As filed with the Securities and Exchange Commission on February 1, 2002 Registration No. 333-75570
Registration No. 333-75570-01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
GREATER ATLANTIC FINANCIAL CORP.
DELAWARE 6035 54-1873112
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification
Incorporation or Number) Code Number)
Organization)
10700 PARKRIDGE BOULEVARD, SUITE P50
RESTON, VIRGINIA 20191
(703) 391-1300
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Co-Registrants' Principal Executive Offices)
CARROLL E. AMOS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
10700 PARKRIDGE BOULEVARD, SUITE P50
RESTON, VIRGINIA 20191
(703) 391-1300
(Name, Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service for Co-Registrants)
GREATER ATLANTIC CAPITAL TRUST I
DELAWARE 6733 26-6000038
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification
Incorporation or Number) Code Number)
Organization)
10700 PARKRIDGE BOULEVARD, SUITE P50
RESTON, VIRGINIA 20191
(703) 391-1300
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Co-Registrants' Principal Executive Offices)
CARROLL E. AMOS
ADMINISTRATIVE TRUSTEE
10700 PARKRIDGE BOULEVARD, SUITE P50
RESTON, VIRGINIA 20191
(703) 391-1300
(Name, Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service for Co-Registrants)
COPIES TO:
GEORGE W. MURPHY, JR. ESQ.
MULDOON MURPHY & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. /__/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /__/
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /__/
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /__/
THE REGISTRATION FEE OF $2,629 WAS PREVIOUSLY PAID UPON THE INITIAL
FILING OF THE FORM SB-2 ON DECEMBER 20, 2001.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
PROSPECTUS
UP TO $11,000,000 CONVERTIBLE PREFERRED SECURITIES
ISSUABLE UPON EXERCISE OF SUBSCRIPTION RIGHTS
GREATER ATLANTIC CAPITAL TRUST I
6.50% CUMULATIVE CONVERTIBLE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10.00 PER
CONVERTIBLE PREFERRED SECURITY) FULLY,
IRREVOCABLY AND UNCONDITIONALLY
GUARANTEED ON A SUBORDINATED BASIS,
AS DESCRIBED IN THIS PROSPECTUS BY
GREATER ATLANTIC FINANCIAL CORP.
[COMPANY LOGO]
------------------------
Greater Atlantic Capital Trust I is distributing 0.365 rights for each
share of Greater Atlantic Financial Corp. common stock outstanding on February
4, 2002 to Greater Atlantic Financial's shareholders of record on that date, or
rights to purchase a total of up to 1,100,000 convertible preferred securities.
Each whole right will entitle you to purchase one convertible preferred
security for $10.00 under the basic subscription privilege. You will also have
the right to oversubscribe for up to the maximum number of convertible preferred
securities offered in the rights offering if you exercise your full basic
subscription privilege. If we receive oversubscription requests for more
convertible preferred securities than we have available for oversubscription,
you will receive only your pro rata portion of these convertible preferred
securities based on the number of convertible preferred securities you subscribe
for pursuant to your oversubscription privilege to the total number of
convertible preferred securities subscribed for pursuant to oversubscription
privileges.
The rights offering will expire at 5:00 p.m., Eastern time, on March 5,
2002, unless we decide to extend it.
The convertible preferred securities represent an indirect interest in
our 6.50% convertible junior subordinated debentures. The convertible debentures
have the same payment terms as the convertible preferred securities and will be
purchased by Greater Atlantic Capital Trust I using the proceeds from the rights
offering. The convertible preferred securities are convertible into shares of
our common stock as described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"GAFC." The closing price as reported on Nasdaq on January 29, 2002, was $6.22.
We intend to list the convertible preferred securities over-the-counter through
the OTC Bulletin Board under the symbol "GAFCP." Trading is expected to commence
on or before delivery of the securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE SAVINGS AND
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
==============================================================================================================
PRICE TO INVESTORS PROCEEDS TO TRUST (1)
---------------------------------------------------
Per Convertible Preferred Security...................... $10.00 $10.00
Total................................................... $11,000,000 $11,000,000
==============================================================================================================
(1) Before deducting estimated offering expenses of $400,000 payable by
Greater Atlantic Financial Corp.
The date of this prospectus is ___________ __, 2002
SUMMARY
This summary highlights information contained in this prospectus.
Because this is a summary, it may not contain all of the information that is
important to you. Therefore, you should also read the more detailed information
set forth in this prospectus, including our financial statements, as well as
other considerations that are important to you in making your decision about
whether to invest in the securities. You should pay special attention to the
"Risk Factors" section beginning on page 8 of this prospectus to determine
whether an investment in the securities is appropriate for you.
As described in greater detail in this prospectus, fractional rights
that would be issued in the rights offering will be rounded up to the next whole
right. Since we do not at this time know the number of additional rights that
brokers and other persons that hold shares of common stock for the accounts of
others will need in order to round up fractional rights for those accounts, we
cannot determine the precise number of convertible preferred securities that we
will issue in connection with the rights offering. As set forth on the cover
page of this prospectus, the Trust may issue a total of 1,100,000 convertible
preferred securities in the rights offering. This amount includes approximately
6,000 convertible preferred securities, which is our estimate of the maximum
number of convertible preferred securities that the Trust will need to issue as
a result of the rounding up of fractional rights to the next whole right. Unless
otherwise indicated, all information in this prospectus assumes that all
1,100,000 convertible preferred securities will be issued in the rights
offering. As used in this prospectus, "we" and "us" and "our" refer to Greater
Atlantic Financial and its subsidiaries depending on the context.
THE COMPANIES
GREATER ATLANTIC FINANCIAL CORP. We are a savings and loan holding company, and are
10700 Parkridge Boulevard headquartered in Reston, Virginia. We were organized in June
Reston, Virginia 20191 1997. We conduct substantially all of our business through
(703) 391-1300 our wholly-owned subsidiary, Greater Atlantic Bank, a
federally-chartered savings bank, and its wholly- owned
subsidiary, Greater Atlantic Mortgage Corporation. We offer
traditional banking services to customers through nine
Greater Atlantic Bank branches located throughout the
greater Washington, D.C./Baltimore Metropolitan area. We
also originate mortgage loans for sale in the secondary
market through Greater Atlantic Mortgage.
At September 30, 2001, we had total assets of $370.6
million, total deposits of $230.0 million and total
consolidated shareholders' equity of approximately $21.2
million.
Since our organization in 1997, we have experienced a
significant increase in our assets. Our total assets have
grown from $31.6 million at September 30, 1997 to $370.6
million at September 30, 2001. This growth in assets has
been accomplished through opening new branches, increasing
deposit market share in existing branches and through
acquisition. Since organizing in 1997, we have opened 4 new
branch offices. We continued our expansion through our
acquisition of Dominion Savings Bank, with assets of
approximately $40.9 million, in August 2000. The acquisition
of Dominion Savings Bank's three offices located in Front
Royal, New Market and Winchester grew our branch network by
50% and enhanced our franchise by establishing a presence in
the attractive Shenandoah Valley market. In addition,
Greater Atlantic Mortgage opened a satellite office in
Martinsburg, West Virginia, and offices in Rockville and
Wheaton, Maryland to expand its retail production. We
believe that there is a void in the Washington,
D.C./Baltimore metropolitan area for service-oriented,
community banks due to the continued consolidation of
in-market institutions predominantly by larger, out-of-state
banks.
While we expect to continue to experience significant growth
in our assets through additional investments in securities
and to consider acquisitions, as opportunities permit,
management expects to focus on the expansion of its
commercial lending activities. The principal lending
activity of Greater
Atlantic Bank is the origination of mortgage loans for the
purpose of purchasing or refinancing single family
residential property. Greater Atlantic Bank also originates,
and has increased its emphasis on, multi-family loans,
construction loans, commercial real estate loans, commercial
business loans and a variety of consumer loans. In its
effort to increase its volume of commercial lending, Greater
Atlantic Bank hired an experienced commercial loan officer
in November 2001 with the responsibility of further
developing the commercial lending policy and increasing
volume.
We also invest in mortgage-backed securities, securities
issued by the U.S. Government, collateralized mortgage
obligations and corporate debt securities.
We offer traditional banking services to our customers
through our nine branches located in Washington, D.C.,
Rockville and Pasadena, Maryland and Arlington, Front Royal,
New Market, South Riding, Sterling and Winchester, Virginia.
Services for personal accounts include no cost and interest
checking, money market savings accounts, certificates of
deposit, savings accounts, individual retirement accounts,
credit cards and safe deposit boxes. Services for business
accounts include small business checking, business interest
checking, business savings, money market investment
accounts, escrow management accounts and merchant services.
GREATER ATLANTIC CAPITAL TRUST I The Trust is a newly formed financing subsidiary of Greater
c/o Greater Atlantic Financial Corp. Atlantic Financial. Upon issuance of the convertible
10700 Parkridge Boulevard preferred securities, the purchasers in the rights offering
Reston, Virginia 20191 will own all of the issued and outstanding convertible
(703) 391-1300 preferred securities of the Trust. In exchange for our
capital contribution to the Trust, we will own all of the
common securities of the Trust. The Trust exists exclusively
for the following purpose:
- issuing convertible preferred securities in this rights
offering for cash;
- issuing the common securities to us;
- investing the proceeds from the sale of its convertible
preferred and common securities in an equivalent amount of
convertible junior subordinated debentures for the Trust, to
be issued by us; and
- engaging in activities that are incidental to those listed
above, such as receiving payments on the debentures and
making distributions to security holders, furnishing notices
and other administrative tasks.
THE CONVERTIBLE PREFERRED SECURITIES RIGHTS OFFERING
RIGHTS.............................. If you were a record holder of our common stock at the close
of business on February 4, 2002, you will receive, at no
charge, 0.365 subscription rights for each share of common
stock you held at that time. Fractional rights will be
rounded up to the next whole right.
SUBSCRIPTION PRICE.................. $10.00 per convertible preferred security.
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BASIC SUBSCRIPTION
PRIVILEGE........................... For each whole right that you own, you will have a basic
subscription privilege to buy from the Trust one convertible
preferred security at the subscription price. You may
exercise the basic subscription privilege for some or all of
your rights.
OVERSUBSCRIPTION PRIVILEGE.......... If you exercise your full basic subscription privilege for
any rights, you will also have an oversubscription privilege
to subscribe for any convertible preferred securities that
our other rights holders do not purchase under their basic
subscription privilege. If the number of convertible
preferred securities remaining after the exercise of the
basic subscription privileges is not sufficient to satisfy
all subscriptions pursuant to the exercise of
oversubscription privileges, all rights holders that
exercise their oversubscription privilege will receive from
the convertible preferred securities available for
oversubscription the lesser of (1) the number of convertible
preferred securities they oversubscribe for or (2) the
number of the convertible preferred securities in proportion
to the number of convertible preferred securities for which
they subscribe pursuant to their oversubscription privilege
to the total number of convertible preferred securities for
which all rights holders subscribe pursuant to
oversubscription privileges, subject to rounding up or down
for fractional convertible preferred securities as
determined by us.
RECORD DATE......................... February 4, 2002.
EXPIRATION DATE..................... The rights will expire at 5:00 p.m., Eastern time, on March
5, 2002 unless we, in our sole discretion, decide to extend
the rights offering. Any rights that are not exercised by or
on the expiration date will expire and will no longer be
exercisable.
HOW TO EXERCISE RIGHTS.............. You may exercise your rights by completing and signing your
subscription order form and delivering it, together with
payment for the convertible preferred securities and any
other required documents to the subscription agent by the
expiration date. It is very important that you read
carefully "The Rights Offering--Subscription Payments" and
the subscription order form and related instructions for
more information regarding the methods of delivery and
payment, because if you fail to comply with these
requirements, your rights may not be properly exercised and
may expire without value. Once you have exercised your
rights, you may not revoke that exercise. All convertible
preferred securities must be purchased through a participant
of The Depository Trust Company, New York, New York, such as
a broker or a dealer.
TRANSFERABILITY OF RIGHTS........... Subscription rights are non-transferable.
YOU WILL NOT RECEIVE CERTIFICATES... The convertible preferred securities will be represented by
a global security that will be deposited with and registered
in the name of The Depository Trust Company, New York, New
York, or its nominee. This means that you will not receive a
certificate for the convertible preferred securities, and
your ownership interests will be recorded through the DTC
book-entry system. Therefore, all convertible preferred
securities must be purchased through a DTC participant such
as a broker or dealer.
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UNFULFILLED SUBSCRIPTIONS........... If you subscribe for convertible preferred securities by
exercising your oversubscription privilege and we are unable
to sell you all of the convertible preferred securities for
which you oversubscribe, due to proration or otherwise, we
will return your payment of the subscription price for the
unpurchased convertible preferred securities at the time of
the closing of the offering. You will not receive interest
on funds you pay to the subscription agent, whether the
convertible preferred securities are issued or the funds are
returned.
FEDERAL INCOME TAX
CONSEQUENCES OF RIGHTS.............. For United States federal income tax purposes, you will
generally not recognize taxable income in connection with
the distribution or exercise of rights. See "Federal Income
Tax Consequences."
SUBSCRIPTION AGENT.................. Wilmington Trust Company, as a trustee of the Trust, will
act as the subscription agent for the rights offering.
SUBSCRIPTIONS BY INSIDERS........... Our directors, executive officers and the beneficial owners
of more than 5% of our common stock currently intend to
fully subscribe for their full basic subscription privileges
(aggregating approximately $5.0 million of the convertible
preferred securities) and to exercise their oversubscription
privileges for up to an additional $1.7 million of the
convertible preferred securities. No individual has entered
into a binding agreement to purchase these convertible
preferred securities and, therefore, actual purchases by
directors, executive officers and the beneficial owners of
more than 5% of our common stock could be more or less than
indicated.
THE CONVERTIBLE PREFERRED SECURITIES
THE ISSUER.......................... Greater Atlantic Capital Trust I.
SECURITIES BEING OFFERED............ We are offering 1,100,000 convertible preferred securities,
which represent preferred undivided interests in the assets
of the Trust. Those assets will consist solely of the
convertible debentures and payments received on the
convertible debentures from us.
The Trust will sell the convertible preferred securities to
shareholders of record for cash. The Trust will use that
cash to buy the convertible debentures from us.
WHEN DISTRIBUTIONS WILL BE PAID TO
YOU................................. If you purchase the convertible preferred securities, you
are entitled to receive cumulative cash distributions at a
6.50% annual rate. Distributions will accumulate from the
date the Trust issues the convertible preferred securities
and will be paid quarterly on March 31, June 30, September
30 and December 31 of each year, beginning June 30, 2002. As
long as the convertible preferred securities are represented
by a global security, the record date for distributions on
the convertible preferred securities will be the business
day prior to the distribution date. We may defer the payment
of cash distributions, as described below.
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WHEN THE SECURITIES MUST BE
REDEEMED............................ The convertible debentures will mature and the convertible
preferred securities must be redeemed on December 31, 2031.
We have the option, however, to shorten the maturity date to
a date not earlier than December 31, 2003 without the
payment of any premium amount.
REDEMPTION BEFORE DECEMBER 31,
2031 IS POSSIBLE.................... The Trust must redeem the convertible preferred securities
when the convertible debentures are paid at maturity, or
upon any earlier redemption of the debentures to the extent
the debentures are redeemed. We may redeem all or part of
the convertible debentures at any time on or after December
31, 2003 without the payment of any premium amounts.
In addition, we may redeem all of the convertible
debentures, at any time, without premium, if:
- there is a change in existing laws or regulations,
or new official administrative or judicial
interpretation or application of these laws and
regulations, that causes the interest we pay on
the convertible debentures to no longer be
deductible by us for federal income tax purposes;
or the Trust becomes subject to federal income
tax; or the Trust becomes or will become subject
to certain other taxes or governmental charges; or
- there is a change in existing laws or regulations
that requires the Trust to register as an
investment company; or
- there is a change in the capital adequacy
guidelines of the Federal Reserve that results in
the preferred securities not being counted as Tier
1 capital, applied as if we were a bank holding
company.
We may also redeem the convertible debentures at any time,
and from time to time, without premium, in an amount equal
to the liquidation amount of any convertible preferred
securities we purchase, plus a proportionate amount of
common securities, but only in exchange for a like amount of
the convertible preferred securities and common securities
then owned by us.
If your convertible preferred securities are redeemed by the
Trust, you will receive the liquidation amount of $10.00 per
convertible preferred security, plus any accrued and unpaid
distributions to the date of redemption.
WE HAVE THE OPTION TO EXTEND THE
INTEREST PAYMENT PERIOD............. The Trust will rely solely on payments made by us under the
convertible debentures to pay distributions on the
convertible preferred securities. As long as we are not in
default under the indenture relating to the convertible
debentures, we may, at one or more times, defer interest
payments on the convertible debentures for up to 20
consecutive quarters, but not beyond December 31, 2031. If
we defer interest payments on the convertible debentures:
- the Trust will also defer distributions on the
convertible preferred securities;
- the distributions you are entitled to will accumulate;
and
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- these accumulated distributions will earn interest
at an annual rate of 6.50%, compounded quarterly,
until paid.
At the end of any deferral period, we will pay to the Trust
all accrued and unpaid interest under the convertible
debentures. The Trust will then pay all accumulated and
unpaid distributions to you.
YOU WILL STILL BE TAXED IF
DISTRIBUTIONS ARE DEFERRED.......... If a deferral of payment occurs, you will still be required
to recognize the deferred amounts as income for federal
income tax purposes in advance of receiving these amounts
even if you are a cash basis taxpayer.
OUR GUARANTEE OF PAYMENT............ Our obligations described in this prospectus, in the
aggregate, constitute a full, irrevocable and unconditional
guarantee on a subordinated basis by us of the obligations
of the Trust under the convertible preferred securities.
Under the guarantee agreement, we guarantee the Trust will
use its assets to pay the distributions on the convertible
preferred securities and the liquidation amount upon
liquidation of the Trust. However, the guarantee does not
apply when the Trust does not have sufficient funds to make
the payments. If we do not make payments on the convertible
debentures, the Trust will not have sufficient funds to make
payments on the convertible preferred securities. In this
event, your remedy will be to institute a legal proceeding
directly against us for enforcement of payments under the
convertible debentures.
WE MAY DISTRIBUTE THE DEBENTURES
DIRECTLY TO YOU..................... We may, at any time, dissolve the Trust and distribute the
convertible debentures to you. If we distribute the
convertible debentures, we will use our best efforts to list
them on a national securities exchange or comparable
automated quotation system.
HOW THE SECURITIES WILL RANK IN
RIGHT OF PAYMENT.................... Our obligations under the convertible preferred securities,
convertible debentures and guarantee are unsecured and will
rank as follows with regard to right of payment:
- the convertible preferred securities will rank
equally with the common securities of the Trust.
The Trust will pay distributions on the
convertible preferred securities and the common
securities pro rata. However, if we default with
respect to the convertible debentures, then no
distributions on the common securities of the
Trust or our common stock will be paid until all
accumulated and unpaid distributions on the
convertible preferred securities have been paid;
- our obligations under the convertible debentures
and the guarantee are unsecured and generally will
rank junior in priority to our existing and future
senior and subordinated indebtedness; and
- because we are a holding company, the convertible
debentures and the guarantee will effectively be
subordinated to all depositors' claims, as well as
existing and future liabilities of our
subsidiaries.
6
VOTING RIGHTS OF THE PREFERRED
SECURITIES.......................... Except in limited circumstances, holders of the convertible
preferred securities will have no voting rights.
PROPOSED OTS BULLETIN BOARD
SYMBOL.............................. GAFCP
HOW THE PROCEEDS OF THIS
OFFERING WILL BE USED............... The Trust will invest all of the proceeds from the sale of
the convertible preferred securities in the convertible
debentures. We estimate that the net proceeds to us from the
sale of the convertible debentures to the Trust, after
deducting offering expenses, will be approximately $10.6
million. We currently intend to retain approximately $2.0
million of the proceeds for general corporate purposes.
Initially, we will invest the retained funds in short-term
investment grade securities. We intend to invest the
remainder of the proceeds in Greater Atlantic Bank to
increase its capital position. Initially, these funds will
be invested in short-term investment grade securities.
Subsequently, such proceeds may be used to fund new loans
and other investments.
CONVERSION INTO COMMON STOCK........ Each convertible preferred security is convertible on or
after 60 days after the closing of the offering, at the
option of the holder, into shares of our common stock at the
initial conversion ratio of 1.429 shares of common stock for
each convertible preferred security (equivalent to an
initial conversion price of $7.00 per share of common
stock), subject to adjustment under certain circumstances.
The last reported sales price of our common stock on the
Nasdaq National Market on January 29, 2002, was $6.22. If
you want to convert a convertible preferred security, the
conversion agent will exchange your convertible preferred
security for the appropriate principal amount of convertible
debentures held by the Trust and immediately convert the
convertible debentures into shares of our common stock. You
will receive cash in lieu of fractional shares. However, you
will not receive cash or additional shares of our common
stock to compensate you for any accrued but unpaid
distributions on the convertible preferred security through
the time of conversion. These accrued amounts will be
forfeited.
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RISK FACTORS
An investment in the convertible preferred securities involves a number
of risks. We urge you to read all of the information contained in this
prospectus. In addition, we urge you to consider carefully the following factors
in evaluating an investment in Greater Atlantic Financial and the Trust before
you purchase any of the convertible preferred securities offered by this
prospectus.
Because the Trust will rely on the payments it receives on the
debentures it owns to fund all payments on the convertible preferred securities,
you are making an investment decision that relates to the debentures being
issued by us as well as the convertible preferred securities. You should
carefully review the information in this prospectus about the convertible
preferred securities, the convertible debentures and the guarantee.
Because the convertible preferred securities are convertible into our
common stock as described in this prospectus, prospective purchasers of
convertible preferred securities are also making an investment decision with
regard to our common stock. For this reason, you should also carefully review
the information in this prospectus about our business and our common stock.
RISKS RELATED TO AN INVESTMENT IN GREATER ATLANTIC FINANCIAL CORP.
OUR RAPID GROWTH PRESENTS INCREASED RISKS.
Since the acquisition of Greater Atlantic Bank, we have grown rapidly as
a result of our branch expansion and the acquisition of Dominion Savings Bank.
In the short-term, we expect this rapid growth to continue. To date, we have not
experienced any material problems as a result of our growth. We believe we have
the management, data processing systems, internal controls and a strong credit
culture to support continued rapid growth. However, our growth and profitability
depend on the ability of our officers and key employees to manage our growth
effectively, to attract and retain skilled employees and to maintain adequate
internal controls and a strong credit culture. Accordingly, there can be no
assurance that we will be successful in managing our expansion and the failure
to do so would adversely affect our financial condition and results of
operations.
INTEREST RATES MAY REDUCE OUR NET INCOME AND FUTURE CASH FLOWS.
Our primary source of income is our net interest income, which is the
difference between the interest income earned on our interest-earning assets and
the interest expense incurred on our interest-bearing liabilities. Because
interest rates on deposit liabilities generally re-price more quickly than the
interest rates on fixed-rate loans, our net interest income generally increases
during periods of declining interest rates and decreases during periods of
rising interest rates. In an environment of decreasing interest rates, the
average life of the loans and mortgage-backed securities in our portfolio may
decrease as the result of borrowers refinancing their mortgage loans to reduce
their borrowing costs. Under these circumstances, we are subject to reinvestment
risk to the extent that we are not able to reinvest such prepayments at rates
which are comparable to the rates that we previously earned on the prepaid loans
or securities. Further, during periods of rapidly declining interest rates, our
interest expense may adjust more slowly in the short term than our interest
income because a majority of our deposit accounts consist of certificates of
deposit that have fixed terms and generally higher interest rates than our other
deposit products, while our adjustable-rate mortgage loans may adjust frequently
throughout the year.
As a federal savings bank, Greater Atlantic Bank is required to monitor
changes in the net present value of the expected future cash flows of its assets
and liabilities, which is referred to as net portfolio value or NPV. In
addition, we monitor our NPV ratio, which is our NPV divided by the estimated
market value of total assets. The NPV ratio can be viewed as a corollary to our
capital ratios. To monitor our overall sensitivity to changes in interest rates,
we simulate the effect of instantaneous changes in interest rates of up to 200
basis points on our assets and liabilities. As of September 30, 2001, an
increase in interest rates of 200 basis points would have increased our NPV by
approximately 26.18%, resulting in an NPV ratio of 7.57%. There can be no
assurance that future changes in our mix of assets and liabilities will not
result in more extensive declines in our NPV and NPV ratio.
WE RELY ON MORTGAGE BANKING INCOME WHICH CARRIES RELATED RISKS.
We have been and continue to be dependent on the origination and sale of
loans by Greater Atlantic Mortgage to sustain profitable operations. This
strategy anticipates that revenues from mortgage banking operations will offset
losses, if any, from our retail branch operations, which have expanded rapidly
since our organization. While this strategy of real estate loan origination
activity, including refinancings, has been successful during periods
8
of declining interest rates and favorable economic conditions, it was not
successful during periods of rising interest rates and unfavorable economic
conditions. Although currently favorable economic conditions exist, there is no
assurance that such favorable conditions will prevail. To the extent such
favorable conditions fail to continue, income from Greater Atlantic Mortgage may
not be available to support our operations.
WE RELY HEAVILY ON OUR MANAGEMENT TEAM, AND THE UNEXPECTED LOSS OF KEY MANAGERS
MAY ADVERSELY AFFECT OUR OPERATIONS.
We are dependent on the continued services of certain key management
personnel, including Carroll E. Amos, our President and Chief Executive Officer.
Our ability to retain executive officers and the current management teams of
each of our lines of business will continue to be important to successful
implementation of our strategies. We have entered into an employment agreement
with Mr. Amos. The unexpected loss of services of any key management personnel,
or the inability to recruit and retain qualified personnel in the future, could
have an adverse effect on our business and financial results. Neither Greater
Atlantic Financial nor Greater Atlantic Bank has a "key man" life insurance
policy for Mr. Amos.
OUR RESIDENTIAL CONSTRUCTION AND NONRESIDENTIAL LENDING CARRY GREATER RISK THAN
PERMANENT LOANS ON SINGLE-FAMILY HOMES.
At September 30, 2001, residential construction, commercial real estate
(including multi-family residential real estate) and commercial business
amounted to approximately $48.8 million or approximately 27.59% of our total
loan portfolio. Greater Atlantic Bank intends to continue to emphasize these
types of lending, which generally provide higher rates of return but also
possess a greater risk of loss than single-family residential real estate loans.
The greater risk results from generally higher loan balances and dependence on
the performance of the property and the business assets other than real estate
such as equipment, inventory and accounts receivable.
Net charge-offs for residential construction, commercial real estate
(including multi-family residential real estate) and commercial business
amounted to approximately $53,000 (or 48.69% of total net charge-offs) and $0
for the years ended September 30, 2001 and 2000, respectively. Greater Atlantic
Bank's level of loans delinquent 60 days or more has increased from $612,000, or
0.43% of total loans, at September 30, 2000 to $933,000, or 0.53% of total
loans, at September 30, 2001.
Greater Atlantic Bank cannot assure that its level of delinquent loans
or its level of charge-offs of residential construction, commercial real estate
(including multi-family residential real estate) and commercial business, as
well as other types of loans, will not be higher in future periods, which could
lead to a significant increase in the provision for loan losses in future
periods and reduce net income. Additionally, our growth in residential
construction, commercial real estate (including multi-family residential real
estate) and commercial business has occurred in a relatively strong real estate
and business environment. These loans have generally performed according to
contractual terms throughout this time period. Accordingly, such loans could
experience higher levels of nonperformance in future periods if the economic or
business environment continues to deteriorate.
STRONG COMPETITION COULD HURT GREATER ATLANTIC FINANCIAL'S PROFITS.
Greater Atlantic Financial faces intense competition both in making
loans and attracting deposits. This competition has made it more difficult for
Greater Atlantic Financial to make new loans and at times has forced it to offer
higher deposit rates in its market area. Greater Atlantic Financial expects
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. Technological advances, for example, have lowered barriers to
market entry, allowed banks to expand their geographic reach by providing
services over the Internet and made it possible for non-depository institutions
to offer products and services that traditionally have been provided by banks.
Recent changes in federal banking law now permit affiliation among banks,
securities firms and insurance companies, which also will change the competitive
environment to which Greater Atlantic Financial conducts business. Some of the
institutions with which Greater Atlantic Financial competes are significantly
larger than Greater Atlantic Financial and, therefore, have significantly
greater resources.
9
A DOWNTURN IN THE LOCAL ECONOMY COULD HURT OUR PROFITS.
A majority of Greater Atlantic Bank's commercial loans and residential
real estate loans are concentrated in borrowers who live and work in the
Washington, D.C./Baltimore Metropolitan area. As a result of this concentration,
a downturn in the Washington, D.C./Baltimore Metropolitan economy would likely
cause significant increases in non-performing loans and assets, which could hurt
our profits. The recent events resulting in the damage to the Pentagon have had
a direct impact on the Washington, D.C./Baltimore Metropolitan economy. The
displacement of workers and disruption to the financial community in Washington,
D.C./Baltimore metropolitan may impact real estate values, interrupt consumer
spending and may hurt business profitability throughout the area. This may
result in an increase in non-performing loans and assets, which, in turn, could
hurt our profits.
OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN PERSONS AFFILIATED WITH GREATER
ATLANTIC FINANCIAL.
Our directors, executive officers and the beneficial owners of more than
5% of Greater Atlantic Financial's common stock own in the aggregate
approximately 37.27% of the common stock of Greater Atlantic Financial (35.89%
assuming the exercise of outstanding options and warrants). If they were to act
as a group or in concert, they could exercise a significant influence over the
outcome of any stockholder vote requiring a majority vote or in the election of
directors and could effectively exercise veto power on matters requiring a
stockholder vote with respect to certain business combinations.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN SUPERMAJORITY VOTING
REQUIREMENTS AND OTHER ANTI-TAKEOVER MEASURES.
Our certificate of incorporation and bylaws contain provisions designed
to help our board of directors deal with attempts to acquire control of Greater
Atlantic Financial. Those provisions include classification of the board of
directors into three classes pursuant to which directors of each class serve for
staggered three year periods. The certificate of incorporation also provides for
80% supermajority voting provisions for the approval of certain business
combinations. Those provisions do not prevent a takeover. However, they may
discourage a takeover attempt not approved by our board of directors even if it
offered stockholders a substantial premium over the market price of our stock.
As a result, stockholders who might desire to participate in such a transaction
might not have the opportunity to do so. Such provisions also make the removal
of our board of directors and management more difficult and may serve to keep
current management in place. In turn, that could adversely affect the market
price of the common stock. We do not have a stockholders' rights plan.
RISKS RELATED TO AN INVESTMENT IN THE CONVERTIBLE PREFERRED SECURITIES
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE CONVERTIBLE DEBENTURES, THE TRUST
WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS. THE GUARANTEE WOULD
NOT APPLY BECAUSE THE GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS FUNDS
AVAILABLE.
The Trust will depend solely on our payments on the convertible
debentures to pay amounts due to you on the convertible preferred securities. If
we default on our obligation to pay the principal or interest on the convertible
debentures, the Trust will not have sufficient funds to pay distributions or the
liquidation amount on the related preferred securities. In that case, you will
not be able to rely on the guarantee for payment of these amounts because the
guarantee only applies if the Trust has sufficient funds to make distributions
or to pay the liquidation amount. Instead, you or the property trustee will have
to institute a direct action against us to enforce the property trustee's rights
under the indenture relating to the convertible debentures.
OUR ABILITY TO MAKE INTEREST PAYMENTS ON THE DEBENTURES AND CONVERTIBLE
DEBENTURES TO THE TRUST MAY BE RESTRICTED.
We are a holding company and substantially all of our assets are held by
our subsidiaries. Our ability to make payments on the convertible debentures
when due will depend primarily on available cash resources at Greater Atlantic
Financial and dividends from our subsidiaries. Dividend payments or extensions
of credit from Greater Atlantic Bank are subject to regulatory limitations,
generally based on capital levels and current and retained earnings, imposed by
the various regulatory agencies with authority over our banking subsidiary. The
ability of our subsidiaries to pay dividends is also subject to their
profitability, financial condition, capital expenditures and other cash flow
requirements. Our subsidiaries may not be able to pay dividends in the future.
10
THE CONVERTIBLE DEBENTURES AND THE GUARANTEE RANK LOWER THAN MOST OF OUR OTHER
INDEBTEDNESS AND OUR HOLDING COMPANY STRUCTURE EFFECTIVELY SUBORDINATES ANY
CLAIMS AGAINST US TO THOSE OF OUR SUBSIDIARIES' CREDITORS.
Our obligations under the convertible debentures and the guarantee are
unsecured and will rank junior in priority of payment to our existing and future
senior and subordinated indebtedness. At September 30, 2001, we had no senior
indebtedness or subordinated indebtedness. The issuance of the convertible
debentures and the convertible preferred securities does not limit our ability
or the ability of our subsidiaries to incur additional indebtedness, guarantees
or other liabilities.
Because we are a holding company, the creditors of our subsidiaries,
including depositors, also will have priority over you in any distribution of
our subsidiaries' assets in liquidation, reorganization or otherwise.
Accordingly, the convertible debentures and the guarantee will be effectively
subordinated to all existing and future liabilities of our subsidiaries, and you
should look only to our assets for payments on the convertible preferred
securities and the convertible debentures. The convertible debentures will be
unsecured and will rank junior to all of our senior and subordinated debt,
including indebtedness we may incur in the future.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE CONVERTIBLE DEBENTURES FOR
SUBSTANTIAL PERIODS.
We may, at one or more times, defer interest payments on the convertible
debentures for up to 20 consecutive quarters. If we defer interest payments on
the convertible debentures, the Trust will defer distributions on the
convertible preferred securities during any deferral period. During a deferral
period, you will be required to recognize as income for federal income tax
purposes the amount approximately equal to the interest that accrues on your
proportionate share of the convertible debentures, held by the Trust in the tax
year in which that interest accrues, even though you will not receive these
amounts until a later date.
You will also not receive the cash related to any accrued and unpaid
interest from the Trust if you sell the convertible preferred securities before
the end of any deferral period. During a deferral period, accrued but unpaid
distributions will increase your tax basis in the convertible preferred
securities. If you sell the convertible preferred securities during a deferral
period, your increased tax basis will decrease the amount of any capital gain or
increase the amount of any capital loss that you may have otherwise realized on
the sale. A capital loss, except in certain limited circumstances, cannot be
applied to offset ordinary income. As a result, deferral of distributions could
result in ordinary income, and a related tax liability for the holder, and a
capital loss that may only be used to offset a capital gain.
We do not currently intend to exercise our rights to defer interest
payments on the convertible debentures. However, if we do defer interest
payments, the market price of the convertible preferred securities would likely
be adversely affected. The convertible preferred securities may trade at a price
that does not fully reflect the value of accrued but unpaid interest on the
debentures or the convertible debentures. If you sell the convertible preferred
securities during a deferral period, you may not receive the same return on
investment as someone who continues to hold the convertible preferred
securities. Because of our right to defer interest payments, the market price of
the convertible preferred securities may be more volatile than the market prices
of other securities without the deferral feature.
WE HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT.
The indenture governing the convertible debentures and the trust
agreement governing the Trust do not require us to maintain any financial ratios
or specified levels of net worth, revenues, income, cash flow or liquidity. The
instruments do not protect holders of the convertible debentures or the
convertible preferred securities in the event we experience significant adverse
changes in our financial condition or results of operations. In addition,
neither the indenture nor the trust agreement limits our ability or the ability
of any subsidiary to incur additional indebtedness. Therefore, you should not
consider the provisions of these governing instruments as a significant factor
in evaluating whether we will be able to comply with our obligations under the
convertible debenture, or the guarantee.
11
WE MAY REDEEM THE CONVERTIBLE DEBENTURES BEFORE DECEMBER 31, 2031.
Under the following circumstances, we may redeem the convertible
debentures before their stated maturity without payment of premium:
- We may redeem the convertible debentures, in whole or in part,
at any time on or after December 31, 2003.
- We may redeem the convertible debentures in whole, but not in
part, within 180 days after certain occurrences at any time
during the life of the Trust. These occurrences may include
adverse tax, investment company or bank regulatory developments.
You should assume that an early redemption may be attractive to us if we
are able to obtain capital at a lower cost than we must pay on the convertible
debentures or if it is otherwise in our interest to redeem the convertible
debentures. If the convertible debentures are redeemed, the Trust must redeem
convertible preferred securities having an aggregate liquidation amount equal to
the aggregate principal amount of the convertible debentures redeemed, and you
may be required to reinvest your principal at a time when you may not be able to
earn a return that is as high as you were earning on the convertible preferred
securities.
WE CAN DISTRIBUTE THE CONVERTIBLE DEBENTURES TO YOU, WHICH MAY HAVE ADVERSE TAX
CONSEQUENCES FOR YOU; THIS RIGHT COULD ALSO ADVERSELY AFFECT THE MARKET PRICE OF
THE CONVERTIBLE PREFERRED SECURITIES.
The Trust may be dissolved at any time before maturity of the
convertible debentures. If this happens, the trustee may distribute the
convertible debentures to you under the terms of the Trust Agreement.
We cannot predict the market prices for the convertible debentures that
may be distributed in exchange for convertible preferred securities upon
liquidation of the Trust. The convertible preferred securities, or the
convertible debentures that you may receive if the Trust is liquidated, may
trade at a discount to the price that you paid to purchase the convertible
preferred securities. Because you may receive the convertible debentures, your
investment decision with regard to the convertible preferred securities will
also be an investment decision with regard to the convertible debentures. You
should carefully review all of the information contained in this prospectus
regarding the convertible debentures.
Under current interpretations of federal income tax laws supporting
classification of the Trust as a grantor trust for tax purposes, a distribution
of the convertible debentures to you upon the dissolution of the Trust would not
be a taxable event to you. Nevertheless, if the Trust is classified for federal
income tax purposes as an association taxable as a corporation at the time it is
dissolved, the distribution of the convertible debentures would be a taxable
event to you. In addition, if there is a change in law, a distribution of the
convertible debentures upon the dissolution of the Trust could be a taxable
event to you.
THERE IS NO CURRENT PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED SECURITIES AND
THEIR MARKET PRICES MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
There is currently no public market for the convertible preferred
securities. Although we intend to list the convertible preferred securities on
the OTC Bulletin Board, there is no guarantee that an active or liquid trading
market will develop for the convertible preferred securities or that the
quotation of the convertible preferred securities will continue on the OTC
Bulletin Board. If an active trading market does not develop, the market price
and liquidity of the convertible preferred securities will be adversely
affected. Even if an active public market does develop, there is no guarantee
that the market price for the convertible preferred securities will equal or
exceed the price you pay for the convertible preferred securities.
Future trading prices of the convertible preferred securities may be
subject to significant fluctuations in response to prevailing interest rates,
our future operating results and financial condition, the market for similar
securities and general economic and market conditions. The initial public
offering price of the convertible preferred securities has been set at the
liquidation amount of the convertible preferred securities and may be greater
than the market price of the security following the offering.
12
The market price for the convertible preferred securities and the
convertible debentures that you may receive in a distribution is also likely to
decline during any period that we are deferring interest payments on the
convertible debentures.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF THERE IS AN
EVENT OF DEFAULT UNDER THE INDENTURE.
You may not be able to directly enforce your rights against us if an
event of default under the indenture occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by the
property trustee of its rights as holder of the convertible debentures against
us. The holders of a majority in liquidation amount of the convertible preferred
securities will have the right to direct the property trustee to enforce its
rights. If the property trustee does not enforce its rights following an event
of default and a request by the record holders to do so, any record holder may,
to the extent permitted by applicable law, take action directly against us to
enforce the property trustee's rights. If an event of default occurs under the
trust agreement that is attributable to our failure to pay interest or principal
on the convertible debentures or if we default under the guarantee, you may
proceed directly against us. You will not be able to exercise directly any other
remedies available to the holders of the convertible debentures unless the
property trustee fails to do so.
AS A HOLDER OF PREFERRED SECURITIES OR CONVERTIBLE PREFERRED SECURITIES YOU HAVE
LIMITED VOTING RIGHTS.
Holders of convertible preferred securities have limited voting rights.
Your voting rights pertain primarily to amendments to the trust agreement. In
general, only we can replace or remove any of the trustees. However, if an event
of default under the trust agreement occurs and is continuing, the holders of at
least a majority in aggregate liquidation amount of the convertible preferred
securities may replace the property trustee and the Delaware trustee.
13
RECENT DEVELOPMENTS
The following tables contain certain information concerning the
financial condition and results of operations of Greater Atlantic Financial at
the dates and for the periods indicated. The data presented at December 31,
2001, and for the three-month period then ended are derived from unaudited
condensed consolidated financial statements but, in the opinion of management,
reflect all adjustments necessary to present fairly the results of these interim
periods. These adjustments consist only of normal recurring adjustments. The
results of operations for the periods ended December 31, 2001, are not
necessarily indicative of the results of operations that may be expected for the
year ending September 30, 2002.
AT OR FOR THE THREE MONTHS
ENDED
DECEMBER 31,
-------------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Consolidated Statements of Operations Data:
Interest income ............................................... $ 5,379 $ 5,542
Interest expense .............................................. 3,450 4,245
----------- -----------
Net interest income ........................................ 1,929 1,297
Provision for loan losses ..................................... 142 --
----------- -----------
Net interest income after provision for loan losses ........ 1,787 1,297
Noninterest income ............................................ 2,224 873
Noninterest expense ........................................... 3,734 2,588
----------- -----------
Income (loss) before taxes ................................ 277 (418)
Income tax provision .......................................... 6 --
----------- -----------
Net (loss) earnings ........................................... $ 271 $ (418)
=========== ===========
Per Share Data:
Net loss:
Basic ....................................................... $ 0.09 $ (0.14)
Diluted ..................................................... 0.09 (0.14)
Book value .................................................... 7.14 6.92
Weighted average shares outstanding:
Basic ...................................................... 3,007,434 3,007,434
Diluted .................................................... 3,027,283 3,007,434
Consolidated Statements of Financial Condition Data:
Total assets .................................................. $ 404,007 $ 319,951
Total loans receivable, net ................................... 188,806 145,521
Mortgage-loans held for sale .................................. 29,766 6,444
Investment securities(1) ...................................... 135,663 101,677
Mortgage-backed securities(1) ................................. 28,845 48,817
Total deposits ................................................ 248,225 191,937
FHLB advances ................................................. 100,200 68,000
Other borrowings .............................................. 32,441 37,341
Total stockholders' equity .................................... 21,467 20,807
14
AT OR FOR THE THREE MONTHS
ENDED DECEMBER 31,
--------------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND YIELDS)
Average Consolidated Statements of
Financial Condition Data:
Total assets ............................................ $ 394,176 $ 287,729
Investment securities(1) ................................ 136,637 84,279
Mortgage-backed securities(1) ........................... 34,540 51,684
Total loans receivable, net ............................. 208,433 139,739
Total deposits .......................................... 244,582 178,854
Total stockholders' equity .............................. 21,211 21,338
Performance Ratios(2):
Return on average assets ................................ 0.28% (0.58)%
Return on average equity ................................ 5.11 (7.84)
Equity to assets ........................................ 5.31 6.50
Net interest margin ..................................... 2.03 1.88
Efficiency ratio(3) ..................................... 89.91 119.26
Asset Quality Data:
Non-performing assets to total assets, at period end .... 0.08 0.38
Non-performing loans to total loans, at period end ...... 0.16 0.77
Net charge-offs to average total loans .................. 0.00 0.00
Allowance for loan losses to:
Total loans .......................................... 0.49% 0.57%
Non-performing loans ................................. 295.67 74.50
Asset Quality Data:
Non-performing loans .................................... $ 323 $ 1,161
Non-performing assets ................................... 323 1,224
Allowance for loan losses ............................... 955 865
Capital Ratios of the Bank:
Leverage ratio .......................................... 5.13% 6.14%
Tier 1 risk-based capital ratio ......................... 9.76 11.15
Total risk-based capital ratio .......................... 10.21 11.64
- -------------------------
(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.
15
MANAGEMENT'S DISCUSSION OF RECENT DEVELOPMENTS
Greater Atlantic Financial had net earnings for the three months ended
December 31, 2001, of $271,000 or $.09 per share, on a diluted basis, compared
to a net loss of $418,000 or $.14 per share for the three months ended December
31, 2000. The improvement in net earnings was primarily attributable to the
operations of Greater Atlantic Mortgage Corporation. Net earnings of Greater
Atlantic Mortgage Corporation increased by $588,000, from a net loss of $20,000
for the three months ended December 31, 2000, to earnings of $568,000 for the
current quarter.
Net interest income for the three months ended December 31, 2001
amounted to $1.9 million, an increase of $632,000 or 49 percent over the
comparable period one year ago. The increase in net interest income during the
current period resulted primarily from a $103.9 million increase in Greater
Atlantic Bank's average interest earning assets coupled with a 15 basis point
increase in the net interest margin from 1.88 percent for the three months ended
December 31, 2000 to 2.03 percent for the three months ended December 31, 2001.
Noninterest income for the three months ended December 31, 2001,
increased $1.4 million from the level earned for the three months ended December
31, 2000. The increase in the current period was primarily attributable to $1.3
million increase in gain on sale of loans by Greater Atlantic Mortgage
Corporation as loan sales increased significantly over the comparable period one
year ago.
Noninterest expense increased $1.1 million to $3.7 million for the three
months ended December 31, 2001, from the comparable period one year ago. The
increase was primarily attributable to an $807,000 increase at Greater Atlantic
Bank's mortgage banking subsidiary, from the comparable period one year ago, as
a result of increased loan origination and sales activity. Greater Atlantic
Bank's increase in noninterest expense of $339,000 was a result of Greater
Atlantic Bank's continued growth. While Greater Atlantic Bank's increase in
noninterest expense was distributed over various categories, the increase in
noninterest expense at the Mortgage Corporation level was primarily in
compensation.
Non-performing assets were $323,000 at December 31, 2001, or .08 percent
of total assets, compared to $1.2 million or .38 percent of total assets at
December 31, 2000. While non-performing assets declined from the comparable
period one year ago, Greater Atlantic Bank increased its provision for loan
losses $142,000 based on an increase in loans delinquent 30 days or more and
current economic conditions in our market area.
The income tax provision of $6,000 recognized in the period results from
utilization of available net operating losses and application of the alternative
minimum tax. Greater Atlantic Financial believes that it will continue to
generate taxable income, for the foreseeable future, which will permit
utilization of the existing net operating losses. At September 30, 2001,
Greater Atlantic Financial had net operating loss carryforwards for federal
income tax purposes of approximately $9.1 million to offset future
taxable income.
At December 31, 2001, Greater Atlantic Financial Corp. had total assets
of $404 million, an increase of $84 million or 26 percent from the $320 million
recorded at December 31, 2000. Loans receivable at December 31, 2001, amounted
to $189 million, an increase of $43 million or 29 percent from the $146 million
held at December 31, 2000. Deposits amounted to $248 million at December 31,
2001 an increase of $56 million from the $192 million held one year ago.
Stockholders' equity at December 31, 2001 amounted to $21 million or $7.14 per
share on a book value basis and $6.71 per share on a tangible book value basis.
16
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following Selected Consolidated Financial Data in
conjunction with our Consolidated Financial Statements and the notes thereto,
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information included
elsewhere in this prospectus.
AT OR FOR THE YEARS
ENDED SEPTEMBER 30,
--------------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Consolidated Statements of Operations Data:
Interest income ............................................... $ 23,623 $ 17,772
Interest expense .............................................. 17,247 13,094
----------- -----------
Net interest income ........................................ 6,376 4,678
Provision for loan losses ..................................... 55 13
----------- -----------
Net interest income after provision for loan losses ........ 6,321 4,665
Noninterest income ............................................ 5,707 2,054
Noninterest expense ........................................... 12,550 10,957
----------- -----------
Loss before taxes ......................................... (522) (4,238)
Income tax benefit ............................................ -- (600)
----------- -----------
Net loss ...................................................... $ (522) $ (3,638)
=========== ===========
Per Share Data:
Net loss:
Basic ....................................................... $ (0.17) $ (1.21)
Diluted ..................................................... (0.17) (1.21)
Book value .................................................... 7.04 6.94
Tangible book value ........................................... 6.80 6.94
Weighted average shares outstanding:
Basic ...................................................... 3,007,434 3,007,434
Diluted .................................................... 3,007,434 3,007,434
Consolidated Statements of Financial Condition Data:
Total assets .................................................. $ 370,604 $ 296,296
Total loans receivable, net ................................... 164,603 132,698
Allowance for loan losses ..................................... 810 765
Mortgage-loans held for sale .................................. 14,683 5,599
Investment securities(1) ...................................... 131,302 70,777
Mortgage-backed securities(1) ................................. 39,115 66,169
Total deposits ................................................ 229,982 188,387
FHLB advances ................................................. 74,500 46,100
Other borrowings .............................................. 43,323 36,736
Total stockholders' equity .................................... 21,180 20,867
Tangible capital .............................................. 20,365 20,295
17
AT OR FOR THE YEARS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND YIELDS)
Average Consolidated Statements of
Financial Condition Data:
Total assets ............................................ $ 343,226 $ 251,417
Investment securities(1) ................................ 118,320 75,808
Mortgage-backed securities(1) ........................... 46,225 59,489
Total loans ............................................. 164,790 106,917
Allowance for loan losses ............................... (800) (599)
Total deposits .......................................... 207,657 137,272
Total stockholders' equity .............................. 21,045 24,067
Performance Ratios(2):
Return on average assets ................................ (0.15)% (1.45)%
Return on average equity ................................ (2.48) (15.12)
Equity to assets ........................................ 6.13 9.57
Net interest margin ..................................... 1.94 1.93
Efficiency ratio(3) ..................................... 103.86 162.76
Asset Quality Data:
Non-performing assets to total assets, at period end .... 0.14 0.12
Non-performing loans to total loans, at period end ...... 0.29 0.14
Net charge-offs to average total loans .................. 0.07 0.06
Allowance for loan losses to:
Total loans .......................................... 0.46% 0.54%
Non-performing loans ................................. 160.08 394.33
Asset Quality Data:
Non-performing loans .................................... $ 506 $ 194
Non-performing assets ................................... 506 366
Allowance for loan losses ............................... 810 765
Capital Ratios of the Bank:
Leverage ratio .......................................... 5.51% 6.85%
Tier 1 risk-based capital ratio ......................... 10.94 13.71
Total risk-based capital ratio .......................... 11.36 14.23
- -------------------------
(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.
18
USE OF PROCEEDS
The Trust will invest all of the proceeds from the sale of the
convertible preferred securities in the corresponding convertible debentures. We
anticipate that the net proceeds to us from the sale of the convertible
debentures will be approximately $10.6 million after deduction of offering
expenses, estimated to be $400,000. We currently intend to retain approximately
$2.0 million of the proceeds for general corporate purposes. Initially, we will
invest the retained funds in short-term investment grade securities. We intend
to invest the remainder of the proceeds in Greater Atlantic Bank to increase its
capital position. Initially, these funds will be invested in short-term
investment grade securities. Subsequently, such proceeds may be used to fund new
loans and other investments.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is quoted on the Nasdaq National Market under the
symbol "GAFC." The following table sets forth the high and low sales prices and
cash dividends declared per share of common stock for the periods indicated. We
currently do not pay dividends on our common stock.
HIGH/LOW STOCK PRICE FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
2001 2000
------------------------ --------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter............................ 3 2 1/8 6 3/4 4 1/4
Second Quarter........................... 5 1/8 3 4 15/32 3 3/8
Third Quarter............................ 4 3/4 3 3 7/8 2 1/2
Fourth Quarter........................... 5 3/4 4 5/8 4 2 11/16
As of September 30, 2001, there were approximately 493 holders of record
of our common stock. The last reported sales price of the common stock on Nasdaq
on January 29, 2002, was $6.22.
Holders of our common stock will be entitled to receive any cash
dividends as may be declared by our board of directors. The declaration and
payment of future dividends to holders of our common stock will be at the
discretion of our board of directors and will depend upon our earnings and
financial condition, the capital requirements of our subsidiaries, regulatory
conditions and considerations and such other factors as our board of directors
may deem relevant.
As a holding company, Greater Atlantic Financial is ultimately dependent
upon its subsidiaries to provide funding for its operating expenses, debt
service and dividends. Various banking laws applicable to our banking subsidiary
limit the payment of dividends, management fees and other distributions by
Greater Atlantic Bank to us and may therefore limit our ability to make dividend
payments.
19
CAPITALIZATION
The following table sets forth our capitalization at September 30, 2001,
on a historical basis and as adjusted for the offering of the convertible
preferred securities and the application of the estimated net proceeds from the
corresponding sale of the convertible debentures to the Trust as if such sale
had been consummated on September 30, 2001. This data should be read in
conjunction with the consolidated financial statements and notes thereto in this
prospectus.
AT SEPTEMBER 30, 2001
------------------------------------------------
AS AS
ACTUAL ADJUSTED(1) ADJUSTED(2)
-------- ------------- -----------
(IN THOUSANDS)
LONG-TERM BORROWINGS:
FHLB advances ..................................................... $ 74,500 $ 74,500 $ 74,500
Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust .................................. -- 5,600 10,600
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value:
10,000,000 shares authorized; 3,007,434 shares outstanding ..... 30 30 30
Additional paid-in capital ........................................ 25,132 25,132 25,132
Accumulated deficit ............................................... (3,450) (3,450) (3,450)
Accumulated other comprehensive income ............................ (532) (532) (532)
Total stockholders' equity ........................................ 21,180 21,180 21,180
CAPITAL RATIOS(3):
Leverage ratio .................................................... 5.51% 6.77% 7.75%
Tier 1 risk-based capital ratio ................................... 10.94% 13.25% 15.03%
Total risk-based capital ratio .................................... 11.36% 13.68% 15.44%
- --------------------------------
(1) Assuming net proceeds of the offering of $5.6 million.
(2) Assuming net proceeds of the offering of $10.6 million.
(3) Ratios for Greater Atlantic Bank only.
ACCOUNTING AND REGULATORY TREATMENT
The Trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the Trust will be included in our
consolidated financial statements. The convertible preferred securities will be
presented as a separate line item in our consolidated balance sheet under the
caption "Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust," or other similar caption. In addition,
appropriate disclosures about the convertible preferred securities, the
guarantee and the convertible debentures will be included in the notes to our
consolidated financial statements. For financial reporting purposes, we will
record distributions payable on the convertible preferred securities in our
consolidated statements of income.
Our future reports filed under the Securities Exchange Act of 1934 will
include a footnote to the audited consolidated financial statements stating
that:
- the Trust is wholly-owned;
- the sole assets of the Trust are the convertible debentures,
specifying outstanding principal amount, interest rate and
maturity date of the convertible debentures; and
20
- our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the Trust under
the convertible preferred securities.
Under accounting rules of the Securities and Exchange Commission, we are
not required to include separate financial statements of the Trust in this
prospectus because we will own all of the voting securities of the Trust, the
Trust has no independent operations and we guarantee the payments on the
convertible preferred securities to the extent described in this prospectus.
THE RIGHTS OFFERING
THE RIGHTS
We are issuing rights at no charge to each record holder of our shares
of common stock at the close of business on February 4, 2002. You will receive
0.365 rights for each share of our common stock that you owned on this date. If
you complete and execute the subscription order form, you agree that your
exercise of the rights will be on the terms and subject to the conditions
specified in the subscription order form and related instructions and in this
prospectus.
Fractional rights will be rounded up to the next whole right. We will
not issue or pay cash in lieu of fractional rights. Upon request to the
subscription agent, you may combine or divide your subscription order form(s)
for one or more subscription order form(s). You may not divide a subscription
order form in such a way as to permit you to receive a greater number of rights
than you are otherwise entitled to receive. However, a depository, bank, trust
company or securities broker or dealer holding shares of the common stock for
more than one beneficial owner on February 4, 2002, the record date, may, upon
proper showing to the subscription agent, exchange its subscription order form
to obtain a subscription order form for the number of rights to which all such
beneficial owners in the aggregate would have been entitled had each been a
holder of record on the record date.
SUBSCRIPTION PRIVILEGES
We are offering two types of subscription privileges:
BASIC SUBSCRIPTION PRIVILEGE. You may purchase one convertible preferred
security for every whole right that you hold. You may exercise some or all of
your rights.
OVERSUBSCRIPTION PRIVILEGE. If you exercise your full basic subscription
privilege, you may also subscribe for additional convertible preferred
securities not subscribed for by other rights holders under their basic
subscription privilege. If you wish to exercise your oversubscription privilege,
you must specify the number of additional convertible preferred securities you
want to purchase, up to the maximum number of convertible preferred securities
offered in the rights offering, and must submit payment for the subscription
price for those additional convertible preferred securities to the subscription
agent. If the number of convertible preferred securities remaining after the
exercise of the basic subscription privileges is not sufficient to satisfy all
subscriptions pursuant to the exercise of oversubscription privileges, rights
holders exercising the oversubscription privilege will receive from the
available convertible preferred securities the lesser of (1) the number of
convertible preferred securities for which they oversubscribed or (2) the number
of convertible preferred securities in proportion to the number of convertible
preferred securities for which each holder subscribes pursuant to their
oversubscription privilege to the total number of convertible preferred
securities for which all rights holders subscribe pursuant to oversubscription
privileges, subject to rounding of fractional convertible preferred securities
up or down by us. If you are not allocated the full amount of convertible
preferred securities for which you oversubscribe, you will receive a refund
(without interest) of the subscription price that you delivered for those
convertible preferred securities that are not allocated to you. The subscription
agent will mail refunds after the closing of the offering.
In order to exercise the oversubscription privilege, banks, brokers and
other nominee rights holders who exercise the oversubscription privilege on
behalf of beneficial owners must certify to the subscription agent and to us
with respect to each beneficial owner the number of convertible preferred
securities subscribed for under the oversubscription privilege.
21
SUBSCRIPTION PRICE
The subscription price is $10.00 per convertible preferred security,
payable as provided in "--Subscription Payments."
DETERMINATION OF THE SUBSCRIPTION PRICE AND CONVERSION RATIO
Our board of directors determined the subscription price and conversion
ratio on January 18, 2002. The board of directors considered the subscription
price and conversion ratio to be fair to our shareholders in light of potential
dilution to all shareholders. Among other things, the board of directors
considered our financial performance, market rates of interest, the market for
trust preferred securities and for convertible trust preferred securities and
the volatility of our common stock in its determination of the subscription
price and conversion ratio.
FINANCIAL ADVISER
Legg Mason Wood Walker, Incorporated has acted as our financial adviser
in connection with the rights offering and has assisted us in structuring the
rights offering and other related matters. Legg Mason is not acting as an
underwriter in connection with the rights offering, and will not be assisting
with or involved in any solicitations or similar activities in connection with
the rights offering.
EXPIRATION TIME AND DATE; CLOSING
The rights offering will expire at 5:00 p.m., Eastern time, on March 5,
2002, unless we, in our sole discretion, extend it. After the expiration of the
rights offering, all unexercised rights will be null and void. We will notify
you of any extension of the expiration date by issuing a press release. We will
not be obligated to honor any purported exercise of rights which the
subscription agent receives after the expiration of the offering, regardless of
when you sent the documents relating to that exercise. The closing of the
offering is expected to take place as soon as practicable after the expiration
of the rights offering but not later than March 31, 2002. Subscription payments
for convertible preferred debentures not allocated or validly purchased, will be
returned as soon as practicable following the closing of the rights offering.
EXERCISE OF SUBSCRIPTION RIGHTS
In order to exercise the rights, you must:
(1) complete and sign your subscription order form; and
(2) deliver the completed and signed subscription order form
together with payment in full of the subscription price for each
convertible preferred securities for which you subscribe under
the basic subscription privilege and the oversubscription
privilege to the subscription agent before the expiration of the
rights offering.
If you do not indicate the number of convertible preferred securities to
be subscribed for on your subscription order form, or if you indicate a number
of convertible preferred securities that does not agree with the aggregate
subscription price payment you delivered, you will be deemed to have subscribed
for the maximum number of whole convertible preferred securities that may be
subscribed for, under both the basic subscription privilege and the
oversubscription privilege, based on the aggregate subscription price payment
you delivered.
The subscription agent will retain all funds delivered to it in payment
of the subscription price until the closing of the offering. If you are
allocated fewer than all the convertible preferred securities for which you
subscribed, the subscription agent will return your excess subscription price
payment to you, without interest, as soon as practicable after the closing of
the offering. You will have no rights as a holder with respect to convertible
preferred securities subscribed for until the closing of the offering.
The signature(s) on the subscription order form should match in every
detail the name(s) of the registered owner(s) printed on the subscription order
form. If there are joint owners of a subscription order form, each joint owner
must sign the subscription order form. All other information on the subscription
order form should be printed or typed.
22
If the subscription order form is executed by an executor,
administrator, trustee, guardian or other fiduciary, or by a corporation, and
the rights are not registered in the name of such fiduciary or corporation, as
indicated on the subscription order form, the person executing the subscription
order form must give his or her full title and furnish proper evidence of
authority to act on behalf of the registered owner of the rights, as indicated
on the subscription order form.
If the subscription order form is executed by an attorney-in-fact
(except where such execution is by a bank, trust company or broker as agent for
the subscriber and the convertible preferred securities are to be registered in
the same name as stated on the subscription order form), evidence of authority
to act must be furnished.
If you hold shares of common stock for the account of others, you should
contact the respective beneficial owners of those shares as soon as possible to
ascertain their intentions and to obtain instructions and certifications with
respect to their rights.
If a beneficial owner so instructs, you should complete the appropriate
subscription order form and related documents. You should submit these to the
subscription agent with the proper subscription price payment. If you are a
beneficial owner whose shares of our common stock are held for your account by a
registered holder, you should give your instructions regarding your beneficially
held rights to that holder. You cannot exercise your rights directly if your
shares are held for your account by another person.
Convertible preferred securities may only be purchased through a DTC
participant. DTC participants are brokers, dealers and others having accounts
with DTC. If you are a registered holder of our common stock, you must indicate
on the subscription order form the name of the DTC participant through which you
intend to purchase the convertible preferred securities, its DTC participant
number, your client account number with the DTC participant and the name on the
client account.
You should carefully read the instructions accompanying the subscription
order form and follow them closely. You should send your subscription order
form, with any other required documents and the subscription price payment, to
the subscription agent. Do not send these materials to us.
The method of delivery of the subscription order form and the payment of
the subscription price to the subscription agent is at your election and risk.
If you send your subscription order form and payments by mail, we suggest that
you send them by registered mail, properly insured. You should also allow
sufficient time to ensure delivery to the subscription agent to permit your
payment to clear prior to the expiration time.
We will determine all questions concerning the timeliness, validity,
form and eligibility of any exercise of rights, which determinations will be
final and binding. In our sole discretion, we may waive any defect or
irregularity, or permit a defect or irregularity to be corrected, or we may
reject the purported exercise of any right because of any defect or
irregularity. Neither the subscription agent nor we are under any duty to notify
you of any defect or irregularity in the exercise of a right, and will not be
held liable for any failure to notify you in that regard. We also reserve the
right to reject any exercise if it could be deemed unlawful or materially
burdensome. See "--Regulatory Limitation" below.
You should direct any questions or requests for assistance concerning
the method of exercising rights, or requests for additional copies of this
prospectus or the instructions, to Denise M. Geran, Wilmington Trust Company, at
(302) 651-1749. If you do not exercise your rights prior to 5:00 p.m., Eastern
time, on the expiration date, they will expire and be null and void.
SUBSCRIPTION PAYMENTS
You must pay for all convertible preferred securities you subscribe for,
whether under the basic subscription privilege or the oversubscription
privilege, in United States dollars, by check or bank draft drawn upon a United
States bank, or postal or express money order, payable to "Wilmington Trust
Company, as subscription agent."
The subscription price will be considered received by the subscription
agent only upon:
- clearance of an uncertified check; or
23
- receipt by the subscription agent of a certified or cashier's
check or bank draft drawn upon a United States bank (or for
Canadian residents only, a bank located in Canada) or of a
postal or express money order; in each case, before 5:00 p.m.,
Eastern time, on the expiration date. Funds paid by uncertified
personal check may take at least five business days to clear.
Accordingly, if you wish to pay the subscription price by
uncertified personal check, you should make payment sufficiently
in advance of the expiration date to ensure its receipt and
clearance by that time. We urge you to consider payment by means
of certified or cashier's check or money order.
NO REVOCATION OF EXERCISE
Once you have exercised the basic subscription privilege or the
oversubscription privilege, you may not revoke that exercise.
SUBSCRIPTION AGENT
The subscription agent is Wilmington Trust Company in its capacity as a
trustee for the Trust. The subscription agent's address, to which you must make
any required deliveries, is:
BY MAIL BY OVERNIGHT COURIER BY HAND
Rodney Square North Rodney Square North Wilmington Trust Plaza
1100 North Market Street 1100 North Market Street First Floor
Wilmington, DE 19890-0001 Wilmington, DE 19890-0001 c/o Rodney Square North
ATTN: Corporate Trust ATTN: Corporate Trust 1100 North Market Street
Administration Administration Wilmington, DE 19890-0001
ATTN: Corporate Trust
Administration
We will pay the fees and expenses of the subscription agent, and have
agreed to indemnify the subscription agent against certain liabilities that it
may incur in connection with the rights offering.
REGULATORY LIMITATION
We will not be required to issue convertible preferred securities in the
rights offering to anyone who, in our opinion, would be required to obtain prior
clearance or approval from any state or federal regulatory authorities to own or
control such convertible preferred securities if such clearance or approval has
not been obtained at or prior to the expiration of the rights offering.
WITHDRAWAL OF THE RIGHTS OFFERING
We reserve the right to withdraw the rights offering for any reason and
at any time prior to 5:00 p.m., Eastern time, on the expiration date, in which
event the subscription agent will return all subscription price payments without
interest. In the event we withdraw the rights offering, all rights will become
null and void.
GLOBAL SECURITY FOR CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities will be represented by a global
security that will be deposited with and registered in the name of The
Depository Trust Company, New York, New York, or its nominee. This means that
you will not receive a certificate for the convertible preferred securities, and
your ownership interests will be recorded through the DTC book-entry system.
Therefore, all convertible preferred securities must be purchased through a DTC
participant. DTC participants are brokers, dealers and others having accounts
with DTC. See "--Exercise of Subscription Rights."
24
NO BOARD RECOMMENDATION
In making any decision to exercise your subscription rights, you must
consider your own best interests. We and none of our board of directors makes
any recommendation as to whether you should exercise your rights.
SUBSCRIPTIONS BY INSIDERS
Our directors, executive officers and the beneficial owners of more than
5% of our common stock currently intend to fully subscribe for their full basic
subscription privileges and to exercise their oversubscription privileges
(aggregating $5.0 million of the convertible preferred securities) for up to an
additional $1.7 million of the convertible preferred securities. No individual
has entered into a binding agreement to purchase these convertible preferred
securities and, therefore, actual purchases by directors, executive officers and
beneficial owners of more than 5% of our common stock could be more or less than
indicated.
NO EFFECT ON STOCK OPTIONS OR WARRANTS
We will not make any adjustments in connection with the rights offering
to any warrants or options issued by us under the Greater Atlantic Financial
Corp. 1997 Stock Option and Warrant Plan or to the number of shares reserved for
issuance under the stock option and warrant plan.
QUESTIONS
If you have any questions about the rights offering or require
additional copies of this prospectus supplement and the accompanying prospectus,
please contact Denise M. Geran, Wilmington Trust Company, at (302) 651-1749.
DESCRIPTION OF THE TRUST
Greater Atlantic Capital Trust I is a statutory business trust formed
pursuant to the Delaware Business Trust Act under an initial trust agreement
executed by us, as sponsor for the Trust, and the trustees, and a certificate of
trust has been filed with the Delaware Secretary of State. The initial trust
agreement will be amended and restated in its entirety in the form filed as an
exhibit to the registration statement of which this prospectus is a part, as of
the date the convertible preferred securities are initially issued. Such amended
and restated trust agreement is called the trust agreement. The trust agreement
will be qualified under the Trust Indenture Act of 1939.
The holders of the convertible preferred securities issued pursuant to
the offering described in this prospectus will own all of the issued and
outstanding convertible preferred securities of the Trust which have certain
prior rights over the other securities of the Trust in certain circumstances as
specified in this prospectus. We will not initially own any of the convertible
preferred securities. We will acquire common securities in an amount equal to at
least 3% of the total capital of the Trust and will initially own, directly or
indirectly, all of the issued and outstanding common securities. The common
securities, together with the convertible preferred securities, are called the
trust securities.
The Trust exists exclusively for the purposes of:
- issuing the convertible preferred securities to the public for
cash;
- issuing its common securities to us in exchange for our
capitalization of the Trust;
- investing the proceeds from the sale of the trust securities in
an equivalent amount of convertible debentures; and
- engaging in other activities that are incidental to those listed
above, such as receiving payments on the debentures and making
distributions to security holders, furnishing notices and other
administrative tasks.
The rights of the holders of the trust securities are as set forth in
the trust agreement, the Delaware Business Trust Act and the Trust Indenture
Act. The trust agreement does not permit the Trust to borrow money or make any
investment other than in the convertible debentures. Other than with respect to
the trust securities, we have agreed to pay for all debts and obligations and
all costs and expenses of the Trust, including the fees and expenses of the
trustees and any income taxes, duties and other governmental charges, and all
costs and expenses
25
related to these charges, to which the Trust may become subject, except for
United States withholding taxes that are properly withheld.
The number of trustees of the Trust under the trust agreement will
initially be five. Three of the trustees will be persons who are employees or
officers of or who are affiliated with Greater Atlantic Financial. They are the
administrative trustees. The fourth trustee will be an entity that maintains its
principal place of business in the State of Delaware. It is the Delaware
trustee. Initially, Wilmington Trust Company, a Delaware banking corporation,
will act as Delaware trustee. The fifth trustee, called the property trustee,
will also initially be Wilmington Trust Company. The property trustee is the
institutional trustee under the trust agreement and acts as the indenture
trustee called for under the applicable provisions of the Trust Indenture Act.
Also for purposes of compliance with the Trust Indenture Act, Wilmington Trust
Company will act as guarantee trustee and indenture trustee under the guarantee
agreement and the indenture, respectively. We, as holder of all of the common
securities, will have the right to appoint or remove any trustee unless an event
of default under the indenture has occurred and is continuing, in which case
only the holders of the convertible preferred securities may remove the Delaware
trustee or the property trustee. The Trust has a term of approximately 31 years
but may terminate earlier as provided in the trust agreement.
The property trustee will hold the convertible debentures for the
benefit of the holders of the trust securities and will have the power to
exercise all rights, powers and privileges under the indenture as the holder of
the convertible debentures. In addition, the property trustee will maintain
exclusive control of a segregated noninterest-bearing "payment account"
established with Wilmington Trust Company to hold all payments made on the
convertible debentures for the benefit of the holders of the trust securities.
The property trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the trust securities out
of funds from the payment account. The guarantee trustee will hold the guarantee
for the benefit of the holders of the convertible preferred securities. We will
pay all fees and expenses related to the Trust and the offering of the
convertible preferred securities, including the fees and expenses of the
trustees.
DESCRIPTION OF THE CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities will be issued pursuant to the
trust agreement. For more information about the trust agreement, see
"Description of the Trust." Wilmington Trust Company will act as property
trustee for the convertible preferred securities under the trust agreement for
purposes of complying with the provisions of the Trust Indenture Act. The terms
of the convertible preferred securities will include those stated in the trust
agreement and those made part of the trust agreement by the Trust Indenture Act.
GENERAL
The trust agreement authorizes the administrative trustees, on behalf of
the Trust, to issue the trust securities, which are comprised of the convertible
preferred securities to be sold to shareholders of record and the common
securities. We will own all of the common securities issued by the Trust. The
Trust is not permitted to issue any securities other than the trust securities
or to incur any other indebtedness.
The convertible preferred securities will represent preferred undivided
beneficial interests in the assets of the Trust, and the holders of the
convertible preferred securities will be entitled to a preference over the
common securities upon an event of default with respect to distributions and
amounts payable on redemption or liquidation. The convertible preferred
securities will rank equally, and payments on the convertible preferred
securities will be made proportionally, with the common securities, except as
described under "--Subordination of Common Securities."
The property trustee will hold legal title to the convertible debentures
in trust for the benefit of the holders of the trust securities. We will
guarantee the payment of distributions out of money held by the Trust, and
payments upon redemption of the convertible preferred securities or liquidation
of the Trust, to the extent described under "Description of the Guarantee." The
guarantee agreement does not cover the payment of any distribution or the
liquidation amount when the trust does not have sufficient funds available to
make these payments.
DISTRIBUTIONS
SOURCE OF DISTRIBUTIONS. The funds of the Trust available for
distribution to holders of the convertible preferred securities will be limited
to payments made under the convertible debentures, which the Trust will purchase
26
with the proceeds from the sale of the trust securities. Distributions will be
paid through the property trustee, which will hold the amounts received from our
interest payments on the convertible debentures in the payment account for the
benefit of the holders of the trust securities. If we do not make interest
payments on the convertible debentures, the property trustee will not have funds
available to pay distributions on the convertible preferred securities.
PAYMENT OF DISTRIBUTIONS. Distributions on the convertible preferred
securities will be payable at the annual rate of 6.50% of the $10.00 stated
liquidation amount, payable quarterly on March 31, June 30, September 30 and
December 31 of each year, to the holders of the convertible preferred securities
on the relevant record dates. So long as the convertible preferred securities
are represented by a global security, as described below, the record date will
be the business day immediately preceding the relevant distribution date. The
first distribution date for the convertible preferred securities will be June
30, 2002.
Distributions will accumulate from the date of issuance, will be
cumulative and will be computed on the basis of a 360-day year of twelve 30-day
months. If the distribution date is not a business day, then payment of the
distributions will be made on the next day that is a business day, without any
additional interest or other payment for the delay. However, if the next
business day is in the next calendar year, payment of the distribution will be
made on the business day immediately preceding the scheduled distribution date.
When we use the term "business day" we mean any day other than a Saturday, a
Sunday, a day on which banking institutions in New York, New York are authorized
or required by law, regulation or executive order to remain closed or a day on
which the corporate trust office of the property trustee or the indenture
trustee is closed for business.
EXTENSION PERIOD. As long as no event of default under the indenture has
occurred and is continuing, we have the right to defer the payment of interest
on the convertible debentures at any time for a period not exceeding 20
consecutive quarters. We refer to this period of deferral as an "extension
period." No extension period may extend beyond December 31, 2031 or end on a
date other than an interest payment date, which dates are the same as the
distribution dates. If we defer the payment of interest, quarterly distributions
on the convertible preferred securities will also be deferred during any such
extension period. Any deferred distributions under the convertible preferred
securities will accumulate additional amounts at the annual rate of 6.50%,
compounded quarterly from the relevant distribution date. The term
"distributions" as used in this prospectus includes those accumulated amounts.
During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock (other than stock dividends, non-cash
dividends in connection with the implementation of a shareholder
rights plan, purchases of common stock in connection with
employee benefit plans or in connection with the
reclassification of any class of our capital stock into another
class of capital stock) or allow any of our subsidiaries to do
the same with respect to their capital stock (other than the
payment of dividends or distributions to us);
- make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with,
or junior in interest to, the convertible debentures or allow
any of our subsidiaries to do the same;
- make any guarantee payments with respect to any other guarantee
by us of any other debt securities of any of our subsidiaries if
the guarantee ranks equally with or junior to the convertible
debentures (other than payments under the guarantee); or
- redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
After the termination of any extension period and the payment of all
amounts due, we may elect to begin a new extension period, subject to the above
requirements.
We do not currently intend to exercise our right to defer distributions
on the convertible preferred securities by deferring the payment of interest on
the convertible debentures.
27
CONVERSION RIGHTS
GENERAL. Convertible preferred securities will be convertible at any
time on or after 60 days after the closing of the offering, and prior to the
close of business on the business day immediately preceding the date of
repayment of such convertible preferred securities, whether at stated maturity
or upon redemption (either at our option or pursuant to a Tax Event, an
Investment Company Event or a Capital Treatment Event), at the option of the
holder thereof and in the manner described below, into shares of common stock at
an initial conversion ratio of 1.429 shares of common stock for each convertible
preferred security (equivalent to an initial conversion price of $7.00 per share
of common stock), subject to adjustment as described below. The Trust will
covenant in the trust agreement not to convert convertible debentures held by it
except pursuant to a notice of conversion delivered to the property trustee, as
conversion agent, by a holder of convertible preferred securities. A holder of a
convertible preferred security wishing to exercise its conversion right must
deliver an irrevocable notice of conversion, together, if the convertible
preferred security is in certificated form, with the certificate representing
such convertible preferred security, to the conversion agent, which will, on
behalf of such holder, exchange such convertible preferred security for a
portion of the convertible debentures and immediately convert such convertible
debentures into common stock. Holders may obtain copies of the required form of
the conversion notice from the conversion agent. In the event Cede & Co.
receives a conversion request from the conversion agent, DTC will redeem the
amount of interest credited to the applicable direct participant(s) in the
convertible preferred securities in accordance with its procedures.
Holders of convertible preferred securities at the close of business on
a distribution record date will be entitled to receive the distribution payable
on such convertible preferred securities on the corresponding distribution date
notwithstanding the conversion of such convertible preferred securities
following the distribution record date but prior to the distribution date;
provided, however, that if any convertible preferred securities are surrendered
for conversion during the period from the close of business on any record date
through and including the next succeeding distribution date (except any such
convertible preferred securities surrendered for conversion after such
convertible preferred securities have been called for redemption by Greater
Atlantic Financial during an extension period), the convertible preferred
securities when surrendered for conversion must be accompanied by payment in
next day funds of an amount equal to the distribution which the registered
holder on such record date is to receive. Except as described above, no
distribution will be payable by Greater Atlantic Financial on converted
convertible preferred securities with respect to any distribution date
subsequent to the date of conversion and neither the Trust nor Greater Atlantic
Financial will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid distributions, whether or not in arrears,
on convertible preferred securities surrendered for conversion. Each conversion
will be deemed to have been effected immediately prior to the close of business
on the day on which the related conversion notice was received by the conversion
agent.
Shares of common stock issued upon conversion of convertible preferred
securities will be validly issued, fully paid and nonassessable. No fractional
shares of common stock will be issued as a result of conversion, but in lieu
thereof such fractional interest will be paid by us in cash based on the last
reported sale price of common stock on the date such convertible preferred
securities are surrendered for conversion.
CONVERSION RATIO ADJUSTMENTS--GENERAL. The conversion ratio is subject
to adjustment if we take certain actions after the date of issuance of the
convertible preferred securities offered in this prospectus, including:
- issue shares of common stock as a dividend or a distribution
with respect to common stock;
- effect subdivisions, combinations and reclassification of common
stock;
- issue rights or warrants to all holders of common stock
entitling them (for a period not exceeding 45 days) to subscribe
for or purchase shares of common stock at less than the then
current market price (as defined below) of the common stock;
- distribute evidences of indebtedness, capital stock, cash or
assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above, and
dividends and distributions paid exclusively in cash) to all
holders of common stock;
- pay any dividends (and other distributions) on common stock
exclusively in cash, but not including cash dividends we pay out
of our retained earnings; and
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- make a tender or exchange offer (other than an odd-lot offer)
for our common stock and pay a price in excess of 110% of the
then current market price of our common stock based on the
closing price on the trading day next succeeding the last date
tenders or exchanges may be made pursuant to such tender or
exchange offer.
"Current Market Price" means, in general, the average of the daily
Closing Prices (as defined below) for the five consecutive trading days selected
by Greater Atlantic Financial commencing not more than 20 trading days before,
and ending not later than, the earlier of the day in question or, if applicable,
the day before the "ex" date with respect to the issuance or distribution in
question.
"Closing Price" of any security on any day means the last reported sale
price, regular way, on such day or, if no sale takes place on such day, the
average of the reported closing bid and asked price on such day, regular way, in
either case as reported on the Nasdaq National Market, or, if such security is
not quoted or admitted to trading on Nasdaq, on the principal national
securities exchange on which such security is listed or admitted to trading, or
if such security is not listed or admitted to trading on a national securities
exchange, on the principal quotation system on which such security is listed or
admitted to trading or quoted, or, if not listed or admitted to trading or
quoted on any national securities exchange or quotation system, the average of
the closing bid and asked prices of such security in the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or if not so available in such manner, as otherwise determined in
good faith by our board of directors.
From time to time, we may increase the conversion ratio of the
convertible debentures (and thus increase the conversion ratio of the
convertible preferred securities) by any amount selected by us for any period of
at least 20 days, in which case we will give at least fifteen days' notice of
such increase. We may, at our option, make such increases in the conversion
ratio, in addition to those set forth above, as we deem advisable to avoid or
diminish any income tax to holders of common stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes. See "Federal Income Tax
Consequences--Adjustment of Conversion Ratio."
No adjustment of the conversion ratio will be made upon the issuance of
any shares of common stock pursuant to any present or future plan providing for
the reinvestment of dividends or interest payable on securities of Greater
Atlantic Financial and the investment of additional optional amounts in shares
of common stock under any such plan, or upon the issuance of any shares of
common stock or options or rights pursuant to any employee benefit plan or
program, or pursuant to any option, warrant, right or any exercisable,
exchangeable or convertible security outstanding as of the date on which the
convertible debentures are first issued. No adjustment of the conversion ratio
will be made upon the issuance of rights under any shareholder rights plan. The
conversion ratio will be rounded to four decimal places. No adjustment in the
conversion ratio will be required unless adjustment would require a change of at
least one percent (1%) in the conversion ratio then in effect; provided,
however, that any adjustment that would not be required to be made will be
carried forward and taken into account in any subsequent adjustment. If any
action would require adjustment of the conversion ratio pursuant to more than
one of the provisions described above, only one adjustment will be made with
respect to that action and such adjustment will be the amount of adjustment that
has the highest absolute value to the holder of the convertible preferred
securities.
CONVERSION RATIO ADJUSTMENTS--MERGER, CONSOLIDATION OR SALE OF ASSETS OF
COMPANY. In the event that we become a party to any transaction, including,
without limitation, and with certain exceptions:
- a recapitalization or reclassification of the common stock;
- consolidation of Greater Atlantic Financial with, or merger of
Greater Atlantic Financial into, any other person, or any merger
of another person into Greater Atlantic Financial;
- any sale, transfer or lease of all or substantially all of the
assets of Greater Atlantic Financial; or
- any compulsory share exchange pursuant to which the common stock
is converted into the right to receive other securities, cash or
other property (each of the foregoing being referred to as a
"business consolidation transaction"), then the holders of
convertible preferred securities then outstanding will have the
right to convert the convertible preferred securities into the
kind and amount of securities, cash or other property receivable
upon the consummation of such business consolidation transaction
by a holder of the number of shares of common stock issuable
upon
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conversion of such convertible preferred securities immediately
prior to such business consolidation transaction.
In the case of a business consolidation transaction, each convertible
preferred security would become convertible into the securities, cash or
property receivable by a holder of the number of shares of the common stock into
which such convertible preferred security was convertible immediately prior to
such business consolidation transaction. This change could substantially lessen
or eliminate the value of the conversion privilege associated with the
convertible preferred securities in the future. For example, if Greater Atlantic
Financial were acquired in a cash merger, each convertible preferred security
would become convertible solely into cash and would no longer be convertible
into securities which value would vary depending on the future prospects of
Greater Atlantic Financial and other factors.
Conversion ratio adjustments or omissions in making such adjustments
may, under certain circumstances, be deemed to be distributions that could be
taxable as dividends to holders of convertible preferred securities or to the
holders of common stock. See "Federal Income Tax Consequences--Adjustment of
Conversion Ratio."
Whenever the conversion ratio is adjusted as described above, we will
place on file with the property trustee and with the conversion agent a
statement signed by the appropriate officer of Greater Atlantic Financial
showing in detail the facts requiring such adjustment and the conversion ratio
after such adjustment and the property trustee or the conversion agent will
exhibit the same from time to time to any holder desiring to inspect the
statement.
REDEMPTION OR EXCHANGE OF CONVERTIBLE DEBENTURES
GENERAL. We will have the right to redeem the convertible debentures:
- in whole at any time, or in part from time to time, on or after
December 31, 2003;
- at any time, in whole, within 180 days following the occurrence
of a Tax Event, an Investment Company Event or a Capital
Treatment Event, which terms we define below; or
- at any time, and from time to time, to the extent of any
convertible preferred securities we purchase, plus a
proportionate amount of the common securities we hold.
MANDATORY REDEMPTION. Upon our repayment or redemption, in whole or in
part, of any convertible debentures, whether on December 31, 2031 or earlier,
the property trustee will apply the proceeds to redeem the same amount of the
trust securities, upon not less than 30 days' nor more than 60 days' notice, at
the redemption price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities, plus accumulated but unpaid
distributions to the date of redemption. If less than all of the convertible
debentures are to be repaid or redeemed on a date of redemption, then the
proceeds from such repayment or redemption will be allocated to redemption of
convertible preferred securities and common securities proportionately.
DISTRIBUTION OF CONVERTIBLE DEBENTURES IN EXCHANGE FOR CONVERTIBLE
PREFERRED SECURITIES. We will have the right at any time to dissolve, wind-up
and terminate the trust and, after satisfaction of the liabilities of creditors
of the Trust as provided by applicable law, including, without limitation,
amounts due and owing the trustees of the Trust, cause the convertible
debentures to be distributed directly to the holders of trust securities in
liquidation of the Trust.
After the liquidation date fixed for any distribution of convertible
debentures in exchange for convertible preferred securities:
- those trust securities will no longer be deemed to be
outstanding;
- certificates representing convertible debentures in a principal
amount equal to the liquidation amount of those convertible
preferred securities will be issued in exchange for the
convertible preferred securities;
- we will use our best efforts to list the convertible debentures
on the OTC Bulletin Board or a national exchange;
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- any certificates representing trust securities that are not
surrendered for exchange will be deemed to represent convertible
debentures with a principal amount equal to the liquidation
amount of those convertible preferred securities, accruing
interest at the rate provided for in the convertible debentures
from the last distribution date on the convertible preferred
securities;
- all rights of the trust security holders other than the right to
receive convertible debentures upon surrender of a certificate
representing trust securities will terminate.
We cannot assure you that the market prices for the convertible
preferred securities or the convertible debentures that may be distributed if a
dissolution and liquidation of the Trust were to occur would be favorable. The
convertible preferred securities that an investor may purchase, or the
convertible debentures that an investor may receive on dissolution and
liquidation of the Trust, may trade at a discount to the price that the investor
paid to purchase the convertible preferred securities.
REDEMPTION UPON A TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL
TREATMENT EVENT. If a Tax Event, an Investment Company Event or a Capital
Treatment Event occurs, we will have the right to redeem the convertible
debentures in whole, but not in part, and thereby cause a mandatory redemption
of all of the trust securities at the redemption price described above. If one
of these events occurs and we do not elect to redeem the convertible debentures,
or to dissolve the Trust and cause the convertible debentures to be distributed
to holders of the trust securities, then the convertible preferred securities
will remain outstanding and additional interest may be payable on the
convertible debentures.
"Tax Event" means the receipt by the Trust and us of an opinion of
counsel experienced in such matters stating that, as a result of any change or
prospective change in the laws or regulations of the United States or any
political subdivision or taxing authority of the United States, or as a result
of any official administrative pronouncement or judicial decision interpreting
or applying the tax laws or regulations, there is more than an insubstantial
risk that:
- interest payable by us on the convertible debentures is not, or
within 90 days of the date of the opinion will not be,
deductible by us, in whole or in part, for federal income tax
purposes;
- the Trust is, or will be within 90 days after the date of the
opinion, subject to federal income tax with respect to income
received or accrued on the convertible debentures; or
- the Trust is, or will be within 90 days after the date of
opinion, subject to more than an immaterial amount of other
taxes, duties, assessments or other governmental charges.
"Investment Company Event" means the receipt by the Trust and us of an
opinion of counsel experienced in such matters to the effect that the Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, as a result of a change in law or regulation
or a change in interpretation or application of law or regulation.
"Capital Treatment Event" means the receipt by the Trust and us of an
opinion of counsel experienced in such matters to the effect that there is more
than an insubstantial risk of impairment of our ability to treat the convertible
preferred securities as Tier 1 capital, applied as if we were a bank holding
company, for purposes of the current capital adequacy guidelines of the Federal
Reserve Board, as a result of any amendment to any laws or any regulations.
For all of the events described above, we or the Trust must request and
receive an opinion with regard to the event within a reasonable period of time
after we become aware of the possible occurrence of an event of this kind.
REDEMPTION OF CONVERTIBLE DEBENTURES IN EXCHANGE FOR CONVERTIBLE
PREFERRED SECURITIES WE PURCHASE. We will also have the right at any time, and
from time to time, to redeem convertible debentures in exchange for any
convertible preferred securities we may have purchased in the market. If we
elect to surrender any convertible preferred securities beneficially owned by us
in exchange for redemption of a like amount of convertible debentures, we will
also surrender a proportionate amount of common securities in exchange for
convertible debentures. Convertible preferred securities owned by other holders
will not be called for redemption at any time when we elect to exchange trust
securities we own to redeem convertible debentures.
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The common securities we surrender will be in the same proportion to the
convertible preferred securities we surrender as is the ratio of common
securities purchased by us to the convertible preferred securities issued by the
Trust. In exchange for the trust securities surrendered by us, the property
trustee will cause to be released to us for cancellation convertible debentures
with a principal amount equal to the liquidation amount of the trust securities,
plus any accumulated but unpaid distributions, if any, then held by the property
trustee allocable to those trust securities. After the date of redemption
involving an exchange by us, the trust securities we surrender will no longer be
deemed outstanding and the convertible debentures redeemed in exchange will be
cancelled.
REDEMPTION PROCEDURES
Convertible preferred securities will be redeemed at the redemption
price with the proceeds from our contemporaneous redemption of the convertible
debentures. Redemptions of the convertible preferred securities will be made,
and the redemption price will be payable, on each redemption date only to the
extent that the Trust has funds available for the payment of the redemption
price.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the date of redemption to each holder of trust securities to
be redeemed at its registered address. Unless we default in payment of the
redemption price on the convertible debentures, interest will cease to
accumulate on the convertible debentures called for redemption on and after the
date of redemption.
If the Trust gives notice of redemption of its trust securities, then
the property trustee, to the extent funds are available, will irrevocably
deposit with the depositary for the trust securities funds sufficient to pay the
aggregate redemption price and will give the depositary for the trust securities
irrevocable instructions and authority to pay the redemption price to the
holders of the trust securities. If the convertible preferred securities are no
longer in book- entry only form, the property trustee, to the extent funds are
available, will deposit with the designated paying agent for such convertible
preferred securities funds sufficient to pay the aggregate redemption price and
will give the paying agent irrevocable instructions and authority to pay the
redemption price to the holders upon surrender of their certificates evidencing
the convertible preferred securities. Notwithstanding the foregoing,
distributions payable on or prior to the date of redemption for any trust
securities called for redemption will be payable to the holders of the trust
securities on the relevant record dates for the related distribution dates.
If notice of redemption has been given and we have deposited funds as
required, then on the date of the deposit all rights of the holders of the trust
securities called for redemption will cease, except the right to receive the
redemption price, but without interest on such redemption price after the date
of redemption. The trust securities will also cease to be outstanding on the
date of the deposit. If any date fixed for redemption of trust securities is not
a business day, then payment of the redemption price payable on that date will
be made on the next day that is a business day without any additional interest
or other payment in respect of the delay. However, if the next business day is
in the next succeeding calendar year, payment of the interest will be made on
the immediately preceding business day.
If payment of the redemption price in respect of trust securities called
for redemption is improperly withheld or refused and not paid by the Trust, or
by us pursuant to the guarantee, distributions on the trust securities will
continue to accumulate at the rate from the date of redemption originally
established by the trust for the trust securities to the date the redemption
price is actually paid. In this case, the actual payment date will be considered
the date fixed for redemption for purposes of calculating the redemption price.
Payment of the redemption price on the convertible preferred securities
and any distribution of convertible debentures to holders of convertible
preferred securities will be made to the recordholders as they appear on the
register for the convertible preferred securities on the relevant record date.
As long as the convertible preferred securities are represented by a global
security, the record date will be the business day immediately preceding the
date of redemption or liquidation date, as applicable.
If less than all of the trust securities are to be redeemed, then the
aggregate liquidation amount of the trust securities to be redeemed will be
allocated proportionately to those trust securities based upon the relative
liquidation amounts. The particular convertible preferred securities to be
redeemed will be selected by the property trustee from the outstanding
convertible preferred securities not previously called for redemption by a
method the property trustee deems fair and appropriate. This method may provide
for the redemption of portions equal to $10.00 or an integral multiple of $10.00
of the liquidation amount of the convertible preferred securities. The property
trustee will promptly notify the registrar for the convertible preferred
securities in writing of the convertible
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preferred securities selected for redemption and, in the case of any convertible
preferred securities selected for partial redemption, the liquidation amount to
be redeemed.
Subject to applicable law, and if we are not exercising our right to
defer interest payments on the convertible debentures, we may, at any time,
purchase outstanding convertible preferred securities.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the
convertible preferred securities and common securities will be made based on the
liquidation amount of these securities. However, if an event of default under
the indenture has occurred and is continuing, no distributions on or redemption
of the common securities may be made unless payment in full in cash of all
accumulated and unpaid distributions on all of the outstanding convertible
preferred securities for all distribution periods terminating on or before that
time, or in the case of payment of the redemption price, payment of the full
amount of the redemption price on all of the outstanding convertible preferred
securities then called for redemption, has been made or provided for. All funds
available to the property trustee will first be applied to the payment in full
in cash of all distributions on, or the redemption price of, the convertible
preferred securities then due and payable.
In the case of the occurrence and continuance of any event of default
under the trust agreement resulting from an event of default under the
indenture, we, as holder of the common securities, will be deemed to have waived
any right to act with respect to that event of default under the trust agreement
until the effect of the event of default has been cured, waived or otherwise
eliminated. Until the event of default under the trust agreement has been so
cured, waived or otherwise eliminated, the property trustee will act solely on
behalf of the holders of the convertible preferred securities and not on our
behalf, and only the holders of the convertible preferred securities will have
the right to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up and terminate
the Trust and cause the convertible debentures to be distributed to the holders
of the trust securities.
In addition, the Trust will automatically dissolve upon expiration of
its term and will dissolve earlier on the first to occur of:
- our bankruptcy, dissolution or liquidation;
- the distribution of a like amount of the convertible debentures
to the holders of trust securities, if we have given written
direction to the property trustee to dissolve the Trust;
- redemption of all of the convertible preferred securities as
described under "--Redemption or Exchange of Convertible
Debentures--Mandatory Redemption;"
- the entry of a court order for the dissolution of the Trust; or
- the distribution of common stock upon conversion of all
outstanding convertible preferred securities.
With the exception of a redemption as described under "--Redemption or
Exchange of Convertible Debentures--Mandatory Redemption," if an early
dissolution of the Trust occurs, the Trust will be liquidated by the
administrative trustees as expeditiously as they determine to be possible. After
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, the trustees will distribute to the holders of trust securities,
convertible debentures:
- in an aggregate stated principal amount equal to the aggregate
stated liquidation amount of the trust securities;
- with an interest rate identical to the distribution rate on the
trust securities; and
- with accrued and unpaid interest equal to accumulated and unpaid
distributions on the trust securities.
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However, if the property trustee determines that the distribution is not
practical, then the holders of trust securities will be entitled to receive,
instead of convertible debentures, a proportionate amount of the liquidation
distribution. The liquidation distribution will be the amount equal to the
aggregate of the liquidation amount plus accumulated and unpaid distributions to
the date of payment. If the liquidation distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
liquidation distribution, then the amounts payable directly by the Trust on the
trust securities will be paid on a proportional basis, based on liquidation
amounts, to us, as the holder of the common securities, and to the holders of
the convertible preferred securities. However, if an event of default under the
indenture has occurred and is continuing, the convertible preferred securities
will have a priority over the common securities. See "--Subordination of Common
Securities."
Under current federal income tax law and interpretations, and assuming
that the Trust is treated as a grantor trust, as is expected, a distribution of
the convertible debentures should not be a taxable event to holders of the
convertible preferred securities. Should there be a change in law, a change in
legal interpretation, a Tax Event or another circumstance, however, the
distribution could be a taxable event to holders of the convertible preferred
securities. If we do not elect to redeem the convertible debentures prior to
maturity or to liquidate the Trust and distribute the convertible debentures to
holders of the convertible preferred securities, the convertible preferred
securities will remain outstanding until the repayment of the convertible
debentures. See "Federal Income Tax Consequences--Receipt of Convertible
Debentures or Cash Upon Liquidation of the Trust" for more information regarding
a taxable distribution.
If we elect to dissolve the Trust and thus cause convertible debentures
to be distributed to holders of the Trust securities in liquidation of the
Trust, we will continue to have the right to shorten the maturity of the
convertible debentures.
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the convertible
preferred securities in the event of any liquidation of the Trust is $10.00 per
convertible preferred security plus accumulated and unpaid distributions to the
date of payment, which may be in the form of a distribution of convertible
debentures having a liquidation value and accrued interest of an equal amount.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under
the trust agreement with respect to the convertible preferred securities:
- the occurrence of an event of default under the indenture;
- a default by the Trust in the payment of any distribution when
it becomes due and payable, and continuation of the default for
a period of 30 days; or
- a default by the Trust in the payment of any redemption price of
any of the trust securities when it becomes due and payable.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to the holders of the convertible preferred
securities, the administrative trustees and to us, unless the event of default
has been cured or waived. Greater Atlantic Financial and the administrative
trustees are required to file annually with the property trustee a certificate
as to whether or not they are in compliance with all the conditions and
covenants applicable to them under the trust agreement.
If an event of default under the indenture has occurred and is
continuing, the convertible preferred securities will have preference over the
common securities upon dissolution of the Trust. The existence of an event of
default under the trust agreement does not entitle the holders of convertible
preferred securities to accelerate the maturity thereof, unless the event of
default is caused by the occurrence of an event of default under the indenture
and both the indenture trustee and holders of at least 25% in principal amount
of the convertible debentures fail to accelerate the maturity thereof.
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REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred and is
continuing, we may remove any trustee at any time. If an event of default under
the indenture has occurred and is continuing, only the holders of a majority in
liquidation amount of the outstanding convertible preferred securities may
remove the property trustee or the Delaware trustee. The holders of the
convertible preferred securities have no right to vote to appoint, remove or
replace the administrative trustees. These rights are vested exclusively with us
as the holder of the common securities. No resignation or removal of a trustee
and no appointment of a successor trustee will be effective until the successor
trustee accepts the appointment in accordance with the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property may
at the time be located, we will have the power to appoint at any time or times,
and upon written request of the property trustee will appoint, one or more
persons or entities either (1) to act as a co-trustee, jointly with the property
trustee, of all or any part of the trust property, or (2) to act as separate
trustee of any trust property. In either case these trustees will have the
powers that may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case an event of
default under the indenture has occurred and is continuing, the property trustee
alone will have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees may be a
successor trustee to any of the trustees, including a successor resulting from a
merger or consolidation. However, any successor trustee must meet all of the
qualifications and eligibility standards to act as a trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. For these purposes, if we consolidate or merge with another
entity, or transfer or sell substantially all of our assets to another entity,
in some cases that transaction may be considered to involve a replacement of the
Trust, and the conditions set forth below would apply to such transaction. The
Trust may, at our request, with the consent of the administrative trustees and
without the consent of the holders of the convertible preferred securities, the
property trustee or the Delaware trustee, undertake a transaction listed above
if the following conditions are met:
- the successor entity either (a) expressly assumes all of the
obligations of the Trust with respect to the convertible
preferred securities, or (b) substitutes for the convertible
preferred securities other securities having substantially the
same terms as the convertible preferred securities (referred to
as "successor securities") so long as the successor securities
rank the same in priority as the convertible preferred
securities with respect to distributions and payments upon
liquidation, redemption and otherwise;
- we appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property trustee
in its capacity as the holder of the convertible debentures;
- the successor securities are listed or traded or will be listed
or traded on any national securities exchange or other
organization on which the convertible preferred securities are
then listed, if any;
- the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the
convertible preferred securities (including any successor
securities) in any material respect;
- the successor entity has a purpose substantially identical to
that of the Trust;
- prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from
independent counsel that (a) any transaction of this kind does
not adversely affect the rights, preferences and privileges of
the holders of the convertible preferred
35
securities (including any successor securities) in any material
respect, and (b) following the transaction, neither the Trust
nor the successor entity will be required to register as an
"investment company" under the Investment Company Act; and
- we own all of the common securities of the successor entity and
guarantee the obligations of the successor entity under the
successor securities at least to the extent provided by the
guarantee, the convertible debentures, the trust agreement and
the expense agreement.
Notwithstanding the foregoing, the Trust may not, except with the consent of
every holder of the convertible preferred securities, enter into any transaction
of this kind if the transaction would cause the Trust or the successor entity
not to be classified as a grantor trust for federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as described below and under "Description of the
Guarantee--Amendments" and as otherwise required by the Trust Indenture Act and
the trust agreement, the holders of the convertible preferred securities will
have no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the convertible preferred
securities, in the following circumstances:
- with respect to acceptance of appointment by a successor
trustee;
- to cure any ambiguity, correct or supplement any provisions in
the trust agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to
matters or questions arising under the trust agreement, as long
as the amendment is not inconsistent with the other provisions
of the trust agreement and does not have a material adverse
effect on the interests of any holder of trust securities; or
- to modify, eliminate or add to any provisions of the trust
agreement if necessary to ensure that the Trust will be
classified for federal income tax purposes as a grantor trust at
all times that any trust securities are outstanding or to ensure
that the Trust will not be required to register as an
"investment company" under the Investment Company Act.
With the consent of the holders of a majority of the aggregate
liquidation amount of the outstanding trust securities, we and the trustees may
amend the trust agreement if the trustees receive an opinion of counsel to the
effect that the amendment or the exercise of any power granted to the trustees
in accordance with the amendment will not affect the Trust's status as a grantor
trust for federal income tax purposes or the Trust's exemption from status as an
"investment company" under the Investment Company Act. However, without the
consent of each holder of trust securities, the trust agreement may not be
amended to (a) change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution required
to be made in respect of the trust securities as of a specified date, or (b)
restrict the right of a holder of trust securities to institute suit for the
enforcement of the payment on or after that date.
As long as the property trustee holds any convertible debentures, the
trustees will not, without obtaining the prior approval of the holders of a
majority in aggregate liquidation amount of all outstanding convertible
preferred securities:
- direct the time, method and place of conducting any proceeding
for any remedy available to the indenture trustee, or executing
any trust or power conferred on the property trustee with
respect to the convertible debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the
principal of all the convertible debentures will be due and
payable; or
- consent to any amendment or termination of the indenture or the
convertible debentures, where the property trustee's consent is
required.
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However, where a consent under the indenture requires the consent of
each holder of the affected convertible debentures, no consent will be given by
the property trustee without the prior consent of each holder of the convertible
preferred securities.
The trustees may not revoke any action previously authorized or approved
by a vote of the holders of the convertible preferred securities except by
subsequent vote of the holders of the convertible preferred securities. The
property trustee will notify each holder of convertible preferred securities of
any notice of default with respect to the convertible debentures. In addition to
obtaining the foregoing approvals of the holders of the convertible preferred
securities, prior to taking any of the foregoing actions, the trustees must
obtain an opinion of counsel experienced in these matters to the effect that the
Trust will not be classified as an association taxable as a corporation for
federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at a
meeting or by written consent. The property trustee will cause a notice of any
meeting at which holders of the trust securities are entitled to vote, or of any
matter upon which action by written consent of the holders is to be taken, to be
given to each holder of record of trust securities.
No vote or consent of the holders of convertible preferred securities
will be required for the Trust to redeem and cancel its convertible preferred
securities in accordance with the trust agreement.
Notwithstanding the fact that holders of convertible preferred
securities are entitled to vote or consent under any of the circumstances
described above, any of the convertible preferred securities that are owned by
Greater Atlantic Financial, the trustees or any affiliate of Greater Atlantic
Financial or any trustee, will, for purposes of the vote or consent, be treated
as if they were not outstanding.
GLOBAL CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities will be represented by one or more
global convertible preferred securities registered in the name of The Depository
Trust Company, New York, New York, or its nominee. A global convertible
preferred security is a security representing interests of more than one
beneficial holder. Ownership of beneficial interests in the global convertible
preferred securities will be reflected in DTC participant account records
through DTC's book-entry transfer and registration system. Participants are
brokers, dealers, or others having accounts with DTC. Indirect beneficial
interests of other persons investing in the convertible preferred securities
will be shown on, and transfers will be effected only through, records
maintained by DTC participants. Except as described below, convertible preferred
securities in definitive form will not be issued in exchange for the global
convertible preferred securities.
No global convertible preferred security may be exchanged for
convertible preferred securities registered in the names of persons other than
DTC or its nominee unless:
- DTC notifies the indenture trustee that it is unwilling or
unable to continue as a depositary for the global convertible
preferred security and we are unable to locate a qualified
successor depositary;
- we execute and deliver to the indenture trustee a written order
stating that we elect to terminate the book-entry system through
DTC; or
- there shall have occurred and be continuing an event of default
under the indenture.
Any global convertible preferred security that is exchangeable pursuant to the
preceding sentence will be exchangeable for definitive certificates registered
in the names as DTC directs. It is expected that the instructions will be based
upon directions received by DTC with respect to ownership of beneficial
interests in the global convertible preferred security. If convertible preferred
securities are issued in definitive form, the convertible preferred securities
will be in denominations of $10.00 and integral multiples of $10.00 and may be
transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
convertible preferred securities represented thereby, a global convertible
preferred security may not be transferred except as a whole by DTC to a nominee
of DTC, by a nominee of DTC to DTC or another nominee of DTC or by DTC or any
nominee to a successor depositary or any nominee of the successor.
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Payments on global convertible preferred securities will be made to DTC,
as the depositary for the global convertible preferred securities. If the
convertible preferred securities are issued in definitive form, distributions
will be payable by check mailed to the address of record of the persons entitled
to the distribution, and the transfer of the convertible preferred securities
will be registrable, and convertible preferred securities will be exchangeable
for convertible preferred securities of other denominations of a like aggregate
liquidation amount, at the corporate office of the property trustee, or at the
offices of any paying agent or transfer agent appointed by the administrative
trustees. In addition, if the convertible preferred securities are issued in
definitive form, the record dates for payment of distributions will be the 15th
day of the month in which the relevant distribution date occurs. For a
description of the terms of DTC arrangements relating to payments, transfers,
voting rights, redemptions and other notices and other matters, see "Book-Entry
Issuance."
Upon the issuance of one or more global convertible preferred
securities, and the deposit of the global convertible preferred security with or
on behalf of DTC or its nominee, DTC or its nominee will credit, on its book-
entry registration and transfer system, the respective aggregate liquidation
amounts of the individual convertible preferred securities represented by the
global convertible preferred security to the designated accounts of persons that
participate in the DTC system. These participant accounts will be designated by
the dealers, underwriters or agents selling the convertible preferred
securities. Ownership of beneficial interests in a global convertible preferred
security will be limited to persons or entities having an account with DTC or
who may hold interests through participants. With respect to interests of any
person or entity that is a DTC participant, ownership of beneficial interests in
a global convertible preferred security will be shown on, and the transfer of
that ownership will be effected only through, records maintained by DTC or its
nominee. With respect to persons or entities who hold interests in a global
convertible preferred security through a participant, the interest and any
transfer of the interest will be shown only on the participant's records. The
laws of some states require that certain purchasers of securities take physical
delivery of securities in definitive form. These laws may impair the ability to
transfer beneficial interests in a global convertible preferred security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global convertible preferred security, the depositary or the
nominee, as the case may be, will be considered the sole owner or holder of the
convertible preferred securities represented by the global convertible preferred
security for all purposes under the trust agreement. Except as described in this
prospectus, owners of beneficial interests in a global convertible preferred
security will not be entitled to have any of the individual convertible
preferred securities represented by the global convertible preferred security
registered in their names, will not receive or be entitled to receive physical
delivery of any of the convertible preferred securities in definitive form and
will not be considered the owners or holders of the convertible preferred
securities under the trust agreement.
None of us, the property trustee, any paying agent or the securities
registrar for the convertible preferred securities will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the global convertible preferred
security representing the convertible preferred securities or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of the
liquidation amount or distributions in respect of a global convertible preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global convertible preferred security as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global convertible preferred security held
through the participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name." The payments will be the
responsibility of the participants.
PAYMENT AND PAYING AGENCY
Payments in respect of the convertible preferred securities will be made
to DTC, which will credit the relevant accounts of participants on the
applicable distribution dates, or, if any of the convertible preferred
securities are not held by DTC, the payments will be made by check mailed to the
address of the holder as listed on the register of holders of the convertible
preferred securities. The paying agent for the convertible preferred securities
will initially be the property trustee and any co-paying agent chosen by the
property trustee and acceptable to us and the administrative trustees. The
paying agent for the convertible preferred securities may resign as paying agent
upon 30 days' written notice to the administrative trustees, the property
trustee and us. If the property trustee no longer is the
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paying agent for the convertible preferred securities, the administrative
trustees will appoint a successor to act as paying agent. The successor must be
a bank or trust company acceptable to us and the property trustee.
REGISTRAR, TRANSFER AGENT AND CONVERSION AGENT
The property trustee will act as the registrar, transfer agent and
conversion agent for the convertible preferred securities. Registration of
transfers of convertible preferred securities will be effected without charge by
or on behalf of the Trust, but upon payment of any tax or other governmental
charges that may be imposed in connection with any transfer or exchange. The
trust and its registrar and transfer agent will not be required to register or
cause to be registered the transfer of convertible preferred securities after
they have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee undertakes to perform only the duties set forth in
the trust agreement. After the occurrence of an event of default that is
continuing, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs. The
property trustee is under no obligation to exercise any of the powers vested in
it by the trust agreement at the request of any holder of convertible preferred
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred. If no event of default under the trust
agreement has occurred and is continuing and the property trustee is required to
decide between alternative causes of action, construe ambiguous or inconsistent
provisions in the trust agreement or is unsure of the application of any
provision of the trust agreement, and the matter is not one on which holders of
convertible preferred securities are entitled to vote upon, then the property
trustee will take the action directed in writing by us. If the property trustee
is not so directed, then it will take the action it deems advisable and in the
best interests of the holders of the trust securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that:
- the Trust will not be deemed to be an "investment company"
required to be registered under Investment Company Act;
- the Trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
- the convertible debentures will be treated as indebtedness of
Greater Atlantic Financial for federal income tax purposes.
In this regard, we and the administrative trustees are authorized to take any
action not inconsistent with applicable law, the certificate of trust or the
trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
The administrative trustees are required to use their best efforts to
maintain the listing of the convertible preferred securities on the OTC Bulletin
Board or a national securities exchange, but this requirement will not prevent
us from redeeming all or a portion of the convertible preferred securities in
accordance with the trust agreement.
Holders of the convertible preferred securities have no preemptive or
similar rights. The trust agreement and the trust securities will be governed by
Delaware law.
DESCRIPTION OF THE CONVERTIBLE DEBENTURES
Concurrently with the issuance of the convertible preferred securities,
the Trust will invest the proceeds from the sale of the trust securities in the
convertible debentures issued by us. The convertible debentures will be issued
as unsecured debt under the indenture between us and Wilmington Trust Company,
as indenture trustee. The indenture will be qualified under the Trust Indenture
Act.
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The following discussion is subject to, and is qualified in its entirety
by reference to, the indenture and to the Trust Indenture Act. We urge
prospective investors to read the form of the indenture, which is filed as an
exhibit to the registration statement of which this prospectus forms a part.
GENERAL
The convertible debentures will be limited in aggregate principal amount
to $11.0 million. This amount represents the sum of the aggregate stated
liquidation amounts of the trust securities. The convertible debentures will
bear interest at the annual rate of 6.50% of the principal amount. The interest
will be payable quarterly on March 31, June 30, September 30 and December 31 of
each year, beginning June 30, 2002, to the person in whose name each convertible
debenture is registered at the close of business on the 15th day of the last
month of the calendar quarter. It is anticipated that, until the liquidation, if
any, of the Trust, the convertible debentures will be held in the name of the
property trustee in trust for the benefit of the holders of the trust
securities.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. If any date on which interest
is payable on the convertible debentures is not a business day, then payment of
interest will be made on the next day that is a business day without any
additional interest or other payment in respect of the delay. However, if the
next business day is in the next calendar year, payment of interest will be made
on the immediately preceding business day. Accrued interest that is not paid on
the applicable interest payment date will bear additional interest on the amount
due at the annual rate of 6.50%, compounded quarterly.
The convertible debentures will mature on December 31, 2031, the stated
maturity date. We may shorten this date once at any time to any date not earlier
than December 31, 2003.
We will give notice to the indenture trustee and the holders of the
convertible debentures, no more than 180 days and no less than 30 days prior to
the effectiveness of any change in the stated maturity date. We will not have
the right to redeem the convertible debentures from the Trust until after
December 31, 2003, except if (a) a Tax Event, an Investment Company Event or a
Capital Treatment Event has occurred, or (b) we repurchase convertible preferred
securities in the market, in which case we can elect to redeem convertible
debentures specifically in exchange for a like amount of convertible preferred
securities owned by us plus a proportionate amount of common securities.
The convertible debentures will be unsecured and will rank junior to all
of our senior and subordinated debt, including indebtedness we may incur in the
future, and will be further subordinated to any debt of ours issued in
connection with trust preferred securities intended to qualify for "Tier 1"
capital treatment unless those debt securities are also convertible into our
common stock. Because we are a holding company, our right to participate in any
distribution of assets of any of our subsidiaries, upon any subsidiary's
liquidation or reorganization or otherwise, and thus the ability of holders of
the convertible debentures to benefit indirectly from any distribution by a
subsidiary, is subject to the prior claim of creditors of the subsidiary, except
to the extent that we may be recognized as a creditor of the subsidiary. The
convertible debentures will, therefore, be effectively subordinated to all
existing and future liabilities of our subsidiaries, and holders of convertible
debentures should look only to our assets for payment. The indenture does not
limit our ability to incur or issue secured or unsecured senior and junior debt.
See "--Subordination."
The indenture does not contain provisions that afford holders of the
convertible debentures protection in the event of a highly leveraged transaction
or other similar transaction involving us, nor does it require us to maintain or
achieve any financial performance levels or to obtain or maintain any credit
rating on the convertible debentures.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the convertible debentures at any time for a period not exceeding 20
consecutive quarters. However, no extension period may extend beyond the stated
maturity of the convertible debentures or end on a date other than a date
interest is normally due. At the end of an extension period, we must pay all
interest then accrued and unpaid, together with interest thereon at the annual
rate of 6.50%, compounded quarterly. During an extension period, interest will
continue to accrue and holders of convertible debentures, or the holders of
convertible preferred securities if they are then outstanding, will be required
to accrue and recognize as income for federal income tax purposes the accrued
but unpaid interest amounts in the year in which such amounts accrued. See
"Federal Income Tax Consequences--Interest Payment Period and Original Issue
Discount."
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During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock (other than stock dividends, non-cash
dividends in connection with the implementation of a shareholder
rights plan, purchases of common stock in connection with
employee benefit plans or in connection with the
reclassification of any class of capital stock into another
class of capital stock) or allow any of our subsidiaries to do
the same with respect to their capital stock (other than payment
of dividends or distributions to us);
- make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay, repurchase or
redeem any debt securities issued by us that rank equally with
or junior to the convertible debentures;
- make or allow any of our subsidiaries to make any guarantee
payments with respect to any other guarantee by us of any other
debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the convertible debentures
(other than payments under the guarantee); or
- redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
Prior to the termination of any extension period, so long as no event of
default under the indenture is continuing, we may further defer the payment of
interest subject to the above stated requirements. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period at any time. We do not currently intend to exercise our
right to defer payments of interest on the convertible debentures.
We must give the property trustee, the administrative trustees and the
indenture trustee notice of our election of an extension period at least two
business days prior to the earlier of (a) the next date on which distributions
on the trust securities would have been payable except for the election to begin
an extension period, or (b) the date we are required to give notice of the
record date, or the date the distributions are payable, to the Nasdaq National
Market, or other applicable self-regulatory organization, or to holders of the
convertible preferred securities, but in any event at least one business day
prior to the record date.
Other than as described above, there is no limitation on the number of
times that we may elect to begin an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the Trust is required to pay any additional taxes, duties,
assessments or other governmental charges as a result of the occurrence of a Tax
Event, we will pay as additional interest on the convertible debentures any
amounts which may be required so that the net amounts received and retained by
the Trust after paying any additional taxes, duties, assessments or other
governmental charges will not be less than the amounts the Trust would have
received had the additional taxes, duties, assessments or other governmental
charges not been imposed.
REDEMPTION
We may redeem the convertible debentures prior to maturity without
payment of premium:
- on or after December 31, 2003 in whole at any time or in part
from time to time;
- in whole at any time within 180 days following the occurrence of
a Tax Event, an Investment Company Event or a Capital Treatment
Event; or
- at any time, and from time to time, to the extent of any
convertible preferred securities we purchase, plus a
proportionate amount of the common securities we hold.
In each case, we will pay a redemption price equal to the accrued and unpaid
interest on the convertible debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount of the redeemed convertible
debentures.
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Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each holder of convertible debentures
to be redeemed at its registered address. Redemption of less than all
outstanding convertible debentures must be effected proportionately, by lot or
in any other manner deemed to be fair and appropriate by the indenture trustee.
Unless we default in payment of the redemption price for the convertible
debentures, on and after the redemption date interest will no longer accrue on
the convertible debentures or the portions of the convertible debentures called
for redemption.
The convertible debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described above in "Description of Convertible Preferred
Securities--Liquidation Distribution Upon Termination," under certain
circumstances, convertible debentures may be distributed to the holders of the
trust securities in liquidation of the Trust after satisfaction of liabilities
to creditors of the Trust. If this occurs, we will use our best efforts to list
the convertible debentures on the OTC Bulletin Board or other stock exchange or
national quotation system on which the convertible preferred securities are then
listed, if any. There can be no assurance as to the market price of any
convertible debentures that may be distributed to the holders of convertible
preferred securities.
RESTRICTIONS ON PAYMENTS
We are restricted from making certain payments (as described below) if
we have chosen to defer payment of interest on the convertible debentures, if an
event of default has occurred and is continuing under the indenture, or if we
are in default with respect to our obligations under the guarantee.
If any of these events occur, we will not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect
to, any of our capital stock (other than stock dividends,
non-cash dividends in connection with the implementation of a
shareholder rights plan, purchases of common stock in connection
with employee benefit plans or in connection with the
reclassification of any class of our capital stock into another
class of capital stock) or allow any of our subsidiaries to do
the same with respect to their capital stock (other than payment
of dividends or distributions to us);
- make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay or repurchase or
redeem any of our debt securities that rank equally with or
junior to the convertible debentures;
- make or allow any of our subsidiaries to make any guarantee
payments with respect to any guarantee by us of the debt
securities of any of our subsidiaries if the guarantee ranks
equally with or junior to the convertible debentures (other than
payments under the guarantee with respect to the convertible
preferred securities); or
- redeem, purchase or acquire less than all of the convertible
debentures or any of the convertible preferred securities.
SUBORDINATION
The convertible debentures are subordinated and junior in right of
payment to all of our senior and subordinated debt, as defined below. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up or reorganization of Greater Atlantic Financial, whether
voluntary or involuntary in bankruptcy, insolvency, receivership or other
proceedings in connection with any insolvency or bankruptcy proceedings, the
holders of our senior and subordinated debt will first be entitled to receive
payment in full of principal and interest before the holders of convertible
debentures will be entitled to receive or retain any payment in respect of the
convertible debentures.
If the maturity of any convertible debentures is accelerated, the
holders of all of our senior and subordinated debt outstanding at the time of
the acceleration will also be entitled to first receive payment in full of all
amounts due
42
to them, including any amounts due upon acceleration, before the holders of the
convertible debentures will be entitled to receive or retain any principal or
interest payments on the convertible debentures.
No payments of principal or interest on the convertible debentures may
be made if there has occurred and is continuing a default in any payment with
respect to any of our senior or subordinated debt or an event of default with
respect to any of our senior or subordinated debt resulting in the acceleration
of the maturity of the senior or subordinated debt, or if any judicial
proceeding is pending with respect to any default.
The term "debt" means, with respect to any person, whether recourse is
to all or a portion of the assets of the person and whether or not contingent:
- every obligation of the person for money borrowed;
- every obligation of the person evidenced by bonds, debentures,
notes or other similar instruments, including obligations
incurred in connection with the acquisition of property, assets
or businesses;
- every reimbursement obligation of the person with respect to
letters of credit, bankers' acceptances or similar facilities
issued for the account of the person;
- every obligation of the person issued or assumed as the deferred
purchase price of property or services, excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business;
- every capital lease obligation of the person; and
- every obligation of the type referred to in the first five
points of another person and all dividends of another person the
payment of which, in either case, the first person has
guaranteed or is responsible or liable, directly or indirectly,
as obligor or otherwise.
The term "senior debt" means the principal of, and premium and interest,
including interest accruing on or after the filing of any petition in bankruptcy
or for reorganization relating to us, on, debt, whether incurred on or prior to
the date of the indenture or incurred after the date. However, senior debt will
not be deemed to include:
- any debt where it is provided in the instrument creating the
debt that the obligations are not superior in right of payment
to the convertible debentures or to other debt which is equal
with, or subordinated to, the convertible debentures;
- any of our debt that when incurred and without regard to any
election under the federal bankruptcy laws, was without recourse
to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees; and
- any debt that by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the convertible debentures as a result of
the subordination provisions of the indenture would be greater
than they otherwise would have been as a result of any
obligation of the holders to pay amounts over to the obligees on
the trade accounts payable or accrued liabilities arising in the
ordinary course of business as a result of subordination
provisions to which the debt is subject.
The term "subordinated debt" means the principal of, and premium and
interest, including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us, on, debt. Except as described
below, subordinated debt includes debt incurred on or prior to the date of the
indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other debt of ours. For purposes of the convertible
debentures, subordinated debt also includes any debt of ours under debt
securities (and guarantees in respect of these debt securities) initially issued
to any trust, or a trustee of a trust, partnership or other entity affiliated
with us that is, directly or indirectly, our financing subsidiary in connection
with the issuance by that entity of preferred securities or other securities
which are intended to qualify for "Tier 1" capital treatment. Subordinated debt
will not be deemed to include:
43
- any of our debt which when incurred and without regard to any
election under the federal bankruptcy laws was without recourse
to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees; and
- any debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the convertible debentures as a result of
the subordination provisions of the indenture would be greater
than they otherwise would have been as a result of any
obligation of the holders to pay amounts over to the obligees on
the trade accounts payable or accrued liabilities arising in the
ordinary course of business as a result of subordination
provisions to which the debt is subject; or
- debt which constitutes senior debt.
We expect from time to time to incur additional indebtedness, and there
is no limitation under the indenture on the amount of indebtedness we may incur.
We had no senior or subordinated debt at September 30, 2001.
CONVERSION OF CONVERTIBLE DEBENTURES
The convertible debentures will be convertible into common stock at the
option of the holders thereof at any time on or after 60 days after the closing
of the offer, and prior to 5:00 p.m., Eastern time, on the business day
immediately preceding the date of repayment of such convertible debentures,
whether at stated maturity or upon redemption (either at the option of Greater
Atlantic Financial or pursuant to a Tax Event, an Investment Company Event or a
Capital Treatment Event), at the conversion ratio as adjusted, as applicable, as
described under "Description of Convertible Preferred Securities--Conversion
Rights." The Trust will covenant not to convert convertible debentures held by
it except pursuant to a notice of conversion delivered to the conversion agent
by a holder of convertible preferred securities. Upon surrender of a convertible
preferred security to the conversion agent for conversion, the Trust will
distribute $10.00 principal amount of the convertible debentures per convertible
preferred security to the conversion agent on behalf of the holder of the
convertible preferred securities so converted whereupon the conversion agent
will convert such convertible debentures to common stock on behalf of such
holder. Greater Atlantic Financial's delivery to the holders of the convertible
debentures (through the conversion agent) of the fixed number of shares of
common stock into which the debentures are convertible (together with the cash
payment, if any, in lieu of fractional shares) will be deemed to satisfy our
obligation to pay the principal amount of the convertible debentures so
converted, and the accrued and unpaid interest thereupon attributable to the
period from the last date to which interest has been paid or duly provided for;
provided, however, that if any debentures are converted after a record date for
payment of interest and on or before the related interest payment date, the
interest payable on the related interest payment date with respect to such
convertible debentures will be paid to the Trust (which will distribute an
equivalent amount to the holder of such convertible preferred security on the
related record date) or other holder of convertible debentures, as the case may
be, despite such conversion, and the holder of the convertible debentures must
deliver an amount equal to the interest payable on the related interest payment
date prior to receiving the shares of common stock; provided, further that if
any convertible debentures are delivered for conversion during an extension
period by a holder after receiving a notice of redemption from the property
trustee, we will be required to pay to the Trust or other holder of the
converted debentures all accrued and unpaid interest, if any, on such
convertible debentures through the date of conversion which amount will be
simultaneously distributed to the holders of the convertible preferred
securities, if any, in respect of which such convertible debentures were
delivered. Except as provided above, neither the Trust nor Greater Atlantic
Financial will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid interest, whether or not in arrears, on
the convertible debentures surrendered for conversion.
PAYMENT AND PAYING AGENTS
Generally, payment of principal of and interest on the convertible
debentures will be made at the office of the indenture trustee in Wilmington,
Delaware. However, we have the option to make payment of any interest by (a)
check mailed to the address of the person entitled to payment at the address
listed in the register of holders of the convertible debentures, or (b) wire
transfer to an account maintained by the person entitled thereto as specified in
the
44
register of holders of the convertible debentures, provided that proper transfer
instructions have been received by the applicable record date. Payment of any
interest on convertible debentures will be made to the person in whose name the
convertible debenture is registered at the close of business on the regular
record date for the interest payment, except in the case of defaulted interest.
Any moneys deposited with the indenture trustee or any paying agent for
the convertible debentures, or then held by us in trust, for the payment of the
principal of or interest on the convertible debentures and remaining unclaimed
for two years after the principal or interest has become due and payable, will
be repaid to us on December 31 of each year. If we hold any of this money in
trust, then it will be discharged from the Trust to us and the holder of the
convertible debenture will thereafter look, as a general unsecured creditor,
only to us for payment.
REGISTRAR AND TRANSFER AGENT
The indenture trustee will act as the registrar and the transfer agent
for the convertible debentures. Convertible debentures may be presented for
registration of transfer, with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed, at the office of the
registrar. Provided that we maintain a transfer agent in Wilmington, Delaware,
we may rescind the designation of any transfer agent or approve a change in the
location through which any transfer agent acts. We may at any time designate
additional transfer agents with respect to the convertible debentures.
If we redeem any of the convertible debentures, neither we nor the
indenture trustee will be required to (a) issue, register the transfer of or
exchange any convertible debentures during a period beginning at the opening of
business 15 days before the day of the mailing of and ending at the close of
business on the day of the mailing of the relevant notice of redemption, or (b)
transfer or exchange any convertible debentures so selected for redemption,
except, in the case of any convertible debentures being redeemed in part, any
portion not to be redeemed.
MODIFICATION OF INDENTURE
We and the indenture trustee may, from time to time without the consent
of the holders of the convertible debentures, amend, waive our rights under or
supplement the indenture for purposes which do not materially adversely affect
the rights of the holders of the convertible debentures. Other changes may be
made by us and the indenture trustee with the consent of the holders of a
majority in principal amount of the outstanding convertible debentures. However,
without the consent of the holder of each outstanding convertible debenture
affected by the proposed modification, no modification may:
- extend the maturity date of the convertible debentures;
- reduce the principal amount or the rate or extend the time of
payment of interest; or
- reduce the percentage of principal amount of convertible
debentures required to amend the indenture.
As long as any of the convertible preferred securities remain outstanding, no
modification of the indenture may be made that requires the consent of the
holders of the convertible debentures, no termination of the indenture may
occur, and no waiver of any event of default under the indenture may be
effective, without the prior consent of the holders of a majority of the
aggregate liquidation amount of the convertible preferred securities.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following events with
respect to the convertible debentures that has occurred and is continuing
constitutes an event of default under the indenture:
- our failure to pay any interest on the convertible debentures
for 30 days after the due date, except where we have properly
deferred the interest payment;
- our failure to pay any principal on the convertible debentures
when due whether at maturity, upon redemption or otherwise;
45
- our failure to observe or perform in any material respect any
other covenants or agreements contained in the indenture for 90
days after written notice to us from the indenture trustee or
the holders of at least 25% in aggregate outstanding principal
amount of the convertible debentures; or
- our bankruptcy, insolvency or reorganization or dissolution of
the Trust.
The holders of a majority of the aggregate outstanding principal amount
of the convertible debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the indenture
trustee. The indenture trustee, or the holders of at least 25% in aggregate
outstanding principal amount of the convertible debentures, may declare the
principal due and payable immediately upon an event of default under the
indenture. The holders of a majority of the outstanding principal amount of the
convertible debentures may rescind and annul the declaration and waive the
default if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the indenture trustee. The holders may not annul the
declaration and waive a default if the default is the non-payment of the
principal of the convertible debentures which has become due solely by the
acceleration. Should the holders of the convertible debentures fail to annul the
declaration and waive the default, the holders of at least 25% in aggregate
liquidation amount of the convertible preferred securities will have this right.
If an event of default under the indenture has occurred and is
continuing, the property trustee will have the right to declare the principal of
and the interest on the convertible debentures, and any other amounts payable
under the indenture, to be immediately due and payable and to enforce its other
rights as a creditor with respect to the convertible debentures.
We are required to file annually with the indenture trustee a
certificate as to whether or not we are in compliance with all of the conditions
and covenants applicable to us under the indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE CONVERTIBLE PREFERRED SECURITIES
If an event of default under the indenture has occurred and is
continuing and the event is attributable to the failure by us to pay interest on
or principal of the convertible debentures on the date on which the payment is
due and payable, then a holder of convertible preferred securities may institute
a direct action against us to compel us to make the payment. We may not amend
the indenture to remove the foregoing right to bring a direct action without the
prior written consent of all of the holders of the convertible preferred
securities. If the right to bring a direct action is removed, the Trust may
become subject to the reporting obligations under the Securities Exchange Act of
1934.
The holders of the convertible preferred securities will not be able to
exercise directly any remedies, other than those set forth in the preceding
paragraph, available to the holders of the convertible debentures unless there
has been an event of default under the trust agreement.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or convey or
transfer our properties and assets substantially as an entirety to any entity,
and no entity may be consolidated with or merged into us or sell, convey,
transfer or otherwise dispose of its properties and assets substantially as an
entirety to us, unless:
- if we consolidate with or merge into another person or convey or
transfer our properties and assets substantially as an entirety
to any person, the successor person is organized under the laws
of the United States or any state or the District of Columbia,
and the successor person expressly assumes by supplemental
indenture our obligations on the convertible debentures, and the
ultimate parent entity of the successor entity expressly assumes
our obligations under the guarantee, to the extent the
convertible preferred securities are then outstanding;
- immediately after the transaction, no event of default under the
indenture, and no event which, after notice or lapse of time, or
both, would become an event of default under the indenture, has
occurred and is continuing; and
- other conditions as prescribed in the indenture are met.
Under certain circumstances, if we consolidate or merge with another
entity, or transfer or sell substantially all of our assets to another entity,
such transaction may be considered to involve a replacement of the Trust, and
the
46
provisions of the trust agreement relating to a replacement of the Trust would
apply to such transaction. See "Description of the Convertible Preferred
Securities--Mergers, Consolidations, Amalgamations or Replacements of the
Trust."
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will be deemed
to have satisfied and discharged our obligations under the indenture when all
convertible debentures not previously delivered to the indenture trustee for
cancellation:
- have become due and payable; and
- will become due and payable at their stated maturity within one
year or are to be called for redemption within one year, and we
deposit or cause to be deposited with the indenture trustee
funds, in trust, for the purpose and in an amount sufficient to
pay and discharge the entire indebtedness on the convertible
debentures not previously delivered to the indenture trustee for
cancellation, for the principal and interest due to the date of
the deposit or to the stated maturity or redemption date, as the
case may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
GOVERNING LAW
The indenture and the convertible debentures will be governed by and
construed in accordance with Delaware law.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
Subject to these provisions, the indenture trustee is under no obligation to
exercise any of the powers vested in it by the indenture at the request of any
holder of convertible debentures, unless offered reasonable security or
indemnity by the holder against the costs, expenses and liabilities which might
be incurred. The indenture trustee is not required to expend or risk its own
funds or otherwise incur personal financial liability in the performance of its
duties if the indenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
MISCELLANEOUS
We have agreed, pursuant to the indenture, for so long as convertible
preferred securities remain outstanding:
- to maintain directly or indirectly 100% ownership of the common
securities of the Trust, except that certain successors that are
permitted pursuant to the indenture may succeed to our ownership
of the common securities;
- to use our reasonable efforts to cause the Trust (a) to remain a
business trust (and to avoid involuntary termination, winding up
or liquidation), except in connection with a distribution of
convertible debentures, the redemption of all of the trust
securities of the Trust or mergers, consolidations or
amalgamations, each as permitted by the trust agreement; and (b)
to otherwise continue not to be treated as an association
taxable as a corporation or partnership for federal income tax
purposes; and
- to use our reasonable efforts to cause each holder of trust
securities to be treated as owning an individual beneficial
interest in the convertible debentures.
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DESCRIPTION OF THE GUARANTEE
The guarantee agreement will be executed and delivered by us
concurrently with the issuance of the convertible preferred securities for the
benefit of the holders of the convertible preferred securities. The guarantee
agreement will be qualified as an indenture under the Trust Indenture Act.
Wilmington Trust Company, the guarantee trustee, will act as trustee for
purposes of complying with the provisions of the Trust Indenture Act, and will
also hold each guarantee for the benefit of the holders of the convertible
preferred securities. Prospective investors are urged to read the form of the
guarantee agreement, which has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the extent described
in the guarantee agreement, the guarantee payment (as defined below) to the
holders of the convertible preferred securities as and when due, regardless of
any defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment.
The following payments with respect to the convertible preferred
securities are called the "guarantee payments" and, to the extent not paid or
made by the Trust and to the extent that the trust has funds available for those
distributions, will be subject to the guarantee:
- any accumulated and unpaid distributions required to be paid on
the convertible preferred securities;
- with respect to any convertible preferred securities called for
redemption, the redemption price; and
- upon a voluntary or involuntary dissolution, winding up or
termination of the Trust or the distribution of convertible
debentures to the holders of convertible preferred securities,
the lesser of:
(a) the amount of the liquidation distribution; and
(b) the amount of assets of the Trust remaining
available for distribution to holders of
convertible preferred securities in liquidation
of the Trust.
We may satisfy our obligations to make a guarantee payment by making a
direct payment of the required amounts to the holders of the convertible
preferred securities or by causing the Trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of the
guarantee payments, but the guarantee only applies to the extent the Trust has
funds available for those distributions. If we do not make interest payments on
the convertible debentures purchased by the Trust, the Trust will not have funds
available to make the distributions and will not pay distributions on the
convertible preferred securities.
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks
subordinate and junior in right of payment to all of our senior and subordinated
debt in the same manner as the convertible debentures. We expect to incur
additional indebtedness in the future, although we have no specific plans in
this regard presently, and neither the indenture nor the trust agreement limits
the amounts of the obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of collection.
If we fail to make guarantee payments when required, holders of convertible
preferred securities may institute a legal proceeding directly against us to
enforce their rights under the guarantee without first instituting a legal
proceeding against any other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the Trust or upon distribution of the
convertible debentures to the holders of the convertible preferred securities.
Because we are a savings and loan holding company, our right to participate in
any distribution of assets
48
of any subsidiary upon the subsidiary's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary, except
to the extent we may be recognized as a creditor of that subsidiary. Our
obligations under the guarantee, therefore, will be effectively subordinated to
all existing and future liabilities of our subsidiaries, and claimants should
look only to our assets for payments under the guarantee.
AMENDMENTS
Except with respect to any changes that do not materially adversely
affect the rights of holders of the convertible preferred securities, in which
case no vote will be required, the guarantee may not be amended without the
prior approval of the holders of a majority of the aggregate liquidation amount
of the outstanding convertible preferred securities.
EVENT OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur upon our
failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the convertible preferred securities will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee in respect of the guarantee and may direct
the exercise of any power conferred upon the guarantee trustee under the
guarantee agreement.
Any holder of convertible preferred securities may institute and
prosecute a legal proceeding directly against us to enforce its rights under the
guarantee without first instituting a legal proceeding against the Trust, the
guarantee trustee or any other person or entity.
We are required to provide to the guarantee trustee annually a
certificate as to whether or not we are in compliance with all of the conditions
and covenants applicable to us under the guarantee agreement.
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect upon:
- full payment of the redemption price of the convertible
preferred securities;
- full payment of the amounts payable upon liquidation of the
Trust; or
- distribution of the convertible debentures to the holders of the
convertible preferred securities.
If at any time any holder of the convertible preferred securities must restore
payment of any sums paid under the convertible preferred securities or the
guarantee, the guarantee will continue to be effective or will be reinstated
with respect to such amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance
of our default in performance of the guarantee, undertakes to perform only those
duties as are specifically set forth in the guarantee. When an event of default
has occurred and is continuing, the guarantee trustee must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to those provisions, the guarantee
trustee is under no obligation to exercise any of the powers vested in it by the
guarantee at the request of any holder of any preferred securities or any
convertible preferred securities, as the case may be, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
EXPENSE AGREEMENTS
We will, pursuant to the separate agreement as to expenses and
liabilities entered into by us and the Trust under the trust agreement,
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust. Third party creditors of the Trust may proceed
directly against us under the expense agreement, regardless of whether they had
notice of the expense agreement.
49
GOVERNING LAW
The guarantee will be governed by New York law.
RELATIONSHIP AMONG THE CONVERTIBLE PREFERRED SECURITIES AND
THE CONVERTIBLE DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We irrevocably guarantee, as and to the extent described in this
prospectus, payments of distributions and other amounts due on the convertible
preferred securities to the extent the Trust has funds available for the payment
of these amounts. We and the Trust believe that, taken together, our obligations
under the convertible debentures, the indenture, the trust agreement, the
expense agreement and the guarantee agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of payment of
distributions and other amounts due on the convertible preferred securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes a guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the obligations of the Trust under
the convertible preferred securities.
If and to the extent that we do not make payments on the convertible
debentures, the Trust will not pay distributions or other amounts due on the
convertible preferred securities. The guarantee does not cover payment of
distributions when the Trust does not have sufficient funds to pay the
distributions. In this event, the remedy of a holder of convertible preferred
securities is to institute a legal proceeding directly against us for
enforcement of payment of the distributions to the holder. Our obligations under
the guarantee are subordinated and junior in right of payment to all of our
other indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the convertible debentures these payments will be sufficient to cover
distributions and other payments due on the convertible preferred securities
primarily because:
- the aggregate principal amount of the convertible debentures
will be equal to the sum of the aggregate stated liquidation
amount of the trust securities;
- the interest rate and interest and other payment dates on the
convertible debentures will match the distribution rate and
distribution and other payment dates for the convertible
preferred securities;
- we will pay for any and all costs, expenses and liabilities of
the Trust, except the obligations of the Trust to pay to holders
of the convertible preferred securities the amounts due to the
holders pursuant to the terms of the convertible preferred
securities; and
- the Trust will not engage in any activity that is not consistent
with the limited purposes of the Trust.
ENFORCEMENT RIGHTS OF HOLDERS OF CONVERTIBLE PREFERRED SECURITIES
A holder of any convertible preferred security may institute a legal
proceeding directly against us to enforce its rights under the guarantee without
first instituting a legal proceeding against the guarantee trustee, the Trust or
any other person. A default or event of default under any of our senior or
subordinated debt would not constitute a default or event of default under the
trust agreement. In the event, however, of payment defaults under, or
acceleration of, our senior or subordinated debt, the subordination provisions
of the indenture provide that no payments may be made in respect of the
convertible debentures until the obligations have been paid in full or any
payment default has been cured or waived. Failure to make required payments on
the convertible debentures, would constitute an event of default under the trust
agreement.
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LIMITED PURPOSE OF THE TRUST
The convertible preferred securities evidence preferred undivided
beneficial interests in the assets of the Trust. The Trust exists for the
exclusive purposes of issuing the trust securities, investing the proceeds
thereof in convertible debentures and engaging in only those other activities
necessary, advisable or incidental thereto. A principal difference between the
rights of a holder of a convertible preferred security and the rights of a
holder of a convertible debenture is that a holder of a convertible debenture is
entitled to receive from us the principal amount of and interest accrued on
convertible debentures held, while a holder of convertible preferred securities
is entitled to receive distributions from the Trust (or from us under the
guarantee) if and to the extent the Trust has funds available for the payment of
the distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation
of the Trust involving the liquidation of the convertible debentures, the
holders of the convertible preferred securities will be entitled to receive, out
of assets held by the Trust, the liquidation distribution in cash.
Upon our voluntary or involuntary liquidation or bankruptcy, the
property trustee, as holder of the convertible debentures would be a
subordinated creditor of ours. Therefore, the property trustee would be
subordinated in right of payment to all of our senior and subordinated debt, but
is entitled to receive payment in full of principal and interest before any of
our shareholders receive payments or distributions. Since we are the guarantor
under the guarantee and have agreed to pay for all costs, expenses and
liabilities of the Trust other than the obligations of the Trust to pay to
holders of the convertible preferred securities the amounts due to the holders
pursuant to the terms of the convertible preferred securities, the positions of
a holder of the convertible preferred securities and a holder of the convertible
debentures relative to our other creditors and to our shareholders in the event
of liquidation or bankruptcy are expected to be substantially the same.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the convertible preferred
securities and may act as securities depositary for the convertible debentures
in the event of the distribution of the convertible debentures to the holders of
the convertible preferred securities. Except as described below, the convertible
preferred securities will be issued only as registered securities in the name of
Cede & Co. (DTC's nominee). One or more global preferred securities will be
issued for the convertible preferred securities and will be deposited with DTC.
DTC is a limited purpose trust company organized under New York banking
law, a "banking organization" within the meaning of the New York banking law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934. DTC
holds securities that its participants deposit with DTC. DTC also facilitates
the settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates.
Direct participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the New York Stock Exchange, the
American Stock Exchange and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to indirect participants, such as
securities brokers and dealers, banks and trust companies that clear through or
maintain custodial relationships with direct participants, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.
Purchases of convertible preferred securities within the DTC system must
be made by or through direct participants, which will receive a credit for the
convertible preferred securities on DTC's records. The ownership interest of
each actual purchaser of each convertible preferred security ("beneficial
owner") is in turn to be recorded on the direct and indirect participants'
records. Beneficial owners will not receive written confirmation from DTC of
their purchases, but beneficial owners are expected to receive written
confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the direct or indirect participants through
which the beneficial owners purchased preferred securities or convertible
preferred security, as the case may be. Transfers
51
of ownership interests in the convertible preferred securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interest in convertible preferred securities unless use of the
book-entry-only system for the convertible preferred securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the
convertible preferred securities; DTC's records reflect only the identity of the
direct participants to whose accounts the convertible preferred securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be accurate, but we and
the Trusts assume no responsibility for the accuracy thereof. Neither we nor the
Trusts have any responsibility for the performance by DTC or its participants of
their respective obligations as described in this prospectus or under the rules
and procedures governing their respective operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder
of the convertible preferred securities. If less than all of the convertible
preferred securities are being redeemed, the amount to be redeemed will be
determined in accordance with the trust agreement.
Although voting with respect to the convertible preferred securities is
limited to the holders of record of the convertible preferred securities in
those instances in which a vote is required, neither DTC nor Cede & Co. will
itself consent or vote with respect to convertible preferred securities. Under
its usual procedures, DTC would mail an omnibus proxy to the property trustee as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
convertible preferred securities are credited on the record date.
DISTRIBUTION OF FUNDS
The property trustee will make distribution payments on the convertible
preferred securities to DTC. DTC's practice is to credit direct participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices and
will be the responsibility of the participant and not of DTC, the property
trustee, the Trusts or us, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of distributions to DTC is the
responsibility of the property trustee, disbursement of the payments to direct
participants is the responsibility of DTC, and disbursements of the payments to
the beneficial owners is the responsibility of direct and indirect participants.
SUCCESSOR DEPOSITARIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to any of the
convertible preferred securities at any time by giving reasonable notice to the
property trustee or us. If no successor securities depositary is obtained,
definitive certificates representing the convertible preferred securities are
required to be printed and delivered. We also have the option to discontinue use
of the system of book-entry transfers through DTC (or a successor depositary).
After an event of default under the indenture, the holders of a majority in
liquidation amount of convertible preferred securities may determine to
discontinue the system of book-entry transfers through DTC. In these events,
definitive certificates for the convertible preferred securities will be printed
and delivered.
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DESCRIPTION OF CAPITAL STOCK
The following descriptions do not purport to be complete and are subject
to, and qualified in their entirety by reference to our Restated Articles of
Incorporation and our bylaws, as amended to date.
GENERAL
The authorized capital stock of Greater Atlantic Financial consists of
10,000,000 shares of common stock, par value $0.01 per share, and 2,500,000
shares of preferred stock, par value $0.01 per share (the "Preferred Stock"). As
of September 30, 2001, 3,007,434 shares of common stock were issued and
outstanding and no shares of Preferred Stock were outstanding. As of September
30, 2001, 319,685 shares of common stock were reserved for issuance pursuant to
outstanding warrants and employee benefit plans. Since Greater Atlantic
Financial is a savings and loan holding company, the right of Greater Atlantic
Financial, and hence the right of creditors and stockholders of Greater Atlantic
Financial, to participate in any distribution of assets of any subsidiary
(including Greater Atlantic Bank) upon its liquidation or reorganization or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of Greater Atlantic Financial
itself as a creditor of the subsidiary may be recognized.
The following summary does not purport to be complete and is subject in
all respects to the applicable provisions of the Delaware General Corporation
Law and Greater Atlantic Financial's Certificate of Incorporation.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote at a meeting of stockholders. The
board of directors is divided into three classes as nearly equal in number as
possible, with one third of the Board elected at each annual meeting of
stockholders. Each share of common stock is entitled to share, pro rata, in
dividends and in Greater Atlantic Financial's assets in the event of its
dissolution or liquidation. Holders of shares of common stock do not possess any
preemptive rights. The outstanding shares of common stock are fully paid and
nonassessable. No option, warrant, privilege or right has been issued or is
outstanding other than options granted under Greater Atlantic Financial's stock
option plans.
Subject to any prior rights of any Preferred Stock of Greater Atlantic
Financial outstanding, holders of the common stock are entitled to dividends
when, as and if declared by the board of directors out of funds legally
available therefor. Under Delaware law, Greater Atlantic Financial may pay
dividends out of surplus (whether capital surplus or earned surplus) or net
profits for the fiscal year in which declared or for the preceding fiscal year,
even if its surplus accounts are in a deficit position. The principal source of
funds for payment of dividends by Greater Atlantic Financial is its subsidiary,
Greater Atlantic Bank. Payments made by such subsidiary to Greater Atlantic
Financial are limited by law and regulations of the bank regulatory authorities.
PREFERRED STOCK
Greater Atlantic Financial's board of directors has the authority to
issue shares of the Preferred Stock from time to time as a class without series,
or in one or more series. The Preferred Stock may be issued with such voting,
dividend, redemption, sinking fund, conversion, exchange, liquidation and other
rights as shall be determined by resolution of the board of directors, without
stockholder approval. Preferred Stock will have a preference over common stock
as to the payment of dividends, as to the right to distribution of assets upon
redemption of shares or upon liquidation of Greater Atlantic Financial, or as to
both dividends and assets, and such other preferences as may be fixed by the
board of directors.
OPTIONS AND WARRANTS
At September 30, 2001, Greater Atlantic Financial had outstanding
warrants to purchase 94,685 shares and options to purchase 139,000 shares of
Greater Atlantic Financial's common stock at exercise prices between $4.00 and
$8.00 per share. The term of the warrants and options is 10 years. Holders of
the warrants and options have no rights to have the underlying shares registered
under the Securities Act. The number of shares that may be purchased upon the
exercise of warrants or options will be adjusted in the event of a
reclassification, recapitalization or other adjustment to the outstanding common
stock. All options and warrants granted under the 1997 Stock Option Plan are
fully vested and exercisable. The exercise of any of these warrants or options
will result in a dilution of the percentage of the shares of Greater Atlantic
Financial's common stock owned by each purchaser of the common stock in this
offering.
DIVIDENDS
Holders of shares of common stock are entitled to dividends if, when and
as declared by the board of directors out of funds legally available therefor.
Greater Atlantic Financial has not paid any dividends on its common
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stock and intends to retain earnings, if any, to finance the development and
expansion of its business. Future dividend policy is subject to the discretion
of the board of directors and will depend upon a number of factors, including
future earnings, capital requirements, regulatory constraints and the financial
condition of Greater Atlantic Financial.
GENERAL VOTING REQUIREMENTS
Except as described in the next section regarding certain supermajority
voting requirements, the affirmative vote of the holders of a majority of the
shares of common stock entitled to vote is required to approve any action for
which shareholder approval is required. A sale or transfer of substantially all
of Greater Atlantic Financial's assets, liquidation, merger, consolidation,
reorganization, or similar extraordinary corporate action requires the
affirmative vote of 80% of the shares of common stock entitled to vote thereon.
SUPERMAJORITY VOTING REQUIREMENTS; ANTI-TAKEOVER MEASURES
GENERAL. Greater Atlantic Financial's Certificate of Incorporation and
Bylaws contain certain provisions designed to enhance the ability of the board
of directors to deal with attempts to acquire control of Greater Atlantic
Financial. These provisions may be deemed to have an anti-takeover effect and
may discourage takeover attempts which have not been approved by the board of
directors (including takeovers which certain shareholders may deem to be in
their best interest). These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even though such transaction
may be favorable to the interests of shareholders, and could potentially
adversely affect the market price.
The following briefly summarizes protective provisions contained in the
Certificate of Incorporation and Bylaws. This summary is necessarily general and
is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the Certificate of Incorporation and Bylaws.
STAGGERED BOARD TERMS. The Bylaws provide that the board of directors be
divided into three classes of directors, one class to be originally elected for
a term expiring at the next annual meeting of stockholders in 2002, another
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2003 and another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2004, with
each director to hold office until his or her successor is duly elected and
qualified.
The Bylaws provide that any directorships resulting from any increase in
the number of directors and any vacancies on Greater Atlantic Financial's Board
resulting from death, resignation, disqualification, or removal, may be filled
by the board of directors, acting by a majority of the directors then in office,
even though less than a quorum, and any director so chosen shall hold office
until the next election of the class for which such director shall have been
chosen and until his or her successor shall be elected and qualified. At each
annual meeting of stockholders the successors to the class of directors whose
term shall then expire shall be elected to hold office for a term expiring at
the third succeeding annual meeting. In addition, any director may be removed
from office but only with cause by the affirmative vote of the holders of 80% of
the capital stock of Greater Atlantic Financial entitled to vote on such matter.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of the Board. Accordingly, these
provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of Greater
Atlantic Financial.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS. The
Certificate of Incorporation require the affirmative vote of holders of at least
80% of Greater Atlantic Financial's common stock entitled to vote to approve
certain business combinations. If Board approval has been obtained, then the
affirmative vote of holders of only a majority of Greater Atlantic Financial's
common stock entitled to vote would be required to approve the transaction.
Business combinations subject to the supermajority voting requirements include
(i) a merger or consolidation of Greater Atlantic Financial or any subsidiary of
Greater Atlantic Financial, (ii) the sale, exchange, transfer or other
disposition (in one or a series of transactions) of substantially all of the
assets of Greater Atlantic Financial or a subsidiary of Greater Atlantic
Financial having an aggregate fair market value, as defined, exceeding 25% or
more of the combined assets of Greater Atlantic Financial and its subsidiaries,
(iii) adoption of a plan or proposal for the liquidation or dissolution or
liquidation of Greater Atlantic Financial on behalf of an interested
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stockholder, as defined; or (iv) any reclassification of securities (including
any reverse stock split) or merger or consolidation with any of Greater Atlantic
Financial's subsidiaries which has the effect of increasing the proportionate
share of the outstanding shares of any class of equity securities of Greater
Atlantic Financial directly or indirectly owned by any interested stockholder or
any affiliate of any interested stockholder. Any amendments to this provision
would require the approval of holders of at least 80% of Greater Atlantic
Financial's common stock entitled to vote thereon.
This provision would have the effect of making more difficult the
accomplishment of a merger or the assumption of control of Greater Atlantic
Financial by a stockholder, because a higher percentage of votes would be
required to approve a business combination if the transaction is not approved by
Greater Atlantic Financial's board of directors. The board of directors of
Greater Atlantic Financial believes that Greater Atlantic Financial and its
stockholders are best served when the Board has the opportunity to objectively
review and evaluate proposed transactions involving Greater Atlantic Financial,
and that these provisions are desirable and in the best interests of Greater
Atlantic Financial and its stockholders because they will deter potential
acquirors from influencing a transaction that could result in stockholders
receiving less than fair value for their shares. These provisions, however, may
make more difficult the consummation of a transaction that has terms favorable
to stockholders of Greater Atlantic Financial.
DELAWARE CORPORATE LAW. The state of Delaware has a statute designed to
provide Delaware corporations with additional protection against hostile
takeovers. The takeover statute, which is codified in Section 203 of the
Delaware General Corporate Law ("Section 203"), is intended to discourage
certain takeover practices by impeding the ability of a hostile acquiror to
engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the board of
directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of continuing members of the
board of directors. A corporation may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by Section 203. At the present time, the board of
directors does not intend to propose any such amendment.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the material federal income tax considerations
that may be relevant to the purchasers of convertible preferred securities,
insofar as the discussion relates to matters of law and legal conclusions,
represents the opinion of Muldoon Murphy & Faucette LLP, counsel to Greater
Atlantic Financial and the Trust. The conclusions expressed herein are based
upon current provisions of the Internal Revenue Code of 1986, as amended,
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change at any time, with possible retroactive
effect. Subsequent changes may cause tax consequences to vary substantially from
the consequences described below. Furthermore, the authorities on which the
following summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of convertible preferred securities may differ from
the treatment described below.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting purchasers of convertible preferred
securities. Moreover, the discussion generally focuses on holders of convertible
preferred securities who are individual citizens or residents of the United
States and trust and estates whose federal taxable income is taxed in the same
manner as individual citizens or residents of the United States, and who acquire
convertible preferred securities on their original issue at their initial
offering price and hold convertible preferred securities as capital assets. The
discussion has only limited application to dealers in securities, corporations,
partnerships, or nonresident aliens and does not address all the tax
consequences that may be relevant to holders who may be subject to special tax
treatment, such as, for example, banks, thrifts, real estate investment trusts,
regulated investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors or persons that will hold the convertible
preferred securities as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset. The following discussion also does
not address the tax consequences to persons that have a functional currency
other than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of convertible preferred securities. Further, it does
not include any description of any alternative minimum tax consequences or the
tax laws of any state or local government or of any foreign government that may
be applicable to the convertible preferred securities. Accordingly, each
prospective investor should consult, and should rely exclusively on, the
investor's own tax advisors in analyzing the federal, state, local and foreign
tax consequences of the purchase, ownership or disposition of convertible
preferred securities.
CLASSIFICATION OF THE CONVERTIBLE DEBENTURES
Based on advice of counsel, we intend to take the position that the
convertible debentures will be classified for federal income tax purposes as
indebtedness of Greater Atlantic Financial under current law, and, by acceptance
of a convertible preferred security, you, as a holder, covenant to treat the
convertible debentures as indebtedness and the convertible preferred securities
as evidence of an indirect beneficial ownership interest in the convertible
debentures. No assurance can be given, however, that this position will not be
challenged by the Internal Revenue Service or, if challenged, that it will not
be successful. The remainder of this discussion assumes that the convertible
debentures will be classified for federal income tax purposes as indebtedness of
Greater Atlantic Financial.
CLASSIFICATION OF GREATER ATLANTIC CAPITAL TRUST I
Muldoon Murphy & Faucette LLP, counsel for Greater Atlantic Financial
and the Trust, has rendered its opinion that, under current law and assuming
full compliance with the terms of trust agreement and indenture, Greater
Atlantic Capital Trust I will be classified for federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for federal income tax purposes, you, as a holder of convertible preferred
securities will be treated as owning an undivided beneficial interest in the
convertible debentures and you will be required to include in its gross income
any interest with respect to the convertible debentures at the time such
interest is accrued or is received, in accordance with the holder's method of
accounting. If the convertible debentures were determined to be subject to the
original issue discount ("OID") rules, you as a holder would instead be required
to include in its gross income any OID accrued with respect to your allocable
share of the convertible debentures whether or not cash was actually distributed
to you.
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INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Under the applicable Treasury regulations, debt instruments such as the
convertible debentures, which are issued at face value will not be considered
issued with OID, even if their issuer can defer payments of interest, if the
likelihood of any deferral is remote. Assuming the accuracy of our conclusion as
set forth below that the likelihood of exercising its option to defer payments
is remote, the convertible debentures will not be treated as issued with OID.
Accordingly, except as set forth below, stated interest on the convertible
debentures generally will be included in income by a holder as ordinary income
at the time it is paid or accrued in accordance with such holder's regular
method of accounting.
A debt instrument will generally be treated as issued with OID if the
stated interest on the instrument does not constitute "qualified stated
interest." Qualified stated interest is generally any one of a series of stated
interest payments on an instrument that are unconditionally payable at least
annually at a single fixed rate. In determining whether stated interest on an
instrument is unconditionally payable and thus constitutes qualified stated
interest, remote contingencies as to the timely payment of stated interest are
ignored. In the case of the convertible debentures, we have concluded that the
likelihood of exercising our option to defer payments of interest is remote.
If the likelihood that we would exercise the option to defer any payment
of interest was determined not to be "remote" or if Greater Atlantic Financial
actually exercises its option to defer the payment of interest, the convertible
debentures would be treated as issued with OID at the time of issuance or at the
time of such exercise, as the case may be, and all stated interest would
thereafter be treated as OID as long as the convertible debentures remained
outstanding. In such event, all of a holder's taxable interest income in respect
of the convertible debentures would constitute OID that would have to be
included in income on a constant yield method before the receipt of the cash
attributable to such income, regardless of such holder's method of tax
accounting, and actual distributions of stated interest would not be reported as
taxable income. Consequently, a holder of convertible preferred securities would
be required to include such OID in gross income even though Greater Atlantic
Financial would not make any actual cash payments during an extension period.
The Treasury regulations referred to above have not been interpreted by
any court decisions or addressed in any ruling or other pronouncements of the
IRS, and it is possible that the IRS could take a position contrary to the
conclusions herein.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of convertible preferred securities other than a holder who
purchased the convertible preferred securities upon original issuance or who
purchased for a price other than the first price at which a substantial amount
of the convertible preferred securities were sold for money other than to a bond
house, broker, or other person acting as an underwriter, placement agent or
wholesaler may be considered to have acquired their undivided interests in the
debentures with "market discount" or "acquisition premium" as these phrases are
defined for federal income tax purposes. Such holders are advised to consult
their tax advisors as to the income tax consequences of the acquisition,
ownership and disposition of the convertible preferred securities.
RECEIPT OF CONVERTIBLE DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under the circumstances described under "Description of the Convertible
Preferred Securities-- Redemption or Exchange of Convertible Debentures" and
"--Liquidation Distribution Upon Termination," the convertible debentures may be
distributed to holders of convertible preferred securities upon a liquidation of
the Trust. Under current federal income tax law, such a distribution would be
treated as a nontaxable event to the holder and would result in the holder
having an aggregate tax basis in the convertible debentures received in the
liquidation equal to the holder's aggregate tax basis in the convertible
preferred securities immediately before the distribution. A holder's holding
period in convertible debentures received in liquidation of the Trust would
include the period for which the holder held the convertible preferred
securities.
If, however, a Tax Event occurs which results in the Trust being treated
as an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the convertible preferred securities.
Under certain circumstances described herein, the convertible debentures may be
redeemed for cash and the proceeds of the redemption distributed to holders in
redemption of their convertible preferred securities. Under current law, such a
redemption should, to the extent that it constitutes a complete redemption,
constitute a taxable disposition of the redeemed convertible preferred
securities, and, for federal income tax purposes, a holder should therefore
recognize gain or loss as if the holder sold the convertible preferred
securities for cash.
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DISPOSITION OF CONVERTIBLE PREFERRED SECURITIES
A holder that sells convertible preferred securities will recognize gain
or loss equal to the difference between the amount realized on the sale of the
convertible preferred securities and the holder's adjusted tax basis in the
convertible preferred securities. A holder's adjusted tax basis in the
convertible preferred securities generally will be its initial purchase price
increased by OID, if any, previously includible in the holder's gross income to
the date of disposition and decreased by payments, if any, received on the
convertible preferred securities in respect of OID to the date of disposition. A
gain or loss of this kind will generally be a capital gain or loss and will be a
long-term capital gain or loss if the convertible preferred securities have been
held for more than one year at the time of sale.
The convertible preferred securities may trade at a price that does not
accurately reflect the value of accrued but unpaid interest with respect to the
underlying convertible debentures. A holder that disposes of its convertible
preferred securities between record dates for payments of distributions thereon
will be required to include accrued but unpaid interest on the convertible
debentures through the date of disposition in income as ordinary income, and to
add the amount to its adjusted tax basis in its proportionate share of the
underlying convertible debentures deemed disposed of. Any OID included in income
will increase a holder's adjusted tax basis as discussed above. To the extent
the selling price is less than the holder's adjusted tax basis a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for federal income tax purposes.
CONVERSION OF CONVERTIBLE PREFERRED SECURITIES
A holder of convertible preferred securities generally will not
recognize income, gain or loss upon the conversion of its convertible preferred
securities into our common stock. A holder will, however, recognize gain upon
the receipt of cash in lieu of a fractional share of common stock equal to the
amount of cash received less the holder's tax basis in such fractional share. A
holder's tax basis in the common stock received upon exchange and conversion
should generally be equal to the holder's tax basis in the convertible preferred
securities delivered to the conversion agent for exchange less the basis
allocated to any fractional share for which cash is received, and a holder's
holding period in the common stock received upon exchange and conversion will
generally begin on the date that the holder acquired the convertible preferred
securities delivered to the conversion agent for exchange.
ADJUSTMENT OF CONVERSION RATIO
Treasury Regulations promulgated under Section 305 of the Code would
treat holders of convertible preferred securities as having received a
constructive distribution from us in the event that the conversion ratio of the
convertible debentures were adjusted if (1) as a result of such adjustment, the
proportionate interest (measured by the quantum of common stock into or for
which the convertible debentures are convertible or exchangeable) of the holders
of the convertible preferred securities in the assets or earnings and profits of
Greater Atlantic Financial were increased, and (2) the adjustment was not made
pursuant to a bona fide, reasonable anti-dilution formula. An adjustment of the
conversion ratio would not be considered made pursuant to such a formula if the
adjustment was made to compensate for certain taxable distributions with respect
to the common stock. Thus, under certain circumstances, an increase in the
conversion ratio for the holders may result in deemed dividend income to holders
to the extent of the current or accumulated earnings and profits of Greater
Atlantic Financial. Holders of the convertible preferred securities would be
required to include their allocable share of such deemed dividend income in
gross income but would not receive any cash related thereto.
OWNERSHIP OF COMMON STOCK
Distributions received by holders of common stock in respect of such
common stock (other than certain distributions of additional shares of common
stock or rights to acquire additional shares of common stock) will be treated as
ordinary dividend income to such holders to the extent such distributions are
considered to be paid by us out of our current or accumulated earnings and
profits, as determined under federal income tax principles. Corporate holders of
common stock may be entitled to a "dividends-received deduction" with respect to
such dividends.
To the extent that any such distribution exceeds our current or
accumulated earnings and profit, such distribution will be treated, first, as a
tax-free return of capital to a holder of common stock to the extent of such
holder's adjusted tax basis in the common stock and, thereafter, as capital
gain.
Distributions of additional shares of common stock, or rights to acquire
additional shares of common stock, that are received as part of a pro rata
distribution of such shares, or rights to acquire such shares, to all our
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shareholders generally should not be subject to federal income tax. The tax
basis of such new shares or rights generally will be determined by allocating
the shareholder's adjusted tax basis in the "old" shares of common stock between
such "old" shares and the new shares or rights received by such shareholder,
based upon their relative fair market values on the date of the distribution.
A holder of common stock generally will recognize gain or loss on a sale
or other taxable disposition of common stock equal to the difference between the
amount realized by the shareholder on such sale or disposition and the
shareholder's adjusted tax basis in such common stock. Such gain or loss
generally will be capital gain or loss and generally will be considered long-
term capital gain or loss if the holder had held such common stock for more than
one year immediately prior to such sale or disposition.
EFFECT OF POSSIBLE CHANGES IN TAX LAWS
In a case filed in the U.S. Tax Court, Enron Corp. v. Commissioner, Tax
Court Docket No. 6149-98, the IRS challenged the deductibility for federal
income tax purposes of interest paid on securities which are similar, but not
identical to, the convertible preferred securities. The parties filed a
stipulation of settled issues, a portion of which stipulated there shall be no
adjustment for the interest deducted by the taxpayer with respect to the
securities. The IRS may also challenge the deductibility of interest paid on the
convertible debentures, which, if such challenge were litigated resulting in the
IRS's position being sustained, would trigger a Tax Event and possibly a
redemption of the convertible preferred securities.
Accordingly, there can be no assurance that a Tax Event will not occur.
A Tax Event would permit us to cause a redemption of the preferred securities
before, as well as after, December 31, 2003.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Interest paid, or, if applicable, OID accrued, on the convertible
preferred securities held of record by individual citizens or residents of the
United States, or certain trusts, estates and partnerships, will be reported to
the Internal Revenue Service on Forms 1099-INT, or, where applicable, Forms
1099-OID, which forms should be mailed to the holders by January 31 following
each calendar year. Payments made on, and proceeds from the sale of, the
convertible preferred securities may be subject to a "backup" withholding tax
(currently at 30.5%) unless the holder complies with certain identification and
other requirements. Any amounts withheld under the backup withholding rules will
be allowed as a credit against the holder's federal income tax liability,
provided the required information is provided to the Internal Revenue Service.
The federal income tax discussion set forth above is included for
general information only and may not be applicable depending upon the particular
situation of a holder of convertible preferred securities. Holders of
convertible preferred securities should consult their tax advisors with respect
to the tax consequences to them of the purchase, ownership and disposition of
the convertible preferred securities, including the tax consequences under
state, local, foreign and other tax laws and the possible effects of changes in
federal or other tax laws.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974, or Section 4975 of the Internal Revenue Code,
generally may purchase convertible preferred securities, subject to the
investing fiduciary's determination that the investment in convertible preferred
securities satisfies ERISA's fiduciary standards and other requirements
applicable to investments by the plan.
In any case, we and/or any of our affiliates may be considered a "party
in interest" (within the meaning of ERISA) or a "disqualified person" (within
the meaning of Section 4975 of the Internal Revenue Code) with respect to
certain plans. These plans generally include plans maintained or sponsored by,
or contributed to by, any such persons with respect to which we or any of our
affiliates are a fiduciary or plans for which we or any of our affiliates
provide services. The acquisition and ownership of convertible preferred
securities by a plan (or by an individual retirement arrangement or other plans
described in Section 4975(e)(1) of the Internal Revenue Code) with respect to
which we or any of our affiliates are considered a party in interest or a
disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Internal Revenue Code, unless the convertible
preferred securities are acquired pursuant to and in accordance with an
applicable exemption.
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As a result, plans with respect to which we or any of our affiliates or
any of its affiliates is a party in interest or a disqualified person should not
acquire or convertible preferred securities unless the convertible preferred
securities are acquired pursuant to and in accordance with an applicable
exemption. Any other plans or other entities whose assets include plan assets
subject to ERISA or Section 4975 of the Internal Revenue Code proposing to
acquire convertible preferred securities should consult with their own counsel.
OUR BUSINESS
GENERAL
We are a savings and loan holding company which was organized in June
1997. We conduct substantially all of our business through our wholly-owned
subsidiary, Greater Atlantic Bank, a federally-chartered savings bank, and its
wholly-owned subsidiary, Greater Atlantic Mortgage Corporation ("Greater
Atlantic Mortgage"). We offer traditional banking services to customers through
the nine bank branches located throughout the greater Washington, DC/Baltimore
metropolitan area. We also originate mortgage loans for sale in the secondary
market through Greater Atlantic Mortgage.
MARKET AREA AND COMPETITION
We operate in a competitive environment, competing for deposits and
loans with other thrifts, commercial banks and other financial entities.
Numerous mergers and consolidations involving banks in the market in which we
operate have occurred resulting in an intensification of competition in the
banking industry in our 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 us 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 reflects changes in market prices and rates, can be
found in Note 17 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.
ACQUISITION OF DOMINION SAVINGS BANK, FSB
On August 22, 2000, Greater Atlantic Financial completed the acquisition
of Dominion Savings Bank, FSB, Front Royal, Virginia. The acquisition is being
accounted for as a purchase and accordingly, the financial statements include
assets and liabilities acquired at fair value and results of operations from the
date of acquisition. Shareholders of Dominion were paid approximately $1.1
million in cash, resulting in goodwill of approximately $1.4 million, which is
being amortized, on a straight-line basis over 15 years. Since the Dominion
acquisition occurred on August 22, 2000, its impact upon Greater Atlantic
Financial's consolidated results of operations for the fiscal year ended
September 30, 2000 was not significant.
LENDING ACTIVITIES
GENERAL. Net loans receivable at September 30, 2001 were $164.6 million,
an increase of $31.9 million or 24.04% from the $132.7 million held at September
30, 2000. The increase in loans consisted primarily of real estate loans secured
by first mortgages on residential properties, construction loans, consumer and
commercial lines of credit secured by mortgages on residential property and
commercial real estate. Loans held for sale amounted to $14.7 million at
September 30, 2001 compared to $5.6 million at September 30, 2000, an increase
of $9.1 million.
60
The increase in loans held for sale is due to growth in the amount of loans
originated for sale and sold during fiscal year 2001 when compared to fiscal
year 2000. Exclusive of the $23.2 million in loans purchased in the Dominion
acquisition in fiscal year 2000, loan originations and purchases for investment
in Greater Atlantic Bank's portfolio increased $5.6 million during the fiscal
year 2001 when compared to fiscal year 2000.
The following table sets forth Greater Atlantic Bank's loan
originations, purchases, sales and principal repayments for the periods
indicated:
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Total loans at beginning of period(1) ................................ $ 146,975 $ 83,637
Originations of loans for investment:
Single-family residential(2) ...................................... 35,843 48,023
Commercial real estate(3) ......................................... 5,055 7,501
Construction ...................................................... 5,825 18,169
Land loans ........................................................ 6,701 2,945
Second trust ...................................................... 1,368 416
Commercial business(4) ............................................ 16,534 17,541
Consumer(5) ....................................................... 32,540 26,816
--------- ---------
Total originations and purchases for investment ................ 103,866 121,411
Loans originated for resale by Greater Atlantic Bank ................. 2,997 --
Loans originated for resale by Greater Atlantic Mortgage ............. 246,927 117,037
--------- ---------
Total originations ................................................... 353,790 238,448
Repayments ........................................................... (68,494) (56,236)
Sale of loans originated for resale by Greater Atlantic Bank ......... (2,891) --
Sale of loans originated for resale by Greater Atlantic Mortgage ..... (237,949) (118,874)
--------- ---------
Net activity in loans ................................................ 44,456 63,338
--------- ---------
Total loans at end of period(1) ...................................... $ 191,431 $ 146,975
========= =========
- -------------------------------
(1) Includes loans held for sale of $14.7 million and $5.6 million at September
30, 2001 and 2000, respectively.
(2) Includes $17.7 million of loans purchased in the Dominion acquisition at
September 30, 2000.
(3) Includes $9,000 of loans purchased in the Dominion acquisition at September
30, 2000.
(4) Includes $2.9 million of loans purchased in the Dominion acquisition at
September 30, 2000.
(5) Includes $2.5 million of loans purchased in the Dominion acquisition at
September 30, 2000.
61
LOAN PORTFOLIO. The following table sets forth the composition of
Greater Atlantic Bank's loan portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated.
AT SEPTEMBER 30,
--------------------------------------------------------------------
2001 2000
------------------------------ -----------------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family(1) ......................... $ 84,570 47.84% $ 78,736 55.70%
Multi-family ............................. 634 0.36 1,053 0.74
Construction ............................. 19,110 10.81 14,537 10.28
Commercial real estate ................... 17,977 10.17 10,765 7.62
Land ..................................... 5,431 3.07 3,158 2.23
Total mortgage loans .................. 127,722 72.25 108,249 76.57
----------- ----------- ----------- -----------
Commercial business and consumer loans:
Commercial business ...................... 11,675 6.61 11,221 7.94
Consumer:
Home equity ........................... 35,353 20.00 20,116 14.23
Automobile ............................ 1,269 0.72 477 0.34
Other ................................. 750 0.42 1,294 0.92
----------- ----------- ----------- -----------
Total commercial business and
consumer loans .................... 49,047 27.75 33,108 23.43
----------- ----------- ----------- -----------
Total loans ..................... 176,769 100.00% 141,357 100.00%
=========== ===========
Less:
Allowance for loan losses ................ (810) (765)
Loans in process ......................... (11,756) (7,953)
Unearned premium ......................... 400 59
----------- -----------
Loans receivable, net ............... $164,603 $132,698
=========== ===========
- --------------------------
(1) Includes loans secured by second trusts on single-family residential
property.
62
LOAN MATURITY. The following table shows the remaining contractual
maturity of Greater Atlantic Bank's total loans at September 30, 2001. 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, 2001
-----------------------------------------------------
MULTI- COMMERCIAL
ONE-TO FAMILY AND BUSINESS
FOUR- COMMERCIAL AND TOTAL
FAMILY REAL ESTATE CONSUMER LOANS
-------- ----------- ----------- --------
(IN THOUSANDS)
Amounts due in:
One year or less ......................... $ 35,996 $ 13,175 $ 41,862 $ 91,033
After one year:
More than one year to three years ........ 28,923 4,595 2,726 36,244
More than three years to five years ...... 7,915 4,922 4,015 16,852
More than five years to 15 years ......... 8,582 815 436 9,833
More than 15 years ....................... 9,158 1,885 8 11,051
-------- -------- -------- --------
Total amount due ...................... $ 90,574 $ 25,392 $ 49,047 $165,013
======== ======== ======== ========
The following table sets forth, at September 30, 2001, the dollar amount
of loans contractually due after September 30, 2002, identifying whether such
loans have fixed interest rates or adjustable interest rates. At September 30,
2001, Greater Atlantic Bank did not have any construction, acquisition and
development, land or commercial business loans contractually due after September
30, 2002.
DUE AFTER SEPTEMBER 30, 2002
--------------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------------- --------
(IN THOUSANDS)
Real estate loans:
One- to four-family ...................... $ 21,666 $ 32,912 $ 54,578
Multi-family and commercial .............. 8,480 3,737 12,217
-------- -------- --------
Total real estate loans ............... 30,146 36,649 66,795
Commercial business and consumer loans ...... 6,560 625 7,185
-------- -------- --------
Total loans ........................... $ 36,706 $ 37,274 $ 73,980
======== ======== ========
ONE- TO FOUR-FAMILY MORTGAGE LENDING. Greater Atlantic 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,
2001, Greater Atlantic Bank's one- to four-family mortgage loans totaled $84.6
million, or 47.84% of total loans. Of the one- to four-family mortgage loans
outstanding at that date, 25.83% were fixed-rate loans and 74.17% were ARM
loans.
CONSTRUCTION AND DEVELOPMENT LENDING. Greater Atlantic Bank originates
construction and development loans primarily to finance the construction of one-
to four-family, owner-occupied residential real estate properties located in
Greater Atlantic Bank's primary market area. Greater Atlantic Bank also
originates land loans to local contractors and developers for the purpose of
making improvements thereon, including small residential subdivisions in Greater
Atlantic Bank's primary market area or for the purpose of holding or developing
land for sale. At September 30, 2001, construction and development loans
(including land loans) totaled $24.5 million, or 13.9%, of Greater Atlantic
Bank's total loans, of which, land loans totaled $5.4 million, or 3.07% 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 based on the prime rate
as reported in The Wall Street Journal. Greater Atlantic Bank's land loans are
only secured by property in its primary market area.
63
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Greater Atlantic Bank
originates multi-family and commercial real estate loans that are generally
secured by five or more unit apartment buildings and properties used for
business purposes such as small office buildings or retail facilities located in
Greater Atlantic Bank's primary market area. Greater Atlantic 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. Greater Atlantic Bank's multi-family and commercial real estate
loan portfolio at September 30, 2001 was $18.6 million, or 10.53% of total
loans. The largest multi-family or commercial real estate loan in Greater
Atlantic Bank's portfolio at September 30, 2001, was a $3.1 million
participation in a performing $8.3 million loan secured by four nursing home
facilities in Michigan.
COMMERCIAL BUSINESS LENDING. At September 30, 2001, Greater Atlantic
Bank had $11.7 million in commercial business loans which amounted to 6.61% of
total loans. Greater Atlantic Bank makes commercial business loans primarily in
its market area to a variety of professionals, sole proprietorships and small
businesses. Greater Atlantic Bank offers a variety of commercial lending
products, including term loans for fixed assets and working capital, revolving
lines of credit and letters of credit. Term loans are generally offered with
initial fixed rates of interest for the first five years and with terms of up to
7 years. Business lines of credit have adjustable rates of interest and are
payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a monthly basis and are indexed to the
prime rate as published in The Wall Street Journal.
CONSUMER LENDING. Consumer loans at September 30, 2001 amounted to $37.4
million or 21.14% of Greater Atlantic Bank's total loans, and consisted
primarily of home equity loans, home equity lines of credit, and, to a
significantly lesser extent, secured and unsecured personal loans and new and
used automobile loans. These loans are generally made to residents of Greater
Atlantic 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.
Greater Atlantic Bank offers home equity loans and home equity lines of
credit (collectively, "home equity loans"). Most of Greater Atlantic Bank's home
equity loans are secured by second mortgages on one- to four-family residences
located in Greater Atlantic Bank's primary market area. At September 30, 2001,
these loans totaled $35.4 million or 20.00% of Greater Atlantic Bank's total
loans and 72.08% of commercial business and consumer loans. Other types of
consumer loans, primarily consisting of secured and unsecured personal loans and
new and used automobile loans, totaled $2.0 million, or 1.14% of Greater
Atlantic Bank's total loans and 4.12% of commercial business and consumer loans
at September 30, 2001.
ASSET QUALITY
DELINQUENT LOANS AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed monthly by management and all loans or
lending relationships delinquent 30 days or more and all real estate owned
("REO") are reviewed monthly by the board of directors. The procedures taken by
Greater Atlantic 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 Greater Atlantic Bank's Asset Classification
Policy require that Greater Atlantic Bank utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. Greater Atlantic Bank has incorporated the internal asset
classifications of the Office of Thrift Supervision as a part of its credit
monitoring system. Greater Atlantic 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."
Greater Atlantic Bank's management reviews and classifies Greater
Atlantic Bank's assets on a regular basis and the board of directors reviews the
management's reports on a quarterly basis. Greater Atlantic Bank classifies
assets in accordance with the management guidelines described above. At
September 30, 2001, Greater
64
Atlantic Bank had $364,000 of loans designated as Substandard which consisted of
four residential loans, one commercial real estate loan and three consumer
loans. At that same date Greater Atlantic Bank had $21,000 of assets classified
as Doubtful, consisting of four second trust loans. At September 30, 2001,
Greater Atlantic Bank had no loans classified as Loss. As of September 30, 2001,
Greater Atlantic Bank also had two residential loans, one construction loan, one
commercial real estate one second trust and one commercial business loan,
totaling $3.0 million, designated as Special Mention.
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and REO. The Bank's policy is to cease
accruing interest on mortgage loans 90 days or more past due, cease accruing
interest on consumer loans 60 days or more past due (unless the loan principal
and interest are determined by management to be fully secured and in the process
of collection), and to charge off any accrued and unpaid interest. As a result,
Greater Atlantic Bank had no loans 90 days or more past due but still accruing
interest or troubled debt restructurings at any of the dates indicated.
SEPTEMBER 30,
----------------------
2001 2000
------ ------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family ................................................ $ 340 $ 144
Commercial ................................................... 36 50
Construction ................................................. 122 --
Consumer ..................................................... 8 --
----- -----
Total non-accrual loans ......................................... 506 194
REO ............................................................. -- 172
----- -----
Total non-performing assets ..................................... $ 506 $ 366
===== =====
Non-performing loans to total loans held for investment ......... 0.29% 0.14%
===== =====
Total non-performing assets to total assets, at period end ...... 0.14% 0.12%
===== =====
During the year ended September 30, 2001, 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
$12,000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Greater Atlantic Bank's allowance for
loan losses. Such agencies may require Greater Atlantic Bank to make additional
provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. There can be no
assurance that Greater Atlantic 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, 2001, Greater Atlantic Bank's allowance for loan losses
amounted to $810,000 or 0.46% of total loans. While the allowance for loan
losses to total non-performing loans at September 30, 2001 is 160.08%, the
allowance as a percentage of total loans decreased 0.08%, from 0.54% at
September 30, 2000 to 0.46% at September 30, 2001.
65
The decrease resulted notwithstanding a $35.4 million increase in total
loans, from $141.4 million at September 30, 2000 to $176.8 million at September
30, 2001. Based on management's estimates of overall asset quality and actual
loss experience, the allowance is considered adequate to cover estimated losses
in loans receivable at September 30, 2001.
The following table sets forth activity in Greater Atlantic Bank's
allowance for loan losses.
AT OR FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ........................ $ 765 $ 590
Provisions ............................................ 55 13
Dominion reserves ..................................... 100 225
Total charge-offs ..................................... (131) (63)
Total recoveries ...................................... 21 --
------ ------
Net charge-offs ....................................... (110) (63)
Balance at end of period .............................. $ 810 $ 765
====== ======
Ratio of net charge-offs during the period
to average loans outstanding during the period ..... 0.07% 0.06%
====== ======
Allowance for loan losses to total non-performing
loans at end of period ............................ 160.08% 394.33%
====== ======
Allowance for loan losses to total loans .............. 0.46% 0.54%
====== ======
The following table sets forth Greater Atlantic Bank's allowance for
loan losses in each of the categories listed and the percentage of such amounts
to the total allowance and the percentage of such amounts to total loans.
AT SEPTEMBER 30,
--------------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
PERCENT OF PERCENT OF
--------------------- ----------------------
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ------ ------ --------- ------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family ......................... $ 95 11.73% 0.06% $ 73 9.54% 0.05%
Multi-family .......................... 5 0.62 -- 8 1.05 0.01
Construction .......................... 74 9.14 0.04 54 7.06 0.04
Commercial real estate ................ 195 24.07 0.11 195 25.49 0.13
Land .................................. 53 6.54 0.03 39 5.10 0.03
------ ------ ------ ------ ------ ------
Total mortgage loans ............... 422 52.10 0.24 369 48.24 0.26
------ ------ ------ ------ ------ ------
Commercial and Consumer:
Commercial ............................ 263 32.47 0.15 168 21.96 0.11
Consumer:
Home equity ........................ 88 10.86 0.05 50 6.54 0.04
Automobile ......................... 31 3.83 0.02 27 3.53 0.02
Total commercial and consumer ..... 382 47.16 0.22 245 32.03 0.17
------ ------ ------ ------ ------ ------
Unallocated .............................. 6 0.74 -- 151 19.73 0.11
------ ------ ------ ------ ------ ------
Total .................................... $ 810 100.00% 0.46% $ 765 100.00% 0.54%
====== ====== ====== ====== ====== ======
66
INVESTMENT ACTIVITIES
The investment policy of Greater Atlantic Bank, as approved by the board
of directors, requires management to maintain adequate liquidity and generate a
favorable return on investments, to complement Greater Atlantic Bank's lending
activities without incurring undue interest rate and credit risk. Greater
Atlantic Bank primarily utilizes investments in securities for liquidity
management, as a source of income and as a method of deploying excess funds not
utilized for investment in loans. Securities bought and held principally for
sale in the near term, generally within 90 days are classified as trading.
At September 30, 2001, Greater Atlantic Bank had invested $37.9 million
in mortgage-backed securities, or 10.20% of total assets, of which $32.6 million
were classified as available-for-sale and $5.3 million were classified as
held-to-maturity. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than estimated prepayments over the life of
the security, which may require adjustments to the amortization of any premium
or accretion of any discount relating to such instruments thereby changing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities or in the event 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 Greater Atlantic Bank's investment securities.
SEPTEMBER 30,
------------------------------------------------------
2001 2000
----------------------- -------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
Available-for-sale:
Equity securities ................... $ -- $ -- $ 2,157 $ 2,171
Corporate debt securities ........... 974 1,025 1,967 1,924
Federal agency securities ........... -- -- 1,000 976
CMOs ................................ 6,971 6,994 3,410 3,358
U.S. Government securities .......... 106,124 105,794 39,967 39,487
-------- -------- -------- --------
Total available-for-sale ......... 114,069 113,813 48,501 47,916
-------- -------- -------- --------
Held-to-maturity:
Corporate debt securities ........... 1,029 991 1,037 965
U.S. Government securities .......... 16,460 15,956 19,878 19,182
-------- -------- -------- --------
Total held-to-maturity ........... 17,489 16,947 20,915 20,147
-------- -------- -------- --------
Total investment securities ...... $131,558 $130,760 $ 69,416 $ 68,063
======== ======== ======== ========
Investment securities with:
Fixed rates ......................... $ 3,443 $ 3,477 $ 7,752 $ 7,572
Adjustable rates .................... 128,115 127,283 61,664 60,491
-------- -------- -------- --------
Total ............................ $131,558 $130,760 $ 69,416 $ 68,063
======== ======== ======== ========
Trading securities(1) .................. $ -- $ -- $ -- $ 1,946
======== ======== ======== ========
- --------------------------------------
(1) Consists of federal agency securities.
67
The following table sets forth information regarding the amortized cost
and estimated market value of Greater Atlantic Bank's mortgage-backed
securities.
SEPTEMBER 30,
------------------------------------------------------
2001 2000
----------------------- ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
Available for sale:
FHLMC ............................... $ 11,770 $ 11,745 $ 10,772 $ 10,705
FNMA ................................ 19,059 19,020 26,880 26,555
GNMA ................................ 1,797 1,788 1,430 1,404
-------- -------- -------- --------
Total ............................ 32,626 32,553 39,082 38,664
-------- -------- -------- --------
Held-to-maturity:
FHLMC ............................... 2,276 2,303 2,817 2,739
FNMA ................................ 2,974 3,023 3,868 3,713
-------- -------- -------- --------
Total Held-to-maturity .......... 5,250 5,326 6,685 6,452
-------- -------- -------- --------
Total ........................... $ 37,876 $ 37,879 $ 45,767 $ 45,116
======== ======== ======== ========
Mortgage-backed securities with:
Fixed rates ......................... $ 3,445 $ 3,445 $ 7,260 $ 7,068
Adjustable rates .................... 34,431 34,434 38,507 38,048
-------- -------- -------- --------
Total ............................ $ 37,876 $ 37,879 $ 45,767 $ 45,116
======== ======== ======== ========
Trading securities ............... $ -- $ 1,312 $ -- $ 20,820
======== ======== ======== ========
68
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of Greater Atlantic
Bank's investment securities available-for-sale and mortgage-backed securities
available-for-sale.
AT SEPTEMBER 30, 2001
----------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities
available-for-sale:
Adjustable-rate securities:
CMO's ........................... $ -- --% $ -- --% $ -- --%
U.S. Government agency .......... -- -- 1,305 7.89 -- --
-------- -------- -------- -------- -------- --------
Total ....................... -- -- 1,305 7.89 -- --
-------- -------- -------- -------- -------- --------
Fixed-rate:
Corporate debt .................. -- -- -- -- -- --
CMOs ............................ -- -- -- -- 1,461 7.39
-------- -------- -------- -------- -------- --------
Total ....................... -- -- -- -- 1,461 7.39
-------- -------- -------- -------- -------- --------
Total investment securities
available-for-sale .............. -- -- 1,305 7.89 1,461 7.39
-------- -------- -------- -------- -------- --------
Mortgage-backed securities
available-for-sale:
Adjustable-rate securities:
FNMA ............................ -- -- 136 6.66 -- --
FHLMC ........................... -- -- -- -- -- --
GNMA ............................ -- -- -- -- 362 7.60
-------- -------- -------- -------- -------- --------
Total ....................... -- -- 136 6.66 362 7.60
-------- -------- -------- -------- -------- --------
Fixed-rate:
FNMA ............................ -- -- 520 7.99 771 9.09
FHLMC ........................... -- -- 184 7.49 -- --
-------- -------- -------- -------- -------- --------
Total ....................... -- -- 704 7.85 771 9.09
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities available-for-
sale ............................ -- -- 840 7.66 1,133 8.61
-------- -------- -------- -------- -------- --------
Total investments .................. $ -- --% $ 2,145 7.80% $ 2,594 7.92%
======== ======== ======== ======== ======== ========
AT SEPTEMBER 30, 2001
------------------------------------------------
MORE THAN TEN YEARS TOTAL
--------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities
available-for-sale:
Adjustable-rate securities:
CMO's ........................... $ 5,533 4.92% $ 5,533 4.92%
U.S. Government agency .......... 104,489 7.14 105,794 7.15
-------- -------- -------- --------
Total ....................... 110,022 7.03 111,327 7.04
-------- -------- -------- --------
Fixed-rate:
Corporate debt .................. 1,025 7.11 1,025 7.11
CMOs ............................ -- -- 1,461 7.39
-------- -------- -------- --------
Total ....................... 1,025 7.11 2,486 7.27
-------- -------- -------- --------
Total investment securities
available-for-sale .............. 111,047 7.03 113,813 7.05
-------- -------- -------- --------
Mortgage-backed securities
available-for-sale:
Adjustable-rate securities:
FNMA ............................ 16,483 7.40 16,619 7.39
FHLMC ........................... 11,560 7.13 11,560 7.13
GNMA ............................ 1,426 7.42 1,788 7.45
-------- -------- -------- --------
Total ....................... 29,469 7.29 29,967 7.29
-------- -------- -------- --------
Fixed-rate:
FNMA ............................ 1,111 9.02 2,402 8.82
FHLMC ........................... -- -- 184 7.49
-------- -------- -------- --------
Total ....................... 1,111 9.02 2,586 8.72
-------- -------- -------- --------
Total mortgage-backed
securities available-for-
sale ............................ 30,580 7.36 32,553 7.41
-------- -------- -------- --------
Total investments .................. $141,627 7.10% $146,366 7.13%
======== ======== ======== ========
69
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of Greater Atlantic
Bank's held-to-maturity investment securities held-to-maturity and
mortgage-backed securities held-to-maturity.
AT SEPTEMBER 30, 2001
-----------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities held-to-maturity:
Adjustable-rate securities:
U.S. Government agency ........................ $ -- --% $ 679 6.63% $ 1,459 7.85%
------- ------- ------- ------- ------- -------
Total ..................................... -- -- 679 6.63 1,459 7.85
------- ------- ------- ------- ------- -------
Fixed-rate:
Corporate debt ................................ -- -- 1,029 7.15 -- --
------- ------- ------- ------- ------- -------
Total ..................................... -- -- 1,029 7.15 -- --
------- ------- ------- ------- ------- -------
Total investment securities held-to-
maturity ...................................... -- -- 1,708 6.94 1,459 7.85
------- ------- ------- ------- ------- -------
Mortgage-backed securities held-to-maturity:
Adjustable-rate securities:
FNMA .......................................... -- -- -- -- -- --
FHLMC ......................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total ..................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Fixed-rate:
FNMA .......................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total ..................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total mortgage-backed securities
held-to-maturity .............................. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total held-to-maturity
investments ................................... $ -- --% $ 1,708 6.94% $ 1,459 7.85%
======= ======= ======= ======= ======= =======
AT SEPTEMBER 30, 2001
---------------------------------------------
MORE THAN TEN
YEARS TOTAL
-------------------- --------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities held-to- maturity:
Adjustable-rate securities:
U.S. Government agency ........................ $14,322 6.40% $16,460 6.54%
------- ------- ------- -------
Total ..................................... 14,322 6.40 16,460 6.54
------- ------- ------- -------
Fixed-rate:
Corporate debt ................................ -- -- 1,029 7.15
------- ------- ------- -------
Total ..................................... -- -- 1,029 7.15
------- ------- ------- -------
Total investment securities held-to-
maturity ...................................... 14,322 6.40 17,489 6.57
------- ------- ------- -------
Mortgage-backed securities held-to- maturity:
Adjustable-rate securities:
FNMA .......................................... 2,124 6.41 2,124 6.41
FHLMC ......................................... 2,276 7.10 2,276 7.10
------- ------- ------- -------
Total ..................................... 4,400 6.77 4,400 6.77
------- ------- ------- -------
Fixed-rate:
FNMA .......................................... 850 6.50 850 6.50
------- ------- ------- -------
Total ..................................... 850 6.50 850 6.50
------- ------- ------- -------
Total mortgage-backed securities
held-to-maturity .............................. 5,250 6.72 5,250 6.72
------- ------- ------- -------
Total held-to-maturity
investments ................................... $19,572 6.49% $22,739 6.61%
======= ======= ======= =======
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 Greater Atlantic Bank's funds for use in
lending, investing and for other general purposes.
DEPOSITS. Because Greater Atlantic Bank has aggressively marketed its
deposit products, expanded its branch network and used brokered deposits to fund
its mortgage-banking activities, total deposits increased to $230.0 million at
September 30, 2001 from $188.4 million at September 30, 2000, an increase of
22.08%. Certificates of deposit increased $15.5 million. Greater Atlantic Bank
offers a variety of deposit accounts with a range of interest rates and terms.
Greater Atlantic Bank's deposits consist of checking, money market, savings,
NOW, certificate accounts and Individual Retirement Accounts. Of the funds
deposited in Greater Atlantic Bank, 64.08% are in certificate of deposit
accounts at September 30, 2001. At September 30, 2001, transaction-based
accounts (savings, NOW, money market and noninterest bearing deposits)
represented 35.92% of total deposits.
At September 30, 2001, $114.3 million, or 77.59% of Greater Atlantic
Bank's certificate of deposit accounts were to mature within one year.
70
The following table sets forth the distribution and the rates paid on
each category of Greater Atlantic Bank's deposits.
AT SEPTEMBER 30,
--------------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
PERCENT OF PERCENT OF
TOTAL RATE TOTAL RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Savings accounts ................... $ 4,641 2.02% 3.15% $ 5,808 3.08% 2.51%
Now and money market accounts ...... 71,229 30.97 3.50 46,263 24.56 5.22
Certificates of deposit ............ 147,365 64.08 5.26 131,893 70.01 6.18
Noninterest-bearing deposits:
Demand deposits ................ 6,747 2.93 -- 4,423 2.35 --
-------- -------- -------- -------- -------- --------
Total deposits ............. $229,982 100.00% 4.52% $188,387 100.00% 5.69%
======== ======== ======== ======== ======== ========
The following table presents information concerning the amounts, the
rates and the periods to maturity of Greater Atlantic Bank's certificate
accounts outstanding.
AT SEPTEMBER 30, 2001
-------------------------
AMOUNT RATE
-------- --------
Balances maturing: (DOLLARS IN THOUSANDS)
Three months or less ......... $ 38,617 5.37%
Three months to one year ..... 75,728 5.29
One year to three years ...... 29,873 4.95
Over three years ............. 3,147 5.64
-------- --------
Total ............ $147,365 5.26%
======== ========
At September 30, 2001, Greater Atlantic Bank had $36.9 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
- ------------------------------ ------- -------
(DOLLARS IN THOUSANDS)
Three months or less ......... $ 8,461 5.69%
Over 3 through 6 months ...... 7,017 5.69
Over 6 through 12 months ..... 12,915 5.08
Over 12 months ............... 8,482 5.11
------- -------
Total .................. $36,875 5.34%
======= =======
BORROWINGS. FHLB advances amounted to $74.5 million at September 30,
2001 an increase from the $46.1 million at September 30, 2000 and other
borrowings (reverse repurchase agreements) amounted to $43.3 million an increase
of $6.6 million compared to $36.7 million at September 30, 2000. During the
fiscal year ended September 30, 2001, all reverse repurchase agreements
represented agreements to repurchase the same securities. At September 30, 2001,
borrowings consisted of FHLB advances and reverse repurchase agreements totaling
$117.8 million.
71
The following table sets forth information regarding Greater Atlantic
Bank's borrowed funds:
AT OR FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
FHLB Advances:
Average balance outstanding ...................................... $ 60,784 $ 55,691
Maximum amount outstanding at any month-end during the period .... 74,500 76,800
Balance outstanding at end of period ............................. 74,500 46,100
Weighted average interest rate during the period ................. 5.59% 6.14%
Weighted average interest rate at end of period .................. 4.47% 6.33%
Reverse repurchase agreements:
Average balance outstanding ...................................... 43,217 31,100
Maximum amount outstanding at any month-end during the period .... 53,279 39,605
Balance outstanding at end of period ............................. 43,323 36,736
Weighted average interest rate during the period ................. 5.14% 6.45%
Weighted average interest rate at end of period .................. 3.32% 6.62%
SUBSIDIARY ACTIVITIES
Our sole subsidiary is Greater Atlantic Bank, Greater Atlantic Bank has
one wholly-owned subsidiary, Greater Atlantic Mortgage Corporation, and in
furtherance of our community banking focus, we have expanded the operations of
Greater Atlantic Mortgage in order to diversify our revenue stream and support
our growth. The strategy of Greater Atlantic Mortgage is to originate mortgage
loans for sale in the secondary market and to develop profitable niche mortgage
products, such as Federal Housing Administration ("FHA") streamline refinancings
and the origination of loans on condominiums in connection with the conversion
of cooperative apartments to condominiums. Currently, the operations of Greater
Atlantic Mortgage employ approximately 60 persons in Tysons Corner, Virginia,
Wheaton and Rockville, Maryland, Martinsburg, West Virginia and Ft. Lauderdale,
Florida. For the fiscal year ended September 30, 2001, Greater Atlantic Mortgage
originated $246.9 million of single-family residential loans, respectively, the
majority of which consisted of loans insured by the FHA or partially guaranteed
by the Veterans Administration ("VA") which were pre-sold in the secondary
market with servicing released.
PERSONNEL
As of September 30, 2001, we had 143 full-time employees and 3 part-time
employees. The employees are not represented by a collective bargaining unit and
Greater Atlantic Financial considers its relationship with its employees to be
good.
72
PROPERTIES
We currently conduct our business from nine full-service banking offices
and our administrative office. The following table sets forth certain
information concerning Greater Atlantic Bank's offices as of September 30, 2001.
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL LEASEHOLD
YEAR DATE OF IMPROVEMENTS
LEASED OR LEASED OR LEASE AT
LOCATION OWNED ACQUIRED EXPIRATION SEPTEMBER 30, 2001
- ------------------------------------------------------------ --------- --------- ---------- ------------------
(IN THOUSANDS)
ADMINISTRATIVE OFFICES:
10700 Parkridge Boulevard
Reston, Virginia 20191 ..................................... Leased 1998 03-31-03 $ 94
BRANCH OFFICES:
11834 Rockville Pike
Rockville, Maryland 20852 .................................. Leased 1998 06-15-05 217
8070 Ritchie Highway
Pasadena, Maryland 21122 ................................... Leased 1998 08-31-08 20
153 Defense Highway
Annapolis, Maryland 21401 .................................. Owned 2000 875
250 N. Glebe Road
Arlington, Virginia 22203 .................................. Leased 1998 03-31-03 30
1025 Connecticut Avenue, N.W
Washington, D.C. 20036 ..................................... Leased 1998 07-31-08 218
46901 Cedar Lakes Plaza
Sterling, Virginia 20164 ................................... Leased 1999 02-28-19 347
43086 Peacock Market Plaza
South Riding, Virginia 20152 ............................... Leased 2000 06-30-15 351
1 South Royal Avenue
Front Royal, Virginia 22630 ................................ Owned 1977 736
9484 Congress Street
New Market, Virginia 22844 ................................. Owned 1989 508
2147 Valley Avenue
Winchester, Virginia 22601 ................................. Owned 2000 317
2800 Valley Avenue
Winchester, Virginia 22601 ................................. Owned 1978 229
GREATER ATLANTIC MORTGAGE OFFICES:
8230 Old Courthouse Road
Vienna, Virginia 22182 ..................................... Leased 1995 12-31-04 1
11300 Rockville Pike
Rockville, Maryland 20852 .................................. Leased 2001 01-31-06 1
2730 University Boulevard
Wheaton, Maryland 20902 .................................... Leased 2000 09-30-05 4
800 East Broward Boulevard
Ft. Lauderdale, Florida 33301 .............................. Leased 2001 04-30-02 --
310 West King Street Month to
Martinsburg, West Virginia 25401 ........................... Leased 2000 Month --
------
Total ................................................. $3,948
======
73
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 Greater Atlantic Financial's financial condition, results of
operations or cash flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The profitability of Greater Atlantic Financial, and more specifically,
the profitability of its primary subsidiary Greater Atlantic Bank, depends
primarily on its net interest income. Net interest income is the difference
between the interest income it earns on its loans and investment portfolio, and
the interest it pays on interest-bearing liabilities, which consists mainly of
interest paid on deposits and borrowings.
Our profitability is also affected by the level of its non-interest
income and operating expenses. Non-interest income consists primarily of gains
on sales of loans and available-for-sale investments, service charge fees and
commissions earned by non-bank subsidiaries. Operating expenses consist
primarily of salaries and employee benefits, occupancy-related expenses,
equipment and technology-related expenses and other general operating expenses.
The operations of Greater Atlantic Bank, and banking institutions in
general, are significantly influenced by general economic conditions and related
monetary and fiscal policies of regulatory agencies. Deposit flows and the cost
of deposits and borrowings are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing real estate and other types of loans, which
in turn are affected by the interest rates at which such financing may be
offered and other factors affecting loan demand and the availability of funds.
FORWARD LOOKING STATEMENTS
When used in this prospectus and in future filings by Greater Atlantic
Financial with the Securities and Exchange Commission, in Greater Atlantic
Financial'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 Greater Atlantic Financial's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in Greater
Atlantic Financial's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Greater Atlantic Financial wishes to advise readers
that the factors listed above could affect Greater Atlantic Financial's
financial performance and could cause Greater Atlantic Financial'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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
SEPTEMBER 30, 2000
NET INCOME. For the fiscal year ended September 30, 2001, Greater
Atlantic Financial incurred a loss of $522,000 or $0.17 per share compared to a
loss of $3.6 million or $1.21 per share for fiscal year 2000. The $3.1 million
decrease in net loss over the comparable period one year ago was primarily due
to increases in net interest income and noninterest income. Those increases
exceeded an increase in noninterest expense and a decrease in Greater Atlantic
Bank's income tax benefit. Greater Atlantic Bank believes that due to continuing
operating losses it is more appropriate not to recognize an income tax benefit
for current period operating losses, and that pre-tax earnings or loss provide a
better basis to compare period to period operations. Viewed from that
perspective, Greater Atlantic Bank's pre-tax loss improved by $3.7 million from
a loss of $4.2 million for the fiscal year ended
74
2000 to a loss of $522,000 for the current year. The reduction in interest
rates, coupled with the continued growth of Greater Atlantic Bank have led to an
improvement in both net interest income and noninterest income.
NET INTEREST INCOME. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing sources of funds such as deposits and
borrowings. The level of net interest income is determined primarily by the
relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon them. The
correlation between the repricing of interest rates on assets and on liabilities
also influences net interest income.
The following table presents a comparison of the components of interest
income and expense and net interest income.
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
--------------------- ---------------------
2001 2000 AMOUNT %
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Loans ................ $12,658 $ 8,462 $ 4,196 49.59%
Investments .......... 10,965 9,310 1,655 17.78
------- ------- ------- -------
Total ............. 23,623 17,772 5,851 32.92
------- ------- ------- -------
Interest expense:
Deposits ............. 11,629 7,668 3,961 51.66
Borrowings ........... 5,618 5,426 192 3.54
------- ------- ------- -------
Total ............. 17,247 13,094 4,153 31.72
------- ------- ------- -------
Net interest income ..... $ 6,376 $ 4,678 $ 1,698 36.30%
======= ======= ======= =======
Our growth in net interest income for fiscal year 2001 was due primarily
to the increase in average interest-earning assets resulting from our planned
growth. Average interest-earning assets increased $87.1 million or 35.97% over
the comparable period one-year ago coupled with a one basis point increase in
net interest margin (net interest income divided by average interest-earning
assets). The increase in net interest margin resulted from the decrease on rates
paid for interest bearing liabilities exceeding the decrease in yields earned on
interest earning assets by 14 basis points. That decrease was offset by an
increase in average interest-bearing liabilities exceeding the increase in
average interest-earning assets by $474,000.
INTEREST INCOME. Interest income for the fiscal year ended September 30,
2001 increased $5.9 million from fiscal year 2000 primarily as a result of an
increase in the average outstanding balances in loans and investment securities.
The increase in interest income from the loan portfolio for fiscal year 2001
compared to interest income earned for fiscal 2000 resulted from an increase of
$57.9 million in the average balance of loans outstanding. That increase was
coupled with an increase of $29.2 million in the average outstanding balance in
the investment and mortgage-backed securities portfolios and was offset by a 17
basis point decrease in the average yield earned on the loan and investment
portfolios.
INTEREST EXPENSE. The $4.2 million increase in interest expense on
deposits and borrowed funds for fiscal year 2001 compared to fiscal year 2000
was principally the result of a significant increase in the average outstanding
balances in total deposits and borrowed funds, and was offset by a 31 basis
point decrease in the average cost of funds. The increase in interest expense on
deposits was primarily due to an increase in average certificates of deposit and
NOW and money market accounts of $67.8 million, or 49.97%, from $135.7 million
for fiscal 2000 to $203.6 million for fiscal 2001. The average rate we paid for
deposits increased from 5.59% for fiscal 2000 to 5.60% for fiscal 2001. That
increase in rate was coupled with an increase of $70.4 million in the average
outstanding balance of deposits. The increase in interest expense on borrowings
was primarily due to an increase in average borrowings of $17.2 million, and was
offset in part by an 85 basis point decline in the average cost of funds.
75
COMPARATIVE AVERAGE BALANCES AND INTEREST INCOME ANALYSIS. The following
table presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all average
balances are average daily balances. Nonaccruing loans have been included in the
tables as loans carrying a zero yield.
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2001 2000
---------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- --------
Assets: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans ............................... $124,646 $ 9,298 7.46% $ 87,468 $ 6,699 7.66%
Consumer loans .................................. 29,106 2,287 7.86 13,980 1,236 8.84
Commercial business loans ....................... 11,038 1,073 9.72 5,469 527 9.64
-------- -------- -------- -------- -------- --------
Total loans .................................. 164,790 12,658 7.68 106,917 8,462 7.91
Investment securities .............................. 118,320 7,897 6.67 75,808 5,380 7.10
Mortgage-backed securities ......................... 46,225 3,068 6.64 59,489 3,930 6.61
-------- -------- -------- -------- -------- --------
Total interest-earning assets ................ 329,335 23,623 7.17 242,214 17,772 7.34
Non-earning assets ................................. 13,891 9,203
-------- --------
Total assets .................................. $343,226 $251,417
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts ................................ $ 4,089 136 3.33 $ 1,532 40 2.61
Now and money market accounts ................... 59,783 2,744 4.59 34,882 1,772 5.08
Certificates of deposit ......................... 143,785 8,749 6.08 100,858 5,856 5.81
-------- -------- -------- -------- -------- --------
Total deposits ............................... 207,657 11,629 5.60 137,272 7,668 5.59
FHLB advances ................................... 60,784 3,396 5.59 55,691 3,419 6.14
Other borrowings ................................ 43,217 2,222 5.14 31,100 2,007 6.45
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ............ 311,658 17,247 5.53 224,063 13,094 5.84
-------- -------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .............. 8,767 1,916
Other liabilities ................................ 1,756 1,371
-------- --------
Total liabilities ............................. 322,181 227,350
Stockholders' equity ............................... 21,045 24,067
-------- --------
Total liabilities and stockholders' equity .... $343,226 $251,417
======== ========
Net interest income ................................ $ 6,376 $ 4,678
======== ========
Interest rate spread ............................... 1.64% 1.50%
======== ========
Net interest margin ................................ 1.94% 1.93%
======== ========
76
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 changes in interest
attributable to both rate and volume has been allocated to the changes in rate
and volume on a pro rata basis.
YEARS ENDED
SEPTEMBER 30, 2001 VS. 2000
CHANGE ATTRIBUTABLE TO
--------------------------------------------
VOLUME RATE TOTAL
-------- -------- --------
(IN THOUSANDS)
Real estate loans ...................... $ 2,847 $ (248) $ 2,599
Consumer loans ......................... 1,337 (286) 1,051
Commercial business loans .............. 537 9 546
-------- -------- --------
Total loans ...................... 4,721 (525) 4,196
Investments ............................ 3,017 (500) 2,517
Mortgage-backed securities ............. (876) 14 (862)
-------- -------- --------
Total interest-earning assets .......... $ 6,862 $ (1,011) $ 5,851
======== ======== ========
Savings accounts ....................... $ 67 $ 29 $ 96
Now and money market accounts .......... 1,265 (293) 972
Certificates of deposit ................ 2,492 401 2,893
-------- -------- --------
Total deposits ....................... 3,824 137 3,961
FHLB advances .......................... 313 (336) (23)
Other borrowings ....................... 782 (567) 215
-------- -------- --------
Total interest-bearing liabilities ..... $ 4,919 $ (766) $ 4,153
======== ======== ========
Change in net interest income .......... $ 1,943 $ (245) $ 1,698
======== ======== ========
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 Greater Atlantic Financial's
internal review process which segments the loan portfolio into groups based on
various risk factors including the types of loans and asset classifications.
Each segment is then assigned a reserve percentage based upon the perceived risk
in that segment. Although management utilizes its best judgment in providing for
probable losses, there can be no assurance that Greater Atlantic Financial will
not have to increase its provisions for loan losses in the future as a result of
an adverse market for real estate and economic conditions generally in Greater
Atlantic Financial's primary market area, future increases in non-performing
assets or for other reasons which would adversely affect Greater Atlantic
Financial's results of operations.
The increase in non-performing loans of $312,000 during fiscal 2001,
resulted primarily from the $196,000 increase in single family loans and a
$122,000 increase in non-performing construction loans. The provision for loan
losses was increased from $13,000 during fiscal 2000 to $55,000 during fiscal
2001. The increase in provision is directly related to the increase in
non-performing loans. Net charge-offs increased from $63,000 during fiscal 2000
to $110,000 during fiscal 2001 as management took a more aggressive posture in
assessing collectibility of classified loans. Management expects charge-offs to
increase in the future as a result of the increase in its total loan portfolio
during fiscal 2001. While we have continued our loan loss provisions in response
to our continued growth in real estate loans, we have allowed our allowance for
loan losses to decline as a percentage of loans due to the continuation of the
low percentages of our charge-offs and non-performing loans.
NONINTEREST INCOME. Noninterest income increased $3.7 million during
fiscal 2001, over the comparable period one year ago, primarily as a result of
the increase in gain on sale of loans, reflecting an increased volume of loan
originations and sales from Greater Atlantic Financial's mortgage banking
activities. That increase was coupled with an increase in gains on the sale of
investments and an increase in service fees on loans and deposits. That
77
increase in gain on sales of investment securities occurred as a result of a
loss of $1.0 million recognized during fiscal 2000 when Greater Atlantic Bank
transferred $22.8 million in securities from available for sale to trading
resulting in a loss of $580,000, with the remaining $420,000 of loss on sale
resulting from sales of $18.0 million in securities as Greater Atlantic Bank
restructured its investment securities portfolio, with no comparable loss
occurring during fiscal 2001. The increase in service fees on loans and deposits
relates primarily to Greater Atlantic Bank's acquisition of Dominion Savings
Bank, with a full year of activity being realized, and increased loan production
at Greater Atlantic Mortgage. The significant level of gains on sale of loans in
fiscal 2001 resulted from Greater Atlantic Financial taking advantage of loan
origination volumes coupled with home loan refinancing and a favorable interest
rate environment which enabled Greater Atlantic Financial to sell at a gain
loans through Greater Atlantic Mortgage.
During the fiscal year ended September 30, 2001, loan disbursements
originated for sale amounted to $249.9 million compared to $117.0 million during
the comparable period one year ago. The $132.9 million increase in loans
originated and disbursed was largely attributable to decreases in market
interest rates, which increased home mortgage refinancings. During the period,
substantially all loans originated were sold in the secondary market, in most
cases with servicing released. Proceeds from the sale of loans for fiscal 2001
amounted to $245.2 million compared to $121.3 million during the comparable
period one year ago. Sales of loans resulted in gains of $4.3 million and $2.5
million for fiscal 2001 and fiscal 2000, respectively.
The following table presents a comparison of the components of
noninterest income.
YEARS ENDED SEPTEMBER 30, DIFFERENCE
-------------------------- ----------------------
2001 2000 AMOUNT %
----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
Noninterest income:
Gain on sale of loans .............................. $ 4,335 $ 2,466 $ 1,869 75.79%
Service fees on loans .............................. 673 464 209 45.04
Service fees on deposits ........................... 456 177 279 157.63
Gain (loss) on sale of investment securities ....... 194 (1,025) 1,219 118.93
Gain on sale of real estate owned .................. 45 14 31 221.43
Other operating income ............................. 4 (42) 46 109.52
------- ------- ------- -------
Total noninterest income ........................ $ 5,707 $ 2,054 $ 3,653 177.85%
======= ======= ======= =======
NONINTEREST EXPENSE. Noninterest expense for fiscal 2001, amounted to
$12.6 million, an increase of $1.6 million or 14.54% from the $11.0 million
incurred in fiscal 2000. Excluding non-recurring expenses of $1.6 million during
fiscal 2000, as a result of the settlement of a lawsuit and related legal fees,
noninterest expense increased $3.2 million over the comparable period one year
ago. The increase in Greater Atlantic Bank's noninterest expense was primarily
in compensation of $1.3 million, depreciation expense on furniture fixtures and
equipment of $180,000, data processing of $477,000, occupancy of $413,000 and
other operating expense of $481,000, when factoring in $1.3 million related to
the settlement. Those increases were attributable to the continued expansion and
growth of Greater Atlantic Bank and an increase in commissions to loan officers
due to increased loan production and the related employee benefit cost
associated with the increase in compensation.
78
The following table presents a comparison of the components of
noninterest expense.
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
--------------------- ----------------------
2001 2000 AMOUNT %
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Noninterest expense:
Compensation and employee benefits ....... $ 6,054 $ 4,738 $ 1,316 27.78%
Occupancy ................................ 1,607 1,194 413 34.59
Professional services .................... 818 794 24 3.02
Advertising .............................. 522 547 (25) (4.57)
Deposit insurance premium ................ 36 52 (16) (30.77)
Furniture, fixtures and equipment ........ 668 488 180 36.89
Data processing .......................... 887 410 477 116.34
Loss from foreclosed real estate ......... 3 10 (7) (70.00)
Other operating expense .................. 1,955 2,724 (769) (28.23)
------- ------- ------- -------
Total noninterest expense ............. $12,550 $10,957 $ 1,593 14.54%
======= ======= ======= =======
INCOME TAXES. Greater Atlantic Financial files a consolidated federal
income tax return with its subsidiaries and computes its income tax provision or
benefit on a consolidated basis. Since, as previously indicated, Greater
Atlantic Bank no longer recognizes a tax benefit for current operating losses
there was no income tax benefit for fiscal 2001 compared to a benefit of
$600,000 in 2000.
Management has provided a valuation allowance for net deferred tax
assets of $2.5 million, as they are unable to determine the timing of the
generation of future taxable income.
At September 30, 2001, Greater Atlantic Financial has net operating loss
carryforwards totaling approximately $9.1 million, which expire in the years
2006 to 2020. As a result of the change in ownership of the Bank, approximately
$1.7 million of the total net operating loss carryforwards are subject to an
annual usage limitation of approximately $114,000.
ASSET-LIABILITY MANAGEMENT
The primary objective of asset/liability management is to ensure the
steady growth of Greater Atlantic Financial'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 Greater Atlantic
Financial. 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 Greater Atlantic Financial's various funding sources. At times,
depending on the level of general interest rates, the relationship between long-
and short-term interest rates, market conditions and competitive factors,
Greater Atlantic Bank may determine to increase our interest rate risk position
in order to increase our net interest margin.
Greater Atlantic Bank manages its exposure to interest rates by
structuring the balance sheet in the ordinary course of business. Greater
Atlantic 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, Greater Atlantic Bank attempts to
attract longer-term deposits. Greater Atlantic Bank has not entered into
instruments such
79
as leveraged derivatives, structured notes, interest rate swaps, caps, floors,
financial options, financial futures contracts or forward delivery contracts for
the purpose of reducing interest rate risk.
One of the ways Greater Atlantic 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 Greater
Atlantic Financial's assets and liabilities, including noninterest-bearing
sources of funds to specific periods at September 30, 2001. Estimates and
assumptions concerning prepayment rates of major asset categories are based on
information obtained from the FHLB of Atlanta on projected prepayment levels on
mortgage-backed and related securities and decay rates on savings, NOW and money
market accounts. Greater Atlantic Bank believes that such information is
consistent with our current experience.
ONE YEAR THREE
TO YEARS TO
90 DAYS 91 DAYS TO 181 DAYS TO THREE FIVE FIVE YEARS
MATURING OR REPRICING PERIODS OR LESS 180 DAYS ONE YEAR YEARS YEARS OR MORE TOTAL
- ----------------------------------- -------- ---------- ----------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans:
Adjustable and balloon ......... $ 20,451 $ 6,577 $ 25,654 $ 31,781 $ 9,119 $ 94 $ 93,676
Fixed-rate ..................... 16,146 506 976 3,460 2,841 8,196 32,125
Second mortgages ............... 430 141 267 893 666 978 3,375
Commercial business ............ 9,260 358 708 2,733 222 -- 13,281
Consumer ....................... 35,165 167 316 1,041 311 -- 37,000
Investment securities ............. 120,903 45 88 330 2,296 4,511 128,173
Mortgage-backed securities ........ 6,686 6,617 10,299 9,339 4,237 1,180 38,358
-------- -------- -------- -------- -------- -------- --------
Total ....................... 209,041 14,411 38,308 49,577 19,692 14,959 345,988
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Savings accounts ............... 232 232 324 1,205 788 1,854 4,635
NOW accounts ................... 1,731 1,731 1,875 4,903 1,298 2,884 14,422
Money market accounts .......... 14,769 14,769 15,337 6,249 2,840 2,841 56,805
Certificates of deposit ........ 38,775 23,392 52,337 29,871 3,053 95 147,523
Borrowings:
FHLB advances .................. 46,500 3,000 -- -- -- 25,000 74,500
Other borrowings ............... 43,323 -- -- -- -- -- 43,323
-------- -------- -------- -------- -------- -------- --------
Total ....................... 145,330 43,124 69,873 42,228 7,979 32,674 341,208
-------- -------- -------- -------- -------- -------- --------
GAP ............................... $ 63,711 $(28,713) $(31,565) $ 7,349 $ 11,713 $(17,715) $ 4,780
======== ======== ======== ======== ======== ======== ========
Cumulative GAP .................... $ 63,711 $ 34,998 $ 3,433 $ 10,782 $ 22,495 $ 4,780
======== ======== ======== ======== ======== ========
Ratio of Cumulative GAP
to total earning assets ........... 18.41% 10.12% 0.99% 3.12% 6.50% 1.38%
======== ======== ======== ======== ======== ========
As indicated in the interest rate sensitivity table, the twelve-month
cumulative gap, representing the total net assets and liabilities that are
projected to re-price over the next twelve months, was asset sensitive in the
amount of $3.4 million at September 30, 2001.
80
While the GAP position is a useful tool in measuring interest rate risk
and contributes toward effective asset and liability management, it is difficult
to predict the effect of changing interest rates solely on the measure, without
accounting for alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates. The GAP
position reflects only the prepayment assumptions pertaining to the current rate
environment and assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates.
Management uses two other analyses to manage interest rate risk: (1) an
earnings-at-risk analysis to develop an estimate of the direction and magnitude
of the change in net interest income if rates move up or down 100 to 300 basis
points; and (2) a value-at-risk analysis to estimate the direction and magnitude
of the change in net portfolio value if rates move up or down 100 to 200 basis
points. Currently Greater Atlantic Bank uses a sensitivity of net interest
income analysis prepared by the FHLB of Atlanta 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, 2001:
NET INTEREST INCOME SENSITIVITY ANALYSIS
- -------------------------------------------------------------------------------------------
BASIS POINT PERCENT
CHANGES IN RATE NET INTEREST CHANGE CHANGE FROM
(BP) MARGIN FROM BASE BASE
- --------------------- ------------------- ------------------- ------------------
300 3.13% (0.09)% (2.80)%
200 3.16 (0.06) (1.86)
100 3.20 (0.02) (0.62)
-- 3.22 -- --
(100) 3.21 (0.01) (0.31)
(200) 3.12 (0.10) (3.11)
(300) 2.85 (0.37) (11.49)
The table indicates that, if 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 decrease by 6 basis points or 1.86%.
Conversely, if interest rates decrease 200 basis points net interest margin, as
a percent of total assets, would decrease by 10 basis points or 3.11%.
The net interest income sensitivity analysis does not represent a
forecast and should not be relied upon as being indicative of expected operating
results. The estimates used are based upon the assumption as to the nature and
timing of interest rate levels including the shape of the yield curve. These
estimates have been developed based upon current economic conditions; Greater
Atlantic Financial cannot make any assurances as to the predictive nature of
these assumptions including how customer preferences or competitor influences
might change.
Presented below, as of September 30, 2001, is an analysis of our
interest rate risk as measured by changes in net portfolio value for parallel
shifts of 200 basis points in market interest rates:
NET PORTFOLIO VALUE AS A PERCENT OF
THE PRESENT VALUE OF ASSETS
-----------------------------------
NET PORTFOLIO VALUE
------------------------------
CHANGES IN PERCENT NET PORTFOLIO CHANGE IN
RATES (BP) DOLLAR CHANGE CHANGE VALUE RATIO NPV RATIO
-------------- ------------- -------- ----------------- --------------
(DOLLARS IN THOUSANDS)
200 $ 5,818 26.18% 7.57% 1.57%
100 3,134 14.10 6.92 0.92
-- -- -- 6.00 --
(100) (3,283) (14.77) 5.11 (0.89)
(200) (3,699) (16.64) 5.00 (1.00)
81
The improvement in net portfolio value of $5.8 million or 26.18% 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 Greater Atlantic Bank as of
September 30, 2001. The foregoing decline in net portfolio value, in the event
of an increase in interest rates of 200 basis points, currently exceeds Greater
Atlantic Financial's internal board guidelines.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Greater Atlantic 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. Greater Atlantic Bank has continued to maintain the
levels of liquid assets as previously required by Office of Thrift Supervision
regulations. Greater Atlantic Bank manages its liquidity position and demands
for funding primarily by investing excess funds in short-term investments and
utilizing FHLB advance and reverse repurchase agreements in periods when Greater
Atlantic Bank's demands for liquidity exceed funding from deposit inflows.
Greater Atlantic Bank's most liquid assets are cash and cash
equivalents, securities available-for-sale and trading securities. The levels of
these assets are dependent on Greater Atlantic Bank's operating, financing,
lending and investing activities during any given period. At September 30, 2001,
cash and cash equivalents, interest bearing deposits and securities
available-for-sale and trading securities totaled $151.1 million, or 40.77% of
total assets.
The primary investing activities of Greater Atlantic Bank are the
origination of residential one- to four- family loans, commercial real estate
loans, real estate construction and development loans, commercial borrowing and
consumer loans and the purchase of United States Treasury and agency securities,
mortgage-backed and mortgage-related securities and other investment securities.
During the year ended September 30, 2001, Greater Atlantic Bank's loan
originations and purchases totaled $103.9 million. Purchases of United States
Treasury and agency securities, mortgage-backed and mortgage related securities
and other investment securities totaled $106.4 million for the year ended
September 30, 2001.
Greater Atlantic Bank has other sources of liquidity if a need for
additional funds arises. At September 30, 2001, Greater Atlantic Bank had $74.5
million in advances outstanding from the FHLB and had an additional overall
borrowing capacity from the FHLB of $36.7 million at that date. Depending on
market conditions, the pricing of deposit products and FHLB advances, Greater
Atlantic Bank may continue to rely on FHLB borrowings to fund asset growth.
At September 30, 2001, Greater Atlantic Bank had commitments to fund
loans and unused outstanding lines of credit, unused standby letters of credit
and undisbursed proceeds of construction mortgages totaling $99.4 million.
Greater Atlantic 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, 2001, totaled $114.3 million. Based upon experience,
management believes the majority of maturing certificates of deposit will remain
with Greater Atlantic Bank. In addition, management of Greater Atlantic 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 Greater Atlantic Bank,
Greater Atlantic 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, 2001, Greater Atlantic Bank exceeded
all minimum regulatory capital requirements with a tangible capital level of
$20.4 million, or 5.51% of total adjusted assets, which exceeds the required
level of $5.5 million, or 1.50%; core capital of $20.4 million, or 5.51% of
total adjusted assets, which exceeds the required level of $14.8 million, or
4.00%; and risk-based capital of $21.2 million, or 11.36% of risk- weighted
assets, which exceeds the required level of $14.9 million, or 8.00%.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
NET INCOME. For the fiscal year ended September 30, 2000 Greater
Atlantic Financial incurred a net loss of $3.6 million or $1.21 per share
compared to net income of $101,000 or $0.07 per share for fiscal year 1999. The
$3.7 million decrease in net income over the comparable period one year ago was
primarily due to the decline in income from mortgage-banking activities. Also,
contributing to the decrease in income was the settlement of a
82
lawsuit against Greater Atlantic Mortgage costing $1.3 million and the sale and
reclassification by the Bank of certain investment securities at a loss of $1.0
million.
NET INTEREST INCOME. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing sources of funds such as deposits and
borrowings. The level of net interest income is determined primarily by the
relative average balances of interest-earning assets and interest- bearing
liabilities in combination with the yields earned and rates paid upon them. The
correlation between the repricing of interest rates on assets and on liabilities
also influences net interest income.
The following table presents a comparison of the components of interest
income and expense and net interest income.
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
----------------------- -----------------------
2000 1999 AMOUNT %
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest income:
Loans ................ $ 8,462 $ 4,210 $ 4,252 101.00%
Investments .......... 9,310 4,836 4,474 92.51
-------- -------- -------- --------
Total ............. 17,772 9,046 8,726 96.46
-------- -------- -------- --------
Interest expense:
Deposits ............. 7,668 5,499 2,169 39.44
Borrowings ........... 5,426 881 4,545 515.89
-------- -------- -------- --------
Total ............. 13,094 6,380 6,714 105.24
-------- -------- -------- --------
Net interest income ..... $ 4,678 $ 2,666 $ 2,012 75.47%
======== ======== ======== ========
Our growth in net interest income for fiscal year 2000 was due primarily
to the increase in average interest-earning assets resulting from our planned
growth. Although average interest-earning assets increased $110.4 million or
83.80% over the comparable period one-year ago, a decline in the net interest
margin (net interest income divided by average interest-earning assets) of 9
basis points limited the increase in net interest income to $2.0 million. The
decline in net interest margin resulted from a significant increase in
investments at a yield lower than could have been obtained if the funds had been
invested in loans.
INTEREST INCOME. Interest income for fiscal year 2000 increased $8.7
million from fiscal year 1999 primarily as a result of an increase in the
average outstanding balances in loans, investment securities and mortgage-backed
securities resulting in large measure from the planned leveraging of our
capital. The increase in interest income from the loan portfolio for fiscal year
2000 compared to interest income earned for fiscal 1999 resulted from an
increase of $55.2 million in the average balance of loans outstanding. That
increase was coupled with an increase in interest income from the investment and
mortgage-backed securities portfolios, resulting from an increase of $55.3
million in the average outstanding balance, and was coupled with a 48 basis
point increase in the average yield earned on the portfolio.
INTEREST EXPENSE. The increase in interest expense on deposits and
borrowed funds for fiscal year 2000 compared to 1999 was principally the result
of a significant increase in the average outstanding balances in total deposits
and borrowed funds, coupled with a 64 basis point increase in the average cost
of funds. The increase in interest expense on deposits of $2.2 million was
primarily due to an increase in average certificates of deposit of $14.7 million
or 17.08% from $86.1 million for fiscal 1999 to $100.9 million for fiscal 2000,
and was coupled with a 44 basis point increase in the average rate paid from
5.37% for fiscal 1999 to 5.81% for fiscal 2000. The average rate we paid for
deposits increased from 5.24% for fiscal 1999 to 5.59% for fiscal 2000. That
increase in rate was coupled with an increase of $32.4 million in the average
outstanding balance of deposits.
83
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 YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2000 1999
----------------------------------- --------------------------------
INTEREST INTEREST AVERAGE
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ YIELD/
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE RATE
-------- -------- ---------- -------- -------- --------
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans ............................... $ 87,468 $ 6,699 7.66% $ 45,090 $ 3,685 8.17%
Consumer loans .................................. 13,980 1,236 8.84 4,167 320 7.68
Commercial business loans ....................... 5,469 527 9.64 2,497 205 8.21
-------- -------- -------- -------- -------- --------
Total loans .................................. 106,917 8,462 7.91 51,754 4,210 8.13
Investment securities .............................. 75,808 5,380 7.10 47,208 2,976 6.30
Mortgage-backed securities ......................... 59,489 3,930 6.61 32,816 1,860 5.67
-------- -------- -------- -------- -------- --------
Total interest-earning assets ................ 242,214 17,772 7.34 131,778 9,046 6.86
-------- -------- -------- --------
Non-earning assets ................................. 9,203 5,611
-------- --------
Total assets .................................. $251,417 $137,389
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ................................ $ 1,532 40 2.61 $ 1,079 36 3.34
Now and money market accounts ................... 34,882 1,772 5.08 17,688 841 4.75
Certificates of deposit ......................... 100,858 5,856 5.81 86,142 4,622 5.37
-------- -------- -------- -------- -------- --------
Total deposits ............................... 137,272 7,668 5.59 104,909 5,499 5.24
FHLB advances ................................... 55,691 3,419 6.14 16,371 810 4.95
Other borrowings ................................ 31,100 2,007 6.45 1,301 71 5.46
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ............ 224,063 13,094 5.84 122,581 6,380 5.20
-------- -------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .............. 1,916 1,855
Other liabilities ................................ 1,371 1,802
-------- --------
Total liabilities ............................. 227,350 126,238
Stockholders' equity ............................... 24,067 11,151
-------- --------
Total liabilities and stockholders' equity .... $251,417 $137,389
======== ========
Net interest income ................................ $ 4,678 $ 2,666
======== ========
Interest rate spread ............................... 1.50% 1.66%
======== ========
Net interest margin ................................ 1.93% 2.02%
======== ========
84
RATE/VOLUME ANALYSIS. The following table presents certain information
regarding changes in interest income and interest expense attributable to
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities for the periods indicated. The change in interest
attributable to both rate and volume has been allocated to the changes in rate
and volume on a pro rata basis.
YEARS ENDED SEPTEMBER 30, 2000
VS. 1999
-------------------------------------------
CHANGE ATTRIBUTABLE TO
-------------------------------------------
VOLUME RATE TOTAL
-------- -------- --------
(IN THOUSANDS)
Real estate loans ...................... $ 3,463 $ (449) $ 3,014
Consumer loans ......................... 754 162 916
Commercial business loans .............. 244 78 322
-------- -------- --------
Total loans ...................... 4,461 (209) 4,252
Investments ............................ 1,803 601 2,404
Mortgage-backed securities ............. 1,512 558 2,070
-------- -------- --------
Total interest-earning assets .......... $ 7,776 $ 950 $ 8,726
======== ======== ========
Savings accounts ....................... $ 15 $ (11) $ 4
Now and money market accounts .......... 818 113 931
Certificates of deposit ................ 790 444 1,234
-------- -------- --------
Total deposits ....................... 1,623 546 2,169
FHLB advances .......................... 1,945 664 2,609
Other borrowings ....................... 1,626 310 1,936
-------- -------- --------
Total interest-bearing liabilities ..... $ 5,194 $ 1,520 $ 6,714
======== ======== ========
Change in net interest income .......... $ 2,582 $ (570) $ 2,012
======== ======== ========
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 Greater Atlantic Financial's
internal review process which segments the loan portfolio into groups based on
various risk factors including the types of loans and asset classifications.
Each segment is then assigned a reserve percentage based upon the perceived risk
in that segment. Although management utilizes its best judgment in providing for
probable losses, there can be no assurance that Greater Atlantic Financial will
not have to increase its provisions for loan losses in the future as a result of
an adverse market for real estate and economic conditions generally in Greater
Atlantic Financial's primary market area, future increases in non-performing
assets or for other reasons which would adversely affect Greater Atlantic
Financial's results of operations.
The increase in non-performing loans of $171,000 during fiscal 2000,
resulted primarily from the addition of two commercial loans and one residential
loan to non-performing status. Excluding those three non-performing loans,
Greater Atlantic Bank experienced a general decline during fiscal 2000,
reflecting continued stability in the local real estate market. The allowance
for loan losses increased $175,000 during fiscal 2000, and resulted primarily
from the $225,000 addition from the Dominion acquisition offset by net
charge-offs exceeding the provision by $50,000. Net charge-offs increased from
$14,000 during fiscal 1999 to $63,000 during fiscal 2000 as new management took
a more aggressive posture in assessing collectability of classified loans.
Management expects charge-offs to increase in the future as a result of the
increase in its total loan portfolio during fiscal 2000. While we have continued
our loan loss provisions in response to our continued growth in real estate
loans, we have allowed our allowance for loan losses to decline as a percentage
of loans due to the continuation of low charge-off and non-performing loan to
average loan percentages.
85
NON-INTEREST INCOME. Non-interest income declined during fiscal 2000,
over the comparable period one year ago, primarily as a result of a decline of
$2.9 million in gain on sale of loans, reflecting a decreased volume of loan
originations and sales from Greater Atlantic Financial's mortgage banking
activities. That decrease was coupled with a loss on sale of investments of $1.0
million. That loss occurred as a result of the Bank transferring $22.8 million
in securities from available for sale to trading resulting in a loss of
$580,000, with the remaining $420,000 of loss on sale of investment securities
resulting from sales of $18.0 million in securities available for sale as the
Bank restructured its investment securities portfolio, while improving its net
interest margin and interest rate risk position. The proceeds from the sale will
be re-invested in substantially higher yielding loans and interest sensitive
investments improving future operations.
During the fiscal year ended September 30, 2000, Greater Financial
Mortgage originated and disbursed $117.0 million in mortgage loans for sale
compared to $294.8 million during the comparable period one year ago. The $177.8
million decrease in loans originated and disbursed was largely attributable to
increases in market interest rates, which reduced home mortgage refinancings.
During the period, substantially all loans originated were sold in the secondary
market, in most cases with servicing released. Proceeds from the sale of loans
for fiscal 2000 amounted to $121.3 million compared to $318.1 million during the
comparable period one year ago. Sales of loans resulted in gains of $2.5 million
and $5.4 million for fiscal 2000 and fiscal 1999, respectively.
The following table presents a comparison of the components of
non-interest income.
YEARS ENDED SEPTEMBER 30, DIFFERENCE
-------------------------- --------------------------
2000 1999 AMOUNT %
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Noninterest income:
Gain on sale of loans .............................. $ 2,466 $ 5,408 $ (2,942) (54.40)%
Service fees on loans .............................. 464 513 (49) (9.55)
Service fees on deposits ........................... 177 110 67 60.91
Gain (loss) on sale of investment securities ....... (1,025) 24 (1,049) (4,370.83)
Other operating income ............................. (28) 26 (54) (207.69)
-------- -------- -------- --------
Total noninterest income ........................ $ 2,054 $ 6,081 $ (4,027) (66.22)%
======== ======== ======== ========
NON-INTEREST EXPENSE. Non-interest expense increased $2.2 million, over
the comparable period one year ago mainly because of a non-recurring expense as
a result of the settlement of a lawsuit and related legal fees amounting to $1.6
million, of which $1.3 million related to the settlement. Excluding that
non-recurring increase in non-interest expense relating to the settlement of the
lawsuit and professional fees, non-interest expense would have increased
$606,000 during fiscal 2000 when compared to fiscal 1999. A significant portion
of the increase in compensation and employee benefits and occupancy expense
resulted from the addition of new employees and property in the Dominion
acquisition. The remaining salary and benefits expense increase reflects base
salary and staff increases during the past fiscal year. Increased data
processing cost of $226,000 resulted from additional systems activity,
conversion costs and the continued growth and expansion of the Bank.
86
The following table presents a comparison of the components of
noninterest expense.
YEARS ENDED
SEPTEMBER 30, DIFFERENCE
----------------------- ------------------------
2000 1999 AMOUNT %
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Noninterest expense:
Compensation and employee benefits ....... $ 4,738 $ 4,523 $ 215 4.75%
Occupancy ................................ 1,194 914 280 30.63
Professional services .................... 794 388 406 104.64
Advertising .............................. 547 661 (114) (17.25)
Deposit insurance premium ................ 52 64 (12) (18.75)
Furniture, fixtures and equipment ........ 488 412 76 18.45
Data processing .......................... 410 184 226 122.83
Loss from foreclosed real estate ......... 10 19 (9) (47.37)
Other operating expense .................. 2,724 1,624 1,100 67.73
------- ------- ------- -------
Total noninterest expense ............. $10,957 $ 8,789 $ 2,168 24.67%
======= ======= ======= =======
INCOME TAXES. The company files a consolidated federal income tax return
with its subsidiaries and computes its income tax provision or benefit on a
consolidated basis. The income tax benefit in fiscal 2000 amounted to $600,000
compared to $169,000 in fiscal 1999.
Management has provided a valuation allowance for net deferred tax
assets of $1.7 million, as they believe that it is more likely than not that the
entire amount of deferred tax assets will not be realized.
At September 30, 2000, Greater Atlantic Financial has net operating loss
carryforwards totaling approximately $6.7 million, which expire in the years
2006 to 2020. As a result of the change in ownership of the Bank, approximately
$1.7 million of the total net operating loss carryforwards are subject to an
annual usage limitation of approximately $114,000.
RECENT ACCOUNTING STANDARDS
In July 2001, The Securities and Exchange Commission issued Staff Accounting
Bulletin No. 102 "Selected Loan Loss Allowance Methodology and Documentation
Issues" ("SAB 102"). SAB 102 sets forth guidelines for determining the allowance
for loan losses under generally accepted accounting principles. In addition, SAB
102 sets forth guidelines for documentation by registrants in support of the
allowance for loan losses. Greater Atlantic Financial adopted SAB 102 on October
1, 2001. Greater Atlantic Financial's banking subsidiary has a detailed loan
classification and estimated loss calculation methodology in effect, which is
the basis for the determination of the allowance for loan losses. This
methodology and related documentation thereof, has been in effect since Greater
Atlantic Financial acquired the banking subsidiary in 1997. Greater Atlantic
Financial believes that adoption of SAB 102 will have no impact on the financial
statements.
In June 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 changes the
accounting for business combinations, requiring that all business combinations
be accounted for using the purchase method and that intangible assets be
recognized as assets apart from goodwill if they arise from contractual or other
legal rights, or if they are separable or capable of being separated from the
acquired entity and sold, transferred, licensed, rented, or exchanged. SFAS No.
141 is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 specifies that financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. SFAS No. 142 is effective for fiscal years beginning
and after December 15, 2001.
87
SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 are reassessed and the remaining
amortization periods adjusted accordingly. Previously recognized intangible
assets deemed to have indefinite lives shall be tested for impairment. Goodwill
recognized on or before June 30, 2001, shall be assigned to one or more
reporting units and shall be tested for impairment as of the beginning of the
fiscal year in which SFAS No. 142 is initially applied in it's entirety.
Greater Atlantic Financial will adopt SFAS 142 on October 1, 2001 and,
accordingly, will discontinue amortization of the exiting goodwill. The adoption
of SFAS 142 will reduce amortization expense approximately $93,000 in fiscal
2002.
MANAGEMENT OF GREATER ATLANTIC FINANCIAL
DIRECTORS
The following table sets forth information regarding the board of
directors of Greater Atlantic Financial. Each of the directors of Greater
Atlantic Financial is also a director of Greater Atlantic Bank.
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH GREATER ATLANTIC FINANCIAL SINCE EXPIRES
- ----------------------- ------ ------------------------------------------------------- -------- ---------
Carroll E. Amos 54 Director, President and Chief Executive Officer 1997 2002
Charles W. Calomiris 43 Director, Chairman of the Board of Directors 2001 2002
Paul J. Cinquegrana 59 Director 1997 2003
Jeffrey M. Gitelman 56 Director 1997 2004
Jeffrey W. Ochsman 48 Director 1999 2003
James B. Vito 75 Director 1998 2002
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive
officers of Greater Atlantic Financial and Greater Atlantic Bank who are not
also directors.
NAME AGE POSITION(S) HELD WITH GREATER ATLANTIC FINANCIAL OR GREATER ATLANTIC BANK
- ------------------------ ------- ------------------------------------------------------------------------------------
Edward C. Allen 53 Senior Vice President and Chief Operating Officer of Greater Atlantic Bank
Jeremiah D. Behan 52 Senior Vice President, Construction Lending of Greater Atlantic Bank
Justin R. Golden 51 Senior Vice President, Consumer Lending of Greater Atlantic Bank
Wade Hotsenpiller 60 General Auditor and Chief Credit Officer of Greater Atlantic Bank
Patsy J. Mays 55 Senior Vice President, Small Business Lending and Retail Banking of Greater
Atlantic Bank
Robert W. Neff 54 Senior Vice President, Commercial Real Estate Lending of Greater Atlantic
Bank
Laurel L. Mitchell 43 Corporate Secretary of Greater Atlantic Financial and Greater Atlantic Bank
David E. Ritter 51 Senior Vice President and Chief Financial Officer of Greater Atlantic Financial
and Greater Atlantic Bank
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Each of the executive officers of Greater Atlantic Financial and Greater
Atlantic Bank holds his or her office until his or her successors is elected and
qualified or until removed or replaced. Officers are subject to re- election by
the board of directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
CHARLES W. CALOMIRIS is Chairman of the Board of Directors of Greater
Atlantic Financial and the Bank. Mr. Calomiris is currently the Paul M. Montrone
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 Greater
Atlantic Financial and of Greater Atlantic Bank. He is a private investor who
until 1996 served as President and Chief Executive Officer of 1st Washington
Bancorp and Washington Federal Saving Bank.
PAUL J. CINQUEGRANA is a Principal of Washington Securities Corporation
a stock and bond brokerage firm.
JEFFREY M. GITELMAN, D.D.S., is an Oral Surgeon and the owner of Jeffrey
M. Gitelman D.D.S., P.C.
JEFFREY W. OCHSMAN is a partner in the law firm of Friedlander, Misler,
Friedlander, Sloan & Herz, PLLC, Washington, D.C.
JAMES B. VITO is Chairman of the Board, of James Vito Inc., a plumbing
and heating company and managing general partner, James Properties, engaged in
the sale and management of property.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
EDWARD C. ALLEN joined Greater Atlantic Bank as a Senior Vice President
and Chief Financial Officer in mid 1996 and became Chief Operating Officer in
1997. Prior to joining Greater Atlantic Bank, Mr. Allen was the Chief Financial
Officer of Servus Financial Corp. from 1994 to 1996 and Senior Vice President of
NVR Savings Bank from 1992 to 1994.
JEREMIAH D. BEHAN joined Greater Atlantic Bank in 1998 as a Senior Vice
President with primary responsibility for Greater Atlantic Bank's Construction
Lending Department. From 1997 until joining Greater Atlantic Bank, Mr. Behan was
the Senior Servicing Officer for Virginia Asset Financing Corporation. From 1986
until 1996, he served as Senior Vice President of Construction Administration
and Servicing at Washington Federal Savings Bank.
JUSTIN R. GOLDEN joined Greater Atlantic 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.
WADE HOTSENPILLER joined Greater Atlantic Financial during the past year
and serves as General Auditor and Chief Credit Officer for Greater Atlantic
Financial and Greater Atlantic Bank. Previously, Mr. Hotsenpiller, a certified
public accountant, was President, CFO and COO of Dominion Savings Bank, FSB in
2000 after serving from 1996 to 1999 as Senior Vice President and COO for
Allstate Financial Corporation.
PATSY J. MAYS joined Greater Atlantic Bank in 1998 as a Senior Vice
President, primarily responsible for Small Business Lending and Retail Banking.
Prior to joining Greater Atlantic Bank, Ms. Mays served as an Assistant Vice
President at Wachovia Bank of South Carolina responsible for sales production
and branch operations from 1995 to 1996. From 1993 until 1995 she served as Vice
President for Branch Administration at Ameribanc Savings Bank.
LAUREL L. MITCHELL joined Greater Atlantic Bank and Greater Atlantic
Financial as Corporate Secretary in 1999 after three years as Executive
Assistant to the Executive Director of Collier, Shannon, Rill and Scott, PLLC.
Ms. Mitchell had previously been employed with America's Community Bankers from
1993 to 1997.
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ROBERT W. NEFF joined Greater Atlantic Bank in 1997 as Senior Vice
President, Commercial Real Estate Lending. Prior to joining Greater Atlantic
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 Greater Atlantic Bank and Greater Atlantic
Financial 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.
DIRECTORS' COMPENSATION
Since the formation of Greater Atlantic Financial, the executive
officers, directors and other personnel have been compensated for services by
Greater Atlantic Bank and have not received additional remuneration from Greater
Atlantic Financial. Outside directors of Greater Atlantic Bank, including the
Chairman of the Board, received $200 for each Board meeting and $100 for each
committee meeting attended. Beginning October 1, 1998, outside directors of
Greater Atlantic Bank received $500 for each Board meeting and $250 for each
committee meeting attended. Beginning on that same date, the Chairman was made a
salaried officer of Greater Atlantic Financial and Greater Atlantic Bank and in
those capacities received compensation at the rate of $3,000 per month.
Beginning December 1, 1999, outside directors of Greater Atlantic Bank received
$600 for each Board meeting and $300 for each committee meeting attended.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by Greater Atlantic Financial for services rendered in all
capacities during the fiscal years ended September 30, 2001 and 2000, to the
Chief Executive Officer, the only executive officer of Greater Atlantic
Financial who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
LONG-TERM COMPENSATION(2)
----------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
-------------------------------------- ------------------------- -------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND FISCAL COMPENSATION STOCK UNDERLYING LTIP COMPENSATION
PRINCIPAL POSITIONS YEAR SALARY BONUS (2) AWARDS OPTIONS/SARS PAYOUTS (2)
- --------------------- -------- ---------- ---------- ------------ ---------- ------------ --------- -------------
Carroll E. Amos
President and
Chief Executive 2001 $156,000 $ -- -- -- 45,000 -- --
Officer 2000 $148,500 $ -- -- -- 36,334 -- --
- ----------------------------
(1) Under Annual Compensation, the column titled "Bonus" consists of Board
approved discretionary bonus.
(2) For 2001 and 2000, there were no (a) perquisites over the lesser of $50,000
or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock. For 2000, Greater Atlantic Bank had no
restricted stock or stock related plans in existence.
EMPLOYMENT AGREEMENTS
CARROLL E. AMOS. Effective November 1, 1997, Greater Atlantic Bank
entered into an employment agreement (the "Employment Agreement") with Mr. Amos.
The Employment Agreement is intended to ensure that Greater Atlantic Bank and
Greater Atlantic Financial will be able to retain Mr. Amos who provides a stable
and competent management base. The continued success of Greater Atlantic Bank
and Greater Atlantic Financial depends to a significant degree on the skills and
competence of its executive officers, particularly Mr. Amos, the Chief Executive
Officer.
The Employment Agreement provides for a three-year term for Mr. Amos and
provides that commencing on the first anniversary date and continuing each
anniversary date thereafter the board of directors may extend the Employment
Agreement for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the board of directors
after conducting a performance evaluation of Mr. Amos. The Employment Agreement
provides that Mr. Amos's base salary will be reviewed annually. The base salary
provided
90
for in the Employment Agreement for Mr. Amos for 1998 was $110,000. At the first
anniversary date, Mr. Amos's base salary was increased to $144,000, and at the
second anniversary date, his base salary was increased to $150,000 and at the
third anniversary date, his base salary was increased to $157,200. In addition
to the base salary, the Employment Agreement provides for, among other things,
participation in various employee benefit plans and stock- based compensation
programs, as well as furnishing fringe benefits available to similarly situated
executive personnel. Effective November 1, 1998, the Employment Agreement also
provides for an automobile allowance of $9,600 per year.
The Employment Agreement provides for termination by Greater Atlantic
Bank for cause (as defined in the Employment Agreement) at any time. In the
event Greater Atlantic Bank chooses to terminate Mr. Amos's employment for
reasons other than for cause or, in the event of Mr. Amos's resignation from
Greater Atlantic Bank upon: (i) failure to re-elect Mr. Amos to his current
office; (ii) a material change in Mr. Amos's functions, duties or
responsibilities; (iii) a relocation of Mr. Amos's principal place of employment
by more than 30 miles; (iv) liquidation or dissolution of Greater Atlantic Bank
or Greater Atlantic Financial; or (v) a breach of the Employment Agreement by
Greater Atlantic Bank, Mr. Amos or, in the event of death, Mr. Amos's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to Mr. Amos
during the remaining term of the Employment Agreement. Greater Atlantic Bank
would also continue to pay for Mr. Amos's life, health and disability coverage
for the remaining term of the Employment Agreement. Upon any termination of Mr.
Amos, Mr. Amos is subject to a covenant not to compete with Greater Atlantic
Bank for one year.
Under the Employment Agreement, if involuntary termination or voluntary
termination follows a change in control of Greater Atlantic Bank or Greater
Atlantic Financial, Mr. Amos or, in the event of his death, his beneficiary,
would receive a severance payment generally equal to the greater of: (i) the
payments due for the remaining terms of the agreement, including the value of
stock-based incentives previously awarded to Mr. Amos; or (ii) three times the
average of the three preceding taxable years' annual compensation. Greater
Atlantic 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 Greater
Atlantic 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 $471,600.
All reasonable costs and legal fees paid or incurred by Mr. Amos
pursuant to any dispute or question of interpretation relating to the Employment
Agreement are to be paid by Greater Atlantic Bank if he is successful on the
merits pursuant to a legal judgment, arbitration or settlement. The Employment
Agreement also provides that Greater Atlantic Bank will indemnify Mr. Amos to
the fullest extent allowable under federal law.
T. MARK STAMM. Effective October 1, 1997, Greater Atlantic Bank entered
into an employment agreement (the "Stamm Agreement") with Mr. Stamm. The Stamm
Agreement and subsequent modifications are intended to ensure that Greater
Atlantic Bank and Greater Atlantic Financial would be able to retain the
services of an experienced mortgage banking professional.
The Stamm Agreement was for a one-year term with total compensation
comprised of three elements, a base salary, a production bonus, and a net income
bonus, based on the net income of the then mortgage banking division of Greater
Atlantic Bank. In addition to the salary and bonus provisions, the Stamm
Agreement provides for, among other things, participation in various employee
benefit plans and stock-based compensation programs, as well as furnishing
fringe benefits available to similarly situated personnel. The Stamm Agreement
also provides Mr. Stamm with the use of an automobile.
Effective October 1, 2000, the Stamm Agreement was modified to provide
for his employment as President of Greater Atlantic Mortgage for a two-year
term. Under the modified agreement, Mr. Stamm's compensation continues to be
comprised of three elements, a base salary for Mr. Stamm of $108,000, a
production bonus of two basis points, payable monthly on each loan closed in a
month and a net income bonus. However, the net income bonus was modified to 40%
on the first $1,250,000, 20% on the next $2,670,000 and 40% on anything over
$3,920,000 of the net income, as defined, of Greater Atlantic Mortgage. For the
year ended September 30, 2001, Greater Atlantic Mortgage had net income before
bonus of $1.1 million.
The Stamm Agreement provides for termination by Greater Atlantic Bank
for cause (as defined in the Stamm Agreement) at any time. In the event Greater
Atlantic Bank chose to terminate Mr. Stamm's employment for reasons other than
for cause, Mr. Stamm or, in the event of death, Mr. Stamm's beneficiary would be
entitled to receive an amount generally equal to the remaining base salary and
bonus payments that would have been paid to
91
Mr. Stamm during the remaining term of the Stamm Agreement, but in no event less
than three months. Greater Atlantic Bank would also continue and pay for Mr.
Stamm's life, health and disability coverage for a term of at least six months,
but in no event less than three months.
Under the Stamm Agreement, if involuntary termination or voluntary
termination follows a change in control of Greater Atlantic Bank, Mr. Stamm or,
in the event of his death, his beneficiary, would be entitled to receive a
severance payment generally equal to the greater of: (i) the payments due for
the remaining term of the agreement, including the value of stock-based
incentives previously awarded to Mr. Stamm; or (ii) three times the average of
the base salary, excluding bonuses and all other forms of compensation paid or
to be paid to Mr. Stamm during the three preceding years. During fiscal year
2000, using funds from a deferred compensation plan, Mr. Stamm reimbursed
Greater Atlantic Mortgage $498,876 for a receivable arising from losses
sustained by Greater Atlantic Mortgage and is obligated in the sum of an
additional $500,000 arising from such losses. However, if Greater Atlantic
Mortgage were to terminate Mr. Stamm without cause during the two-year term of
the Stamm Agreement, he would be reimbursed for the $498,876 payment after
deducting any bonus earned and not paid. Further, if during the term of the
Stamm Agreement Mr. Stamm should resign or if Greater Atlantic Mortgage had a
net loss from operations of $250,000 before computing bonus and was closed, Mr.
Stamm's termination would be without any requirement for reimbursement of the
$498,876. Greater Atlantic Bank would also continue Mr. Stamm's life, health,
and disability coverage for thirty-six months. In the event of a change in
control of Greater Atlantic Bank, the total amount of payment due under the
Stamm Agreement, based solely on the base salary paid to Mr. Stamm, and
excluding any benefits under any employee benefit plan which may otherwise
become payable, would equal approximately $324,000.
1997 INCENTIVE STOCK OPTION AND WARRANT PLAN
Under the Greater Atlantic Financial Corp. 1997 Stock Option and Warrant
Plan (the "Option Plan"), which was ratified by shareholders in 1997, options
are granted to employees at the discretion of a committee comprised of
disinterested directors who administer the plan.
The following table provides information with respect to options granted
to the Chief Executive Officer in fiscal year 2001.
Percent of Total
Options / SARs
Number of Securities Granted to
Underlying Options / Employees in Fiscal Exercise or Base
Name SARs Granted (#) Year Price ($ / Sh) Expiration Date
(a) (b) (c) (d) (e)
- ------------------- ------------------------ ------------------------ -------------------- -------------------
Carroll E. Amos 8,666 100% $4.00 40512
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding stock options held
by the Chief Executive Officer as of September 30, 2001. Also reported are the
values for "in-the-money" options which represent the positive spread between
the exercise price of any such existing stock options and the price of the
Common Stock as of the end of the fiscal year on September 30, 2001. At
September 30, 2001, options for 45,000 shares of Common Stock were exercisable
by Mr. Amos.
Fiscal Year End Options / SAR Values
----------------------------------------------------------------------------------------
Shares
Acquired Value of Unexercised In-the-
on Value Number of Securities Underlying Money Options at Fiscal Year
Exercise Realized Unexercised Options at Fiscal Year End ($) (1) Exercisable /
Name (#) ($) End (#) Exercisable / Unexercisable Unexercisable
- ------------------- ------------ ------------ --------------------------------------- --------------------------------
Carroll E. Amos 0 0 45,000 / 0 0 / 0
- -----------------------
(1) Average market value of underlying securities during the fiscal year 2001
($3.785 per share) minus the average exercise or base price of $7.05 per share.
92
Under the stock option plan, as amended, 94,685 warrants, each with a
warrant price of $7.50, were granted in fiscal 1998 to the members of the board
of directors and original stockholders on the basis of one warrant for each
share of stock purchased. Mr. Amos was not granted warrants in fiscal 1998, but
was granted 16,667 options to purchase Greater Atlantic Financial stock at the
$7.50 warrant price.
On December 31, 1999, the Board of Directors voted to increase the
number of shares of common stock with respect to which options may be granted
from 76,667 shares to 225,000 shares. That action was approved by the
stockholders at the annual meeting held on March 14, 2000.
The grants of stock options are designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in Greater Atlantic Financial as an incentive to contribute
to the success of Greater Atlantic Financial, and reward employees for
outstanding performance. All employees of Greater Atlantic Financial, Greater
Atlantic Bank and its subsidiaries are eligible to participate in the stock
option plan. The committee administering the plan will determine the terms of
awards granted to officers and employees. The committee will also determine
whether stock options will qualify as incentive stock options or non-statutory
stock options, as described below, the number of shares subject to each stock
option, the exercise price of each stock option, the method of exercising stock
options, and the time when stock options become exercisable. Only employees may
receive grants of Incentive stock options.
An individual generally will not recognize taxable income upon the grant
of a non-statutory stock option or incentive stock option or upon the exercise
of an incentive stock option, provided the individual does not dispose of the
shares received through the exercise of the incentive stock option for at least
one year after the date the individual receives the shares in connection with
the option exercise and two years after the date of grant of the stock option (a
"disqualifying disposition"). No compensation deduction will generally be
available to Greater Atlantic Financial as a result of the exercise of incentive
stock options unless there has been a disqualifying disposition. In the case of
a non-statutory stock option and in the case of a disqualifying disposition of
shares received in connection with the exercise of an incentive stock option, an
individual will recognize ordinary income upon exercise of the stock option (or
upon the disqualifying disposition) in an amount equal to the amount by which
the fair market value of the common stock exceeds the exercise price of the
stock option. The amount of any ordinary income recognized by an optionee upon
the exercise of a non-statutory stock option or due to a disqualifying
disposition will be a deductible expense to Greater Atlantic Financial for tax
purposes. In the case of limited rights, the holder will recognize any amount
paid to him or her upon exercise in the year in which the payment is made and
Greater Atlantic Financial will be entitled to a deduction for federal income
tax purposes of the amount paid.
Stock options are exercisable for a period of time following the date on
which the optionee ceases to perform services for Greater Atlantic Bank or
Greater Atlantic Financial, except that in the event of death or disability,
options accelerate and become fully vested and could be exercisable for up to
one year thereafter or such other period of time as determined by Greater
Atlantic Financial. In the case of death or disability, stock options may be
exercised for a period of 12 months or such other period of time as determined
by the committee. However, any incentive stock options exercised more than three
months following the date the employee ceases to perform services as an employee
would be treated essentially as a non-statutory stock option. In the event of
retirement, if the optionee continues to perform services as a director or
consultant on behalf of Greater Atlantic Bank, Greater Atlantic Financial or an
affiliate, unvested options and awards would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
consultant or director. In the event of death, disability or normal retirement,
Greater Atlantic Financial, if requested by the optionee, or the optionee's
beneficiary, could elect, in exchange for vested options, to pay the optionee,
or the optionee's beneficiary in the event of death, the amount by which the
fair market value of the common stock exceeds the exercise price of the options
on the date of the employee's termination of employment.
TRANSACTIONS WITH RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of Greater Atlantic 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.
Greater Atlantic Bank currently makes loans to its executive officers
and directors on the same terms and conditions offered to the general public.
Greater Atlantic Bank's policy provides that all loans made by Greater Atlantic
Bank to its executive officers and directors be made in the ordinary course of
business, on substantially the
93
same terms, including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. The aggregate balance of
loans to directors and executive officers is $540,000 and $445,000 at September
30, 2001 and 2000, respectively. Such loans were made by Greater Atlantic 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.
Greater Atlantic Financial's policy is that all transactions between
Greater Atlantic Financial 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 Greater Atlantic Financial 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 Greater
Atlantic Financial not having any interest in the transaction.
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, Greater Atlantic Financial is
required by federal law to file reports with, and otherwise comply with, the
rules and regulations of the Office of Thrift Supervision. Greater Atlantic is
subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation, as the deposit insurer. Greater Atlantic 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. Greater Atlantic 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 Greater Atlantic'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 the Congress,
could have a material adverse impact on Greater Atlantic Financial, Greater
Atlantic and their operations. Certain of the regulatory requirements applicable
to Greater Atlantic and to Greater Atlantic Financial are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-KSB does not purport to be a complete description of such statutes and
regulations and their effects on Greater Atlantic and Greater Atlantic
Financial.
HOLDING COMPANY REGULATION
Greater Atlantic Financial is a unitary savings and loan holding company
under federal law because Greater Atlantic is its only insured subsidiary. Under
prior law, a unitary savings and loan holding company, such as Greater Atlantic
Financial was not generally restricted as to the types of business activities in
which it could engage, provided that its subsidiary savings association
continued to be a qualified thrift lender. See "--Federal Savings Institution
Regulation--QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial 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, grand-fathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies
existing prior to May 4, 1999, so long as the association continues to comply
with the QTL Test. Greater Atlantic Financial does not qualify for the
grandfather and is limited to such activities. If Greater Atlantic Financial
acquires another savings institution or savings bank that is not a problem
institution, that meets the qualified thrift lender test and that the Office of
Thrift Supervision considers to be a savings institution, Greater Atlantic
Financial would become a multiple savings and loan holding company if the
acquired institution is held as a separate subsidiary and not merged into
Greater Atlantic. As a multiple savings and loan holding company, Greater
Atlantic Financial would generally be limited to activities permissible for bank
holding companies under Section 4(c)(8) of the Association Holding Company Act,
subject to the prior approval of the Office of Thrift Supervision, and to
certain activities authorized by Office of Thrift Supervision regulation.
94
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of Greater Atlantic Financial and
institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Greater Atlantic must
notify the Office of Thrift Supervision 30 days before declaring any dividend to
Greater Atlantic Financial. 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 HOLDING COMPANY. Under the Federal Change in Bank
Control Act, a notice must be submitted to the Office of Thrift Supervision if
any person (including a company), or group acting in concert, seeks to acquire
10% or more of the outstanding voting stock of Greater Atlantic Financial,
unless the Office of Thrift Supervision has found that the acquisition will not
result in a change of control of the Greater Atlantic Financial. Under the
Federal Change in Bank Control Act, the Office of Thrift Supervision has 60 days
from the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that so acquires control
would then be subject to regulation as a savings and loan holding company.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
CAPITAL REQUIREMENTS. The Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable
95
fair market values. Overall, the amount of supplementary capital included as
part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk- based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At September 30, 2001, Greater Atlantic met each of its capital
requirements.
The following table presents Greater Atlantic Bank's capital position at
September 30, 2001.
CAPITAL
-------------------------
EXCESS
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
Tangible ........... $20,365 $ 5,548 $14,817 5.51% 1.50%
Core (Leverage) .... 20,365 14,794 5,571 5.51 4.00
Risk-based ......... 21,175 14,910 6,265 11.36 8.00
PROMPT CORRECTIVE REGULATORY ACTION. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Greater Atlantic is a member of the
Savings Association Insurance Fund. The Federal Deposit Insurance Corporation
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the Federal Deposit Insurance Corporation and currently range
from zero basis points for the healthiest institutions to 27 basis points for
the riskiest.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of First Federal. Management cannot predict
what insurance assessment rates will be in the future.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the Savings Association
Insurance Fund. During 2001, FICO payments for Savings Association Insurance
Fund members approximated 2.07 basis points.
Greater Atlantic's assessment rate for fiscal 2001 ranged from 184 to
196 basis points. The Federal Deposit Insurance Corporation has authority to
increase insurance assessments. A significant increase in the premiums payable
to the Savings Association Insurance Fund would likely have an adverse effect on
the operating expenses
96
and results of operations of Greater Atlantic. Management cannot predict what
insurance assessments rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of Greater Atlantic does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
September 30, 2001, Greater Atlantic's limit on loans to one borrower was $3.2
million, and Greater Atlantic's largest aggregate outstanding balance of loans
to one borrower was $3.1 million.
QTL TEST. The Home Owners' Loan Act requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2001, Greater Atlantic maintained 100% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger. An
application to and the prior approval of the Office of Thrift Supervision is
required prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under Office of Thrift
Supervision regulations (i.e., generally, examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with Office of Thrift Supervision. If an application is not required,
the institution must still provide prior notice to Office of Thrift Supervision
of the capital distribution if, like Greater Atlantic, it is a subsidiary of a
holding company. In the event Greater Atlantic's capital fell below its
regulatory requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, Greater Atlantic's ability to make
capital distributions could be restricted. In addition, the Office of Thrift
Supervision could prohibit a proposed capital distribution by any institution,
which would otherwise be permitted by the regulation, if the Office of Thrift
Supervision determines that such distribution would constitute an unsafe or
unsound practice.
LIQUIDITY. The OTS has issued a final rule implementing a recent
amendment to the HOLA removing a requirement to maintain a specified level of
liquid assets and placing savings institutions on the same basis as other
insured depositories that do not have a statutorily mandated liquidity
requirement. The OTS final rule requires savings institutions and their service
corporations maintain sufficient liquidity to ensure their safe and sound
operation.
ASSESSMENTS. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed based upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
Greater Atlantic's latest quarterly thrift financial report. The assessments
paid by Greater Atlantic for the fiscal year ended September 30, 2001, totaled
$75,000.
TRANSACTIONS WITH RELATED PARTIES. Greater Atlantic's authority to
engage in transactions with "affiliates" (e.g., any company that controls or is
under common control with an institution, including Greater Atlantic Financial
and its non-savings institution subsidiaries) is limited by federal law. The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate
97
amount of covered transactions with all affiliates is limited to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Greater Atlantic's authority to extend credit to executive officers,
directors and 10% stockholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. An exception exists for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. The law limits both the individual and aggregate
amount of loans Greater Atlantic may make to insiders based, in part, on Greater
Atlantic's capital position and requires certain board approval procedures to be
followed.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1.0 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 to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
FEDERAL HOME LOAN BANK SYSTEM
Greater Atlantic is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Greater
Atlantic, as a member of the Federal Home Loan Bank, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
Greater Atlantic was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at September 30, 2001 of $3.9 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. Recent legislation has changed the
structure of the Federal Home Loan Banks funding obligations for insolvent
thrifts, revised the capital structure of the Federal Home Loan Banks and
implemented entirely voluntary membership for Federal Home Loan Banks.
Management cannot predict the effect that these changes may have with respect to
its Federal Home Loan Bank membership.
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 over $5.7 million to
and including $41.3 million; a 10% reserve ratio is applied above
98
$41.3. The first $5.7 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. Greater Atlantic 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. Greater Atlantic Financial and Greater Atlantic 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 Greater Atlantic Bank or Greater Atlantic Financial. Greater
Atlantic 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 Greater Atlantic Bank makes
"non-dividend distributions" to Greater Atlantic Financial 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 Greater Atlantic Bank's taxable income.
Non-dividend distributions include distributions in excess of Greater Atlantic
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 Greater Atlantic 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 Greater Atlantic Bank's bad debt
reserve. Thus, any dividends to Greater Atlantic Financial that would reduce
amounts appropriated to Greater Atlantic Bank's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for Greater
Atlantic 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, Greater Atlantic Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includible 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 Greater Atlantic
Bank. Greater Atlantic Bank does not intend to pay dividends that would result
in a recapture of any portion of its bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which Greater Atlantic Financial's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). Greater Atlantic Financial
expects to be subject to the AMT in fiscal 2002 and 2003.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. Greater Atlantic
Financial may exclude from its income 100% of dividends received from Greater
Atlantic 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 Greater Atlantic Financial
and Greater Atlantic Bank will not file a consolidated tax return, except that
if Greater Atlantic Financial or Greater Atlantic Bank owns more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
99
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 Greater Atlantic Bank and
Greater Atlantic Financial. Virginia taxable income is equal to federal taxable
income with certain adjustments. Significant modifications include the
subtraction from federal taxable income of interest or dividends on obligations
or securities of the United States that are exempt from state income taxes, and
a recomputation of the bad debt reserve deduction on reduced modified taxable
income.
DELAWARE TAXATION. As a Delaware company not earning income in Delaware,
Greater Atlantic Financial 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 Greater Atlantic Financial
conducts business outside of Delaware, Greater Atlantic Financial may be
considered doing business and subject to additional taxing jurisdictions outside
of Delaware.
LEGAL MATTERS
Certain legal matters, including matters relating to federal income tax
considerations, for Greater Atlantic Financial and the Trust will be passed upon
by Muldoon Murphy & Faucette LLP, Washington, D.C., special counsel to Greater
Atlantic Financial and the Trust. Muldoon Murphy & Faucette LLP will rely on the
opinion of Morris, James, Hitchens & Williams LLP, special Delaware counsel to
the Trust as to certain matters of Delaware law.
EXPERTS
The consolidated financial statements included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their reports appearing elsewhere herein and in the Registration Statement and
have been included herein in reliance upon such reports given upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form SB-2 filed
by Greater Atlantic Financial and the Trust with the Securities and Exchange
Commission under the Securities Act, with respect to the convertible preferred
securities, the convertible debentures and the guarantee. This prospectus does
not contain all the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information with respect to
Greater Atlantic Financial and the securities offered by this prospectus,
reference is made to the registration statement, including the exhibits to the
registration statement and documents incorporated by reference. Statements
contained in this prospectus concerning the provisions of such documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Securities and Exchange Commission.
We file periodic reports, proxy statements and other information with
the Securities and Exchange Commission. Our filings are available to the public
over the Internet at the Securities and Exchange Commission's web site at
http://www.sec.gov. You may also inspect and copy these materials at the public
reference facilities of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information.
100
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...............................................................F-2
Consolidated Statements of Financial Condition at September 30, 2001 and 2000..............F-3
Consolidated Statements of Operations for years ended September 30, 2001 and 2000..........F-4
Consolidated Statements of Changes in Stockholders' Equity for years ended
September 30, 2001 and 2000 .............................................................. F-5
Consolidated Statements of Cash Flows for years ended September 30, 2001 and 2000..........F-6
Notes to Consolidated Financial Statements.................................................F-8
F-1
Independent Auditors' Report
Board of Directors and Stockholders
Greater Atlantic Financial Corp.
Reston, Virginia
We have audited the accompanying consolidated statements of financial condition
of Greater Atlantic Financial Corp. and Subsidiaries as of September 30, 2001
and 2000, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of Greater Atlantic Financial's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Greater Atlantic
Financial Corp. and Subsidiaries at September 30, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Washington, D.C.
October 31, 2001
F-2
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
---------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
----------------------
Assets
Cash and cash equivalents............................................. $ 1,456 $ 2,312
Interest bearing deposits............................................. 1,962 3,405
Investment securities (Notes 3 and 10)
Available-for-sale.................................................. 146,366 86,580
Held-to-maturity.................................................... 22,739 27,600
Trading............................................................. 1,312 22,766
Loans held for sale (Note 4).......................................... 14,683 5,599
Loans receivable, net (Notes 4, 10 and 16)............................ 164,603 132,698
Accrued interest and dividends receivable (Note 5).................... 2,777 2,494
Deferred income taxes (Note 11)....................................... 1,520 1,520
Federal Home Loan Bank stock, at cost................................. 3,910 3,560
Foreclosed real estate (Note 7)....................................... - 172
Premises and equipment, net (Note 6).................................. 6,350 4,859
Goodwill (Note 2)..................................................... 1,284 1,378
Prepaid expenses and other assets..................................... 1,642 1,353
-------- --------
Total assets.......................................................... $370,604 $296,296
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits (Note 8)..................................................... $229,982 $188,387
Advance payments from borrowers for taxes and insurance............... 220 264
Accrued expenses and other liabilities (Note 9)....................... 1,399 3,942
Advances from the FHLB and other borrowings (Note 10)................. 117,823 82,836
-------- --------
Total Liabilities..................................................... $349,424 $275,429
-------- --------
Commitments and contingencies (Note 12)
Stockholders' Equity (Notes 13 and 14)
Preferred stock $.01 par value - 2,500,000 shares authorized,
none outstanding................................................. $ - $ -
Common stock, $.01 par value - 10,000,000 shares authorized;
3,007,434 shares outstanding..................................... 30 30
Additional paid-in-capital......................................... 25,132 25,132
Accumulated deficit................................................ (3,450) (2,928)
Accumulated other comprehensive loss............................... (532) (1,367)
-------- --------
Total stockholders' equity............................................ 21,180 20,867
-------- --------
Total liabilities and stockholders' equity............................ $370,604 $296,296
======== ========
See accompanying notes to consolidated financial statements.
F-3
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
SEPTEMBER 30,
----------------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
----------------------
Interest income
Loans....................................................... $12,658 $ 8,462
Investments................................................. 10,965 9,310
------- -------
Total interest income......................................... 23,623 17,772
------- -------
Interest expense
Deposits (Note 8)........................................... 11,629 7,668
Borrowed money.............................................. 5,618 5,426
------- -------
Total interest expense........................................ 17,247 13,094
------- -------
Net interest income........................................... 6,376 4,678
Provision for loan losses (Note 4)............................ 55 13
------- -------
Net interest income after provision for loan losses........... 6,321 4,665
------- -------
Noninterest income
Fees and service charges.................................... 1,129 641
Gain on sale of loans....................................... 4,335 2,466
Gain (loss) on sale of investment securities................ 194 (1,025)
Gain (loss) on sale of real estate owned.................... 45 14
Other operating income (loss)............................... 4 (42)
------- -------
Total noninterest income...................................... 5,707 2,054
------- -------
Noninterest expense
Compensation and employee benefits.......................... 6,054 4,738
Occupancy................................................... 1,607 1,194
Professional services....................................... 818 794
Advertising................................................. 522 547
Deposit insurance premium................................... 36 52
Furniture, fixtures and equipment........................... 668 488
Data processing............................................. 887 410
Other real estate owned expenses (Note 7)................... 3 10
Other operating expenses.................................... 1,955 2,724
------- -------
Total noninterest expense..................................... 12,550 10,957
------- -------
Loss before income tax benefit................................ (522) (4,238)
------- -------
Income tax benefit (Note 11).................................. - (600)
------- -------
Net (loss) income............................................. $ (522) $(3,638)
======= =======
Basic and diluted (loss) income per share (Note 15)........... $ (0.17) $ (1.21)
======= =======
See accompanying notes to consolidated financial statements.
F-4
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
--------------
Net loss....................................................... $ (522) $(3,638)
-------- -------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities..................... 835 (485)
-------- -------
Other comprehensive income (loss).............................. 835 (485)
-------- -------
Comprehensive income (loss).................................... $ 313 $(4,123)
======== ========
See accompanying notes to consolidated financial statements.
Greater Atlantic Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL ACCUMULATED OTHER TOTAL
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
--------- ------ ---------- ----------- ------------- -------------
(IN THOUSANDS)
Balance at September 30, 1999 . $ - $ 30 $25,132 $ 710 $ (882) $24,990
Other comprehensive income..... - - - - (485) (485)
Net loss for period........... - - - (3,638) - (3,638)
-------- -------- --------- --------- -------- --------
Balance at September 30, 2000.. - 30 25,132 (2,928) (1,367) 20,867
Other comprehensive income..... - - - - 835 835
Net loss for period............ - - - (522) - (522)
-------- -------- --------- --------- -------- --------
Balance at September 30, 2001.. $ - $ 30 $25,132 $(3,450) $ (532) $21,180
======== ======== ========= ========= ======== ========
See accompanying notes to consolidated financial statements.
F-5
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Cash flows from operating activities
Net loss.......................................................... $ (522) $ (3,638)
Adjustments to reconcile net loss to net cash
provided by operating activities..................................
Provision for loan losses......................................... 55 13
Amortization of excess of purchase price over assets acquired..... 93 -
Amortization of deposit acquisition adjustment.................... 143 -
Amortization of loan acquisition adjustment....................... (27) -
Depreciation and amortization..................................... 529 376
Deferred income taxes............................................. - (196)
Proceeds from sale of trading securities.......................... 20,164 5,578
Proceeds from repayments of trading securities.................... 1,354 -
Amortization of trading security premiums......................... 38 -
Net loss (gain) on trading securities............................. 11 580
Realized (gain) loss on sale of investments....................... (135) 451
Realized (gain) loss on sale of mortgaged-backed securities....... (70) (6)
Amortization of investment security premiums...................... 1,467 624
Amortization of mortgage-backed securities premiums............... 264 224
Amortization of deferred fees..................................... (238) (127)
Discount accretion net of premium amortization.................... 108 80
Loss on disposal of fixed assets.................................. 2 67
Gain on sale of foreclosed real estate............................ (45) (14)
Gain on sale of loans held for sale............................... (4,335) (2,466)
(Increase) decrease in assets:
Loans originated for sale......................................... (249,924) (117,037)
Proceeds from sale of loans originated for sale................... 245,175 121,339
Accrued interest and dividend receivable.......................... (284) (1,045)
Prepaid expenses and other assets................................. (344) 124
Deferred loan fees collected, net of deferred costs incurred...... 44 (64)
Increase (decrease) in liabilities:
Accrued expenses and other liabilities............................ (2,544) 2,772
Income taxes payable.............................................. 55 -
-------- ---------
Net cash provided by operating activities........................ $ 11,034 $ 7,635
-------- ---------
F-6
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Cash flow from investing activities
Net increase in loans ........................................... $(31,844) $(76,075)
Purchases of premises and equipment ............................. (2,022) (3,081)
Proceeds from sales of foreclosed real estate ................... 217 310
Purchases of investment securities .............................. (91,454) (30,006)
Proceeds from sale of investment securities ..................... 11,803 15,626
Proceeds from repayments of investment securities ............... 16,221 7,366
Purchases of mortgage-backed securities ......................... (14,898) (29,169)
Proceeds from sale of mortgage-backed securities ................ 6,307 1,960
Proceeds from repayments of mortgage-backed securities .......... 16,292 13,549
Purchases of FHLB stock ......................................... (1,650) (4,270)
Proceeds from sale of FHLB stock ................................ 1,300 2,723
Acquisition, net of cash acquired ............................... - (1,379)
-------- ---------
Net cash used in investing activities ........................... (89,728) (102,446)
======== =========
Cash flow from financing activities
Net increase in deposits ........................................ 41,452 59,380
Net advances from FHLB .......................................... 28,400 8,450
Net borrowings on reverse repurchase agreements ................. 6,587 30,995
Increase in advance payments by borrowers for taxes and insurance (44) -
-------- ---------
Net cash provided by financing activities ....................... 76,395 98,825
-------- ---------
Increase in cash and cash equivalents ........................... (2,299) 4,014
-------- ---------
Cash and cash equivalents, at beginning of period ............... 5,717 1,703
-------- ---------
Cash and cash equivalents, at end of period ..................... $ 3,418 $ 5,717
========= =========
See accompanying notes to consolidated financial statements
F-7
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Greater Atlantic Financial Corp. (GAFC or the "Company") is a bank
holding company whose principal activity is the ownership and management of
Greater Atlantic Bank (GAB or "the Bank"), and its wholly owned subsidiary,
Greater Atlantic Mortgage Corporation (GAMC). The Bank originates commercial,
mortgage and consumer loans and receives deposits from customers located
primarily in Virginia, Washington, D.C. and Maryland. The Bank operates under a
federal bank charter and provides full banking services.
GAMC was incorporated as a separate entity on June 11, 1998 and began
independent operations on September 1, 1998. GAMC is involved primarily in the
origination and sale of single-family mortgage loans and, to a lesser extent,
multi-family residential and second mortgage loans. GAMC also originates loans
for the Bank's portfolio.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GAFC and
its wholly owned subsidiaries, GAB and GAMC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
RISK AND UNCERTAINTIES
In its normal course of business, Greater Atlantic Financial 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.
Greater Atlantic Financial 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 Greater Atlantic Financial'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 Greater Atlantic Financial.
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, 2001 and September 30, 2000, the allowance for loan
losses and valuation of real estate are adequate based on information currently
available. A worsening or protracted economic decline would increase the
likelihood of losses due to credit and market risks and could create the need
for substantial additional loan loss reserves. See discussion of regulatory
matters in Note 13.
CONCENTRATION OF CREDIT RISK
Greater Atlantic Financial's primary business activity is with customers
located in Maryland, Virginia and the District of Columbia. Greater Atlantic
Financial primarily originates residential loans to customers throughout these
areas, most of who are residents local to Greater Atlantic Financial's business
locations. Greater Atlantic Financial 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, 2001.
F-8
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
Investment securities, which Greater Atlantic Financial 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 Greater Atlantic Financial
intends to hold for indefinite periods of time, use for asset/liability
management or that are to be sold in response to changes in interest rates,
prepayment risk, the need to increase regulatory capital or other similar
factors are classified as available-for-sale and carried at fair value with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity. If a sale does occur, gains and losses are
recognized as a component of earnings at the time of the sale. The amortization
of premiums and accretion of discounts are recorded on the level yield
(interest) method.
Investment securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at unpaid principal balances, net of
unearned discounts resulting from add-on interest, participation or whole-loan
interests owned by others, undisbursed loans in process, deferred loan fees, and
allowances for loan losses.
Loans are placed on non-accrual status when the principal or interest is
past due more than 90 days or when, in management's opinion, collection of
principal and interest is not likely to be made in accordance with a loan's
contractual terms.
The allowance for loan losses provides for the risk of losses inherent
in the lending process. The allowance for loan losses is based on periodic
reviews and analyses of the loan portfolio which include consideration of such
factors as the risk rating of individual credits, the size and diversity of the
portfolio, economic conditions, prior loss experience and results of periodic
credit reviews of the portfolio. The allowance for loan losses is increased by
provisions for loan losses charged against income and reduced by charge-offs,
net of recoveries. In management's judgment, the allowance for loan losses is
considered adequate to absorb losses inherent in the loan portfolio at September
30, 2001.
Greater Atlantic Financial 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, Greater Atlantic Financial 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, Greater Atlantic Financial 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.
F-9
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. Greater Atlantic Financial 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
Greater Atlantic Financial originates and sells loans and participating
interest in loans generally without retaining servicing rights. Loans are sold
to provide Greater Atlantic Financial with additional funds and to generate
gains from mortgage banking operations. Loans originated for sale are carried at
the lower of cost or market. When a loan and the related servicing are sold
Greater Atlantic Financial recognizes any gain or loss at the time of sale.
When servicing is retained on a loan that is sold, Greater Atlantic
Financial recognizes a gain or loss based on the present value of the difference
between the average constant rate of interest it receives, adjusted for a normal
servicing fee, and the yield it must pay to the purchaser of the loan over the
estimated remaining life of the loan. Any resulting net premium is deferred and
amortized over the estimated life of the loan using a method approximating the
level yield (interest) method. Loans of $162,000 and $16.4 million were sold
with servicing rights retained during the years ended September 30, 2001 and
September 30, 2000, respectively. Greater Atlantic Financial 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.
F-10
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 11).
CASH AND CASH EQUIVALENTS
Greater Atlantic Financial considers cash and interest bearing deposits
in other banks as cash and cash equivalents for purposes of preparing the
statement of cash flows.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for the reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 is effective for financial statements for
periods beginning after December 15, 1997. Presently, Greater Atlantic
Financial's comprehensive income and loss is from unrealized gains and losses on
certain investment securities.
STOCK-BASED COMPENSATION
Greater Atlantic Financial measures compensation cost for stock options
using the intrinsic value method prescribed by APB Opinion No. 25, which
requires compensation expense to be recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. Greater
Atlantic Financial provides pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS 123, "Accounting for Stock-Based Compensation," had been
applied. See Note 14 for the pro forma net income and pro forma earnings per
share disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current method of presentation. These reclassifications have no effect on the
results of operations previously reported.
F-11
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITION
On August 22, 2000, Greater Atlantic Financial completed the acquisition
of certain assets of Dominion Savings Bank, FSB, Front Royal, Virginia. The
acquisition is being accounted for as a purchase and accordingly, the financial
statements include assets and liabilities acquired at fair value and results of
operations from the date of acquisition. Shareholders of Dominion were paid
approximately $1.1 million in cash, resulting in goodwill of approximately $1.4
million, which is being amortized, on a straight-line basis over 15 years. Since
the Dominion acquisition occurred on August 22, 2000, its impact upon Greater
Atlantic Financial's consolidated results of operations for the fiscal year
ended September 30, 2000 was not significant.
The following unaudited pro forma information presents the results of
operations of Greater Atlantic Financial as if the acquisition had occurred on
October 1, 1999.
YEAR ENDED
SEPTEMBER 30,
2000
--------------
(IN THOUSANDS)
Total interest income..................................................... $ 20,811
Net loss.................................................................. $ (4,809)
Diluted loss per common share............................................. $ (1.60)
This pro forma result of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
F-12
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
Available-for-Sale, September 30, 2001 COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
Investment securities
SBA notes................................... $106,124 $112 $442 $105,794
CMOs........................................ 6,971 58 35 6,994
Corporate debt securities................... 974 51 - 1,025
-------- ------- ------- --------
114,069 221 477 113,813
-------- ------- ------- --------
Mortgage-backed securities
FNMA notes.................................. 19,059 59 98 19,020
GNMA notes.................................. 1,797 1 10 1,788
FHLMC notes................................. 11,770 21 46 11,745
-------- ------- ------- --------
32,626 81 154 32,553
-------- ------- ------- --------
$146,695 $302 $631 $146,366
======== ======= ======= ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
Held-to-Maturity, September 30, 2001 COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
Investment securities
SBA notes................................... $16,460 $ - $504 $15,956
Corporate debt securities................... 1,029 - 38 991
-------- ------- ------- --------
17,489 - 542 16,947
-------- ------- ------- --------
Mortgaged-backed securities
FNMA notes.................................. 2,974 49 - 3,023
FHLMC notes................................. 2,276 27 - 2,303
-------- ------- ------- --------
5,250 76 - 5,326
-------- ------- ------- --------
$22,739 $76 $542 $22,273
======== ======= ======= ========
F-13
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE, SEPTEMBER 30, 2000 COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
Investment securities
Equity securities........................... $ 2,157 $87 $ 73 $ 2,171
SBA notes................................... 39,967 - 480 39,487
FHLB notes.................................. 1,000 - 24 976
CMOs........................................ 3,410 3 55 3,358
Corporate debt securities................... 1,967 - 43 1,924
-------- ------- ------- --------
48,501 90 675 47,916
-------- ------- ------- --------
Mortgage-backed securities
FNMA notes.................................. 26,880 4 329 26,555
GNMA notes.................................. 1,430 - 26 1,404
FHLMC notes................................. 10,772 2 69 10,705
-------- ------- ------- --------
39,082 6 424 38,664
-------- ------- ------- --------
$87,583 $96 $1,099 $86,580
======== ======= ======= ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY, SEPTEMBER 30, 2000 COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
Investment securities
SBA notes................................... $19,878 $- $ 696 $19,182
Corporate debt securities................... 1,037 - 72 965
-------- ------- ------- --------
20,915 - 768 20,147
-------- ------- ------- --------
Mortgaged-backed securities
FNMA notes.................................. 3,868 - 155 3,713
FHLMC notes................................. 2,817 - 78 2,739
-------- ------- ------- --------
6,685 - 233 6,452
-------- ------- ------- --------
$27,600 $- $1,001 $26,599
======== ======= ======= ========
The weighted average interest rate on investments was 7.04% and 8.61%
for the years ended September 30, 2001 and 2000, respectively.
F-14
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRADING ACTIVITIES
Trading assets, at fair value, consist of the following:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
FHLB notes............................................ $ - $ 1,946
Mortgaged-backed securities........................... 1,312 20,820
------ -------
$1,312 $22,766
====== =======
The net losses on trading activities included in earnings are as
follows:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
FHLB notes............................................ $ - $ (54)
Mortgaged-backed securities........................... (11) (526)
------ ------
$(11) $(580)
====== ======
Proceeds from the sale of available for sale securities were $18.1
million and $15.1 million for the years ended September 30, 2001 and 2000,
respectively. Gross realized gains were $194,000 for the year ended September
30, 2001 compared to gross losses of $1.0 million for the year ended September
30, 2000. The amortized cost and estimated fair value of securities at September
30, 2001, by contractual maturity, are as follows:
F-15
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMORTIZED MARKET
Available-for-Sale, September 30, 2001 COST VALUE
--------- --------
(IN THOUSANDS)
Amounts maturing in:
One year or less......................................... $ 1,308 $ 1,305
After one year through five years........................ 1,440 1,461
After five years through ten years....................... 111,321 111,047
After ten years.......................................... 32,626 32,553
-------- --------
Mortgaged-backed securities.............................. $146,695 $146,366
======== ========
AMORTIZED MARKET
Held-to-Maturity, September 30, 2001 COST VALUE
--------- --------
(IN THOUSANDS)
Amounts maturing in:
One year or less......................................... $ 1,708 $ 1,648
After one year through five years........................ 1,459 1,395
After five years through ten years....................... 14,322 13,904
After ten years.......................................... 5,250 5,326
------- -------
Mortgaged-backed securities.............................. $22,739 $22,273
======= =======
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.
F-16
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
Loans receivable consists of the following:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Mortgage loans:
Single-family........................................... $ 99,232 $ 84,354
Multi-family............................................ 634 1,053
Construction............................................ 19,110 14,537
Commercial real estate.................................. 17,977 10,765
Land loans.............................................. 5,431 3,158
-------- --------
Total mortgage loans....................................... 142,384 113,867
Commercial loans........................................... 11,675 11,221
Consumer loans............................................. 37,372 21,887
-------- --------
Total loans................................................ 191,431 146,975
-------- --------
Due borrowers on loans-in process.......................... (11,756) (7,953)
Deferred loan fees......................................... 245 149
Allowance for loan losses.................................. (810) (765)
Unearned (discounts) premium............................... 176 (109)
-------- --------
(12,145) (8,678)
-------- --------
$179,286 $138,297
======== ========
Loans held for sale........................................ $ 14,683 $ 5,599
Loans receivable, net...................................... 164,603 132,698
-------- --------
$179,286 $138,297
======== ========
Loans held for sale are all single-family mortgage loans.
The activity in allowance for loan losses is summarized as follows:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Balance, beginning......................................... $ 765 $ 590
Provision for loan losses.................................. 55 13
Dominion reserves.......................................... 100 225
Charge-offs................................................ (131) (63)
Recoveries................................................. 21 -
----- -----
Balance, ending............................................ $ 810 $ 765
===== =====
The amount of loans serviced for others totaled $16.0 million and $18.1
million as of September 30, 2001 and September 30, 2000, respectively.
F-17
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for uncollected interest, established for mortgage loans
which are delinquent for a period of 90 days or more, amounted to $12,000 and
$3,000 as of September 30, 2001 and September 30, 2000, 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
$506,000 and $194,000 as of September 30, 2001, and September 30, 2000,
respectively.
5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable consist of the following:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Investments................................................ $ 1,655 $ 1,463
Loans receivable........................................... 1,059 951
Accrued dividends on FHLB stock............................ 63 80
-------- -------
$ 2,777 $ 2,494
======== =======
6. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Furniture, fixtures and equipment.......................... $ 4,170 $ 3,172
Leasehold improvements..................................... 2,723 2,225
Land....................................................... 1,648 1,137
-------- -------
8,541 6,534
-------- -------
Less: Allowance for depreciation and amortization.......... 2,191 1,675
-------- -------
$ 6,350 $ 4,859
======== =======
7. FORECLOSED REAL ESTATE
Foreclosed real estate is summarized as follows:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Real estate acquired through settlement of loans........... $ - $ 172
======= =======
F-18
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost of operations for foreclosed real estate consists of the
following:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Income:
Gain on sale............................................... $ 45 $ 14
Expense:
Loss on sale............................................... - -
Provision for (recovery of) loss........................... - -
Operating expenses......................................... 3 10
----- -----
3 10
----- -----
Gain (loss)................................................ $ 42 $ 4
===== =====
Activity in the allowance for losses on foreclosed real estate is
summarized as follows:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Balance, beginning......................................... $ - $ 5
Provision (recovery) charged to income..................... - -
Charge-offs, net of recoveries............................. - (5)
----- -----
Balance, ending............................................ $ - $ -
===== =====
F-19
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS
Deposits are summarized as follows:
RANGES OF
CONTRACTUAL
INTEREST
SEPTEMBER 30, AMOUNT RATES %
- ----------------------------------------------- ---------- ------------ ------
(DOLLARS IN THOUSANDS)
Savings accounts............................... $ 4,641 0.00 - 3.25% 2.0%
NOW/money market accounts...................... 71,229 0.00 - 3.63% 31.0
Certificates of deposit........................ 147,365 3.54 - 9.00% 64.0
Non-interest bearing demand deposits........... 6,747 0.00% 2.9
-------- -------
$229,982 100.0%
======== =======
RANGES OF
CONTRACTUAL
INTEREST
SEPTEMBER 30, AMOUNT RATES %
- ----------------------------------------------- ---------- ------------ ------
(DOLLARS IN THOUSANDS)
Savings accounts............................... $ 5,808 2.50 - 3.25% 3.1%
NOW/money market accounts...................... 46,263 0.00 - 6.11% 24.6
Certificates of deposit........................ 131,893 4.45 - 9.00% 70.0
Non-interest bearing demand deposits........... 4,423 0.00% 2.3
-------- -------
$188,387 100.0%
======== =======
Certificates of deposit as of September 30, 2001 mature as follows:
YEARS ENDING SEPTEMBER 30, AMOUNT
- -------------------------------------------------------------------- ------------
(IN THOUSANDS)
2002................................................................ $114,344
2003................................................................ 26,688
2004................................................................ 3,185
2005................................................................ 1,095
2006................................................................ 2,053
--------
$147,365
========
F-20
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposit accounts consists of the following:
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000
---- ----
(IN THOUSANDS)
NOW/money market accounts.................. $ 2,744 $ 1,773
Savings accounts........................... 136 40
Certificates of deposit.................... 8,749 5,855
------- -------
$11,629 $ 7,668
======= =======
Deposits, including certificates of deposit, with balances in excess of
$100,000 totaled $52.2 million and $28.7 million at September 30, 2001, and
September, 30, 2000, respectively.
9. DEFERRED COMPENSATION PLAN
On October 30, 1997, Greater Atlantic Financial adopted a deferred
compensation plan. Under the deferred compensation plan, an employee may elect
to participate by directing that all or part of his or her compensation be
credited to a deferral account. The election must be made prior to the beginning
of the calendar year. The deferral account bears interest at 6% per year. The
amounts credited to the deferral account are payable in preferred stock or cash
at the election of the Board of Directors on the date Greater Atlantic Financial
announces a change in control or the date three years from the date the
participant elects to participate in the deferred compensation plan. The
liability associated with the plan was $ 0 and $500,000 at September 30, 2001
and 2000, respectively.
F-21
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank has $36.7 million Credit availability as of September 30, 2001
from the Federal Home Loan Bank of Atlanta (FHLB), which it uses to fund loans
originated by Greater Atlantic Mortgage Corporation. Any advances in excess of
$10 million are required to be collateralized with eligible securities. The
credit availability is at the discretion of the FHLB.
The following table sets forth information regarding the Bank's borrowed
funds:
AT OR FOR THE
YEARS ENDED
SEPTEMBER 30,
----------------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
FHLB Advances:
Average balance outstanding................................... $60,784 $55,691
Maximum amount outstanding at any month-end during the period. 74,500 76,800
Balance outstanding at end of period.......................... 74,500 46,100
Weighted average interest rate during the period.............. 5.59% 6.14%
Weighted average interest rate at end of period............... 4.47% 6.33%
Reverse repurchase agreements:
Average balance outstanding................................... 43,217 31,100
Maximum amount outstanding at any month-end during the period. 53,279 39,605
Balance outstanding at end of period.......................... 43,323 36,736
Weighted average interest rate during the period.............. 5.14% 6.45%
Weighted average interest rate at end of period............... 3.32% 6.62%
The Bank has pledged certain investments with carrying values of $89.3
million at September 30, 2001, to collateralize advances from the FHLB.
First mortgage loans in the amount of $27.8 million are available to be
pledged as collateral for the advances at September 30, 2001.
F-22
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The following is a summary of the income tax provision (benefit):
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000
---- ----
(IN THOUSANDS)
Current - Federal benefit.................................. $ - $ -
State benefit.............................................. - -
------ ------
- -
Deferred - Federal and state (benefit) provision........... - (600)
------ ------
$ - $(600)
====== ======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income as a result of the following differences:
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000
---- ----
(IN THOUSANDS)
Federal tax benefit........................................ $ (188) $(1,441)
State tax benefit.......................................... (21) (212)
(Increase) decrease in benefit resulting from:
Change in the valuation allowance.......................... 282 1,233
Permanent differences...................................... 25 20
Change in effective deferred tax rate...................... - -
Other...................................................... (98) (200)
------- --------
Income tax benefit......................................... $ - $ (600)
======= ========
F-23
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of Greater Atlantic Financial's deferred tax
assets and liabilities are as follows:
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
Deferred tax assets
Net operating loss carryforwards........................ $3,605 $2,603
Allowance for loan losses............................... 319 226
Loans held for sale..................................... 16 18
Core deposit intangible................................. 67 67
Deferred loan fees...................................... 163 98
Compensation payable.................................... - 226
Net discounts on second trusts.......................... 21 32
Other................................................... 46 33
------ ------
Total deferred tax assets.................................. 4,237 3,303
------ ------
Deferred tax liabilities
FHLB stock dividends.................................... 39 39
Accelerated depreciation................................ 150 44
------ ------
Total deferred tax liabilities............................. 189 83
------ ------
Net deferred tax assets.................................... 4,048 3,220
Less: Valuation allowance.................................. 2,528 1,700
------ ------
Total...................................................... $1,520 $1,520
====== ======
Management has provided a valuation allowance for net deferred tax
assets, as they are unable to determine the timing of the generation of future
taxable income.
At September 30, 2001, Greater Atlantic Financial has net operating loss
carryforwards for federal income tax purposes of approximately $9.1 million,
which expire in the years 2006 to 2020. As a result of the change in ownership
of the Bank, approximately $1.7 million of the total net operating loss
carryforwards are subject to an annual usage limitation of approximately
$114,000.
F-24
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
On July 28, 1999, First Guaranty Mortgage Corporation filed a complaint
against Greater Atlantic Financial and it's wholly owned subsidiary GAB and GAMC
in Circuit Court of Arlington, Virginia. This complaint alleged breach of
contract and related claims against these three companies and employees of GAMC
who formerly were employed at First Guaranty. First Guaranty alleged that GAMC,
GAB and GAFC wrongfully interfered with the business of First Guaranty's
Frederick, Maryland office by hiring the employees of that office. First
Guaranty sought approximately $5,000,000 in compensatory and $20,000,000 in
punitive damages. In 2000, Greater Atlantic Financial entered into a settlement,
which resolved this claim. The resulting provision for litigation loss of $1.25
million has been reflected in other operating expenses in the accompanying
statement of operations for the year ended September 30, 2000.
Greater Atlantic Financial is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit, and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement Greater Atlantic
Financial has in particular classes of financial instruments.
Greater Atlantic Financial's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. Greater
Atlantic Financial uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
At September 30, 2001, Greater Atlantic Financial had outstanding
commitments to originate and purchase loans and undisbursed construction
mortgages aggregating approximately $99.4 million. Fixed rate commitments are at
market rates as of the commitment dates and generally expire within 60 days. In
addition, Greater Atlantic Financial was contingently liable under unfunded
lines of credit for approximately $50.2 million and standby letters of credit
for approximately $93,000.
Effective October 1, 2000, Greater Atlantic Financial renewed an
employment agreement with the executive in charge of its mortgage division which
calls for a base salary of $108,000 plus bonuses based on loan closings and net
income levels. The term of this agreement is for two years and can be
automatically extended. Effective November 1, 1997, Greater Atlantic Financial
entered into a three year employment agreement with the President and Chief
Executive Officer of the Bank. The agreement can be and was automatically
extended for an additional year effective December 1, 2000. The agreement
provides for a base salary of $157,200 per year.
F-25
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL COMMITMENTS
Greater Atlantic Financial has entered into lease agreements for the
rental of certain properties expiring on various dates through February 28,
2019. The future minimum rental commitments as of September 30, 2001, for all
noncancellable lease agreements, are as follows:
RENTAL
YEARS ENDING SEPTEMBER 30, COMMITMENTS
----------------------------------------------------------------- -----------
(IN
THOUSANDS)
2002.............................................................. $ 1,303
2003.............................................................. 1,307
2004.............................................................. 1,332
2005.............................................................. 1,273
2006.............................................................. 1,307
Thereafter........................................................ 6,101
-------
Total............................................................. $12,623
=======
Net rent expense for the years ended September 30, 2001 and September
30, 2000 was $1.3 million and $1.1 million, respectively.
13. REGULATORY MATTERS
Generally, annual dividends to shareholders are limited to the amount of
current year net income, plus the total net income for the preceding two years,
adjusted for any prior year distributions. Under certain circumstances,
regulatory approval would be required before making a capital distribution. The
Bank did not pay any cash dividends during the year ended September 30, 2001.
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, 2001 and September 30, 2000, the
Bank was classified as a well capitalized financial institution.
As part of FDICIA, the minimum capital requirements that the Bank is
subject to are as follows: 1) tangible capital equal to at least 1.5% of
adjusted total assets, 2) core capital equal to at least 4% of adjusted total
assets and 3) total risk-based capital equal to at least 8% of risk-based
assets.
F-26
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the Bank's capital position at September 30, 2001
and September 30, 2000:
REQUIRED REQUIRED ACTUAL ACTUAL
AT SEPTEMBER 30, 2001 BALANCE PERCENT BALANCE PERCENT SURPLUS
- --------------------------------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS)
Tangible........................ $ 5,548 1.50% $20,365 5.51% $14,817
Core............................ $14,794 4.00% $20,365 5.51% $ 5,571
Risk-based...................... $14,910 8.00% $21,175 11.36% $ 6,265
REQUIRED REQUIRED ACTUAL ACTUAL
AT SEPTEMBER 30, 2000 BALANCE PERCENT BALANCE PERCENT SURPLUS
- --------------------------------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS)
Tangible........................ $ 4,442 1.50% $20,295 6.85% $15,853
Core............................ $11,845 4.00% $20,295 6.85% $ 8,450
Risk-based...................... $11,841 8.00% $21,060 14.23% $ 9,219
The following is a reconciliation of the Bank's net worth as reported to
the OTS on GAAP capital as presented in the accompanying financial statements.
SEPTEMBER 30,
--------------
2001 2000
---- ----
(IN THOUSANDS)
GAAP capital................................................. $21,118 $20,494
Unrealized (gains) losses on available for sale securities... 531 1,179
Goodwill..................................................... (1,284) (1,378)
------- -------
Tangible capital............................................. 20,365 20,295
Adjustments.............................................. - -
------- -------
Core capital................................................. 20,365 20,295
Allowance for general loss reserves...................... 810 765
------- -------
Risk-based capital........................................... $21,175 $21,060
======= =======
Failure to meet any of the three capital requirements causes savings
institutions to be subject to certain regulatory restrictions and limitations
including a limit on asset growth, and the requirement to obtain regulatory
approval before certain transactions or activities are entered into.
14. STOCKHOLDERS' EQUITY
Effective November 14, 1998, Greater Atlantic Financial 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. 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, 2001, 94,685 warrants were
outstanding at an exercise price of $7.50.
F-27
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary represents the activity under the Plan:
NUMBER EXERCISE EXPIRATION
OF SHARES PRICE DATE
--------- -------- ----------
Balance outstanding at September 30, 1999..................... 58,334
Options granted............................................... 17,500 $6.00 12/01/2009
-------
Balance outstanding at September 30, 2000..................... 75,834
Options granted............................................... 63,166 $4.00 12/01/2009
-------
Balance outstanding and exercisable at September 30, 2001..... 139,000
=======
A summary of the stock options outstanding and exercisable as of
September 30, 2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------- ----------- ------------ -------- ----------- --------
$7.50 16,667 6.2 $7.50 16,667 $7.50
$8.38 41,667 7.2 $8.38 41,667 $8.38
$6.00 17,500 8.2 $6.00 17,500 $6.00
$4.00 63,166 9.2 $4.00 63,166 $4.00
Greater Atlantic Financial has adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but it continues to measure compensation cost for
the stock options using the intrinsic value method prescribed by APB Opinion No.
25. For the years ended September 30, 2001 and 2000, the fair value of stock
options has been estimated using the Black-Scholes option pricing model with the
following assumptions: Risk free interest rates of 5.25% and 6.21% for the years
ended September 30, 2001 and 2000, respectively, expected volatility of 61% and
41% for 2001 and 2000, respectively, dividend pay out rate of zero and an
expected option life of ten years. Using these assumptions, the average weighted
fair value of the stock options granted are $1.59 and $3.79 for 2001 and 2000,
respectively.
Because Greater Atlantic Financial's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-28
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If Greater Atlantic Financial had elected to recognize compensation cost
based on the value at the grant dates with the method prescribed by SFAS 123,
net income would have been changed to the pro forma amounts indicated below:
YEARS ENDED SEPTEMBER 30,
----------------------------------------
2001 2000
---------------- ------------------
PRO PRO
REPORTED FORMA REPORTED FORMA
-------- ----- -------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net (loss).................................. $ (522) $ (622) $(3,638) $(3,638)
Basic and diluted earnings (loss) per share. $(0.17) $(0.21) $ (1.21) $ (1.22)
15. EARNINGS PER SHARE OF COMMON STOCK
Greater Atlantic Financial reports earning per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires two presentations of earning per share - "basic" and
"diluted." Basic earnings per share are computed by dividing income available to
common stockholders (the numerator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been
issued.
The numerator in calculating both basic and diluted earnings per share
for each period is reported net income. The denominator is based on the
following weighted average number of common shares.
YEARS ENDED
SEPTEMBER 30,
-----------------
2001 2000
---- ----
Basic............................................ 3,007,434 3,007,434
Diluted.......................................... 3,007,434 3,007,434
16. RELATED PARTY TRANSACTIONS
The Bank offers loans to its officers, directors, employees and related
parties of such persons. These loans are made in the ordinary course of business
and, in the opinion of management, do not involve more than the normal risk of
collectibility, or present other unfavorable features. Such loans are made on
the same terms as those prevailing at the time for comparable transactions with
non-affiliated persons. The aggregate balance of loans to directors, officers
and other related parties is $540,000 and $445,000 as of September 30, 2001 and
September 30, 2000, respectively.
17. MARKET VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments, which is provided
below, is based on the requirements of Financial Accounting Standard Board
Statement of Financial Accounting Standards No. 107, "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.
F-29
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is reasonable to
estimate that value:
A. Cash and interest-bearing deposits -- Fair value is estimated to be
carrying value.
B. Investment securities -- Fair value is estimated using quoted market
prices or market estimates.
C. Loans receivable -- For residential mortgage loans, fair value is
estimated by discounting future cash flows using the current rate for similar
loans.
D. Deposits -- For passbook savings, checking and money market accounts,
fair value is estimated at carrying value. For fixed maturity certificates of
deposit, fair value is estimated by discounting future cash flows at the
currently offered rates for deposits of similar remaining maturities.
E. Advances from the FHLB of Atlanta and reverse repurchase agreements
- -- Fair value is estimated by discounting future cash flows at the currently
offered rates for advances of similar remaining maturities.
F. Off-balance sheet instruments -- The fair value of commitments is
determined by discounting future cash flows using the current rate for similar
loans. Commitments to extend credit for other types of loans and standby letters
of credit were determined by discounting future cash flows using current rates.
F-30
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair value of financial instruments is
summarized as follows:
SEPTEMBER 30,
-----------------------------------------
2001 2000
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------ ----------- ------- ----------
(IN THOUSANDS)
Assets:
Cash and interest bearing deposits.......... $ 3,418 $ 3,418 $ 5,717 $ 5,717
Investment securities....................... 170,417 169,951 136,946 135,945
Loans receivable............................ 179,286 182,370 138,297 134,827
Liabilities:
Deposits.................................... 229,982 232,706 188,387 188,051
Borrowings.................................. 117,832 119,075 82,836 82,738
Off-balance sheet instruments:
Commitments to extend credit................ - 1,275 - 480
Loans in process............................ - - - 21
18. EMPLOYEE BENEFIT PLANS
Greater Atlantic Financial 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 Greater Atlantic
Financial. Greater Atlantic Financial made no contributions for the years ended
September 30, 2001 and 2000.
19. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Cash paid during period for interest on
deposits and borrowings....................................... $ 3,344 $ 2,521
Transfer of investments to trading classification............. - 22,766
Transfer of loans to foreclosed assets........................ - 281
F-31
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT REPORTING
Greater Atlantic Financial has two reportable segments, banking and
mortgage banking. The Bank operates retail deposit branches throughout the
greater Washington, D.C./Baltimore metropolitan area. Greater Atlantic Banking
segment provides retail consumer and small businesses with deposit products such
as demand, transaction, savings accounts and certificates of deposit and lending
products, such as residential and commercial real estate, construction and
development, consumer and commercial business loans. Further, Greater Atlantic
Banking segment invests in residential real estate loans purchased from GAMC and
others, and also invests in mortgage-backed and other securities. The mortgage
banking segment activities, which are conducted principally through GAMC,
include the origination of residential real estate loans either for the Bank's
portfolio or for sale into the secondary market with servicing released.
The accounting policies of the segments are the same as those described
in Note 1. Greater Atlantic Financial evaluates performance based on net
interest income, noninterest income, and noninterest expense. The total of these
three items is the reportable segment's net contribution.
Greater Atlantic Financial's reportable segments are strategic business
units that offer different services in different geographic areas. They are
managed separately because each segment appeals to different markets and,
accordingly, requires different technology and marketing strategies.
Since Greater Atlantic Financial derives a significant portion of its
revenue from interest income and interest expense, the segments are reported
below using net interest income. Because Greater Atlantic Financial also
evaluates performance based on noninterest income and noninterest expense, these
measures of segment profit and loss are also presented.
TOTAL TOTAL
MORTGAGE REPORTABLE INTERSEGMENT OPERATING
FOR THE YEARS ENDED SEPTEMBER 30, BANKING BANKING SEGMENTS ELIMINATIONS EARNINGS
---------------------------------- ---------- --------- ---------- ------------- ---------
(IN THOUSANDS)
Net interest income:(1)
2001............................. $ 6,147 $ 174 $ 6,321 $ - $ 6,321
2000............................. 4,436 229 4,665 - 4,665
Noninterest income:
2001............................. $ 922 $ 4,877 $ 5,799 $ (92) $ 5,707
2000............................. (875) 2,980 2,105 (51) 2,054
Noninterest expense:
2001............................. $ 8,229 $ 4,413 $ 12,642 $ 92 $ 12,550
2000............................. 6,059 4,949 11,008 51 10,957
Net income:
2001............................. $ (1,160) $ 638 $ (522) $ - $ (522)
2000............................. (2,093) (1,545) (3,638) - (3,638)
Segment assets:
2001............................. $370,731 $ 16,291 $ 387,022 $(16,418) $ 370,604
2000............................. 308,227 6,368 314,595 (18,299) 296,296
- --------------------------
(1) Segment net interest income reflects income after provision for loan
losses.
F-32
GREATER ATLANTIC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Recent Accounting Standards
In July 2001, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 102 "Selected Loan Loss Allowance Methodology and
Documentation Issues" ("SAB 102"). SAB 102 sets forth guidelines for determining
the allowance for loan losses under generally accepted accounting principles. In
addition, SAB 102 sets forth guidelines for documentation by registrants in
support of the allowance for loan losses. Greater Atlantic Financial adopted SAB
102 on October 1, 2001. Greater Atlantic Financial's banking subsidiary has a
detailed loan classification and estimated loss calculation methodology in
effect, which is the basis for the determination of the allowance for loan
losses. This methodology and related documentation thereof, has been in effect
since Greater Atlantic Financial acquired Greater Atlantic Banking subsidiary in
1997. Greater Atlantic Financial believes that adoption of SAB 102 will have no
impact on the financial statements.
In June 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 changes the
accounting for business combinations, requiring that all business combinations
be accounted for using the purchase method and that intangible assets be
recognized as assets apart from goodwill if they arise from contractual or other
legal rights, or if they are separable or capable of being separated from the
acquired entity and sold, transferred, licensed, rented, or exchanged. SFAS No.
141 is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 specifies that financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. SFAS No. 142 is effective for fiscal years beginning
and after December 15, 2001.
SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 are reassessed and the remaining
amortization periods adjusted accordingly. Previously recognized intangible
assets deemed to have indefinite lives shall be tested for impairment. Goodwill
recognized on or before June 30, 2001, shall be assigned to one or more
reporting units and shall be tested for impairment as of the beginning of the
fiscal year in which SFAS No. 142 is initially applied in it's entirety.
Greater Atlantic Financial will adopt SFAS 142 on October 1, 2001 and,
accordingly, will discontinue amortization of the exiting goodwill. The adoption
of SFAS 142 will reduce amortization expense approximately $93,000 in fiscal
2002.
F-33
You should rely only on the information contained in this prospectus or that to
which we have referred you. We have not authorized anyone to provide you with
any additional or different information. This prospectus does not constitute an
offer to sell, or the solicitation of an offer to buy, any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation would be unlawful. The affairs of Greater Atlantic Financial Corp.
or the Trust may change after the date of this prospectus. Delivery of this
prospectus and the sales of securities made hereunder does not mean otherwise.
TABLE OF CONTENTS
PAGE
-----
Summary........................................1
Risk Factors...................................8
Recent Developments...........................14
Selected Consolidated Financial Data..........17
Use of Proceeds...............................19
Price Range of Common Stock and Dividends.....19
Capitalization................................20
Accounting and Regulatory Treatment...........20
The Rights Offering...........................21
Description of the Trust......................25
Description of the Convertible Preferred
Securities....................................26
Description of the Convertible Debentures.....39
Description of the Guarantee..................47
Relationship among the Convertible Preferred
Securities and the Convertible Debentures
and the Guarantee...........................50
Book-Entry Issuance...........................51
Description of Capital Stock..................53
Federal Income Tax Consequences...............55
ERISA Considerations..........................59
Our Business..................................60
Management's Discussion and Analysis of
Financial
Condition and Results of Operations.........74
Management of Greater Atlantic Financial......88
Regulation and Supervision....................94
Federal and State Taxation....................99
Legal Matters................................100
Experts......................................100
Where You Can Find Information...............100
Index to Consolidated Financial Statements...F-1
================================================================================
UP TO $11,000,000
CONVERTIBLE PREFERRED SECURITIES
ISSUABLE UPON EXERCISE OF SUBSCRIPTION RIGHTS
GREATER ATLANTIC FINANCIAL
CAPITAL TRUST I
6.50% CUMULATIVE CONVERTIBLE TRUST
PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10.00 PER
CONVERTIBLE PREFERRED SECURITY)
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED,
ON A SUBORDINATED BASIS, AS DESCRIBED IN THIS
PROSPECTUS BY
GREATER ATLANTIC FINANCIAL CORP.
[COMPANY LOGO]
---------------------------------
PROSPECTUS
---------------------------------
,2002
------------
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General and Business Corporations Law of the
State of Delaware (being Chapter 1 of Title 8 of the Delaware Statutes), Article
Tenth of the Registrant's Certificate of Incorporation provides as follows:
TENTH:
A. Each person who was or is made a party or is threatened
to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or
was a Director or an Officer of the Corporation or is or was serving at
the request of the Corporation as a Director, Officer, employee or agent
of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit
plan (hereinafter an "indemnitee"), whether the basis of such proceeding
is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than
such law permitted the Corporation to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in
Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such
indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of
this Article TENTH shall include the right to be paid by the Corporation
the expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter and "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an indemnitee in his or her capacity
as a Director or Officer (and not in any other capacity in which service
was or is rendered by such indemnitee, including, without limitation,
services to an employee benefit plan) shall be made only upon delivery
to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which
there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses
under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this
Article TENTH shall be contract rights and such rights shall continue as
to an indemnitee who has ceased to be a Director, Officer, employee or
agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article TENTH is
not paid in full by the Corporation within sixty days after a written
claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable
period shall be twenty days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and (ii) in any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard
of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create
a presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or
by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is
not entitled to be indemnified, or to such advancement of expenses,
under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article TENTH shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense,
to protect itself and any Director, Officer, employee or agent of the
Corporation or subsidiary or Affiliate or another corporation,
partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time
to time by the Board of Directors, grant rights to indemnification and
to the advancement of expenses to any employee or agent of the
Corporation to the fullest extent of the provisions of this Article
TENTH with respect to the indemnification and advancement of expenses of
Directors and Officers of the Corporation.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable in
connection with the sale and distribution of the securities being registered,
other than underwriting discounts and commissions. All of such expenses will be
paid by Greater Atlantic. All amounts shown are estimates, except the SEC
registration fee:
SEC registration fee..................................................$ 2,629
Trustee, Conversion Agent and Subscription Agreement fees...............12,000
Printing, EDGAR, postage and mailing expenses...........................80,000
Fees and expenses of counsel............................................85,000
Accounting and related expenses.........................................40,000
Blue Sky fees and expenses..............................................20,000
Financial Advisor fee..................................................100,000
Nasdaq Listing fee......................................................34,750
Certificate printing.....................................................5,000
Miscellaneous...........................................................20,621
Total.................................................................$400,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 27. EXHIBITS.
Exhibit
Number Description
- ------ -----------
4.1 Articles of Incorporation of Greater Atlantic Financial Corp.(1)
4.2 By-Laws of Greater Atlantic Financial Corp.(1)
4.3 Form of Indenture for Convertible Junior Subordinated Debentures.(2)
4.4 Form of Convertible Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.3).(2)
4.5 Certificate of Trust of Greater Atlantic Capital Trust I.(2)
4.6 Trust Agreement of Greater Atlantic Capital Trust I.(2)
4.7 Form of Amended and Restated Trust Agreement of Greater Atlantic Capital Trust I.(2)
4.8 Form of Convertible Preferred Securities Certificate of Greater Atlantic Capital Trust I (included
as Exhibit D to Exhibit 4.7).(2)
4.9 Form of Convertible Preferred Securities Guarantee Agreement of Greater Atlantic Capital
Trust I.(2)
4.10 Form of Agreement as to Expenses and Liabilities of Greater Atlantic Capital Trust I (included as
Exhibit C to Exhibit 4.7).(2)
5.1 Opinion of Muldoon Murphy & Faucette LLP.(2)
5.2 Opinion of Morris, James, Hitchens & Williams LLP.(2)
8.1 Opinion of Muldoon Murphy & Faucette LLP as to certain tax matters.(2)
12.1 Calculation of ratios of earnings to fixed charges.(2)
23.1 Consent of BDO Seidman, LLP Incorporation.*
23.2 Consent of Muldoon Murphy & Faucette LLP (included in opinions filed as Exhibits 5.1 and 8.1).(2)
23.3 Consent of Morris, James, Hitchens & Williams LLP (included in opinion filed as exhibit 5.2).(2)
24.1 Powers of Attorney (included as part of signature pages).(2)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Indenture for Convertible Junior Subordinated
Debentures.(2)
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Amended and Restated Trust Agreement for
Greater Atlantic Capital Trust I.(2)
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Guarantee Agreement relating to Greater Atlantic
Capital Trust I.(2)
99.1 Form of Dear Valued Shareholder Letter.*
99.2 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees.*
99.3 Form of Letter to Our Clients.*
99.4 Form of Subscription Order Form.*
99.5 Form of Subscription Instruction Form.*
- -----------------------
* Filed herewith.
(1) Incorporated herein by reference to the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission on April 13, 1999.
(2) Previously filed.
ITEM 28. UNDERTAKINGS.
(1)(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to
directors, officers and controlling persons of Greater Atlantic
Financial Corp. pursuant to the foregoing provisions, or
otherwise, Greater Atlantic Financial Corp. has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable.
(b) In the event that a claim for indemnification against such
liabilities (other than the payment by Greater Atlantic
Financial Corp. of expenses incurred or paid by a director,
officer or controlling person of Greater Atlantic Financial
Corp. 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,
Greater Atlantic Financial Corp. 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 Act and will be governed by the final
adjudication of such issue.
(2) The Greater Atlantic Financial Corp. will:
(a) For determining any liability under the
Securities Act, treat the information omitted
from the form of prospectus filed as part of
this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities
Act (Sections 230.424(b)(1), (4) or 230.497(h))
as part of this Registration Statement as of the
time the Commission declared it effective.
(b) For determining any liability under the
Securities Act, treat each post-effective
amendment that contains a form of prospectus as
a new registration statement for the securities
offered in the registration statement, and that
offering of the securities at that time as the
initial bona fide offering of those securities.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Greater
Atlantic Capital Trust I certifies that it has reasonable grounds to believe
that it meets all of the requirements of filing on Form SB-2 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Reston, Commonwealth of Virginia, on
February 1, 2002.
GREATER ATLANTIC CAPITAL TRUST I
By: Greater Atlantic Financial Corp.,
as Depositor
By: /s/ Carroll E. Amos
-------------------------------------------
Carroll E. Amos
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Greater
Atlantic Financial Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements of filing on Form SB-2 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Reston, Commonwealth of Virginia, on
February 1, 2002.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E. Amos
-------------------------------------------
Carroll E. Amos
President and Chief Executive Officer
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 date indicated.
Signature Title Date
- --------- ----- ----
/s/ Carroll E. Amos Director, President and February 1, 2002
- ----------------------------------- Chief Executive Officer
Carroll E. Amos (principal executive officer)
/s/ David E. Ritter Chief Financial Officer February 1, 2002
- ----------------------------------- (principal accounting and
David E. Ritter financial officers)
* Director and Chairman February 1, 2002
- ----------------------------------- of the Board
Charles W. Calomiris
* Director February 1, 2002
- -----------------------------------
Paul J. Cinquegrana
* Director February 1, 2002
- -----------------------------------
Jeffrey M. Gitelman
* Director February 1, 2002
- -----------------------------------
Jeffrey W. Ochsman
* Director February 1, 2002
- -----------------------------------
James B. Vito
*Pursuant to the Power of Attorney included as part of the signature pages to
the Registration Statement filed on Form SB-2 for Greater Atlantic Financial
Corp. on December 20, 2001.
/s/ Carroll E. Amos Director, President and February 1, 2002
- ----------------------------------- Chief Executive Officer
Carroll E. Amos (principal executive officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.1 Articles of Incorporation of Greater Atlantic Financial Corp.(1)
4.2 By-Laws of Greater Atlantic Financial Corp.(1)
4.3 Form of Indenture for Convertible Junior Subordinated Debentures.(2)
4.4 Form of Convertible Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.3).(2)
4.5 Certificate of Trust of Greater Atlantic Capital Trust I.(2)
4.6 Trust Agreement of Greater Atlantic Capital Trust I.(2)
4.7 Form of Amended and Restated Trust Agreement of Greater Atlantic Capital Trust I.(2)
4.8 Form of Convertible Preferred Securities Certificate of Greater Atlantic Capital Trust I (included
as Exhibit D to Exhibit 4.7).(2)
4.9 Form of Convertible Preferred Securities Guarantee Agreement of Greater Atlantic Capital
Trust I.(2)
4.10 Form of Agreement as to Expenses and Liabilities of Greater Atlantic Capital Trust I (included as
Exhibit C to Exhibit 4.7).(2)
5.1 Opinion of Muldoon Murphy & Faucette LLP.(2)
5.2 Opinion of Morris, James, Hitchens & Williams LLP.(2)
8.1 Opinion of Muldoon Murphy & Faucette LLP as to certain tax matters.(2)
12.1 Calculation of ratios of earnings to fixed charges.(2)
23.1 Consent of BDO Seidman, LLP Incorporation.*
23.2 Consent of Muldoon Murphy & Faucette LLP (included in opinions filed as Exhibits 5.1 and
8.1).(2)
23.3 Consent of Morris, James, Hitchens & Williams LLP (included in opinion filed as exhibit 5.2).(2)
24.1 Powers of Attorney (included as part of signature pages).(2)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Indenture for Convertible Junior Subordinated
Debentures.(2)
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Amended and Restated Trust Agreement for
Greater Atlantic Capital Trust I.(2)
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of
Wilmington Trust Company, as trustee under the Guarantee Agreement relating to Greater Atlantic
Capital Trust I.(2)
99.1 Form of Dear Valued Shareholder Letter.*
99.2 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees.*
99.3 Form of Letter to Our Clients.*
99.4 Form of Subscription Order Form.*
99.5 Form of Subscription Instruction Form.*
- -----------------------
* Filed herewith.
(1) Incorporated herein by reference to the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission on April 13, 1999.
(2) Previously filed.