U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25045
GRAND CENTRAL FINANCIAL CORP.
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(Name of small business issuer in its charter)
Delaware 34-1877137
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 Main Street, Wellsville, Ohio 43968
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 532-1517
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
As of December 31, 2002, the Registrant's revenues were $7.7 million.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of February 27, 2003 was approximately $16,854,231. As of
February 27, 2003, there were 1,645,921 shares of the Registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders
to be held on April 23, 2003 are incorporated herein by reference to Part III of
this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One): YES ; NO X
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INDEX
PAGE
PART I
Item 1. Description of Business.......................................................... 3
Item 2. Description of Property.......................................................... 29
Item 3. Legal Proceedings................................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders.............................. 29
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......................... 30
Item 6. Management's Discussion and Analysis or Plan of Operation........................ 31
Item 7. Financial Statements............................................................. 40
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................. 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................................ 41
Item 10. Executive Compensation........................................................... 41
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................. 41
Item 12. Certain Relationships and Related Transactions................................... 41
PART IV
Item 13. Exhibits and Reports on Form 8-K................................................. 42
Item 14. Controls and Procedures.......................................................... 43
SIGNATURES
CERTIFICATIONS
2
Certain statements contained in this report that are not historical facts
are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements may materially differ from
those expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services. The Company does not undertake, and specifically
disclaims 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Grand Central Financial Corp. (the "Company") was organized as a Delaware
corporation in September 1998 as the holding company for Central Federal Savings
and Loan Association (the "Association") in connection with the Association's
conversion from a mutual to stock form of organization. As a savings and loan
holding company, the company is subject to regulation by the Office of Thrift
Supervision (the "OTS"). Currently, the Company does not transact any material
business other than through the Association. At December 31, 2002, the Company
had total assets of $110.5 million and stockholders' equity of $17.6 million.
The Association is a community-oriented savings institution which was
originally organized in 1892. The Association's principal business consists of
attracting deposits from the general public in its primary market area and
investing those deposits and other funds, generated from operations, and from
Federal Home Loan Bank of Cincinnati ("FHLB") advances, primarily in
conventional mortgage loans secured by single-family residences. The Association
also invests in consumer loans, primarily indirect automobile loans and loans
originated directly or on the Association's behalf by automobile dealers at the
time of sale. To a significantly lesser extent, the Association invests in home
equity, multi-family, commercial real estate, construction and land loans. The
Association also invests in mortgage-backed securities, primarily those
guaranteed or insured by government agencies such as Ginnie Mae, Fannie Mae and
Freddie Mac, and other investment grade securities. The Association's revenues
are derived principally from the generation of interest and fees on loans
originated and, to a lesser extent, interest and dividends on investment
securities. The Association's primary sources of funds are retail savings
deposits and, to a lesser extent, principal and interest payments on loans and
investment securities, FHLB advances and proceeds from the sale of loans. The
Association operates through its home office located in Wellsville, Ohio, and a
full service branch office in East Liverpool, Ohio.
MARKET AREA AND COMPETITION
The Association's primary market area is a competitive market for financial
services and the Association faces significant competition both in making loans
and in attracting deposits. The Association faces direct competition from a
number of financial institutions operating in its market area, many with a
state-wide or regional presence, and in some cases, a national presence. Many of
these financial institutions are significantly larger and have greater financial
resources than the Association. The Association's competition for loans comes
principally from savings institutions, mortgage banking companies, commercial
banks and credit unions. Its most direct competition for deposits has
historically come from savings institutions and commercial banks. In addition,
the Association faces increasing
3
competition for deposits and other financial products from non-bank institutions
such as brokerage firms and insurance companies in mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by single-family
residences. At December 31, 2002, the Association had gross loans receivable of
$63.1 million, of which $48.4 million were single-family, residential mortgage
loans, or 76.6% of the Association's gross loans receivable. The remainder of
the portfolio consisted of: consumer loans of $13.0 million, or 20.6% of gross
loans receivable; $128,000 of construction and land loans, or .20% of gross
loans receivable; $1.5 million of multi-family mortgage and commercial real
estate loans, or 2.4% of gross loans receivable; and $120,000 of commercial
loans, or .2% of gross loans receivable. At that same date, 70.1% of the
Association's loan portfolio had fixed interest rates. The Association had no
single-family residential mortgage loans held-for-sale at December 31, 2002.
The types of loans that the Association may originate are subject to
federal and state law and regulations. Interest rates charged by the Association
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. In turn,
these factors are affected by, among other things, economic conditions, fiscal
policies of the federal government, the monetary policies of the Federal Reserve
Board and legislative tax policies.
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
AT DECEMBER 31,
2002 2001 2000
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------- ------------------------- --------------------------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family(1)................... $ 48,365 76.62% $ 59,246 74.57% $ 64,234 73.93%
Multi-family and commercial........ 1,536 2.44 1,381 1.74 1,185 1.36
Construction....................... 128 0.20 675 0.85 810 0.93
------ ----- ------ ----- ------ -----
Total real estate loans...... 50,029 79.26 61,302 77.16 66,229 76.22
------ ----- ------ ----- ------ -----
Consumer loans:
Home equity loans.................. 1,378 2.18 2,416 3.04 3,038 3.50
Automobile......................... 10,719 16.98 15,549 19.57 17,292 19.90
Other.............................. 876 1.39 -- -- -- --
------ ----- ------ ----- ------ -----
Total consumer loans......... 12,973 20.55 17,965 22.61 20,330 23.40
Commercial loans...................... 120 0.19 184 0.23 331 0.38
------ ----- ------ ----- ------ -----
Total loans.................. 63,122 100.00% 79,451 100.00% 86,890 100.00%
====== ====== ======
Less:
Deferred loan origination
fees and discounts.............. (196) (287) (271)
Allowance for loan losses.......... (361) (373) (354)
------ ------ -----
Total loans, net................ $ 62,565 $ 78,791 $ 86,265
========= ======== ========
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(1) Includes loans held-for-sale.
4
LOAN MATURITY. The following table shows the remaining contractual maturity
of the Association's commercial and construction loans at December 31, 2002. The
table does not include the effect of future principal prepayments.
AT DECEMBER 31, 2002
----------------------------------------------------
CONSTRUCTION (1) COMMERCIAL TOTAL
---------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Amounts due in:
One year or less........................... $ -- $ 46 $ 46
------- ------- -------
After one year:
More than one year to three years....... 46 46
More than three years to five years..... 146 146
More than five years to 10 years........ 329 329
More than 10 years to 15 years.......... 128 547 675
More than 15 years...................... -- 541 541
------- ------- -------
Total amount due..................... $ 128 $ 1,655 $ 1,783
======= ======= =======
---------------------------
(1) Construction loans, which consist of loans to the owner for the
construction of single-family residences, automatically convert to
permanent financing upon completion of the construction phase.
The following table sets forth, at December 31, 2002, the dollar amount of
commercial loans contractually due after December 31, 2003, and whether such
loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2003
--------------------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(DOLLARS IN THOUSANDS)
Commercial loans.................... $ 1,417 $ 238 $ 1,655
======= ===== =======
ORIGINATION OF LOANS. The Association's mortgage lending activities are
conducted through its home office and its branch office. Although the
Association may originate both adjustable-rate and fixed-rate mortgage loans, a
substantial majority of the Association's loan originations have been fixed-rate
mortgage loans. The Association's ability to originate loans depends upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future level of interest rates. The
Association has not emphasized the origination of adjustable-rate mortgage loans
due to the relatively low demand for such loans in the Association's primary
market area. The Association sells a portion of the mortgage loans that it
originates, primarily to Freddie Mac, and retains only loans that bear an
interest rate above levels established from time to time by the Association's
board of directors based on current market rates. At December 31, 2002, there
were no single-family residential mortgage loans categorized as held-for-sale.
The Association also emphasizes the origination of home equity loans and
construction loans secured primarily by owner-occupied properties.
5
The following table sets forth the Association's loan originations,
purchases, sales and principal repayments for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Loans at beginning of period................... $78,791 $86,265 $73,324
------- ------- -------
Originations:
Real estate:
Single-family......................... 14,447 23,462 16,938
Multi-family and commercial........... 450 458 313
Construction.......................... 306 1,034 1,137
Consumer.............................. 5,063 8,367 12,071
Commercial............................ 120 27 389
------- ------- -------
Total loans originated............. 20,386 33,348 30,848
------- ------- -------
Principal loan repayments and prepayments... (16,180) (29,166) (17,459)
Loan sales............................... (20,005) (11,430) (410)
Transfers to REO......................... (151) (145) --
Change in unearned origination fees...... (288) (62) (53)
Change in allowance for loan losses...... 12 (19) 15
------- ------- -------
Net loan activity.............................. (16,226) (7,474) 12,941
------- ------- -------
Loans at end of period(1)................ $62,565 $78,791 $86,265
======= ======= =======
-----------------------
(1) Loans at end of period include loans in process of $116,000, $688,000 and
$814,000 for fiscal years 2002, 2001 and 2000, respectively.
SINGLE-FAMILY MORTGAGE LENDING. The primary lending activity of the
Association has been and continues to be the origination of permanent
conventional mortgage loans secured by single-family residences located in the
Association's primary market area. The Association sells a portion of the
fixed-rate loans that it originates. The Association retains the servicing
rights on the loans it sells. The Association retains fixed-rate loans with a
rate of interest higher than the level established by the Association's board of
directors as high in relation to the current market based on Freddie Mac's
levels. At December 31, 2002, the Association retained 30-year loans with a rate
of interest of 7.5% or higher and 15-year loans with a rate of interest of 7.0%
or higher. The Association generally retains for its portfolio any adjustable
rate mortgage ("ARM") loans that it originates. Most single-family mortgage
loans are underwritten according to Freddie Mac guidelines. Loan originations
are obtained from the Association's loan officers and their contacts with the
local real estate industry, existing or past customers, and members of the local
communities. The Association primarily originates fixed-rate loans in the
current low interest rate environment, but also offers adjustable-rate mortgage
loans. At December 31, 2002, single-family mortgage loans totaled $48.5 million,
or 76.9% of total loans at such date. At that date, of the Association's
mortgage loans secured by single-family residences, $29.8 million, or 61.6%,
were fixed-rate loans.
The Association's policy is to originate single-family residential mortgage
loans in amounts up to 80% of the appraised value of the property securing the
loan and up to 95% of the appraised value if private mortgage insurance is
obtained. Mortgage loans originated by the Association generally include
due-on-sale clauses which provide the Association with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the
6
Association's consent. Due-on-sale clauses are an important means of adjusting
the rates on the Association's fixed-rate mortgage loan portfolio and the
Association exercises its rights under these clauses. The residential mortgage
loans originated by the Association are generally for terms to maturity of up to
30 years.
The Association offers several adjustable-rate loan programs with terms of
up to 25 years and interest rates that adjust either annually or every three
years. Of the Association's mortgage loans secured by single-family residences,
$6.5 million, or 11.0%, had adjustable rates. Certain of the Association's
one-year ARM loans have a maximum adjustment limitation of 2% per year and a 6%
lifetime cap on adjustments. The Association has additional one-year ARM loans
that have no caps. The Association's three-year ARM loan has a maximum
adjustment limitation of 1.5% per change and a 6% lifetime cap. The interest
rate adjustments on ARM loans currently offered are indexed to the monthly
average rate on a variety of established indices.
The volume and types of ARM loans originated by the Association have been
affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years, demand
for ARM loans in the Association's primary market area has been weak due to the
low interest rate environment and consumer preference for fixed-rate loans.
Consequently, in recent years the Association has not originated a significant
amount of ARM loans as compared to its originations of fixed-rate loans. The ARM
loans offered by the Association do not provide for initial deep discount
interest rates or for negative amortization. Although the Association expects to
offer ARM loans, the Association cannot be certain that in the future it will be
able to originate a sufficient volume of ARM loans to constitute a significant
portion of the Association's loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. On a limited basis, the
Association occasionally originates multi-family mortgage loans generally
secured by properties located in the Association's primary market area. In
reaching its decision on whether to make a multi-family loan, the Association
considers a number of factors including: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio
(the ratio of net operating income to debt service); and the ratio of loan
amount to appraised value. Pursuant to the Association's current underwriting
policies, a multi-family mortgage loan may be made in an amount up to 80% of the
appraised value of the underlying property. In addition, the Association
generally requires a debt service ratio of 120%. Properties securing a
multi-family loan are appraised by an independent appraiser.
When evaluating a multi-family loan, the Association also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, and the Association's lending experience
with the borrower. The Association's underwriting policies require that the
borrower be able to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is required to
present evidence of the ability to repay the mortgage and a satisfactory credit
history. In making its assessment of the creditworthiness of the borrower, the
Association generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation.
On a limited basis, the Association originates commercial real estate loans
that are generally secured by properties used for business or religious purposes
such as farms, churches, small office buildings or retail facilities located in
its primary market area. The Association's underwriting procedures provide that
commercial real estate loans may be made in amounts up to 70% of the appraised
value of the property. The Association's underwriting standards and procedures
are similar to those applicable to its multi-family loans, whereby the
Association considers the net operating income of the property, the debt service
ratio and the borrower's expertise, credit history and profitability. The
largest commercial real estate loan in the Association's portfolio at December
31, 2002 was $250,000. The loan was current and performing in accordance with
its contractual terms at December 31, 2002.
7
Multi-family and commercial real estate loans are generally considered to
involve a greater degree of risk than single-family residential mortgage loans.
Because payments on loans secured by multi-family and commercial real estate
properties are dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Association
seeks to minimize these risks through its underwriting policies, which require
such loans to be qualified at origination on the basis of the property's income
and debt coverage ratio.
The Association's multi-family and commercial real estate loan portfolio at
December 31, 2002 totaled $1.5 million or 2.3% of gross loans receivable.
COMMERCIAL LENDING. On a very limited basis, the Association makes
commercial business loans generally secured by business equipment, inventory,
accounts receivable and other business assets. At December 31, 2002, the
Association's commercial loan portfolio was $120,000, or .2% of gross loans
receivable, none of which were in non-accrual status. The Association does not
currently anticipate that commercial lending activities will significantly
increase in the immediate future.
CONSTRUCTION AND LAND LENDING. The Association generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Association's construction loans primarily are made to
finance the construction of owner-occupied single-family residential properties
and, to a significantly lesser extent, individual properties built by developers
for future sale. The Association's construction loans to individuals are
primarily fixed-rate loans which, after a four-month construction period,
convert to permanent loans with maturities of up to 30 years. The Association's
policies provide that construction loans may be made in amounts up to 80% of the
appraised value of the property for construction of single-family residences.
The Association requires an independent appraisal of the property. Loan proceeds
are disbursed in increments as construction progresses and as inspections
warrant. The Association requires regular inspections to monitor the progress of
construction. Land loans are determined on an individual basis, but generally
they do not exceed 75% of the actual cost or current appraised value of the
property, whichever is less. The largest construction and land loan in the
Association's portfolio at December 31, 2002 had a balance of $128,000 and is
secured by a mortgage. This loan is currently performing in accordance with its
terms. At December 31, 2002, the Association had $189,000 of construction and
land loans totaling .3% of the Association's gross loans receivable.
Construction and land financing is considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction.
If the estimate of value proves to be inaccurate, the Association may be
confronted with a project, when completed, having a value which is insufficient
to assure full repayment.
CONSUMER AND OTHER LENDING. The Association's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity loans
and loans secured by deposits. The Association originates a relatively small
number of home equity lines of credit, which are generally ARM loans with the
rate adjusting monthly at 2% above the prime rate of interest as disclosed in
The Wall Street Journal. At December 31, 2002, the Association's consumer loan
portfolio was $12.8 million, or 20.3%, of gross loans receivable.
Loans secured by rapidly depreciable assets such as automobiles entail
greater risks than single-family residential mortgage loans. In such cases,
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans depend on the borrower's
continuing financial stability and, therefore, are more
8
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the event of a default. A significant
portion of the Association's automobile loans are originated on the
Association's behalf by automobile dealers at the time of sale. This indirect
lending requires the maintenance of relationships with such dealers. Such loans
do not have the benefit of direct interaction between the borrowers and the
Association's lending officers during the underwriting process.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies of the Association. Consumer loans in amounts up to $25,000
may be approved by the Association's loan officers. Loans in excess of $25,000
and up to $50,000 must be approved by the President or Vice President. Consumer
loans in excess of $50,000 must be approved by the Board of Directors. All
mortgage loans are approved by the Executive Committee. Pursuant to OTS
regulations, loans to one borrower cannot exceed 15% of the Association's
unimpaired capital and surplus. The Association will not make loans to one
borrower that are in excess of regulatory limits.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a
quarterly review of all delinquent loans thirty days or more past due. The
procedures taken by the Association with respect to delinquencies vary depending
on the nature of the loan and period of delinquency. When a borrower fails to
make a required payment on a loan, the Association takes a number of steps to
have the borrower cure the delinquency and restore the loan to current status.
The Association sends the borrower a written notice of non-payment after the
loan is first past due and if payment is not received, then the Association
sends out additional letters and makes phone calls. If management believes that
the loan is well-secured, the Association generally will try to work with the
borrower to have the loan brought current. If the loan is still not brought
current and it becomes necessary for the Association to take legal action, the
Association will commence foreclosure proceedings against any real property that
secures the loan. If a foreclosure action is instituted and the loan is not
brought current, paid in full, or refinanced before the foreclosure sale, the
real property securing the loan is foreclosed upon and sold at a sheriff's sale.
Federal regulations and the Association's Classification of Assets Policy
require that the Association use an internal asset classification system as a
means of reporting problem and potential problem assets. The Association has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Association 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 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 having so little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets are required
to be designated "special mention" when they posses weaknesses but do not
currently expose the insured institution to sufficient risk to warrant
classification in one of these categories.
When an insured institution classifies one or more assets, or portions
thereof, as substandard or doubtful, under current OTS policy the Association is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
9
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Management believes that an adequate allowance for loan losses has been
established. However, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for estimated loan losses may
become necessary.
The Association's Classification of Assets Committee reviews and classifies
the Association's assets on a quarterly basis and the Board of Directors reviews
the results of the reports on a quarterly basis. The Association classifies
assets in accordance with the management guidelines described above. At December
31, 2002, the Association had no assets designated as special mention, $1.38
million of assets classified as substandard consisting of 24 loans, and no
assets classified as doubtful and loss.
The following table(1) sets forth the delinquencies in the Association's
loan portfolio as of the dates indicated.
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- ---------------- ------------------ --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
-------- ----------- ------ ---------- ------ -------- ------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family.............. 10 $559 10 $761 5 $134 -- --
Multi-family and commercial -- -- -- --
Consumer Loans:
Home equity loans and
lines of credit............ -- -- -- --
Automobile................. 1 5 3 19 2 10 -- --
Unsecured lines of credit.. 1 1 -- -- -- --
Other...................... 2 6 7 1 -- --
Commercial Loans.............. -- -- -- -- -- -- -- --
-- ---- -- ---- -- ---- -- --
Total................... 13 $570 14 $781 14 $145 -- --
== ==== == ==== == ==== == ==
Delinquent loans to total
loans....................... 0.90% 0.18%
----------------------------
(1) The table does not include delinquent loans less than 60 days past due. At
December 31, 2002 and 2001, total loans past due 30 to 59 days amounted to
$517,000 and $662,000, respectively.
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and real estate owned ("REO"). At
December 31, 2002, non-accrual loans totaled $781,000 consisting of 14 loans. It
is the policy of the Association to cease accruing interest on loans 90 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 all accrued interest. At December 31, 2002, 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
$88,954. At December 31, 2002 and 2001, the Association had no impaired loans.
10
AT DECEMBER 31,
---------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
Single-family real estate.................................... $761 $871 $465
Consumer..................................................... 20 12 24
Commercial................................................... -- -- --
---- ---- ----
Total(1).................................................. 781 883 489
Real estate owned (REO)......................................... 0 98 --
Other repossessed assets........................................ 2 4 --
---- ---- ----
Total nonperforming assets(2)............................. 783 985 489
Troubled debt restructurings.................................... 0 -- --
---- ---- ----
Troubled debt restructurings and total nonperforming assets..... $783 $985 $489
==== ==== ====
Total nonperforming loans and troubled debt restructurings
as a percentage of total loans............................... 1.24% 1.11% 0.56%
Total nonperforming assets and troubled debt restructurings
as a percentage of total assets.............................. 0.70% 0.81% 0.35%
------------------------
(1) Total non-accruing loans equals total nonperforming loans.
(2) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
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 the Association's 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. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowance for loan losses. Such
agencies may require the Association to make additional provisions for loan
losses based upon information available at the time of the review. As of
December 31, 2002, the Association's allowance for loan losses was .57% of gross
loans receivable as compared to 0.47% as of December 31, 2001. The Association
had non-accrual loans of $781,000 and $883,000 at December 31, 2002 and December
31, 2001, respectively. The Association will continue to monitor and modify its
allowances for loan losses as conditions dictate.
11
The following table sets forth activity in the Association's allowance for
loan losses for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2002 2001 2000
------------- ------------------ -------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of year............. $373 $354 $369
Charged-off loans:
Single-family real estate............................. -- -- --
Multi-family and commercial real estate............... -- -- --
Consumer.............................................. 35 53 22
----- ----- -----
Total charged-off loans............................ 35 53 22
Recoveries on loans previously charged off:
Single-family real estate............................. -- -- --
Consumer.............................................. 4 10 7
----- ----- -----
Total recoveries................................... 4 10 7
Net loans charged-off.................................... 31 43 15
Provision for loan losses................................ 19 62 --
----- ----- -----
Allowance for loan losses, end of period................. $361 $373 $ 354
===== ===== =====
Allowance for loan losses to total loans................. 0.57% 0.47% 0.41%
Allowance for loan losses to nonperforming loans
and troubled debt restructuring....................... 46.10% 42.24% 72.39%
Net loans charged-off to allowance
for loan losses....................................... 8.60% 11.53% 4.24%
Net loans charged-off to average loans................... 0.05% 0.05% 0.02%
The following table sets forth the Association's allowance for loan losses
in each of the categories listed at the dates indicated and the percentage of
such amounts to the total allowance and to total loans.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- -------- ------ --------- ------- ------ --------- --------
(DOLLARS IN THOUSANDS)
Real estate.............. $296 82.00% 79.54% $280 75.07% 77.16% $276 77.97% 75.85%
Consumer................. 64 17.73 20.27 90 24.13 22.61 66 18.64 23.77
Commercial............... 1 0.27 0.19 3 0.80 0.23 12 3.39 0.38
Unallocated.............. -- -- -- -- -- -- -- -- --
---- ------ ------ ---- ------ ------ ---- ------ ------
Total allowance for
loan losses........ $361 100.00% 100.00% $373 100.00% 100.00% $354 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
12
REAL ESTATE OWNED
At December 31, 2002, the Association had no real estate owned.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally-chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally-chartered
savings institution is otherwise authorized to make directly. Additionally, the
Association must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Historically, the Association has maintained
liquid assets above the minimum OTS requirements and at a level considered to be
more than adequate to meet its normal daily activities.
The investment policy of the Association as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Association's lending activities. The Association's policies
generally limit investments to government and federal agency securities. The
Association's policies provide the authority to invest in United States Treasury
and federal agency securities meeting the Association's guidelines and in
mortgage-backed securities guaranteed by the U.S. government and agencies
thereof. The Association funds such investments not only through payments on
deposit accounts and the proceeds from the repayment of loans and the
Association's operations, but also through FHLB advances. The success of such
use of FHLB advances depends on management's ability to maintain a positive
spread between the interest earned on the investment securities and the interest
cost of the FHLB advances. At December 31, 2002, the Association had investment
and mortgage-backed securities with a carrying value of $19.3 million and a
market value of $19.6 million. At December 31, 2002, the Association had $1.4
million in mortgage-backed and investment securities classified as
available-for-sale and $17.8 million in investment and mortgage-backed
securities classified as held-to-maturity. Of the Association's mortgage-backed
securities, $1.4 million had adjustable rates at December 31, 2002.
At December 31, 2002, all of the Association's mortgage-backed securities
were insured or guaranteed by either Freddie Mac, Fannie Mae or Ginnie Mae. In
addition, the Association owned one CMO which failed a stress test at December
31, 2002. The security failed the portion of the test in which the life of the
security would shorten beyond the prescribed limit in the event interest rates
drop 200 basis points or more. The security failed the portion of the test in
which the percentage change in price would drop more than the prescribed amount
in the event interest rates rise 300 basis points or more. The risk involved is
the inability to sell the security to reinvest at more favorable rates.
Management does not consider these security to be high risk.
13
The following table sets forth certain information regarding the amortized
cost and fair value of the Association's securities at the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000
----------------------- ---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------------ ---------- ---------------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government
agencies.............................. $ 2,527 $2,557 $ 2,000 $2,017 $7,993 $ 7,866
Corporate obligations................. 1,996 1,996 -- -- -- --
------- ------- ------- ------- ------- -------
Total........................... 4,523 4,553 2,000 2,017 7,993 7,866
------- ------- ------- ------- ------- -------
Total debt securities........... -- -- 2,000 2,017 7,993 7,866
------- ------- ------- ------- ------- -------
Equity securities available for sale:
Fannie Mae Stock......................... -- -- 78 79 -- --
------- ------- ------- ------- ------- -------
Mortgage-related securities:
Mortgage-related securities held-to-
maturity:
Freddie Mac........................... 776 780 12,590 12,750 15,442 15,241
Fannie Mae............................ 12,521 12,834 5,270 5,283 6,454 6,386
Collateralized Mortgage Obligations... 2 2 3,483 3,478 5,907 5,758
------- ------- ------- ------- ------- -------
Total mortgage-related securities
held-to-maturity................ 13,299 13,616 21,343 21,511 27,803 27,385
------- ------- ------- ------- ------- -------
Mortgage-related securities available-
for-sale:
Freddie Mac........................... 152 151 181 178 217 215
Fannie Mae............................ 558 579 753 750 1,223 1,233
Ginnie Mae............................ 685 709 1,056 1,085 1,627 1,642
------- ------- ------- ------- ------- -------
Total mortgage-related
securities available-for-sale... 1,395 1,439 1,990 2,013 3,067 3,090
------- ------- ------- ------- ------- -------
Total mortgage-related securities 14,694 15,054 23,333 23,524 30,870 30,475
------- ------- ------- ------- ------- -------
Net unrealized gains on
available-for-sale securities... 44 -- 24 -- 23 --
------- ------- ------- ------- ------- -------
Total securities................ $19,261 $19,608 $25,435 $25,620 $38,886 $38,341
======= ======= ======= ======= ======= =======
14
The following table sets forth the Association's securities activities for
the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
INVESTMENT SECURITIES:
Investment securities, beginning of period(1)............. $25,435 $38,886 $58,503
Purchases:
Investment securities -- held-to-maturity.............. 21,508 -- --
Investment securities -- available-for-sale............ 290 233 174
Sales:
Investment securities -- available-for-sale............ (386) (230) (227)
Calls, maturities and payments:
Investment securities -- held-to-maturity.............. (27,056) (12,493) (18,950)
Investment securities -- available-for-sale............ (594) (1,077) (788)
Net increase (decrease) in premium amortization and
discount accretion...................................... 44 114 191
Net increase (decrease) in unrealized gain (loss)......... 20 2 (17)
Net increase (decrease) in investment securities.......... $(6,174) $13,451 $(19,617)
------- ------- -------
Investment securities, end of period...................... $19,261 $25,435 $38,886
======= ======= =======
-------------------
(1) Includes mortgage-related securities.
15
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
investment securities and mortgage-related securities as of December 31, 2002.
AT DECEMBER 31, 2002
-----------------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
---------- ------------ ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies......... $ 509 3.21% $ 2,018 3.30%
Corporate obligations $ 1,996 2.12%
Mortgage-related securities:
Freddie Mac.................... $ 693 6.00%
Fannie Mae..................... 1,286 4.76% 1,516 6.01%
Collateralized Mortgage
Obligations.................
-------- -------- -------
Total securities at
amortized cost........... $ 2,505 2.34% $ 3,304 3.87% $ 2,209 6.01%
======== ======== =======
Available-for-sale securities:
Mortgage-related securities:
Freddie Mac....................
Fannie Mae.....................
Ginnie Mae.....................
Total securities at fair
value.....................
AT DECEMBER 31, 2002
------------------------------------------------
MORE THAN
TEN YEARS TOTAL
----------------------- ------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities:
Investment securities:
Obligations of U.S.
government agencies......... $ 2,527 3.28%
Corporate obligations 1,996 2.12%
Mortgage-related securities:
Freddie Mac.................... 83 7.00% 776 6.11%
Fannie Mae..................... 9,719 6.59% 12,521 6.33%
Collateralized Mortgage
Obligations................. 2 6.50% 2 6.50%
------- -------
Total securities at
amortized cost........... $ 9,804 6.59% $17,822 5.42%
======= =======
Available-for-sale securities:
Mortgage-related securities:
Freddie Mac.................... $ 151 4.35% $ 151 4.35%
Fannie Mae..................... 579 5.45% 579 5.45%
Ginnie Mae..................... 709 6.70% 709 6.70%
------- -------
Total securities at fair
value..................... $ 1,439 5.95% $ 1,439 5.95%
======= =======
16
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows generated
from operations are the primary sources of the Association's funds for use in
lending, investing and for other general purposes. The Association has
historically also used FHLB advances as a source of funds.
DEPOSITS. The Association offers a variety of deposit accounts with a range
of interest rates and terms. The Association's deposits consist of passbook
accounts, savings and club accounts, NOW accounts, money market accounts and
certificates of deposit. For the year ended December 31, 2002, certificates of
deposit constituted 55.8% of total average deposits. The term of the
certificates of deposit offered by the Association vary from six months to four
years and the offering rates are established by the Association on a weekly
basis. Once a certificate account is established, no additional amounts are
permitted to be deposited in that account, with the exception of Individual
Retirement Account certificates. Specific terms of an individual account vary
according to the type of account, the minimum balance required, the time period
funds must remain on deposit and the interest rate, among other factors. The
flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. At
December 31, 2002, the Association had $21.9 million of certificate accounts
maturing in less than one year. The Association expects that most of these
accounts will be reinvested and does not believe that there are any material
risks associated with the respective maturities of these certificates. The
Association's deposits are obtained predominantly from the area in which its
banking offices are located. The Association relies primarily on a willingness
to pay market-competitive interest rates to attract and retain these deposits.
Accordingly, rates offered by competing financial institutions significantly
affect the Association's ability to attract and retain deposits.
The following table presents the deposit activity of the Association for
the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Increase (decrease) before interest credited......... $ (504) $ (508) $(2,503)
Interest credited.................................... 1,982 2,679 667
------- ------- -------
Net increase (decrease).............................. $ 1,478 $ 2,171 $(1,836)
======= ======= =======
At December 31, 2002, the Association had $5.1 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................. $1,090 5.17%
Over 3 through 6 months.............. 210 3.61%
Over 6 through 12 months............. 599 3.29%
Over 12 months....................... 3,222 3.89%
-----
Total.......................... $5,121 4.07%
======
17
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
December 31, 2002. Averages for the periods presented utilize month-end
balances.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------- -------------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
------- -------- ------ ------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
NOW accounts.............. $ 8,748 11.43% 1.66% $ 8,611 11.28% 1.64% $5,496 7.54% 3.09%
Money market accounts..... 7,038 9.20% 1.49 7,038 9.22 3.38 5,813 7.98 4.58
Savings accounts.......... 17,653 23.07% 1.69 17,653 23.12 2.42 19,849 27.23 2.81
Certificates of deposit... 42,338 55.32% 4.63 42,338 55.46 5.76 40,271 55.25 5.51
Non-interest-bearing
deposits:
Demand deposits........ 754 0.99% -- 702 0.92 -- 1,461 2.00 --
------ ----- ------ ----- ------ -----
Total average
deposits.......... $76,531 100.00% 3.31% $76,342 100.00% 4.29% $72,890 100.00% 4.43%
======= ====== ======= ====== ======= ======
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding.
PERIOD TO MATURITY FROM DECEMBER 31, 2002 AT DECEMBER 31,
-------------------------------------------------------- ---------------------------------
TWO TO OVER
LESS THAN ONE TO THREE THREE
ONE YEAR TWO YEARS YEARS YEARS TOTAL 2001 2000 1999
--------- ---------- ------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS:
0 to 3.99%................ $12,638 $ 9,821 $ 107 $ 793 $23,359 $ 5,725 $ 99 $ 20
4.00 to 4.99%............. 5,108 2,520 1,675 2,864 12,167 11,271 6,357 13,448
5.00 to 5.99%............. 2,465 499 457 3,421 17,299 16,406 25,292
6.00 to 6.99%............. 1,487 60 1,547 6,447 13,694 2,383
7.00 to 7.99%............. 160 160 2,690 3,010 --
Over 8.00%................ 52 5 -- 10 67 240 374 96
------- ------- ------ ------ ------- ------- ------- -------
Total certificate
accounts............. $21,910 $12,905 $2,239 $3,667 $40,721 $43,672 $39,940 $41,239
======= ======= ====== ====== ======= ======= ======= =======
BORROWINGS. The Association utilizes FHLB advances as an alternative to
retail deposits to fund its operations as part of its operating strategy. These
FHLB advances are collateralized primarily by certain of the Association's
mortgage loans and mortgage-backed securities and secondarily by the
Association's investment in capital stock of the FHLB. FHLB advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the FHLB.
18
The following table sets forth certain information regarding the
Association's borrowed funds at or for the periods ended on the dates indicated:
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
FHLB advances and other borrowings:
Average balance outstanding.................................. $ 13,802 $ 31,367 $ 38,815
Maximum amount outstanding at any month-end
during the period......................................... 12,370 36,678 40,536
Balance outstanding at end of period......................... 11,430 18,393 40,536
Weighted average interest rate during the period............. 4.81% 5.00% 5.74%
Weighted average interest rate at end of period.............. 5.53% 4.62% 5.74%
SUBSIDIARY ACTIVITIES
As of December 31, 2002, the Company maintained the Association as a wholly
owned subsidiary. The Association has no subsidiaries.
PERSONNEL
As of December 31, 2002, the Association had 30 full-time employees and 8
part-time employees. The employees are not represented by a collective
bargaining unit and the Association believes it has a good relationship with its
employees.
19
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected financial and other data of the Company set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Company and Notes thereto presented elsewhere in this report.
AT DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets............................. $ 110,519 $120,927 $140,933 $142,497 $133,436
Cash and cash equivalents................ 12,879 4,380 2,930 4,928 26,026
Loans, net(1)............................ 62,565 78,791 86,265 73,177 64,101
Securities held-to-maturity:
Mortgage-related securities, net...... 13,299 21,343 27,803 33,216 30,137
Investment securities, net............ 4,523 2,000 7,993 21,492 2,492
Securities available-for-sale:
Mortgage-related securities, net...... 1,439 2,013 3,090 3,770 4,970
Investment securities, net............ -- 79 -- 25 179
Deposits................................. 74,690 76,168 73,997 75,833 84,638
FHLB advances............................ 11,430 18,393 40,536 36,419 16,029
Total equity............................. 17,583 18,160 17,833 29,200 31,773
Real estate owned, net................... -- 98 -- 11 --
Nonperforming assets and troubled
debt restructurings................... 781 985 489 104 39
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
SELECTED OPERATING DATA:
Total interest income.................... $7,083 $9,588 $9,834 $9,303 $8,787
Interest expense......................... 3,470 5,308 5,802 4,714 4,963
----- ----- ----- ----- -----
Net interest income................... 3,613 4,280 4,032 4,589 3,824
Provision for loan losses................ 19 62 -- -- 154
----- ----- ----- ----- -----
Net interest income after provision
for loan losses.................... 3,594 4,218 4,032 4,589 3,670
Non-interest income:
Net gain (loss) on sale of securities. 16 15 10 38 21
Other................................. 664 179 284 276 318
----- ----- ----- ----- -----
Total non-interest income.......... 680 194 294 314 339
Non-interest expense..................... 3,287 3,502 3,900 4,956 3,681
----- ----- ----- ----- -----
Income (loss) before income taxes........ 987 910 426 (53) 328
Income taxes............................. 313 312 150 (11) 117
----- ----- ----- ----- -----
Net income (loss).................. $ 674 $ 598 $ 276 $ (42) $ 211
====== ===== ===== ===== =====
(See footnotes on next page)
20
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ---------- -----------
SELECTED OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Average yield on interest-earning assets(3).... 7.00% 7.71% 7.42% 6.97% 7.44%
Average rate paid on interest-bearing
liabilities.................................. 3.64 4.66 5.01 4.55 4.73
Average interest rate spread(4)................ 3.36 3.05 2.21 2.42 2.71
Net interest margin(5)......................... 3.57 3.44 2.96 3.44 3.31
Ratio of interest-earning assets to
interest-bearing liabilities................ 106.09 109.07 120.16 127.68 112.43
Efficiency ratio(6)............................ 76.85 78.54 90.36 101.75 88.87
Non-interest expense as a percent of average
Assets...................................... 2.85 2.63 2.82 3.60 3.03
Return on average assets....................... 0.58 0.45 0.20 (0.03) 0.17
Return on average equity....................... 3.76 3.32 1.27 (0.14) 1.41
Ratio of average equity to average assets...... 13.54 15.68 22.48 12.36
Earnings per shares(7)......................... 0.44 0.38 0.17 (0.02) --
REGULATORY CAPITAL RATIOS:
Tangible capital ratio......................... 18.90 18.40 15.60 15.10 16.10
Core capital ratio............................. 18.90 18.40 15.60 15.10 16.10
Risk-based capital ratio....................... 38.60 35.70 32.40 34.10 36.80
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total
loans(8).................................... 1.24 1.11 0.56 0.13 0.06
Nonperforming assets and troubled debt
restructurings as a percent of total
assets(9)................................... 0.70 0.81 0.35 0.07 0.03
Allowance for loan losses as a percent
of total loans.............................. 0.57 0.47 0.41 0.50 0.59
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings(1)(8)........................ 0.46% 0.42% 0.72% 3.97% 9.72%
FULL SERVICE OFFICES AT END OF PERIOD............. 2 2 3 4 6
-------------------------
(1) Loans, net, represents gross loans receivable and loans held for sale net
of the allowance for loan losses, loans in process and deferred loan
origination fees. The allowance for loan losses at December 31, 2002, 2001,
2000, 1999 and 1998 was $361,000, $373,000, $354,000, $369,000 and
$379,000, respectively.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(3) Calculations of yield are presented on a taxable equivalent basis using the
Federal income tax rate of 34%.
(4) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) Equals non-interest expense divided by net interest income plus
non-interest income (excluding gains or losses on securities transactions).
(7) Earnings per shares is not applicable for 1998.
(8) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. The Association ceases to accrue interest on
loans 90 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 all accrued interest.
(9) Non-performing assets consist of non-performing loans, other repossessed
assets and REO.
21
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, the Company is required by federal
law to report to, and otherwise comply with the rules and regulations of, the
Office of Thrift Supervision ("OTS"). The Association is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), as the
deposit insurer. The Association is a member of the Federal Home Loan Bank
System and, with respect to deposit insurance, of the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Association must file reports
with the OTS and the FDIC 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 OTS and/or the FDIC conduct periodic examinations to test the
Association'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 OTS, the
FDIC or Congress, could have a material adverse impact on the Company, the
Association and their operations. Certain regulatory requirements applicable to
the Association and to the Company are referred to below or elsewhere herein.
The description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-KSB does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the
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 under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding companies may only engage in such activities.
The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies
existing prior to May 4, 1999, so long as the holding company's savings
association subsidiary continues to comply with the QTL Test. The Company does
qualify for the grandfathering. Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the qualified
thrift lender test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Association Holding Company Act, subject to the prior approval of
the OTS, and certain activities authorized by OTS regulation. However, the OTS
has issued an interpretation concluding that multiple savings and loan holding
companies may also engage in activities permitted for financial holding
companies.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the
22
company and institution involved, the effect of the acquisition on the risk to
the deposit insurance funds, the convenience and needs of the community and
competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The
Association must notify the OTS 30 days before declaring any dividend to the
Company. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the OTS 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 ("CIBCA"), a notice must be submitted to the OTS if any person
(including a company), or group acting in concert, seeks to acquire 10% or more
of the Company's outstanding voting stock, unless the OTS has found that the
acquisition will not result in a change of control of the Company. Under the
CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer and the anti-trust effects of the acquisition. Any
company that acquires control would then be subject to regulation as a savings
and loan holding company.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings associations 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, certain lending authority for federal associations, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital to
total assets ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest CAMELS rating), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. The OTS 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 OTS 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
23
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At December 31, 2002, the Association met each of its capital
requirements.
The following table presents the Association's capital position at December
31, 2002:
EXCESS CAPITAL
----------------- ----------------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------------ -------------- ----------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Tangible............ $20,802 $1,651 $19,151 18.89% 1.5%
======= ====== ======= ====== ============
Core (Leverage)..... $20,802 $4,403 $16,399 18.89% 4%
======= ====== ======= ====== ============
Risk-based.......... $21,163 $4,385 $16,778 38.60% 8%
======= ====== ======= ====== ============
PROMPT CORRECTIVE REGULATORY ACTION. The OTS 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 OTS 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 OTS 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 OTS 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. The Association is a member of the SAIF. The
FDIC 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
semi-annually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest.
24
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During fiscal
2002, FICO payments for SAIF members approximated 1.75 basis points of
assessable deposits.
The Association's assessment rate for the fiscal year 2002 was .0001715 and
the total assessment paid for this period (including the FICO assessment) was
$13,571. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Association. Management
cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC 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 FDIC or the OTS. The
management of the Association 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 December
31, 2002, the Association's limit on loans to one borrower was $5.2 million, and
the Association's largest aggregate outstanding balance of loans to one borrower
was $450,000.
QTL TEST. The HOLA 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 December 31, 2002, the Association maintained 93% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the regulation, an application
to and the prior approval of the OTS is required prior to any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under OTS 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 the OTS. If an application is not
required, the institution must still provide prior notice to the OTS of the
capital distribution if, like the Bank, it is a subsidiary of a holding company.
In the event the Association's capital fell below its regulatory requirements or
the OTS notified it that it was in need of increased supervision, the
Association's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital
25
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31,2002 totaled $38,215.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The recently enacted Sarbanes Oxley Act generally prohibits loans by the
Company to its executive officers and directors. However, that act contains a
specific exception for loans by the Association to its executive officer's and
directors in compliance with federal banking laws. Under such laws the
Association's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
limited. The law limits both the individual and aggregate amount of loans the
Association may make to insiders based, in part, on the Association's capital
position and requires certain board approval procedures to be followed. Such
loans are required to be made on terms substantially the same as those offered
to unaffiliated individuals and not involve more than the normal risk of
repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
ENFORCEMENT. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC 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 OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
26
FEDERAL HOME LOAN BANK SYSTEM
The Association 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. The
Association, 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.
The Association was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at December 31, 2002 of $3.5 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These 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, The Association'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 Negotiable Order of Withdrawal (NOW) and regular checking accounts).
The regulations generally provide that reserves be maintained against aggregate
transaction accounts as follows: a 3% reserve ratio is assessed on net
transaction accounts up to and including $42.1 million; a 10% reserve ratio is
applied above $42.1. The first $6.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. These amounts are adjusted annually. The Association
complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a fiscal
year, consolidated basis and the accrual method of accounting, and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. For its 2002 taxable year, the
Association is subject to a maximum federal income tax rate of 34%.
BAD DEBT RESERVE. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrifts") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
27
In August 1996, the provisions repealing the above thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. Those rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Association's
bad debt deduction will be equal to net charge-offs. The new rules allowed an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years was equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution was permitted to postpone the reserve capture, it
was required to begin its six year recapture no later than the 1998 tax year.
The unrecaptured base year reserves will not be subject to recapture as long as
the institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to a provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation.
Dividends paid out of the Association's current or accumulated earnings and
profits will not be so included in the Association's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth. In
general, the tax liability is the greater of 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess
of $50,000 or 0.4% times of taxable net worth. Under these alternative measures
of computing tax liability, complex formulas determine the jurisdictions to
which total net income and total net worth are apportioned or allocated. The
minimum tax is $50 per year and maximum tax liability as measured by net worth
is limited to $150,000 per year.
A special litter tax also applies to all corporations, including the
Company, subject to the Ohio Corporation franchise tax. This litter tax does not
apply to "financial institutions." If the franchise tax is paid on the net
income basis, the litter tax is equal to 0.11% of the first $50,000 of computed
Ohio taxable
28
income and 0.22% of computer Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to 0.014%
times taxable net worth.
Certain holding companies, such as the Company, will qualify for complete
exemption from the net worth tax if certain conditions are met. The Company will
most likely meet these conditions, and thus, calculate its Ohio franchise tax on
the net income basis.
The Association is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.3% for 2000
and 1.4% for 1999 and thereafter of the Association's apportioned book net
worth, determined in accordance with Generally Accepted Accounting Principles,
less any statutory deduction. As a "financial institution," the Association is
not subject to any tax based upon net income or net profits imposed by the State
of Ohio.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempted 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Association conducts its business through two banking offices located
in Columbiana and Jefferson Counties, Ohio.
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR DATE OF LEASEHOLD
OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 2002
------------- ---------- -------------- ------------- -----------------
(IN THOUSANDS)
ADMINISTRATIVE/HOME OFFICE:
601 Main Street
Wellsville, Ohio 43968 Owned 1989 -- $409
BRANCH OFFICE:
49028 Foulks Drive
East Liverpool, Ohio 43920 Owned 1979 -- $221
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Association is a party to any pending legal
proceedings. Periodically, there have been various claims and lawsuits involving
the Association, such as claims to enforce liens, condemnation proceedings on
properties in which the Association holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Association's business. The Association is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Association.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
29
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq SmallCap Market under
the symbol "GCFC." As of December 31, 2002, there were 1,645,921 shares of
common stock outstanding and 580 stockholders, excluding persons or entities who
hold stock in nominee or "street name." Dividend payments by the Company are
dependent primarily on dividends received by the Company from the Association.
Under federal regulations, the dollar amount of dividends the Association may
pay is dependent upon its capital position and recent net income. Generally, if
the Association satisfies its regulatory capital requirements, it may make
dividend payments up to the limits prescribed in the OTS regulations. However,
institutions that have converted to the stock form of ownership may not declare
or pay a dividend on, or repurchase any of, its common stock if the effect
thereof would cause the regulatory capital of the institution to be reduced
below the amount required for the liquidation account which was established in
the conversion in accordance with the OTS regulations.
The table below shows the price range of common stock and dividends paid
for the years ended December 31, 2002 and 2001. This information was provided by
the Nasdaq SmallCap Market.
FISCAL 2002 FISCAL 2001
--------------------------------------------- ------------------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
----------- -------------- --------------- ----------- ----------- ------------
First Quarter....... $11.00 $ 9.90 $0.09 $14.50 $9.00 $0.07
Second Quarter...... 11.36 10.40 0.09 10.50 8.90 0.07
Third Quarter....... 10.79 9.03 0.09 9.87 8.51 0.08
Fourth Quarter...... 10.00 9.10 0.09 10.25 8.51 0.09
The information set forth under the section captioned "Proposal 2.
Ratification of the Grand Central Financial Corp. 2003 Equity Compensation Plan"
in the Proxy Statement for the 2003 Annual Meeting of Shareholders to be held on
April 23, 2003 at page 14 is incorporated herein by reference.
--------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted-average exercise Number of securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
--------------------------------------------------------------------------------------------------------------------
- Equity compensation 182,497 $9.22
plans approved by security
holders
--
--------------------------------------------------------------------------------------------------------------------
- Equity compensation
plans not approved by
security holders -- -- --
--------------------------------------------------------------------------------------------------------------------
Total 182,497 $9.22 --
--------------------------------------------------------------------------------------------------------------------
30
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The Company's results of operations are dependent primarily on net interest
income, which is the difference ("spread") between the interest income earned on
its loans, mortgage-backed securities, and securities portfolio and its cost of
funds, consisting of interest paid on its deposits and borrowed funds. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. The Company's net
income is also affected by, among other things, loan fee income, provisions for
loan losses, service charges, operating expenses and franchise and income taxes.
The Company's revenues are derived primarily from interest on mortgage loans,
consumer loans, mortgage-backed securities and securities, as well as income
from service charges and loan originations. The Company's operating expenses
principally consist of employee compensation and benefits, occupancy, federal
deposit-insurance premiums and other general and administrative expenses. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities. Future changes
in applicable law, regulations or government policies may materially impact the
Company.
MANAGEMENT STRATEGY
The Company is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Company attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, to originate single-family residential
mortgage loans and short-term consumer loans. To a lesser extent, the Company
also originates residential construction loans in its market area and a limited
amount of commercial business loans and loans secured by multi-family and
non-residential real estate. Management's efforts in increasing the Company's
volume of shorter-term consumer loans have been intended to help reduce interest
rate risk, as well as to build on the Company's residential mortgage business.
The Company's deposits are insured up to the maximum allowable amount by the
SAIF, and administered by the FDIC. The Company also invests in mortgage-backed
securities, most of which are insured or guaranteed by federal agencies, as well
as securities issued by the U.S. government or agencies thereof.
As part of the Company's long-term growth strategy, the Company currently
anticipates that it will consider expansion into one or more additional
geographic markets. In connection with such expansion, the Company would expect
to increase the Company's Board of Directors by adding one or more directors
familiar with such a new market or markets. The Company's Board of Directors has
authorized the issuance by the Company of additional shares of the Company's
common stock through a private placement. The number of such shares to be issued
is expected to equal up to, but be less than, 20 percent of the total number of
shares outstanding on the date of the issuance of the new shares. The price at
which such shares would be issued is expected to equal the book value of the
outstanding shares at the time of issuance. The new shares are expected to be
issued to accredited investors, who have previously expressed an interest in
purchasing shares in Founders Capital Corporation, which was founded by the
Company's Chairman and Chief Executive Officer.
The Company is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations, except as discussed below. The Company is also not
aware of any current recommendations by its regulators which would have a
material effect if implemented, except as discussed below.
31
MANAGEMENT OF MARKET RISK
GENERAL. Market risk is the risk of loss from adverse changes in market
prices and rates. The Association's market risk arises primarily from
interest-rate risk inherent in its lending and deposit-taking activities. The
Association, like other financial institutions, is subject to interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Association's principal financial
objectives is to achieve long-term profitability while reducing and managing its
exposure to fluctuations in interest rates. To that end, management actively
monitors and manages its interest rate risk exposure.
QUALITATIVE ASPECTS OF MARKET RISK. The principal objective of the
Association's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
risk appropriate to the Association's business strategy, operating environment,
capital and liquidity requirement and performance objectives, and manage the
risk consistent with Board of Directors' approved guidelines. Through such
management, the Association seeks to reduce the vulnerability of its operations
to changes in interest rates. The Association monitors its interest rate risk as
such risk relates to its operating strategies. The Association's Board of
Directors has established an Asset/Liability Committee, responsible for
reviewing its asset/liability policies and interest rate risk position, which
meets on a monthly basis and reports trends and interest rate risk position to
the Board of Directors. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on earnings of the Association.
The Association has sought to reduce exposure of its earnings to changes in
market interest rates by managing asset and liability maturities and interest
rates primarily through the use of adjustable-rate mortgage-backed securities
and, subject to market conditions, adjustable-rate mortgage loans and by
extending the maturities of it interest-bearing liabilities. In the current
interest rate environment, customer demand for adjustable-rate mortgage loans
has been limited.
QUANTITATIVE ASPECTS OF MARKET RISK. As part of its interest rate risk
analysis, the Association uses an interest rate sensitivity model which
generates estimates of the change in the Association's net portfolio value
("NPV") over a range of interest rate scenarios and which is prepared by the OTS
on a quarterly basis. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The NPV ratio, under any
interest rate scenario, is defined as the NPV in that scenario divided by the
market value of assets in the same scenario. The OTS produces such analysis
using its own model, based upon data submitted on the Association's quarterly
Thrift Financial Reports, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. The following table sets forth the
Association's NPV as of December 31, 2002, as calculated by the OTS.
The following table sets forth the Association's NPV as of December 31,
2002, as calculated by the OTS.
NET PORTFOLIO VALUE
---------------------------------------------- NPV AS A % OF PORTFOLIO
(DOLLARS IN THOUSANDS) VALUE OF ASSETS
CHANGE IN INTEREST -----------------------
RATES IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE
------------ ------ -------- -------- ----- ------
300 $15,436 $(1,367) (8)% 14.73% (75) bp
200 16,478 (324) (2) 15.47 (1) bp
100 17,053 250 1 15.80 32 bp
Static 16,803 -- -- 15.48 --
(100) 16,129 (674) (4) 14.81 (67) bp
32
Because of the market rates of interest at December 31, 2002, the NPV for a
decline of 200 and 300 basis points cannot be reasonably calculated.
As illustrated in the table, the Association's NPV declines in a rising
interest rate environment. Specifically, the table indicates that, at December
31, 2002, the Association's NPV was $16.80 million (or 15.48% of the market
value of portfolio assets) and that, based upon the assumptions utilized, an
immediate increase in market interest rates of 200 basis points would result in
a $324,000 or 2% decline in the Association's NPV and would result in a 1 basis
point or 10.1% decline in the Association's NPV ratio to 15.47%. The percentage
decline in the Association's NPV at December 31, 2002 was within the limit in
the Association's Board-approved guidelines.
In evaluating the Association's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Furthermore, in the event of a change in interest
rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in case of an interest rate
increase. Therefore, the actual effect of changing interest rates may differ
from that presented in the foregoing table.
The Board of Directors and management of the Association believe that
certain factors afford the Association the ability to operate successfully
despite its exposure to interest rate risk. The Association manages its interest
rate risk by attempting to originate adjustable-rate loans as market conditions
allow, purchasing adjustable-rate mortgage-backed securities, maintaining
capital well in excess of regulatory requirements and by selling fixed rate
one-to four-family real estate loans, except such loans that bear an interest
rate above levels established from time to time by the Association's board of
directors based on current market rates.
33
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Association at and for the years ended December 31, 2002 and
2001. The average yields and costs are derived by dividing income or expense by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown, except where otherwise noted, and reflect
annualized yields and costs. Average balances are derived from average monthly
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2002 2001
------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ----------- -------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Investment securities (1):
Taxable................................. $ 23,852 $ 1,534 6.43% $ 32,757 $ 2,481 7.57%
Time deposits with other bank........... 7,105 137 1.93 5,646 207 3.67
Loans (2).................................. 68,847 5,255 7.63 82,676 6,685 8.09
FHLB stock................................. 3,406 157 4.61 3,224 215 6.67
-------- ----- -------- -----
Total interest-earning assets........ 103,210 7,083 6.86 124,303 9,588 7.71
Non-interest-earning assets................... 12,055 8,928
-------- --------
Total assets......................... $115,265 $133,231
======== ========
INTEREST-BEARING LIABILITIES:
Deposits................................... $ 75,498 2,509 3.32 $ 75,640 3,245 4.29
FHLB advances and other borrowings......... 13,802 664 4.81 31,367 1,569 5.00
Loan Payable............................... 6,100 297 4.87 6,850 494 7.21
------ ----- ------- -----
Total interest-bearing liabilities.... 95,400 3,470 3.64 113,857 5,308 4.66
Non-interest-bearing liabilities........... 1,958 1,336
----- -------
Total liabilities.................... 97,358 115,193
Equity..................................... 17,907 18,038
------ --------
Total liabilities and equity......... $115,265 $133,231
======== ========
Net interest-earning assets................
Net interest income/interest rate spread (3) 3,613 3.22% $4,280 3.05%
===== ===== ====== =====
Net interest margin as a percentage
of interest-earning assets (4).......... 3.50% 3.44%
===== =====
Ratio of interest-earning assets
to interest-bearing liabilities......... 106.09% 109.17%
======= =======
-----------------------
(1) Includes investment securities available-for-sale and held-to-maturity,
mortgage-related securities available-for-sale and held-to-maturity.
(2) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
34
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Association's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change (the sum of the prior columns). The changes attributable to the combined
impact of volume and rate have been allocated on a proportional basis between
changes in rate and volume.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------ -------------------------------
INCREASE/ INCREASE/(DECREASE)
(DECREASE) DUE TO DUE TO
-------------------- ---------------------
RATE VOLUME NET RATE VOLUME NET
--------- --------- -------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits.................... $ -- $ -- $ -- $ -- $ (171) $ (171)
Investment securities:
Taxable................................ (338) (609) (947) -- (1) (1)
Non-taxable............................ -- -- -- 449 (780) (331)
Time deposits with other banks........ (115) 45 (70) (179) 25 (154)
Loans..................................... (359) (1,071) (1,430) 217 198 415
FHLB...................................... (70) 12 (58) (21) 17 (4)
------ ------- ------- -------- ------ ------
Total interest-earning assets.......... $ (882) $(1,623) $(2,505) $ 466 $ (712) $ (246)
====== ======= ======= ======== ====== ======
INTEREST-BEARING LIABILITIES:
Deposits. . . . . . . . . . . . . . . . . . $ (730) $ (6) $ (736) $ (104) $ 183 $ 79
FHLB advances and other borrowings (58) (847) (905) (265) (395) (660)
Loan Payable.............................. (147) (50) (197) (30) 117 87
------ ------- ------- -------- ------ ------
Total interest-bearing liabilities..... (935) (903) (1,838) (399) (95) (494)
------ ------- ------- -------- ------ ------
Increase(decrease) in net interest income....... $ 53 $ (720) $ (667) $ 865 $ (617) $ 248
====== ======= ======= ======== ====== ======
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND DECEMBER 31, 2001
Total assets of the Company were $110.5 million at December 31, 2002,
compared to $120.9 million at December 31, 2001, representing a decrease of
$10.4 million, or 8.6%.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $8.5
million, from $4.4 million at December 31, 2001 to $12.9 million at December 31,
2002. The increase is due to the additional funds from the reduction in the
security and loan portfolios as mentioned below.
SECURITIES. Total securities decreased $6.2 million, or 24.27%, from $25.4
million at December 31, 2001 to $19.3 million at December 31, 2002. Most of the
proceeds from maturing securities, pay-downs, and securities sold were used to
pay down Federal Home Loan Bank advances and loans payable during 2002.
LOANS. Loans, including loans held for sale, decreased $16.2 million, or
20.59% from $78.8 million at December 31, 2001 to $62.6 million at December 31,
2002. Average loans comprised 68.02%
35
of interest-earning assets in 2002 compared to 66.51% in 2001. The increase was
due to the decrease in interest-earnings assets from 2001 to 2002. Refinancing
was at an all-time high throughout the United States of America and the 30-year
fixed mortgage rate hit its lowest rate in over 40 years. As a result, the
Company sold long term, relatively low interest rate single-family real estate
loans during 2002 instead of holding them in its portfolio. The company has also
had a decline in consumer loans, which are mostly automobile loans, of $5.0
million or 27.79% due to local competition from dealers offering special rebates
and financing programs. The Company currently grants loans for both new and used
automobile purchases. The weighted average rate earned on new and used
automobile was 7.07% at December 31, 2002. Maturities for new and used
automobile loans range from 12 months to 66 months. The Company does not
originate sub-prime automobile loans.
OTHER ASSETS. During the third quarter of 2002, the Association purchased
$3.0 million of Bank Owned Life Insurance ("BOLI") to help fund future deferred
compensation plans. This transaction accounted for the majority of the change in
other assets, which increased by $3.2 million from December 31, 2001 to December
31, 2002.
DEPOSITS AND BORROWINGS. The Company's deposits are obtained primarily from
individuals and businesses in its market area. Total deposits decreased $1.5
million, or 1.94%, from $76.2 million at December 31, 2001 to $74.7 million at
December 31, 2002. The decrease in deposits was due to normal fluctuations in
customer balances. Deposits are still the primary funding source for loans, and
the Company will use FHLB advances as a secondary funding source as needed. The
Company used the proceeds from the sale of loans, pay downs of securities, and
repayment of loans to repay FHLB advances, which decreased from $18.4 million at
December 31, 2001 to $11.4 million at December 31, 2002. The Company also used
some of the funds to reduce the loan payable from $7.0 million at December 31,
2001 to $4.9 million at December 31, 2002 per the loan agreement.
SHAREHOLDERS' EQUITY. Shareholders' equity decreased $577,000 or 3.18% from
$18.2 million at December 31, 2001 to $17.6 million at December 31, 2002. Equity
decreased primarily due to the purchase of treasury stock of $1.0 million in
2002, which was due to the Company's stock repurchase program. This decrease was
offset partially by an increase of $674,000 from earnings which was
substantially offset by dividends paid of $551,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
GENERAL. Net income for the year ended December 31, 2002 increased by
$76,000 from $598,000 for the year ended December 31, 2001 to $674,000 for the
year ended December 31, 2002. The increase was primarily due to the increase in
non-interest income of $486,000 or 250.5% and a decrease in non-interest expense
of $215,000. The Company also benefited from a reduction in interest expense of
$1.8 million, which was offset by the reduction of interest income of $2.5
million during 2002.
NET INTEREST INCOME. Net interest income is the largest component of the
Company's net income, and consists of the difference between interest income
generated on interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income decreased approximately $667,000 or 15.6%, from $4.2
million for the year ended December 31, 2001 to $3.6 million for the year ended
December 31, 2002. The decrease was due to a $2.51 million, or 26.1% decrease in
interest income, which was offset by a $1.84 million, or 34.6%, decrease in
interest expense. As mentioned earlier, rates for one- to -four-family mortgages
have been at historic lows over the past twelve months resulting in high
refinancing activity. Due to refinancing, the
36
Company has a smaller portfolio earning at a lower rate, resulting in lower
interest income. The Company experienced similar circumstances with automobile
loans. Management is in the process of reviewing its lending policies in
relation to current market conditions and has introduced new adjustable rate
products to stimulate loan growth.
The Company also earned less interest from its securities portfolio during
the year ended December 31, 2002, sustaining a decrease of $1.0 million or 37.3%
when compared to 2001. Most of the Company's investments are in mortgage-backed
instruments, which experienced rate reductions and prepayments similar to those
on one-to-four family mortgages.
The decrease in interest income was offset substantially by the decrease in
interest expense. Interest expense for 2002 decreased $1.84 million or 34.6%
compared to 2001. The decrease was due to the declining interest rate
environment during 2002. The Company also was able to reduce its advances with
the FHLB with the funds received from loan and security repayments. As a result,
the Company reduced interest expense for FHLB advances by $905,000, when
compared to 2001.
Average loans outstanding for the year ended December 31, 2002 decreased
$13.8 million, or 16.73%, compared to average loans outstanding for the year
ended December 31, 2001, and average securities decreased $7.4 million, or
19.39%, compared to the prior year. For the year ended December 31, 2002, the
Association experienced a decrease in average yield on assets of 71 basis points
and a decrease in the average cost of liabilities of 102 basis points. The
combination of the decrease in average interest-bearing assets coupled with the
decrease in interest rates resulted in a $667,000 decrease in net interest
income over net interest income for the year ended December 31, 2002. Average
net interest margin increased 26 basis points from 3.31% for the year ended
December 31, 2001 to 3.57% for the year ended December 31, 2002. The
Association's average interest rate spread increased 31 basis points from 3.05%
for the year ended December 31 2001 to 3.36% for the year ended December 31,
2002.
The tables appearing elsewhere in this annual report provide a more
detailed analysis of the changes in average balances, yields/rates and net
interest income identifying that portion of change in average volume versus that
portion due to changes in average rates. See "Average Balance Sheet,"
"Rate/Volume Analysis" and "Weighted Average Yields."
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions, considerations
applicable to specific loans, such as the ability of the borrower to repay the
loan and the estimated value of the underlying collateral, as well as changes in
the size and growth of the loan portfolio. A provision for loan losses was
recorded during the year ended December 31, 2001 of $62,000, and $19,000 for the
year ended December 31, 2001 as a result of management's quarterly calculations,
and its estimate of losses which can be reasonably estimated, taking into
account the current economic climate. At December 31, 2002, the allowance for
loan losses represented 0.57% of total loans compared to 0.53% at December 31,
2001. Management believes the allowance for loan losses represents a reasonable
estimate of probable losses; however future additions to the allowance may be
necessary based on changes in economic conditions.
NONINTEREST INCOME. The Company experienced a $486,000, or 250.5% increase
in noninterest income for the year ended December 31, 2002 compared to the year
ended December 31, 2001. The majority of the increase was due to the gain on
sale of loans. Gain on sale of loans for 2002 increased $412,000 from a loss of
$40,000 in the 2001 period to a gain of $372,000 in 2002. The Company sold $19.6
million of loans during 2002. Management decided to sell low rate long-term
assets instead of holding them in its portfolio. Management has sold loans in
the past and will continue to do so depending on the market environment. Other
income grew as well in 2002 due to income from the BOLI and a
37
$40,000 gain on sale of other real estate owned. The overall increase in
non-interest income was offset by the decrease in income from service charges on
deposits, due to the closing of branches during 2001. The decreasing trend
stabilized during 2002 and management believes service charges in 2003 will not
experience further declines.
NONINTEREST EXPENSE. Noninterest expense for the year ended December 31,
2002 decreased $215,000, or 6.1%, as compared with the year ended December 31,
2001. The majority of the decrease is due to management's decision to close a
branch during 2001. As a result of the closing, salaries and employee benefits,
occupancy expense, data processing expense and other expenses decreased. There
was also a charge of $154,000 related to branch closing in 2001, which were not
repeated in 2002. The decreases in these areas were slightly offset by the
increase in loan expense, due to the refinancing activity mentioned earlier, and
professional fees.
INCOME TAXES. The income tax expense totaled $313,000 for the year ended
December 31, 2002 compared to $312,000 for the year ended December 31, 2001, due
to the increase in income before income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000
GENERAL. Net income for the year ended December 31, 2001 increased by
$322,000 from $276,000 for the year ended December 31, 2000 to $598,000 for the
year ended December 31, 2001. The increase was primarily due to the increase in
net interest income of $248,000 or 6.15%. The Company also benefited from a
reduction in non-interest expense of $398,000 which was partially offset by a
reduction in non-interest income of $100,000 during 2001.
NET INTEREST INCOME. Net interest income is the largest component of the
Company's net income, and consists of the difference between interest income
generated on interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
Net interest income increased approximately $248,000 or 6.15%, from $4.0
million for the year ended December 31, 2000 to $4.3 million for the year ended
December 31, 2001. The increase was due to a $494,000, or 8.62% decrease in
interest expense, which was off-set by a $246,000, or 2.04%, decrease in
interest income.
Average loans outstanding for the year ended December 31, 2001 increased
$2.5 million, or 3.11%, compared to average loans outstanding for the year ended
December 31, 2000, and average securities decreased $11.0 million, or 25.11%,
compared to the prior year. For the year ended December 31, 2001, the
Association experienced an increase in average yield on assets of 19 basis
points and a decrease in the average cost of liabilities of 36 basis points. The
combination of the increase in average interest-bearing liabilities coupled with
the decrease in interest rates resulted in a $246,000 increase in net interest
income over net interest income for the year ended December 31, 2000. Average
net interest margin increased 35 basis points from 2.96% for the year ended
December 31, 2000 to 3.31% for the year ended December 31, 2001. The
Association's average interest rate spread increased 54 basis points from 2.21%
for the year ended December 31 2000 to 2.75% for the year ended December 31,
2001. In addition, the 2000 results were significantly affected by the Company's
return of capital and the additional compensation recorded due to the return of
capital distributions on stock in the Incentive Plan being passed through to
plan participants.
The tables appearing elsewhere in this annual report provide a more
detailed analysis of the changes in average balances, yields/rates and net
interest income identifying that portion of change in
38
average volume versus that portion due to changes in average rates. See "Average
Balance Sheet," "Rate/Volume Analysis" and "Weighted Average Yields."
PROVISIONS FOR LOAN LOSSES. The provision for loan losses is based on
management's regular review of the loan portfolio, which considers factors such
as past experience, prevailing general economic conditions, considerations
applicable to specific loans, such as the ability of the borrower to repay the
loan and the estimated value of the underlying collateral, as well as changes in
the size and growth of the loan portfolio. No provision for loan losses was
recorded during the year ended December 31, 2000, but the Company recorded a
provision of $62,000 for 2001. The Company experienced higher consumer loan
charge-offs during 2001 compared to 2000 due to the recession in the economy and
higher consumer bankruptcy levels. Total nonperforming loans increased from
$489,000 at December 31, 2000 to $985,000 at December 31, 2001 or an increase of
101%. Management increased the provision as a result of the increased
charge-offs and the increase in nonaccrual loans. At December 31, 2001, the
allowance for loan losses represented 0.53% of total loans compared to 0.41% at
December 31, 2000 and management believed the allowance was adequate to cover
probable losses.
NONINTEREST INCOME. The Company experienced a $100,000 decrease in
noninterest income for the year ended December 31, 2001 compared to the year
ended December 31, 2000. The decrease was primarily due to the loss the Company
recognized on the loans sold. The Company recognized a net gain on the sale of
loans originated and sold during the year of $74,000, which was offset by the
loss recognized on the $114,000 aggregate decline in value of loans held for
sale at December 31, 2001. Gains on sales of securities increased $5,000 to
$15,000 at December 31, 2001 and slightly offset the decrease in gains on sale
of loans.
NONINTEREST EXPENSE. Noninterest expense for the year ended December 31,
2001 decreased $398,000, or 10.21%, as compared with the year ended December 31,
2000. Salaries and benefits decreased $450,000 or 19.45% due primarily to a
decrease in the expense related to the recognition and retention plan of
$474,000 from 2000 to 2001 due to the higher cost in 2000 resulting from the
return of capital in 2000. In addition, salary expense was reduced as a result
of the reduction in staffing due to the branch closing in 2001, which was offset
by normal inflationary increases in salary costs and increases in the cost of
the ESOP plan in 2001. Occupancy expense decreased $100,000 primarily as a
result of the branch closure. However, the decrease was offset by $154,000 of
one-time charges related to the closing of the branch.
INCOME TAXES. The income tax expense totaled $312,000 for the year ended
December 31, 2001 compared to $150,000 for the year ended December 31, 2000, due
to the increase in income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and other borrowings,
including advances from the FHLB, loan and mortgage-backed securities repayments
and other funds provided by operations. The Company also has a limited ability
to borrow additional funds from the FHLB. The Company maintains investments in
liquid assets based upon management's assessment of: (i) the Company's need for
funds; (ii) expected deposit flows; (iii) the yields available on short-term
liquid assets; and (iv) the objectives of the Company's asset/liability
management program. The Company's average liquidity ratios were 26.60%, 13.26%,
and 18.70% for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company's liquidity ratio increased due the funds received from the sale of
the stock on December 31, 1999. As the conversion proceeds are utilized,
management expects the liquidity ratio to continue to return to more historical
levels.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows from operating activities
39
were $8,829, $(7,303) and $1,110 for the years ended December 31, 2002, 2001 and
2000, respectively. Net cash from investing activities consisted primarily of
disbursements for loan organizations and the purchase, sales and maturities of
investments and mortgage-backed securities and the purchase of BOLI. Net cash
from financing activities consisted primarily of the net proceeds from sale of
stock, activity in deposit accounts, FHLB advances and loans payable.
At December 31, 2002, the Company exceeded all of its regulatory capital
requirements with a core capital level of $20.8 million, or 18.9%, of adjusted
total assets, which is above the required level of $4.4 million, or 4.00%; Tier
I capital of $20.8 million, or 38.0%, of risk-weighted assets, which is above
the required level of $2.2 million, or 4.00%; and risk-based capital of $21.2
million, or 38.6%, of risk-weighted assets, which is above the required level of
$4.4 million, or 8.00%. See "Regulatory Capital Compliance."
The Company's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 2002,
cash and short-term investments totaled $20.1 million. The Company has other
sources of liquidity if a need for additional funds arises, including the sale
of loans held for sale and the repayment of mortgage backed securities and
loans. The Company may also utilize FHLB advances or the sale of securities
available for sale as a source of funds. At December 31, 2002, the Company had
advances outstanding from the FHLB of $11.4 million and $1.4 million of
securities available for sale.
At December 31, 2002, the Company had outstanding commitments to originate
loans of $3.2 million compared to $6.7 million at December 31, 2001. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from December 31, 2002 totaled $21.9 million. The Company
expects that a substantial portion of the maturing certificate accounts will be
retained by the Company at maturity. However, if a substantial portion of these
deposits are not retained, the Company may utilize FHLB advances to a limited
extent or raise interest rates on deposits to attract new accounts, which may
result in higher levels of interest expense.
IMPACT OF NEW ACCOUNTING STANDARDS
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of debt
were issued in 2002. Management determined that when the new accounting
standards are adopted in 2003 they will not have a material impact on the
Company's financial condition or results of operations.
IMPACT ON INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations
primarily in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of the Company
are monetary in nature. Therefore, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. The liquidity, maturity
structure and quality of the Company's assets and liabilities are critical to
the maintenance of acceptable performance levels.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements listed in the Index to Consolidated Financial
Statements at Item 13 of this Form 10-KSB are incorporated by reference into
this Item 7 of Part II of this Form 10-KSB.
40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information relating to the directors and officers of the Company and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders to be held on April 23, 2003, at pages 5 and 13,
respectively.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained under the sections captioned "Executive
Compensation" in the Proxy Statement for the 2003 Annual Meeting of Shareholders
to be held on April 23, 2003 at page 8 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
(a) Security Ownership of Certain Beneficial Owners.
Information required by this item is incorporated herein by reference
to the section captioned "Stock Ownership" in the Proxy Statement for
the 2003 Annual Meeting of Shareholders to be held on April 23, 2003
at page 3.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by reference
to the section captioned "Stock Ownership" in the Proxy Statement for
the 2003 Annual Meeting of Shareholders to be held on April 23, 2003
at page 3.
The information regarding the Company's Equity Compensation Plan required
by this item is incorporated herein by reference to Item 5 of Part II of this
Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement for the 2003 Annual Meeting of Shareholders
to be held on April 23, 2003 at page 13 is incorporated herein by reference.
41
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report.
1. Financial Statements
The following consolidated financial statements of the Company
and its subsidiaries are filed as part of this document under Item 7:
Report of Independent Auditors...............................F-2
Consolidated Balance Sheets..................................F-3
Consolidated Statements of Income............................F-4
Consolidated Statements of Changes in Shareholders' Equity...F-5
Consolidated Statements of Cash Flows........................F-6
Notes to Consolidated Financial Statements...................F-8
2. Financial Statement Schedules
All schedules have been omitted because the required information
is either inapplicable or included in the Consolidated Financial
Statements or related Notes contained in the Annual Report.
3. Exhibits Required by Securities and Exchange Commission
Regulation S-B
Exhibit
No.
---
3.1 Certificate of Incorporation of Grand Central Financial
Corp.(1)
3.2 Bylaws of Grand Central Financial Corp.(1)
4.0 Draft Stock Certificate of Grand Central Financial Corp.(1)
10.1 Employment Agreement between Grand Central Financial Corp.
and William R. Williams(2)
10.2 Employment Agreement between Grand Central Financial Corp.
and John A. Rife(2)
10.3 Employment Agreement between Grand Central Financial Corp.
and Daniel F. Galeoti(2)
10.4 Employment Agreement between Grand Central Financial Corp.
and Charles O. Standley(2)
10.5 Employment Agreement between Central Federal Savings and
Loan Association of Wellsville and William R. Williams(2)
10.6 Employment Agreement between Central Federal Savings and
Loan Association of Wellsville and John A. Rife(2)
10.7 Employment Agreement between Central Federal Savings and
Loan Association of Wellsville and Daniel F. Galeoti(2)
10.8 Employment Agreement between Central Federal Savings and
Loan Association of Wellsville and Charles O. Standley(2)
10.9 Form of Central Federal Savings and Loan Association of
Wellsville Employee Severance Compensation Plan(1)
10.10 Form of Central Federal Savings and Loan Association of
Wellsville Supplemental
Executive Retirement Plan(1)
11.0 Statement Re: Computation of Per Share Earnings(3)
21.0 Subsidiaries Information Incorporated Herein By Reference
to Part 1--Subsidiary Activities
42
23.0 Consent of Independent Auditors
99.1 Chief Executive Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
--------------------------
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form SB-2, and any
amendments thereto, Registration No. 333-64089.
(2) Incorporated by reference into this document from the Annual
Report on Form 10-KSB, filed by the Company for the year ended
December 31, 1998.
(3) Incorporated by reference to Note 18 of the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K filed during the last quarter of 2002
On December 23, 2002, the Company filed an 8-K to announce that
it had declared a quarterly dividend of $0.09 per share of common
stock. The press release announcing the declaration of a dividend was
filed by exhibit.
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the chief executive
officer and the chief financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
(b) CHANGES IN INTERNAL CONTROLS. The Company made no significant changes
in its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls by the
chief executive officer and chief financial officer.
43
GRAND CENTRAL FINANCIAL CORP.
Wellsville, Ohio
ANNUAL REPORT
December 31, 2002 and 2001
CONTENTS
Page
----
Report of Independent Auditors .............................................F-2
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Income...........................................F-4
Consolidated Statements of Changes in Shareholders' Equity..................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-8
--------------------------------------------------------------------------------
F-1.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Grand Central Financial Corp.
Wellsville, Ohio
We have audited the accompanying consolidated balance sheets of Grand Central
Financial Corp. as of December 31, 2002 and 2001 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Central
Financial Corp. as of December 31, 2002 and 2001 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 19, 2003
--------------------------------------------------------------------------------
F-2.
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
(Dollars in thousands, except
per share data)
2002 2001
--------- ---------
ASSETS
Cash and amounts due from depository institutions $ 12,876 $ 4,378
Interest-bearing deposits in other banks 3 2
--------- ---------
Total cash and cash equivalents 12,879 4,380
Time deposits with other bank 7,205 7,006
Securities available for sale 1,439 2,092
Securities held to maturity
(fair value 2002 - $18,169, 2001 - $23,528) 17,822 23,343
Loans held for sale -- 8,221
Loans, net (of allowance of $361 and $373) 62,565 70,570
Federal Home Loan Bank stock 3,485 3,328
Accrued interest receivable 403 530
Premises and equipment, net 833 849
Bank owned life insurance 3,068 --
Other assets 820 608
--------- ---------
$ 110,519 $ 120,927
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 1,396 $ 825
Interest-bearing 73,294 75,343
--------- ---------
Total deposits 74,690 76,168
Federal Home Loan Bank advances 11,430 18,393
Loan payable 4,900 7,000
Advance payments by borrowers for taxes and insurance 487 603
Accrued interest payable 63 88
Other liabilities 1,366 515
--------- ---------
Total liabilities 92,936 102,767
SHAREHOLDHERS' EQUITY
Preferred Stock, authorized 1,000,000 shares, no shares
issued and outstanding
Common stock, $.01 par value, 6,000,000 shares authorized,
1,938,871 shares issued 19 19
Additional paid-in capital 8,306 8,310
Retained earnings 14,085 13,962
Unearned Employee Stock Ownership Plan shares (1,425) (1,651)
Unearned stock based incentive plan shares (160) (270)
Treasury stock, at cost (2002 - 292,950 shares,
2001 - 196,540 shares) (3,270) (2,226)
Accumulated other comprehensive income 28 16
--------- ---------
17,583 18,160
--------- ---------
Total shareholders' equity $ 110,519 $ 120,927
========= =========
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3.
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
(Dollars in thousands, except
per share data)
2002 2001 2000
------ ------- ------
INTEREST INCOME
Loans, including fees $5,255 $ 6,685 $6,270
Interest on securities 1,691 2,696 3,393
Interest-bearing deposits in banks 137 207 171
------ ------- ------
Total interest income 7,083 9,588 9,834
INTEREST EXPENSE
Deposits 2,509 3,245 3,166
FHLB borrowings 664 1,569 2,229
Loan payable 297 494 407
------ ------- ------
Total interest expense 3,470 5,308 5,802
------ ------- ------
NET INTEREST INCOME 3,613 4,280 4,032
Provision for loan losses 19 62 --
------ ------- ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,594 4,218 4,032
NON-INTEREST INCOME
Service charges 98 157 208
Gain (loss) on sale of loans 372 (40) 4
Gain on sale of securities 16 15 10
Other income 194 62 72
------ ------- ------
Total non-interest income 680 194 294
NON-INTEREST EXPENSE
Salaries and employee benefits 1,794 1,864 2,314
Net occupancy expense 263 267 367
Data processing expense 132 137 141
Franchise taxes 287 309 356
Professional fees 211 163 181
Loan expense 197 130 112
Branch closing expense -- 154 --
Other expenses 403 478 429
------ ------- ------
Total non-interest expense 3,287 3,502 3,900
------ ------- ------
INCOME BEFORE INCOME TAXES 987 910 426
Income tax expense 313 312 150
------ ------- ------
NET INCOME $ 674 $ 598 $ 276
====== ======= ======
Basic earnings per share $ 0.44 $ 0.38 $ 0.17
Diluted earnings per share 0.43 0.38 0.17
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4.
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------
Unearned Unearned
Employee Stock Accumulated
Additional Stock Based Other Total
Common Paid-in Retained Ownership Incentive Treasury Comprehensive Shareholders'
Stock Capital Earnings Plan Shares Plan Shares Stock Income Equity
------ ---------- -------- ----------- ----------- -------- ------------- -------------
Balance at January 1, 2000 $ 19 $ 18,595 $ 14,010 $ (1,231) $ (934) $(1,285) $ 26 $ 29,200
Comprehensive income:
Net income 276 276
Other comprehensive income (11) (11)
--------
Total comprehensive income 265
Return of capital (10,313) (738) (11,051)
Commitment to release 11,656
employees stock ownership
plan shares 40 116 156
Purchase of 92,096 shares of
treasury stock (866) (866)
Compensation expense with respect
to release of 15,516 incentive
plan shares and return of capital 569 569
Cash dividends declared
($.25 per share) (440) (440)
---- -------- -------- -------- -------- ------- ---- --------
Balances at December 31, 2000 19 8,322 13,846 (1,853) (365) (2,151) 15 17,833
Comprehensive income:
Net income 598 598
Other comprehensive income 1 1
--------
Total comprehensive income 599
Commitment to release 18,864
employee stock ownership
plan shares (12) 202 190
Purchase of 7,500 shares of
treasury stock (75) (75)
Release of 15,516 incentive
plan shares 95 95
Cash dividends declared
($.31 per share) (482) (482)
---- -------- -------- -------- -------- ------- ---- --------
Balance at December 31, 2001 19 8,310 13,962 (1,651) (270) (2,226) 16 18,160
Comprehensive income:
Net income 674 674
Other comprehensive income 12 12
--------
Total comprehensive income 686
Commitment to release 21,588
employee stock ownership
plan shares (4) 226 222
Purhcase of 96,410 shares of
treasury stock (1,044) (1,044)
Release of 15,516 incentive
plan shares 110 110
Cash dividends declared
($.36 per share) (551) (551)
---- -------- -------- -------- -------- ------- ---- --------
Balance at December 31, 2002 $ 19 $ 8,306 $ 14,085 $ (1,425) $ (160) $(3,270) $ 28 $ 17,583
==== ======== ======== ======== ======== ======= ==== ========
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-5.
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 674 $ 598 $ 276
Adjustments to reconcile net income to net cash
provided by operating activities:
Discount accretion net of premium amortization (30) (36) (191)
(Gain) loss on sale of securities (16) (15) (10)
FHLB stock dividend (157) (215) (218)
Provision for loan losses 19 62 --
Compensation expense on ESOP shares 222 190 156
(Gain) loss on sale of fixed assets, net -- -- 9
(Gain) loss on sales of loans held for sale, net (372) 40 (4)
Depreciation 118 101 141
Write-down of assets from branch closings -- 154 --
Deferred income taxes 138 36 (22)
Compensation expense for RRP shares 110 95 569
Change in:
Accrued interest receivable (127) 576 (123)
Loans held for sale 8,221 (8,221) --
Accrued interest payable (25) (544) 454
Other assets and liabilities 54 (124) 73
-------- -------- --------
Net cash from operating activities 8,829 (7,303) 1,110
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale
Purchases (290) (233) (174)
Proceeds from sales 386 245 236
Proceeds from maturities and payments 594 1,077 788
Securities held to maturity
Purchases (21,508) -- --
Proceeds from maturities and payments 27,056 12,493 18,950
Increase in time deposits with other banks (199) (6) (7,000)
Purchase of bank owned life insurance (3,000) -- --
Purchase of loans -- -- (2,772)
Net change in loans 8,985 15,769 (10,166)
Net purchases of premises and equipment (102) (10) --
-------- -------- --------
Net cash from investing activities 11,922 29,335 (138)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,478) 2,171 (1,836)
Proceeds from loan payable -- -- 7,000
Repayments of loan payable (2,100) -- --
Net change in short-term FHLB advances -- -- 5,289
Proceeds from long-term FHLB advances -- 49,320 --
Repayment of long-term FHLB advances (6,963) (71,463) (1,172)
Purchase of treasury stock (1,044) (75) (866)
Return of capital -- -- (11,051)
Cash dividends paid (551) (482) (440)
Net change in escrow accounts (116) (53) 106
-------- -------- --------
Net cash from financing activities (12,252) (20,582) (2,970)
-------- -------- --------
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6.
GRAND CENTRAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
(Dollars in thousands)
2002 2001 2000
------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 8,499 $1,450 $(1,998)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,380 2,930 4,928
------- ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $12,879 $4,380 $ 2,930
======= ====== =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 3,495 $5,852 $ 5,348
Income taxes 160 226 --
NONCASH TRANSACTIONS
Transfers to other real estate owned -- 145 --
Transfer of held for sale loans to portfolio -- -- 147
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, dollar amounts are in thousand, except per share
data
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Grand Central Financial Corp. (Company) and its wholly-owned
subsidiary Central Federal Savings and Loan of Wellsville (Bank). All
significant intercompany balances and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS: The Company is engaged in the business of banking with
operations and four offices in Wellsville, Ohio and surrounding areas, which are
primarily light industrial areas. These communities are the source of
substantially all of the Company's deposits and loan activities. The Company's
primary source of revenue is single-family residential loans.
USE OF ESTIMATES: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses and fair values of financial instruments are particularly subject to
change.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with financial institutions and
interest-bearing deposits in other banks. The Company reports net cash flows for
customer loan and deposit transactions.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Trading securities are carried at fair value, with changes in unrealized holding
gains and losses included in income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
--------------------------------------------------------------------------------
(Continued)
F-8.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection. Consumer loans are
typically charged off no later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans, and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure are
initially recorded at lower of cost or fair value when acquired, established a
new cost basis. If fair value declines, valuation allowance is recorded through
expense. Costs after acquisition are expensed.
PREMISES AND EQUIPMENT: Land is carried at cost. Other premises and equipment
are recorded at cost and are depreciated on the straight-line method.
Depreciation and amortization are provided over the estimated useful lives of
the respective assets which range from 3 to 40 years.
OTHER REAL ESTATE OWNED: Assets acquired through or instead of loan foreclosure
are initially recorded at fair value when acquired, establishing a new cost
basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
--------------------------------------------------------------------------------
(Continued)
F-9.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SERVICING ASSETS: Servicing assets represent purchased rights and the allocated
value of retained servicing rights on loans sold. Servicing assets are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the assets, using groupings
of the underlying loans as to interest rates and prepayment characteristics.
Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance.
BANK OWNED LIFE INSURANCE: The Company has purchased life insurance policies on
certain key executives. Company owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
STOCK COMPENSATION: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2002 2001
---- ----
Net income as reported $674 $598
Deduct: Stock-based compensation expense
determined under fair value based method 121 121
---- ----
Pro forma net income $553 $477
==== ====
Basic earnings per share as reported $.44 $.38
Pro forma basic earnings per share .36 .30
Diluted earnings per share as reported .43 .38
Pro forma diluted earnings per share .35 .30
INCOME TAXES: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
--------------------------------------------------------------------------------
(Continued)
F-10.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EMPLOYEE STOCK OWNERSHIP PLAN: The cost of shares issued to the Employee Stock
Ownership Plan ("ESOP"), but not yet allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to the holding company or by
the holding company to its shareholders. These restrictions pose no practical
limit on the ability of the bank or company to pay dividends at historical
levels.
EARNINGS PER COMMON SHARE: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Recognition and Retention Plan ("RRP") shares are considered outstanding as they
become vested. Diluted earnings per common share include the dilutive effect of
RRP shares and the additional potential common shares issuable under stock
options.
CONCENTRATIONS OF CREDIT RISK: At December 31, 2002, the Bank had deposits of
$7,205 with a local institution. This amount is not fully insured by the Federal
Deposit Insurance Corporation.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which is also recognized as a separate
component of shareholders' equity.
RESTRICTIONS ON CASH: Cash on hand or on deposit with the Federal Reserve Bank
of $135 was required to meet regulatory reserve and clearing requirements at
year end 2002. These balances do not earn interest.
--------------------------------------------------------------------------------
(Continued)
F-11.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on-and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
BUSINESS SEGMENTS: While the Company's chief decision-makers monitor the revenue
streams of the various Company products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Company's financial condition or
results of operations.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
--------------------------------------------------------------------------------
(Continued)
F-12.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows:
Gross Gross
Fair Unrealized Unrealized
2002 Value Gains Losses
---- ----- ----- ------
Mortgage-backed securities:
Freddie Mac $ 151 $ - $(1)
Fannie Mae 579 21 -
Ginnie Mae 709 24 -
------ --- ---
Total $1,439 $45 $(1)
====== === ===
2001
----
Fannie Mae Stock $ 79 $ 1 $ -
Mortgage-backed securities:
Freddie Mac 178 - (3)
Fannie Mae 750 1 (4)
Ginnie Mae 1,085 29
------ --- ---
Total $2,092 $31 $(7)
====== === ===
--------------------------------------------------------------------------------
(Continued)
F-13.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
2002 Amount Gains Losses Value
---- ------ ----- ------ -----
U.S. government and federal
agencies $ 2,527 $ 30 $ - $ 2,557
Corporate obligations 1,996 - - 1,996
Mortgage-backed securities:
Freddie Mac 776 4 - 780
Fannie Mae 12,521 318 (5) 12,834
CMO's 2 - - 2
------- ---- --- -------
Total $17,822 $352 $(5) $18,169
======= ==== === =======
2001
----
U.S. government and federal
agencies $ 2,000 $ 17 $ - $ 2,017
Mortgage-backed securities:
Freddie Mac 12,590 168 (8) 12,750
Fannie Mae 5,270 24 (11) 5,283
CMO's 3,483 13 (18) 3,478
------- ---- ---- -------
Total $23,343 $222 $(37) $23,528
======= ==== ==== =======
The fair value of debt securities and carrying amount, if different, at year end
2002 by contractual maturity were as follows. Securities not due at a single
maturity date, primarily mortgage-backed securities, are shown separately.
Available for sale Held to maturity
------------------ ----------------
Fair Amortized Fair
Value Cost Value
----- ---- -----
One year or less $ - $ 2,505 $ 2,517
After five years through
ten years - 2,018 2,036
Mortgage-backed securities 1,439 13,299 13,616
------ ------- -------
$1,439 $17,822 $18,169
====== ======= =======
--------------------------------------------------------------------------------
(Continued)
F-14.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Sales of available for sale securities were as follows.
2002 2001 2000
---- ---- ----
Proceeds $386 $245 $236
Gross gains 16 15 10
Securities with a carrying amount of approximately $2,343 and $3,594, were
pledged to secure deposits as required or permitted by law at December 31, 2002
and 2001, respectively.
NOTE 3 - LOANS
Loans at year-end were as follows.
2002 2001
---- ----
Loans secured by real estate:
Construction loans on single family
residences $ 128 $ 675
Single family 48,169 50,738
Multi-family and commercial 1,536 1,381
Commercial loans 120 184
Consumer loans 12,973 17,965
------- -------
62,926 70,943
Allowance for loan losses (361) (373)
------- -------
Total $62,565 $70,570
======= =======
Activity in the allowance for loan losses for the year was as follows.
2002 2001 2000
---- ---- ----
Balance, beginning of period $373 $354 $ 369
Loans charged-off (35) (53) (22)
Recoveries 4 10 7
Provision for losses 19 62 -
---- ---- ----
Balance, end of period $361 $373 $354
==== ==== ====
--------------------------------------------------------------------------------
(Continued)
F-15.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Nonperforming loans were as follows.
2002 2001
---- ----
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 781 883
Impaired loans are not material for any period presented.
Loans to principal officer, directors, and their affiliates in 2002 were as
follows.
2002
----
Balance, beginning of period $ 273
New loans 560
Payments (226)
-----
Balance, end of period $ 607
=====
NOTE 4 - MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The outstanding balances of serviced loans were approximately $25,930
and $11,767 at December 31, 2002 and 2001, respectively.
Changes in capitalized mortgage loan servicing rights included in other assets
were as follows.
2002 2001
---- ----
Balance at beginning of year $ 88 $ 58
Originations 162 45
Amortization (50) (15)
---- ----
Totals $200 $ 88
==== ====
--------------------------------------------------------------------------------
(Continued)
F-16.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows.
2002 2001
---- ----
Land $ 63 $ 63
Buildings and improvements 1,485 1,462
Furniture, fixtures and equipment 1,227 1,148
------- -------
2,775 2,673
Accumulated depreciation and amortization (1,942) (1,824)
------- -------
Total $ 833 $ 849
======= =======
Certain Company facilities and equipment were leased under various operating
leases. Rental expense was $0, $16, and $38 for years ended December 31, 2002,
2001 and 2000.
The Company closed one branch during 2001 and took charges totaling $154. In
connection with the branch closings the Company paid a cancellation fee for
terminating the lease, wrote-off the remaining leasehold improvements and
abandoned equipment and wrote down the remaining equipment to its estimated
realizable value.
NOTE 6 - DEPOSITS
Interest-bearing deposit account balances are summarized as follows.
2002 2001
---- ----
Interest-bearing checking
account $14,458 $14,163
Savings accounts 18,115 17,508
Certificates of deposit 40,721 43,672
------- -------
$73,294 $75,343
======= =======
--------------------------------------------------------------------------------
(Continued)
F-17.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
The aggregate amount of certificates of deposit with a minimum denomination of
$100 thousand was approximately $3,520 and $3,946 at December 31, 2002 and 2001
respectively. Deposits in excess of $100 are not insured by the FDIC.
At December 31, 2002, scheduled maturities of certificates of deposit are as
follows:
2003 $21,910
2004 12,905
2005 2,239
2006 3,647
2007 20
-------
Total $40,721
=======
Deposits from principal officers, directors and their affiliates at year end
2002 and 2001 were $300 and $364.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
The Bank has entered into various borrowing agreements with the Federal Home
Loan Bank (FHLB) of Cincinnati. FHLB advances are comprised of the following:
Maturity Interest Rate 2002 2001
-------- ------------- ---- ----
2002 5.95% - 6.50% $ 6,119
2003 5.45% - 5.80% $ 170 850
2005 6.86% - 6.96% 53 73
2006 6.31% 27 33
2007 6.45% - 6.60% 180 318
2008 5.07% - 5.59% 6,000 6,000
2009 5.07% - 5.47% 5,000 5,000
------- -------
Total $11,430 $18,393
======= =======
Pursuant to a collateral agreement with the FHLB, the advances are secured by
all stock invested in the FHLB, certain securities and certain qualifying first
mortgage loans. Qualifying first mortgage loans and securities pledged to secure
FHLB advances totaled $47,004 at December 31, 2002. Based on the carrying amount
of FHLB stock owned by the Company, total FHLB advances are limited to
approximately $69,696 at December 31, 2002.
--------------------------------------------------------------------------------
(Continued)
F-18.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
At December 31, 2002, scheduled payments on borrowings are as follows:
2003 $ 6,235
2004 1,068
2005 4,065
2006 54
2007 8
-----------
Total $ 11,430
===========
NOTE 8 - LOAN PAYABLE
The Company has a note payable with a financial institution with a balance at
December 31, 2002 and 2001 of $4,900 and $7,000 at a rate of 4.30%. A reduction
to principal of $100 per quarter is required and the remaining balance will be
paid on the maturity date of January 21, 2004. Interest is to be paid on a
monthly basis. The note is secured by stock the Company owns in the Bank. The
proceeds were used to fund the return of capital of $6.00 per share in the first
quarter of 2000.
NOTE 9 - FEDERAL INCOME TAXES
Income tax expense consists of the following:
2002 2001 2000
---- ---- ----
Current $ 175 $ 276 $ 172
Deferred 138 36 (22)
------------ ------------ ------------
$ 313 $ 312 $ 150
============ ============ ============
-------------------------------------------------------------------------------
(Continued)
F-19.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 9 - FEDERAL INCOME TAXES (Continued)
The provision for federal income taxes differ from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis.
2002 2001 2000
---- ---- ----
Expected tax provision at a 34% rate $ 336 $ 309 $ 145
Effect of tax-exempt income - - (1)
ESOP shares released at fair market value 1 - 15
Bank owned life insurance income (23) - -
Other (1) 3 (9)
------------ ------------ ------------
$ 313 $ 312 $ 150
============ ============ ============
Effective tax rate 31.7% 34.1% 35.7%
-------------------------------------------------------------------------------
(Continued)
F-20.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 9 - FEDERAL INCOME TAXES (Continued)
The net deferred tax assets in the balance sheets include the following
components:
2002 2001
---- ----
Deferred tax assets
Bad debt $ 123 $ 127
Deferred loan fees and costs 265 267
Accrued stock award 16 51
Nonaccrual interest 30 13
--------- -------
Total deferred tax assets 434 458
Deferred tax liabilities
Fixed assets 76 60
Unrealized gain on securities
available for sale 14 8
FHLB Stock Dividends 330 277
Mortgage loan servicing rights 68 30
Other 10 3
--------- -------
Total deferred tax liabilities 498 378
--------- -------
Net deferred tax asset (liability) $ (64) $ 80
========= =======
No valuation allowance for deferred tax assets was provided because the Company
had sufficient taxes paid in and available for recovery to warrant recording the
full deferred tax asset.
Retained earnings at December 31, 2002 and 2001, includes approximately $2,250
for which no federal income tax liability has been recorded. These amounts
represent an allocation of income to bad debt deductions for tax purposes alone.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments from carryback of net operating losses would create income for tax
purposes only, which would be subject to current tax. The unrecorded deferred
tax liability on the above amounts at December 31, 2002 and 2001 was
approximately $765.
Taxes attributable to securities gains approximated $5, $5 and $3 for the years
ended December 31, 2002, 2001, and 2000 respectively.
-------------------------------------------------------------------------------
(Continued)
F-21.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 10 - PENSION PLAN
The Company maintains a contributory trustee pension plan for all eligible
employees. The benefits contemplated by the plan are funded as accrued through
the purchase of individual life insurance policies. The cost of funding is
charged directly to operations. No unfunded liability exists for past service
costs. The Company made no contributions for 2002, 2001 or 2000.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN
During 1998, the Company established an Employee Stock Ownership Plan ("ESOP")
for the benefit of employees 21 and older and who have completed at least one
year of service. Contributions under the ESOP are conditioned upon the ESOP
being qualified under Sections 401 and 501 of the Internal Revenue code of 1986,
as amended (the "Code").
To fund the plan, the ESOP borrowed $1,551 from the Company for the purposes of
purchasing 155,111 shares of stock at $10 per share. Principal and interest
payments on the loan are due in annual installments, which began December 31,
1998 with the final payments of principal and interest being due and payable at
maturity on December 31, 2009. Interest is payable during the term of the loan
at a fixed rate of 7.5%. The loan is collateralized by the shares of the
Company's common stock purchased with the proceeds. As the Bank periodically
makes contributions to the ESOP to repay the loan, shares are allocated to
participants on the basis of the ratio of each year's principal and interest
payments to the total of all principal and interest payments. All dividends on
unallocated shares received by the ESOP are used to pay debt service. The shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. When loan payments are made, ESOP
shares are allocated to participants based on relative compensation.
In March 2000, the Company declared and paid a $6.00 per share return of capital
distribution. The ESOP received $738 from the return of capital distribution on
123,081 unallocated shares. The ESOP purchased an additional 83,353 shares with
a portion of the proceeds from the return of capital distribution. In addition,
the ESOP has approximately $195 of proceeds from the return of capital which
will be used to buy additional shares for the plan. The additional shares
purchased will be held in suspense and allocated to participants in a manner
similar to the original ESOP shares.
ESOP compensation expense was $222, $190 and $156 for 2002, 2001 and 2000. ESOP
shares at December 31, 2002 and 2001 were as follows:
2002 2001
---- ----
Allocated to participants 108,483 89,976
Unearned 122,882 144,470
----------- -----------
Total ESOP shares 231,365 234,446
=========== ===========
Fair value of unreleased shares $ 1,153 $ 1,420
=========== ===========
-------------------------------------------------------------------------------
(Continued)
F-22.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION PLAN
Options to buy stock are granted to directors, officers and employees under the
stock option plan. The maximum number of Common Shares that may be issued under
the plan is 193,887. The exercise price is the market price at date of grant.
The Plan provides for the grant of options, which may qualify as either
incentive stock options or nonqualified options. One-fifth of the options
awarded become first exercisable on each of the first five anniversaries of the
date of grant. The option period expires 10 years from the date of grant.
2002 2001
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning
of year 182,497 $ 9.23 182,497 $ 9.23
Granted - -
Exercised - -
Forfeited - -
-------------- -------------- --------------- --------------
Outstanding at end of year 182,497 $ 9.23 182,497 $ 9.23
============== ============== =============== ==============
2002 2001
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Options exerciseable at
year-end 107,903 $ 9.22 71,402 $ 9.21
Options outstanding at year-end 2002 were as follows.
Outstanding Exerciseable
----------- ------------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life Number Price
------ ------ ---- ------ -----
$ 9.20 - $9.82 182,497 6.7 years 107,903 $ 9.22
=============== ============== ================ ==============
-------------------------------------------------------------------------------
(Continued)
F-23.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 13 - STOCK BASED INCENTIVE PLAN
The Company maintains a stock based incentive plan for the benefit of directors
and certain key employees of the Company. The stock based incentive plan is used
to provide such individuals ownership interest in the Company in a manner
designed to compensate such directors and key employees for services. The Bank
contributed sufficient funds to enable the stock based incentive plan to
purchase a number of common shares in the open market equal to 4% of the common
shares sold in connection with the Conversion.
On July 15, 2000 a Committee of the Board of Directors awarded 73,679 shares to
certain directors and officers of the Company. No shares had been previously
awarded. One-fifth of such shares are earned and nonforfeitable on each of the
first five anniversaries of the date of the awards. In the event of the death or
disability of a participant or a change in control of the Company, the
participant's shares will be deemed to be entirely earned and nonforfeitable
upon such date. There were 3,875 shares at December 31, 2001 reserved for future
awards. In March 2000, the Company declared and paid a $6.00 per share return of
capital distribution. The return of capital for the shares in the plan was
passed through to the plan participants which resulted in an expense of
approximately $465. Compensation expense, which is based on the cost of the
shares, and the return of capital distribution to plan participants in 2002 was
$110, $95 for 2001 and $569 for 2000.
NOTE 14 - REGULATORY MATTERS
Related to its conversion from a mutual to stock savings and loan association,
the Bank established a liquidation account of approximately $14,300, which was
equal to its total net worth as of the date of the latest balance sheet
appearing in the final conversion prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The Bank may not pay dividends that
would reduce shareholders' equity below the required liquidation account
balance.
-------------------------------------------------------------------------------
(Continued)
F-24.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 14- REGULATORY MATTERS (Continued)
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet minimum capital requirements can initiate certain mandatory, and
possible additional discretionary actions by regulators that, if undertaken,
could have a direct affect on the Bank and the financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to total assets (as defined). As discussed in greater detail below, as
of December 31, 2002, the Bank meets all of the capital adequacy requirements to
which it is subject.
As of the most recent notifications from the OTS, the Bank was categorized as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since the most recent notification that
management believes have changed the Bank's prompt corrective action category.
-------------------------------------------------------------------------------
(Continued)
F-25.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 14- REGULATORY MATTERS (Continued)
At December 31, 2002 and 2001, the Bank's actual capital levels and minimum
required levels were:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2002
Total Risk-Based
Capital (to Risk-
Weighted Assets) $ 21,163 38.6% $ 4,385 8.0% $ 5,482 10.0%
Tier I Capital
(to Risk-Weighted
Assets) 20,802 38.0 2,193 4.0 3,289 6.0
Tier I Capital
(to Adjusted Assets) 20,802 18.9 4,403 4.0 5,504 5.0
2001
Total Risk-Based
Capital (to Risk-
Weighted Assets) $ 22,660 35.7% $ 5,079 8.0% $ 6,349 10.0%
Tier I Capital
(to Risk-Weighted
Assets) 22,287 35.1 2,540 4.0 3,809 6.0
Tier I Capital
(to Adjusted Assets) 22,287 18.4 4,839 4.0 6,049 5.0
-------------------------------------------------------------------------------
(Continued)
F-26.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 14 - REGULATORY MATTERS (Continued)
Banking regulations limit capital distributions by banks. Generally, capital
distributions are limited to undistributed net income for the current and prior
two years. At year-end 2002, approximately $334 is available to pay dividends to
the holding company.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
The Company had outstanding commitments to originate loans as follows:
December 31,
------------
2002 2001
---- ----
First mortgages $ 892 $ 4,117
Consumer lines 2,044 2,421
Commercial lines 250 168
------------ ------------
$ 3,186 $ 6,706
============ ============
As of December 31, 2002, fixed-rate commitments totaled $123 and had interest
rates ranging from 6.625% to 8.25%. As of December 31, 2001, fixed-rate
commitments totaled $3,954 and had interest rates ranging from 5.875% to 8.75%.
Commitments to make loans are generally made for periods of 60 days or less.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
-------------------------------------------------------------------------------
(Continued)
F-27.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans: The fair value of loans is estimated by discounting future cash flows
using the current rater at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans held for
sale is estimated based on quoted market prices.
Federal Home Loan Bank Stock: The estimated fair value of Federal Home Loan Bank
stock is considered to approximate cost since it may be redeemed at par under
certain circumstances.
Deposit Liabilities: The fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
Federal Home Loan Bank Advances: The fair value of Federal Home Loan Bank
Advance is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
Loan Payable: The fair value of the loan payable is estimated by discounting
future cash flows using the current rates for borrowings of similar remaining
maturities.
Accrued Interest Receivable and Accrued Interest Payable: For these assets and
liabilities, the carrying amount is a reasonable estimate of fair value.
Off Balance Sheet Commitments: The fair value of off balance sheet commitments
to extend credit is not material.
The estimated fair values of the Company's financial instruments are as follows:
2002 2001
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial assets:
Cash and cash equivalents $ 12,879 $ 12,879 $ 4,380 $ 4,380
Time deposits with other bank 7,205 7,205 7,006 7,006
Securities 19,261 19,608 25,435 25,620
Loans, net of allowance 62,565 65,119 70,570 72,647
Loans held for sale - - 8,221 8,221
FHLB Stock 3,485 3,485 3,328 3,328
Accrued interest receivable 403 403 530 530
Financial liabilities:
Deposits (74,690) (75,345) (76,168) (76,796)
Federal Home Loan Bank
advances (11,430) (12,819) (18,393) (19,059)
Loan payable (4,900) (4,900) (7,000) (7,000)
Accrued interest payable (63) (63) (88) (88)
-------------------------------------------------------------------------------
(Continued)
F-28.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at December 31, 2002 the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
2002 should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities of the Company may have value, but are not included
in the above disclosures, such as property and equipment. Also, nonfinancial
instruments typically not recognized in these financial statements nevertheless
may have value, but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit accounts, the
earnings potential of certain loan servicing rights, the value of a trained work
force, customer goodwill and similar items.
NOTE 17 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
2002 2001 2000
---- ---- ----
Unrealized holding gains and losses on $ 34 $ 17 $ (7)
available-for-sale securities
Less reclassification adjustments for gains
later recognized in income (16) (15) (10)
-------------- --------------- --------------
Net unrealized gains and losses 18 2 (17)
Tax effect (6) (1) (6)
-------------- --------------- --------------
Other comprehensive income $ 12 $ 1 $ (11)
============== =============== ==============
-------------------------------------------------------------------------------
(Continued)
F-29.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 18 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
2002 2001 2000
---- ---- ----
Basic
Net income $ 674 $ 598 $ 276
============== =============== ==============
Weighted average common shares
outstanding 1,530,429 1,564,797 1,599,747
Basic earnings per common share $ 0.44 $ 0.38 $ 0.17
============== =============== ==============
Diluted
Net income $ 674 $ 598 $ 276
============== =============== ==============
Weighted average common shares
Outstanding for basic earnings per common
share 1,530,429 1,564,797 1,595,477
Add: Dilutive effects of assumed exercises of
stock options and RRP shares 31,570 4,713 29,649
-------------- --------------- --------------
Average shares and dilutive potential
common shares 1,561,999 1,569,510 1,625,126
============== =============== ==============
Diluted earnings per common share $ 0.43 $ 0.38 $ 0.17
============== =============== =============
Stock options for 8,000 shares of common stock were not considered in computing
earnings per share for 2002 and 2001 because they were antidilutive.
-------------------------------------------------------------------------------
(Continued)
F-30.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Grand Central Financial Corp. follows,
CONDENSED BALANCE SHEET,
December 31, 2002 and 2001
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 516 $ 1,738
Investment in banking subsidiary 20,831 22,303
Other assets 1,291 1,290
--------------- ----------------
Total assets $ 22,638 $ 25,331
=============== ================
LIABILITIES AND EQUITY
Loan payable $ 4,900 $ 7,000
Accrued expenses and other liabilities 155 171
Shareholders' equity 17,583 18,160
--------------- ----------------
Total liabilities and shareholders' equity $ 22,638 $ 25,331
=============== ================
CONDENSED STATEMENTS OF INCOME
December 31, 2002 and 2001
2002 2001
---- ----
Interest and dividend income
Loan interest income $ 77 $ 86
--------------- ----------------
77 86
Interest expense 297 494
Operating expenses 173 204
--------------- ----------------
470 698
Loss before taxes and equity in
undistributed loss of subsidiary (393) (612)
Income tax benefit (137) (208)
--------------- ----------------
Loss before equity in undistributed
loss of subsidiary (256) (404)
Equity in undistributed earnings of subsidiary 930 1,002
--------------- ----------------
Net income $ 674 $ 598
=============== ================
-------------------------------------------------------------------------------
(Continued)
F-31.
GRAND CENTRAL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
-------------------------------------------------------------------------------
NOTE 19- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
At December 31, 2002 and 2001
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 674 $ 598
Equity in undistributed earnings of subsidiary (930) (1,002)
Cash received from bank for ESOP loan 212 212
Change in other assets and other liabilities (589) 422
--------------- ----------------
Net cash from operating activities (633) 229
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loan payable (2,100) -
Purchase of treasury stock 1,044 (75)
Cash dividends paid 551 (482)
Dividends on unallocated ESOP shares (84) (60)
--------------- ----------------
Net cash from financing activities (589) (617)
--------------- ----------------
Net change in cash and cash equivalents (1,222) (388)
Beginning cash and cash equivalents 1,738 2,126
--------------- ----------------
Ending cash and cash equivalents $ 516 $ 1,738
=============== ================
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings per Share
Interest Net Interest Net ------------------
Income Income Income Basic Fully Diluted
-------- ------------ ------ ----- -------------
2002
First quarter $ 1,940 $ 996 $ 209 $ .13 $ .13
Second quarter 1,767 858 140 .09 .09
Third quarter 1,719 854 114 .08 .07
Fourth quarter 1,657 905 211 .14 .14
2001
First quarter $ 2,550 $ 1,032 $ 180 $ .12 $ .12
Second quarter 2,521 1,113 91 .06 .06
Third quarter 2,263 980 275 .18 .18
Fourth quarter 2,254 1,155 52 .02 .02
-------------------------------------------------------------------------------
(Continued)
F-31.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRAND CENTRAL FINANCIAL CORP.
/s/ David C. Vernon
---------------------------------------------
David C. Vernon
Chairman of the Board and Chief Executive Officer
Date: March 28, 2003
Pursuant to the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ David C. Vernon Chairman of the Board and March 28, 2003
------------------------------------ Chief Executive Officer
David C. Vernon
(principal executive officer)
/s/ William R. Williams President and Director March 28, 2003
------------------------------------
William R. Williams
/s/ John A. Rife Executive Vice President March 28, 2003
------------------------------------ and Treasurer
John A. Rife
(principal accounting
and financial officer)
/s/ Gerry W. Grace Director March 28, 2003
------------------------------------
Gerry W. Grace
/s/ Jeffrey W. Aldrich Director March 28, 2003
------------------------------------
Jeffrey W. Aldrich
/s/ Thomas P. Ash Director March 28, 2003
------------------------------------
Thomas P. Ash
CERTIFICATION
I, David C. Vernon, certify, that:
1. I have reviewed this annual report on Form 10-KSB of Grand Central
Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ David C. Vernon
---------------------------------------
David C. Vernon
Chairman of the Board and Chief
Executive Officer
CERTIFICATION
I, John A. Rife, certify, that:
1. I have reviewed this annual report on Form 10-KSB of Grand Central
Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ John A. Rife
--------------------------------------
John A. Rife
Executive Vice President and Treasurer