of directors; provided, however, that a director
may not be removed if the number of votes sufficient to elect the director
under cumulative voting is voted against the director’s
removal.
|
Under
Delaware law, subject to the rights of preferred stockholders, any
director, or the entire board of directors, may be removed from office at
any time, but only for cause and only by the affirmative vote of at least
80% of the voting power of the then-outstanding shares of capital stock
entitled to vote generally in the election of directors voting together as
a single class.
|
Notice
of Shareholder Proposals and Director Nominations
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
articles of incorporation provide that shareholders may make a nomination
for director provided that such nomination or nominations must be made in
writing and delivered or mailed to, the President of Summit no later than
30 days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than thirty (30) days notice of
the meeting is given to shareholders, such nomination or
nominations shall be mailed or delivered to the President of
Summit no later than the fifth (5th) day following the day on which the
notice of meeting was mailed.
|
For
business to be properly brought before an annual meeting by a stockholder,
the business must relate to a proper subject matter for stockholder action
and the stockholder must have given timely notice thereof in writing to
the Secretary of Greater Atlantic. To be timely, a
stockholder's notice must be delivered or mailed to and received at the
principal executive offices of Greater Atlantic not less than ninety (90)
days prior to the date of the annual meeting; provided, however, that
in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than the
close of business on the 10th day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure was
made. A stockholder's notice to the Secretary shall set forth
as to each matter such stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address, as they appear
on Greater Atlantic’s books, of the stockholder proposing such business;
(iii) the class and number of shares of Greater Atlantic's capital stock
that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business.
Nominations
of persons for election to the board of directors may be made by any
stockholder entitled to vote for the election of directors at the meeting
if made by timely notice in writing to the Secretary of Greater
Atlantic. To be timely, a stockholder's notice shall be
delivered or mailed to and received at the principal executive offices of
Greater Atlantic not less than ninety (90) days prior to the date of the
meeting; provided,
however, that in the event that less than one hundred (100) days'
notice or prior disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 10th day
following
|
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
the
day on which such notice of the date of the meeting was mailed or such
public disclosure was made. Such stockholder's notice shall set
forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations
of proxies for election of directors, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); and
(ii) as to the stockholder giving the notice (x) the name and address, as
they appear on Greater Atlantic's books, of such stockholder and (y) the
class and number of shares of Greater Atlantic's capital stock that are
beneficially owned by such
stockholder.
|
Anti-Takeover
Provisions - Business Combinations
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
articles of incorporation provide that at least 66 2/3% of the authorized,
issued and outstanding voting shares of Summit must approve certain
“business combinations” unless the “business combination” has been
previously approved by at least 66 2/3% of the board of directors of
Summit, in which case only a simple majority vote of the shareholders
shall be required.
Summit’s
articles of incorporation additionally provide that neither Summit nor any
of its subsidiaries shall become a party to any “business combination”
unless certain fair price requirements are satisfied. West
Virginia corporate law does not contain statutory provisions concerning
restrictions on business combinations.
|
Greater
Atlantic’s certificate of incorporation provides that at least 80% of the
voting power of the then outstanding shares of voting stock must approve
certain “business combinations” involving an “interested stockholder.”
However, this vote requirement is not applicable to any particular
business combination, and such business combination shall require only the
vote of a majority of the outstanding shares of capital stock entitled to
vote, if a majority of directors not affiliated with the interested
stockholder approves the business combination, or certain price and
procedure requirements are met. An “interested stockholder” generally
means a person who is a greater than 10% stockholder of Greater Atlantic
or who is an affiliate of Greater Atlantic and at any time within the past
two years was a greater than 10% stockholder of Greater
Atlantic.
|
Shareholder Action Without a
Meeting
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
bylaws provide that any action required to be taken at a meeting of the
shareholders may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote on the matter at issue.
|
Under
Delaware law, unless limited by the certificate of incorporation, any
action that could be taken by shareholders at a meeting may be taken
without a meeting if a consent (or consents) in writing, setting forth the
action so taken, is signed by the holders of record of outstanding stock
having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled
to vote thereon were present and voted. Greater Atlantic’s certificate of
incorporation does not contain a provision limiting such
action.
|
Calling
Special Meetings of Shareholders
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Special
meetings of the shareholders may be called by the president or by the
board of directors, and shall be called by the President if the holders of
at least 10% of all the votes entitled to be cast on an issue to be
considered at the proposed special meeting sign, date and deliver to
Summit one or more written demands for the meeting describing the purpose
or purposes for which it shall be held.
|
Special
meetings of stockholders may be called only by the board of directors
pursuant to a resolution adopted by a majority of the total number of
directors which Greater Atlantic would have if there were no vacancies on
the board of directors.
|
Notice
of Meetings
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
bylaws require that the notice of annual and special meetings be given by
mailing to each shareholder a written notice specifying the time and place
of such meeting, and, in the case of special meetings, the business to be
transacted. The notice must be mailed to the last addresses of
the shareholders as they respectively appear upon the books of the Summit
not less than 10 nor more than 60 days before the date of such
meeting.
|
Greater
Atlantic’s bylaws provide that written notice of the place, date, and time
of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to
be held, to each stockholder entitled to vote at such meeting, except as
otherwise required by law (meaning, as required from time to time by the
Delaware General Corporation Law or the certificate of
incorporation).
|
Vote
Required for Amendments to Articles
of
Incorporation and Certain Transactions
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Summit’s
articles of incorporation require the affirmative vote of holders of at
least 66 2/3% of the then outstanding voting shares of Summit;
provided, however, such vote shall not be required for any such amendment,
change or repeal recommended to the stockholders by the favorable vote of
not less than 66 2/3% of the directors of Summit, and any such
amendment shall require only a majority vote.
West
Virginia law provides that on matters other than the election of directors
and certain extraordinary corporate actions, if a quorum is present, then
action on a matter is approved if the votes cast favoring the action
exceed the votes cast opposing the action, unless the vote of a greater
number is required by law or the articles of incorporation or
bylaws. The articles of incorporation or bylaws of Summit do
not require a greater number. An abstention is not considered a
“vote cast” for purposes of the voting requirements, but a stockholder who
abstains in person or by proxy is considered present for purposes of the
quorum requirement.
The
articles of incorporation of Summit provide that at least 66 2/3% of the
authorized, issued and outstanding voting shares of Summit must approve
any merger or consolidation of Summit with another corporation or any
sale, lease or exchange by liquidation or otherwise of all or
substantially all of the assets of Summit unless such transaction has been
previously approved by at least 66 2/3% of the board of directors in which
case a simple majority vote of the shareholders shall be
required.
|
Greater
Atlantic’s certificate of incorporation reserves the right to amend or
repeal any provision in the certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware; provided, however, that,
notwithstanding any other provision of the certificate of incorporation or
any provision of law which might otherwise permit a lesser vote or no
vote, the affirmative vote of the holders of at least 80% of the voting
power of all of the then-outstanding shares of the capital stock of the
corporation entitled to vote generally in the election of directors,
voting together as a single class, are required to amend or repeal certain
articles.
Delaware
law provides that any amendment to the certificate of incorporation must
first be proposed by the board of directors in a resolution setting forth
the proposed amendment, declaring its advisability and submitting it to
the stockholders entitled to vote on approval of the
amendment. It must then be submitted to the stockholders at the
next annual meeting, or at a special meeting called for the purpose of
considering the amendment or submitted for adoption by written consent.
The affirmative vote required is a majority of the outstanding shares
entitled to vote thereon.
|
Amendment
of Bylaws
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Under
West Virginia law both the board of directors and stockholders
have the power to amend the bylaws. Summit’s bylaws provide
that the bylaws may only be altered, amended or repealed and new bylaws
may only be adopted by the board of directors at a regular or special
meeting of the board of directors by a vote of three
|
The
bylaws of Greater Atlantic provide that the board of directors may amend,
alter or repeal the bylaws at any meeting of the board, provided notice of
the proposed change was given not less than two (2) days prior to the
meeting. The stockholders shall also have power to amend, alter
or repeal the bylaws at any meeting of
|
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
fourths
of the board of directors or by a majority of the
stockholders.
|
stockholders
provided notice of the proposed change was given in the notice of the
meeting, and provided there is the vote of at least 80% of the voting
power of all the then-outstanding shares of the voting stock, voting
together as a single class.
|
Appraisal
Rights
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
Under
West Virginia law, stockholders are generally entitled to object and
receive payment of the fair value of their stock in the event of any of
the following corporate actions: merger, transfer of all or
substantially all of the corporation’s assets, participation in a share
exchange as the corporation the stock of which is to be acquired, or an
amendment to the articles of incorporation that reduces the number of
shares of a class or series owned by stockholders to a fraction of a share
if the corporation has the obligation or right to repurchase the
fractional shares.
|
Delaware
law provides that stockholders of a corporation who are voting on a merger
or consolidation generally are entitled to dissent from the transaction
and obtain payment of the fair value of their shares (so-called “appraisal
rights”). Appraisal rights do not apply if, however, (1) the shares
are listed on a national securities exchange or are held by 2,000 or more
holders of record (not currently the case with respect to Greater
Atlantic’s common stock) and (2) except for cash in lieu of
fractional share interests, the shares are being exchanged for the shares
of the surviving corporation of the merger or the shares of any other
corporation, which shares of such other corporation will, as of the
effective date of the merger or consolidation, be listed on a national
securities exchange or be held of record by more than 2,000 holders.
Appraisal rights also are not available to a corporation’s stockholders
when the corporation will be the surviving corporation and a vote of its
stockholders is not required to approve the merger.
Delaware
law also provides that any corporation may provide in its certificate of
incorporation that appraisal rights shall be available in connection with
amendments to its certificate of incorporation, any merger to which the
corporation is a party or the sale of all or substantially all of the
corporation’s assets. Greater Atlantic’s certificate of
incorporation contains no such provision.
|
Dividends
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
A
West Virginia corporation generally may pay dividends in cash, property or
its own shares except when the corporation is unable to pay its debts as
they become due in the usual course of business or the corporation’s total
assets would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to be dissolved at the time
of the dividend, to satisfy any stockholders who have rights superior to
those receiving the dividend. Summit’s articles of
incorporation provide that preferred stock will not pay any
dividends.
|
Under
Delaware law, stockholders are entitled, when declared by the board of
directors, to receive dividends, subject to any restrictions contained in
the certificate of incorporation and subject to any rights or preferences
of any series of preferred stock. There are no express restrictions
regarding dividends in Greater Atlantic’s certificate of
incorporation.
|
Discharge
of Duties; Exculpation and Indemnification
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
West
Virginia law requires that a director of a West Virginia corporation
discharge duties as a director in good faith, in a manner reasonably
believed to be in the best interest of the corporation and with the care
that a person in a like position would reasonably believe
appropriate under similar circumstances. Summit’s articles of
incorporation provide that each director or officer of Summit shall be
indemnified for costs and expenses arising out of any civil suit or
proceeding against the director or officer by reason of being a director
or officer of Summit provided the director or officer acted in good faith
and in a manner which the director or officer reasonably believed to be in
or not opposed to the best interests of the corporation.
With
respect to any criminal proceeding, a director or officer shall be
entitled to indemnification if such person had no reasonable cause to
believe his or her conduct was unlawful.
However,
a director or officer shall not be indemnified if he or she is adjudged in
such suit or proceeding to be liable for gross negligence or willful
misconduct in performance of a duty owed to the
corporation.
|
The
Delaware General Corporation Law requires directors to discharge their
duties as a director in good faith, on an informed basis, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances, and in a manner reasonably believed to be in the best
interests of the corporation.
Delaware
law provides that a corporation may indemnify any director made party to
any proceeding by reason of service in that capacity if the person acted
in good faith and in a manner the person reasonably believed to be in the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Delaware
law also provides that a corporation may not indemnify a director in
respect to any claim, issue or matter as to which the director has been
adjudged to be liable to the corporation unless and only to the extent
that, the Court of Chancery or court where such action was brought
determines indemnity is proper. Furthermore, directors shall be
indemnified where they have been successful on the merits or
otherwise.
Greater
Atlantic’s certificate of incorporation provides that the corporation
shall indemnify
|
|
Summit
Financial Group, Inc.
|
Greater
Atlantic Financial Corp.
|
|
any
director made party to a proceeding because he or she is or was serving as
director against all expense, liability and loss to the fullest extent
authorized by Delaware law.
Greater
Atlantic’s certificate of incorporation also provides that a director
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director’s duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law; (iii) for unlawful payment of dividends or unlawful stock purchases
or redemption; or (iv) for any transaction from which the director derived
an improper personal benefit.
|
ADJOURNMENT
OF THE MEETING
In the
event that there are not sufficient votes to constitute a quorum or to approve
the matters to be considered at the time of the special meeting, the merger
agreement will not be approved unless the special meeting is adjourned to a
later date or dates in order to permit further solicitation of
proxies. In order to allow proxies that have been received at the
time of the meeting to be voted for an adjournment, if necessary, Greater
Atlantic is submitting the question of adjournment to its shareholders as a
separate matter for their consideration. The board of directors of
Greater Atlantic recommends that its shareholders vote FOR the adjournment
proposal. If it is necessary to adjourn a meeting, no notice of such
adjourned meeting is required to be given to the company’s shareholders, other
than an announcement at the special meeting of the place, date and time to which
the meeting is adjourned, if the meeting is adjourned for 30 days or
less.
The
board of directors of Greater Atlantic recommends that you vote “FOR” approval
of this proposal.
LEGAL
MATTERS
Hunton
& Williams LLP will opine as to the qualification of the merger as a
reorganization and the tax treatment of the consideration paid in connection
with the merger under the Internal Revenue Code. Bowles Rice McDavid
Graff & Love LLP has opined as to the legality of the common stock of Summit
offered by this proxy statement/prospectus. Bowles Rice McDavid Graff
& Love LLP rendered legal services to Summit and its subsidiaries during
2007 and it is expected that the firm will continue to render certain services
to both in the future. The fees paid to Bowles Rice McDavid Graff & Love LLP
represented less than 5% of Bowles Rice McDavid Graff & Love LLP’s and
Summit’s revenues for 2007.
EXPERTS
The
consolidated financial statements of Summit appearing in Summit’s Annual Report
(Form 10-K) for the year ended December 31, 2007, as amended on April 15,
2008 on Form 10-K/A, and Summit management’s assessment of effectiveness of
internal control over financial reporting as of December 31, 2007, included
therein, have been audited by Arnett & Foster P.L.L.C., independent
registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference. Such
consolidated financial statements and management’s assessment are incorporated
herein by reference in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
The
consolidated financial statements of Greater Atlantic and subsidiaries as of
September 30, 2007 and 2006, and for each of the three years in the period ended
September 30, 2007, attached to this proxy statement/prospectus and the
registration statement on Form S-4, as amended, as Annex D, have been
attached hereto and to the registration statement in reliance upon the report of
BDO Seidman, LLP, independent registered public accountants, and upon the
authority of BDO Seidman, LLP as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
Summit
has filed with the SEC under the Securities Act a registration statement on Form
S-4 to register the shares of Summit common stock to be issued to Greater
Atlantic’s shareholders in connection with the merger. The
registration statement, including the exhibits and schedules thereto, contains
additional relevant information about Summit and its common
stock. The rules and regulations of the SEC allow Summit and Greater
Atlantic to omit certain information included in the registration statement from
this proxy statement/prospectus. This proxy statement/prospectus is
part of the registration
statement
and is a prospectus of Summit with respect to its shares of common stock to be
issued in the Merger, in addition to being Greater Atlantic’s proxy statement
for its special meeting.
Both
Summit (File No. 0-16587) and Greater Atlantic (File No. 0-26467) file
reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934. You may read and copy this
information at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet web site that
contains reports, proxy statements and other information about issuers, like
Summit and Greater Atlantic, who file electronically with the
SEC. The address of that site is www.sec.gov. Each of
Summit and Greater Atlantic also posts its SEC filings on its web
site. The website addresses are www.summitfgi.com
and www.gab.com,
respectively. Information contained on the Summit website or the
Greater Atlantic website is not incorporated by reference into this proxy
statement/prospectus, and you should not consider information contained in its
website as part of this proxy statement/prospectus. You can also
inspect reports, proxy statements and other information that Summit and Greater
Atlantic have filed with the SEC at the Financial Industry Regulatory Authority,
1735 K Street, Washington, D.C. 20096.
The SEC
allows Summit to “incorporate by reference” information into this proxy
statement/prospectus. This means that we can disclose important
information to you by referring you to another document filed separately by
Summit with the SEC. The information incorporated by reference is
considered to be a part of this proxy statement/prospectus, except for any
information that is superceded by information that is included in this proxy
statement/prospectus.
This
proxy statement/prospectus incorporates by reference the documents listed below
that Summit previously filed with the SEC:
|
|
●
|
Quarterly
Report on Form 10-Q
|
Quarter
ended March 31, 2008.
|
|
|
|
|
●
|
Annual
Report on Form 10-K
|
Year
ended December 31, 2007, as amended on April 15,
2008.
|
|
|
●
|
Definitive
Proxy Materials for
|
Filed
on April 11, 2008.
|
|
|
the
2008 Annual Meeting of
|
|
|
|
Shareholders |
|
|
●
|
Current
Reports on Form 8-K
|
Filed
on February 5, 2008, April 10, 2008, April 25, 2008, and June 12,
2008.
|
Greater
Atlantic previously filed with the SEC the documents listed below which are
attached to this proxy statement/prospectus for your reference:
|
|
●
|
Annual
Report on Form 10-K
|
Year
ended September 30, 2007.
|
|
|
●
|
Quarterly
Reports on Form 10-Q
|
Quarter
ended December 31, 2007 and March 31,
2008.
|
|
Neither
Summit nor Greater Atlantic has authorized anyone to give any information or
make any representation about the merger or the companies that is different
from, or in addition to, that contained in this proxy statement/prospectus or in
any of the materials that we have incorporated into this proxy
statement/prospectus. Therefore, if anyone does give you information
of this sort, you should not rely on it. Information in this proxy
statement/prospectus about Summit has been supplied by Summit and information
about Greater Atlantic has been supplied by Greater Atlantic. The
information contained in
this
proxy statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another
date applies.
OTHER
MATTERS
The board
of directors knows of no other matters that may come before this
meeting. If any matters other than those referred to should properly
come before the meeting, it is the intention of the persons named in the
enclosed proxy to vote such proxy in accordance with their best
judgment.
By Order of the Board
of Directors
Edward C. Allen,
Secretary
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Under
Article X, Section I of its Articles of Incorporation, Summit is required
under certain circumstances to indemnify its directors and officers and
directors and officers of any majority or wholly owned subsidiary of Summit, for
claims and liabilities, including costs and expenses of defending
such claim or liability to which they are made a party by reason of any action
alleged to have been taken, omitted, or neglected by him or her as such director
or officer of Summit, provided that he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. These provisions are in addition to all other rights which
any director or officer may be entitled as a matter of law. The full
text of Article X, Section I is set forth below. Reference is made to West
Virginia Code § 31D-8-851 through § 31D-8-856 which sets forth the
indemnification rights permitted under West Virginia law. The full text of the
relevant codes are set forth below.
Article X,
Section I of the Articles of Incorporation of Summit contains the following
indemnification provision:
Unless
otherwise prohibited by law, each director and officer of the corporation now or
hereafter serving as such, and each director and officer of any majority or
wholly owned subsidiary of the corporation that has been designated as entitled
to indemnification by resolution of the board of directors of the corporation as
may be from time to time determined by said board, shall be indemnified by the
corporation against any and all claims and liabilities (other than an action by
or in the right of the corporation or any majority or wholly owned subsidiary of
the corporation) including expenses of defending such claim of liability to
which he or she has or shall become subject by reason of any action alleged to
have been taken, omitted, or neglected by him or her as such director or officer
provided the director or officer acted in good faith and in a manner which the
director or officer reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. The corporation shall reimburse each such person as
provided above in connection with any claim or liability brought or arising by
or in the right of the corporation or any majority or wholly owned subsidiary of
the corporation provided, however, that such person shall be not indemnified in
connection with, any claim or liability brought by or in the right of the
corporation or any majority or wholly owned subsidiary of the corporation as to
which the director or officer shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation or any majority or wholly owned subsidiary of the corporation unless
and only to the extent that the court in which such action or proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which such court shall
deem proper.
The
determination of eligibility for indemnification shall be made by those board
members not party to the action or proceeding or in the absence of such board
members by a panel of independent shareholders appointed for such purpose by a
majority of the shareholders of the corporation or in any other manner provided
by law.
The right
of indemnification hereinabove provided for shall not be exclusive of any rights
to which any director or officer of the corporation may otherwise be entitled by
law.
The board
of directors may by resolution, by law or other lawful manner from time to time
as it shall determine extend the indemnification provided herein to agents and
employees of the corporation, to directors, officers, agents or employees of
other corporations or entities owned in whole or in part by the
corporation. The corporation may purchase and maintain insurance for
the purposes hereof.
W. Va.
Code § 31D-8-851 through § 31D-8-856 provide:
§31D-8-851. Permissible
indemnification.
(a) Except
as otherwise provided in this section, a corporation may indemnify an individual
who is a party to a proceeding because he or she is a director against liability
incurred in the proceeding if:
(1)
(A) He or she conducted himself or herself in good faith; and
(B) He
or she reasonably believed: (i) In the case of conduct in his or
her official capacity, that his or her conduct was in the best interests of the
corporation; and (ii) in all other cases, that his or her conduct was at
least not opposed to the best interests of the corporation; and
(C) In
the case of any criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was unlawful; or
(2) He
or she engaged in conduct for which broader indemnification has been made
permissible or obligatory under a provision of the articles of incorporation as
authorized by subdivision (5), subsection (b), section two hundred two, article
two of this chapter.
(b) A
director’s conduct with respect to an employee benefit plan for a purpose he or
she reasonably believed to be in the interests of the participants in, and the
beneficiaries of, the plan is conduct that satisfies the requirement of
subparagraph (ii), paragraph (B), subdivision (1), subsection (a) of this
section.
(c) The
termination of a proceeding by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, is not determinative that the
director did not meet the relevant standard of conduct described in this
section.
(d) Unless
ordered by a court under subdivision (3), subsection (a), section eight hundred
fifty-four of this article, a corporation may not indemnify a
director:
(1) In
connection with a proceeding by or in the right of the corporation, except for
reasonable expenses incurred in connection with the proceeding if it is
determined that the director has met the relevant standard of conduct under
subsection (a) of this section; or
(2) In
connection with any proceeding with respect to conduct for which he or she was
adjudged liable on the basis that he or she received a financial benefit to
which he or she was not entitled, whether or not involving action in his or her
official capacity.
§31D-8-852. Mandatory
Indemnification.
A
corporation must indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which he or she was a party
because he or she was a director of the corporation against reasonable expenses
incurred by him or her in connection with the proceeding.
§31D-8-853. Advance for
expenses.
(a) A
corporation may, before final disposition of a proceeding, advance funds to pay
for or reimburse the reasonable expenses incurred by a director who is a party
to a proceeding because he or she is a director if he or she delivers to the
corporation:
(1) A
written affirmation of his or her good faith belief that he or she has met the
relevant standard of conduct described in section eight hundred fifty-one of
this article or that the proceeding involves conduct for which liability has
been eliminated under a provision of the articles of incorporation as authorized
by subdivision (4), subsection (b), section two hundred two, article two of this
chapter; and
(2) His
or her written undertaking to repay any funds advanced if he or she is not
entitled to mandatory indemnification under section eight hundred fifty-two of
this article and it is ultimately determined under section eight hundred
fifty-four or eight hundred fifty-five of this article that he or she has not
met the relevant standard of conduct described in section eight hundred
fifty-one of this article.
(b) The
undertaking required by subdivision (2), subsection (a) of this section
must be an unlimited general obligation of the director but need not be secured
and may be accepted without reference to the financial ability of the director
to make repayment.
(c) Authorizations
under this section are to be made:
(1) By
the board of directors:
(A) If
there are two or more disinterested directors, by a majority vote of all the
disinterested directors, a majority of whom constitute a quorum for this
purpose, or by a majority of the members of a committee of two or more
disinterested directors appointed by a vote; or
(B) If
there are fewer than two disinterested directors, by the vote necessary for
action by the board in accordance with subsection (c), section eight hundred
twenty-four of this article in which authorization directors who do not qualify
as disinterested directors may participate; or
(2) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted on
the authorization; or
(3) By
special legal counsel selected in a manner in accordance with subdivision (2),
subsection (b), section eight hundred fifty-five of this article.
§31D-8-854. Circuit court-ordered indemnification
and advance for expenses.
(a) A
director who is a party to a proceeding because he or she is a director may
apply for indemnification or an advance for expenses to the circuit court
conducting the proceeding or to another circuit court of competent
jurisdiction. After receipt of an application and after giving any
notice it considers necessary, the circuit court shall:
(1) Order indemnification if the circuit court determines that the director
is entitled to mandatory indemnification under section eight hundred fifty-two
of this article;
(2) Order
indemnification or advance for expenses if the circuit court determines that the
director is entitled to indemnification or advance for expenses pursuant to a
provision authorized by subsection (a), section eight hundred fifty-eight of
this article; or
(3) Order
indemnification or advance for expenses if the circuit court determines, in view
of all the relevant circumstances, that it is fair and reasonable:
(A) To
indemnify the director; or
(B) To
advance expenses to the director, even if he or she has not met the relevant
standard of conduct set forth in subsection (a), section eight hundred fifty-one
of this article, failed to comply with section eight hundred fifty-three of this
article or was adjudged liable in a proceeding referred to in subdivision
(1) or (2), subsection (d), section eight hundred fifty-one of this
article, but if he or she was adjudged so liable his or her indemnification is
to be limited to reasonable expenses incurred in connection with the
proceeding.
(b) If
the circuit court determines that the director is entitled to indemnification
under subdivision (1), subsection (a) of this section or to indemnification
or advance for expenses under subdivision (2) of said subsection, it shall
also order the corporation to pay the director’s reasonable expenses incurred in
connection with obtaining circuit court-ordered indemnification or advance for
expenses. If the circuit court determines that the director is
entitled to indemnification or advance for expenses under subdivision
(3) of said subsection, it may also order the corporation to pay the
director’s reasonable expenses to obtain circuit court-ordered indemnification
or advance for expenses.
§31D-8-855. Determination and
authorization of indemnification.
(a) A
corporation may not indemnify a director under section eight hundred fifty-one
of this article unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is permissible
because he or she has met the relevant standard of conduct set forth in section
eight hundred fifty-one of this article.
(b) The
determination is to be made:
(1) If
there are two or more disinterested directors, by the board of directors by a
majority vote of all the disinterested directors, a majority of whom constitute
a quorum for this purpose, or by a majority of the members of a committee of two
or more disinterested directors appointed by a vote;
(2) By
special legal counsel:
(A) Selected
in the manner prescribed in subdivision (1) of this subsection;
or
(B) If
there are fewer than two disinterested directors, selected by the board of
directors in which selection directors who do not qualify as disinterested
directors may participate; or
(3) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted on
the determination.
(c) Authorization
of indemnification is to be made in the same manner as the determination that
indemnification is permissible, except that if there are fewer than two
disinterested directors or if the determination is made by special legal
counsel, authorization of indemnification is to be made by those entitled under
paragraph (B), subdivision (2), subsection (b) of this section to select
special legal counsel.
§31D-8-856. Indemnification of
officers.
(a) A
corporation may indemnify and advance expenses under this part to an officer of
the corporation who is a party to a proceeding because he or she is an officer
of the corporation:
(1) To
the same extent as a director; and
(2) If
he or she is an officer but not a director, to a further extent as may be
provided by the articles of incorporation, the bylaws, a resolution of the board
of directors or contract except for:
(A) Liability
in connection with a proceeding by or in the right of the corporation other than
for reasonable expenses incurred in connection with the proceeding;
or
(B) Liability
arising out of conduct that constitutes:
(i) Receipt
by him or her of a financial benefit to which he or she is not
entitled;
(ii) An
intentional infliction of harm on the corporation or the shareholders;
or
(iii) An
intentional violation of criminal law.
(b) The
provisions of subdivision (2), subsection (a) of this section apply to an
officer who is also a director if the basis on which he or she is made a party
to the proceeding is an act or omission solely as an officer.
(c) An
officer of a corporation who is not a director is entitled to mandatory
indemnification under section eight hundred fifty-two of this article and may
apply to a court under section eight hundred fifty-four of this article for
indemnification or an advance for expenses in each case to the same extent to
which a director may be entitled to indemnification or advance for expenses
under those provisions.
Certain
rules of the Federal Deposit Insurance Corporation limit the ability of certain
depository institutions, their subsidiaries and their affiliated depository
institution holding companies to indemnify affiliated parties, including
institution directors. In general, subject to the ability to purchase
directors’ and officers’ liability insurance and to advance professional
expenses under certain circumstances, the rules prohibit such institutions from
indemnifying a director for certain costs incurred with regard to an
administrative or enforcement action commenced by any federal banking agency
that results in a final order or settlement pursuant to which the director is
assessed a civil money penalty, removed from office, prohibited from
participating in the affairs of an insured depository institution or required to
cease and desist from or take an affirmative action described in
Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. §
1818(b)).
Item
21. Exhibits and Financial Statement Schedules.
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Exhibit
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||
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Number
|
Description
of Exhibits
|
|
|
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2.1
|
Agreement
and Plan of Reorganization, dated as of June 9, 2008, by and among Summit
Financial Group, Inc., Greater Atlantic Financial Corp. and SFG II, Inc.
(included as Annex A to the
proxy statement/prospectus).
|
|
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5.1
|
Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
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8.1
|
Tax
Opinion of Hunton & Williams, including consent.
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21
|
Subsidiaries
of Registrant
|
|
|
23.1
|
Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
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23.2
|
Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
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23.3
|
Consent
of Arnett & Foster, P.L.L.C.
|
|
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23.4
|
Consent
of BDO Seidman, LLP
|
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23.5
|
Consent
of Sandler O’Neill & Partners, L.P.
|
|
|
24
|
Powers
of Attorney (signature page).
|
|
|
99.1
|
Form
of Proxy for Greater Atlantic Financial Corp.
|
|
(b) Financial
Statement Schedules
(c) Opinion
of Sandler O’Neill & Partners, L.P.
The
opinion of Sandler O’Neill & Partners, L.P. to the board of directors of
Greater Atlantic Financial Corp. is included in Annex C to the proxy
statement/prospectus.
Item 22.
Undertakings.
1. The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters in addition to the information called for by the
other items of the applicable form.
2. The
registrant undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to
Rule 415
(230.415),
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
3. Insofar
as indemnification for liabilities under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
4. The
undersigned registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
5. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration when it became effective.
6. The
undersigned registrant hereby undertakes:
a. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
b. That
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
c.
To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
7. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant’s
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is attached to the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Signatures
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Moorefield, State of West
Virginia, on July 7, 2008.
|
SUMMIT
FINANCIAL GROUP, INC.
|
||||
|
By:
|
/s/
H. Charles Maddy,
III
|
|||
|
President
and Chief Executive Officer
|
||||
|
By:
|
/s/ Robert S.
Tissue
|
|||
|
Senior
Vice President, Chief Financial
Officer
|
||||
POWER
OF ATTORNEY
Each of the undersigned hereby appoints
H. Charles Maddy, III as attorney-in-fact and agent for the undersigned, with
full power of substitution, for and in the name, place and stead of the
undersigned, to sign and file with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, any and all amendments (including
post-effective amendments) to this Registration Statement, with any schedules or
exhibits thereto, and any and all supplements or other documents to be filed
with the Securities and Exchange Commission pertaining to the registration of
securities covered hereby, with full power and authority to do and perform any
and all acts and things as may be necessary or desirable in furtherance of such
registration.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
/s/ Oscar
M.
Bean
Director July 7,
2008
Oscar
M. Bean
/s/ Frank A. Baer,
III
Director July
7, 2008
Frank
A. Baer, III
/s/ Dewey S. Bensenhaver,
M.D.
Director July
5, 2008
Dewey
S. Bensenhaver, M.D.
/s/ James M.
Cookman
Director July
7, 2008
James
M. Cookman
____________________________ Director
John
W. Crites
/s/ Patrick N.
Frye
Director July
7, 2008
Patrick
N. Frye
/s/ James Paul Geary,
II Director
July 7, 2008
James
Paul Geary, II
/s/ Thomas J. Hawse,
III
Director July
7, 2008
Thomas
J. Hawse, III
/s/ Phoebe Fisher
Heishman
Director July
5, 2008
Phoebe
Fisher Heishman
/s/ Gary L.
Hinkle
Director July
7, 2008
Gary
L. Hinkle
/s/ Gerald W.
Huffman
Director July
7, 2008
Gerald
W. Huffman
/s/ Duke A.
McDaniel
Director July
7, 2008
Duke
A. McDaniel
/s/ Ronald F.
Miller
Director July
7, 2008
Ronald
F. Miller
____________________________
Director
G.
R. Ours, Jr.
/s/ Charles S.
Piccirillo
Director July
7, 2008
Charles
S. Piccirillo
EXHIBIT
INDEX
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
|
|
|
|
2.1
|
Agreement
and Plan of Reorganization, dated as of June 9, 2008, by and among Summit
Financial Group, Inc., Greater Atlantic Financial Corp. and SFG II, Inc.
(included as Annex A to the
proxy statement/prospectus).
|
|
|
5.1
|
Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
|
|
|
8.1
|
Tax
Opinion of Hunton & Williams, including consent.
|
|
|
21
|
Subsidiaries
of Registrant
|
|
|
23.1
|
Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
|
|
|
23.2
|
Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
|
|
|
23.3
|
Consent
of Arnett & Foster, P.L.L.C.
|
|
|
23.4
|
Consent
of BDO Seidman, LLP
|
|
|
23.5
|
Consent
of Sandler O’Neill & Partners, L.P.
|
|
|
24
|
Powers
of Attorney (signature page).
|
|
|
99.1
|
Form
of Proxy for Greater Atlantic Financial Corp.
|
|
ANNEX
A
AGREEMENT
AND PLAN OF REORGANIZATION
dated as
of June 9, 2008
by and
among
SUMMIT
FINANCIAL GROUP, INC.
AND
GREATER
ATLANTIC FINANCIAL CORP.
AND
SFG
II, INC.
Page
|
ARTICLE
I
|
Certain
Definitions
|
1
|
|
1.01
|
Certain
Definitions
|
1
|
|
ARTICLE
II
|
The
Merger
|
7
|
|
2.01
|
The
Merger
|
7
|
|
2.02
|
Effective
Date and Effective Time
|
7
|
|
2.03
|
Indentures,
Guarantees and Common Securities
|
8
|
|
ARTICLE
III
|
The
Bank Merger
|
8
|
|
3.01
|
The
Bank Merger
|
8
|
|
3.02
|
Effective
Date and Effective Time
|
9
|
|
ARTICLE
IV
|
Consideration;
Exchange Procedures
|
9
|
|
4.01
|
Merger
Consideration
|
9
|
|
4.02
|
Rights
as Stockholders; Stock Transfers
|
10
|
|
4.03
|
Fractional
Shares
|
10
|
|
4.04
|
Exchange
Procedures
|
11
|
|
4.05
|
Options
|
12
|
|
4.06
|
Dissenters’
Rights
|
12
|
|
ARTICLE
V
|
Actions
Pending the Effective Time
|
13
|
|
5.01
|
Forebearances
of GAFC
|
13
|
|
5.02
|
Forebearances
of Summit
|
15
|
|
ARTICLE
VI
|
Representations
and Warranties
|
15
|
|
6.01
|
Disclosure
Schedules
|
15
|
|
6.02
|
Standard
|
16
|
|
6.03
|
Representations
and Warranties of GAFC
|
16
|
|
6.04
|
Representations
and Warranties of Summit
|
25
|
|
ARTICLE
VII
|
Covenants
|
33
|
|
7.01
|
Reasonable
Best Efforts
|
33
|
|
7.02
|
Stockholder
Approval
|
33
|
|
7.03
|
Registration
Statement
|
34
|
|
7.04
|
Press
Releases
|
35
|
|
7.05
|
Access;
Information
|
35
|
|
7.06
|
Acquisition
Proposals
|
36
|
|
7.07
|
Takeover
Laws
|
36
|
|
7.08
|
Funding
of Loan Loss Allowance and Payment of Expenses
|
36
|
|
7.09
|
Certain
Policies
|
36
|
|
7.10
|
Regulatory
Applications
|
37
|
|
7.11
|
Indemnification
|
37
|
|
7.12
|
Benefit
Plans
|
38
|
|
7.13
|
Notification
of Certain Matters
|
38
|
|
7.14
|
Contractual Rights of Current
Employees
|
39
|
|
7.15
|
GAFC Trust Preferred
Securities
|
39
|
A-i
Table
of Contents
Page
|
7.16
|
Transition
|
39
|
|
7.17
|
Compliance with Regulatory Authority
Order
|
39
|
|
7.18
|
Compliance
with Laws
|
40
|
|
ARTICLE
VIII
|
Conditions
to Consummation of the Merger
|
40
|
|
8.01
|
Conditions
to Each Party’s Obligation to Effect the Merger
|
40
|
|
8.02
|
Conditions
to Obligation of GAFC
|
41
|
|
8.03
|
Conditions
to Obligation of Summit
|
41
|
|
ARTICLE
IX
|
Termination
|
43
|
|
9.01
|
Termination
|
43
|
|
9.02
|
Effect
of Termination and Abandonment
|
44
|
|
9.03
|
Fees
and Expenses
|
44
|
|
ARTICLE
X
|
Miscellaneous
|
45
|
|
10.01
|
Survival
|
45
|
|
10.02
|
Waiver;
Amendment
|
45
|
|
10.03
|
Counterparts
|
45
|
|
10.04
|
Governing
Law
|
45
|
|
10.05
|
Expenses
|
45
|
|
10.06
|
Notices
|
45
|
|
10.07
|
Entire
Understanding; No Third Party Beneficiaries
|
46
|
|
10.08
|
Interpretation;
Effect
|
46
|
AGREEMENT AND PLAN OF
REORGANIZATION, dated as of June 9, 2008 (this “Agreement”), by and
among GREATER ATLANTIC FINANCIAL CORP. (“GAFC”), SUMMIT FINANCIAL GROUP, INC.
(“Summit”) and SFG II, INC. (“Merger Sub”).
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
Moorefield, West Virginia.
C. Merger
Sub. Merger Sub is a West Virginia corporation, having its
principal place of business in Moorefield, West Virginia.
D. 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.
E. Board
Action. The respective Boards of Directors of each of Summit,
GAFC and Merger Sub 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(b).
“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(b).
“Cease and Desist Order”
means the Order to Cease and Desist (together with the accompanying Stipulation
and Consent to Issuance of Order to Cease and Desist) effective April 25, 2008,
by and between GAB and the Office of Thrift Supervision.
“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 4.06.
“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)(ii).
“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 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 Capital Trust I, a second tier business
trust subsidiary of GAFC.
“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).
“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” has the meaning set
forth in the preamble to this Agreement.
“Monthly Losses” shall have
the meaning set forth in Section 4.01(b).
“NASDAQ” means The NASDAQ Stock
Market, Inc.’s Capital Market.
“Net Additional Loan Losses”
shall have the meaning set forth in Section 4.01(b)(iii).
“New Certificates” has the meaning set
forth in Section 4.04(a).
“Non-Performing Loans” shall
have the meaning set forth in Section 8.03(h).
“Old Certificates” has the meaning set
forth in Section 4.04(a).
“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.
“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.
“Specific Reserve Reductions”
shall mean the amount by which GAFC may appropriately reduce the allowance for
loan losses specifically allocated to an extension of credit (and thereby take a
negative provision to the allowance for loan losses) as a result of the amount
of principal actually received by GAFC on such extension of credit.
“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.
“WVBCA” shall mean the West
Virginia Business Corporation Act, as amended.
ARTICLE
II
The
Merger
2.01 The
Merger. (a) Prior to the Effective Time, Summit
shall take any and all action necessary 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 West Virginia 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), (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.
(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 offices
of the Secretaries of State of the State of Delaware and the State of West
Virginia a certificate of merger in accordance with Section 252 of the DGCL and
articles of merger in accordance with Section 31D-11-1106 of the WVBCA or such
later date and time as may be set forth in such certificate of merger and
articles of merger. The Merger shall have the effects prescribed in
the DGCL and the WVBCA.
(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.
2.03 Indentures,
Guarantees and Common Securities. At Closing, as further
consideration for the Merger: Summit shall assume (i) the obligations
of GAFC under the Indenture (including the conversion rights of the debenture
holders set forth in Section 4.4 of the Indenture) pursuant to a supplemental
indenture in form and substance reasonably satisfactory to Summit, GAFC and
Wilmington Trust Company (each, a “Supplemental Indenture”) and (ii) the
obligations of GAFC under each of the Guarantees pursuant to a supplemental
guarantee in form and substance reasonably satisfactory to Summit and
GAFC.
ARTICLE
III
The
Bank Merger
3.01 The Bank
Merger. (a) 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,
(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 Section 31D-11-
1106 of
the WVBCA 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
WVBCA.
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 as Summit may determine in its
sole discretion.
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) Merger Consideration. Subject
to adjustment as set forth in Section 4.01(b), 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(b), the
number of shares of Summit Stock (the “Merger Consideration”) equal to
$4.00, 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”). In no event shall the Exchange Ratio exceed
0.328625.
(b) Adjustment to Merger
Consideration for Decrease in GAFC’s
Shareholders’ Equity and for Net Additional Loan
Losses.
(i) If
as of the Effective Date, GAFC’s Shareholders’ Equity, as adjusted to exclude
(a) accumulated other comprehensive income or loss, and (b) the effect of
removing the benefit of the net operating loss carry forwards from the net
deferred tax assets (the “Adjusted Shareholders’
Equity”), is less than $4,213,617 (the “Benchmark Equity”) determined in
accordance with GAAP fairly applied, 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.
(ii) For
purposes of this Section 4.01(b), the Adjusted Shareholders’ Equity shall be
increased by: (x) Monthly Losses incurred after March 31, 2008, and
prior to September 1, 2008, and (y) fees paid or accrued to Sandler O’Neill and
Partners, LP, and to Muldoon Murphy & Aguggia LLP or Kilpatrick Stockton LLP
after March 31, 2008, up to $150,000. “Monthly Losses” shall
mean GAFC’s actual monthly operating losses calculated in accordance with
GAAP fairly applied, up to $250,000.
(iii) On
the Effective Date, GAFC shall have complied with Section 7.08 of this Agreement
with respect to GAFC’s allowance for loan losses. If Summit’s due
diligence
results
in a determination by Summit prior to the Effective Date that additional
provisions should be made to GAFC’s allowance for loan losses to meet the
requirements of the preceding sentence, then the Merger Consideration will be
reduced dollar for dollar by the amount determined by Summit with the reasonable
agreement of GAFC (the “Net
Additional Loan Losses”). In calculating the amount of the
Merger Consideration reduction, Summit and GAFC agree that Specific Reserve
Reductions may be used to offset losses from other loans to determine the amount
of provisions needed to the allowance for loan losses.
(iv) If
Summit and GAFC cannot agree as to the amount of the Net Additional Loan Losses,
then GAFC may, at its option, sell the loans that Summit determines require
additional provisions to a third party, provided that the sale is (x) without
recourse and (y) requires the third party purchaser to assume all collection and
servicing costs. If the book value of the loan sold exceeds the
purchase price of the loan sold, such excess will be deemed a Net Additional
Loan Loss and the Merger Consideration will be reduced one dollar for every
dollar of the amount of the Net Additional Loan Loss. If GAFC cannot
sell the loans that Summit determines require additional provisions for loan
losses, then Summit’s determination of any Net Additional Loan Losses with
respect to such loans shall be conclusive and binding on the parties, with the
concurrence of GAFC’s independent accountants.
(c) 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.
(d) 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.
(e) 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”) and
(ii) 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, 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 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 (iii) 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
4.04. After becoming so entitled in accordance with this Section
4.04, 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 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 4.04 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, 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
GAAP.
(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, including, but not
limited to implementation of any leverage strategies; (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
and Summit’s representations, warranties and covenants contained in this
Agreement are qualified by reference to the respective 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
or GAFC, as the case may be.
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 May 31, 2008, 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 May 31, 2008, 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
May 31, 2008.
(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. Except as disclosed in Schedule 6.03(f), (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 of the State of Delaware pursuant to the DGCL, the filing of articles of merger with the Secretary of State of the State of West Virginia pursuant to the WVBCA, 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, 2005, 2006 and 2007,
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, 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 “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,
2007. 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, 2005. 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, 2004, (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, 2005. 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, 2007, GAFC and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past
practice
(vi) Since
September 30, 2007, (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) Except as disclosed on Disclosure Schedule
6.03(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
(iii) Except
as disclosed on Disclosure Schedule 6.03(j), GAFC has received, since September
30, 2006, 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, 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.
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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) GAFC
and its Subsidiaries do not maintain any Compensation and Benefit Plans covering
foreign Employees.
(vi) 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).
(vii) 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.
(viii) 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.
(ix) 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. 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 May 31, 2008, the authorized capital stock of Summit consists solely of
20,000,000 shares of Summit Common Stock, of which as of May 31,
2008, 7,408,941 shares were outstanding, and 250,000 shares of Summit
Preferred Stock, of which none are issued and outstanding as of May 31,
2008. 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 May 31, 2008, Summit has 337,580 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
(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. Except as set forth in Section 8.01(a), 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 of the State of Delaware pursuant to the DGCL, the filing of
articles of merger with the Secretary of State of the State of West Virginia
pursuant to the WVBCA, 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, 2005, 2006
and 2007, 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, 2007. 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.
(i) Since
December 31, 2007, Summit and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past
practice.
(ii) Since
December 31, 2007, (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 Merger
Sub.
(i) Organization, Standing and
Authority. The Merger Sub is duly organized and validly
existing in good standing under the laws of the state 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. The Merger Sub has been organized for the purpose of the
transactions contemplated by this Agreement, and Merger Sub has not previously
conducted any business or incurred any liabilities.
(ii) Power. The Merger
Sub has 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 authorized by all
requisite action on the part of the Merger Sub. This Agreement is 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. (a) 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.
(b) If the
assumption of the Trust Preferred Securities by Summit requires Summit to obtain
shareholder approval to amend its Restated Articles of Incorporation (the
“Summit Articles”), then Summit agrees to take, in accordance with applicable
law, the Indenture and the Guarantee, and the Summit Articles and Summit
By-laws, all action necessary to convene an appropriate meeting of its
stockholders to consider and vote upon the approval of the amendment to its
Restated Articles of Incorporation (including any adjournment or
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, if required, the proxy solicitation
materials of Summit (the “Summit Proxy Statement”), 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, the Summit Proxy
Statement, if required, 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 thirty
(30) days from the date this Agreement is executed. 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 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.
7.08 Funding of Loan
Loss Allowance and Payment of Expenses. If required,
GAFC shall make appropriate accruals, consistent with GAAP fairly applied
and the Interagency Policy Statement on Allowance for Loan and Lease Losses, to
ensure that its allowance for loan losses is adequate to absorb all estimated
inherent losses in the loan portfolio on the Effective Date. Summit
shall determine whether GAFC’s allowance for loan losses is adequate, with the
concurrence of GAFC’s independent accountants. GAFC shall, consistent
with GAAP fairly applied, prior to the Effective Date, pay or accrue all costs
and expenses incurred by GAFC, and regardless of whether required to do so under
GAAP shall pay prior to the Effective Date, all expenses relating to or arising
from the transactions contemplated hereunder.
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
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 not 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 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.
7.15 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, 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.
7.16 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.
7.17 Compliance with
Regulatory Authority Order. GAFC shall, and
shall cause its Subsidiaries 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 law so as to comply with any order, decree, agreement, memorandum of
understanding, administrative action or similar arrangement with, or commitment
letter or similar submission to, or extraordinary supervisory letter from any
Regulatory Authority relating to GAFC or its Subsidiaries, including, but not
limited to, the Cease and Desist Order, except to the extent the Office of
Thrift Supervision may waive or modify the terms of the Cease and Desist Order
(in which case GAFC shall comply with such waiver or
modification). GAFC agrees to provide to Summit any communication,
written or otherwise, from or to a Regulatory Authority within two days of
receipt or submission by GAFC.
7.18 Compliance with
Laws. Each of GAFC and
its Subsidiaries shall comply 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 employees
conducting such businesses.
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 (i) GAFC and (ii) Summit, if the
assumption of the Trust Preferred Securities by Summit requires Summit to obtain
shareholder approval to amend the Summit Articles.
(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 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
(e) Registration
Statement shall have been issued and no proceedings for that purpose shall have
been initiated or threatened by the SEC.
(f) Blue Sky
Approvals. All permits and other authorizations under state
securities laws necessary to consummate the transactions contemplated hereby and
to issue the shares of Summit Common Stock to be issued in the Merger shall have
been received and be in full force and effect.
(g) 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 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) Consents to Lease
Assignments. All consents or approvals of any third party
required to be made or obtained by GAFC or any of its Subsidiaries in connection
with the assignment of any real property lease to which GAFC or its Subsidiaries
is a party shall have been obtained in a form reasonably satisfactory to
Summit.
(f) Regulatory
Issues. No Regulatory Authority shall have issued any order,
decree, agreement, memorandum of understanding, administrative action or similar
arrangement with, or commitment letter or similar submission to, or
extraordinary supervisory letter from such Regulatory Authority relating to GAFC
or its Subsidiaries that shall remain in effect after the Effective
Time.
(g) Loan Loss Allowance Fully
Funded. GAFC shall have performed in all respects its
obligations required to be performed by it under Section 7.08 of this Agreement
at or prior to the Effective Date.
(h) Minimum Regulatory Capital
Ratios. GAFC and its subsidiary, GAB, shall have the following
minimum regulatory capital ratios on a consolidated basis: Tier 1 (core) capital
ratio equal to 4.0%; Tier 1 risk-based capital ratio equal to 4.0 %; and total
risk-based capital ratio equal to 8.0%. GAFC’s minimum regulatory
capital ratios shall be calculated in accordance with the regulatory capital
regulations issued by the Federal Reserve Board, even though such regulations do
not apply to GAFC, and GAB’s regulatory capital ratios shall be calculated in
accordance with the regulatory capital requirements of the Office of Thrift
Supervision. The maximum ratio of the sum of non-performing loans,
OREO, and the net loans charged-off subsequent to March 31, 2008, to total
consolidated assets shall not exceed 2.78%. “Non-performing loans”
shall mean loans that are 90 days or more past due and non-accrual
loans.
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, GAFC and Merger Sub, 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, and provided
that with respect to any breach of the covenants and agreements set forth in
Sections 7.03, 7.04, 7.12, and 7.14 only 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 (i) the conditions to consummation of the Merger (other
than the receipt of regulatory approvals set forth in Section 8.01(b) and the
receipt of shareholder approvals set forth in Section 8.01(a)) have not been
fulfilled by September 30, 2008, or (ii) the Merger is not consummated by
December 31, 2008, except to the extent that the failure of such conditions to
consummation to be fulfilled, or the Merger 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, or the Summit Meeting, as applicable.
(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 $550,000 (the “Section
9.03(a) Fee”) as follows: (i) $150,000 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) $200,000 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);
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, 7.15 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:
Kilpatrick
Stockton LLP
Suite
900
607
14th
Street, NW
Washington,
DC 20005-2018
Facsimile: (202)
204-5617
Attn: George
W. Murphy, Jr., Esq.
If to
Summit or Merger Sub, 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
|
SFG II,
INC.
By: /s/ H. Charles Maddy,
III
H. Charles Maddy, III
|
|
Title:
|
President
and Chief Executive Officer
|
ANNEX B
WEST'S DELAWARE CODE
ANNOTATED
TITLE 8.
CORPORATIONS
CHAPTER
1. GENERAL CORPORATION LAW
SUBCHAPTER
IX. MERGER, CONSOLIDATION OR CONVERSION
§
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.
(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.
(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
June 9,
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 June 10, 2008 (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”). 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 that number of shares of Summit common stock, $2.50
par value per share, (the “Summit Common Stock”) equal to $4.00 divided by the
average closing price of Summit Common Stock as reported on the
NASDAQ Capital Market for the twenty trading days prior to the closing of the
Merger (the “Exchange Ratio”). In no event will each share of GAFC
Common Stock be exchanged for more than 0.328625 of a share of Summit Common
Stock. The aggregate value of the merger consideration is subject to
a dollar for dollar adjustment if, at closing, Greater Atlantic’s shareholders’
equity is below an amount, subject to certain adjustments, as specified in the
Agreement to the closing of the Merger. 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, 2008 and 2009 prepared by and reviewed with management of
Greater Atlantic and
growth
and performance estimates for Greater Atlantic for the years ending December 31,
2010, 2011 and 2012 as provided by and reviewed with management of Greater
Atlantic; (v) internal financial projections for Summit for the year ending
December 31, 2008 prepared by and reviewed with management of Summit and growth
and performance guidance for Summit for the years ending December 31, 2009
through 2012 as provided by and reviewed with management of Summit; (vi) 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; (vii) 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; (viii) the financial terms of certain recent business
combinations in the commercial banking industry, to the extent publicly
available; (ix) the current market environment generally and the banking
environment in particular; and (x) 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, including certain operating,
liquidity, regulatory and other financial matters 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 and estimates for Greater Atlantic and
Summit and the projections of transaction costs, purchase accounting adjustments
and expected cost savings
C-2
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 Merger and
will receive a fee for our services, a substantial portion of which is
contingent upon consummation of the Merger. As you know, we have
provided investment banking services to Greater Atlantic in the past, including
in connection with the previous transaction with Summit which was ultimately
terminated. We will also receive a fee for rendering this
opinion. Greater Atlantic has also agreed to indemnify us against
certain liabilities arising out of our engagement.
In the
ordinary course of our business as a broker-dealer, we may purchase securities
from and sell securities to Greater Atlantic and Summit and their respective
affiliates. We may also actively trade the equity or debt securities
of Greater Atlantic and Summit or their respective affiliates for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
Our
opinion is directed to the Board of Directors of Greater Atlantic in connection
with its consideration of the Merger and does not constitute a recommendation to
any shareholder of Greater Atlantic as to how such shareholder should vote at
any meeting of shareholders called to consider and vote upon the Merger or the
form of consideration such shareholder should elect. Our opinion is
directed only to the fairness, from a financial point of view, of the Merger
Consideration to be received in the Merger to holders of GAFC Common Stock and
does not address the underlying business decision of Greater Atlantic to engage
in the Merger, the relative merits of the Merger as compared to any other
alternative business strategies that might exist for Greater Atlantic or the
effect of any other transaction in which Greater Atlantic might
engage. Our opinion is not to be quoted or referred to, in whole or
in part, in a registration statement, prospectus, proxy statement or in any
other document, nor shall this opinion be used for any other purposes, without
Sandler O'Neill’s prior written consent. 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)
|
DELAWARE
|
54-1873112
|
|
(State
or other jurisdiction of
|
(I.R.S. Employer
|
|
incorporation
or organization)
|
Identification No.)
|
10700 Parkridge Boulevard, Suite P50,
Reston, Virginia 20191
(Address of Principal Executive
Offices)
(Zip Code)
703-391-1300
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
|
|
INDEX
|
|
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.
D-1-16
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.
|
ITEM 2.
|
PROPERTIES
|
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.
|
|
PART II
|
|
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
and
for Past Five Years
|
Age
|
Director
Since (1)
|
Expiration
of
Term as
Director
|
Shares of
Common Stock
Beneficially Owned
(1)
|
Ownership as a
Percent of
Class
|
|
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
|
Age
|
Shares of
Common Stock
Beneficially
Owned(1)
|
Ownership as A
Percent of Class
|
|
Executive Officers
Who
Are Not Directors
|
|||
|
Edward C. Allen
joined the bank as Chief Financial Officer and became Chief Operating
Officer in 1997.
|
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
|
|
(In
Thousands)
|
|
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
|
4.
|
Loans
Receivable
|
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
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.
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 Subsidiaries
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 | ) | |||||
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E.
Amos
Carroll E. Amos
Chief
Executive Officer, President and Director
Dated: December 28, 2007
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Board of Directors
Greater Atlantic Financial Corp.
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (333-76169 and 333-92342) of our report
dated 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.;
|
2.
|
Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
|
|
3.
|
Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
|
|
4.
|
The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e) for
the registrant and have:
|
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that
material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report
is
being prepared;
(b)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls
and procedures as of the end of the period covered by this based on
such; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting;
and;
|
5.
|
The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
|
|
|
(a) All significant deficiencies and material
weaknesses in
the design or operation of internal control over financial
reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
|
|
|
b)
|
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.;
|
|
Date: December
28, 2007
|
/s/ Carroll E.
Amos
|
|
|
Carroll E. Amos
|
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, David
E. Ritter, Chief Financial Officer of Greater Atlantic Financial Corp., certify
that:
1. I have
reviewed this annual report on Form 10-K of Greater Atlantic Financial Corp.;
|
2.
|
Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
annual report;
|
|
3.
|
Based on my
knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
|
|
4.
|
The registrant's
other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15 (e) and 15d-15 (e) for the registrant and have:
|
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls
and procedures as of the end of the period covered by this based on such;
and
(c) Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting;
and;
|
5.
|
The registrant's
other certifying officers and I have disclosed, based on our most recent
evaluation of
internal control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
|
|
|
a) All significant
deficiencies and
material weaknesses in
the design or operation of internal control over
financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
|
|
|
b)
|
Any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial
reporting.
|
|
Date: December
28, 2007
|
/s/
David E. Ritter
|
|
|
David E. Ritter
|
Chief
Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Greater Atlantic Financial Corp.
(the “Company”) on Form
10-K for the year ended September 30, 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 pusuant 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
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[√]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended December 31, 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)
|
|
Delaware
54-1873112
|
|
|
(State
or other jurisdiction
of
(I.R.S.
Employer
|
|
|
incorporation
or
organization)
Identification
No.)
|
10700
Parkridge Boulevard, Suite P50, Reston,
Virginia
20191
(Address
of Principal Executive
Offices)
(Zip Code)
(703)
391-1300
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [
√ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer [__]Accelerated filer [__]Non-
accelerated filer [ √ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes [__] No [
√ ]
At
February 11, 2008 there were 3,024,220 shares of the registrant’s Common
Stock,
par value $0.01 per share outstanding
Greater
Atlantic Financial Corp.
Quarterly
Report on Form 10-Q
For
the Quarter Ended December 31, 2007
Table
of Contents
PAGE NO.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|||||
|
Item
1.
|
Condensed
Financial Statements (Unaudited)
|
|||||
|
Consolidated
Statements of Financial Condition at December 31, 2007 and September 30,
2007
|
3
|
|||||
|
Consolidated
Statements of Operations
|
||||||
|
for
the three months ended December 31, 2007 and December 31,
2006
|
4
|
|||||
|
Consolidated
Statements of Comprehensive Income (Loss)
|
||||||
|
for
the three months ended December 31, 2007 and December 31,
2006
|
5
|
|||||
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
||||||
|
for
the three months ended December 31, 2007 and December 31,
2006
|
5
|
|||||
|
Consolidated
Statements of Cash Flows
|
||||||
|
for
the three months ended December 31, 2007 and December 31,
2006
|
6
|
|||||
|
Notes
to Consolidated Financial Statements
|
8
|
|||||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
||||
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
22
|
||||
|
Item
4.
|
Controls
and Procedures
|
24
|
||||
|
PART
II.
|
OTHER
INFORMATION
|
|||||
|
Item
1.
|
Legal
Proceedings
|
24
|
||||
|
Item
1A.
|
Risk
Factors
|
24
|
||||
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
27
|
||||
|
Item
3.
|
Defaults
Upon Senior Securities
|
27
|
||||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
27
|
||||
|
Item
5.
|
Other
Information
|
27
|
||||
|
Item
6.
|
Exhibits
|
27
|
||||
|
SIGNATURES
|
28
|
|||||
|
CERTIFICATIONS
|
29
|
|||||
Greater
Atlantic Financial Corp.
Consolidated
Statements of Financial Condition (Unaudited)
|
December
31,
|
September
30,
|
|||||
|
2007
|
2007
|
|||||
|
(Dollars
in Thousands)
|
(Unaudited)
|
|||||
|
Assets
|
||||||
|
Cash
and cash equivalents:
|
||||||
|
Non-interest
bearing and vault
|
$ 3,012
|
$ 3,146
|
||||
|
Interest
bearing
|
5,496
|
4,486
|
||||
|
Investment
securities
|
||||||
|
Available-for-sale
|
46,149
|
48,910
|
||||
|
Held-to-maturity
|
2,845
|
3,053
|
||||
|
Loans
receivable, net
|
168,006
|
176,108
|
||||
|
Accrued
interest and dividends receivable
|
1,623
|
1,675
|
||||
|
Deferred
income taxes
|
2,151
|
2,096
|
||||
|
Federal
Home Loan Bank stock, at cost
|
1,731
|
1,731
|
||||
|
Premises
and equipment, net
|
2,188
|
2,285
|
||||
|
Goodwill
|
956
|
956
|
||||
|
Prepaid
expenses and other assets
|
1,441
|
1,548
|
||||
|
Total
assets
|
$235,598
|
$245,994
|
||||
|
|
|
|||
|
Liabilities
and Stockholders’ equity
|
||||
| Liabilities | ||||
| Deposits |
$188,937
|
$197,991
|
||
| Advance payments from borrowers for taxes and insurance |
175
|
229
|
||
| Accrued expenses and other liabilities |
1,769
|
1,601
|
||
| Income taxes payable |
16
|
36
|
||
| Advances from the FHLB and other borrowings |
26,687
|
27,192
|
||
| Junior subordinated debt securities |
9,376
|
9,374
|
||
| Total liabilities |
226,960
|
236,423
|
||
| Commitments and contingencies | ||||
| Stockholders’ Equity | ||||
| Preferred stock $.01 par value - 2,500,000 shares authorized, none outstanding |
-
|
-
|
||
| Common stock, $.01 par value – 10,000,000 | ||||
| shares authorized; 3,024,220 shares outstanding |
30
|
30
|
||
| Additional paid-in capital |
25,273
|
25,273
|
||
| Accumulated deficit |
(15,252)
|
(14,408)
|
||
| Accumulated other comprehensive loss |
(1,413)
|
(1,324)
|
||
| Total stockholders’ equity |
8,638
|
9,571
|
||
| Total liabilities and stockholders’ equity |
$235,598
|
$245,994
|
||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Operations (Unaudited)
|
Three
Months Ended
December
31,
|
||||||||
|
(Dollars
in Thousands, Except Per Share Data)
|
2007
|
2006
|
||||||
|
Interest
income
|
||||||||
|
Loans
|
$ | 3,110 | $ | 3,670 | ||||
|
Investments
|
768 | 1,135 | ||||||
|
Total
interest income
|
3,878 | 4,805 | ||||||
|
Interest
expense
|
||||||||
|
Deposits
|
2,029 | 2,239 | ||||||
|
Borrowed
money
|
571 | 762 | ||||||
|
Total
interest expense
|
2,600 | 3,001 | ||||||
|
Net
interest income
|
1,278 | 1,804 | ||||||
|
Provision
for loan losses
|
102 | 148 | ||||||
|
Net
interest income after provision for loan losses
|
1,176 | 1,656 | ||||||
|
Noninterest
income
|
||||||||
|
Fees
and service charges
|
139 | 152 | ||||||
|
Loss
on derivatives
|
(14 | ) | (20 | ) | ||||
|
Other
operating income
|
12 | 6 | ||||||
|
Total
noninterest income
|
137 | 138 | ||||||
|
Noninterest
expense
|
||||||||
|
Compensation
and employee benefits
|
943 | 1,266 | ||||||
|
Occupancy
|
324 | 343 | ||||||
|
Professional
services
|
182 | 400 | ||||||
|
Advertising
|
19 | 24 | ||||||
|
Deposit
insurance premium
|
146 | 23 | ||||||
|
Furniture,
fixtures and equipment
|
105 | 130 | ||||||
|
Data
processing
|
224 | 220 | ||||||
|
Other
operating expenses
|
214 | 280 | ||||||
|
Total
noninterest expense
|
2,157 | 2,686 | ||||||
|
Net
loss before income tax provision
|
(844 | ) | (892 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
Net
loss
|
$ | (844 | ) | $ | (892 | ) | ||
|
Loss
per common share
|
||||||||
|
Basic and
diluted:
|
||||||||
|
Basic
|
$ | (0.28 | ) | $ | (0.30 | ) | ||
|
Diluted
|
(0.28 | ) | (0.30 | ) | ||||
|
Weighted
average common shares outstanding
|
||||||||
|
Basic
and diluted
|
3,024,220 | 3,021,297 | ||||||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
|
Three
months ended
|
||||||||
|
December
31,
|
||||||||
|
(In
Thousands)
|
2007
|
2006
|
||||||
|
Net
(loss) earnings
|
$ | (844 | ) | $ | (892 | ) | ||
|
Other
comprehensive (loss) income, net of tax
|
||||||||
|
Unrealized
(loss) gain on securities
|
(89 | ) | 116 | |||||
|
Other
comprehensive (loss) income
|
(89 | ) | 116 | |||||
|
Comprehensive
loss
|
$ | (933 | ) | $ | (776 | ) | ||
Greater
Atlantic Financial Corp.
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
For
the Three Months Ended December 31, 2007 and 2006
|
Preferred
Stock
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Earnings
(Deficit)
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Stockholders’
Equity
|
|||||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||||||
|
Balance
at September 30, 2006
|
$ | - | $ | 30 | $ | 25,228 | $ | (15,359 | ) | $ | (1,049 | ) | $ | 8,850 | ||||||||||
|
Other
comprehensive income
|
- | - | - | - | 116 | 116 | ||||||||||||||||||
|
Net
loss for the period
|
- | - | - | (892 | ) | - | (892 | ) | ||||||||||||||||
|
Balance
at December 31, 2006
|
$ | - | $ | 30 | $ | 25,228 | $ | (16,251 | ) | $ | (933 | ) | $ | 8,074 | ||||||||||
|
Balance
at September 30, 2007
|
$ | - | $ | 30 | $ | 25,273 | $ | (14,408 | ) | $ | (1,324 | ) | $ | 9,571 | ||||||||||
|
Other
comprehensive loss
|
- | - | - | - | (89 | ) | (89 | ) | ||||||||||||||||
|
Net
loss for the period
|
- | - | - | (844 | ) | - | (844 | ) | ||||||||||||||||
|
Balance
at December 31, 2007
|
$ | - | $ | 30 | $ | 25,273 | $ | (15,252 | ) | $ | (1,413 | ) | $ | 8,638 | ||||||||||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited)
|
Three
months ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
Thousands)
|
||||||||
|
Cash
flow from operating activities
|
||||||||
|
Net
loss
|
$ | (844 | ) | $ | (892 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by
|
||||||||
|
(used
in) operating activities
|
||||||||
|
Provision
for loan loss
|
102 | 148 | ||||||
|
Amortization
of deferred loan acquisition cost, net
|
1 | (7 | ) | |||||
|
Depreciation
and amortization
|
97 | 115 | ||||||
|
Loss
from derivatives
|
14 | 20 | ||||||
|
Amortization
of investment security premiums
|
118 | 155 | ||||||
|
Amortization
of mortgage-backed securities premiums
|
35 | 106 | ||||||
|
Amortization
of deferred fees
|
(66 | ) | (99 | ) | ||||
|
Discount
accretion net of premium amortization
|
71 | (72 | ) | |||||
|
Amortization
of convertible preferred stock costs
|
2 | 2 | ||||||
|
Gain
on sale of fixed assets
|
- | (26 | ) | |||||
|
(Increase)
decrease in assets
|
||||||||
|
Accrued
interest and dividend receivable
|
52 | 51 | ||||||
|
Prepaid
expenses and other assets
|
83 | 203 | ||||||
|
Deferred
loan fees collected, net of deferred costs incurred
|
88 | 163 | ||||||
|
Increase
(decrease) in liabilities
|
||||||||
|
Accrued
expenses and other liabilities
|
178 | 82 | ||||||
|
Income
taxes payable
|
(20 | ) | - | |||||
|
Net
cash provided by (used in) operating activities
|
(89 | ) | (51 | ) | ||||
Continued
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited) – (Continued)
|
Three
months ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
Thousands)
|
||||||||
|
Cash
flow from investing activities
|
||||||||
|
Net
decrease (increase) in loans
|
$ | 7,906 | $ | (1,997 | ) | |||
|
Disposal
(purchase) of premises and equipment, net
|
- | 15 | ||||||
|
Proceeds
from repayments of other investment securities
|
1,405 | 2,895 | ||||||
|
Proceeds
from repayments of mortgage-backed securities
|
1,267 | 4,090 | ||||||
|
Purchases
of FHLB stock
|
- | (225 | ) | |||||
|
Proceeds
from sale of FHLB stock
|
- | 180 | ||||||
|
Net
cash provided by investing activities
|
10,578 | 4,958 | ||||||
|
Cash
flow from financing activities
|
||||||||
|
Net
decrease in deposits
|
(9,054 | ) | (12,294 | ) | ||||
|
Net
decrease in advances from the FHLB and other borrowings
|
(505 | ) | (5,602 | ) | ||||
|
Increase
in advance payments by borrowers
for
taxes and insurance
|
(54 | ) | (4 | ) | ||||
|
Net
cash used in financing activities
|
(9,613 | ) | (17,900 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
876 | (12,993 | ) | |||||
|
Cash
and cash equivalents, at beginning of period
|
7,632 | 19,804 | ||||||
|
Cash
and cash equivalents, at end of period
|
$ | 8,508 | $ | 6,811 | ||||
See
accompanying notes to consolidated financial statements
D-2-7
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
(1) BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements, which include the
accounts of Greater Atlantic Financial Corp. (the “company”) and its wholly
owned subsidiary, Greater Atlantic Bank (the “bank”) have been prepared in
accordance with the instructions for Form 10-Q. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) with respect to interim financial
reporting. It is recommended that these consolidated financial
statements be read in conjunction with the company’s Annual Report on Form 10-K
for the year ended September 30, 2007. The results of operations for
the three months ended December 31, 2007 are not necessarily indicative of the
results of operations that may be expected for the year ending September 30,
2008 or any future periods. In addition, other reclassifications have
been made to prior periods to place them on a basis comparable with the current
period presentation.
(2)
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.
D-2-8
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
(3) LOAN
IMPAIRMENT AND LOAN LOSSES
In
accordance with guidance in the Statements of Financial Accounting Standards
Nos. 114 and 118, the company conducts a quarterly analysis to determine the
adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses
follows (also see page 20 for discussion of non-performing loans):
|
At
or for the three months ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(Dollars
in Thousands)
|
||||||||
|
Balance
at beginning of period
|
$ | 2,305 | $ | 1,330 | ||||
|
Provisions
|
102 | 148 | ||||||
|
Total
charge-offs
|
(5 | ) | (325 | ) | ||||
|
Total
recoveries
|
8 | 5 | ||||||
|
Net
recoveries (charge-offs)
|
3 | (320 | ) | |||||
|
Balance
at end of period
|
$ | 2,410 | $ | 1,158 | ||||
|
Ratio
of net charge-offs (recoveries) during the period
to
average loans outstanding during the period
|
(0.002 | )% | 0.17 | % | ||||
|
Allowance
for loan losses to total non-performing
loans
at end of period
|
86.88 | % | 247.44 | % | ||||
|
Allowance
for loan losses to total loans
|
1.38 | % | 0.58 | % | ||||
The
company considers a loan to be impaired if it is probable that it 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 loans at December 31, 2007 was $4.8 million and
the related allowance associated with impaired loans was $1.6
million. There were no impaired loans in the comparable period one
year ago. At December 31, 2007, all impaired loans had a related
allowance. We recognize interest collected on these loans on a
cost-recovery or cash-basis method. The amount of interest income
recognized during the time that those loans were impaired amounted to
$69,000
(4)
REGULATORY MATTERS
The
capital distribution regulation of the OTS requires that the bank provide the
applicable OTS Regional Director with a 30-day advance written notice of all
proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during
the year ended September 30, 2006.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, would be
deferred. The announcement by the company followed advice received by
the bank that the Office of Thrift Supervision would not approve the bank’s
application to pay a cash dividend to the company. Accordingly, the
company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than 20
consecutive quarterly periods).
D-2-9
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created
five categories of financial institutions based on the adequacy of their
regulatory capital levels: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under
FDICIA, a well capitalized financial institution is one with Tier 1 leverage
capital of 5%, Tier 1 risk-based capital of 6% and total risk-based capital of
10% and an adequately capitalized financial institution is one with Tier 1
leverage capital of 4%, Tier 1 risk-based capital of 4% and total risk-based
capital of 8%. At December 31, 2007, the bank was classified as a
well capitalized financial institution.
There are
currently no orders, agreements, recommendations or understandings with our
regulatory agency, which, if implemented, would affect our liquidity, capital
resources, or results of operations.
The following presents the bank’s capital position at December 31,
2007:
|
Required
Balance
|
Required
Percent to be Well Capitalized
|
Actual
Balance
|
Actual
Percent
|
Surplus/
(Shortfall)
|
||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||
|
Leverage
|
$ | 11,770 | 5.00 | % | $ | 18,191 | 7.73 | % | $ | 6,421 | ||||||||||
|
Tier
1 Risk-based
|
$ | 9,741 | 6.00 | % | $ | 18,104 | 11.15 | % | $ | 8,363 | ||||||||||
|
Total
Risk-based
|
$ | 16,236 | 10.00 | % | $ | 20,138 | 12.40 | % | $ | 3,903 | ||||||||||
The
company’s common stock is currently quoted on the Pink Sheets under the symbol
GAFC.PK.
(5) STOCK
OPTIONS
Effective
November 14, 1998, the company established the 1997 Stock Option and Warrant
Plan (the “Plan”). The Plan reserves options for 76,667 shares for
employees and warrants for 94,685 shares for stockholders. The Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. The stock options and warrants vest
immediately upon issuance and carry a maximum term of 10 years. The
exercise price for the stock options and warrants is the fair market value at
grant date. As of December 31, 2007, 221,333 options were
outstanding. During the quarter ended December 31, 2007 all 88,016
warrants expired.
The
following summary represents the activity under the Plan:
|
Number
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(in
Years)
|
||||||||||
|
Balance
outstanding and exercisable at September 30, 2006
|
253,000 | $ | 6.72 | 5.70 | ||||||||
|
Options
expired
|
(7,500 | ) | $ | 6.75 | ||||||||
|
Balance
outstanding and exercisable at September 30, 2007
|
245,500 | $ | 6.72 | 4.63 | ||||||||
|
Options
expired
|
(24,167 | ) | $ | 7.27 | ||||||||
|
Balance
outstanding and exercisable at December 31, 2007
|
221,333 | $ | 6.66 | 4.64 | ||||||||
D-2-10
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
The
company has adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”), to
measure compensation cost for stock options effective after October 1,
2005. Prior to its adoption, the company accounted for its options
under APB 25 “Accounting for Stock Issued to Employees” with the pro forma
impact disclosed. As allowable under SFAS 123R, the company used the
Black-Scholes method to measure the compensation cost of stock options granted
in 2006 with the following assumptions: risk-free interest rate of 4.88%, a
dividend payout rate of zero, and an expected option life of nine
years. The volatility is 32%. Using those assumptions, the
fair value of stock options granted during fiscal 2006 was
$2.92. There were no options
granted during the three months ended December 31, 2007 and
2006.
(6)
EARNINGS PER SHARE
Earnings
per share is based on the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding for basic and diluted
earnings per share for the three months ended December 31, 2007 and 2006 were
the same, as the effect of the conversion of preferred securities and the impact
of the exercised stock options of 1,375,137 and 1,380,300 in the periods ended
December 31, 2007 and 2006, respectively, were excluded as they would have been
anti-dilutive for those periods.
(7)
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.
D-2-11
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
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 a 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 that
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, that changes in ownership interest be
accounted for similarly, as equity transactions, and that, 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.
(8)
JUNIOR SUBORDINATED DEBT SECURITIES
On March
20, 2002, Greater Atlantic Capital Trust I (the, “Trust”), a Delaware statutory
business trust and a wholly owned Trust subsidiary of the company, issued $9.6
million aggregate liquidation amount (963,038 shares) of 6.50% cumulative
preferred securities maturing on December 31, 2031, retaining an option to call
the securities on or after December 31, 2003. Conversion of the
preferred securities into the company’s common stock may occur at any time on or
after 60 days after the closing of the offering. The company may
redeem the preferred securities, in whole or in part, at any time on or after
December 31, 2003. Distributions on the preferred securities are
payable quarterly on March 31, June 30, September 30 and December 31 of each
year beginning on June 30, 2002. The Trust also issued 29,762 common
securities to the company for $297,620. The proceeds from the sale of
the preferred securities and the proceeds from the sale of the trust’s common
securities were utilized to purchase from the company junior subordinated debt
securities of $9,928,000 bearing interest of 6.50% and maturing December 31,
2031. The company has
fully and unconditionally guaranteed the preferred securities along with all
obligations of the trust related thereto. The sale of the preferred
securities yielded $9.3 million after deducting offering expenses.
To comply
with FIN46, the trust preferred subsidiary was deconsolidated in 2004, and the
related securities have been presented as obligations of the company and titled
“Junior Subordinated Debt Securities” in the financial statements.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company follows advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the company.
Accordingly,
the company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which can be no longer than 20
consecutive quarterly periods).
The
company retained approximately $1.3 million of the proceeds for general
corporate purposes, investing the retained funds in short-term
investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position (also see Note 4 Regulatory
Matters).
D-2-12
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of December 31, 2007 and Three Months Ended December 31, 2007 and 2006
(Unaudited)
(9)
DERIVATIVE FINANCIAL INSTRUMENTS
During
fiscal years 2003 and 2002, the bank entered into various interest rate caps
that total $20 million in notional principal with terms between five and ten
years that limit the float between a floor of 2.00%, and are capped between
6.50% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.
Realized
and unrealized gains and losses on those derivatives which meet hedge accounting
requirements are deferred and recognized when the hedge transaction
occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the three months ended December 31, 2007 and 2006
the instruments did not meet hedge accounting requirements. The
statements of operations include net losses of $14,000 and $20,000 for the three
months ended December 31, 2007 and 2006, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
This
report contains forward-looking statements. When used in this 10-Q
report and in future filings by the company with the Securities and Exchange
Commission (the “SEC”), in the company’s press releases or other public or
shareholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimate,” “project” or
similar expressions are intended to identify “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the company’s
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the company’s market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The company wishes to
advise readers that the factors listed above could affect the company’s
financial performance and could cause the company’s actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The
company does not undertake and specifically declines any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated
events.
The
matters discussed in management’s discussion and analysis of financial condition
and results of operations reflects continuing operations, unless otherwise
noted.
General
We are a
savings and loan holding company, which was organized in June
1997. We conduct substantially all of our business through our wholly
owned subsidiary, the bank, a federally chartered savings bank. The
bank is a member of the Federal Home Loan Bank (“FHLB”) system and its deposits
are insured up to applicable limits by the Federal Deposit Insurance
Corporation. We offer traditional banking services to customers
through the five branches of the bank located throughout the greater Washington,
D.C. metropolitan area and the Shenandoah Valley.
The
profitability of the company depends primarily on its non-interest income and
net interest income. Net interest income is the difference between
the interest income it earns on its loans and investment portfolio, and the
interest it pays on interest-bearing liabilities, which consist mainly of
interest paid on deposits and borrowings. Non-interest income
consists primarily of gain on sales of loans, derivatives and available-for-sale
investments and fees from service charges on deposits and loans.
The level
of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
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. Subsequently, 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.
The sale
of the Pasadena branch office, to Bay-Vanguard was completed on August 24, 2007,
with the bank recognizing a gain of $4.3 million.
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, the company and
Summit amended their 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.
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.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates under
different assumptions or conditions. The company believes that, of
its significant accounting policies, the most critical accounting policies we
apply are those related to the evaluation of the adequacy of the allowance for
loan losses.
A variety
of factors impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization of
loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance
is established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments on
loans. Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of our regulators, changes in the size
and composition of the loan portfolio and peer comparisons. The
analysis also requires consideration of the economic climate and direction,
change in the interest rate environment, which may impact a borrower’s ability
to pay, legislation impacting the banking industry and economic conditions
specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
Financial
Condition
At
December 31, 2007 the company’s total assets were $235.6 million, compared to
the $246.0 million held at September 30, 2007, representing a decrease of
4.23%. The decrease resulted primarily from a decrease in investment
securities and loans receivable and was offset in part by an increase in
interest bearing deposits. The decline in the bank’s overall asset
size is reflected in the consolidated statements of financial condition and
statements of operations as we continued to manage its assets and liabilities to
maintain the bank in a well capitalized position.
Net loans
receivable at December 31, 2007 were $168.0 million, a decrease of $8.1 million
or 4.60% from the $176.1 million held at September 30, 2007. The decrease in
loans consisted primarily of a $378,000 decline in the bank’s single family loan
portfolio, coupled with a decrease of $2.3 million in the bank’s consumer loan
portfolio. Because the bank’s single family and consumer loan
portfolios consist primarily of adjustable-rate loans, with the current yield
curve, customers are refinancing away from adjustable-rate loans and into longer
term, fixed-rate loans or curtailing outstanding balances. Commercial
real estate loans outstanding decreased by $3.4 million and commercial business
loans decreased by $2.3 million during the period. Those decreases
were offset in part by an increase of $507,000 in construction and land
loans. The increase in construction and land loans was primarily in
the single family residential sector of the market. The company
anticipates that lending in that area may slow as a result of the current slow
sales pace occurring in the single family market.
At
December 31, 2007, investment securities were $49.0 million, a decrease of $3.0
million or 5.71% from the $52.0 million held at September 30,
2007. The cash proceeds from the sale or payoff of investment
securities were used to reduce higher cost wholesale funding, including
borrowings and wholesale deposits.
Deposits
at December 31, 2007 were $188.9 million, a decrease of $9.1 million from the
$198.0 million held at September 30, 2007. Total deposits decreased
primarily due to a $7.7 million decline in our money fund accounts and our
reduced reliance on brokered deposits and wholesale deposits, which have a
higher cost. Those types of deposits have declined $16.0 million
since December 31, 2006 while total retail deposits have increased $33.7
million. The increase in retail deposits since December 31, 2006 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.
Comparison
of Results of Operations for the Three Months Ended
December
31, 2007 and December 31, 2006
Net Income. For
the three months ended December 31, 2007, the company had a net loss of $844,000
or $0.28 per diluted share, compared to a net loss of $892,000 or $0.30 per
diluted share for the three months ended December 31, 2006. The
$48,000 decrease in the net loss over the comparable period one-year ago was
primarily the result of a decrease in non-interest expense and a decrease in the
provision for loan losses. Those decreases were offset by decreases
in net interest income and non-interest income. The ongoing net
losses reported in the company’s Annual Report on Form 10-K for the year ended
September 30, 2007, remain a consistent problem for management because the loan
production needed to maintain the retail branch network has not been attained,
and 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 also presents
a very challenging environment in which to seek to increase our net interest
margin.
Net Interest
Income. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing liabilities such as deposits and
borrowings. The level of net interest income is determined primarily
by the relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon
them. The correlation between the re-pricing of interest rates on
assets and on liabilities also influences net interest income.
The
following table presents a comparison of the components of interest income and
expense and net interest income.
|
Net
interest income from continuing operations
|
Difference
|
|||||||||||||||
|
Three
Months Ended December 31,
|
2007
|
2006
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Loans
|
$ | 3,110 | $ | 3,670 | $ | (560 | ) | (15.26 | )% | |||||||
|
Investments
|
768 | 1,135 | (367 | ) | (32.33 | ) | ||||||||||
|
Total
|
3,878 | 4,805 | (927 | ) | (19.29 | ) | ||||||||||
|
Interest
expense:
|
||||||||||||||||
|
Deposits
|
2,029 | 2,239 | (210 | ) | (9.38 | ) | ||||||||||
|
Borrowings
|
571 | 762 | (191 | ) | (25.07 | ) | ||||||||||
|
Total
|
2,600 | 3,001 | (401 | ) | (13.36 | ) | ||||||||||
|
Net
interest income
|
$ | 1,278 | $ | 1,804 | $ | (526 | ) | (29.16 | )% | |||||||
The
decrease in net interest income during the three months ended December 31, 2007,
from the comparable period one year ago, resulted primarily from a $49.2 million
decrease in the bank’s interest-earning assets coupled with average interest-earning
assets declining by $2.8 million more than the decline in average
interest-bearing liabilities. That decrease was coupled with
an 37 basis point decrease in net interest margin (net interest income divided
by average interest-earning assets) from 2.59% for the three months ended
December 31, 2006 to 2.22% for the three months ended December 31,
2007. The decrease in net interest margin also resulted from the
average cost on interest-bearing liabilities increasing by 21 basis point while
the average yield on interest-earning assets declined 14 basis points resulting
in a change of 35 basis points.
The
interest rate environment has been a difficult one for most financial
institutions. We expect the interest rate environment to remain
challenging and we believe it will continue to have an impact on our net
interest margin and net interest rate spread. We also believe,
however, that our strategy of changing the balance sheet from one that was
wholesale oriented, as reflected in the company’s former reliance on brokered
and internet deposits, to one which is more retail oriented, will benefit us
over time. We believe that change will position us to realize a
benefit when the interest rate environment improves. If market
interest rates were to rise, given our asset sensitivity position, we would also
expect our net interest margin to improve. However, in a declining
rate environment our interest rate spread and our net interest income would
decline. The bank continues to monitor the markets and its interest
rate position to alleviate any material changes in net interest
margin.
Interest
Income. Interest income for the three months ended December
31, 2007 decreased $927,000 compared to the three months ended December 31,
2006, primarily as a result of a $49.2 million decrease in the average balances
of outstanding loans and investment securities. The decreases in
those balances were coupled with a decrease of 14 basis points in the average
yield earned on interest earning assets.
Interest
Expense. The $401,000 decrease in interest expense for the
three months ended December 31, 2007 compared to the 2006 period was principally
the result of a $46.3 million decrease in the average amount of deposits and
borrowings. That decrease in the average interest-bearing liabilities
was partially offset by a 21 basis point increase in the cost of funds on
average deposits and borrowings. The decrease in interest expense on
deposits was primarily due to a decrease of $27.6 million in average deposits,
primarily due to the sale of the Pasadena branch. That decrease was
offset by a 19 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.
The
decrease in interest expense on borrowings for the three months ended December
31, 2007, when compared to the 2006 period, was principally the result of a
$18.7 million decrease in average borrowed funds, partially offset by a 63 basis
point increase in the cost of borrowed funds. The components
accountable for the decrease of $191,000 in interest expense on borrowings were
a $251,000 decrease relating to average volume, partially offset by a $60,000
increase relating to average cost.
Comparative Average Balances and
Interest Income Analysis. The following table presents the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and annualized rates. No tax-equivalent
adjustments were made and all average balances are average daily
balances. Non-accruing loans have been included in the tables as
loans carrying a zero yield.
|
For
the Three Months Ended December31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/ Rate
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/
Rate
|
|||||||||||||||||||
|
Assets:
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||
|
Real
estate loans
|
$ | 88,508 | $ | 1,540 | 6.96 | % | $ | 93,132 | $ | 1,717 | 7.37 | % | ||||||||||||
|
Consumer
loans
|
51,242 | 914 | 7.13 | 59,504 | 1,180 | 7.93 | ||||||||||||||||||
|
Commercial
business loans
|
33,904 | 656 | 7.74 | 39,550 | 773 | 7.82 | ||||||||||||||||||
|
Total
loans
|
173,654 | 3,110 | 7.16 | 192,186 | 3,670 | 7.64 | ||||||||||||||||||
|
Investment
securities
|
40,223 | 541 | 5.38 | 57,168 | 800 | 5.60 | ||||||||||||||||||
|
Mortgage-backed
securities
|
16,016 | 227 | 5.67 | 29,704 | 335 | 4.51 | ||||||||||||||||||
|
Total
interest-earning assets
|
229,893 | 3,878 | 6.75 | 279,058 | 4,805 | 6.89 | ||||||||||||||||||
|
Non-earning
assets
|
11,663 | 11,672 | ||||||||||||||||||||||
|
Total assets
|
$ | 241,556 | $ | 290,730 | ||||||||||||||||||||
|
Liabilities
and Stockholders'
Equity:
|
||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
$ | 2,073 | 5 | 0.96 | $ | 3,154 | 7 | 0.89 | ||||||||||||||||
|
Now
and money market accounts
|
56,309 | 465 | 3.30 | 79,378 | 711 | 3.58 | ||||||||||||||||||
|
Certificates
of deposit
|
124,568 | 1,559 | 5.01 | 127,998 | 1,521 | 4.75 | ||||||||||||||||||
|
Total
deposits
|
182,950 | 2,029 | 4.44 | 210,530 | 2,239 | 4.25 | ||||||||||||||||||
|
FHLB
advances
|
26,346 | 394 | 5.98 | 36,839 | 496 | 5.39 | ||||||||||||||||||
|
Other
borrowings
|
11,775 | 177 | 6.01 | 20,019 | 266 | 5.31 | ||||||||||||||||||
|
Total interest-bearing
liabilities
|
221,071 | 2,600 | 4.70 | 267,388 | 3,001 | 4.49 | ||||||||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Noninterest-bearing
demand deposits
|
9,079 | 12,330 | ||||||||||||||||||||||
|
Other
liabilities
|
1,921 | 2,266 | ||||||||||||||||||||||
|
Total
liabilities
|
232,071 | 281,984 | ||||||||||||||||||||||
|
Stockholders’
equity
|
9,485 | 8,746 | ||||||||||||||||||||||
|
Total liabilities and
stockholders'
Equity
|
$ | 241,556 | $ | 290,730 | ||||||||||||||||||||
|
Net
interest income
|
$ | 1,278 | $ | 1,804 | ||||||||||||||||||||
|
Interest
rate spread
|
2.04 | % | 2.40 | % | ||||||||||||||||||||
|
Net
interest margin
|
2.22 | % | 2.59 | % | ||||||||||||||||||||
Rate/Volume Analysis. The following table
presents certain information regarding changes in interest income and interest
expense attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
Three
Months Ended
December
31, 2007 compared to
|
||||||||||||
|
December
31, 2006
|
||||||||||||
|
Change
Attributable to
|
||||||||||||
|
Volume
|
Rate
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Real
estate loans
|
$ | (85 | ) | $ | (92 | ) | $ | (177 | ) | |||
|
Consumer
loans
|
(164 | ) | (102 | ) | (266 | ) | ||||||
|
Commercial
business loans
|
(110 | ) | (7 | ) | (117 | ) | ||||||
|
Total
loans
|
(359 | ) | (201 | ) | (560 | ) | ||||||
|
Investments
|
(237 | ) | (22 | ) | (259 | ) | ||||||
|
Mortgage-backed
securities
|
(154 | ) | 46 | (108 | ) | |||||||
|
Total
interest-earning assets
|
$ | (750 | ) | $ | (177 | ) | $ | (927 | ) | |||
|
Savings
accounts
|
$ | (2 | ) | $ | - | $ | (2 | ) | ||||
|
Now
and money market accounts
|
(207 | ) | (39 | ) | (246 | ) | ||||||
|
Certificates
of deposit
|
(41 | ) | 79 | 38 | ||||||||
|
Total
deposits
|
(250 | ) | 40 | (210 | ) | |||||||
|
FHLB
advances
|
(141 | ) | 39 | (102 | ) | |||||||
|
Other
borrowings
|
(110 | ) | 21 | (89 | ) | |||||||
|
Total
interest-bearing liabilities
|
(501 | ) | 100 | (401 | ) | |||||||
|
Change
in net interest income
|
$ | (249 | ) | $ | (277 | ) | $ | (526 | ) | |||
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 was to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio and in our underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussions with the
operational staff, including the line lenders and senior
management. However, when we entered into the definitive agreement
for the company to merge with Summit, and based on the due diligence performed
by Summit, it was deemed unnecessary to continue such a contract through the
fiscal year ended September 30, 2007 and beyond.
Non-performing
assets amounted to $2.8 million or 1.18% of total assets at December 31, 2007, a
$2.3 million increase from the $468,000 or 0.16% of total assets classified as
non-performing at December 31, 2006. At December 31, 2007, assets
that were classified totaled $5.6 million, of which $430,000 were classified as
special mention, $4.1 million were classified as substandard and $1.1 million
were classified as doubtful. A $102,000 provision for loan losses was
recorded during the three months ended December 31, 2007, compared to a
provision of $148,000 during the three months ended December 31,
2006. Credit quality at the bank remains a concern, with a ratio of
non-performing assets to total assets of 1.18%, and with significant classified
and past-due loans. Those factors combined with expected credit
exposure growth and deteriorating economic conditions, may result in an increase
in the allowance for loan losses resulting in an increase in the provision for
loan losses in future periods.
Non-interest Income.
Non-interest income decreased $1,000 during the three months ended
December 31, 2007, over the comparable three months one year
ago. That decrease was primarily the result of a decrease of $13,000
in loan and deposit fees offset by an increase in gains on derivatives and other
operating income
The
following table presents a comparison of the components of non-interest
income.
|
Difference
|
||||||||||||||||
|
Three
Months Ended December 31,
|
2007
|
2006
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
income:
|
||||||||||||||||
|
Service
fees on loans
|
$ | 37 | $ | 42 | $ | (5 | ) | (11.90 | )% | |||||||
|
Service
fees on deposits
|
102 | 110 | (8 | ) | (7.27 | ) | ||||||||||
|
Loss
on derivatives
|
(14 | ) | (20 | ) | 6 | 30.00 | ||||||||||
|
Other
operating income
|
12 | 6 | 6 | 100.00 | ||||||||||||
|
Total
non-interest income
|
$ | 137 | $ | 138 | $ | (1 | ) | (0.72 | )% | |||||||
Non-interest expense.
Non-interest expense decreased $529,000 from $2.7 million for the three
months ended December 31, 2006 to $2.2 million for the three months ended
December 31 in the current year. The decrease was distributed over
various non-interest expense categories with the primary contributors being
compensation and employee benefits, and professional services. The
decreases in non-interest expense were partially offset by an increase of
$123,000 in the bank’s deposit insurance premium.
The
following table presents a comparison of the components of non-interest
expense.
|
Difference
|
||||||||||||||||
|
Three
Months Ended December 31,
|
2007
|
2006
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||
|
Compensation
and employee benefits
|
$ | 943 | $ | 1,266 | $ | (323 | ) | (25.51 | )% | |||||||
|
Occupancy
|
324 | 343 | (19 | ) | (5.54 | ) | ||||||||||
|
Professional
services
|
182 | 400 | (218 | ) | (54.50 | ) | ||||||||||
|
Advertising
|
19 | 24 | (5 | ) | (20.83 | ) | ||||||||||
|
Deposit
insurance premium
|
146 | 23 | 123 | 534.78 | ||||||||||||
|
Furniture,
fixtures and equipment
|
105 | 130 | (25 | ) | (19.23 | ) | ||||||||||
|
Data
processing
|
224 | 220 | 4 | 1.82 | ||||||||||||
|
Other
operating expense
|
214 | 280 | (66 | ) | (23.57 | ) | ||||||||||
|
Total
non-interest expense
|
$ | 2,157 | $ | 2,686 | $ | (529 | ) | (19.69 | )% | |||||||
Income Taxes. The
company files a consolidated federal income tax return with its subsidiaries and
computes its income tax provision or benefit on a consolidated
basis. Due to our operating losses, we did not record a provision for
income taxes for the three months ended December 31, 2007 or
2006. The company believes that, in the unlikely event that the
proposed merger is not consummated, it will generate future taxable income
through earnings and branch sales, to assure utilization of a portion of the
existing net operating losses.
Contractual
Obligations and Off-Balance Sheet Financing Arrangements
The
following table summarizes the bank’s contractual obligations at December 31,
2007 and the effect those obligations are expected to have on the bank’s
liquidity and cash flows in future periods.
|
Total
|
Less
Than One Year
|
Two
– Three Years
|
Four
– Five
Years
|
After
Five
Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
FHLB
Advances (1)
|
$ | 25,000 | $ | - | $ | 25,000 | $ | - | $ | - | ||||||||||
|
Reverse
repurchase agreements
|
1,687 | 1,687 | - | - | - | |||||||||||||||
|
Subordinated
debt securities (2)
|
25,982 | 1,310 | 1,310 | 1,310 | 22,052 | |||||||||||||||
|
Operating
leases
|
3,773 | 1,124 | 1,975 | 316 | 358 | |||||||||||||||
|
Total
obligations
|
$ | 56,442 | $ | 4,121 | $ | 28,285 | $ | 1,626 | $ | 22,410 | ||||||||||
|
(1) The
company expects to refinance these short and medium-term obligations under
substantially the same terms and conditions.
(2) Includes
principal and interest due on our junior subordinated debt
securities
|
||||||||||||||||||||
Other
Commercial Commitments
|
Total
|
Less
Than One Year
|
Two
– Three Years
|
Four
– Five
Years
|
After
Five
Years
|
||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||
|
Certificate
of deposit maturities (1)
|
$ | 125,090 | $ | 111,979 | $ | 10,430 | $ | 2,588 | $ | 93 | ||||||||||
|
Loan
originations
|
5,566 | 5,566 | - | - | - | |||||||||||||||
|
Unfunded
lines of credit (2)
|
111,396 | 111,396 | - | - | - | |||||||||||||||
|
Standby
letters of credit
|
310 | 310 | - | - | - | |||||||||||||||
|
Total
|
$ | 242,362 | $ | 229,251 | $ | 10,430 | $ | 2,588 | $ | 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,
open-end loans on one-four dwelling units and commercial lines that mostly
remain unfunded. The committed amount of these lines total $169.0
million.
|
||||||||||||||||||||
Liquidity and Capital
Resources. The bank’s primary sources of funds are deposits,
principal and interest payments on loans, mortgage-backed and investment
securities and borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. The bank continues to maintain the levels
of liquid assets previously required by OTS regulations. The bank
manages its liquidity position and demands for funding primarily by investing
excess funds in short-term investments and utilizing FHLB advances and reverse
repurchase agreements in periods when the bank’s demands for liquidity exceed
funding from deposit inflows.
The
bank’s most liquid assets are cash and cash equivalents and securities
available-for-sale. The levels of those assets are dependent on the
bank’s operating, financing, lending and investing activities during any given
period. At December 31, 2007, cash and cash equivalents, interest
bearing deposits and securities available-for-sale totaled $54.7 million or
23.20% of total assets.
The
primary investing activities of the bank are the origination of consumer loans,
residential one- to four-family loans, commercial business loans, commercial
real estate loans, and real estate construction and development loans and the
purchase of United States Treasury and agency securities, mortgage-backed and
mortgage-related securities and other investment securities. During
the three months ended December 31, 2007, the bank’s loan originations totaled
$13.6 million. The bank did not purchase any United States Treasury
or agency securities, mortgage-backed or mortgage related securities or other
investment securities during the three months ended December 31,
2007. All of our investment securities are classified as either
available for sale or held to maturity and for the period ended December 31,
2007 were considered temporarily impaired. The market value of our
investment portfolio is obtained from various third party brokerage firms and we
believe our filing fairly quantifies the value of those
securities. The investments are debt securities that pay principal
and interest monthly to maturity
at such
time as principal is repaid. The fluctuation in value of our
portfolio is primarily the result of changes in market rates rather than due to
the credit quality of the issuer. The unrealized loss in the bank’s
investment portfolio totaled $1.8 million at December 31, 2007. 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 December 31, 2007, the bank had $25.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity from
the FHLB of $9.7 million. Depending on market conditions, the pricing
of deposit products and the pricing of FHLB advances, the bank may continue to
rely on FHLB borrowings to fund asset growth.
At
December 31, 2007, the bank had commitments to fund loans of $3.4 million,
unused outstanding lines of credit of $111.4 million, consisting primarily of
equity lines of credit, unused standby letters of credit of $310,000 and
undisbursed proceeds of construction mortgages of $2.2
million. Unfunded lines of credit have remained relatively constant
and have actually decreased by $419,000 during the three months ended December
31, 2007. The bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments.
Certificate
accounts, including IRA and Keogh accounts, which are scheduled to mature in
less than one year from December 31, 2007, totaled $112.0
million. Based upon experience, management believes the majority of
maturing deposits will remain with the bank. In addition, management
of the bank believes that it can adjust the rates offered on certificates of
deposit to retain deposits in changing interest rate environments. In
the event that a significant portion of those deposits are not retained by the
bank, the bank would be able to utilize FHLB advances and reverse repurchase
agreements to fund deposit withdrawals, which would result in an increase in
interest expense to the extent that the average rate paid on such borrowings
exceeds the average rate paid on deposits of similar duration.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market
risk is the risk of loss from adverse changes in market prices and
rates. The company’s market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. The
company has little or no risk related to trading accounts, commodities or
foreign exchange. In general, market risk reflects the sensitivity of
income to variations in interest rates and other relevant market rates or
prices. The company’s market rate sensitive instruments include
interest-earning assets and interest-bearing liabilities. The company
enters into market rate sensitive instruments in connection with its various
business operations. Loans originated, and the related commitments to
originate loans that will be sold, represent market risk that is realized in a
short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises from changes in United
States interest rates and the effects thereof on mortgage prepayment and closing
behavior, as well as depositors’ choices (“interest rate
risk”). Changes in those interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and we
will continue to attempt to attract a greater proportion of short-term
liabilities to help us address our interest rate risk. The lag in
implementation of re-pricing terms on our adjustable-rate assets may result in a
decline in net interest income in a rising interest rate
environment. There can be no assurance that our interest rate risk
will be minimized or eliminated. Further, an increase in the general
level of interest rates may adversely affect the ability of certain borrowers to
pay the interest on and principal of their obligations. Accordingly,
changes in levels of market interest rates, (primarily increases in market
interest rates), could materially adversely affect our interest rate spread,
asset quality, loan origination volume and overall financial condition and
results of operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets. We retain short-term and adjustable-rate assets because they
have re-pricing characteristics that more closely match the re-pricing
characteristics of our liabilities.
To
mitigate further the risk of timing differences in the re-pricing of assets and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed with
short-term deposits and borrowings. Periodically, mismatches are
identified and managed by adjusting the re-pricing characteristics of our
interest-bearing liabilities with derivatives, such as interest rate caps and
interest rate swaps.
Through
the use of these derivative instruments, management attempts to reduce or offset
increases in interest expense related to deposits and borrowings. We
use interest rate caps and pay-fixed interest rate swaps to protect against
rising interest rates.
The
interest rate caps are designed to provide an additional layer of protection,
should interest rates on deposits and borrowings rise, by effectively
lengthening the re-pricing period. At December 31, 2007, we held an
aggregate notional value of $20 million of interest rate caps. None
of the interest rate caps had strike rates that were in effect at December 31,
2007, as current LIBOR rates were below the strike rate.
We are
also striving to increase the proportion of transaction deposits to total
deposits to diminish our exposure to adverse changes in interest
rates. In particular, non-interest-bearing checking accounts and
custodial accounts are less sensitive to interest rate fluctuations and provide
a growing source of non-interest income through deposit and other retail banking
fees.
The
following table, which is based on information that we provide to the Office of
Thrift Supervision, presents the change in our net portfolio value at September
30, 2007 that would occur in the event of an immediate change in interest rates
based on Office of Thrift Supervision assumptions, with no effect given to any
steps that we might take to counteract that change.
|
Net
Portfolio Value
(Dollars
in thousands)
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
|||||||||||||||||||||
|
Basic
Point (“bp”)
Change
in Rates
|
$Amount
|
$Change
|
%
Change
|
NPV
Ratio
|
Change
(bp)
|
|||||||||||||||||
| +300 | 21,078 | -3,195 | -13 | % | 8.58 | % | -106 | bp | ||||||||||||||
| +200 | 22,219 | -2,054 | -8 | % | 8.97 | % | -67 | bp | ||||||||||||||
| +100 | 23,297 | -976 | -4 | % | 9.33 | % | -31 | bp | ||||||||||||||
| 0 | 24,273 | - | 9.64 | % | - | |||||||||||||||||
| -100 | 24,555 | 282 | 1 | % | 9.69 | % | 5 | bp | ||||||||||||||
| -200 | 24,581 | 308 | 1 | % | 9.66 | % | 2 | bp | ||||||||||||||
The
Office of Thrift Supervision uses various assumptions in assessing interest rate
risk. Those assumptions relate to interest rates, loan prepayment rates, deposit
decay rates and the market values of certain assets under differing interest
rate scenarios, among others. As with any method of measuring interest rate
risk, certain shortcomings are inherent in the methods of analyses presented in
the foregoing tables. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect our rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe those assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment
activity.
Item 4. Controls and
Procedures.
The
company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.
In
connection with this Form 10-Q, the company's management, with the participation
of its Chief Executive Officer and Chief Financial Officer, evaluated the
company's disclosure controls and procedures as currently in effect, and such
officers have concluded that, as of this date, the company's disclosure controls
and procedures are effective.
Management
of the company is also responsible for establishing and maintaining adequate
internal control over financial reporting and control of the company's assets to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
There were no changes in the company's internal control over financial reporting
during the company's quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the company's internal
control over financial reporting.
Part
II.Other Information
Item 1.Legal
Proceedings
Not
applicable.
Item 1A.Risk
Factors
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At
December 31, 2007, our loan portfolio consisted of $31.6 million, or 18.09% of
commercial real estate loans, $18.5 million, or 10.62% of construction and land
development loans and $32.6 million, or 18.65% 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, difficult 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. Those
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. 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.
Failure
to remain a well capitalized institution.
As of
December 31 and 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.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3.
Defaults Upon Senior Securities
Not
applicable.
Item
4.
Not
applicable.
Item
5.
Other Information
Not
applicable.
Item 6. Exhibits
(a) Exhibits
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
Greater
Atlantic Financial Corp.
Signatures
Pursuant
to the requirement of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
Greater Atlantic
Financial Corp.
|
|
|
(Registrant)
|
|
|
By: /s/ Carroll E.
Amos
|
|
|
President
and Chief Executive Officer
|
|
|
By: /s/ David E.
Ritter
|
|
|
David
E. Ritter
|
|
|
Senior
Vice President and Chief Financial
Officer
|
|
|
Date:
February 13, 2008
|
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
|
|
1.I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
|
|
2.Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
|
5.The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/ Carroll E.
Amos
Carroll E. Amos
President
and Chief Executive Officer
Date: February 13, 2008
Exhibit
31.2
CERTIFICATION
I, David
E. Ritter, Senior Vice President and Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
|
|
1.I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
|
|
2.Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
c.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
|
5.The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By: /s/ David E.
Ritter
David
E. Ritter
Senior Vice President and
Chief Financial Officer
Date: February 13, 2008
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Greater Atlantic Financial Corp. (the “company”) on Form 10-Q for the period
ended December 31, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, Carroll E. Amos, President and Chief
Executive Officer of the company, certify, pursuant to 18 U.S.C.§ 1350, as added
by § 906 of the Sarbanes-Oxley Act of 2002, that:
|
A.
|
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
B.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the company
as of and for the period covered by the
Report.
|
By: /s/ Carroll E.
Amos
Carroll
E. Amos
President and Chief Executive Officer
Date: February 13, 2008
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Greater Atlantic Financial Corp. (the “company”) on Form 10-Q for the period
ended December 31, 2007 as filed with the Securities and Exchange Commission on
the date hereof (the “Report”), I, David E. Ritter Senior Vice President and
Chief Financial Officer of the company, certify, pursuant to 18 U.S.C.§ 1350, as
added by § 906 of the Sarbanes-Oxley Act of 2002, that:
|
C.
|
The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
|
|
D.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the company
as of and for the period covered by the
Report.
|
By: /s/ David E.
Ritter
David E. Ritter
Senior Vice President and
Chief Financial Officer
Date: February 13, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[√]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ________ to _________.
Commission
file number: 0-26467
GREATER
ATLANTIC FINANCIAL CORP.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
54-1873112
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation or
organization)
|
Identification
No.)
|
10700 Parkridge
Boulevard, Suite P50, Reston,
Virginia
20191
(Address
of Principal Executive
Offices)
(Zip Code)
(703)
391-1300
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [
√ ] No [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer [__]Accelerated filer [__]Non-
accelerated filer [__]Smaller Reporting Company [ √ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes [__] No [
√ ]
At May
12, 2008 there were 3,024,220 shares of the registrant’s Common
Stock,
par value $0.01 per share outstanding
Greater
Atlantic Financial Corp.
Quarterly
Report on Form 10-Q
For
the Quarter Ended March 31, 2008
Table
of Contents
PAGE NO.
|
PART
I. FINANCIAL INFORMATION
|
|||||||
|
Item
1.
|
Condensed
Financial Statements (Unaudited)
|
||||||
|
Consolidated
Statements of Financial Condition at March 31, 2008 and September 30,
2007
|
3
|
||||||
|
Consolidated
Statements of Operations
|
|||||||
|
for
the three and six months ended March 31, 2008 and March 31,
2007
|
4
|
||||||
|
Consolidated
Statements of Comprehensive Income (Loss)
|
|||||||
|
for
the three and six months ended March 31, 2008 and March 31,
2007
|
5
|
||||||
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|||||||
|
for
the six months ended March 31, 2008 and March 31, 2007
|
5
|
||||||
|
Consolidated
Statements of Cash Flows
|
|||||||
|
for
the six months ended March 31, 2008 and March 31, 2007
|
6
|
||||||
|
Notes
to Consolidated Financial Statements
|
8
|
||||||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|||||
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
28
|
|||||
|
Item
4T.
|
Controls
and Procedures
|
30
|
|||||
|
PART
II. OTHER INFORMATION
|
|||||||
|
Item
1.
|
Legal
Proceedings
|
30
|
|||||
|
Item
1A.
|
Risk
Factors
|
30
|
|||||
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33
|
|||||
|
Item
3.
|
Defaults
Upon Senior Securities
|
33
|
|||||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
33
|
|||||
|
Item
5.
|
Other
Information
|
33
|
|||||
|
Item
6.
|
Exhibits
|
33
|
|||||
|
SIGNATURES
|
34
|
||||||
|
CERTIFICATIONS
|
35
|
||||||
Greater
Atlantic Financial Corp.
Consolidated
Statements of Financial Condition (Unaudited)
|
March
31,
|
September
30,
|
||||
|
2008
|
2007
|
||||
|
(Dollars
in Thousands)
|
(Unaudited)
|
||||
|
Assets
|
|||||
|
Cash
and cash equivalents:
|
|||||
|
Non-interest
bearing and vault
|
$ 2,408
|
$ 3,146
|
|||
|
Interest
bearing
|
14,874
|
4,486
|
|||
|
Investment
securities
|
|||||
|
Available-for-sale
|
42,201
|
48,910
|
|||
|
Held-to-maturity
|
2,720
|
3,053
|
|||
|
Loans
receivable, net
|
159,724
|
176,108
|
|||
|
Accrued
interest and dividends receivable
|
1,319
|
1,675
|
|||
|
Deferred
income taxes
|
1,480
|
2,096
|
|||
|
Federal
Home Loan Bank stock, at cost
|
1,640
|
1,731
|
|||
|
Premises
and equipment, net
|
2,093
|
2,285
|
|||
|
Goodwill
|
956
|
956
|
|||
|
Prepaid
expenses and other assets
|
1,005
|
1,548
|
|||
|
Total
assets
|
$230,420
|
$245,994
|
|||
|
Liabilities
and Stockholders’ equity
|
|||||
|
Liabilities
|
|||||
|
Deposits
|
$188,805
|
$197,991
|
|||
|
Advance
payments from borrowers for taxes and insurance
|
269
|
229
|
|||
|
Accrued
expenses and other liabilities
|
1,938
|
1,601
|
|||
|
Income
taxes payable
|
16
|
36
|
|||
|
Advances
from the FHLB and other borrowings
|
26,732
|
27,192
|
|||
|
Junior
subordinated debt securities
|
9,379
|
9,374
|
|||
|
Total
liabilities
|
227,139
|
236,423
|
|||
|
Commitments
and contingencies
|
|||||
|
Stockholders’
Equity
|
|||||
|
Preferred
stock $.01 par value - 2,500,000 shares authorized,
none
outstanding
|
-
|
-
|
|||
|
Common
stock, $.01 par value – 10,000,000
|
|||||
|
shares
authorized; 3,024,220 shares outstanding
|
30
|
30
|
|||
|
Additional
paid-in capital
|
25,273
|
25,273
|
|||
|
Accumulated
deficit
|
(20,260)
|
(14,408)
|
|||
|
Accumulated
other comprehensive loss
|
(1,762)
|
(1,324)
|
|||
|
Total
stockholders’ equity
|
3,281
|
9,571
|
|||
|
Total
liabilities and stockholders’ equity
|
$230,420
|
$245,994
|
|||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Operations (Unaudited)
|
Three Months Ended
March 31,
|
Six Months Ended
March 31,
|
||||||
|
(Dollars
in Thousands, Except Per Share Data)
|
2008
|
2007
|
2008
|
2007
|
|||
|
Interest
income
|
|||||||
|
Loans
|
$
2,697
|
$
3,651
|
$
5,807
|
$
7,322
|
|||
|
Investments
|
727
|
943
|
1,496
|
2,077
|
|||
|
Total
interest income
|
3,424
|
4,594
|
7,303
|
9,399
|
|||
|
Interest
expense
|
|||||||
|
Deposits
|
1,862
|
2,187
|
3,892
|
4,426
|
|||
|
Borrowed
money
|
541
|
712
|
1,112
|
1,474
|
|||
|
Total
interest expense
|
2,403
|
2,899
|
5,004
|
5,900
|
|||
|
Net
interest income
|
1,021
|
1,695
|
2,299
|
3,499
|
|||
|
Provision
for loan losses
|
2,688
|
145
|
2,790
|
293
|
|||
|
Net
interest income after provision for loan losses
|
(1,667)
|
1,550
|
(491)
|
3,206
|
|||
|
Noninterest
income
|
|||||||
|
Fees
and service charges
|
134
|
155
|
274
|
307
|
|||
|
Loss
on derivatives
|
(14)
|
(13)
|
(28)
|
(33)
|
|||
|
Other
operating income
|
7
|
6
|
17
|
11
|
|||
|
Total
noninterest income
|
127
|
148
|
263
|
285
|
|||
|
Noninterest
expense
|
|||||||
|
Compensation
and employee benefits
|
887
|
1,175
|
1,831
|
2,441
|
|||
|
Occupancy
|
329
|
344
|
653
|
687
|
|||
|
Professional
services
|
678
|
323
|
860
|
722
|
|||
|
Advertising
|
10
|
45
|
28
|
69
|
|||
|
Deposit
insurance premium
|
118
|
7
|
264
|
30
|
|||
|
Furniture,
fixtures and equipment
|
109
|
137
|
214
|
267
|
|||
|
Data
processing
|
210
|
233
|
435
|
452
|
|||
|
Other
operating expenses
|
241
|
258
|
454
|
539
|
|||
|
Total
noninterest expense
|
2,582
|
2,522
|
4,739
|
5,207
|
|||
|
Loss
before income tax provision
|
(4,122)
|
(824)
|
(4,967)
|
(1,716)
|
|||
|
Provision
for income taxes – increase in deferred tax assets valuation
allowances
|
885
|
-
|
885
|
-
|
|||
|
Net
loss
|
$ (5,007)
|
$ (824)
|
$ (5,852)
|
$ (1,716)
|
|||
|
Loss
per common share
|
|||||||
|
Basic and
diluted:
|
|||||||
|
Basic
|
$ (1.66)
|
$ (0.27)
|
$ (1.93)
|
$ (0.57)
|
|||
|
Diluted
|
(1.66)
|
(0.27)
|
(1.93)
|
(0.57)
|
|||
|
Weighted
average common shares outstanding
|
|||||||
|
Basic
and diluted
|
3,024,220
|
3,023,911
|
3,024,220
|
3,022,590
|
|||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)
|
Three months ended
March 31,
|
Six months ended
March 31,
|
|||||||||||||||
|
(In
Thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
(loss) earnings
|
$ | (5,007 | ) | $ | (824 | ) | $ | (5,852 | ) | $ | (1,716 | ) | ||||
|
Other
comprehensive (loss) income, net of tax
|
||||||||||||||||
|
Unrealized
(loss) gain on securities
|
(349 | ) | (60 | ) | (438 | ) | 56 | |||||||||
|
Other
comprehensive (loss) income
|
(349 | ) | (60 | ) | (438 | ) | 56 | |||||||||
|
Comprehensive
loss
|
$ | (5,356 | ) | $ | (884 | ) | $ | (6,290 | ) | $ | (1,660 | ) | ||||
Greater
Atlantic Financial Corp.
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
For
the Six Months Ended March 31, 2008 and 2007
|
Preferred
Stock
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Earnings
(Deficit)
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Stockholders’
Equity
|
|||||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||||||
|
Balance
at September 30, 2006
|
$ | - | $ | 30 | $ | 25,228 | $ | (15,359 | ) | $ | (1,049 | ) | $ | 8,850 | ||||||||||
|
Stock
Option Expense
|
22 | 22 | ||||||||||||||||||||||
|
Other
comprehensive income
|
- | - | - | - | 56 | 56 | ||||||||||||||||||
|
Net
loss for the period
|
- | - | - | (1,716 | ) | - | (1,716 | ) | ||||||||||||||||
|
Balance
at March 31, 2007
|
$ | - | $ | 30 | $ | 25,250 | $ | (17,075 | ) | $ | (993 | ) | $ | 7,212 | ||||||||||
|
Balance
at September 30, 2007
|
$ | - | $ | 30 | $ | 25,273 | $ | (14,408 | ) | $ | (1,324 | ) | $ | 9,571 | ||||||||||
|
Other
comprehensive loss
|
- | - | - | - | (438 | ) | (438 | ) | ||||||||||||||||
|
Net
loss for the period
|
- | - | - | (5,852 | ) | - | (5,852 | ) | ||||||||||||||||
|
Balance
at March 31, 2008
|
$ | - | $ | 30 | $ | 25,273 | $ | (20,260 | ) | $ | (1,762 | ) | $ | 3,281 | ||||||||||
See
accompanying notes to consolidated financial statements
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited)
|
Six
months ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
Thousands)
|
||||||||
|
Cash
flow from operating activities
|
||||||||
|
Net
loss
|
$ | (5,852 | ) | $ | (1,716 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by
|
||||||||
|
(used
in) operating activities
|
||||||||
|
Provision
for loan loss
|
2,790 | 293 | ||||||
|
Amortization
of deferred loan acquisition cost, net
|
3 | (25 | ) | |||||
|
Depreciation
and amortization
|
191 | 228 | ||||||
|
Loss
from derivatives
|
28 | 33 | ||||||
|
Amortization
of investment security premiums
|
203 | 363 | ||||||
|
Amortization
of mortgage-backed securities premiums
|
91 | 214 | ||||||
|
Amortization
of deferred fees
|
(131 | ) | (178 | ) | ||||
|
Decrease
in deferred tax asset
|
885 | - | ||||||
|
Discount
accretion net of premium amortization
|
168 | (145 | ) | |||||
|
Amortization
of convertible preferred stock costs
|
5 | 4 | ||||||
|
(Increase)
decrease in assets
|
||||||||
|
Accrued
interest and dividend receivable
|
356 | 251 | ||||||
|
Prepaid
expenses and other assets
|
495 | 351 | ||||||
|
Deferred
loan fees collected, net of deferred costs incurred
|
208 | 260 | ||||||
|
Increase
(decrease) in liabilities
|
||||||||
|
Accrued
expenses and other liabilities
|
356 | (477 | ) | |||||
|
Income
taxes payable
|
(20 | ) | - | |||||
|
Net
cash used in operating activities
|
(224 | ) | (544 | ) | ||||
Continued
Greater
Atlantic Financial Corp.
Consolidated
Statements of Cash Flows (Unaudited) – (Continued)
|
Six
months ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
Thousands)
|
||||||||
|
Cash
flow from investing activities
|
||||||||
|
Net
decrease in loans
|
$ | 13,347 | $ | 10,161 | ||||
|
Disposal
(purchase) of premises and equipment, net
|
- | (24 | ) | |||||
|
Proceeds
from repayments of other investment securities
|
2,584 | 6,224 | ||||||
|
Proceeds
from repayments of mortgage-backed securities
|
3,458 | 8,032 | ||||||
|
Purchases
of FHLB stock
|
- | (653 | ) | |||||
|
Proceeds
from sale of FHLB stock
|
91 | 837 | ||||||
|
Net
cash provided by investing activities
|
19,480 | 24,577 | ||||||
|
Cash
flow from financing activities
|
||||||||
|
Net
decrease in deposits
|
(9,186 | ) | (3,547 | ) | ||||
|
Net
decrease in advances from the FHLB and other borrowings
|
(460 | ) | (15,620 | ) | ||||
|
Increase
in advance payments by borrowers
for
taxes and insurance
|
40 | 120 | ||||||
|
Net
cash used in financing activities
|
(9,606 | ) | (19,047 | ) | ||||
|
Increase
in cash and cash equivalents
|
9,650 | 4,986 | ||||||
|
Cash
and cash equivalents, at beginning of period
|
7,632 | 19,804 | ||||||
|
Cash
and cash equivalents, at end of period
|
$ | 17,282 | $ | 24,790 | ||||
See
accompanying notes to consolidated financial statements
D-3-7
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
(1) BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements, which include the
accounts of Greater Atlantic Financial Corp. (the “company”) and its wholly
owned subsidiary, Greater Atlantic Bank (the “bank”) have been prepared in
accordance with the instructions for Form 10-Q. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) with respect to interim financial
reporting. It is recommended that these consolidated financial
statements be read in conjunction with the company’s Annual Report on Form 10-K
for the year ended September 30, 2007. The results of operations for
the three or the six months ended March 31, 2008 are not necessarily indicative
of the results of operations that may be expected for the year ending September
30, 2008 or any future periods. In addition, other reclassifications
have been made to prior periods to place them on a basis comparable with the
current period presentation.
(2)
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. (“Summit”), 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.
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. In a Form 8-K filed
on March 26, 2008 we announced that our shareholders overwhelmingly approved the
terms and conditions of the proposed merger of Greater Atlantic with and into
Summit. On April 9, 2008, the company announced that it had received
written notice from Summit that Summit had exercised its right to terminate the
agreement for the company to merge with and into Summit. Greater
Atlantic and Summit have initiated negotiations towards entering into a new
definitive agreement. However, no assurances can be given that the
negotiations will lead to the parties entering into a new definitive
agreement.
D-3-8
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
(3) LOAN
IMPAIRMENT AND LOAN LOSSES
In
accordance with guidance in the Statements of Financial Accounting Standards
Nos. 114 and 118, the company conducts a quarterly analysis to determine the
adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses
follows (also see page 20 for discussion of non-performing loans):
|
At or for the six months ended
March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(Dollars
in Thousands)
|
||||||||
|
Balance
at beginning of period
|
$ | 2,305 | $ | 1,330 | ||||
|
Provisions
|
2,790 | 293 | ||||||
|
Total
charge-offs
|
(2,824 | ) | (327 | ) | ||||
|
Total
recoveries
|
14 | 626 | ||||||
|
Net
recoveries (charge-offs)
|
(2,810 | ) | 299 | |||||
|
Balance
at end of period
|
$ | 2,285 | $ | 1,922 | ||||
|
Ratio
of net charge-offs (recoveries) during the period
to
average loans outstanding during the period
|
1.66 | % | (0.16 | )% | ||||
|
Allowance
for loan losses to total non-performing
loans
at end of period
|
99.43 | % | 118.13 | % | ||||
|
Allowance
for loan losses to total loans
|
1.40 | % | 1.02 | % | ||||
The
company considers a loan to be impaired if it is probable that it 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, to measure impairment,
the company uses the fair value of the collateral, less estimated costs to sell
on a discounted basis.
Our total
recorded investment in impaired loans at March 31, 2008 was $2.2 million
compared to $1.3 million at March 31, 2007. The related allowance
associated with those impaired loans at March 31, 2008 was $1.5 million compared
to an allowance of $500,000 at March 31, 2007. At March 31, 2008 and
2007, all impaired loans had a related allowance. We recognize
interest collected on these loans on a cost-recovery or cash-basis
method. The amount of interest income recognized during the time that
those loans were impaired amounted to $110,000
(4)
REGULATORY MATTERS
The
capital distribution regulation of the OTS requires that the bank provide the
applicable OTS Regional Director with a 30-day advance written notice of all
proposed capital distributions whether or not advance approval was
required.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, would be
deferred. The announcement by the company followed advice received by
the bank that the Office of Thrift Supervision would not approve the bank’s
application to pay a cash dividend to the company. Accordingly, the
company exercised its right to defer the payment of interest on its 6.50%
Convertible Junior Subordinated Debentures Due 2031 related to the Trust
Preferred Securities, for an indefinite period (which continues, but can be no
longer than 20 consecutive quarterly periods).
D-3-9
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
On April
29, 2008, the company issued a news release announcing that the bank, its
wholly-owned subsidiary, consented to the issuance by the Office of Thrift
Supervision (the “OTS”) of a Cease and Desist Order effective April 25, 2008
(the “Order”).
The Order
requires the bank to, among other things, report, within prescribed time periods
to the OTS Regional Director for the Southeast Region (the “Regional Director”)
on the status of the ongoing merger negotiations with Summit; have, at June 30,
2008, and maintain a Tier One (Core) Capital Ratio of at least 6% and a total
risk based capital ratio of at least 12%; develop a comprehensive long term
operating strategy to be implemented if the proposed merger with Summit is not
consummated; incorporate the long term operating strategy into a three-year
business plan containing at a minimum the requirements set forth in the Order;
cease, effective immediately, making commercial real estate loans, commercial
loans and loans on raw land without the prior written approval of the Regional
Director, except for such loans as to which the bank has a legally binding
written commitment to lend as of the effective date of the Order, and reduce its
exposure to concentrations in those types of loans, cease, effective
immediately, accepting brokered deposits; and prohibits the payment of dividends
or other capital distributions.
In
addition, the Order requires the bank’s board of directors to take action with
respect to credit administration, reducing classified assets and accounting
system controls and to establish a regulatory compliance committee of three or
more non-employee directors to monitor and coordinate compliance with the
provisions of the Order and provide the board of directors with progress reports
on compliance, which reports are to be transmitted by the board of directors of
the bank to the Regional Director.
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created
five categories of financial institutions based on the adequacy of their
regulatory capital levels: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under
FDICIA, a well capitalized financial institution is one with Tier 1 leverage
capital of 5%, Tier 1 risk-based capital of 6% and total risk-based capital of
10% and an adequately capitalized financial institution is one with Tier 1
leverage capital of 4%, Tier 1 risk-based capital of 4% and total risk-based
capital of 8%. At March 31, 2008, the bank was classified as a well
capitalized financial institution.
The
following presents the bank’s capital position at March 31, 2008:
|
Required
Balance
|
Required
Percent to be Well Capitalized
|
Actual
Balance
|
Actual
Percent
|
Surplus/
(Shortfall)
|
||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||
|
Leverage
|
$ | 11,569 | 5.00 | % | $ | 13,966 | 6.04 | % | $ | 2,397 | ||||||||||
|
Tier
1 Risk-based
|
$ | 9,335 | 6.00 | % | $ | 13,880 | 8.92 | % | $ | 4,545 | ||||||||||
|
Total
Risk-based
|
$ | 15,559 | 10.00 | % | $ | 15,829 | 10.17 | % | $ | 270 | ||||||||||
The
company’s common stock is currently quoted on the Pink Sheets under the symbol
GAFC.PK.
(5) STOCK
OPTIONS
Effective
November 14, 1998, the company established the 1997 Stock Option and Warrant
Plan (the “Plan”). The Plan reserves options for 76,667 shares for
employees and warrants for 94,685 shares for stockholders. The Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. The stock options and warrants vest
immediately upon issuance and carry a maximum term of 10 years. The
exercise price for the stock options and warrants is the fair market value at
grant date. As of March 31, 2008, 209,333 options were outstanding
and all the warrants had expired.
D-3-10
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
The
following summary represents the activity under the Plan:
|
Number
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(in
Years)
|
|
|
Balance
outstanding and exercisable at September 30, 2006
|
253,000
|
$
6.72
|
5.70
|
|
Options
expired
|
(7,500)
|
$
6.75
|
|
|
Balance
outstanding and exercisable at September 30, 2007
|
245,500
|
$
6.72
|
4.63
|
|
Options
expired
|
(36,167)
|
$
6.85
|
|
|
Balance
outstanding and exercisable at March 31, 2008
|
209,333
|
$
6.70
|
4.18
|
The
company has adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment” (“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 the pro forma impact disclosed. As
allowable under SFAS 123R, the company used the Black-Scholes method to measure
the compensation cost of stock options granted in 2006 with the following
assumptions: risk-free interest rate of 4.88%, a dividend payout rate of zero,
and an expected option life of nine years. The volatility is
32%. Using those assumptions, the fair value of stock options granted
during fiscal 2006 was $2.92. There were no options
granted during the six months ended March 31, 2008 and 2007.
(6)
EARNINGS PER SHARE
Earnings
per share is based on the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an
entity. The weighted average shares outstanding for basic and diluted
earnings per share for the six months ended March 31, 2008 and 2007 were the
same, as the effect of the conversion of preferred securities and the impact of
the exercised stock options of 1,379,999 and 1,373,469 in the periods ended
March 31, 2008 and 2007, respectively, were excluded as they would have been
anti-dilutive for those periods.
(7)
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. SFAS No. 157 applies to other accounting pronouncements
that require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. The Statement does not require any new fair value
measurements and is effective for financial assets and liabilities for fiscal
years beginning after November 15, 2007. In February 2008, the FASB approved the
issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the
effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and
nonfinancial liabilities except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis. We do not believe
the adoption of SFAS 157 will have a material impact on the consolidated
financial statements.
D-3-11
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
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, any contingent consideration to be paid, 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 and to expense transaction costs when
incurred. SFAS No. 141(R) applies to fiscal years beginning after
December 15, 2008 and is adopted prospectively. Earlier adoption is
prohibited. This statement will only apply to any acquisitions
occurring after the effective date.
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 a 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 that
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, that changes in ownership interest be
accounted for similarly, as equity transactions, and that, 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.
On March
20, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 provides for enhanced disclosures about how
and why an entity uses derivatives and how and where those derivatives and
related hedged items are reported in the entity’s financial
statements. SFAS 161 also requires certain tabular formats for
disclosing such information. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008 with early application
encouraged. SFAS 161 applies to all entities and all derivative
instruments and related hedged items accounted for under SFAS
133. Among other things, SFAS 161 requires disclosures of an entity’s
objectives and strategies for using derivatives by primary underlying risk and
certain disclosures about the potential future collateral or cash requirements
as a result of contingent credit-related features. The company is
currently evaluating the impact, if any, that the adoption of SFAS 161 will have
on the company’s financial statements.
D-3-12
Greater
Atlantic Financial Corp.
Notes
to Consolidated Financial Statements
Information
as of March 31, 2008 and Three and Six Months Ended March 31, 2008 and 2007
(Unaudited)
(8)
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. The company retained approximately $1.3 million of the
proceeds for general corporate purposes, investing the retained funds in
short-term investments. The remaining $8.0 million of the proceeds
was invested in the bank to increase its capital position (also see Note 4
Regulatory Matters).
To comply
with FIN 46, the trust preferred subsidiary was deconsolidated in 2004, and the
related securities have been presented as obligations of the company and titled
“Junior Subordinated Debt Securities” in the financial statements.
On
December 19, 2006, the company issued a news release announcing that the first
quarter distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company follows advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the company.
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 continues, but can be no
longer than 20 consecutive quarterly periods).
(9)
DERIVATIVE FINANCIAL INSTRUMENTS
During
fiscal years 2003 and 2002, the bank entered into various interest rate caps
that total $20 million in notional principal with terms between five and ten
years that limit the float between a floor of 2.00%, and are capped between
6.50% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.
Realized
and unrealized gains and losses on those derivatives which meet hedge accounting
requirements are deferred and recognized when the hedge transaction
occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the six months ended March 31, 2008 and 2007 the
instruments did not meet hedge accounting requirements. The
statements of operations include net losses of $28,000 and $33,000 for the six
months ended March 31, 2008 and 2007, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
This
report contains forward-looking statements. When used in this 10-Q
report and in future filings by the company with the Securities and Exchange
Commission (the “SEC”), in the company’s press releases or other public or
shareholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimate,” “project” or
similar expressions are intended to identify “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the company’s
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the company’s market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The company wishes to
advise readers that the factors listed above could affect the company’s
financial performance and could cause the company’s actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The
company does not undertake and specifically declines any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated
events.
The
matters discussed in management’s discussion and analysis of financial condition
and results of operations reflects continuing operations, unless otherwise
noted.
General
We are a
savings and loan holding company, which was organized in June
1997. We conduct substantially all of our business through our wholly
owned subsidiary, the bank, a federally chartered savings bank. The
bank is a member of the Federal Home Loan Bank (“FHLB”) system and its deposits
are insured up to applicable limits by the Federal Deposit Insurance
Corporation. We offer traditional banking services to customers
through the five branches of the bank located throughout the greater Washington,
D.C. metropolitan area and the Shenandoah Valley.
The
profitability of the company depends primarily on its non-interest income and
net interest income. Net interest income is the difference between
the interest income it earns on its loans and investment portfolio, and the
interest it pays on interest-bearing liabilities, which consist mainly of
interest paid on deposits and borrowings. Non-interest income
consists primarily of gain on sales of loans, derivatives and available-for-sale
investments and fees from service charges on deposits and loans.
The level
of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
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. Subsequently, in a
Form 8-K filed on April 16, 2007, we announced that the company and Summit
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, and was completed on
August 24, 2007, with the bank recognizing a gain of $4.3
million.
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, the company and
Summit amended their 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. In a Form 8-K filed on March 26, 2008 we announced that our
shareholders overwhelmingly approved the terms and conditions of the proposed
merger of Greater Atlantic with and into Summit. On April 9, 2008,
the company announced that it had received written notice from Summit that
Summit had exercised its right to terminate the agreement for the company to
merge with and into Summit. Greater Atlantic and Summit have
initiated negotiations towards entering into a new definitive
agreement. However, no assurances can be given that the negotiations
will lead to the parties entering into a new definitive agreement.
Critical
Accounting Policies, Estimates and Judgments
The
company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from those estimates under
different assumptions or conditions. The company believes that, of
its significant accounting policies, the most critical accounting policies we
apply are those related to the evaluation of the adequacy of the allowance for
loan losses.
A variety
of factors impact the carrying value of the loan portfolio including the
calculation of the allowance for loan losses, valuation of underlying
collateral, the timing of loan charge-offs and the amount and amortization of
loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance
is established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments on
loans. Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of our regulators, changes in the size
and composition of the loan portfolio and peer comparisons. The
analysis also requires consideration of the economic climate and direction,
change in the interest rate environment, which may impact a borrower’s ability
to pay, legislation impacting the banking industry and economic conditions
specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
Financial
Condition
At March
31, 2008 the company’s total assets were $230.4 million, compared to the $246.0
million held at September 30, 2007, representing a decrease of
6.33%. The decrease resulted primarily from a decrease in investment
securities and loans receivable and was offset in part by an increase in
interest bearing deposits. The decline in the bank’s overall asset
size is reflected in the consolidated statements of financial condition and
statements of operations as we continued to manage the bank’s assets and
liabilities to maintain the bank in a well capitalized position.
Net loans
receivable at March 31, 2008 were $159.7 million, a decrease of $16.4 million or
9.30% from the $176.1 million held at September 30, 2007. The decrease in loans
consisted primarily of a decrease of $1.9 million in the bank’s consumer loan
portfolio, coupled with a $302,000 decline in the bank’s single family loan
portfolio. Because the bank’s single family and consumer loan
portfolios consist primarily of adjustable-rate loans, with the current yield
curve, customers are refinancing away from adjustable-rate loans and into longer
term, fixed-rate loans or curtailing outstanding balances. Commercial
business loans decreased by $9.1 million, land loans decreased $3.6 million and
commercial real estate loans outstanding decreased by $1.9 million during the
period. Those decreases were offset in part by an increase of
$448,000 in construction loans. The increase in construction lending
was primarily in the single family residential sector of the
market. The company anticipates that lending in that area will slow
as a result of the current slow pace of sales occurring in the single family
market.
At March
31, 2008, investment securities were $44.9 million, a decrease of $7.1 million
or 13.55% from the $52.0 million held at September 30, 2007. The cash
proceeds from the sale or payoff of investment securities were used to reduce
higher cost wholesale funding, including borrowings and wholesale
deposits.
Deposits
at March 31, 2008 were $188.8 million, a decrease of $9.2 million from the
$198.0 million held at September 30, 2007. Total deposits decreased
primarily due to a $4.6 million decline in our money fund accounts and our
reduced reliance on brokered deposits and wholesale deposits, which have a
higher cost. Those types of deposits have declined $5.8 million since
September 30, 2007. While non-interest bearing now accounts and
passbook accounts also declined, those declines were partially offset by an
increase of $2.3 million in certificate of deposits which have been obtained
through the bank’s marketing efforts and are at a lower cost than brokered and
wholesale deposits.
Comparison
of Results of Operations for the Three Months Ended
March
31, 2008 and March 31, 2007
Net Income. For
the three months ended March 31, 2008, the company had a net loss of $5.0
million or $1.66 per diluted share, compared to a net loss of $824,000 or $0.27
per diluted share for the three months ended March 31, 2007. The $4.2
million increase in the net loss over the comparable period one-year ago was
primarily the result of an increase in the provision for loan losses, decreases
in net interest income, non-interest income and increases in non-interest
expense and provision for income taxes. The provision for income
taxes of $885,000 is the result of increasing the allowance on the deferred tax
asset during the quarter. The ongoing net losses reported in the
company’s Annual Report on Form 10-K for the year ended September 30, 2007 and
for this three month period, remain a consistent problem for management because
the loan production needed to maintain the retail branch network has not been
attained, and the bank is currently managing its assets and liabilities to
maintain a well capitalized status and effect a sale of the
bank. Because of the bank’s loans to one borrower limit, and the
current issuance by the Office of Thrift Supervision of a Cease and Desist Order
effective April 25, 2008 it cannot expand its commercial loan portfolio and
maintain a consistent level of outstanding loans to larger
customers. Those factors have caused and will cause earning assets to
decline, impacting earnings. Further, margin pressure from the yield
curve also presents a very challenging environment in which to seek to increase
our net interest margin.
Net Interest
Income. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing liabilities such as deposits and
borrowings. The level of net interest income is determined primarily
by the relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon
them. The correlation between the re-pricing of interest rates on
assets and on liabilities also influences net interest income.
The
following table presents a comparison of the components of interest income and
expense and net interest income.
|
Net
interest income from continuing operations
|
Difference
|
|||||||||||||||
|
Three
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Loans
|
$ | 2,697 | $ | 3,651 | $ | (954 | ) | (26.13 | )% | |||||||
|
Investments
|
727 | 943 | (216 | ) | (22.91 | ) | ||||||||||
|
Total
|
3,424 | 4,594 | (1,170 | ) | (25.47 | ) | ||||||||||
|
Interest
expense:
|
||||||||||||||||
|
Deposits
|
1,862 | 2,187 | (325 | ) | (14.86 | ) | ||||||||||
|
Borrowings
|
541 | 712 | (171 | ) | (24.02 | ) | ||||||||||
|
Total
|
2,403 | 2,899 | (496 | ) | (17.11 | ) | ||||||||||
|
Net
interest income
|
$ | 1,021 | $ | 1,695 | $ | (674 | ) | (39.76 | )% | |||||||
The
decrease in net interest income during the three months ended March 31, 2008,
from the comparable period one year ago, resulted primarily from a $45.2 million
decrease in the bank’s interest-earning assets coupled with average interest-earning
assets declining by $1.7 million more than the decline in average
interest-bearing liabilities. That decrease was coupled with a
69 basis point decrease in net interest margin (net interest income divided by
average interest-earning assets) from 2.51% for the three months ended March 31,
2007 to 1.82% for the three months ended March 31, 2008. The decrease
in net interest margin also resulted from the average cost on interest-bearing
liabilities decreasing by 2 basis points while the average yield on
interest-earning assets declined 71 basis points resulting in a change of 69
basis points.
The
current interest rate environment has been a difficult one for most financial
institutions. We expect the interest rate environment to remain
challenging and we believe it will continue to have an impact on our net
interest margin and net interest rate spread. We also believe,
however, that our strategy of changing the balance sheet from one that was
wholesale oriented, as reflected in the company’s former reliance on brokered
and internet deposits, to one which is more retail oriented, will benefit us
over time. We believe that change will position us to realize a
benefit when the interest rate environment improves. If market
interest rates were to rise, given our asset sensitivity position, we would also
expect our net interest margin to improve. However, in a declining
rate environment our interest rate spread and our net interest income would
decline. The bank continues to monitor the markets and its interest
rate position to alleviate any material changes in net interest
margin.
Interest
Income. Interest income for the three months ended March 31,
2008 decreased $1.2 million compared to the three months ended March 31, 2007,
primarily as a result of a $45.2 million decrease in the average balances of
outstanding loans and investment securities. The decreases in those
balances were coupled with a decrease of 71 basis points in the average yield
earned on interest earning assets.
Interest
Expense. The $496,000 decrease in interest expense for the
three months ended March 31, 2008 compared to the 2007 period was principally
the result of a $43.5 million decrease in the average amount of deposits and
borrowings. That decrease in the average interest-bearing liabilities
was coupled with a 2 basis point decrease in the cost of funds on average
deposits and borrowings. The decrease in interest expense on deposits
was primarily due to a decrease of $26.4 million in average deposits, primarily
reflecting the sale of the Pasadena branch. That decrease was coupled
with a 10 basis point decrease in rates paid on deposits, primarily due to lower
rates paid on interest-bearing demand deposits and certificates and lower
pricing on new and renewed time deposits.
The
decrease in interest expense on borrowings for the three months ended March 31,
2008, when compared to the 2007 period, was principally the result of a $17.1
million decrease in average borrowed funds, partially offset by a 61 basis point
increase in the cost of borrowed funds. The components accountable
for the decrease of $171,000 in interest expense on borrowings were a $227,000
decrease relating to average volume, partially offset by a $56,000 increase
relating to average cost.
Comparative Average Balances and
Interest Income Analysis. The following table presents the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and annualized rates. No tax-equivalent
adjustments were made and all average balances are average daily
balances. Non-accruing loans have been included in the tables as
loans carrying a zero yield.
|
For
the Three Months Ended March31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/ Rate
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/
Rate
|
|||||||||||||||||||
|
Assets:
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||
|
Real
estate loans
|
$ | 83,519 | $ | 1,408 | 6.74 | % | $ | 93,062 | $ | 1,696 | 7.29 | % | ||||||||||||
|
Consumer
loans
|
51,006 | 781 | 6.12 | 56,230 | 1,074 | 7.64 | ||||||||||||||||||
|
Commercial
business loans
|
30,774 | 508 | 6.60 | 39,919 | 881 | 8.83 | ||||||||||||||||||
|
Total
loans
|
165,299 | 2,697 | 6.53 | 189,211 | 3,651 | 7.72 | ||||||||||||||||||
|
Investment
securities
|
44,745 | 562 | 4.93 | 54,579 | 662 | 4.85 | ||||||||||||||||||
|
Mortgage-backed
securities
|
14,520 | 175 | 4.82 | 25,979 | 281 | 4.33 | ||||||||||||||||||
|
Total
interest-earning assets
|
224,564 | 3,424 | 6.10 | 269,769 | 4,594 | 6.81 | ||||||||||||||||||
|
Non-earning
assets
|
10,909 | 11,119 | ||||||||||||||||||||||
|
Total assets
|
$ | 235,473 | $ | 280,888 | ||||||||||||||||||||
|
Liabilities
and Stockholders'
Equity:
|
||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
$ | 1,939 | 4 | 0.83 | $ | 3,233 | 7 | 0.87 | ||||||||||||||||
|
Now
and money market accounts
|
53,373 | 385 | 2.89 | 75,438 | 657 | 3.48 | ||||||||||||||||||
|
Certificates
of deposit
|
124,168 | 1,473 | 4.75 | 127,228 | 1,523 | 4.79 | ||||||||||||||||||
|
Total
deposits
|
179,480 | 1,862 | 4.15 | 205,899 | 2,187 | 4.25 | ||||||||||||||||||
|
FHLB
advances
|
25,000 | 374 | 5.98 | 38,378 | 505 | 5.26 | ||||||||||||||||||
|
Other
borrowings
|
11,464 | 167 | 5.83 | 15,201 | 207 | 5.45 | ||||||||||||||||||
|
Total interest-bearing
liabilities
|
215,944 | 2,403 | 4.45 | 259,478 | 2,899 | 4.47 | ||||||||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Noninterest-bearing
demand deposits
|
9,013 | 11,473 | ||||||||||||||||||||||
|
Other
liabilities
|
2,147 | 2,096 | ||||||||||||||||||||||
|
Total
liabilities
|
227,104 | 273,047 | ||||||||||||||||||||||
|
Stockholders’
equity
|
8,369 | 7,841 | ||||||||||||||||||||||
|
Total liabilities and
stockholders'
Equity
|
$ | 235,473 | $ | 280,888 | ||||||||||||||||||||
|
Net
interest income
|
$ | 1,021 | $ | 1,695 | ||||||||||||||||||||
|
Interest
rate spread
|
1.65 | % | 2.34 | % | ||||||||||||||||||||
|
Net
interest margin
|
1.82 | % | 2.51 | % | ||||||||||||||||||||
Rate/Volume Analysis. The following table
presents certain information regarding changes in interest income and interest
expense attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
Three
Months Ended
March
31, 2008 compared to
|
||||||||||||
|
March
31, 2007
|
||||||||||||
|
Change
Attributable to
|
||||||||||||
|
Volume
|
Rate
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Real
estate loans
|
$ | (174 | ) | $ | (114 | ) | $ | (288 | ) | |||
|
Consumer
loans
|
(100 | ) | (193 | ) | (293 | ) | ||||||
|
Commercial
business loans
|
(202 | ) | (171 | ) | (373 | ) | ||||||
|
Total
loans
|
(476 | ) | (478 | ) | (954 | ) | ||||||
|
Investments
|
(119 | ) | 9 | (110 | ) | |||||||
|
Mortgage-backed
securities
|
(124 | ) | 18 | (106 | ) | |||||||
|
Total
interest-earning assets
|
$ | (719 | ) | $ | (451 | ) | $ | (1,170 | ) | |||
|
Savings
accounts
|
$ | (3 | ) | $ | - | $ | (3 | ) | ||||
|
Now
and money market accounts
|
(192 | ) | (80 | ) | (272 | ) | ||||||
|
Certificates
of deposit
|
(37 | ) | (13 | ) | (50 | ) | ||||||
|
Total
deposits
|
(232 | ) | (93 | ) | (325 | ) | ||||||
|
FHLB
advances
|
(176 | ) | 45 | (131 | ) | |||||||
|
Other
borrowings
|
(51 | ) | 11 | (40 | ) | |||||||
|
Total
interest-bearing liabilities
|
(459 | ) | (37 | ) | (496 | ) | ||||||
|
Change
in net interest income
|
$ | (260 | ) | $ | (414 | ) | $ | (674 | ) | |||
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 provision for loan losses in the future. An
increase in the 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 was to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio and in our underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussions with the
operational staff, including the line lenders and senior
management. However, when we entered into the definitive agreement
for the company to merge with Summit, and based on the due diligence performed
by Summit, it was deemed unnecessary to continue such a contract through the
fiscal year ended September 30, 2007. However, since the bank
received the written
notice from Summit that Summit exercised its right to terminate the merger
agreement, the bank has again contracted with an independent outside
third party to have its loan portfolio reviewed.
Non-performing
assets amounted to $2.3 million or 1.00% of total assets at March 31, 2008, a
$700,000 increase from the $1.6 million or 0.57% of total assets classified as
non-performing at March 31, 2007. At March 31, 2008, assets that were
classified totaled $3.1 million, of which $148,000 were classified as special
mention, $1.1 million were classified as substandard and $1.9 million were
classified as doubtful. A $2.7 million provision for loan losses was
recorded during the three months ended March 31, 2008, compared to a provision
of $145,000 during the three months ended March 31, 2007. The $2.5 million
increase in the provision for loan losses from the year ago period resulted
primarily from the provision necessary for loan losses resulting from the
deterioration in the asset quality during the current period and provision
provided for the $1.5 million of loans receivable classified as
doubtful. Credit quality at the bank remains a concern, with a ratio
of non-performing assets to total assets of 1.00%, and with significant
classified and past-due loans. Those factors combined with expected
credit exposure growth and deteriorating economic conditions, may result in an
increase in the allowance for loan losses resulting in an increase in the
provision for loan losses in future periods.
Non-interest Income.
Non-interest income decreased $21,000 during the three months ended March
31, 2008, over the comparable three month period one year ago. That
decrease was primarily the result of a $21,000 decrease in service fees on loans
and deposits.,
The
following table presents a comparison of the components of non-interest
income.
|
Difference
|
||||||||||||||||
|
Three
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
income:
|
||||||||||||||||
|
Service
fees on loans
|
$ | 35 | $ | 45 | $ | (10 | ) | (22.22 | )% | |||||||
|
Service
fees on deposits
|
99 | 110 | (11 | ) | (10.00 | ) | ||||||||||
|
Loss
on derivatives
|
(14 | ) | (13 | ) | (1 | ) | (7.69 | ) | ||||||||
|
Other
operating income
|
7 | 6 | 1 | 16.67 | ||||||||||||
|
Total
non-interest income
|
$ | 127 | $ | 148 | $ | (21 | ) | (14.19 | )% | |||||||
Non-interest expense.
Non-interest expense increased $60,000 from $2.5 million for the three
months ended March 31, 2007 to $2.6 million for the three months ended March 31
in the current year. That increase was primarily the result of a
$355,000 increase in professional services and an increase of $111,000 in the
bank’s deposit insurance premium. Those increases were partially
offset by decreases distributed over various non-interest expense categories
with the primary contributors being compensation and employee benefits,
advertising, furniture fixtures and equipment and data
processing. The increase in professional services resulted from the
receipt of written notice that Summit exercised its
right to terminate the merger agreement. As a result, the bank
then had to recognize all professional services related to the
merger.
The
following table presents a comparison of the components of non-interest
expense.
|
Difference
|
||||||||||||||||
|
Three
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||
|
Compensation
and employee benefits
|
$ | 887 | $ | 1,175 | $ | (288 | ) | (24.51 | )% | |||||||
|
Occupancy
|
329 | 344 | (15 | ) | (4.36 | ) | ||||||||||
|
Professional
services
|
678 | 323 | 355 | 109.91 | ||||||||||||
|
Advertising
|
10 | 45 | (35 | ) | (77.78 | ) | ||||||||||
|
Deposit
insurance premium
|
118 | 7 | 111 | 1,585.71 | ||||||||||||
|
Furniture,
fixtures and equipment
|
109 | 137 | (28 | ) | (20.44 | ) | ||||||||||
|
Data
processing
|
210 | 233 | (23 | ) | (9.87 | ) | ||||||||||
|
Other
operating expense
|
241 | 258 | (17 | ) | (6.59 | ) | ||||||||||
|
Total
non-interest expense
|
$ | 2,582 | $ | 2,522 | $ | 60 | 2.38 | % | ||||||||
Income Taxes. The
company files a consolidated federal income tax return with its subsidiaries and
computes its income tax provision or benefit on a consolidated
basis. Due to our operating losses, we did not record a provision for
current income taxes for the three months ended March 31, 2008 or
2007. However the bank had to reduce its net deferred tax asset by
$885,000 for the quarter ended March 31, 2008. That reduction in
deferred tax asset resulted from the reduction in capital the company has
sustained as a result of the provision for loan losses recorded during the
quarter and quarterly operating losses. These losses have occurred
and are continuing to occur as the bank delays the implementation of stand alone
strategies in anticipation of completing a sale of the bank. In its
cease and desist order the OTS mandated a 6% core capital ratio and a 12% total
risk-based capital ratio. With the reduction in the capital levels,
and higher capital requirements, the bank has had to lower its future earning
asset growth, which in turn negatively impacts expected future earnings, and had
to reduce its net deferred tax asset.
Contractual
Obligations and Off-Balance Sheet Financing Arrangements
The
following table summarizes the bank’s contractual obligations at March 31, 2008
and the effect those obligations are expected to have on the bank’s liquidity
and cash flows in future periods.
|
Total
|
Less
Than One Year
|
Two
– Three Years
|
Four
– Five Years
|
After
Five Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
FHLB
Advances (1)
|
$ | 25,000 | $ | - | $ | 25,000 | $ | - | $ | - | ||||||||||
|
Reverse
repurchase agreements
|
1,732 | 1,732 | - | - | - | |||||||||||||||
|
Subordinated
debt securities (2)
|
25,982 | 1,310 | 1,310 | 1,310 | 22,052 | |||||||||||||||
|
Operating
leases
|
3,495 | 1,124 | 1,793 | 251 | 327 | |||||||||||||||
|
Total
obligations
|
$ | 56,209 | $ | 4,166 | $ | 28,103 | $ | 1,561 | $ | 22,379 | ||||||||||
|
(1) The
company expects to refinance these short and medium-term obligations under
substantially the same terms and conditions.
(2) Includes
principal and interest due on our junior subordinated debt
securities
|
||||||||||||||||||||
Other
Commercial Commitments
|
Total
|
Less
Than One Year
|
Two
– Three Years
|
Four
– Five Years
|
After
Five Years
|
||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||
|
Certificate
of deposit maturities (1)
|
$ | 122,011 | $ | 110,112 | $ | 8,962 | $ | 2,844 | $ | 93 | ||||||||||
|
Loan
originations
|
5,260 | 5,260 | - | - | - | |||||||||||||||
|
Unfunded
lines of credit (2)
|
107,403 | 107,403 | - | - | - | |||||||||||||||
|
Standby
letters of credit
|
255 | 255 | - | - | - | |||||||||||||||
|
Total
|
$ | 234,929 | $ | 223,030 | $ | 8,962 | $ | 2,844 | $ | 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,
open-end loans on one-four dwelling units and commercial lines that mostly
remain unfunded. The committed amount of these lines total $169.0
million.
|
||||||||||||||||||||
Comparison
of Results of Operations for the Six Months Ended
March
31, 2008 and March 31, 2007
Net Income. For
the six months ended March 31, 2008, the company had a net loss of $5.9 million
or $1.93 per diluted share, compared to a net loss of $1.7 million or $0.57 per
diluted share for the six months ended March 31, 2007. The $4.2
million increase in the net loss over the comparable period one-year ago was
primarily the result of an increase in the provision for loan losses, decreases
in net interest income, non-interest income, an increase in provision for income
taxes and were offset by a decrease in non-interest expense. The
provision for income taxes of $885,000 is the result of increasing the allowance
on the deferred tax asset over the six months ended March 31,
2008. The ongoing net losses reported in the company’s Annual Report
on Form 10-K for the year ended September 30, 2007 and for this six month
period, remain a consistent problem for management because the loan production
needed to maintain the retail branch network has not been attained, and 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 and the
current issuance by the Office of Thrift Supervision of a Cease and Desist Order
effective April 25, 2008, it cannot expand its commercial loan portfolio and
maintain a consistent level of outstanding loans to larger
customers. Those factors have caused and will cause earning assets to
decline, impacting earnings. Further, margin pressure from the yield
curve also presents a challenging environment in which to seek to increase our
net interest margin.
Net Interest
Income. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing liabilities such as deposits and
borrowings. The level of net interest income is determined primarily
by the relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon
them. The correlation between the re-pricing of interest rates on
assets and on liabilities also influences net interest income.
The
following table presents a comparison of the components of interest income and
expense and net interest income.
|
Net
interest income from continuing operations
|
Difference
|
|||||||||||||||
|
Six
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Loans
|
$ | 5,807 | $ | 7,322 | $ | (1,515 | ) | (20.69 | )% | |||||||
|
Investments
|
1,496 | 2,077 | (581 | ) | (27.97 | ) | ||||||||||
|
Total
|
7,303 | 9,399 | (2,096 | ) | (22.30 | ) | ||||||||||
|
Interest
expense:
|
||||||||||||||||
|
Deposits
|
3,892 | 4,426 | (534 | ) | (12.07 | ) | ||||||||||
|
Borrowings
|
1,112 | 1,474 | (362 | ) | (24.53 | ) | ||||||||||
|
Total
|
5,004 | 5,900 | (896 | ) | (15.19 | ) | ||||||||||
|
Net
interest income
|
$ | 2,299 | $ | 3,499 | $ | (1,200 | ) | (34.30 | )% | |||||||
The
decrease in net interest income during the six months ended March 31, 2008,
resulted primarily from a $47.2 million decrease in the bank’s interest-earning
assets coupled with average interest-earning
assets declining by $2.3 million more than the decline in average
interest-bearing liabilities. That decrease was coupled with a
53 basis point decrease in net interest margin (net interest income divided by
average interest-earning assets) from 2.55% for the six months ended March 31,
2007 to 2.02% for the six months ended March 31, 2008. The decrease
in net interest margin was also affected by the average yield on
interest-earning assets decreasing by 42 basis points and the increase of 10
basis points in the average cost on interest-bearing liabilities.
Interest
Income. Interest income for the six months ended March 31,
2008 decreased $2.1 million compared to the six months ended March 31, 2007,
primarily as a result of a $47.2 million decrease in the average balances of
outstanding loans and investment securities. The decreases in those
balances were coupled with a decrease of 42 basis points in the average yield
earned on interest earning assets.
Interest
Expense. The $896,000 decrease in interest expense for the six
months ended March 31, 2008 compared to the 2007 period was principally the
result of a $44.9 million decrease in the average amount of deposits and
borrowings. That decrease in the average interest-bearing liabilities
was partially offset by a 10 basis point increase in the cost of funds on
average deposits and borrowings. The decrease in interest expense on
deposits was primarily due to a decrease of $27.0 million in average deposits,
primarily due to the sale of the Pasadena branch and was offset in part by a 5
basis point increase in rates paid on deposits, primarily due to elevated
pricing on new and renewed time deposits.
The
decrease in interest expense on borrowings for the six months ended March 31,
2008, when compared to the 2007 period, was principally the result of a $17.9
million decrease in average borrowed funds, partially offset by a 62 basis point
increase in the cost of borrowed funds. The components accountable
for the decrease of $362,000 in interest expense on borrowings were a $479,000
decrease relating to average volume, partially offset by a $117,000 increase
relating to average cost.
Comparative Average Balances and
Interest Income Analysis. The following table presents the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and annualized rates. No tax-equivalent
adjustments were made and all average balances are average daily
balances. Non-accruing loans have been included in the tables as
loans carrying a zero yield.
|
For
the Six Months Ended March 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/ Rate
|
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/
Rate
|
|||||||||||||||||||
|
Assets:
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||
|
Real
estate loans
|
$ | 86,014 | $ | 2,948 | 6.85 | % | $ | 93,096 | $ | 3,414 | 7.33 | % | ||||||||||||
|
Consumer
loans
|
51,124 | 1,694 | 6.63 | 57,867 | 2,254 | 7.79 | ||||||||||||||||||
|
Commercial
business loans
|
32,339 | 1,165 | 7.20 | 39,735 | 1,654 | 8.33 | ||||||||||||||||||
|
Total
loans
|
169,477 | 5,807 | 6.85 | 190,698 | 7,322 | 7.68 | ||||||||||||||||||
|
Investment
securities
|
42,484 | 1,094 | 5.15 | 55,874 | 1,461 | 5.23 | ||||||||||||||||||
|
Mortgage-backed
securities
|
15,268 | 402 | 5.27 | 27,841 | 616 | 4.43 | ||||||||||||||||||
|
Total
interest-earning assets
|
227,229 | 7,303 | 6.43 | 274,413 | 9,399 | 6.85 | ||||||||||||||||||
|
Non-earning
assets
|
11,286 | 11,396 | ||||||||||||||||||||||
|
Total assets
|
$ | 238,515 | $ | 285,809 | ||||||||||||||||||||
|
Liabilities
and Stockholders'
Equity:
|
||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
$ | 2,006 | 9 | 0.90 | $ | 3,193 | 15 | 0.94 | ||||||||||||||||
|
Now
and money market accounts
|
54,841 | 851 | 3.10 | 77,408 | 1,368 | 3.53 | ||||||||||||||||||
|
Certificates
of deposit
|
124,368 | 3,032 | 4.88 | 127,613 | 3,043 | 4.77 | ||||||||||||||||||
|
Total
deposits
|
181,215 | 3,892 | 4.30 | 208,214 | 4,426 | 4.25 | ||||||||||||||||||
|
FHLB
advances
|
25,673 | 768 | 5.98 | 37,609 | 1,001 | 5.32 | ||||||||||||||||||
|
Other
borrowings
|
11,619 | 344 | 5.92 | 17,610 | 473 | 5.37 | ||||||||||||||||||
|
Total interest-bearing
liabilities
|
218,507 | 5,004 | 4.58 | 263,433 | 5,900 | 4.48 | ||||||||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Noninterest-bearing
demand deposits
|
9,046 | 11,901 | ||||||||||||||||||||||
|
Other
liabilities
|
2,037 | 2,167 | ||||||||||||||||||||||
|
Total
liabilities
|
229,590 | 277,501 | ||||||||||||||||||||||
|
Stockholders’
equity
|
8,925 | 8,308 | ||||||||||||||||||||||
|
Total liabilities and
stockholders'
Equity
|
$ | 238,515 | $ | 285,809 | ||||||||||||||||||||
|
Net
interest income
|
$ | 2,299 | $ | 3,499 | ||||||||||||||||||||
|
Interest
rate spread
|
1.85 | % | 2.37 | % | ||||||||||||||||||||
|
Net
interest margin
|
2.02 | % | 2.55 | % | ||||||||||||||||||||
Rate/Volume Analysis. The following table
presents certain information regarding changes in interest income and interest
expense attributable to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities for the periods
indicated. The change in interest attributable to both rate and
volume has been allocated to the changes in rate and volume on a pro rata
basis.
|
Six
Months Ended
March
31, 2008 compared to
|
||||||||||||
|
March
31, 2007
|
||||||||||||
|
Change
Attributable to
|
||||||||||||
|
Volume
|
Rate
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Real
estate loans
|
$ | (260 | ) | $ | (206 | ) | $ | (466 | ) | |||
|
Consumer
loans
|
(263 | ) | (297 | ) | (560 | ) | ||||||
|
Commercial
business loans
|
(308 | ) | (181 | ) | (489 | ) | ||||||
|
Total
loans
|
(831 | ) | (684 | ) | (1,515 | ) | ||||||
|
Investments
|
(350 | ) | (17 | ) | (367 | ) | ||||||
|
Mortgage-backed
securities
|
(278 | ) | 64 | (214 | ) | |||||||
|
Total
interest-earning assets
|
$ | (1,459 | ) | $ | (637 | ) | $ | (2,096 | ) | |||
|
Savings
accounts
|
$ | (6 | ) | $ | - | $ | (6 | ) | ||||
|
Now
and money market accounts
|
(399 | ) | (118 | ) | (517 | ) | ||||||
|
Certificates
of deposit
|
(77 | ) | 66 | (11 | ) | |||||||
|
Total
deposits
|
(482 | ) | (52 | ) | (534 | ) | ||||||
|
FHLB
advances
|
(318 | ) | 85 | (233 | ) | |||||||
|
Other
borrowings
|
(161 | ) | 32 | (129 | ) | |||||||
|
Total
interest-bearing liabilities
|
(961 | ) | 65 | (896 | ) | |||||||
|
Change
in net interest income
|
$ | (498 | ) | $ | (702 | ) | $ | (1,200 | ) | |||
Non-performing
assets amounted to $2.3 million or 1.00% of total assets at March 31, 2008, a
$700,000 increase from the $1.6 million, or 0.57% of total assets, classified as
non-performing at March 31, 2007. At March 31, 2008, assets that were
classified totaled $3.1 million, of which $148,000 were classified as special
mention, $1.1 million were classified as substandard and $1.9 million were
classified as doubtful. A $2.8 million provision for loan losses was
recorded during the six months ended March 31, 2008, compared to a provision of
$293,000 during the six months ended March 31, 2007. The $2.5 million
increase in the provision for loan losses from the year ago period resulted
primarily from the provision necessary for loan losses resulting from the
deterioration in the asset quality during the current period and provision
provided for the $1.5 million of loans receivable classified as
doubtful. Credit quality at the bank remains a concern, with a ratio
of non-performing assets to total assets of 1.00%, and with significant
classified and past-due loans. Those factors combined with expected
credit exposure growth and deteriorating economic conditions, may result in an
increase in the allowance for loan losses and an increase in the provision for
loan losses in future periods.
Non-interest Income.
Non-interest income decreased $22,000 during the six months ended March
31, 2008, over the comparable six month period one year ago. That
decrease was primarily the result of a $33,000 decrease in service fees on loans
and deposits and a loss on derivatives.
The
following table presents a comparison of the components of non-interest
income.
|
Non-interest
income from continuing operations
|
Difference
|
|||||||||||||||
|
Six
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
income:
|
||||||||||||||||
|
Service
fees on loans
|
$ | 73 | $ | 87 | $ | (14 | ) | (16.09 | )% | |||||||
|
Service
fees on deposits
|
201 | 220 | (9 | ) | (4.09 | ) | ||||||||||
|
Gain
(loss) on derivatives
|
(28 | ) | (33 | ) | (5 | ) | (15.15 | ) | ||||||||
|
Other
operating income
|
17 | 11 | 6 | 54.55 | ||||||||||||
|
Total
non-interest income
|
$ | 263 | $ | 285 | $ | (22 | ) | (7.72 | )% | |||||||
Non-interest expense.
Non-interest expense decreased $468,000 from $5.2 million for the six
months ended March 31, 2007 to $4.7 million for the six months ended March 31 in
the current year. That decrease was primarily the result of a
decrease of $840,000 in compensation and employee benefits, occupancy,
advertising, furniture fixtures and equipment, data processing and other
operating expense. Those decreases were partially offset by increases
in deposit insurance premium and professional services totaling
$372,000. The increase in professional services resulted from the
receipt of written notice that Summit exercised its
right to terminate the merger agreement. As a result, the bank
then had to recognize all professional services related to the
merger.
The
following table presents a comparison of the components of non-interest
expense.
|
Non-interest
expense from continuing operations
|
Difference
|
|||||||||||||||
|
Six
Months Ended March 31,
|
2008
|
2007
|
Amount
|
%
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||
|
Compensation
and employee benefits
|
$ | 1,831 | $ | 2,441 | $ | (610 | ) | (24.99 | )% | |||||||
|
Occupancy
|
653 | 687 | (34 | ) | (4.95 | ) | ||||||||||
|
Professional
services
|
860 | 722 | 138 | 19.11 | ||||||||||||
|
Advertising
|
28 | 69 | (41 | ) | (59.42 | ) | ||||||||||
|
Deposit
insurance premium
|
264 | 30 | 234 | 780.00 | ||||||||||||
|
Furniture,
fixtures and equipment
|
214 | 267 | (53 | ) | (19.85 | ) | ||||||||||
|
Data
processing
|
435 | 452 | (17 | ) | (3.76 | ) | ||||||||||
|
Other
operating expense
|
454 | 539 | (85 | ) | (15.77 | ) | ||||||||||
|
Total
non-interest expense
|
$ | 4,739 | $ | 5,207 | $ | (468 | ) | (8.99 | )% | |||||||
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 current income taxes for the
six months ended March 31, 2008 and 2007 due to our operating
losses. However the bank reduced its net deferred tax asset by
$885,000 for the quarter ended March 31, 2008, as a result of the reduction in
capital because the provision for loan losses recorded during the quarter and
quarterly operating losses that have occurred and are continuing to occur as the
bank delays implementation of a stand alone strategy. In addition the
OTS issued an order mandating a 6% core capital ratio and a 12% total risk-based
capital ratio. With the reduction in the capital levels, and higher
capital requirements, the bank has had to lower its earning asset
growth. That in turn, negatively impacts expected future earnings and
required reduction of its deferred tax asset.
Liquidity and Capital
Resources. The bank’s primary sources of funds are deposits,
principal and interest payments on loans, mortgage-backed and investment
securities and borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. The bank continues to maintain the levels
of liquid assets previously required by OTS regulations. The bank
manages its liquidity position and demands for funding primarily by investing
excess funds in short-term investments and utilizing FHLB advances and reverse
repurchase agreements in periods when the bank’s demands for liquidity exceed
funding from deposit inflows.
The
bank’s most liquid assets are cash and cash equivalents and securities
available-for-sale. The levels of those assets are dependent on the
bank’s operating, financing, lending and investing activities during any given
period. At March 31, 2008, cash and cash equivalents, interest
bearing deposits and securities available-for-sale totaled $59.5 million or
25.82% of total assets.
The
primary investing activities of the bank are the origination of consumer loans,
residential one- to four-family loans, commercial business loans, commercial
real estate loans, and real estate construction and development loans and the
purchase of United States Treasury and agency securities, mortgage-backed and
mortgage-related securities and other investment securities. During
the six months ended March 31, 2008, the bank’s loan originations totaled $33.7
million. The bank did not purchase any United States Treasury or
agency securities, mortgage-backed or mortgage related securities or other
investment securities during the six months ended March 31, 2008. All
of our investment securities are classified as either available for sale or held
to maturity and for the period ended March 31, 2008 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 until 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 unrealized loss in the bank’s investment
portfolio totaled $2.4 million at March 31, 2008. The company has the
ability and liquidity to hold those securities until such time as the value
recovers or the securities mature.
The bank
has other sources of liquidity if a need for additional funds
arises. At March 31, 2008, the bank had $25.0 million in advances
outstanding from the FHLB and had an additional overall borrowing capacity from
the FHLB of $9.7 million. Depending on market conditions, the pricing
of deposit products and the pricing of FHLB advances, the bank may rely on FHLB
borrowings to fund asset growth.
At March
31, 2008, the bank had commitments to fund loans of $4.1 million, unused
outstanding lines of credit of $107.4 million, consisting primarily of equity
lines of credit, unused standby letters of credit of $255,000 and undisbursed
proceeds of construction mortgages of $1.2 million. Unfunded lines of
credit have remained relatively constant and have actually decreased by $4.4
million during the six months ended March 31, 2008. The bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments.
Certificate
accounts, including IRA and Keogh accounts, which are scheduled to mature in
less than one year from March 31, 2008, totaled $110.1 million. Based
upon experience, management believes the majority of maturing deposits will
remain with the bank. In addition, management of the bank believes
that it can adjust the rates offered on certificates of deposit to retain
deposits in changing interest rate environments. In the event that a
significant portion of those deposits are not retained by the bank, the bank
would be able to utilize FHLB advances and reverse repurchase agreements to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such borrowings exceeds the average
rate paid on deposits of similar duration.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market
risk is the risk of loss from adverse changes in market prices and
rates. The company’s market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. The
company has little or no risk related to trading accounts, commodities or
foreign exchange. In general, market risk reflects the sensitivity of
income to variations in interest rates and other relevant market rates or
prices. The company’s market rate sensitive instruments include
interest-earning assets and interest-bearing liabilities. The company
enters into market rate sensitive instruments in connection with its various
business operations. Loans originated, and the related commitments to
originate loans that will be sold, represent market risk that is realized in a
short period of time, generally two or three months.
The
company’s primary source of market risk exposure arises from changes in United
States interest rates and the effects thereof on mortgage prepayment and closing
behavior, as well as depositors’ choices (“interest rate
risk”). Changes in those interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and we
will continue to attempt to attract a greater proportion of short-term
liabilities to help us address our interest rate risk. The lag in
implementation of re-pricing terms on our adjustable-rate assets may result in a
decline in net interest income in a rising interest rate
environment. There can be no assurance that our interest rate risk
will be minimized or eliminated. Further, an increase in the general
level of interest rates may adversely affect the ability of certain borrowers to
pay the interest on and principal of their obligations. Accordingly,
changes in levels of market interest rates, (primarily increases in market
interest rates), could materially adversely affect our interest rate spread,
asset quality, loan origination volume and overall financial condition and
results of operations.
To
mitigate the impact of changes in market interest rates on our interest-earning
assets and interest-bearing liabilities, we actively manage the amounts and
maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets. We retain short-term and adjustable-rate assets because they
have re-pricing characteristics that more closely match the re-pricing
characteristics of our liabilities.
To
mitigate further the risk of timing differences in the re-pricing of assets and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed with
short-term deposits and borrowings. Periodically, mismatches are
identified and managed by adjusting the re-pricing characteristics of our
interest-bearing liabilities with derivatives, such as interest rate caps and
interest rate swaps.
Through
the use of these derivative instruments, management attempts to reduce or offset
increases in interest expense related to deposits and borrowings. We
use interest rate caps and pay-fixed interest rate swaps to protect against
rising interest rates.
The
interest rate caps are designed to provide an additional layer of protection,
should interest rates on deposits and borrowings rise, by effectively
lengthening the re-pricing period. At March 31, 2008, we held an
aggregate notional value of $20 million of interest rate caps. None
of the interest rate caps had strike rates that were in effect at March 31,
2008, as current LIBOR rates were below the strike rate.
We are
also striving to increase the proportion of transaction deposits to total
deposits to diminish our exposure to adverse changes in interest
rates. In particular, non-interest-bearing checking accounts and
custodial accounts are less sensitive to interest rate fluctuations and provide
a growing source of non-interest income through deposit and other retail banking
fees.
The
following table, which is based on information that we provide to the Office of
Thrift Supervision, presents the change in our net portfolio value at December
31, 2007 that would occur in the event of an immediate change in interest rates
based on Office of Thrift Supervision assumptions, with no effect given to any
steps that we might take to counteract that change.
|
Net
Portfolio Value
(Dollars
in thousands)
|
Net
Portfolio Value as % of
Portfolio
Value of Assets
|
|||||||||||||||||||||
|
Basic
Point (“bp”)
Change
in Rates
|
$Amount
|
$Change
|
%
Change
|
NPV
Ratio
|
Change
(bp)
|
|||||||||||||||||
| +300 | 19,614 | -2,759 | -12 | % | 8.33 | % | -94 | bp | ||||||||||||||
| +200 | 20,794 | -1,579 | -7 | % | 8.75 | % | -52 | bp | ||||||||||||||
| +100 | 21,642 | -731 | -3 | % | 9.04 | % | -23 | bp | ||||||||||||||
| 0 | 22,373 | - | 9.27 | % | - | |||||||||||||||||
| -100 | 22,478 | 105 | 0 | % | 9.27 | % | 0 | bp | ||||||||||||||
| -200 | 22,297 | -76 | 0 | % | 9.16 | % | 11 | bp | ||||||||||||||
The
Office of Thrift Supervision uses various assumptions in assessing interest rate
risk. Those assumptions relate to interest rates, loan prepayment rates, deposit
decay rates and the market values of certain assets under differing interest
rate scenarios, among others. As with any method of measuring interest rate
risk, certain shortcomings are inherent in the methods of analyses presented in
the foregoing tables. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could deviate significantly from those assumed in calculating
the table. Prepayment rates can have a significant impact on interest
income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect our rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe those assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment
activity.
Item 4T. Controls and
Procedures.
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based upon their evaluation, the principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports that the Company files or submits under the Exchange Act with the
Securities and Exchange Commission (the “SEC”) (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and (2) is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company’s internal control
over financial reporting occurred during the quarter ended March 31, 2008 that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Part
II.Other Information
Item
1. Legal Proceedings
Not
applicable.
Item 1A.
Risk Factors
Our
increased emphasis on commercial and construction lending may expose us to
increased lending risks.
At March
31, 2008, our loan portfolio consisted of $33.1 million, or 20.27% of commercial
real estate loans, $12.2 million, or 7.46% of construction and land development
loans and $25.7 million, or 15.73% 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, difficult 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. Those
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. As described in Note 4 to the Notes to Consolidated
Financial Statements in this Form 10-Q. The bank has consented to the
issuance by the OTS of the order, effective April 25, 2008. The order
is described in detail in Note 4, Regulatory Matters.
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. 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.
Restrictions
on acceptance of brokered deposits.
Under the
Order issued by the OTS effective April 25, 2008, the bank is prohibited from
accepting brokered certificates of deposit without the permission of the
OTS.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3.
Defaults Upon Senior Securities
Not
applicable.
Item
4.
Submission of Matters to a Vote of Security Holders
|
(a)
|
Greater
Atlantic Financial Corp. Special Meeting was held on March 25,
2008.
|
|
(b)
|
Omitted
per instructions.
|
|
(c)
|
A
brief description of each matter voted upon at the Special Meeting held on
March 25, 2008 and number votes cast for, against or
abstain.
|
|
1.
|
To
approve and adopt the Agreement and Plan of Reorganization dated as of
April 12, 2007, as amended December 6, 2007 between Greater Atlantic
Financial Corp. and Summit Financial Group, Inc. and the transactions
contemplated thereby.
|
Votes
For
Votes
Against
Votes
Abstain
2,506,555
103,424
3,400
|
2.
|
To
adjourn the meeting to later date or dates, if necessary, to permit
further solicitation of proxies in the event there are not sufficient
votes at the time of the meeting to approve the matters to be considered
by the shareholders at the meeting.
|
Votes
For
Votes
Against
Votes
Abstain
2,495,236
108,453
3,400
|
3.
|
In
the discretion, the proxies are authorized to vote upon any other business
that may properly come before the meeting, or any adjournment
thereof.
|
Votes
For
Votes
Against
Votes
Abstain
2,808,448
150,859
20,130
Item
5.
Other Information
Not
applicable.
Item
6.
Exhibits
(a)
Exhibits
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
|
|
32.2
Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
|
Greater
Atlantic Financial Corp.
Signatures
Pursuant
to the requirement of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
Greater Atlantic
Financial Corp.
|
|
|
(Registrant)
|
|
|
By: /s/ Carroll E.
Amos
|
|
|
President
and Chief Executive Officer
|
|
|
By: /s/ David E.
Ritter
|
|
|
David
E. Ritter
|
|
|
Senior
Vice President and Chief Financial
Officer
|
|
|
Date:
May 14, 2008
|
Exhibit
31.1
CERTIFICATION
I,
Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
|
|
1.I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
|
|
|
2.Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
|
5.The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
By:/s/ Carroll E.
Amos
Carroll E. Amos
President and Chief Executive
Officer
Date: May 14, 2008
Exhibit
31.2
CERTIFICATION
I, David
E. Ritter, Senior Vice President and Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
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1.I
have reviewed this Quarterly Report on Form 10-Q of Greater Atlantic
Financial Corp.;
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2.Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
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3.Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
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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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
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a)
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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;
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b)
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Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
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c)
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Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report, based on such evaluation;
and
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d)
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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 officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board or directors (or persons performing the equivalent
functions):
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a.
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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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By:/s/ David E.
Ritter
David E. Ritter
Senior Vice President and
Chief Financial Officer
Date: May 14, 2008
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Greater Atlantic Financial Corp. (the “company”) on Form 10-Q for the period
ended March 31, 2008 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, Carroll E. Amos, President and Chief Executive
Officer of the company, certify, pursuant to 18 U.S.C.§ 1350, as added by § 906
of the Sarbanes-Oxley Act of 2002, that:
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A.
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The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
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B.
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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.
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By: /s/ Carroll E.
Amos
Carroll E. Amos
President and Chief Executive Officer
Date: May 14, 2008
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADDED BY
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Greater Atlantic Financial Corp. (the “company”) on Form 10-Q for the period
ended March 31, 2008 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), I, David E. Ritter Senior Vice President and Chief
Financial Officer of the company, certify, pursuant to 18 U.S.C.§ 1350, as added
by § 906 of the Sarbanes-Oxley Act of 2002, that:
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C.
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The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
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D.
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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.
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By: /s/ David E.
Ritter
David E. Ritter
Senior Vice President and
Chief Financial Officer
Date: May 14, 2008
D-3-38