s4amend.htm
|
As
filed with the Securities and Exchange Commission on
February
11, 2008
|
Registration
No. 33-
146882
|
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
----------
Pre-Effective Amendment No. 1 to the
FORM S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
----------
SUMMIT FINANCIAL GROUP,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
West
Virginia
|
6711
|
55-0672148
|
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.
R. S. Employer
Identification
Number)
|
300 North Main
Street
Moorefield, West
Virginia 26836
(304) 530-1000
----------
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
H. Charles Maddy,
III
Summit Financial Group,
Inc.
300 N. Main
Street
Moorefield, West
Virginia 26836
(304) 530-1000
----------
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
with copies to:
|
Sandra
M. Murphy, Esq.
|
George
W. Murphy, Jr., Esq.
|
|
Bowles
Rice McDavid Graff & Love LLP
|
Victor
L. Cangelosi, Esq.
|
|
600
Quarrier Street
|
Muldoon
Murphy & Aguggia LLP
|
|
P.
O. Box 1386
|
5101
Wisconsin Avenue, N.W.
|
|
Charleston,
West Virginia 25325-1386
|
Washington,
D.C. 20016
|
|
(304)
347-1131
|
(202)
362-0840
|
Approximate
date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box.
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of
Securities
to Be Registered
|
Amount
to Be
Registered
|
Proposed
Maximum
Offering
Price Per Unit
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount
of
Registration
Fee
|
|
Common
Stock,
par
value $ 2.50 per share
|
712,809
shares
|
|
$9,012,175
|
$354.18
|
THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
|
(1)
|
The number of shares of common stock, par value $2.50
per share of Summit Financial Group, Inc. to be registered pursuant to
this Registration Statement represents the maximum number of shares
issuable by Summit Financial Group, Inc. upon consummation of the merger
with Greater Atlantic Financial Corp.
|
|
(2)
|
The proposed maximum aggregate offering price is
estimated solely to determine the registration fee and reflects the market
price of Greater Atlantic Financial Corp. common stock to be exchanged for
Summit Financial Group, Inc. common stock in connection with the merger,
computed in accordance with Rule 457(c) and Rule 457(f) under the
Securities Act of 1933, as amended, based upon the average high and low
sales prices ($4.78) of Greater Atlantic Financial Corp. common stock as
reported on the Pink Sheets on February 5, 2008, less the amount of cash
to be paid by Summit Financial Group, Inc. in connection with the merger
($5,443,596).
|
|
(3)
|
Summit Financial Group, Inc. has previously paid
$308.24 of the filing fee.
|
MERGER PROPOSAL - YOUR VOTE IS VERY
IMPORTANT
You are
cordially invited to attend the special meeting of the shareholders of Greater
Atlantic Financial Corp. (“Greater Atlantic”) to be held on
________, ____, 2008 at 10:00 a.m., Eastern Standard
Time, at the Crowne Plaza Tysons Corner, 1960 Chain Bridge Road, McLean,
Virginia . At the special meeting, you will be asked to approve
the proposed merger of Greater Atlantic and Summit Financial Group, Inc.
(“Summit”). In the merger, you will receive a combination of cash and
shares of Summit common stock for each share of Greater Atlantic common stock
that you own, subject to a “stock collar” limiting the maximum and minimum
number of shares Summit will issue. The stock collar is described
more fully below. Subject to the stock collar, the total
consideration for your Greater Atlantic stock will be paid 70% in the form of
Summit common stock and 30% in cash, with each share of Greater Atlantic common
stock exchanged for shares of Summit common stock valued at $4.20 and $1.80 in
cash. The number of shares of Summit common stock that you will receive for each
share of Greater Atlantic common stock you own will be determined by the
exchange ratio at closing.
At the
closing, we will determine the exchange ratio by dividing $4.20 by the average
closing price of Summit common stock reported on the NASDAQ Capital
Market for the twenty (20) trading days prior to closing (the “Average
Closing Price”). The exchange ratio is subject to a stock collar, which sets the
maximum and minimum numbers of shares that Summit will issue. If the
Average Closing Price of Summit common stock is less than $17.82, the exchange
ratio will be calculated by dividing $4.20 by $17.82. If the Average
Closing Price is greater than $24.10, the exchange ratio will be calculated by
dividing $4.20 by $24.10. Thus, for each share of Greater Atlantic common stock
that you own, you will receive $1.80 in cash and at least 0.1743 shares of
Summit common stock, but no more than 0.2357 shares of Summit common stock,
based on an exchange ratio as described in the accompanying proxy
statement/prospectus . A chart on page 37 under “Merger
Consideration” provides examples of the value of the transaction to shareholders
of Greater Atlantic at selected Average Closing Prices of Summit common
stock. Cash will be paid instead of issuing fractional shares of
Summit common stock.
We expect
the merger to be tax-free with respect to the shares of Summit common stock that
you receive. You may have to recognize income or gain for tax
purposes for the cash you receive in the merger.
The merger proposal is described in
this proxy statement/prospectus. We encourage you to read this entire
document carefully, including the “Risk Factors” section beginning on page
13 .
Your
board recommends that you vote for the merger. We need your vote to complete the
merger. Whether or not you plan to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. If you neither return your card nor vote in
person, the effect will be to vote against the merger.
You
should obtain current market quotations on shares of Summit common stock, which
is listed on the NASDAQ Capital Market under the symbol “SMMF,” and Greater
Atlantic common stock, which is quoted on the Pink Sheets under the symbol
“GAFC.PK.”
Carroll
E. Amos
President and Chief Executive
Officer
Greater Atlantic Financial
Corp.
An investment in Summit common stock in
connection with the merger involves certain risks and
uncertainties. See “Risk Factors” beginning on
page 13 of this proxy statement/prospectus.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of the
securities to be issued in the merger or determined if this proxy
statement/prospectus is truthful or complete. It is illegal to tell
you otherwise.
The securities to be issued in the
merger are not savings or deposit accounts, deposits or other
obligations of any bank or banking association , and are not insured by
the Federal Deposit Insurance Corporation or any other federal or state
governmental agency.
This proxy statement/prospectus is dated __________ , 2008 and is
expected to be first mailed to shareholders on or about ________ ,2008.
ADDITIONAL INFORMATION
This document incorporates important business and financial
information about Summit Financial Group, Inc. from other documents filed with
the Securities and Exchange Commission that have not been included in or
delivered with this document. You may read and copy these documents
at the SEC’s public reference facilities. Please call the SEC at
1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site the SEC maintains at http://www.sec.gov. See
“Where You Can Find More
Information” on page 82.
You also may request copies of these documents from Summit
Financial Group, Inc. Summit Financial Group, Inc. will provide you
with copies of these documents, without charge, upon written or oral request
to:
Summit Financial Group, Inc.
300 North Main Street
Moorefield, West Virginia 26836
Attention: Teresa D. Sherman
Telephone: (304) 530-1000
To ensure timely
delivery before the special meeting, you should make any requests for these
documents by ____________ ___, 2008.
[insert logo]
GREATER ATLANTIC FINANCIAL
CORP.
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
TO BE HELD ON
___________, 2008
YOU ARE
HEREBY NOTIFIED of and invited to attend the special meeting of shareholders of
Greater Atlantic Financial Corp., a Delaware corporation, to be held on
____________, __________, 2008 , at 10:00 a.m. at
the Crowne Plaza Tysons Corner, 1960 Chain Bridge Road, McLean ,
Virginia , for the purpose of considering and voting upon the
following:
|
|
1.
|
A
proposal to approve and adopt the Agreement and Plan of Reorganization
dated as of April 12, 2007, as amended on December 6,
2007 , by and between Greater Atlantic Financial Corp. (“Greater
Atlantic”) and Summit Financial Group, Inc. (“Summit”) and the
transactions contemplated thereby. In this proxy
statement/prospectus, we refer to the Agreement and Plan of
Reorganization, as amended , as the merger
agreement. The merger agreement provides that Greater Atlantic
will merge with and into a subsidiary of Summit, upon the terms and
subject to the conditions set forth in the merger agreement, as more fully
described in the accompanying proxy statement/prospectus. In
the merger, among other things, each share of Greater Atlantic common
stock will be converted into and become the right to receive a combination
of $1.80 in cash and shares of Summit common stock based on an exchange
ratio, subject to adjustment as further described in the accompanying
proxy statement/prospectus. Cash will be paid instead of
issuing fractional shares of Summit common
stock.
|
|
|
2.
|
A
proposal to adjourn the meeting to a later date or dates, if necessary, to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to approve the matters to be
considered by the shareholders at the meeting, as more fully described in
the accompanying proxy statement
prospectus.
|
Our board
of directors has determined that the terms of the merger are fair to and in the
best interests of Greater Atlantic and our shareholders, has approved and
adopted the merger agreement, and unanimously recommends that our shareholders
vote “FOR” the approval
and adoption of the merger agreement and the transactions contemplated
thereby.
Our board
of directors has fixed the close of business on February 20, 2008
as the record date for determination of our shareholders entitled to
receive notice of and to vote at the special meeting. A list of
shareholders entitled to vote will be available at 10700 Parkridge Boulevard,
Suite P50, Reston, Virginia 20191, for ten (10) days before the
meeting and will also be available for inspection at the meeting. The
meeting may be adjourned or postponed from time to time upon approval of our
shareholders without any notice other than by announcement at the special
meeting of the adjournment or postponement thereof, and any and all business for
which notice is hereby given may be transacted at such adjourned or postponed
special meeting.
The
affirmative vote of the holders of a majority of shares of our common stock
entitled to vote at the special meeting is required to approve and adopt the
merger agreement. Please complete, date, sign and promptly return the
enclosed proxy card, which is solicited by your board of directors, in the
enclosed envelope, whether or not you expect to attend the special
meeting. You may revoke the proxy at any time before its exercise by
delivering to us a written notice of revocation, by delivering to us a duly
executed proxy card bearing a later date or by voting in person at the special
meeting. Failure to return a properly executed proxy card, or to vote
at the special meeting, or abstaining from voting, will have the same effect as
a vote against the merger agreement and the transactions contemplated
thereby.
By Order of the Board
of Directors
Edward C.
Allen
Secretary
Reston,
Virginia
___________,
2008
EACH STOCKHOLDER, WHETHER OR NOT HE OR
SHE PLANS TO ATTEND THE SPECIAL MEETING, IS REQUESTED TO SIGN, DATE, AND RETURN
THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
Page
|
QUESTIONS
AND ANSWERS ABOUT THE MERGER
|
1
|
|
SUMMARY
|
5
|
|
RISK
FACTORS
|
13
|
|
FORWARD-LOOKING
STATEMENTS
|
17
|
| RECENT DEVELOPMENTS
|
17 |
|
PRICE
RANGE OF COMMON STOCK AND DIVIDENDS
|
20
|
|
UNAUDITED
COMPARATIVE PER SHARE DATA
|
22
|
|
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
|
24
|
|
SUMMARY
SELECTED FINANCIAL DATA
|
30
|
|
INFORMATION
ABOUT THE MEETING AND VOTING
|
33
|
| |
General
|
33
|
| |
Matters
Relating to the Special Meeting of Greater Atlantic's
Shareholders
|
33
|
| |
Proxies
|
33
|
| |
Solicitation
of Proxies
|
34
|
| |
Record
Date and Voting Rights
|
34
|
| |
Vote
Required
|
34
|
| |
Recommendation
of the Greater Atlantic Board of Directors
|
35
|
| |
Appraisal
Rights for Greater Atlantic Stockholders
|
35
|
|
THE
MERGER
|
36
|
| |
Merger
|
36
|
| |
Merger
Consideration
|
36
|
| |
Surrender
of Stock Certificates
|
37
|
| |
No
Fractional Shares
|
38
|
| |
Treatment
of Greater Atlantic Stock Options and Warrants
|
38
|
| |
Dissenters’
or Appraisal Rights
|
38
|
| |
Background
of the Merger; Board Recommendations and Reasons for the
Merger
|
42
|
| |
Greater
Atlantic's Reasons for the Merger
|
47
|
| |
Summit's
Reasons for the Merger
|
48
|
| |
Opinion
of Greater Atlantic’s Financial Advisor
|
49
|
| |
Interests
of Certain Persons in the Merger
|
57
|
| |
Conditions
of the Merger
|
59
|
| |
Representations
and Warranties
|
60
|
| |
Termination
of the Merger Agreement
|
60
|
| |
Effect
of Termination; Termination Fee
|
61
|
Page
| |
Waiver
and Amendment
|
62
|
| |
Indemnification
|
62
|
| |
Acquisition
Proposals
|
62
|
| |
Closing
Date; Effective Time
|
62
|
| |
Regulatory
Approvals
|
63
|
| |
Conduct
of Business Pending the Merger
|
63
|
| |
Accounting
Treatment
|
66
|
| |
Management
and Operations after the Merger
|
66
|
| |
Resales
of Summit Common Stock
|
66
|
|
CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
|
66
|
| |
General
|
66
|
| |
The
Merger
|
67
|
| |
Consequences
to Shareholders
|
67
|
| |
Backup
Withholding and Reporting Requirements
|
69
|
|
INFORMATION
ABOUT SUMMIT FINANCIAL GROUP, INC. AND
GREATER
ATLANTIC FINANCIAL CORP.
|
70
|
| |
Summit
Financial Group, Inc.
|
70
|
| |
Greater
Atlantic Financial Corp.
|
70
|
|
DESCRIPTION
OF SUMMIT FINANCIAL GROUP COMMON STOCK
|
71
|
| |
General
|
71
|
| |
Common
Stock
|
71
|
| |
Preemptive
Rights
|
72
|
| |
Certain
Provisions of the Bylaws
|
72
|
| |
Shares
Eligible for Future Sale
|
72
|
|
COMPARATIVE
RIGHTS OF SHAREHOLDERS
|
73
|
|
ADJOURNMENT
OF THE MEETING
|
82
|
|
LEGAL
MATTERS
|
82
|
|
EXPERTS
|
82
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
82
|
|
OTHER
MATTERS
|
84
|
| |
|
|
Annex
A
|
Agreement
and Plan of Reorganization dated as of April 12, 2007,
between
Greater
Atlantic Financial Corp. and Summit Financial Group, Inc.
|
|
| Annex A-1 |
Amendment to Agreement and Plan of Reogranization dated as
of December 6, 2007, by and among Summit Financial Group, Inc., Greater
Atlantic Financial Corp. and SFG II, Inc.
|
|
|
Annex
B
|
Section
262 of the Delaware General Corporation Law
|
|
|
Annex
C
|
Opinion
of Sandler O’Neill & Partners, L.P., dated ______________,
2008 , to the
board
of directors of Greater Atlantic Financial Corp.
|
|
|
Annex
D
|
Greater
Atlantic Financial Corp. Form 10-K for the year ended September 30,
2007
|
|
QUESTIONS AND ANSWERS ABOUT THE
MERGER
|
Q:
|
What will shareholders be
voting on at the special
meeting?
|
|
A:
|
Shareholders
will be voting on a proposal to approve and adopt the merger agreement
between Greater Atlantic and Summit and the transactions contemplated
thereby.
|
Shareholders
will also consider any other matters that may properly come before the
meeting.
|
Q:
|
Why is Greater Atlantic
proposing the merger?
|
|
A:
|
We
believe the proposed merger is in the best interests of Greater Atlantic
and its shareholders. Our board of directors believes that
combining with Summit provides significant value to our shareholders and
provides those shareholders the option to participate in the opportunities
for growth offered by the combined
company.
|
You
should review the reasons for the merger described in greater detail under the
caption “Background of the Merger; Board Recommendations and Reasons for the
Merger” beginning on page 42 .
|
Q:
|
When and where is the
shareholder meeting?
|
|
A:
|
The
special meeting is scheduled to take place on
________, 2008, at 10:00 a.m.,
local time, at the Crowne Plaza Tysons Corner, 1960 Chain Bridge Road,
McLean, Virginia.
|
|
Q:
|
What does the Greater Atlantic
board of directors
recommend?
|
|
A:
|
The
Greater Atlantic board of directors has approved the merger
agreement. The Greater Atlantic board recommends that
shareholders vote “FOR” the proposal to approve the merger agreement and
the transactions contemplated
thereby.
|
Q: What
will shareholders receive for their stock?
|
A:
|
For
each share of Greater Atlantic common stock that you own, you will receive
a combination of $1.80 in cash and shares of Summit common stock based on
an exchange ratio, subject to a “stock collar” or a limit on the maximum
and minimum number of shares Summit will issue. The stock
collar is described more fully below. Subject to the
stock collar, the total consideration for your Greater Atlantic stock will
be paid in the form of 70% in Summit common stock and 30% in cash as
follows: (referred to in this proxy statement/prospectus as “Merger
Consideration”):
|
|
|
(2)
|
the
number of shares of Summit Stock equal to $4.20 divided by the average
closing price of Summit Stock reported on the NASDAQ Capital
Market for the twenty (20) trading days prior to the
closing.
|
The
number of shares of Summit common stock that you will receive for each share of
Greater Atlantic common stock you own will be determined by the exchange ratio
at closing. At the closing, we will determine the exchange ratio by
dividing $4.20 by the average closing price of Summit common stock reported on
the NASDAQ Capital Market for the twenty (20) trading days
prior to closing (the “Average Closing Price”). The exchange ratio is subject to
a stock collar, which sets the
maximum
and minimum numbers of shares that Summit will issue. If the Average
Closing Price of Summit common stock is less than $17.82, the exchange ratio
will be calculated by dividing $4.20 by $17.82. If the Average
Closing Price is greater than $24.10, the exchange ratio will be calculated by
dividing $4.20 by $24.10. Thus, for each share of Greater Atlantic common stock
that you own, you will receive $1.80 in cash and at least 0.1743 shares of
Summit common stock, but no more than 0.2357 shares of Summit common stock,
based on an exchange ratio. Cash will be paid instead
of issuing fractional shares of Summit common stock. A chart on page
37 under “Merger Consideration” provides examples of the value of the
transaction to shareholders of Greater Atlantic at selected Average Closing
Prices of Summit common stock.
Q: How
will I receive my shares of Summit common stock and cash?
|
A:
|
The
exchange agent will mail transmittal forms to each Greater Atlantic
shareholder within five (5) business days after completion of the
merger. You should complete the transmittal form and return it
to the exchange agent as soon as possible. Once the exchange
agent has received the proper documentation, it will forward to you the
cash and shares of Summit common stock to which you are
entitled.
|
Shareholders
will not receive any fractional shares of Summit common
stock. Instead, they will receive cash, without interest, for any
fractional share of Summit common stock that they might otherwise have been
entitled to receive based on the market value of the Summit common stock on the
date that the merger occurs.
Q: How
do I exchange my Greater Atlantic stock certificates?
|
A:
|
If
the merger is completed, Summit will send Greater Atlantic shareholders
written instructions for exchanging their stock
certificates. You will be asked to return your Greater Atlantic
stock certificates, and shortly after the merger, the exchange agent will
allocate cash and Summit common stock among Greater Atlantic
shareholders. In any event, you should not
forward your Greater Atlantic certificates with your proxy
card.
|
|
Q:
|
What should I do if my shares
of Greater Atlantic are held by my broker or otherwise in “street
name?”
|
|
A:
|
If
you hold your shares of Greater Atlantic common stock in “street name”
(i.e., your bank
or broker holds your shares for you), you should receive instructions
regarding election procedures directly from your bank or
broker. If you have any questions regarding these procedures,
you should contact your bank or broker directly, or you may contact Summit
or Greater Atlantic at the addresses or telephone numbers listed on
page 70 .
|
Q: When
will we complete the merger?
|
A:
|
We
intend to complete the merger as soon as possible after shareholder
approval is received, all regulatory approvals have been obtained, and
all other conditions to
the closing have been satisfied or
waived.
|
The regulatory approvals are described
under “– Regulatory Approvals” beginning on page 63 .
Q: What
should I do now?
|
A:
|
Mail
your signed and dated proxy card in the enclosed return envelope as soon
as possible so that your shares may be represented at the shareholder
meeting. It is important that the proxy card be received as
soon as possible and in any event before the shareholder
meeting.
|
Q: Can
I change my vote after I mail my proxy card?
|
A:
|
Yes. You
can change your vote at any time before your proxy is voted at the
shareholder meeting. You can do this in one of three
ways:
|
|
·
|
First,
you can send a written notice stating that you revoke your
proxy.
|
|
·
|
Second,
you can complete, sign, date and submit a new proxy
card.
|
|
·
|
Third,
you can attend the shareholder meeting and vote in
person. Simply attending the shareholder meeting, however, will
not revoke your proxy.
|
If you
choose either of the first or second methods, you must submit your notice of
revocation or your new proxy card to Greater Atlantic prior to the shareholder
meeting. Your submissions must be mailed to the Secretary of Greater
Atlantic at the address listed on page 33 .
|
Q:
|
Who will be soliciting
proxies?
|
|
A:
|
In
addition to solicitation of proxies by officers, directors and employees
of Greater Atlantic, Greater Atlantic has engaged a professional proxy
solicitation firm, Georgeson Inc., to assist it in soliciting
proxies.
|
|
Q:
|
What if I do not vote or I
abstain from voting?
|
|
A:
|
If
you do not vote or you abstain from voting, your failure to vote or
abstention will count as a “NO” vote on the proposal
to approve and adopt the merger
agreement.
|
|
Q:
|
If my shares are held by my
broker in “street name,” will my broker vote my shares for
me?
|
|
A:
|
Your
broker will vote your shares on the proposal to approve and adopt the
merger agreement only if you provide instructions on how to
vote. You should follow the directions provided by your broker
to vote your shares. If you do not provide your broker with
instructions on how to vote your shares held in “street name,” your broker
will not be permitted to vote your shares on the proposal to approve and
adopt the merger agreement, which will have the effect of a “NO” vote on the items
being considered.
|
|
Q:
|
Will I be able to sell the
shares of Summit common stock that I receive in the
merger?
|
|
A:
|
Yes,
in most cases. The shares of Summit common stock to be issued
in the merger will be registered under the Securities Act of 1933 and
listed on the NASDAQ Capital Market. However, certain
shareholders who are deemed to be “affiliates” of Summit or Greater
Atlantic under the Securities Act (generally, directors, executive
officers and shareholders of Summit or Greater Atlantic holding 10% or
more of the outstanding shares of common stock) must abide by certain
transfer restrictions under the Securities
Act.
|
Q: What
are the tax consequences of the merger to me?
|
A:
|
Your
tax consequences will depend on your basis in the Greater Atlantic common
stock that you own. For greater detail, see “Certain Federal
Income Tax Consequences of the Merger” beginning on page
66 .
|
Q: Who
should shareholders call with questions?
A: If
you have more questions about the merger you should contact:
Carroll
E. Amos
President
and Chief Executive Officer
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Telephone:
(703) 391-1300
This brief summary highlights
selected information from this proxy statement/prospectus and may not contain
all of the information that is important to you. We urge you to
carefully read the entire proxy statement/prospectus and the other documents to
which this proxy statement/prospectus refers to fully understand the
merger. See “Where You Can Find More Information” on
page 82 . Each item in this summary
includes a page reference directing you to a more complete description of that
item.
We have
attached the merger agreement to this proxy statement/prospectus as Annex
A. Please read the merger agreement. It is the
legal document that governs the merger.
In the
merger, Summit will acquire Greater Atlantic by means of the merger of Greater
Atlantic Financial Corp. (“Greater Atlantic”) into a subsidiary of Summit
Financial Group, Inc. (“Summit”).
Each
share of Greater Atlantic common stock outstanding will be converted in the
merger into cash and shares of Summit common stock as further described
below. We expect to complete the merger in the first
quarter of 2008 , although there can be no assurance in this regard.
Our Reasons for the Merger
(page 47 )
The terms
of the merger agreement were the results of arm’s length negotiations between
representatives of Greater Atlantic and Summit. In deciding to enter
into the merger agreement, Greater Atlantic’s board of directors considered a
number of factors including:
|
·
|
The
understanding of the Board of Directors of the strategic options available
to Greater Atlantic and the Board of Directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of those
options or the execution of the business plan under the best case
scenarios were likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the Board of Directors considered Greater Atlantic’s ability
to achieve consistent profitability as an independent entity and the
prospects for regulatory action if it failed to do
so.
|
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common stock
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
|
·
|
Sandler
O’Neill’s written opinion that, as of April 12, 2007, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
|
·
|
The
wider array of financial products and services that would be available to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the merger
is intended to qualify as a transaction that is generally tax-free for
U.S. federal income tax purposes.
|
|
·
|
The
results of the due diligence review of
Summit.
|
|
·
|
The
Greater Atlantic employees to be retained after the merger would have
opportunities for career advancement in a larger
organization.
|
|
·
|
The
likelihood of receiving timely regulatory approval and the approval of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could be
triggered upon termination of or failure to consummate the
merger.
|
In
deciding to enter into the merger agreement, Summit’s board of directors
considered a number of factors, including the opportunity the merger presented
to expand its presence in attractive markets in Virginia. Summit
believes the acquisition of Greater Atlantic’s operations is consistent with its
plan to have operations, offices and distinct capabilities in every market of
its choice within its region.
What Shareholders Will Receive
(page 36 )
If the
merger is completed, Greater Atlantic stockholders will receive a combination of
cash and shares of Summit common stock for each share of Greater Atlantic common
stock that is owned, subject to a “stock collar” limiting the maximum and
minimum number of shares Summit will issue. The stock collar is
described more fully below. Subject to the stock collar, the total
consideration for the Greater Atlantic stock will be paid 70% in the form of
Summit common stock and 30% in cash, with each share of Greater Atlantic common
stock exchanged for shares of Summit common stock valued at $4.20 and $1.80 in
cash. The number of shares of Summit common stock that each Greater
Atlantic shareholder will receive for each share of Greater Atlantic common
stock he or she owns will be determined by the exchange ratio at
closing.
At the
closing, we will determine the exchange ratio by dividing $4.20 by the average
closing price of Summit common stock reported on the NASDAQ Capital
Market for the twenty (20) trading days prior to closing (the “Average
Closing Price”). The exchange ratio is subject to a stock collar, which sets the
maximum and minimum numbers of shares that Summit will issue. If the
Average Closing Price of Summit common stock is less than $17.82, the exchange
ratio will be calculated by dividing $4.20 by $17.82. If the Average
Closing Price is greater than $24.10, the exchange ratio will be calculated by
dividing $4.20 by $24.10. Thus, for each share of Greater Atlantic
common stock that is owned, each Greater Atlantic shareholder will receive $1.80
in cash and at least 0.1743 shares of Summit common stock, but no more than
0.2357 (based on an exchange ratio) shares of Summit common
stock. A chart on page 37 under “Merger Consideration”
provides examples of the value of the transaction to shareholders of Greater
Atlantic at selected Average Closing Prices of Summit common stock.
Summit
will not issue any fractional shares in the merger. Instead, you will
receive cash for any fractional share of Summit common stock owed to
you. The amount of cash that you will receive for any
such
fractional share will be calculated by multiplying the fractional share interest
by the closing price of Summit common stock on the NASDAQ Capital Market on the
effective date of the merger.
Dissenters’ or Appraisal Rights
(page 38 )
Under
Delaware law, Greater Atlantic stockholders may object to the merger and demand
to be paid the fair value of their shares. Under Delaware law, you should know
that in determining the fair value of your shares, any appreciation or
depreciation resulting from the accomplishment or expectation of the merger will
not be considered. To properly exercise your appraisal rights and
avoid a waiver of such rights, you must not vote your shares in favor of the
merger and you must follow the exact procedures required by Delaware law (see
Annex
B).
Resale of Summit Shares Received in
the Merger (page 66 )
Summit
has registered the shares of its common stock to be issued in the merger under
the federal securities laws. Therefore, you may sell shares that you
receive in the merger without restriction unless you are considered an affiliate
of Greater Atlantic or you become an affiliate of Summit. A director,
executive officer or stockholder who beneficially owns 10% or more of the
outstanding shares of a company is generally deemed to be an affiliate of that
company.
If you
are considered an affiliate of Greater Atlantic or become an affiliate of
Summit, you may resell the shares of Summit common stock you receive pursuant to
an effective registration statement under the securities laws, or pursuant to
Rule 145 of the SEC’s rules, or in transactions otherwise exempt from
registration under the securities laws. Summit is not obligated and
does not intend to register for resale the shares issued to affiliates of
Greater Atlantic.
Our Recommendation
(page 35)
The
Greater Atlantic board of directors believes that the merger is advisable and in
the best interests of Greater Atlantic’s shareholders. Greater
Atlantic’s board unanimously recommends that shareholders vote “FOR” the proposal to approve and
adopt the merger agreement and the transactions contemplated
thereby.
Summary of Risk Factors
(page 13 )
The
merger is subject to risks, some of which are described below. You
should carefully consider these risk factors and others discussed in more detail
on pages 13 through 17 in deciding whether to vote for
approval of the merger agreement.
|
·
|
Summit
may be unable to manage effectively the new assets it
acquires;
|
|
·
|
changes
in interest rates may adversely affect Summit’s
business;
|
|
·
|
loss
of Summit’s CEO or other executive officers could adversely affect its
business;
|
|
·
|
Summit
and its subsidiaries operate in highly competitive
markets;
|
|
·
|
dividend
payments by Summit’s subsidiaries to Summit and by Summit to its
stockholders could be restricted;
|
|
·
|
Summit’s
business is concentrated in the Eastern Panhandle and South Central
regions of West Virginia and in the Shenandoah Valley and Northern
Virginia, and a downturn in the local economies may adversely affect its
business;
|
|
·
|
determination
of the adequacy of the allowance for loan losses is based upon estimates
that are inherently subjective and dependent on the outcome of future
events. Ultimate losses may differ from current
estimates. As a result, such losses may increase
significantly.
|
Opinion of Financial Advisor
(page 49 )
In
approving the merger, Greater Atlantic’s board considered the opinion of its
financial advisor, Sandler O’Neill & Partners, L.P., as to the fairness from
a financial point of view of the consideration to be paid by Summit in the
merger as of April 12, 2007, as updated _______________,
2008 . We have attached this opinion to this proxy
statement/prospectus as Annex C. You
should read this opinion completely to understand the assumptions made, matters
considered and limitations of the review undertaken by Sandler O’Neill &
Partners, L.P. in providing its opinion.
Accounting Treatment
(page 66)
The
merger will be accounted for under the purchase method of
accounting.
Certain Federal Income Tax
Consequences (page 66 )
A holder
of Greater Atlantic common stock who exchanges his or her Greater Atlantic
common stock actually owned for a combination of cash and common stock of Summit
will recognize income or gain in an amount equal to the lesser of (a) the
amount of cash received, or (b) the gain realized on the
exchange. The gain realized on the exchange will equal the fair
market value of Summit common stock received plus the amount of cash received,
less the holder’s adjusted tax basis in the shares of Greater Atlantic common
stock exchanged by the holder. No loss may be recognized by a holder
of Greater Atlantic common stock from the combined distribution of cash and
Summit common stock or the stock distribution. You should consult
your own tax advisor for a full understanding of the merger’s tax consequences
that are particular to you. You will not be obligated to exchange
your shares of Greater Atlantic common stock unless Greater Atlantic receives a
legal opinion that the merger will be treated for federal income tax purposes as
a merger within the meaning of Section 368 of the Internal Revenue
Code. This opinion, however, will not bind the Internal Revenue
Service, which could take a different view.
Shareholders
will also be required to file certain information with their federal income tax
returns and to retain certain records with regard to the merger.
The discussion of United States
federal income tax consequences set forth above is for general information only
and does not purport to be a complete analysis or listing of all potential tax
effects that may apply to a holder of Greater Atlantic common
stock. Shareholders of Greater Atlantic are strongly urged to consult
their tax advisors to determine the particular tax consequences to them of the
merger, including the application and effect of federal, state, local, foreign
and other tax laws.
The Companies
(page 70 )
Summit Financial Group,
Inc.
300 North Main
Street
Moorefield, West
Virginia 26836
(304) 530-1000
Summit
Financial Group, Inc. is a $1.3 billion financial holding company headquartered
in Moorefield, West Virginia, at 300 North Main Street. Summit
provides commercial and retail banking services primarily in the Eastern
Panhandle and South Central regions of West Virginia and the Northern region of
Virginia. Summit provides these services through its community bank
subsidiary, Summit Community Bank. Summit also operates Summit
Insurance Services, LLC in Moorefield, West Virginia.
As
of September 30, 2007, Summit had total assets of $1.3
billion, total deposits of $ 828.6 million, and stockholders’ equity of $
93.5 million.
Greater Atlantic Financial
Corp.
10700 Parkridge Boulevard, Suite
P50
Reston,
Virginia 20191
(703) 391-1300
Greater
Atlantic is a savings and loan holding company organized under the laws of the
State of Delaware and is registered under the Home Owners’ Loan
Act. It has one subsidiary – Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
banks make are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
As
of September 30, 2007, Greater Atlantic reported total
assets of $ 246.0 million, net loans of $ 176.1 million, deposits
of $ 198 million and shareholders’ equity of $ 9.6 million.
The Special Meeting and Required Vote
(page 34 )
Greater
Atlantic is holding a special shareholders’ meeting on ________,
2008 at 10:00 a.m. at the Crowne Plaza Tysons Corner, 1960 Chain Bridge Road,
McLean, Virginia . The purpose of the meeting is for Greater
Atlantic Financial Corp. stockholders to consider and vote on the merger
agreement. The record date for the meeting is the close of business
on February 20, 2008 . On that date, Greater Atlantic had
3,024,220 shares of common stock outstanding and entitled to
vote. Only stockholders of record at the close of business on the
record date will be entitled to vote at the meeting and any
adjournment. You can cast one vote for each share of Greater Atlantic
common stock that you owned on that date.
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting. As of
February 5, 2008 , Greater Atlantic’s directors and executive
officers, and their
affiliates,
held 301,759 shares of Greater Atlantic common stock, which
represents approximately 9.98 % of the total outstanding shares of Greater
Atlantic common stock entitled to vote at the special meeting. The
Greater Atlantic directors have indicated that they plan to vote the shares of
Greater Atlantic common stock that they own for approval of the merger agreement
and the transactions contemplated thereby.
Conditions to Completion of the
Merger (page 59 )
The
obligations of Summit and Greater Atlantic to complete the merger depend on a
number of conditions being met. These include:
|
·
|
Greater
Atlantic’s shareholders’ approval of the merger
agreement;
|
|
·
|
approval
of the merger by the necessary federal and state regulatory
authorities;
|
|
·
|
authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger;
|
|
·
|
absence
of any law or court order prohibiting the
merger;
|
|
·
|
receipt
of an opinion from counsel to Summit that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
|
|
·
|
the
balance of core deposits (as defined in the merger agreement) being not
less than $144 million;
|
|
·
|
the
sale of Greater Atlantic Bank’s branch office in Pasadena, Maryland, at
least forty-five (45) days prior to consummation of the merger (the sale,
involving deposits of approximately $52.0 million, was completed on August
24, 2007); and
|
|
·
|
the
continued accuracy of certain representations and
warranties.
|
Where the
law permits, either of us could choose to waive a condition to our obligation to
complete the merger although that condition has not been
satisfied. We cannot be certain when, or if, the conditions to the
merger will be satisfied or waived, or that the merger will be
completed.
Regulatory Approvals
(page 63)
We cannot complete the merger unless it is approved by the Board
of Governors of the Federal Reserve System. On October 4, 2007,
Summit filed an application to obtain approval of the merger with the Federal
Reserve Bank of Richmond. The Division of Banking Supervision and
Regulation of the Board of Governors in Washington, D.C. is responsible for
processing the application. As discussed in more detail on page 63,
Summit requested the Federal Reserve to suspend processing of the application in
order to afford Summit sufficient time to file additional information requested
by the Federal Reserve and to allow the Federal Reserve sufficient time to
review the additional information. As of the mailing date of this
proxy statement/prospectus, Summit has filed the supplementary information that
the Federal Reserve has requested as of that date. The Federal
Reserve has informed Summit that, if the Federal Reserve determines that the
application is complete, it will reactivate the application immediately before
rendering a decision on the application.
Once the Board of Governors approves the merger, Summit will
file notices of closing with the Federal Reserve Bank of Richmond.
As of the
date of this proxy statement/prospectus, we have not yet received the required
approvals. While we do not know of any reason why we would not be
able to obtain the necessary approvals in a timely manner, we cannot be certain
when or if we will receive them.
Termination of the Merger Agreement
(page 60 )
Greater
Atlantic and Summit may mutually agree to terminate the merger at any
time.
Either
Greater Atlantic or Summit may terminate the merger agreement if any of the
following occurs:
|
|
•
|
either
party breaches any of its representations or obligations under the merger
agreement, and does not cure the breach within 30 days if such breach
individually or in the aggregate with other breaches results in a material
adverse effect;
|
|
|
•
|
the
merger is not completed by March 31, 2008 , unless the
failure of the merger to be consummated arises out of or results from the
knowing action or inaction of the party seeking to terminate;
or
|
|
|
•
|
the
approval of any governmental entity required for consummation of the
merger is denied or the shareholders of Greater Atlantic do not approve
the merger agreement.
|
Summit
may terminate the merger agreement if Greater Atlantic’s board fails to
recommend approval of the merger agreement, withdraws its recommendation or
modifies its recommendation in a manner adverse to Summit before Greater
Atlantic’s shareholder meeting.
Greater
Atlantic may terminate the merger agreement in order to enter into an agreement
with respect to an unsolicited proposal that if consummated would result in a
transaction more favorable to Greater Atlantic’s shareholders from a financial
point of view, provided that Summit does not make a counteroffer that is at
least as favorable to the other proposal and Greater Atlantic pays the
termination fee described below.
Termination Fee (See
Page 61 )
In the
event the merger agreement is terminated (i) due to failure to obtain Greater
Atlantic’s shareholder approval and prior to such time a competing acquisition
proposal for Greater Atlantic has been made public and not withdrawn or (ii) by
Greater Atlantic in order to enter into an agreement with respect to a superior
proposal, then Greater Atlantic must pay Summit a cash termination fee of
$750,000 according to the following schedule: (i) $250,000 no later
than two (2) business days after the date of termination, (ii) $100,000 on the
date that is one (1) year after the termination date, (iii) $100,000 on the date
that is two (2) years after the termination date, and (iv) $300,000 on the date
that is three (3) years after the termination date.
In the
event the merger agreement is terminated (i) because Greater Atlantic’s board
fails to recommend, withdraws, modifies, or changes its recommendation of the
merger before Greater Atlantic’s shareholder meeting, (ii) by Summit due to a
breach by Greater Atlantic of any representation, warranty, covenant or other
agreement, or (iii) by Summit due to a failure to consummate the
merger by March 31, 2008 , then Greater Atlantic must pay Summit a cash
termination fee of $250,000 no later than two (2) business days after the
termination date, unless the failure of the merger to be consummated by that
date arises out of or results from the knowing action or inaction of Summit.
Waiver and Amendment
(page 62 )
We may
jointly amend the merger agreement, and each of us may waive our right to
require the other party to adhere to the terms and conditions of the merger
agreement. However, we may not do so after Greater Atlantic’s
shareholders approve the necessary transactions if the amendment or waiver would
violate the Delaware General Corporation Law or the West Virginia Business
Corporation Act.
Interests of Directors and Officers
in the Merger that Differ from Your Interests (page
57 )
Some of
the directors and officers of Greater Atlantic have interests in the merger that
differ from, or are in addition to, their interests as shareholders of Greater
Atlantic. These interests exist because of, among other things,
employment or severance agreements that the officers entered into with Greater
Atlantic, and rights that these officers and directors have under Greater
Atlantic’s benefit plans. These employment and severance agreements
provide certain officers with severance benefits if their employment is
terminated following the merger. Further, certain
officers and employees of Greater Atlantic will benefit from accelerated vesting
of stock options.
The
members of the Greater Atlantic board of directors knew about these additional
interests and considered them when they approved the merger agreement and the
merger.
If the
merger is completed, each outstanding option and warrant to purchase shares of
Greater Atlantic common stock under any and all plans of Greater Atlantic under
which stock options and warrants have been granted and are outstanding shall
vest and holders of Greater Atlantic stock options shall be entitled to receive
cash in an amount equal to the difference between the value of (a) the Merger
Consideration and (b) the applicable exercise price (rounded to the nearest
cent) for each outstanding Greater Atlantic stock option and
warrant.
Comparative Rights of Summit Shareholders and Greater
Atlantic Shareholders (page 73 )
The
rights of Summit’s shareholders are governed by West Virginia law and by
Summit’s articles of incorporation and bylaws. The rights of Greater
Atlantic’s shareholders are governed by Delaware law and by Greater Atlantic’s
certificate of incorporation and bylaws. Upon completion of the
merger, the rights of the Summit shareholders, including former shareholders of
Greater Atlantic, will be governed by West Virginia law and the articles of
incorporation and bylaws of Summit.
You
should carefully read and consider the following risk factors concerning Summit,
Greater Atlantic and the merger before you decide whether to vote to approve the
merger and/or the other matters to be considered and voted upon at the
shareholder meeting.
Risks Associated with the
Merger
Fluctuations in the trading price of
Summit common stock will change the value of the shares of Summit common stock
you receive in the merger.
The
number of shares of Summit common stock that you will receive for each share of
Greater Atlantic common stock will be calculated at closing based on the
exchange ratio. At the closing, we will determine the exchange ratio
by dividing the average closing price of Summit common stock reported on the
NASDAQ Capital Market for the twenty (20) trading days prior to
closing (the “Average Closing Price”) by $4.20. However, the exchange
ratio is subject to a stock collar, which sets a maximum and minimum numbers of
shares that Summit will issue. If the Average Closing Price of Summit
common stock is less than $17.82, then the exchange ratio will be calculated by
dividing $4.20 by $17.82. If the Average Closing Price is greater
than $24.10, then the exchange ratio will be calculated by dividing $4.20 by
$24.10. This means that for each share of Greater Atlantic common
stock that you own, you will receive at least 0.1742 shares of Summit common
stock, but no more than 0.2356 shares of Summit common
stock. As a result, the market value of the Summit common stock that
you receive in the merger will increase or decrease depending on the direction
of the price movement of the Summit common stock. See chart on
page 37 under the heading “Merger Consideration” for an
illustration of what you will receive based on Summit’s stock
price. Also, after the merger, the market value of Summit common
stock may decrease and be lower than the market value of Summit common stock
that was used in calculating the exchange ratio in the merger.
The integration of the operations of
Summit and Greater Atlantic may be more difficult than
anticipated.
The
success of the merger will depend on a number of factors, including but not
limited to Summit’s ability to:
|
·
|
timely
and successfully integrate the operations of Summit and Greater
Atlantic;
|
|
·
|
maintain
existing relationships with depositors in Greater Atlantic to minimize
withdrawals of deposits subsequent to the
merger;
|
|
·
|
maintain
and enhance existing relationships with borrowers to limit unanticipated
losses of loan customers of Greater
Atlantic;
|
|
·
|
control
the incremental non-interest expense from Summit to maintain overall
operating efficiencies;
|
|
·
|
retain
and attract qualified personnel at Summit and Greater
Atlantic;
|
|
·
|
compete
effectively in the communities served by Summit and Greater Atlantic and
in nearby communities; and
|
|
·
|
manage
effectively its anticipated growth resulting from the
merger.
|
The merger with Greater Atlantic may
distract management of Summit from its other
responsibilities.
The
acquisition of Greater Atlantic could cause the management of Summit to focus
its time and energies on matters related to the acquisition that otherwise would
be directed to the business and operations of Summit. Any such
distraction on the part of management, if significant, could affect its ability
to service existing business and develop new business and adversely effect the
business and earnings of Summit.
Greater Atlantic’s shareholders will
have less influence as shareholders of Summit than as shareholders of Greater
Atlantic
Greater
Atlantic’s shareholders currently have the right to vote in the election of the
board of directors of Greater Atlantic and on other matters affecting Greater
Atlantic. After the merger, the shareholders of Greater Atlantic as a
group will own approximately 8.0% of the combined organization. When
the merger occurs, each shareholder that receives shares of Summit common stock
will become a shareholder of Summit with a percentage ownership of the combined
organization much smaller than such shareholder’s percentage ownership of
Greater Atlantic. Because of this, Greater Atlantic’s shareholders
will have less influence on the management and policies of Summit than they now
have on the management and policies of Greater Atlantic.
Directors and officers of Greater
Atlantic have interests in the merger that differ from the interests of
non-director or non-management shareholders.
Some of
the directors and officers of Greater Atlantic have interests in the merger that
differ from, or are in addition to, their interests as shareholders of Greater
Atlantic, generally. These interests exist because of, among other
things, employment or severance agreements that certain officers entered into
with Greater Atlantic, rights that Greater Atlantic officers and directors have
under Greater Atlantic’s benefit plans (including the treatment of their stock
options and warrants following the merger) and rights to indemnification
following the merger. Although the members of each of Summit’s and
Greater Atlantic’s board of directors knew about these additional interests and
considered them when they approved the merger agreement and the merger, you
should understand that some of the directors and officers of Greater Atlantic
will receive benefits or other payments in connection with the merger that you
will not receive. See “The Merger – Interests of Certain Persons in
the Merger” on page 57 .
Risks Associated with
Summit
Changes in interest rates may
adversely affect Summit’s business.
Summit’s
earnings, like most financial institutions, depend significantly on its net
interest income. Net interest income is the difference between the
interest income Summit earns on loans and other assets which earn interest and
the interest expense incurred to fund those assets, such as on savings deposits
and borrowed money. Therefore, changes in general market interest
rates, such as a change in the monetary policy of the Board of Governors of the
Federal Reserve System or otherwise beyond those which are contemplated by
Summit’s interest rate risk model and policy, could have an effect on net
interest income.
Our success depends on key
personnel.
Summit
depends, and for the foreseeable future will depend, on the services of H.
Charles Maddy, III, the President and Chief Executive Officer of Summit, Robert
S. Tissue, the Senior Vice President and Chief Financial Officer of Summit,
Patrick N. Frye, the Senior Vice President and Chief Credit Officer of Summit,
Scott C. Jennings, the Senior Vice President and Chief Operating Officer of
Summit, Ronald F. Miller, the President and Chief Executive Officer of Summit
Community Bank, C.
David
Robertson, the Chairman of the Board of Summit Community Bank and Doug A.
Mitchell, the Senior Vice President, Retail Banking of Summit. Summit’s
Board of Directors will continue to rely on the expertise and management
abilities of Messrs. Maddy, Tissue, Frye, Jennings, Miller, Robertson and
Mitchell, and the other principal officers of Summit. If Summit loses
the services of one or more of these key personnel, it could have a negative
impact on its business because of their skills, years of industry experience and
the difficulty of promptly finding qualified replacement personnel.
Summit faces strong
competition.
Summit
engages in highly competitive activities. Each activity and market
served involves competition with other banks and savings institutions, as
well as with non-banking and non-financial enterprises that offer financial
products and services that compete directly with Summit’s products and
services. Summit actively competes with other banks, mortgage
companies and other financial service companies in its efforts to obtain
deposits and make loans, in the scope and types of services offered, in
interest rates paid on deposits and charged on loans, and in
other aspects of banking.
In
addition to competing with other banks and mortgage companies, Summit competes
with other financial institutions engaged in the business of making loans
or accepting deposits, such as savings and loan associations, credit
unions, industrial loan associations, insurance companies, small loan
companies, finance companies, real estate investment trusts, certain
governmental agencies, credit card organizations and other enterprises.
In recent years, competition for money market accounts from
securities brokers has also intensified. Additional competition for
deposits comes from government and private issues of debt obligations and
other investment alternatives for depositors such as money market
funds. Summit takes an aggressive competitive posture, and intends to
continue vigorously competing for market share within our service areas by
offering competitive rates and terms on both loans and
deposits.
Summit’s ability to pay dividends is subject to
regulation.
Summit’s
ability to pay dividends on its common stock is subject to its profitability and
to government regulations that limit the aggregate amount of cash dividends paid
to shareholders based on retained earnings and then-current income
levels. There can be no assurance that Summit’s future earnings will
support dividend payments in the future. Summit's settlement of
the civil action styled Corinthian Mortgage
Corporation v. Summit Financial LLC et al., (the "Litigation") resulted
in Summit paying Corinthian Mortgage $9.25 million and recognizing a one-time
pre-tax charge in the fourth quarter of 2007 of $9.25 million ($5.8 million
after taxes). After taking into account this charge, Summit remained
well-capitalized as of December 31, 2007. Summit expects to remain
well-capitalized upon completion of the merger.
There is a concentration of ownership of
Summit’s Common Stock.
Summit’s directors and executive officers beneficially own approximately 27.5%
of Summit Financial Group, Inc.’s outstanding Common
Stock. Accordingly, such persons effectively have the ability to
control Summit and direct its affairs and business, which may include taking
actions that may be inconsistent with the interests of non-affiliated
shareholders.
Common Stock is not
Insured.
The Common Stock is not insured by the Federal Deposit Insurance Corporation or
any other governmental agency.
Risk Factors Relating to
Summit’s Growth.
Summit may not be able to maintain and manage its growth, which may adversely
affect its results of operations and financial
condition. Summit has had significant growth during the past five
years, and Summit plans to continue to grow and expand. Summit’s
ability to continue to grow depends on its ability to open new branch offices,
attract deposits to those locations, and identify loan and investment
opportunities. Summit’s ability to manage growth successfully also
will depend on whether it can maintain capital levels adequate to support its
growth and maintain cost controls and asset quality.
Summit expects to remain well-capitalized upon the acquisition of
Greater Atlantic . It is possible that Summit may need to raise
additional capital to support future growth. Summit cannot make any
assurance that additional capital would be available on terms satisfactory to
all shareholders. This could force Summit to limit its growth
strategy. If Summit is unable to sustain its growth, its earnings
could be adversely affected. If Summit grows too quickly, however,
and is not able to control costs and maintain asset quality, rapid growth also
could adversely affect its financial performance.
Summit depends on local economic conditions,
over which it has no control.
Summit’s success depends to a certain extent upon the general economic
conditions in the geographic markets in which it operates. Although
Summit anticipates that economic conditions in these markets will continue to be
favorable, no assurance can be given that these economic conditions will
continue. Adverse changes in economic conditions in the geographic
markets in which Summit’s subsidiaries are located would likely impair their
ability to collect loans and could otherwise have a negative effect on Summit’s
financial condition. In addition, Summit’s deposit balances may
fluctuate due to economic conditions or other conditions over which it has no
control.
There are no assurances as to the
adequacy of the allowance for credit losses.
Summit
believes that its allowance for credit losses is maintained at a level adequate
to absorb probable losses in its loan portfolio given the current information
known to management.
Management
establishes the allowance based upon many factors, including, but not limited
to:
|
·
|
historical
loan loss experience;
|
|
·
|
industry
diversification of the commercial loan
portfolio;
|
|
·
|
the
effect of changes in the local real estate market on collateral
values;
|
|
·
|
the
amount of nonperforming loans and related collateral
security;
|
|
·
|
current
economic conditions that may affect the borrower’s ability to pay and
value of collateral;
|
|
·
|
sources
and cost of funds;
|
|
·
|
volume,
growth and composition of the loan portfolio;
and
|
|
·
|
other
factors management believes are
relevant.
|
These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events, so ultimate losses may
differ from current estimates. Depending on changes in economic,
operating and other conditions, including changes in interest rates, that are
generally beyond its control, Summit’s actual loan losses could increase
significantly. As a result, such losses could exceed Summit’s current allowance
estimates. Summit can provide no assurance that its allowance is
sufficient to cover actual loan losses should such losses differ substantially
from our current estimates.
In
addition, federal and state regulators, as an integral part of their respective
supervisory functions, periodically review Summit’s allowance for credit
losses. Summit’s independent auditors also review the allowance as a
part of their audit. Any increase in its allowance required by either
the regulatory agencies or independent auditors would reduce Summit’s pre-tax
earnings.
|
|
FORWARD-LOOKING
STATEMENTS
|
This
proxy statement/prospectus contains data and information that constitute
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding, among other things, the anticipated
closing date of the merger, the expected pro forma effect of the merger, and
plans and objectives of Summit’s management for future operations of the
combined organization following consummation of the merger. You can
identify these forward-looking statements because they may include terms such as
“believes,” “anticipates,” “intends,” “expects,” or similar
expressions and may include discussions of future strategy. Each of
Summit and Greater Atlantic caution you not to rely unduly on any
forward-looking statements in this proxy statement/prospectus. These
forward-looking statements are based on current expectations that involve a
number of risks and uncertainties. Actual results may differ
materially from the results expressed in these forward-looking
statements.
Factors
that might cause such a difference include the following:
|
·
|
the
ability of Greater Atlantic to obtain the required shareholder approval or
the ability of the companies to obtain the required regulatory approvals
for the merger;
|
|
·
|
the
ability of the companies to consummate the
merger;
|
|
·
|
Summit’s
ability to successfully integrate Greater Atlantic into Summit following
the merger;
|
|
·
|
a
material adverse change in the financial condition, results of operations
or prospects of either Summit or Greater
Atlantic;
|
|
·
|
Summit’s
ability to fully realize any cost savings and revenues or the ability to
realize them on a timely basis;
|
|
·
|
the
risk of borrower, depositor and other customer attrition after the
transaction is completed;
|
|
·
|
a
change in general business and economic
conditions;
|
|
·
|
changes
in the interest rate environment, deposit flows, loan demand, real estate
values, and competition;
|
|
·
|
changes
in accounting principles, policies or
guidelines;
|
|
·
|
changes
in legislation and regulation;
|
|
·
|
other
economic, competitive, governmental, regulatory, geopolitical, and
technological factors affecting the companies’ operations, pricing, and
services; and
|
|
·
|
other
risk factors described on pages 13 to 17 of this
proxy statement/prospectus.
|
RECENT DEVELOPMENTS
Litigation Settlement
On November 21, 2007, Summit entered into a Letter of Intent with
Danny L. Wiginton, Commonwealth Savingshares Corporation, SOUTHBank FSB, and
Corinthian Mortgage Corporation (the “Letter of Intent”). The purpose of the
Letter of Intent was to settle the previously disclosed Litigation and to state
the basic terms and conditions upon which the parties have agreed to negotiate a
proposed transaction whereby Summit may acquire Commonwealth Savingshares
Corporation (“CSC”) and its subsidiary, SOUTHBank FSB, or exercise a
cash alternative to settle the Litigation.
Under the Letter of Intent, Summit and CSC agreed to negotiate in
an effort to enter into a definitive merger agreement to purchase CSC for a
combination of stock and cash equal to $52.5 million. However, at any
time prior to execution of a definitive merger agreement, Summit, CSC, and CSC’s
principal shareholder (Danny L. Wiginton) each had the right, in its or his sole
discretion to choose not to pursue the acquisition of CSC by Summit and to
terminate the Letter of Intent. In such case, Summit would pay
Corinthian, CSC and Wiginton the total sum of $10.5 million as consideration (i)
for settling the Litigation and (ii) as a break-up fee.
On December 5, 2007, Summit exercised the cash alternative
provided in the Letter of Intent. After due consideration, Summit
believes exercise of the cash alternative is in the bests interests of Summit
and its shareholders. Accordingly, Summit elected to pay Corinthian,
CSC and Wiginton the total sum of $10.5 million. $1.25 million of
this total amount was paid by Summit’s insurance carrier. As a result of
the settlement, Summit recognized a one-time after-tax charge in the fourth
quarter of 2007 of $5.8 million ($9.25 million pre- tax).
The settlement ends all current litigation between Summit, its
wholly owned subsidiary, Summit Community Bank, Inc. (the “Bank”), the
individual defendants who were former employees of Summit named in the
Litigation, and the plaintiff Corinthian Mortgage Corporation.
Fiscal Year and the Fourth Quarter Financial
Results
On January 31, 2008, Summit reported fiscal year and fourth
quarter 2007 financial results from continuing operations, which excludes from
income substantially all business activities of Summit Mortgage, its residential
mortgage loan origination unit, which ceased operations in January
2007. Income from continuing operations for 2007 was $13.5 million or
$1.85 per diluted share, an increase of 22.4 percent and 20.1 percent,
respectively, compared with $11.1 million or $1.54 per diluted share reported
for the prior-year. Excluding mark-to-market changes in fair value of
interest rate swaps, income from continuing operations was $12.6 million for
2007 compared to $11.1 million for 2006. The 2007 results from
continuing operations reflect strong loan growth, well-controlled operating
expenses and a stable net interest margin year-over-year.
For the fourth quarter of 2007, Summit’s income from
continuing operations was $3.9 million or $0.52 per diluted share compared with
the $2.7 million or $0.39 per diluted share reported for the prior-year quarter,
an increase of 40.7 percent and 33.3 percent, respectively. Excluding
mark-to-market changes in fair value of interest rate swaps, fourth quarter 2007
income from continuing operations was $3.4 million compared to $2.7 million for
the same period in 2006.
Consolidated net income for 2007 was $6.5 million or $0.88 per
diluted share, compared with $8.3 million or $1.15 per diluted share reported
for 2006, a decline of 21.8 percent and 23.5 percent,
respectively. 2007 consolidated results include a loss from
discontinued operations related to Summit Mortgage of $7.1 million, or $0.97 per
diluted share, which includes a $5.8 million after-tax charge to settle the
Corinthian litigation. 2006 results include a loss from discontinued
operations of $2.8 million, or $0.39 per diluted share.
On a consolidated basis, Summit reported a fourth quarter
2007 net loss of $2.8 million, or $0.37 per diluted share, compared with net
income of $207,000, or $0.03 per diluted share for the prior-year fourth
quarter. Consolidated results for the fourth quarter also reflect the
above-mentioned 2007 litigation settlement and a charge to terminate the
mortgage company in 2006.
For 2007, Summit’s returns on average shareholders’
equity and average assets from continuing operations calculated in accordance
with GAAP were 15.39 percent and 1.04 percent, respectively, compared with
prior-year ratios of 13.99 percent and 0.94 percent. Fourth quarter
2007 returns on average shareholders’ equity and average assets from continuing
operations were 16.23 percent and 1.13 percent, respectively, compared with
prior-year ratios of 13.37 percent and 0.89 percent.
Summit’s total revenues for 2007 were $46.4 million, consisting
of $39.0 million of net interest income plus $7.4 million of noninterest income,
an increase of 17.4 percent compared to total revenues of $39.5 million in
2006. Net interest income for the year increased 8.8 percent above
2006, reflecting 10.7 percent growth in average earning assets, partially offset
by a 12 basis point decline in the net interest margin, to 3.26 percent.
Summit’s total revenue for the fourth quarter of 2007 was
$13.0 million, up 26.3 percent from fourth quarter 2006 revenue of $10.3
million. Net interest income was $10.3 million, up 10.3 percent from
the year-ago quarter, from the combined impact of an 11.6 percent increase in
average earning assets and an eight basis point decline in the net interest
margin, to 3.24 percent.
For 2007, Summit’s noninterest income was $7.4 million, up $3.7
million or 102.5 percent from the $3.6 million reported for fiscal
2006. Excluding changes in fair value of interest rate swaps and the
net cash settlement of interest on these swaps from fiscal 2007 and 2006, and
further excluding the $2.1 million of insurance revenues from the Kelly Agencies
acquisition, noninterest income from organic sources was $4.5 million, up
$249,000 or 5.8 percent above fiscal 2006. Service fee income
increased $246,000, or 8.9 percent, to $3.0 million, compared to $2.8 million
for the prior-year. For the fourth quarter of 2007, noninterest
income was $2.7 million, up $1.8 million from the $946,000 recorded for the
year-ago quarter. Service fee income increased $161,000, or 22.9
percent, to $863,000 for fourth quarter of 2007.
Summit’s 2007 noninterest expense was $25.1 million, a 16.1
percent, or $3.5 million increase over the $21.6 million record for the previous
fiscal year. Salaries and benefits accounted for 79.9 percent of the
increase, increasing $2.8 million, or 23.6 percent, to $14.6 million for the
year; 2007 results include the addition of 34 employees associated with the
acquisition of the Kelly Agencies. The efficiency ratio for
continuing operations was 53.00 percent for 2007, compared with 52.15 percent
for 2006. For the fourth quarter of 2007, noninterest expense was
$6.9 million, up 30.4 percent or $1.6 million from the fourth quarter of 2006,
and 1.3 percent or $90,000 from the linked quarter. The efficiency ratio (for
continuing operations) was 53.03 percent for the fourth quarter of 2007,
compared with 49.61 percent for the prior-year fourth quarter, and 53.91 percent
for the linked quarter.
Summit’s assets at December 31, 2007 were $1.44 billion,
an increase of $200.0 million, or 16.2 percent, over the prior-year
period. Loans, net of unearned income, were $1.06 billion at period
end, up $138.1 million, or 15.0 percent, year over year. Loan growth
was distributed across virtually every loan category (except consumer loans);
however, commercial real estate (CRE) loans, the largest loan category at 36.1
percent of the portfolio, was also the driver of 2007 loan growth, up $70.3
million year-over-year; CRE contributed approximately 50 percent of total loan
growth for the year. Residential real estate, the second largest loan
category at 30.3 percent, contributed approximately $40 million of loan growth,
mostly in the second half of the year. Growth of construction and
development loans slowed substantially this year with only a $9.5 million
increase, its portfolio share reduced to 21.2 percent from 23.3 percent at
year-end 2006.
At December 31, 2007, Summit’s nonperforming assets were $12.4
million, or 0.86 percent of total assets, compared with $7.7 million, or 0.58
percent for the linked quarter and $5.4 million, or 0.43 percent for the
year-ago quarter. Residential real estate loans account for approximately $4.9
million of nonperforming assets, and construction and development loans –
largely residential – accounted for an additional $2.0 million. Commercial real
estate loans totaled approximately $2.5 million of nonperforming assets.
For the current quarter, Summit had net charge-offs of
$285,000, or an annualized 0.11 percent of average loans, compared with
$566,000, or an annualized 0.23 percent for the linked quarter, and $263,000, or
0.11 percent annualized for the year earlier period. At December 31, 2007, loan
loss reserves were 0.86 percent of loans outstanding.
Summit’s total deposits at December 31, 2007 were $828.7
million compared with $888.7 million at the prior year-end, a decrease of $60
million or 6.8 percent. Brokered deposits declined by $103.2 million
or 36.9 percent over the past year, to $176.4 million at December 31, 2007,
while Summit’s retail deposit portfolio increased by $43.2 million, or 7.1
percent, to $652.3 million at year-end 2007. Retail deposits now
account for 78.7 percent of total deposits, compared with 68.5 percent at year
end 2006.
Summit’s shareholders’ equity at December 31, 2007 was $89.4
million, an increase of 13.5 percent over the last twelve
months. Common shares outstanding totaled 7,408,941 at year-end,
compared with 7,089,680 for the prior-year end. The increase includes
the issuance of approximately 318,000 shares during the third quarter of 2007
for the acquisition of the Kelly Agencies.
PRICE RANGE OF COMMON STOCK AND
DIVIDENDS
Summit
common stock is traded on the NASDAQ Capital Market (formerly known as the
NASDAQSmallCap Market) under the symbol “SMMF”. The closing sale
price reported for Summit common stock on April 12, 2007, the last trading date
preceding the public announcement of the merger agreement, was
$20.80. Since February 22, 2007, Greater Atlantic common stock has
been quoted on the Pink Sheets under the symbol “GAFC.PK.” Before
that date, Greater Atlantic common stock was quoted on the NASDAQ Capital
Market. The closing sale price reported for Greater Atlantic common
stock on April 12, 2007, the last trading date preceding the public announcement
of the merger agreement, was $2.54.
The
following table sets forth for the periods indicated the high and low prices per
share of Summit common stock and Greater Atlantic common stock as reported on
their respective market, along with the semi-annual cash dividends per share
declared. The per share prices do not include adjustments for
markups, markdowns or commissions.
| |
Summit Financial Group,
Inc.
|
|
Greater Atlantic Financial
Corp.
|
|
Sales
Price
|
Cash Dividend
Declared
|
|
Sales
Price
|
Cash Dividend
Declared
|
| |
|
High
|
Low
|
|
High
|
Low
|
|
2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
$25.09
|
$19.90
|
$ -
|
|
$6.05
|
$4.60
|
$ -
|
|
Second
Quarter
|
$24.52
|
$19.10
|
$0.16
|
|
$5.90
|
$5.04
|
$ -
|
|
Third
Quarter
|
$24.18
|
$17.95
|
$ -
|
|
$5.36
|
$4.75
|
$ -
|
|
Fourth
Quarter
|
$20.16
|
$17.50
|
$0.16
|
|
$5.20
|
$4.30
|
$ -
|
| |
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
$21.51
|
$19.49
|
$ -
|
|
$4.30
|
$2.35
|
$ -
|
|
Second
Quarter
|
$21.20
|
$19.80
|
$0.17
|
|
$5.10
|
$2.25
|
$ -
|
|
Third
Quarter
|
$19.65
|
$18.28
|
$ -
|
|
$5.50
|
$5.00
|
$ -
|
|
Fourth Quarter
|
$18.96 |
$13.60 |
$.017 |
|
$5.35
|
$4.69 |
$ - |
| |
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
First Quarter (through
February 8, 2008)
|
$15.52 |
$13.52 |
$ - |
|
$4.95 |
$3.85 |
$ -
|
The
shareholders of Summit are entitled to receive dividends when and as declared by
its board of directors. Dividends have been paid
semi-annually. Dividends were $0.34 per share in 2007,
$0.32 per share in 2006 and $0.30 per share in 2005 . The payment
of dividends is subject to the restrictions set forth in the West Virginia
Business Corporation Act and the limitations imposed by the Federal Reserve
Board.
Payment
of dividends by Summit depends upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s state non-member banking
subsidiary is regulated by the Federal Deposit Insurance Corporation (“FDIC”)
and the West Virginia Division of Banking and generally, the prior approval of
the FDIC is required if the total dividends declared by a state non-member bank
in any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two
years. Additionally, prior approval of the FDIC is required when a
state non-member bank has deficit retained earnings but has sufficient current
year’s net income, as defined, plus the retained net profits of the two
preceding years. The FDIC may prohibit dividends if it deems the
payment to be an
unsafe or
unsound banking practice. The FDIC has issued guidelines for dividend
payments by state non-member banks emphasizing that proper dividend size depends
on the bank’s earnings and capital.
The
following table sets forth historical per share market values for Summit common
stock and Greater Atlantic common stock (i) on April 12, 2007, the last
trading day prior to public announcement of the merger agreement, and
(ii) on February 5, 2008 , the most recent practicable date
before the printing and mailing of this proxy
statement/prospectus. The table also shows the equivalent pro forma
market value of Greater Atlantic common stock on April 12, 2007, and February
5, 2008 , assuming receipt of stock consideration.
The
equivalent pro forma market value per share of Greater Atlantic common stock is
the result obtained by multiplying the historical market price of Summit common
stock by the applicable exchange ratio and adding the cash consideration of
$1.80. For purposes of determining the equivalent pro forma market
value and the applicable exchange ratio, we have assumed that the average
closing price of a share of Summit common stock is equal to the historical
market price on April 12, 2007, and on February 5,
2008 . Accordingly, the pro forma market value of Greater Atlantic
common stock (i) on April 12, 2007, is determined by multiplying $20.80 by
the exchange ratio of 0.2019, and (ii) on February 5, 2008 , is
determined by multiplying $15.50 by the exchange ratio of 0.2357.
The
historical market prices represent the last sale prices on April 12, 2007, and
February 5, 2008 . The average closing price of Summit
common stock used to determined the exchange ratio and the market price may be
higher or lower than the closing prices of Summit common stock on the dates
shown in the table and, therefore, the market value of the Summit common stock
that you receive may be higher or lower than the equivalent pro forma market
value shown in the table.
| |
|
Historical Market Price Per
Share
|
|
|
|
|
| |
|
Summit
|
|
|
Greater
Atlantic
|
|
|
Greater Atlantic
Equivalent Pro Forma Market Value Per Share
|
|
| |
|
|
|
|
|
|
|
|
|
|
April
12, 2007
|
|
$ |
20.80
|
|
|
$ |
2.54
|
|
|
$ |
6.00
|
|
|
February 5, 2008
|
|
$ |
15.50
|
|
|
$ |
4.95
|
|
|
$ |
5.45
|
|
Once the
merger is completed, there will be no further public market for Greater Atlantic
common stock.
UNAUDITED COMPARATIVE PER SHARE
DATA
We have summarized below historical earnings, dividend and book
value per share information for Summit and Greater Atlantic and additional
similar information as if the companies had been combined for the periods shown,
which we refer to as “pro forma” information. The pro forma and pro
forma equivalent per share information gives effect to the merger as if the
transaction had been effective at the year end dates presented, in the case of
book value data, and as if the transaction had been effective at the beginning
of each period presented, in the case of the earnings and dividend data.
The pro forma combined and pro forma equivalent per share
information below assume that Summit will pay consideration totaling $6.00 per
share for each outstanding share of Greater Atlantic common stock, as
follows: $1.80 in cash, and $4.20 in Summit common
stock. For purposes of valuing Summit’s common stock paid, a price
per share of $20.80 was assumed, which represents the closing price of Summit’s
common stock on the last trading day preceding the public announcement of the
Greater Atlantic merger transaction, and which results in an exchange ratio
0.2019 shares of Summit common stock for each share of Greater Atlantic common
stock.
The Greater Atlantic pro forma equivalent per share amounts below
are calculated by multiplying the Summit pro forma combined earnings per share
and book value per share by the exchange ratio of 0.2019 so that the per share
amounts equate to the respective values for one share of Greater Atlantic common
stock.
We expect that both Summit and Greater Atlantic will incur merger
and integration costs as a result of the merger. We also anticipate
that the merger will provide the combined company with financial benefits that
may include reduced operating expenses. The information set forth
below, while helpful in illustrating the financial characteristics of the
combined company under one set of assumptions, may not reflect all of these
anticipated financial expenses and does not reflect any of these anticipated
financial benefits and, accordingly, does not attempt to predict or suggest
future results. It also does not necessarily reflect what the
historical results of the combined company would have been had our companies
been combined during the periods presented.
Summit reports on a calendar year basis while Greater Atlantic
reports on a fiscal year ending on September 30. Accordingly for
purposes of the below earnings per share data, Summit’s statements of income for
the nine months ended September 30, 2007, and the year ended December 31,
2006, have been combined with Greater Atlantic’s statements of income for the
nine months ended June 30, 2007, and the year ended September 30, 2006,
respectively.
The information in the following table is based on, and you should
read it together with, the historical financial information and the notes
thereto for Summit and Greater Atlantic contained in this proxy
statement/prospectus.
|
For the Nine Months Ended 9/30/07-Summit &
6/30/07-Greater Atlantic
|
|
| |
|
|
|
|
|
|
|
|
|
|
Greater
|
|
| |
|
|
|
|
Greater
|
|
|
|
|
|
Atlantic
|
|
| |
|
Summit
|
|
|
Atlantic
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Combined
|
|
|
Equivalent
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.34 |
|
|
$ |
(0.74 |
) |
|
$ |
1.04 |
|
|
$ |
0.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.33 |
|
|
$ |
(0.74 |
) |
|
$ |
1.04 |
|
|
$ |
0.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$ |
0.17 |
|
|
$ |
- |
|
|
$ |
0.16 |
|
|
$ |
0.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share (at 9/30/2007)
|
|
$ |
12.63 |
|
|
$ |
2.19 |
|
|
$ |
13.25 |
|
|
$ |
2.68 |
|
|
For the Year Ended 12/31/06-Summit & 9/30/06-Greater
Atlantic
|
|
| |
|
|
|
|
|
|
|
|
|
|
Greater
|
|
| |
|
|
|
|
Greater
|
|
|
|
|
|
Atlantic
|
|
| |
|
Summit
|
|
|
Atlantic
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Combined
|
|
|
Equivalent
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.55 |
|
|
$ |
(1.02 |
) |
|
$ |
1.16 |
|
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.54 |
|
|
$ |
(1.02 |
) |
|
$ |
1.15 |
|
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$ |
0.32 |
|
|
$ |
- |
|
|
$ |
0.29 |
|
|
$ |
0.06 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share (at 12/31/2006)
|
|
$ |
11.12 |
|
|
$ |
2.67 |
|
|
$ |
12.20 |
|
|
$ |
2.46 |
|
UNAUDITED PRO FORMA FINANCIAL
INFORMATION
The following unaudited pro forma condensed combined consolidated
balance sheet as of September 30, 2007 and unaudited pro forma condensed
combined consolidated statements of income for the nine months ended September
30, 2007 and the year ended December 31, 2006 combine the historical
financial statements of Summit and Greater Atlantic. The unaudited
pro forma financial statements give effect to the proposed merger of Greater
Atlantic with and into Summit as if the merger occurred on September 30, 2007
with respect to the balance sheet, and on January 1, 2007, and January 1,
2006, with respect to the statements of income for the nine months ended
September 30, 2007, and the year ended December 31, 2006,
respectively. The unaudited pro forma financial statements give
effect to the proposed merger under the purchase method of accounting using an
acquisition price of $6.00 per share for Greater Atlantic common stock.
Summit reports on a calendar year basis while Greater Atlantic
reports on a fiscal year ending on September 30. Accordingly for
purposes of the unaudited pro forma condensed combined consolidated statements
of income, Summit’s statements of income for the nine months ended September 30,
2007 and the year ended December 31, 2006 have been combined with Greater
Atlantic’s statements of income for the nine months ended June 30, 2007 and the
year ended September 30, 2006, respectively.
The purchase method of accounting requires that all of Greater
Atlantic’s assets and liabilities be adjusted to their estimated fair market
values as of the date of acquisition. For purposes of the unaudited
pro forma financial statements, fair market value of September 30, 2007
assets and liabilities has been estimated by management of Summit using market
information available on September 30, 2007. Accordingly, these
adjustments are only approximations. This information may not
necessarily be indicative of the financial position or results of operations
that would have occurred if the merger had been consummated on the date or at
the beginning of the period indicated or which may be obtained in the
future. Upon consummation of the merger, Summit will make adjustments
as of the date of consummation based on appraisals and
estimates. The unaudited pro forma information, while helpful
in illustrating the financial characteristics of the combined company under one
set of assumptions, does not reflect benefits of expected cost savings or
opportunities to earn additional revenue and, accordingly, does not attempt to
predict or suggest future results. It also does not necessarily
reflect what the historical results of the combined company would have been had
our companies been combined during this period.
|
SUMMIT AND GREATER ATLANTIC
|
|
|
Unaudited Pro Forma Condensed Combined Consolidated
Balance Sheet
|
|
|
September 30, 2007
|
|
|
(dollars in thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
| |
|
Summit
|
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
| |
|
Financial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Group, Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
Combined
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$ |
13,435 |
|
|
$ |
3,146 |
|
|
$ |
- |
|
|
|
|
$ |
16,581 |
|
|
Interest bearing deposits with other banks
|
|
|
179 |
|
|
|
4,486 |
|
|
|
(5,736 |
) |
(1 |
) |
|
|
6,433 |
|
| |
|
|
|
|
|
|
|
|
|
|
(496 |
) |
(2 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
8,000 |
|
(5 |
) |
|
|
|
|
|
Federal funds sold
|
|
|
2,499 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
2,499 |
|
|
Securities available for sale
|
|
|
279,289 |
|
|
|
50,641 |
|
|
|
- |
|
|
|
|
|
329,930 |
|
|
Securities held to maturity
|
|
|
- |
|
|
|
3,053 |
|
|
|
- |
|
|
|
|
|
3,053 |
|
|
Loans held for sale, net
|
|
|
1,596 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
1,596 |
|
|
Loans, net
|
|
|
986,437 |
|
|
|
176,108 |
|
|
|
725 |
|
(3 |
) |
|
|
1,163,270 |
|
|
Premises and equipment, net
|
|
|
22,004 |
|
|
|
2,285 |
|
|
|
- |
|
|
|
|
|
24,289 |
|
|
Accrued interest receivable
|
|
|
7,239 |
|
|
|
1,675 |
|
|
|
- |
|
|
|
|
|
8,914 |
|
|
Identifiable intangibles
|
|
|
3,945 |
|
|
|
- |
|
|
|
3,000 |
|
(3 |
) |
|
|
6,945 |
|
|
Goodwill
|
|
|
6,198 |
|
|
|
956 |
|
|
|
7,772 |
|
(3 |
) |
|
|
14,926 |
|
|
Other assets
|
|
|
17,858 |
|
|
|
3,644 |
|
|
|
(973 |
) |
(3 |
) |
|
|
23,107 |
|
| |
|
|
|
|
|
|
|
|
|
|
1,600 |
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
978 |
|
(3 |
) |
|
|
|
|
|
Total assets
|
|
$ |
1,340,679 |
|
|
$ |
245,994 |
|
|
$ |
14,870 |
|
|
|
|
$ |
1,601,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
828,599 |
|
|
$ |
197,991 |
|
|
$ |
377 |
|
(3 |
) |
|
$ |
1,026,967 |
|
|
Short-term borrowings
|
|
|
124,699 |
|
|
|
2,192 |
|
|
|
- |
|
|
|
|
|
126,891 |
|
|
Long-term borrowings
|
|
|
263,679 |
|
|
|
25,000 |
|
|
|
788 |
|
(3 |
) |
|
|
297,467 |
|
| |
|
|
|
|
|
|
|
|
|
|
10,000 |
|
(5 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
(5 |
) |
|
|
|
|
|
Subordinated debentures owed
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
subsidiary trusts
|
|
|
19,589 |
|
|
|
9,374 |
|
|
|
|
|
|
|
|
|
28,963 |
|
|
Other liabilities
|
|
|
10,638 |
|
|
|
1,866 |
|
|
|
1,100 |
|
(3 |
) |
|
|
15,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
615 |
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
858 |
|
(3 |
) |
|
|
|
|
|
Total liabilities
|
|
|
1,247,204 |
|
|
|
236,423 |
|
|
|
11,738 |
|
|
|
|
|
1,495,365 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and related
surplus
|
|
|
24,376 |
|
|
|
25,303 |
|
|
|
12,702 |
|
(1 |
) |
|
|
37,078 |
|
| |
|
|
|
|
|
|
|
|
|
|
(25,303 |
) |
(4 |
) |
|
|
|
|
|
Retained earnings
|
|
|
69,104 |
|
|
|
(14,408 |
) |
|
|
(496 |
) |
(2 |
) |
|
|
69,105 |
|
| |
|
|
|
|
|
|
|
|
|
|
14,905 |
|
(4 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive (loss)
|
|
|
(5 |
) |
|
|
(1,324 |
) |
|
|
1,324 |
|
(4 |
) |
|
|
(5 |
) |
|
Total shareholders' equity
|
|
|
93,475 |
|
|
|
9,571 |
|
|
|
3,132 |
|
|
|
|
|
106,178 |
|
|
Total liabilities and shareholders' equity
|
|
$ |
1,340,679 |
|
|
$ |
245,994 |
|
|
$ |
14,870 |
|
|
|
|
$ |
1,601,543 |
|
See Notes to Unaudited Pro Forma
Financial Statements
|
SUMMIT AND GREATER ATLANTIC
|
|
|
Unaudited Pro Forma Condensed Combined Consolidated
Statement of Income
|
|
|
(dollars in thousands, except per share amounts)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
| |
|
September 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
| |
|
Summit
|
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
| |
|
Financial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Group, Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
Combined
|
|
|
Interest income
|
|
$ |
67,587 |
|
|
$ |
14,082 |
|
|
$ |
(1,868 |
) |
(6 |
) |
|
$ |
80,111 |
|
| |
|
|
|
|
|
|
|
|
|
|
310 |
|
(7 |
) |
|
|
|
|
|
Interest expense
|
|
|
38,861 |
|
|
|
8,976 |
|
|
|
(1,456 |
) |
(6 |
) |
|
|
46,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
86 |
|
(8 |
) |
|
|
|
|
|
Net interest income
|
|
|
28,726 |
|
|
|
5,106 |
|
|
|
|
|
|
|
|
|
33,644 |
|
|
Provision for loan losses
|
|
|
1,305 |
|
|
|
289 |
|
|
|
|
|
|
|
|
|
1,594 |
|
|
Net interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan
losses
|
|
|
27,421 |
|
|
|
4,817 |
|
|
|
|
|
|
|
|
|
32,050 |
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
2,141 |
|
|
|
465 |
|
|
|
(29 |
) |
(6 |
) |
|
|
2,577 |
|
|
Other
|
|
|
2,518 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
2,525 |
|
|
Total noninterest income
|
|
|
4,659 |
|
|
|
472 |
|
|
|
|
|
|
|
|
|
5,102 |
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
10,518 |
|
|
|
3,523 |
|
|
|
(192 |
) |
(6 |
) |
|
|
13,849 |
|
|
Net occupancy expense
|
|
|
1,292 |
|
|
|
1,051 |
|
|
|
(81 |
) |
(6 |
) |
|
|
2,262 |
|
|
Equipment expense
|
|
|
1,436 |
|
|
|
395 |
|
|
|
(13 |
) |
(6 |
) |
|
|
1,818 |
|
|
Other
|
|
|
4,942 |
|
|
|
2,545 |
|
|
|
(17 |
) |
(6 |
) |
|
|
7,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
322 |
|
(9 |
) |
|
|
|
|
|
Total noninterest expense
|
|
|
18,188 |
|
|
|
7,514 |
|
|
|
|
|
|
|
|
|
25,721 |
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
13,892 |
|
|
|
(2,225 |
) |
|
|
|
|
|
|
|
|
11,431 |
|
|
Income tax expense
|
|
|
4,223 |
|
|
|
- |
|
|
|
(846 |
) |
(10 |
) |
|
|
3,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
(11 |
) |
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
9,669 |
|
|
$ |
(2,225 |
) |
|
$ |
700 |
|
|
|
|
$ |
8,144 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.34 |
|
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
$ |
1.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.33 |
|
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
$ |
1.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$ |
0.17 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
$ |
0.16 |
|
See Notes to Unaudited Pro Forma
Financial Statements
|
SUMMIT AND GREATER ATLANTIC
|
|
|
Unaudited Pro Forma Condensed Combined Consolidated
Statement of Income
|
|
|
(dollars in thousands, except per share amounts)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
| |
|
Summit
|
|
|
Atlantic
|
|
|
|
|
|
|
|
|
|
| |
|
Financial
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Group, Inc.
|
|
|
Corp.
|
|
|
Adjustments
|
|
|
|
|
Combined
|
|
|
Interest income
|
|
$ |
80,278 |
|
|
$ |
18,794 |
|
|
$ |
(2,225 |
) |
(6 |
) |
|
$ |
97,261 |
|
| |
|
|
|
|
|
|
|
|
|
|
414 |
|
(7 |
) |
|
|
|
|
|
Interest expense
|
|
|
44,379 |
|
|
|
11,583 |
|
|
|
(1,692 |
) |
(6 |
) |
|
|
54,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
(8 |
) |
|
|
|
|
|
Net interest income
|
|
|
35,899 |
|
|
|
7,211 |
|
|
|
|
|
|
|
|
|
42,878 |
|
|
Provision for loan losses
|
|
|
1,845 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
1,971 |
|
|
Net interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan
losses
|
|
|
34,054 |
|
|
|
7,085 |
|
|
|
|
|
|
|
|
|
40,907 |
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
2,758 |
|
|
|
610 |
|
|
|
(40 |
) |
(6 |
) |
|
|
3,328 |
|
|
Other
|
|
|
875 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
1,182 |
|
|
Total noninterest income
|
|
|
3,633 |
|
|
|
917 |
|
|
|
|
|
|
|
|
|
4,510 |
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
11,821 |
|
|
|
4,718 |
|
|
|
(256 |
) |
(6 |
) |
|
|
16,283 |
|
|
Net occupancy expense
|
|
|
1,557 |
|
|
|
1,337 |
|
|
|
(102 |
) |
(6 |
) |
|
|
2,792 |
|
|
Equipment expense
|
|
|
1,901 |
|
|
|
554 |
|
|
|
(24 |
) |
(6 |
) |
|
|
2,431 |
|
|
Other
|
|
|
6,330 |
|
|
|
4,476 |
|
|
|
(62 |
) |
(6 |
) |
|
|
11,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
429 |
|
(9 |
) |
|
|
|
|
|
Total noninterest expense
|
|
|
21,609 |
|
|
|
11,085 |
|
|
|
|
|
|
|
|
|
32,679 |
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
16,078 |
|
|
|
(3,083 |
) |
|
|
|
|
|
|
|
|
12,738 |
|
|
Income tax expense
|
|
|
5,018 |
|
|
|
- |
|
|
|
(1,172 |
) |
(10 |
) |
|
|
3,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(98 |
) |
(11 |
) |
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
11,060 |
|
|
$ |
(3,083 |
) |
|
$ |
1,013 |
|
|
|
|
$ |
8,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.55 |
|
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
$ |
1.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
1.54 |
|
|
$ |
(1.02 |
) |
|
|
|
|
|
|
|
$ |
1.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$ |
0.32 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
$ |
0.29 |
|
See Notes to Unaudited Pro Forma
Financial Statements
|
SUMMIT
AND GREAT ATLANTIC
|
|
Notes
to Unaudited Pro Forma Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effect of stock and cash consideration paid by Summit to
Greater Atlantic's shareholders in conjunction with the merger and record
cash paid for its estimated direct transaction costs. Under the
terms of the Greater Atlantic transaction, Summit will pay total
consideration of $6.00 per share for each of the 3,024,220 outstanding
common shares of Greater Atlantic. This consideration will be
paid 70% (or $4.20 per share) in the form of Summit common stock and 30%
(or $1.80 per share) in cash.
|
| |
| |
| |
| |
| |
|
|
|
|
|
|
|
|
|
| |
(a)
|
Stock consideration: Issuance of 694,843 shares
of Summit common stock to Greater Atlantic shareholders assuming Summit's
stock price of $18.28 at September 30, 2007.
|
| |
|
| |
|
|
|
|
|
|
|
|
|
| |
(b)
|
Cash consideration and estimated direct transaction
costs: Cash payments totalling $5,736,000 representing
$5,444,000 in cash consideration paid to Greater Atlantic shareholders,
$89,000 paid to holders of Greater Atlantic stock options in settlement of
such options, and $203,000 for Summit's estimated direct transaction
costs.
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(2)
|
Effect of Greater Atlantic's estimated direct transaction
costs.
|
| |
|
|
|
|
|
|
|
|
|
|
(3)
|
Adjust acquired assets and liabilities of Greater Atlantic
to fair value and record related tax effects as follows (in
thousands):
|
| |
| |
|
|
|
|
|
|
|
|
|
| |
|
Purchase price and estimated transaction costs ($18,438)
paid by Summit in excess of Greater Atlantic's pro forma equity at
September 30, 2007 ($9,074) adjusted for the direct transaction costs paid
by Greater Atlantic.
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
$ 9,364
|
|
| |
|
Estimated fair value purchase accounting adjustments:
|
|
|
|
| |
|
Loans
|
|
|
|
|
$ 725
|
|
|
| |
|
Deposits
|
|
|
|
(377)
|
|
|
| |
|
Borrowings
|
|
|
|
(788)
|
|
|
| |
|
Core deposit intangible
|
|
|
3,000
|
|
|
| |
|
Net deferred tax liabilities on
purchase accounting adjustments
|
(973)
|
|
|
| |
|
Tax benefit of purchased net
operating loss carryforwards
|
1,600
|
|
|
| |
|
|
|
|
|
|
$ 3,187
|
(3,187)
|
|
| |
|
Purchase price and estimated transaction costs in excess of
fair value of net assets acquired
|
|
|
|
| |
|
|
6,177
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Estimated exit and other restructuring costs expected to be
incurred in connection with the acquisition of Greater Atlantic:
|
|
|
|
| |
|
|
|
|
| |
|
Employee severance costs
|
|
|
$ 1,100
|
|
|
| |
|
EDP contracts cancellation costs
|
|
|
615
|
|
|
| |
|
Lease termination costs
|
|
|
858
|
|
|
| |
|
Net deferred tax asset on exit and
restructuring costs
|
(978)
|
|
|
| |
|
|
|
|
|
|
$ 1,595
|
1,595
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Goodwill
|
|
|
|
|
|
$ 7,772
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
(4)
|
Reflect elimination of Greater Atlantic's equity
accounts.
|
|
|
|
|
SUMMIT AND GREAT ATLANTIC
|
|
Notes to Unaudited Pro Forma Financial Statements -
continued
|
| |
|
|
|
|
|
|
|
|
|
|
(5)
|
Issuance of qualifying subordinated debt prior to
acquisition of Greater Atlantic. The proceeds of this issuance
will be utilized as follows (in thousands):
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Finance cash consideration and transaction costs
associated with Greater Atlantic acquisition ($5,736) and cash reserve
($2,264)
|
|
|
|
| |
|
|
|
|
| |
|
$ 8,000
|
|
|
| |
|
Reduction of principal of existing Summit long term
borrowing
|
2,000
|
|
|
| |
|
Total issuance of qualifying subordinated debt
|
|
$ 10,000
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
(6)
|
Estimated reductions to interest income, interest expense,
non-interest income and non-interest expense as result of sale of Greater
Atlantic's Pasadena, Maryland branch bank.
|
| |
| |
|
|
|
|
|
|
|
|
|
|
(7)
|
Other pro forma adjustments to interest income, as follows
(in thousands):
|
|
|
| |
|
|
|
|
|
|
Nine Months
|
Year
|
|
| |
|
|
|
|
|
|
Ended
|
Ended
|
|
| |
|
|
|
|
|
|
September 30,
|
December 31,
|
|
| |
|
|
|
|
|
|
2007
|
2006
|
|
| |
|
Estimated accretion of fair value adjustment to securities
over portfolio's estimated 3 year average life to maturity
|
|
|
|
| |
|
$ 446
|
$ 595
|
|
| |
|
Estimated amortization of fair value adjustment to loans
over portfolio's estimated 4 year average life to maturity
|
|
|
|
| |
|
(136)
|
(181)
|
|
| |
|
|
|
|
|
|
$ 310
|
$ 414
|
|
| |
|
|
|
|
|
|
|
|
|
|
(8)
|
Other proforma adjustments to interest expense,
as follows (in thousands):
|
|
|
| |
|
|
|
|
|
|
Nine Months
|
Year
|
|
| |
|
|
|
|
|
|
Ended
|
Ended
|
|
| |
|
|
|
|
|
|
September 30,
|
December 31,
|
|
| |
|
|
|
|
|
|
2007
|
2006
|
|
| |
|
Estimated amortization of fair value adjustment to deposits
over the estimated 2 year average remaining maturity of the deposits
|
|
|
|
| |
|
$ (141)
|
$ (189)
|
|
| |
|
Estimated amortization of fair value adjustment to
borrowings over the estimated 3 year average remaining maturity of the
borrowings
|
|
|
|
| |
|
|
|
|
| |
|
(197)
|
(263)
|
|
| |
|
Estimated interest expense on issuance of $10 million in
qualifying subordinated debt at 7.00%, less reduction in interest as
result of pay down of $2 million in principal of an existing Summit long
term borrowing having an effective interest rate of 6.75% using proceeds
from the subordinated debt issuance
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
424
|
565
|
|
| |
|
|
|
|
|
|
$ 86
|
$ 113
|
|
| |
|
|
|
|
|
|
|
|
|
|
(9)
|
Amortization of core deposit intangible over
estimated 7 year average life.
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
(10)
|
Tax benefit, previously unrecognized, of Greater
Atlantic's loss from continuing operations at a 38% effective tax
rate.
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(11)
|
Tax effect of pro forma adjustments at a 38%
effective tax rate.
|
|
|
|
SUMMARY SELECTED FINANCIAL
DATA
The following table sets forth certain summary historical
consolidated financial information for Summit and Greater
Atlantic. The balance sheet data and income statement data of Summit
is as of and for the five years in the period ended December 31, 2006 and for
Greater Atlantic is as of and for the five years in the period ended September
30, 2007, and are derived from the audited consolidated financial statements of
Summit and Greater Atlantic, respectively. The balance sheet data and
income statement data of Summit for the nine months ended September 30, 2007,
and September 30, 2006, are derived from the unaudited consolidated
financial statements of Summit. You should not rely on the nine-month
information as being indicative of the results that may be expected for the
entire year or for any future interim period.
The following information should be read in conjunction with the
audited and unaudited consolidated financial statements and the related notes of
Summit, which are incorporated by reference into this proxy
statement/prospectus, and the audited consolidated financial statements of
Greater Atlantic, which are attached to this proxy
statement/prospectus.
|
SUMMIT FINANCIAL GROUP, INC.
Summary Consolidated Financial Data
|
|
|
Dollars in thousands,
except per share amounts
|
|
Nine
months
ended
September 30, 2007
|
|
|
Nine
months
ended
September 30, 2006
|
|
|
For the Year Ended
December 31,
|
|
| |
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
67,587 |
|
|
$ |
58,394 |
|
|
$ |
80,278 |
|
|
$ |
56,653 |
|
|
$ |
45,041 |
|
|
$ |
41,154 |
|
|
$ |
40,689 |
|
|
Interest expense
|
|
|
38,861 |
|
|
|
31,871 |
|
|
|
44,379 |
|
|
|
26,503 |
|
|
|
18,663 |
|
|
|
17,827 |
|
|
|
18,842 |
|
|
Net interest income
|
|
|
28,726 |
|
|
|
26,523 |
|
|
|
35,899 |
|
|
|
30,150 |
|
|
|
26,378 |
|
|
|
23,327 |
|
|
|
21,847 |
|
|
Provision for loan losses
|
|
|
1,305 |
|
|
|
915 |
|
|
|
1,845 |
|
|
|
1,295 |
|
|
|
1,050 |
|
|
|
915 |
|
|
|
1,215 |
|
|
Net interest income after provision for loan losses
|
|
|
27,421 |
|
|
|
25,608 |
|
|
|
34,054 |
|
|
|
28,855 |
|
|
|
25,328 |
|
|
|
22,412 |
|
|
|
20,632 |
|
|
Noninterest income
|
|
|
4,659 |
|
|
|
2,687 |
|
|
|
3,634 |
|
|
|
1,605 |
|
|
|
3,263 |
|
|
|
3,275 |
|
|
|
1,945 |
|
|
Noninterest expense
|
|
|
18,188 |
|
|
|
16,310 |
|
|
|
21,610 |
|
|
|
19,263 |
|
|
|
16,919 |
|
|
|
14,218 |
|
|
|
12,607 |
|
|
Income (loss) before income taxes
|
|
|
13,892 |
|
|
|
11,985 |
|
|
|
16,078 |
|
|
|
11,197 |
|
|
|
11,672 |
|
|
|
11,469 |
|
|
|
9,970 |
|
|
Income tax expense
|
|
|
4,223 |
|
|
|
3,674 |
|
|
|
5,018 |
|
|
|
3,033 |
|
|
|
3,348 |
|
|
|
3,414 |
|
|
|
2,732 |
|
|
Income (loss) from continuing operations
|
|
|
9,669 |
|
|
|
8,311 |
|
|
|
11,060 |
|
|
|
8,164 |
|
|
|
8,324 |
|
|
|
8,055 |
|
|
|
7,238 |
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs and impairment of
long-lived assets
|
|
|
123 |
|
|
|
- |
|
|
|
(2,480 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Operating income (loss)
|
|
|
(798 |
) |
|
|
(377 |
) |
|
|
(1,750 |
) |
|
|
3,862 |
|
|
|
2,913 |
|
|
|
(44 |
) |
|
|
- |
|
|
Income (loss) from discontinued operations before tax
|
|
|
(675 |
) |
|
|
(377 |
) |
|
|
(4,230 |
) |
|
|
3,862 |
|
|
|
2,913 |
|
|
|
(44 |
) |
|
|
- |
|
|
Income tax expense (benefit)
|
|
|
(231 |
) |
|
|
(116 |
) |
|
|
(1,427 |
) |
|
|
1,339 |
|
|
|
1,004 |
|
|
|
(15 |
) |
|
|
- |
|
|
Income (loss) from discontinuedoperations
|
|
|
(444 |
) |
|
|
(261 |
) |
|
|
(2,803 |
) |
|
|
2,523 |
|
|
|
1,909 |
|
|
|
(29 |
) |
|
|
- |
|
|
Net income
|
|
$ |
9,225 |
|
|
$ |
8,050 |
|
|
$ |
8,257 |
|
|
$ |
10,687 |
|
|
$ |
10,233 |
|
|
$ |
8,206 |
|
|
$ |
7,238 |
|
|
Balance Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
1,340,679 |
|
|
$ |
1,211,195 |
|
|
$ |
1,235,519 |
|
|
$ |
1,110,214 |
|
|
$ |
889,830 |
|
|
$ |
791,577 |
|
|
$ |
671,894 |
|
|
Securities
|
|
|
279,289 |
|
|
|
246,332 |
|
|
|
247,874 |
|
|
|
223,772 |
|
|
|
211,362 |
|
|
|
235,409 |
|
|
|
212,598 |
|
|
Loans
|
|
|
986,437 |
|
|
|
894,836 |
|
|
|
916,045 |
|
|
|
793,452 |
|
|
|
602,728 |
|
|
|
498,340 |
|
|
|
419,205 |
|
|
Deposits
|
|
|
828,599 |
|
|
|
865,072 |
|
|
|
888,688 |
|
|
|
673,887 |
|
|
|
524,596 |
|
|
|
511,801 |
|
|
|
458,648 |
|
|
Short-term borrowings
|
|
|
124,699 |
|
|
|
90,422 |
|
|
|
60,428 |
|
|
|
182,028 |
|
|
|
120,629 |
|
|
|
49,714 |
|
|
|
20,191 |
|
|
Long-term borrowings and
subordinated debentures
|
|
|
283,268 |
|
|
|
165,716 |
|
|
|
195,698 |
|
|
|
172,295 |
|
|
|
173,101 |
|
|
|
168,549 |
|
|
|
137,396 |
|
|
Shareholders equity
|
|
|
93,475 |
|
|
|
79,481 |
|
|
|
78,752 |
|
|
|
72,691 |
|
|
|
65,150 |
|
|
|
57,005 |
|
|
|
52,080 |
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
$ |
1.34 |
|
|
$ |
1.17 |
|
|
$ |
1.55 |
|
|
$ |
1.15 |
|
|
$ |
1.18 |
|
|
$ |
1.14 |
|
|
$ |
1.03 |
|
|
Diluted earnings
|
|
|
1.33 |
|
|
|
1.16 |
|
|
|
1.54 |
|
|
|
1.13 |
|
|
|
1.17 |
|
|
|
1.14 |
|
|
|
1.03 |
|
|
Earnings per share – discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss)
|
|
|
(0.06 |
) |
|
|
(0.04 |
) |
|
|
(0.39 |
) |
|
|
0.35 |
|
|
|
0.27 |
|
|
|
- |
|
|
|
- |
|
|
Diluted earnings (loss)
|
|
|
(0.06 |
) |
|
|
(0.04 |
) |
|
|
(0.39 |
) |
|
|
0.35 |
|
|
|
0.27 |
|
|
|
- |
|
|
|
- |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
|
1.28 |
|
|
|
1.13 |
|
|
|
1.16 |
|
|
|
1.51 |
|
|
|
1.46 |
|
|
|
1.14 |
|
|
|
1.03 |
|
|
Diluted earnings
|
|
|
1.27 |
|
|
|
1.12 |
|
|
|
1.15 |
|
|
|
1.48 |
|
|
|
1.44 |
|
|
|
1.14 |
|
|
|
1.03 |
|
|
Shareholders’ equity (at period end)
|
|
|
12.63 |
|
|
|
11.19 |
|
|
|
11.12 |
|
|
|
10.20 |
|
|
|
9.25 |
|
|
|
8.12 |
|
|
|
7.43 |
|
|
Cash dividends
|
|
|
0.17 |
|
|
|
0.16 |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.26 |
|
|
|
0.215 |
|
|
|
0.1875 |
|
|
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
14.41 |
% |
|
|
13.79 |
% |
|
|
10.44 |
% |
|
|
15.09 |
% |
|
|
16.60 |
% |
|
|
14.69 |
% |
|
|
15.15 |
% |
|
Return on average assets
|
|
|
0.97 |
% |
|
|
0.93 |
% |
|
|
0.70 |
% |
|
|
1.10 |
% |
|
|
1.22 |
% |
|
|
1.11 |
% |
|
|
1.15 |
% |
|
Dividend payout
|
|
|
13.1 |
% |
|
|
14.2 |
% |
|
|
27.6 |
% |
|
|
20.0 |
% |
|
|
17.9 |
% |
|
|
18.8 |
% |
|
|
18.2 |
% |
|
Equity to assets
|
|
|
7.0 |
% |
|
|
6.6 |
% |
|
|
6.4 |
% |
|
|
6.5 |
% |
|
|
7.3 |
% |
|
|
7.2 |
% |
|
|
7.8 |
%
|
|
GREATER ATLANTIC FINANCIAL CORP.
Summary Consolidated Financial Data
|
|
|
Dollars in thousands,
except per share amounts
|
|
For the Year Ended
September 30,
|
|
| |
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
18,421 |
|
|
$ |
18,794 |
|
|
$ |
16,958 |
|
|
$ |
18,085 |
|
|
$ |
19,361 |
|
|
Interest expense
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
10,013 |
|
|
|
11,970 |
|
|
|
12,277 |
|
|
Net interest income
|
|
|
6,428 |
|
|
|
7,211 |
|
|
|
6,945 |
|
|
|
6,115 |
|
|
|
7,084 |
|
|
Provision for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
|
209 |
|
|
|
791 |
|
|
Net interest income after provisionfor loan losses
|
|
|
5,743 |
|
|
|
7,085 |
|
|
|
6,726 |
|
|
|
5,906 |
|
|
|
6,293 |
|
|
Noninterest income
|
|
|
615 |
|
|
|
917 |
|
|
|
1,695 |
|
|
|
547 |
|
|
|
766 |
|
|
Gain on branch sale
|
|
|
4,255 |
|
|
|
- |
|
|
|
945 |
|
|
|
- |
|
|
|
- |
|
|
Noninterest expense
|
|
|
9,626 |
|
|
|
11,085 |
|
|
|
9,889 |
|
|
|
10,370 |
|
|
|
10,014 |
|
|
Income before income taxes
|
|
|
987 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
Income tax expense
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Income from continuing operations
|
|
|
951 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs and impairment of
long-lived assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Operating income (loss)
|
|
|
- |
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428 |
|
|
|
4,898 |
|
|
Income (loss) from discontinued operations before tax
|
|
|
- |
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428 |
|
|
|
4,898 |
|
|
Income tax expense (benefit)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Income (loss) from discontinued operations
|
|
|
- |
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428 |
|
|
|
4,898 |
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
|
$ |
1,943 |
|
|
Balance Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
245,994 |
|
|
$ |
305,219 |
|
|
$ |
339,542 |
|
|
$ |
433,174 |
|
|
$ |
498,456 |
|
|
Securities
|
|
|
51,963 |
|
|
|
80,157 |
|
|
|
115,798 |
|
|
|
153,007 |
|
|
|
224,784 |
|
|
Loans, net
|
|
|
176,108 |
|
|
|
193,307 |
|
|
|
194,920 |
|
|
|
246,387 |
|
|
|
242,253 |
|
|
Deposits
|
|
|
197,991 |
|
|
|
230,174 |
|
|
|
237,794 |
|
|
|
288,956 |
|
|
|
297,876 |
|
|
Short-term borrowings
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
|
|
64,865 |
|
|
|
77,835 |
|
|
Long-term borrowings and
subordinated debentures
|
|
|
34,374 |
|
|
|
45,388 |
|
|
|
47,378 |
|
|
|
60,569 |
|
|
|
96,159 |
|
|
Shareholders equity
|
|
|
9,571 |
|
|
|
8,850 |
|
|
|
14,375 |
|
|
|
15,944 |
|
|
|
20,442 |
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
$ |
0.31 |
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
|
$ |
(1.30 |
) |
|
$ |
(0.98 |
) |
|
Diluted earnings
|
|
|
0.31 |
|
|
|
(1.02 |
) |
|
|
(0.17 |
) |
|
|
(1.30 |
) |
|
|
(0.98 |
) |
|
Earnings per share – discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
|
- |
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
|
|
0.14 |
|
|
|
1.63 |
|
|
Diluted earnings
|
|
|
- |
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
|
|
0.14 |
|
|
|
1.11 |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
|
0.31 |
|
|
|
(1.84 |
) |
|
|
(0.54 |
) |
|
|
(1.16 |
) |
|
|
0.65 |
|
|
Diluted earnings
|
|
|
0.31 |
|
|
|
(1.84 |
) |
|
|
(0.54 |
) |
|
|
(1.16 |
) |
|
|
0.44 |
|
|
Shareholders’ equity (at period end)
|
|
|
3.17 |
|
|
|
2.93 |
|
|
|
4.76 |
|
|
|
5.29 |
|
|
|
6.79 |
|
|
Cash dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
12.08 |
% |
|
|
(45.80 |
%) |
|
|
(11.79 |
%) |
|
|
(22.90 |
%) |
|
|
12.83 |
% |
|
Return on average assets
|
|
|
0.33 |
% |
|
|
(1.77 |
%) |
|
|
(0.44 |
%) |
|
|
(0.69 |
%) |
|
|
0.41 |
% |
|
Dividend payout
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Equity to assets
|
|
|
3.9 |
% |
|
|
2.9 |
% |
|
|
4.2 |
% |
|
|
3.7 |
% |
|
|
4.1 |
%
|
|
|
INFORMATION ABOUT THE MEETING
AND VOTING
|
General
This
section contains information about the Greater Atlantic special shareholder
meeting that has been called to vote upon the matters described
below. We expect to mail this proxy statement/prospectus to you, as a
Greater Atlantic shareholder, on or about ____________,
2008 .
In this
proxy statement/prospectus, we refer to the Agreement and Plan of Reorganization
dated as of April 12, 2007, as amended on December 6,
2007 , among Summit and Greater Atlantic as the merger
agreement. Proxies may be voted on other matters that may properly
come before the Greater Atlantic meeting, if any, at the discretion of the proxy
holders. Greater Atlantic’s board knows of no such other matters
except those incidental to the conduct of the meeting. A copy of the
merger agreement is attached as Annex A.
Matters Relating to the Special
Meeting of Greater Atlantic’s Stockholders
Time and
Place:
_______________, 2008
10:00 a.m., Eastern Time
Crowne Plaza Tysons Corner
1960
Chain Bridge Road
McLean, Virginia 22102
|
|
Purpose of Meeting:
|
To
vote on the proposed merger of Greater Atlantic and Summit pursuant to
which Greater Atlantic will merger with a wholly-owned subsidiary of
Summit formed for the merger.
|
|
|
To
vote on the proposal to adjourn the meeting to a later date, if necessary,
to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meeting to approve the matters to be
considered by the shareholders at the
meeting.
|
Proxies
The
accompanying form of proxy is for use at the special meeting if you are unable
or do not desire to attend in person. You may attend the meeting even
if you have previously delivered a proxy to us. You can revoke your
proxy at any time before the vote is taken at the special meeting by submitting
to the Greater Atlantic corporate secretary written notice of revocation or a
properly executed proxy of a later date, or by attending the special meeting and
voting in person. Written notices of revocation and other
communications about revoking your proxy should be addressed to:
Greater Atlantic Financial
Corp.
10700
Parkridge Boulevard, Suite P50
Reston,
Virginia 20191
Attention: Edward
C.
Allen
Telephone: (703)
391-1300
All
shares represented by valid proxies that we receive through this solicitation,
and not revoked before they are exercised, will be voted in the manner specified
in such proxies. If you make no specification on your returned proxy
card, your proxy will be voted “FOR” the matters to
be considered at the special meeting as described above.
Solicitation of
Proxies
Greater
Atlantic will bear the entire cost of soliciting proxies from you, except that
Summit has agreed to pay the cost of the preparation and filing of this proxy
statement/prospectus and other fees relating to the merger paid to the
Securities and Exchange Commission. In addition to solicitation of
proxies by mail, we will request banks, brokers and other record holders to send
proxies and proxy material to the beneficial owners of the stock and secure
their voting instructions, if necessary. Greater Atlantic will
reimburse those record holders for their reasonable expenses in taking those
actions. If necessary, we also may use several of our regular
employees, who will not be specially compensated, to solicit proxies from our
shareholders, either personally or by telephone, the Internet, fax, letter or
special delivery letter. Finally, Greater Atlantic has retained a
professional proxy solicitation firm, Georgeson Inc., to assist in soliciting
proxies. We will pay a fee in the amount of $5,500 to Georgeson Inc.
for its services, and we will also reimburse them for all costs and expenses,
which we expect to be approximately $2,500 , in connection with
this solicitation.
Record Date and Voting
Rights
In
accordance with Delaware law and Greater Atlantic’s certificate of incorporation
and bylaws, we have fixed February 20, 2008 as the record date for
determining the shareholders entitled to notice of and to vote at the special
meeting. Accordingly, you are only entitled to notice of, and to vote
at, the special meeting if you were a record holder of Greater Atlantic common
stock at the close of business on the record date. At that time,
3,024,220 shares of Greater Atlantic common stock were outstanding, held
by 271 holders of record. To have a quorum that permits us to
conduct business at the special meeting, we require the presence, whether in
person or through the prior submission of a proxy, of the holders of Greater
Atlantic common stock representing a majority of the shares outstanding and
entitled to vote on the record date. You are entitled to one vote for
each outstanding share of Greater Atlantic common stock you held as of the close
of business on the record date.
Holders
of shares of Greater Atlantic common stock present in person at the special
meeting but not voting, and shares of Greater Atlantic common stock for which we
have received proxies indicating that their holders have abstained, will be
counted as present at the special meeting for purposes of determining whether we
have a quorum for transacting business. Shares held in street name
that have been designated by brokers on proxy cards as not voted will not be
counted as votes cast for or against any proposal. These broker
non-votes, however, will be counted for purposes of determining whether a quorum
exists.
Vote Required
The
approval of the merger agreement and the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of Greater Atlantic’s
outstanding shares entitled to vote at the special meeting.
Because approval of the merger
agreement and the transactions contemplated thereby require the affirmative vote
of the holders of a majority of the outstanding shares of Greater Atlantic
common stock entitled to vote at the special meeting, abstentions and broker
non-votes will have the same effect as votes against these
matters. Accordingly, the Greater Atlantic board of directors urges
you to complete, date and sign the accompanying proxy and return it promptly in
the enclosed, postage-paid envelope.
As of the
record date, directors and executive officers, and their affiliates, of Greater
Atlantic beneficially owned approximately 301,759 shares of
Greater Atlantic common stock, entitling them to exercise approximately
9.98% of the voting power of the Greater Atlantic common stock entitled
to vote at the special meeting. Each director and executive officer
of Greater Atlantic intends to vote
each share of Greater Atlantic common
stock that he owns “FOR” approval and adoption of the merger
agreement and the transactions contemplated thereby.
Recommendation of the Greater
Atlantic Board of Directors
The
Greater Atlantic board of directors has approved the merger agreement and the
transactions contemplated thereby, including the merger. The Greater
Atlantic board believes that the merger agreement and the transactions
contemplated thereby, including the merger, are advisable, and are in the best
interests of, Greater Atlantic and its shareholders and unanimously recommends
that shareholders vote “FOR” approval of the
merger agreement and the transactions contemplated thereby.
Appraisal Rights for Greater Atlantic
Stockholders
If the
merger agreement is approved and adopted by the Greater Atlantic stockholders,
holders of Greater Atlantic common stock who delivered a written demand for
appraisal to Greater Atlantic prior to the vote on the merger agreement at
Greater Atlantic’s special meeting and did not vote in favor of the approval and
adoption of the merger agreement will be entitled to receive the fair value of
their shares under Section 262 of the Delaware General Corporation
Law. The text of this law is attached to this proxy
statement/prospectus as Annex B.
THE MERGER
This summary of the material terms
and provisions of the merger agreement is qualified in its entirety by reference
to such document. The merger agreement and
its amendment are attached as Annex A and
Annex A-1 to this proxy
statement/prospectus. We incorporate this document into
this summary by reference.
Merger
Subject
to satisfaction or waiver of all conditions in the merger agreement, Greater
Atlantic will merge with and into SFG II, Inc., a wholly-owned subsidiary of
Summit. Upon completion of the merger, Greater Atlantic’s corporate
existence will terminate and SFG II, Inc. will continue as the surviving
corporation.
Merger
Consideration
In the
merger, you will receive a combination of cash and shares of Summit common stock
for each share of Greater Atlantic common stock that you own, subject to a
“stock collar” limiting the maximum and minimum number of shares Summit will
issue. The stock collar is described more fully
below. Subject to the stock collar, the total consideration for your
Greater Atlantic stock will be paid 70% in the form of Summit common stock and
30% in cash, with each share of Greater Atlantic common stock exchanged for
shares of Summit common stock valued at $4.20 and $1.80 in cash.
The
number of shares of Summit common stock that you will receive for each share of
Greater Atlantic common stock you own will be determined by the exchange ratio
at closing. At the closing, we will determine the exchange ratio by
dividing $4.20 by the average closing price of Summit common stock reported
on the NASDAQ Capital Market for the twenty (20)
trading days prior to closing (the “Average Closing Price”). The exchange ratio
is subject to a stock collar, which sets the maximum and minimum numbers of
shares that Summit will issue. If the Average Closing Price of Summit
common stock is less than $17.82, the exchange ratio will be calculated by
dividing $4.20 by $17.82. If the Average Closing Price is greater
than $24.10, the exchange ratio will be calculated by dividing $4.20 by $24.10.
Thus, for each share of Greater Atlantic common stock that you own, you will
receive $1.80 in cash and at least 0.1743 shares of Summit common stock, but no
more than 0.2357 shares of Summit common stock (based on an exchange
ratio). Cash will be paid instead of issuing fractional shares of
Summit common stock.
The
following chart provides examples of the value of the transaction to
shareholders of Greater Atlantic at selected Average Closing Prices of Summit
common stock.
|
SMMF
|
|
Exchange
|
|
Value to GAFC
Shareholders
|
|
Deal
Value
|
|
Stock
Price
|
|
Ratio
|
|
Stock
($)
|
Cash ($)
|
|
Per
Share
|
|
$28.75
|
|
0.1743
|
|
$5.01
|
$1.80
|
|
$6.81
|
|
$26.50
|
|
0.1743
|
|
$4.62
|
$1.80
|
|
$6.42
|
|
$25.00
|
|
0.1743
|
|
$4.36
|
$1.80
|
|
$6.16
|
|
$24.10
|
|
0.1743
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$24.00
|
|
0.1750
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$23.25
|
|
0.1806
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$22.50
|
|
0.1867
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$21.75
|
|
0.1931
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$21.00
|
|
0.2000
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$20.25
|
|
0.2074
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$19.50
|
|
0.2154
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$18.75
|
|
0.2240
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$18.00
|
|
0.2333
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$17.82
|
|
0.2357
|
|
$4.20
|
$1.80
|
|
$6.00
|
|
$16.75
|
|
0.2357
|
|
$3.95
|
$1.80
|
|
$5.75
|
|
$15.25
|
|
0.2357
|
|
$3.59
|
$1.80
|
|
$5.39
|
|
$13.75
|
|
0.2357
|
|
$3.24
|
$1.80
|
|
$5.04
|
|
$12.25
|
|
0.2357
|
|
$2.89
|
$1.80
|
|
$4.69
|
|
$10.75
|
|
0.2357
|
|
$2.53
|
$1.80
|
|
$4.33
|
The
amount and nature of the merger consideration was established through
arm’s-length negotiations between Summit and Greater Atlantic and their
respective advisors, and reflects the balancing of a number of countervailing
factors. The total amount of the merger consideration reflects a
price both parties concluded was appropriate. See “– Background of
the Merger; Board Recommendations and Reasons for the Merger” beginning on
page 42 and “– Summit’s Reasons for the Merger” beginning on
page 48 . The parties have structured the merger, in part, to
have the favorable tax attributes of a “reorganization” for federal income tax
purposes. See “– Certain Federal Income Tax Consequences of the
Merger” beginning on page 66 .
We cannot assure you that the current
fair market value of Summit or Greater Atlantic common stock will be equivalent
to the fair market value of Summit or Greater Atlantic common stock on the
effective date of the merger.
Surrender of Stock
Certificates
Registrar
and Transfer Company will act as exchange agent in the merger and in that role
will process the exchange of Greater Atlantic stock certificates for cash and
Summit common stock. Within five (5) business days after completion
of the merger, the exchange agent will mail to each Greater Atlantic shareholder
of record a letter of transmittal and instructions for use in effecting the
surrender of their Greater Atlantic common stock for Summit common stock, if
any, that the holders of the Greater Atlantic common stock are entitled to
receive, and the cash, if any, that the holders of the Greater Atlantic common
stock are entitled to receive, any cash in lieu of fractional shares and any
payment equal to any dividend or other distribution with respect to Summit
common stock with a record date prior to the effective time of the
merger.
After the
effective time of the merger, each certificate formerly representing Greater
Atlantic common stock, until so surrendered and exchanged, will evidence only
the right to receive the cash and the number of whole shares of Summit common
stock that the holder is entitled to receive in the merger, any cash payment in
lieu of a fractional share of Summit common stock and any dividend or
other
distribution
with respect to Summit common stock with a record date prior to the effective
time of the merger. The holder of such unexchanged certificate will
not be entitled to receive any dividends or distributions payable by Summit
until the certificate has been exchanged. Subject to applicable laws,
following surrender of such certificates, such dividends and distributions,
together with any cash payment in lieu of a fractional share of Summit common
stock, will be paid without interest.
After the
completion of the merger, there will be no further transfers of Greater Atlantic
common stock. Greater Atlantic stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged for
the merger consideration.
If your
Greater Atlantic stock certificates have been either lost, stolen or destroyed,
you will have to prove your ownership of these certificates and that they were
lost, stolen or destroyed before you receive any consideration for your
shares. Upon request, our exchange agent, Registrar and Transfer
Company, will send you instructions on how to provide evidence of
ownership.
No Fractional
Shares
Each
holder of shares of common stock exchanged pursuant to the merger who would
otherwise have been entitled to receive a fraction of a share of Summit common
stock shall receive, in lieu thereof, cash (without interest) in an amount equal
to the product of (i) such fractional part of a share of Summit common stock
multiplied by (ii) the closing price for a share of Summit common stock on the
NASDAQ Capital Market on the effective date of the merger.
Treatment of Greater Atlantic Stock
Options and Warrants
At the effective time, each outstanding
and unexercised option and warrant granted by Greater Atlantic to purchase
shares of Greater Atlantic common stock shall vest and holders of such options
and warrants shall be entitled to receive cash in an amount equal to the
difference between the value of (a) the merger consideration and (b) the
applicable exercise price (rounded to the nearest cent) for each outstanding
option and warrant granted by Greater Atlantic to purchase shares of Greater
Atlantic common stock. At the effective time, Summit shall have no
obligation to make any additional grants or awards under the Greater Atlantic
stock plans or warrants.
Dissenters’ or Appraisal
Rights
Under the
Delaware General Corporation Law (DGCL), Greater Atlantic stockholders may
object to the merger and demand in writing to be paid the fair value of their
shares. Determination of fair value is based on all relevant factors,
but excludes any appreciation or depreciation resulting from the accomplishment
or expectation of the merger. Stockholders who elect to exercise
appraisal rights must comply with all of the procedures of Section 262 of the
DGCL to preserve those rights. A copy of Section 262 is attached as
Annex B to this
proxy statement/prospectus.
Section
262 sets forth the procedures to be followed by a stockholder electing to demand
appraisal of his or her shares. These
procedures are complicated and must be followed strictly. Failure to
comply with these procedures may cause you to lose your appraisal
rights. The following information is only a brief summary of the
required procedures under Delaware law and is qualified in its entirety by the
provisions of Section 262.
Under
Section 262, Greater Atlantic is required to notify stockholders not less than
20 days before the special meeting to vote on the merger that appraisal rights
will be available. A copy of Section 262 must be included with that
notice. This proxy statement/prospectus constitutes Greater
Atlantic's notice to its stockholders of the availability of appraisal rights in
connection with the merger in compliance with the requirements of Section
262. If you wish to consider exercising your appraisal
rights,
you should carefully review the text of Section 262 contained in Annex
B. If you fail to timely and properly comply with the
requirements of Section 262, your appraisal rights under Delaware law may be
lost.
Please
review Section 262 for the complete procedures. Neither Summit nor
Greater Atlantic will give you any notice of your appraisal rights other than as
described in this proxy statement/prospectus and as required by the
DGCL.
General
Requirements
If you
want to object to the merger and be paid the full value of your shares in cash,
Section 262 generally requires you to take the following actions:
|
|
•
|
You
must deliver a written demand for appraisal to Greater Atlantic before the
vote is taken on the merger agreement at Greater Atlantic's special
meeting. This written demand for appraisal must be in addition
to and separate from any proxy or vote against the merger
agreement. Merely voting against, abstaining from voting or
failing to vote in favor of adoption of the merger agreement will not
constitute a demand for appraisal within the meaning of Section
262. See "Requirements for Written Demand for Appraisal" below
for more details on making a demand for
appraisal.
|
|
|
•
|
You
must not vote in favor of approval and adoption of the merger
agreement. A failure to vote will satisfy this requirement, but
a vote in favor of the merger agreement will constitute a waiver of your
right of appraisal. Accordingly, if you want to maintain your
appraisal rights you must either check the "Against" box or the "Abstain"
box on the proxy card or refrain from executing and returning the enclosed
proxy card.
|
|
|
•
|
You
must continuously hold your shares of Greater Atlantic stock from the date
you make the demand for appraisal through the effective date of the
merger.
|
Requirements for Written Demand for
Appraisal
A written
demand for appraisal of Greater Atlantic stock is only effective if it is signed
by, or for, the stockholder of record who owns the shares at the time the demand
is made. The demand must be signed as the stockholder's name appears
on its Greater Atlantic stock certificate(s). If you are a beneficial
owner of Greater Atlantic stock but not a stockholder of record, you must have
the stockholder of record for your shares sign a demand for appraisal on your
behalf.
If you
own Greater Atlantic stock in a fiduciary capacity, such as a trustee, guardian
or custodian, you must disclose the fact that you are signing the demand for
appraisal in that capacity.
If you
own Greater Atlantic stock with one or more other persons, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed for
them, the demand for appraisal. An authorized agent, which could
include one or more of the owners, may sign the demand for appraisal for a
stockholder of record; however, the agent must expressly disclose who the
stockholder of record is and that he or she is signing the demand as that
stockholder's agent.
If you
are a record owner, such as a broker, who holds Greater Atlantic stock as a
nominee for others, you may exercise a right of appraisal with respect to the
shares held for one or more beneficial owners, while not exercising that right
for other beneficial owners. In such a case, you should specify in
the written demand the number of shares as to which you wish to demand
appraisal. If you do not specify the number of shares, it will be
assumed that your written demand covers all the shares of Greater Atlantic stock
that are in your name.
Greater
Atlantic stockholders who wish to exercise their appraisal rights should address
written demands to:
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Attention:
Corporate Secretary
Greater
Atlantic must receive all written demands for appraisal before the vote
concerning the merger agreement is taken. As explained above, this
written demand should be signed by, or on behalf of, the stockholder of
record. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of stock owned, and
that the stockholder is thereby demanding appraisal of such stockholder's
shares.
Written
Notice
Within 10
days after the effective date of the merger, Summit, as the surviving
corporation in the merger, must give written notice that the merger has become
effective to each Greater Atlantic stockholder who has properly sent a written
demand for appraisal and who did not vote in favor of the
merger. Except as required by law, Summit will not notify
stockholders of any dates by which appraisal rights must be
exercised.
Petition With Chancery
Court
Within
120 days after the effective date of the merger, either Summit or any
stockholder who has complied with the requirements of Section 262(a) and (d) may
file a petition in the Delaware Court of Chancery demanding a determination of
the value of the shares of all stockholders entitled to
appraisal. Summit does not presently intend to file a petition, and
if you seek to exercise appraisal rights you should not assume that Summit will
file a petition or that Summit will initiate any negotiations with respect to
the fair value of your shares. If you are a Greater Atlantic
stockholder and want to have your Greater Atlantic shares appraised you should
be prepared to initiate any petitions necessary for the perfection of your
appraisal rights within the time period and in the manner prescribed in Section
262. Since Summit has no obligation to file a petition, your failure
to file a petition within the period specified could result in the loss of your
appraisal rights.
Withdrawal of
Demand
If you
change your mind and decide you no longer want an appraisal, you may withdraw
your demand for appraisal at any time within 60 days after the effective date of
the merger. If you withdraw your demand for appraisal, your appraisal
rights will be terminated and you will receive the merger consideration provided
in the merger agreement.
Request for Appraisal Rights
Statement
If you
have complied with the conditions of Section 262, you are entitled, upon written
request, to receive from Summit a statement setting forth the aggregate number
of shares for which appraisal rights have been properly exercised and the
aggregate number of holders of such shares. Summit must mail this
statement to you within 10 days after receiving your written
request. In order to receive this statement, you must send your
request within 120 days after the effective date of the merger to Summit at the
following address:
Summit Financial Group,
Inc.
300 North Main Street
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Chancery Court
Procedures
If you
properly file a petition for appraisal in the Court and deliver a copy of such
petition to Summit, Summit will then have 20 days to provide the Court with a
list of the names and addresses of all the stockholders who have demanded
payment for their shares and have not reached an agreement with Summit as to the
value of their shares. If the Court decides it is appropriate, it has
the power to conduct a hearing to determine which stockholders have complied
with Section 262 and have become entitled to appraisal. The Register
in Chancery, if ordered to do so by the Court, will then send notice of the time
and place of the hearing on the petition to all the stockholders who have
demanded appraisal. The Court may also require you to submit your
stock certificates to the Register in Chancery so that it can note on the
certificates that an appraisal proceeding is pending. If you do not
follow the Court's directions, you may be dismissed from the
proceeding.
Chancery Court Appraisal of Greater
Atlantic Shares
After the
Court determines which stockholders are entitled to an appraisal, the Court will
appraise the shares, determining their fair value by considering all relevant
factors except for any appreciation or depreciation resulting from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if the payment of interest is deemed appropriate by the
Court. After the Court determines the fair value of the shares, it
will direct Summit to pay that value to the stockholders who are entitled to
such payment. In order to receive the fair value for your shares, you
must surrender your stock certificates.
The Court
could determine that the fair value of shares of Greater Atlantic stock is more
than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration that
you would under the merger agreement.
Costs and Expenses of Appraisal
Proceeding
The costs
of the appraisal proceeding may be determined by the Court and assessed against
the parties as the Court deems equitable under the
circumstances. Upon application of a stockholder, the Court may also
order that all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all the shares entitled to an appraisal.
Loss of Stockholders'
Rights
If you
demand appraisal, after the effective date of the merger you will not be
entitled to:
• vote
your shares of stock, for any purpose, for which you have demanded
appraisal;
|
|
•
|
receive
payment of dividends or other distributions with respect to your shares,
except for dividends or distributions, if any, that are payable to the
holders of record as of a record date before the effective date of the
merger; or
|
• receive
the payment of the consideration provided for in the merger
agreement.
However,
you can regain these rights if no petition for an appraisal is filed within 120
days after the effective date of the merger, or if you deliver to Summit a
written withdrawal of your demand for an appraisal and your acceptance of the
merger, either within 60 days after the effective date of the merger
or
with
the written consent of Summit. As explained above, these actions will
also terminate your appraisal rights. However, an appraisal
proceeding in the Court cannot be dismissed without the Court's
approval. The Court may condition its approval upon any terms that it
deems just.
If you fail to comply strictly with
these procedures you will lose your appraisal rights. Consequently,
if you wish to exercise your appraisal rights, you are strongly urged to consult
a legal advisor before attempting to exercise your appraisal
rights.
Periodically,
the management of Greater Atlantic has evaluated Greater Atlantic’s strategic
options, including continuing to operate as an independent entity. At
the time of the most recent strategic evaluation in early 2006, Greater Atlantic
had not achieved consistent profitable earnings, sustaining losses in fiscal
years 2002, 2004 and 2005, and had continued to suffer losses in the first
quarter of fiscal year 2006. This inability to achieve consistent
profitability and its potential implications for Greater Atlantic’s financial
condition has been and continues to be an item of supervisory note by the Office
of Thrift Supervision, Greater Atlantic’s primary regulator.
At a
meeting of the Board of Directors on September 28, 2005, the Board of Directors
authorized Charles W. Calomiris, Greater Atlantic’s Chairman of the Board, to
select and engage a qualified financial advisory firm to assist the Board of
Directors in its strategic planning process. Subsequently, the
Chairman of the Board, together with Carroll E. Amos, Greater Atlantic’s
President and Chief Executive Officer, met with representatives of financial
advisory firms, including with representatives of Sandler O’Neill &
Partners, L.P. (“Sandler O’Neill”). On January 30, 2006, Greater
Atlantic engaged Sandler O’Neill to serve as independent financial advisor to
the Board of Directors in connection with Greater Atlantic’s review of its
strategic options and to provide merger and acquisition analyses in connection
with a potential business combination transaction.
At a
meeting on March 8, 2006, the Board of Directors met with representatives of
Sandler O’Neill who made a presentation to the Board of Directors regarding
strategic options available to Greater Atlantic. The discussion
focused on the merits of engaging in a potential business combination
transaction (either a whole-bank merger or acquisition or sale of one or more
branch offices) versus remaining independent. In discussing those
options, the Board of Directors noted and assessed the various perceived risks,
including the perceived supervisory risk associated with remaining independent
given Greater Atlantic’s recent operating history. Sandler O’Neill’s
presentation also included an overview of the current merger and acquisitions
environment. The representatives of Sandler O’Neill presented a
listing of recent thrift merger and acquisition transactions with
characteristics that would be comparable to a potential transaction involving
Greater Atlantic, branch sales in the immediate and adjoining markets, a list of
potential acquirers, an overview of the equity market for bank and thrift stocks
and comparable group analyses on both nationwide and regional
bases. At the conclusion of the discussion, the Board of Directors
directed the Executive Committee of the Board of Directors, in consultation with
Greater Atlantic Financial Corp.’s financial and legal advisors, to take all
necessary and appropriate action to conduct a process to determine what, if any,
level of interest other parties might have in engaging in a potential business
combination transaction with Greater Atlantic.
On March
29, 2006, Sandler O’Neill identified for Greater Atlantic 69 parties Sandler
O’Neill believed might have an interest in exploring a potential business
combination with Greater Atlantic. Over approximately the next month,
Sandler O’Neill, in consultation with Greater Atlantic’s senior management and
legal counsel, prepared a Confidential Information Memorandum containing
financial and other information regarding Greater Atlantic for distribution to
interested parties following their execution of confidentiality
agreements. The Confidential Offering Memorandum provided
instructions for interested parties to submit, by June 9, 2006, written
indications of interest for a whole-bank transaction, a branch purchase
transaction or an equity investment.
During
April and May 2006, 16 interested parties executed confidentiality agreements
and thereafter received a Confidential Offering Memorandum, including Summit
which executed a confidentiality agreement dated April 25, 2006.
On June
22, 2006, the Board of Directors met, together with representatives of Sandler
O’Neill and with representatives of legal counsel, to consider the 16
indications of interest that had been received: three for a
whole-bank transaction, 12 for a branch acquisition and one for an equity
investment. The representatives of Sandler O’Neill reviewed and
discussed the financial terms of each indication of interest with the Board of
Directors.
The
whole-bank indications of interest varied with Party “A” indicating a proposed
transaction value of approximately $12.2 million, and Party “B” and Summit each
indicating a proposed transaction value of approximately $18.2 million, or $6.00
per share. Parties “A” and “B” proposed all-cash transactions, and
Summit proposed a stock/cash transaction. Summit’s indication of
interest, however, was conditioned on Greater Atlantic Bank selling its branch
office in Pasadena, Maryland, before the closing of the proposed
transaction. Summit’s indication of interest, coupled with the sale
of the Pasadena branch office to Bay-Vanguard Federal Savings Bank, which
indicated the highest deposit premium for that branch (9.5%), would result in an
aggregate indicated value of approximately $23.2 million, or $7.67 per share,
compared to approximately $18.2 million, or $6.00 per share, indicated by Party
“B” and approximately $12.2 million, or $4.03 per share, indicated by Party
“A”. During its discussion, the Board of Directors noted that
engaging in a proposed transaction with Summit would require separate
applications for regulatory approval and incur additional cost and possibly a
longer approval process because it would entail the separate sale of the
Pasadena branch office. The representatives of Sandler O’Neill then
presented the Board with financial profiles, comparable peer analyses and
background on the three interested parties.
Following
the review of the whole-bank indications of interest, the Board reviewed and
discussed the indications of interest for the separate branch sales, noting that
Greater Atlantic had received indications of interest providing for deposit
premiums ranging from 5.0% to 9.5%, with both the high and the low being for the
Pasadena branch office. The representatives of Sandler O’Neill noted
that the median deposit premium for recently announced branch sales ranged from
4.5% to 8.1%. The highest indication of interest for the Pasadena
branch office, at a 9.5% deposit premium, was submitted by Bay-Vanguard Federal
Savings Bank.
The Board
of Directors then turned to the indication of interest submitted by the private
equity investor. The Board of Directors noted that while five private
equity investors had expressed interest when initially contacted by Sandler
O’Neill, and four had executed confidentiality agreements and received a
Confidential Offering Memorandum, only one of the private equity investors
submitted a written indication of interest. The indication of
interest received from the private equity investor proposed the sale of two
branch offices of Greater Atlantic Bank, a substantial loan sale, a capital
investment of approximately $7.5 million and a consulting contract for the
private equity group. In addition, the indication of interest provided that
Greater Atlantic negotiate exclusively with the private equity investor for four
weeks toward a definitive agreement. Given the whole-bank indications
of interest that had been received, the Board of Directors determined not to
give exclusivity to any interested party at this time.
Following
further discussion, the Board of Directors authorized Sandler O’Neill to contact
each of the parties that had submitted a whole-bank indication of interest and
communicate to them Greater Atlantic’s interest in pursuing a proposed
transaction and to contact both Summit and Bay-Vanguard Federal Savings Bank to
invite them to commence their respective due diligence reviews. The
Board of Directors
also authorized Sandler O’Neill to contact Party “B” and invite it to commence
its due diligence review as soon as Summit and Bay-Vanguard Federal Savings Bank
had completed their reviews.
On June
22, 2006, Mr. Amos, Edward C. Allen, Chief Operating Officer of Greater Atlantic
Bank, and David E. Ritter, Greater Atlantic’s Senior Vice President and Chief
Financial Officer, met with H. Charles Maddy, III, Summit’s President and Chief
Executive Officer, and Robert S. Tissue, Summit’s Senior Vice President and
Chief Financial Officer, to discuss Summit’s indication of
interest.
On June
26, 2006, Summit began its due diligence review of Greater Atlantic at the main
offices of Greater Atlantic.
On June
30, 2006, Bay-Vanguard Federal Savings Bank began its due diligence review of
the Pasadena branch office. Also, on that date, Summit advised
Sandler O’Neill that its Board of Directors had authorized management to proceed
with negotiations toward a definitive agreement with Greater Atlantic, subject
to completion of its due diligence review.
On August
10, 2006, Greater Atlantic announced publicly that it was investigating an
unreconciled inter-company account between Greater Atlantic Bank and Greater
Atlantic Mortgage Corporation, Greater Atlantic Bank’s wholly-owned mortgage
banking subsidiary that had terminated operations earlier in the
year.
On
September 8, 2006, Greater Atlantic announced publicly that the former
management company of Greater Atlantic Mortgage Corporation and its principal
had initiated arbitration proceedings against Greater Atlantic, Greater Atlantic
Bank and Mr. Amos.
On
September 26, 2006, Greater Atlantic received from Party “C” an unsolicited
indication of interest to purchase the Rockville, Maryland, and South Riding,
Virginia, branch offices of Greater Atlantic Bank for a 4% deposit
premium.
Following
the public announcements of the internal accounting issue and the commencement
of the arbitration proceeding, various interested parties, including Summit,
informed Greater Atlantic that these outstanding issues would have to be
resolved before they could complete their due diligence review of Greater
Atlantic and confirm their continued interest in pursuing a proposed
transaction. In an effort to continue the process, on October 4,
2006, Greater Atlantic authorized Sandler O’Neill to contact Summit and the
other parties that expressed interest in pursuing a whole-bank transaction to
determine whether they would be interested in pursuing a purchase and assumption
transaction, which would permit them to acquire all of Greater Atlantic’s assets
and liabilities other than the liabilities associated with the internal
accounting issue and the arbitration proceeding.
On
December 7, 2006, Greater Atlantic Financial Corp. was advised of the interest
of Party “D” in acquiring Greater Atlantic Financial Corp. Party “D”
provided a confidentiality agreement and information concerning itself on
December 7, 2006. Subsequently, on February 8, 2007, Party
“D” submitted an indication of interest providing for an all-cash transaction
ranging from $15 million to $20 million, or an indicated range of $5.00 to $6.67
per share, subject to, among other things, settlement of the outstanding
arbitration and due diligence.
On
January 11, 2007, Greater Atlantic received an indication of interest letter
from Summit proposing a purchase and assumption transaction.
On
January 16, 2007, the Board of Directors held a special meeting. A
representative of Sandler O’Neill analyzed the financial terms of Summit’s
purchase and assumption proposal as compared to the branch purchase indications
of interest with the highest deposit premiums. The Board of Directors
noted that Greater Atlantic would lose the tax benefit of its net operating loss
carryforwards in a purchase and assumption transaction but would preserve it in
a whole-bank merger or acquisition transaction. Valuing the deferred
tax asset at approximately $1.98 million for purposes of evaluating a proposed
purchase and assumption transaction, the Board of Directors noted that Summit’s
purchase and assumption proposal
indicated
a net transaction value of approximately $13.48 million, or $4.46 per
share. Following a review of the indications of interest received for
branch office transactions, the Board of Directors noted that the aggregate
transaction value for those transactions would amount to approximately $14.99
million, or $4.92 per share. During its discussion, the Board of
Directors also noted the execution risk that would be involved in dealing with
multiple acquirors, as well as the regulatory risk that would be involved given
that the Office of Thrift Supervision may raise issue with a series of proposed
purchase and assumption transactions that would leave Greater Atlantic Bank a
smaller institution with substantial liabilities, including the potential
liability associated with the pending arbitration proceeding.
Following
further discussion, the Board of Directors instructed the representative of
Sandler O’Neill to advise Summit that Greater Atlantic has continued interest in
pursing a whole-bank transaction with Summit and that Summit was authorized to
continue its due diligence review of Greater Atlantic.
On
January 18, 2007, the representative of Sandler O’Neill advised Greater Atlantic
that Summit remained interested in proceeding with its due diligence review in
an effort to negotiate and execute a definitive merger agreement.
On
January 24, 2007, Party “E” executed a confidentiality agreement, and on January
25, 2007, Party “E” submitted an indication of interest.
On
January 25, 2007, the Board of Directors met to discuss the indication of
interest submitted by Party “E”. Party “E” proposed an all- cash
transaction valuing Greater Atlantic at $4.634 per share, subject to an
exclusivity period and other conditions.
On
January 25, 2007, Party “F” executed a confidentiality agreement.
On
January 29, 2007, Summit resumed its due diligence review of Greater
Atlantic.
On
February 7, 2007, Party “F” submitted an indication of interest for an all-cash
transaction that indicated a range of value from approximately $14.5 million to
$16.0 million, or a range of $4.79 to $5.30 per share, subject to due diligence
and other conditions.
On
February 8, 2007, an indication of interest for an all-cash, whole-bank
transaction was received from Party “D” indicating a transaction value ranging
from $15 million to $20 million, or $5.00 to $6.67, per share, subject to due
diligence and other conditions.
On
February 9, 2007, Summit submitted a revised indication of interest for a
whole-bank transaction, but with the exclusion of the Pasadena branch office and
with an indicated value of $4.60 per share.
On
February 9, 2007, Greater Atlantic announced publicly the resolution of the
arbitration proceeding.
On
February 13, 2007, Messrs. Calomiris and Amos, Sidney M. Bresler, a director of
Greater Atlantic, and Paul J. Cinquegrana, a director of Greater Atlantic now
deceased, met with Messrs. Maddy, III and Tissue. Messrs. Maddy, III
and Tissue provided background information about Summit and expressed Summit’s
interest in a transaction with Greater Atlantic.
On
February 14, 2007, the Board of Directors of Greater Atlantic met. A
representative of Sandler O’Neill and representatives of Greater Atlantic’s
legal counsel were also present. The representative of Sandler
O’Neill reviewed the terms of the various indications of interest that had been
received to date. The Board of Directors considered and discussed in
detail Greater Atlantic’s prospects as an independent entity and came to the
consensus that it would be in the best interests of Greater Atlantic and its
stockholders to pursue a merger transaction with Summit, as well as the sale of
the
Pasadena
branch office to Bay-Vanguard Federal Savings Bank. Following all
discussion, the Board of Directors determined to pursue the proposals by Summit
and Bay-Vanguard Federal Savings Bank and instructed senior management, in
consultation with Greater Atlantic’s legal and financial advisors, to proceed to
negotiate the terms of a definitive merger agreement with Summit and the terms
of a definitive purchase and assumption agreement with Bay-Vanguard Federal
Savings Bank, consistent with their respective indications of interest, for
presentation to and consideration by the Board of Directors at the earliest
practicable time.
On
February 20, 2007, representatives of Bay-Vanguard Federal Savings Bank
conducted a due diligence review of the Pasadena branch office.
On March
1 and 2, 2007, representatives of Greater Atlantic conducted a due diligence
review of Summit at its offices in Moorefield, West Virginia.
On March
21, 2007, Bay-Vanguard Federal Savings Bank informed Greater Atlantic, through a
representative of Sandler O’Neill, that its had revised its indication of
interest to reduce the deposit premium for the Pasadena branch office to
8.5%.
On March
28, 2007, the Board of Directors of Greater Atlantic met. Senior
management of Greater Atlantic advised the Board of Directors that
representatives of the Office of Thrift Supervision had inquired recently about
the status of the ongoing merger and acquisition discussions and the prospects
of negotiating and entering into a definitive agreement in the near
term. The Board of Directors then discussed the Bay-Vanguard Federal
Savings Bank’s revised indication of interest for the purchase of the Pasadena
branch office at a deposit premium of 8.5%. The representative of
Sandler O’Neill noted that the new proposed deposit premium, although reduced
from the 9.5% proposed initially, remained the highest proposal
obtained. Following discussion, the Board of Directors authorized
management, with the assistance of Greater Atlantic’s legal and financial
advisors, to negotiate a definitive purchase and assumption agreement for the
sale of the Pasadena branch office consistent with the terms of the revised
indication of interest of Bay-Vanguard Federal Savings Bank.
During
the balance of March and early April 2007, representatives of Greater Atlantic
and of Summit negotiated the terms of the definitive merger agreement and senior
management representatives of Greater Atlantic and of Summit were in periodic
contact to discuss transaction integration issues. During the same
period, representatives of Greater Atlantic Bank and of Bay-Vanguard Federal
Savings Bank negotiated the terms of the definitive purchase and assumption
agreement for the purchase of the Pasadena branch office.
On the
morning of April 12, 2007, a joint meeting of the Boards of Directors of Greater
Atlantic and Greater Atlantic Bank was held to consider and discuss the terms of
the definitive merger agreement as negotiated by Greater Atlantic and Summit and
the terms of the definitive purchase and assumption agreement as negotiated by
Greater Atlantic Bank and Bay-Vanguard Federal Savings Bank for the purchase the
Pasadena branch office. A representative of Sandler O’Neill and
representatives of Greater Atlantic’s legal counsel were present at the
meeting. Copies of the merger agreement and ancillary documents and
of the purchase and assumption agreement were sent to each director before the
meeting. The representative of Sandler O’Neill made a presentation
regarding the fairness of the proposed merger consideration to the holders of
Greater Atlantic’s common stock from a financial point of view and delivered the
opinion of Sandler O’Neill that, as of April 12, 2007, and subject to
the limitations and qualifications set forth in the opinion, the proposed merger
consideration was fair from a financial point of view to the holders of Greater
Atlantic common stock. The Board of Directors considered carefully
the opinion of Sandler O’Neill as well as Sandler O’Neill’s experience,
qualifications and interest in the proposed
transactions. Representatives of Greater Atlantic’s legal counsel
reviewed in detail the terms of the merger agreement and the ancillary documents
and the terms of the purchase and assumption agreement with the Board of
Directors and reviewed with the Board of Directors its fiduciary duties in
the
context
of the proposed transactions. In addition, senior management of
Greater Atlantic, along with representatives of Sandler O’Neill and of legal
counsel, presented the findings of Greater Atlantic’s due diligence review of
Summit. In addition, the Board discussed the expected transaction
costs including the value of severance obligations under existing employment and
change in control agreements with members of management and other benefit
arrangements. Following those presentations, and discussion regarding
the transactions, all of the directors present determined that the merger
agreement and the ancillary transactions and the purchase and assumption
agreement were advisable and in the best interests of Greater Atlantic and its
stockholders and authorized Mr. Amos to execute and deliver the merger agreement
and related documents and the purchase and assumption agreement on behalf of
Greater Atlantic and Greater Atlantic Bank and to take all actions appropriate
to effect the transactions contemplated by those agreements. Jeffrey
M. Gitelman, D.D.S was the only director of Greater Atlantic and Greater
Atlantic Bank absent from the meeting. Dr. Gitelman’s absence was
unavoidable but he advised the Board of Directors before the meeting by e-mail
that he was in favor of both transactions. Later in the day, Greater
Atlantic issued a press release announcing the execution of the merger agreement
with Summit and the execution by Greater Atlantic Bank of the purchase and
assumption agreement with Bay-Vanguard Federal Savings Bank.
Greater Atlantic’s Reasons for the
Merger
At the
meeting at which the merger agreement was presented for consideration, Greater
Atlantic’s Board of Directors, by a unanimous vote of the directors present at
the meeting, approved the merger agreement and recommended that Greater
Atlantic’s stockholders vote “FOR” approval of the merger
agreement.
Greater
Atlantic’s Board of Directors has determined that the merger is advisable and in
the best interests of Greater Atlantic and its stockholders. In
approving the merger agreement, the Board of Directors consulted with Sandler
O’Neill regarding the fairness of the transaction to Greater Atlantic’s
stockholders from a financial point of view and with Greater Atlantic’s legal
counsel regarding its legal duties and the terms of the merger agreement and
ancillary documents. In determining to approve the merger agreement
and recommend that stockholders approve the merger, the Board of Directors, in
consultation with Greater Atlantic’s senior management and financial and legal
advisors, considered a number of factors, including the following material
factors:
|
·
|
The
understanding of the Board of Directors of the strategic options available
to Greater Atlantic and the Board of Directors’ assessment of those
options with respect to the prospects and estimated results of the
execution by Greater Atlantic of its business plan as an independent
entity under various scenarios, and the determination that none of those
options or the execution of the business plan under the best case
scenarios were likely to create greater present value for Greater
Atlantic’s stockholders than the value to be paid by Summit. In
particular, the Board of Directors considered Greater Atlantic’s ability
to achieve consistent profitability as an independent entity and the
prospects for regulatory action if it failed to do
so.
|
|
·
|
The
ability of Greater Atlantic’s stockholders to participate in the future
prospects of the combined entity through ownership of Summit common stock
and that Greater Atlantic’s shareholders would have potential value
appreciation by owning the common stock of
Summit.
|
|
·
|
Summit’s
ability to continue to pay cash dividends on its common stock (Greater
Atlantic has never paid cash
dividends).
|
|
·
|
Sandler
O’Neill’s written opinion that, as of April 12, 2007, and subject to the
assumptions and limitations set forth in the opinion, the merger
consideration was fair to Greater Atlantic’s stockholders from a financial
point of view.
|
|
·
|
The
wider array of financial products and services that would be available to
customers of Greater Atlantic and the communities served by Greater
Atlantic.
|
|
·
|
The
current and prospective economic, competitive and regulatory environment
and the regulatory compliance costs facing Greater Atlantic and other
similar size, independent, community banking institutions generally,
including the cost of compliance with the requirements of the
Sarbanes-Oxley Act.
|
|
·
|
A
review, with the assistance of Greater Atlantic’s financial and legal
advisors, of the terms of the merger agreement, including that the merger
is intended to qualify as a transaction that is generally tax-free for
U.S. federal income tax purposes.
|
|
·
|
The
results of the due diligence review of
Summit.
|
|
·
|
The
Greater Atlantic employees to be retained after the merger would have
opportunities for career advancement in a larger
organization.
|
|
·
|
The
likelihood of timely receiving regulatory approval and the approval of
Greater Atlantic’s stockholders and the estimated transaction and
severance costs associated with the merger and payments that could be
triggered upon termination of or failure to consummate the
merger.
|
The
foregoing information and factors considered by Greater Atlantic’s Board of
Directors is not exhaustive, but includes all material factors that the Board of
Directors considered and discussed in approving the merger agreement and
recommending that Greater Atlantic’s stockholders vote to approve the
merger. In view of the wide variety of factors considered and
discussed by the Board of Directors in connection with its evaluation of the
merger and the complexity of these factors, the Board of Directors did not
consider it practical to, nor did it attempt to, quantify, rank or otherwise
assign any specific or relative weights to the specific factors that it
considered in reaching its decision; rather it considered all of the factors as
a whole. The Board of Directors discussed and considered the
foregoing factors and reached general consensus that the merger was in the best
interests of Greater Atlantic and its stockholders. In considering
the foregoing factors, individual directors of Greater Atlantic may have
assigned different weights to different factors. The Board of
Directors relied on the experience and expertise of Sandler O’Neill for
quantitative analysis of the financial terms of the merger
agreement. See “The
Merger Opinion of
Greater Atlantic’s Financial Advisor” attached to this proxy
statement/prospectus as Annex C. It should be noted that
this explanation of the reasoning of Greater Atlantic’s Board of Directors and
all other information presented in this section is forward-looking in nature
and, therefore, should be read in light of the factors discussed under “Warning About Forward-Looking
Statements” on page 17 .
Summit’s Reasons for the
Merger
The
merger is consistent with Summit’s plan to have operations, offices and distinct
capabilities in every market of its choice within its region. The
merger will afford Summit the opportunity to further expand market share in the
Northern Virginia market. Summit believes that, in addition to expanding
Summit’s presence in very attractive markets, the merger provides an opportunity
to enhance Summit’s stockholder value with the prospects of positive long-term
performance of Summit’s common stock. Summit believes that the merger is a
strategic fit between Summit and Greater Atlantic given the compatibility of the
management and business philosophy of each company. Enhanced opportunities
should result from the merger by eliminating redundant or unnecessary costs and
enhancing revenue growth prospects.
Opinion of Greater Atlantic’s
Financial Advisor
By letter
agreement dated January 30, 2006, Greater Atlantic retained Sandler O’Neill to
act as its financial advisor in connection with a possible business
combination. Sandler O’Neill is a nationally recognized investment
banking firm whose principal business specialty is financial
institutions. In the ordinary course of its investment banking
business, Sandler O’Neill is regularly engaged in the valuation of financial
institutions and their securities in connection with mergers and acquisitions
and other corporate transactions.
Sandler
O'Neill acted as financial advisor to Greater Atlantic in connection with the
proposed merger with Summit and participated in certain of the negotiations
leading to the merger agreement. At the April 12, 2007 meeting at
which Greater Atlantic’s Board considered and approved the merger agreement,
Sandler O’Neill delivered to the Board its oral opinion, subsequently confirmed
in writing that, as of such date, the merger consideration was fair to Greater
Atlantic’s stockholders from a financial point of view. Sandler
O’Neill has updated it fairness opinion as of the date of this proxy
statement. The full text of Sandler O’Neill’s updated opinion is
attached as Annex C to this document. The opinion outlines the procedures
followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Sandler O’Neill in rendering its
opinion. The description of the opinion set forth below is qualified
in its entirety by reference to the opinion. Greater Atlantic
stockholders are urged to read the entire opinion carefully in connection with
their consideration of the proposed merger.
Sandler
O’Neill’s opinion speaks only as of the date of the opinion and was necessarily
based upon financial, economic, market and other conditions as they existed, and
could be evaluated, on that date. The opinion is directed to the
Greater Atlantic Board and speaks only to the fairness of the merger
consideration to Greater Atlantic stockholders from a financial point of
view. It does not address the underlying business decision of Greater
Atlantic to engage in the merger or any other aspect of the merger and is not a
recommendation to any Greater Atlantic stockholder as to how such stockholder
should vote at the special meeting with respect to the merger, the form of
consideration such stockholder should elect, or any other matter.
In
connection with rendering its April 12, 2007 opinion and its opinion
dated ________,2008 , Sandler O’Neill reviewed and considered, among other
things:
|
(1)
|
the
merger agreement;
|
|
(2)
|
certain
publicly available financial statements and other historical financial
information of Greater Atlantic that Sandler O’Neill deemed
relevant;
|
|
(3)
|
certain
publicly available financial statements and other historical financial
information of Summit that Sandler O’Neill deemed
relevant;
|
|
(4)
|
internal
financial projections for Greater Atlantic for the year ending December
31, 2007, prepared by and reviewed with senior management of Greater
Atlantic and growth and performance projections for the years ending
December 31, 2008, 2009 and 2010, as provided by and reviewed with senior
management of Greater Atlantic;
|
|
(5)
|
internal
financial projections for Summit for the years ending December 31, 2007
and 2008 prepared by and reviewed with management of Summit and growth and
performance projections for the year ending December 31, 2009 and 2010, as
provided by and reviewed with management of
Summit;
|
|
(6)
|
the
pro forma financial impact of the merger on Summit based on assumptions
relating to transaction expenses, purchase accounting adjustments and cost
savings determined by the senior managements of Greater Atlantic and
Summit;
|
|
(7)
|
the
pro forma financial impact on Greater Atlantic of the sale of Greater
Atlantic Bank’s Pasadena branch
office;
|
|
(8)
|
the
publicly reported historical price and trading activity for Greater
Atlantic’s and Summit’s respective common stock, including a comparison of
certain financial and stock market information for Greater Atlantic and
Summit with similar publicly available information for certain other
companies the securities of which are publicly
traded;
|
|
(9)
|
the
financial terms of certain recent business combinations in the commercial
banking and thrift industries, to the extent publicly
available;
|
|
(10)
|
the
current market environment generally and the banking environment in
particular; and
|
|
(11)
|
such
other information, financial studies, analyses and investigations and
financial, economic and market criteria as Sandler O’Neill considered
relevant.
|
Sandler
O’Neill also discussed with certain members of Greater Atlantic’s senior
management the business, financial condition, results of operations and
prospects of Greater Atlantic and held similar discussions with certain members
of senior management of Summit regarding the business, financial condition,
results of operations and prospects of Summit.
In
performing its reviews
and analyses, Sandler O’Neill relied upon the accuracy and completeness of all
of the financial and other information that was available to it from public
sources, that was provided by Greater Atlantic and Summit or their respective
representatives or that was otherwise available to Sandler O’Neill and assumed
such accuracy and completeness for purposes of rendering its
opinions. Sandler O’Neill further relied on the assurances of senior
management of Greater Atlantic and Summit that they were not aware of any facts
or circumstances that would make any of such information inaccurate or
misleading. Sandler O’Neill was not asked to, and did not, undertake
an independent verification of any of such information and Sandler O’Neill did
not assume any responsibility or liability for the accuracy or completeness
thereof. Sandler O’Neill did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities (contingent or otherwise) of Greater Atlantic or Summit or any of
their subsidiaries, or the collectibility of any such assets, nor was Sandler
O’Neill furnished with any such evaluations or appraisals. Sandler
O’Neill is not an expert in the evaluation of allowances for loan losses and it
did not make an independent evaluation of the adequacy of the allowance for loan
losses of Greater Atlantic or Summit, nor did Sandler O’Neill review any
individual credit files relating to Greater Atlantic or
Summit. Sandler O’Neill assumed, with Greater Atlantic’s consent,
that the respective allowances for loan losses for both Greater Atlantic and
Summit were adequate to cover such losses and together will be adequate for the
combined company.
With
respect to the internal financial projections for Greater Atlantic and Summit
and the projections of transaction costs, purchase accounting adjustments and
expected cost savings prepared by and/or reviewed with the senior managements of
Greater Atlantic and Summit used by Sandler O’Neill in its analyses, senior
management of Greater Atlantic and Summit confirmed that those projections and
the assumptions related thereto reflected the best currently available estimates
and judgments of the future financial performance of Greater Atlantic and
Summit. Sandler O’Neill assumed that the financial performances
reflected in all projections and estimates used by them in their analyses would
be achieved and expressed no opinion as to such projections or estimates or the
assumptions on which they were based. Those estimates and
projections, as well as the other estimates used by Sandler O'Neill in
its
analysis,
were based on numerous variables and assumptions which are inherently uncertain
and, accordingly, actual results could vary materially from those set forth in
such projections.
Sandler
O’Neill also assumed that there had been no material change in Greater
Atlantic’s and Summit’s assets, financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to them, that Greater Atlantic and Summit would remain as going
concerns for all periods relevant to its analyses, that all of the
representations and warranties contained in the merger agreement were true and
correct as set forth in the merger agreement, that each party to the merger
agreement would perform all of the covenants required to be performed by such
party under that agreement, that the conditions precedent in the merger
agreement will not be waived and that the merger will qualify as a tax-free
reorganization for federal income tax purposes. Sandler O’Neill, with
Greater Atlantic’s consent, relied on the advice Greater Atlantic received from
its legal, accounting, and tax advisors as to all legal, accounting, and tax
matters relating to the merger agreement and the merger.
In
rendering its April 12, 2007 opinion and its updated opinion, Sandler O’Neill
performed a variety of financial analyses. Sandler O’Neill prepared
its analyses solely for purposes of rendering its opinions and provided such
analyses to the Greater Atlantic Board of Directors. The summary
below is not a complete description of the analyses underlying Sandler O’Neill’s
opinions or the presentation made by Sandler O’Neill to Greater Atlantic’s
Board, but is instead a summary of the material analyses performed and presented
in connection with its opinions. The preparation of a fairness
opinion is a complex process involving subjective judgments as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Also, no company included
in Sandler O’Neill’s comparative analyses described below is identical to
Greater Atlantic or Summit and no transaction is identical to the
merger. Accordingly, an analysis of comparable companies or
transactions involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect their public trading values or merger
transaction values. The process, therefore, is not necessarily susceptible
to a partial analysis or summary description.
In
arriving at its opinions, Sandler O’Neill did not attribute any particular
weight to any analysis or factor that it considered. Rather, Sandler
O’Neill made its own qualitative judgments as to the significance and relevance
of each analysis and factor. The financial analyses summarized below
include information presented in tabular format. Sandler O’Neill did
not form an opinion as to whether any individual analysis or factor (positive or
negative) considered in isolation supported or failed to support its opinions;
rather Sandler O’Neill made its determination as to the fairness of the merger
consideration on the basis of its experience and professional judgment after
considering the results of all the analyses taken as a
whole. Accordingly, Sandler O’Neill believes that its analyses and
the summary of its analyses must be considered as a whole and that selecting
portions of its analyses or focusing on the information presented below in
tabular format, without considering all analyses and factors or the full
narrative description of the financial analyses, including methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of the process underlying its analysis and opinions. The tables
alone do not constitute complete descriptions of the financial analyses
presented in such tables.
In
performing its analysis, Sandler also made numerous assumptions with respect to
industry performance, business and economic conditions and various other
matters, many of which cannot be predicted and are beyond the control of Greater
Atlantic, Summit and Sandler O’Neill. The analysis performed by
Sandler O’Neill is not necessarily indicative of actual values or future
results, both of which may be significantly more or less favorable than
suggested by such analysis. Estimates on the values of companies did
not purport to be appraisals or necessarily reflect the prices at which
companies or their securities might actually be sold. Such estimates
are inherently subject to uncertainty and actual values may be materially
different. Accordingly, Sandler O’Neill’s analysis does not
necessarily reflect the value of Greater Atlantic’s common stock or Summit’s
common stock or the prices at which Greater Atlantic’s or Summit’s common stock
may be sold at any time. The analysis of Sandler and its
opinions
were
among a number of factors taken into consideration by Greater Atlantic’s Board
in making its determination to adopt the merger agreement and the analysis
described below should not be viewed as determinative of the decision of Greater
Atlantic’s Board with respect to the fairness of the merger.
Summary of
Proposal. Sandler O’Neill
reviewed the financial terms of the proposed transaction. Pursuant to
the merger agreement, each share of Greater Atlantic common stock issued and
outstanding immediately prior to the merger will be converted into the right to
receive (a) cash in an amount equal to $1.80 per share and (b) that number of
shares of Summit common stock, $2.50 par value per share, (the “Summit Common
Stock”) equal to $4.20 divided by the average closing price of Summit Common
Stock reported on the NASDAQ Capital Market for the twenty (20)
trading days prior to the closing of the Merger; provided, however, if the
Average Closing Price is less than $17.82, the Exchange Ratio will be seventy
percent of the Merger Consideration divided by $17.82. If the Average
Closing Price is greater than $24.10, then the Exchange Ratio will be seventy
percent of the Merger Consideration divided by $24.10. Sandler
O’Neill calculated the aggregate transaction value to be $18.2
million. Based upon financial information for Greater Atlantic for
the twelve months ended June 30, 2006, Sandler O’Neill calculated the following
ratios:
Transaction
price / Last twelve months’ earnings per
share NM
Transaction
price / Book value per share (1) 167%
Transaction
price / Tangible book value per share (1) 183%
Tangible
book premium/Core Deposits (1),
(2) 4.1%
2 Day
market premium as of September 27,
2007 17.2%
2 Day
market premium as of April 10,
2007
140.0%
|
(1)
|
Book
value has been adjusted for the branch sale proceeds of $4.2 million,
resulting in an addition of $1.40 per
share.
|
|
(2)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Stock Trading
History. Sandler O’Neill also
reviewed the history of the publicly reported trading prices of Greater
Atlantic’s common stock for the three-year period ended April 5,
2007. Sandler O'Neill also reviewed the history of the reported
trading prices and volume of Summit’s common stock for the one year and the
three year periods ended April 5, 2007. Sandler O’Neill then compared
the relationship between the movements in the price of Greater Atlantic’s common
stock against the movements in the prices of the Standard & Poor's 500
Index, the NASDAQ Bank Index, the Standard & Poor’s Bank Index and the
performance of a composite peer group - a weighted average (by market
capitalization) composite of publicly traded comparable depository institutions
selected by Sandler O’Neill. Sandler O’Neill also compared the relationship
between the movements in the prices of Summit’s common stock to movements in the
prices of the Nasdaq Bank Index, S&P Bank Index, and S&P 500 Index and
the performance of a composite peer group - a weighted average (by market
capitalization) composite of publicly traded comparable depository institutions
selected by Sandler O’Neill. The composition of the peer group for
Greater Atlantic is discussed under the relevant section under “Comparable
Company Analysis” below. The composition of the peer group for Summit
is discussed under the relevant section under “Comparable Company Analysis”
below.
The
relative performances were as follows:
Greater
Atlantic’s Stock Performance
|
|
Beginning Index
Value
|
Ending Index
Value
|
|
|
April 8,
2004
|
April 5,
2007
|
|
|
Greater
Atlantic
|
100.00%
|
32.2%
|
|
|
S&P
500 Index
|
100.00
|
126.8
|
|
|
NASDAQ
Bank Index
|
100.00
|
109.5
|
|
|
S&P
Bank Index
|
100.00
|
117.5
|
|
|
Regional
Peer Group Index(1)
|
100.00
|
96.0
|
|
|
(1) Refers
to the peer group outlined in the Comparable Group Analysis section
below.
|
Summit’s
Stock Performance
|
|
Beginning Index
Value
|
Ending Index
Value
|
|
|
April 8,
2004
|
April 5,
2007
|
|
|
S&P
500 Index
|
100.00
|
126.8
|
|
|
NASDAQ
Bank Index
|
100.00
|
109.5
|
|
|
S&P
Bank Index
|
100.00
|
117.5
|
|
|
Regional
Peer Group Index(1)
|
100.00
|
111.1
|
|
|
(1) Refers to
the peer group outlined in the Comparable Group Analysis section
below.
|
Comparable Company
Analysis. Sandler O’Neill used
publicly available information to compare selected financial and market trading
information for Greater Atlantic and Summit to various peer groups selected by
Sandler O’Neill. The peer group for Greater Atlantic consisted of the
following companies:
|
American
Bank Holdings, Inc.
|
KS
Bancorp, Inc.
|
|
Coddle
Creek Financial Corp.
|
SE
Financial Corp.
|
|
Community
Financial Corporation
|
South
Street Financial Corp.
|
|
First
Keystone Financial, Inc.
|
Virginia
Savings Bank, FSB
|
|
First
Star Bancorp, Inc.
|
Washington
Savings Bank, F.S.B.
|
|
Independence
Federal Savings Bank
|
WVS
Financial Corp.
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as of
April 10, 2007. The table below compares the data for Greater Atlantic with the
median data for the regional peer group.
Greater
Atlantic Comparable Group Analysis
| |
Greater
Atlantic
|
Regional
Peer
Group
Median
|
|
Market
Capitalization (in
millions)
|
$7
|
$34
|
|
Total
assets (in
millions)
|
$287
|
$325
|
|
Tangible
equity/Tangible assets
|
2.49%
|
7.99%
|
|
Last
twelve months’ return on average assets
|
(1.36%)
|
0.67%
|
|
Last
twelve months’ return on average equity
|
(37.18%)
|
7.91%
|
|
Price/Tangible
book value per share
|
100%
|
126%
|
|
Price/Last
twelve months’ earnings per share
|
NM
|
15.6x
|
The
“Regional Peer Group” for Summit consisted of the following
companies:
|
Burke
& Herbert Bank & Trust Co.
|
Middleburg
Financial Corporation
|
|
Cardinal
Financial Corporation
|
National
Bankshares, Incorporated
|
|
Eastern
Virginia Bankshares, Inc.
|
Old
Point Financial Corporation
|
|
First
Mariner Bancorp
|
Shore
Bancshares, Inc.
|
|
First
United Corporation
|
Virginia
Commerce Bancorp, Inc.
|
|
FNB
Corporation
|
Virginia
Financial Group, Inc.
|
The
analysis compared publicly available financial information as of and for the
most recently reported twelve-month period and market trading information as of
April 10, 2007. The table below compares the data for Summit with the
median data for the peer group.
Summit
Comparable Group Analysis
| |
Summit
|
Regional
Peer
Group
Median
|
|
Market
Capitalization (in
millions)
|
$149
|
$190
|
|
Total
assets (in
millions)
|
$1,235
|
$1,306
|
|
Tangible
equity/Tangible assets
|
6.23%
|
8.69%
|
|
Last
twelve months’ return on average assets
|
0.70
%
|
1.12%
|
|
Last
twelve months’ return on average equity
|
10.46%
|
12.46%
|
|
Price/Tangible
book value per share
|
194%
|
202%
|
|
Price/Last
twelve months’ earnings per share
|
18.2x
|
15.7x
|
|
Price/Estimated
2007 earnings per share
|
12.2x
|
14.9x
|
Analysis of Selected
Merger Transactions. Sandler O’Neill reviewed 17 merger
transactions announced from January 1, 2004 through April 10, 2007 involving
acquisitions of banks and thrifts in the United States with announced
transaction value less than $30 million and the selling companies recorded
negative earnings for the last twelve month period. Sandler O’Neill reviewed the
multiples of transaction price at announcement to stated book value per share,
tangible book value per share, as well as tangible book premium to core deposits
and current market price premium, and computed high, low, mean and median
multiples and premiums for the transactions.
Comparable
Transactions Analysis
| |
Selected
Merger Median Multiple
|
| |
|
|
Transaction
price/ Book value per share
|
172%
|
| |
|
|
Transaction
price / Tangible book value per share
|
172%
|
| |
|
|
Tangible
book premium / Core deposits (1)
|
13.1%
|
| |
|
|
Premium
to current market price
|
66.8%
|
|
(1)
|
Core
deposits exclude time deposits with account balances greater than
$100,000.
|
Discounted Cash Flow
Analysis. Sandler O’Neill performed an analysis to
estimate the future stream of after-tax cash flows that Summit would provide to
equity holders through 2010 on a stand-alone basis, assuming Summit increased
their annual dividend by $0.02 annually and that Summit performed in accordance
with the earnings and growth projections reviewed with Summit’s senior
management. To approximate the terminal value of Summit common stock
at December 31, 2010, Sandler O’Neill applied price/earnings multiples ranging
from 10x to 20x and multiples of tangible book value ranging from 150% to
275%. The dividend stream and terminal values were then discounted to
present values using discount rates ranging from 9% to 15%, which were selected
by Sandler O’Neill to reflect different assumptions regarding required rates of
return of holders or prospective buyers of Summit’s common
stock. This analysis resulted in the following reference ranges of
indicated per share values for Summit’s common stock:
Terminal Earnings
Multiple
|
Discount
Rate
|
10x
|
12x
|
14x
|
16x
|
18x
|
20x
|
|
9.0%
|
$17.48
|
$20.74
|
$24.00
|
$27.26
|
$30.52
|
$33.78
|
|
10.0%
|
$16.86
|
$20.01
|
$23.15
|
$26.30
|
$29.44
|
$32.58
|
|
11.0%
|
$16.28
|
$19.31
|
$22.34
|
$25.38
|
$28.41
|
$31.44
|
|
12.0%
|
$15.72
|
$18.65
|
$21.57
|
$24.50
|
$27.42
|
$30.35
|
|
13.0%
|
$15.19
|
$18.01
|
$20.83
|
$23.66
|
$26.48
|
$29.30
|
|
14.0%
|
$14.68
|
$17.40
|
$20.13
|
$22.85
|
$25.58
|
$28.30
|
|
15.0%
|
$14.19
|
$16.82
|
$19.45
|
$22.08
|
$24.71
|
$27.34
|
Terminal Tangible Book
Multiple
|
Discount
Rate
|
150%
|
175%
|
200%
|
225%
|
250%
|
275%
|
|
9.0%
|
$19.98
|
$23.11
|
$26.25
|
$29.38
|
$32.51
|
$35.64
|
|
10.0%
|
$19.28
|
$22.30
|
$25.32
|
$28.34
|
$31.36
|
$34.38
|
|
11.0%
|
$18.61
|
$21.52
|
$24.44
|
$27.35
|
$30.26
|
$33.17
|
|
12.0%
|
$17.97
|
$20.78
|
$23.59
|
$26.40
|
$29.21
|
$32.02
|
|
13.0%
|
$17.36
|
$20.07
|
$22.78
|
$25.49
|
$28.20
|
$30.92
|
|
14.0%
|
$16.77
|
$19.39
|
$22.01
|
$24.62
|
$27.24
|
$29.86
|
|
15.0%
|
$16.21
|
$18.74
|
$21.27
|
$23.79
|
$26.32
|
$28.85
|
Sandler
O’Neill performed a similar analysis assuming Summit’s 2010 net income varied
from 25% above to 25% below the estimates noted above. This analysis
resulted in the following reference ranges of indicated per share values for
Summit’s common stock, using a discount rate of 12.98%:
Terminal Earnings
Multiple
|
EPS Projection Change from
Base Case
|
10x
|
12x
|
14x
|
16x
|
18x
|
20x
|
|
(25.0%)
|
$11.67
|
$13.79
|
$15.90
|
$18.02
|
$20.14
|
$22.26
|
|
(20.0%)
|
$12.37
|
$14.63
|
$16.89
|
$19.15
|
$21.41
|
$23.67
|
|
(15.0%)
|
$13.08
|
$15.48
|
$17.88
|
$20.28
|
$22.68
|
$25.09
|
|
(10.0%)
|
$13.79
|
$16.33
|
$18.87
|
$21.41
|
$23.96
|
$26.50
|
|
(5.0%)
|
$14.49
|
$17.18
|
$19.86
|
$22.54
|
$25.23
|
$27.91
|
|
0.0%
|
$15.20
|
$18.02
|
$20.85
|
$23.67
|
$26.50
|
$29.32
|
|
5.0%
|
$15.90
|
$18.87
|
$21.84
|
$24.80
|
$27.77
|
$30.73
|
|
10.0%
|
$16.61
|
$19.72
|
$22.83
|
$25.93
|
$29.04
|
$32.15
|
|
15.0%
|
$17.32
|
$20.57
|
$23.81
|
$27.06
|
$30.31
|
$33.56
|
|
20.0%
|
$18.02
|
$21.41
|
$24.80
|
$28.19
|
$31.58
|
$34.97
|
|
25.0%
|
$18.73
|
$22.26
|
$25.79
|
$29.32
|
$32.85
|
$36.38
|
In its
discussions with the Greater Atlantic Board, Sandler O’Neill noted that the
discounted cash flow analysis is a widely used valuation methodology, but the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, and the results thereof are not necessarily indicative of
actual values or future results.
Pro Forma Merger
Analysis. Sandler O’Neill analyzed certain potential pro
forma effects of the merger, assuming (1) a deal price per share of $6.00; (2)
all options to purchase shares of Greater Atlantic common stock with a strike
price lower than the current market value of Greater Atlantic common stock
outstanding at June 30, 2007 are to be cashed out; (3) each of Greater Atlantic
and Summit performs in accordance with the earnings projections and estimates
discussed above; (4) the Pasadena, MD branch sale closes during the third
quarter of 2007; (5) the Pasadena branch deposits, overall core deposits, and
total equity remain constant; and (6) the merger closes during the fourth
quarter of 2007. Sandler O’Neill
also
assumed various purchase accounting adjustments (including amortizable
identifiable intangibles created in the merger), charges and transaction costs
associated with the merger, and cost savings resulting from the merger (100% of
which would be realized in 2008). Based on the assumptions listed
above, the analysis indicated that the merger would be 1.3% dilutive to Summit’s
estimated 2008 earnings per share and approximately 6.5% accretive to 2009
earnings per share, and accretive to Summit’s estimated 2008 and 2009 tangible
book value per share. The actual results achieved by the combined
company may vary from projected results and the variations may be
material.
Sandler O’Neill’s Compensation and
Other Relationships with Greater Atlantic and
Summit. Greater Atlantic has agreed to pay Sandler
O’Neill a monthly retainer of $10,000 each month (“General Advisory Services
Fee”) and will continue to do so until the closing of the
transaction. Sandler O’Neill will also be paid a transaction fee in
connection with the merger of $150,000, plus an incentive fee of $61,209, which
is equal to 5% of the Aggregate Purchase Price over $17,000,000. It
is agreed that one-half of the General Advisory Services Fee shall be credited
against the $150,000 transaction fee. A fee of $100,000 has been paid
to Sandler O’Neill for rendering its fairness opinions. In connection
with the Pasadena, Maryland branch sale, Greater Atlantic has agreed to pay
Sandler O’Neill a fee of $77,281, which is equal to 0.15% of the total deposits
in the branch sale transaction. 50% of such branch sale transaction
fee was paid upon signing of the definitive agreement and the remaining amount
was paid the day of closing of the branch sale transaction. Greater
Atlantic has also agreed to reimburse certain of Sandler O’Neill’s reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify Sandler O’Neill and its affiliates and their respective partners,
directors, officers, employees, agents and controlling persons against certain
expenses and liabilities, including liabilities under the securities
laws.
In the
ordinary course of its business as a broker-dealer, Sandler O’Neill may purchase
securities from and sell securities to Greater Atlantic and Summit and their
affiliates. Sandler O’Neill may also actively trade the debt and/or
equity securities of Greater Atlantic or Summit or their affiliates for its own
account or for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
Interests of Certain Persons in the
Merger
Certain
members of Greater Atlantic’s management have interests in the merger in
addition to their interests as shareholders of Greater
Atlantic. These interests are described below. In each
case, the Greater Atlantic board of directors was aware of these potential
interests, and considered them, among other matters, in approving the merger
agreement and the transactions contemplated thereby.
Employment and Severance
Agreements.
After the
effective date of the merger, the employment of certain employees of Greater
Atlantic may be terminated in a manner which will entitle them to receive
termination benefits provided under existing employment agreements with Greater
Atlantic. The terms of such termination benefits for each employee
are set forth below.
Amos Employment
Agreement. Effective,
November 1, 1997, Greater Atlantic Bank entered into an employment agreement
with Carroll E. Amos, President and Chief Executive Officer of Greater Atlantic
Bank. Under the employment agreement, if, following a change in control (as
defined in the employment agreement), Mr. Amos voluntarily resigns or his
employment is terminated involuntarily for reasons other than cause, Mr. Amos
(or in the event of his death, his beneficiary) would be entitled to a lump sum
cash severance payment equal to the greater of: (i) the remaining payments due
for the term of the employment agreement, or (ii) two times the average of Mr.
Amos’ annual compensation for the three years preceding the change in
control. For purposes of the employment agreement, the merger with
Summit Financial Group constitutes a change in control. In addition
to a cash severance payment, the employment agreement provides that Greater
Atlantic Bank or its successor will cause to be continued
Mr. Amos’
life, health, dental and disability insurance coverage for thirty-six months
following his termination of employment in connection with a change in
control. That insurance coverage is required to be provided under
terms substantially identical to the coverage maintained by Greater Atlantic
Bank prior to Mr. Amos’ termination date. In the event Mr. Amos’
employment is voluntarily or involuntarily terminated following the merger by
and between Summit Financial and Greater Atlantic, Mr. Amos would be entitled to
a lump sum cash payment and health and welfare benefits equal to
approximately $394,000 .
Senior Officers’ Severance
Compensation Plan. Effective on December 1, 1999, Greater
Atlantic’s subsidiary, Greater Atlantic Bank, implemented an Employee Severance
Compensation Plan (the “Officer Plan”), to provide severance benefits
to the following senior officers who are terminated, voluntarily or
involuntarily from employment with Greater Atlantic Bank within one year of a
change in control (as defined in the Officer Plan) of the bank or Greater
Atlantic: Edward C. Allen, Justin R. Golden, Gary L. Hobert, Robert
W. Neff and David E. Ritter. The severance benefits are paid in
a lump sum cash payment within thirty days after termination equal in amount to
the compensation paid to such Participant during the twelve months immediately
preceding the date of termination. The merger would constitute a
change in control under the Officer Plan. Accordingly, if the
employment of the Participants is terminated within one year of the merger, then
each Participant will receive the following severance benefits: Edward C. Allen
- $121,000, Justin R. Golden - $101,000, Gary L. Hobert - $135,000, Robert W.
Neff - $130,000 and David E. Ritter - $114,000.
Conversion of Stock Options and
Warrants. The merger agreement provides that each stock option
and warrant granted to officers, employees and directors of Greater Atlantic
under Greater Atlantic’s stock option plan and outstanding prior to the
effective date will vest and holders of such options shall be entitled to
receive cash in an amount equal to the difference between the value of (a)
the merger consideration and (b) the applicable exercise price
(rounded to the nearest cent) for each outstanding option and warrant granted by
Greater Atlantic to purchase shares of Greater Atlantic common
stock. The following table sets forth the cash that will be paid to
each executive officer of Greater Atlantic upon consummation of the merger in
accordance with the terms of the merger agreement and assumes that the value for
each share of stock of Greater Atlantic that will be exchanged in the merger is
$6.00.
|
GREATER ATLANTIC FINANCIAL
CORP.
|
|
|
|
Option Payouts at
Merger
|
|
|
|
| |
|
|
|
|
| |
|
|
Value of
|
|
| |
|
Exercise
|
Merger
|
|
| |
# of
|
Price
|
Consideration
|
Cash
|
|
Employee
|
options
|
(per
share)
|
(per
share)
|
Payout
|
|
Carroll
E. Amos
|
8,666
|
4.00
|
6.00
|
$17,332.00
|
|
Robert
W. Neff
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
|
David
E. Ritter
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
|
Edward
C. Allen
|
9,000
|
4.00
|
6.00
|
$18,000.00
|
|
Justin
R. Golden
|
8,000
|
4.00
|
6.00
|
$16,000.00
|
|
Gary
L. Hobert
|
10,000
|
5.31
|
6.00
|
$ 6,900.00
|
| |
|
|
|
|
Employee Benefit
Plans. Summit intends to provide the employees of Greater
Atlantic with employee benefit plans substantially similar to those provided to
the employees of Summit. Employees of Greater Atlantic will receive
credit for their service to Greater Atlantic in determining their eligibility
and vesting in the benefit plans provided by Summit.
Conditions of the
Merger
The
respective obligations of Summit and Greater Atlantic to consummate the merger
are subject to the satisfaction of certain mutual conditions, including the
following:
|
·
|
The
shareholders of Greater Atlantic approve the merger agreement and the
transactions contemplated thereby, described in the proxy
statement/prospectus at the meeting of shareholders for Greater
Atlantic;
|
|
·
|
All
regulatory approvals required by law to consummate the transactions
contemplated by the merger agreement are obtained from the Federal Reserve
Board and any other appropriate federal and/or state regulatory agencies
without unreasonable conditions, and all waiting periods after such
approvals required by law or regulation
expire;
|
|
·
|
The
registration statement (of which this proxy statement/prospectus is a
part) registering shares of Summit common stock to be issued in the merger
is declared effective and not subject to a stop order or any threatened
stop order;
|
|
·
|
There
shall be no actual or threatened litigation, investigations or proceedings
challenging the validity of, or damages in connection with, the merger
that would have a material adverse effect with respect to the interests of
Summit or Greater Atlantic or impose a term or condition that shall be
deemed to materially adversely impact the economic or business benefits of
the merger;
|
|
·
|
The
absence of any statute, rule, regulation, judgment, decree, injunction or
other order being enacted, issued, promulgated, enforced or entered by a
governmental authority effectively prohibiting consummation of the
merger;
|
|
·
|
All
permits or other authorizations under state securities laws necessary to
consummate the merger and to issue the shares of Summit common stock to be
issued in the merger being obtained and remaining in full force and
effect; and
|
|
·
|
Authorization
for the listing on the NASDAQ Capital Market of the shares of Summit
common stock to be issued in the
merger.
|
In
addition to the mutual covenants described above, the obligation of Summit to
consummate the merger is subject to the satisfaction, unless waived, of the
following other conditions:
|
·
|
The
representations and warranties of Greater Atlantic made in the merger
agreement are true and correct as of the date of the merger agreement and
as of the effective time of the merger and Summit receives a certificate
of the chief executive officer and the chief financial officer of Greater
Atlantic to that effect;
|
|
·
|
Greater
Atlantic performs in all material respects all obligations required to be
performed under the merger agreement prior to the effective time of the
merger and delivers to Summit a certificate of its chief executive officer
and chief financial to that effect;
and
|
· Summit shall have
received an opinion of Hunton & Williams, special counsel to Summit, dated
as of the effective time of the merger, that the
merger
constitutes a “reorganization”
under Section 368 of the Internal Revenue Code.
In
addition to the mutual covenants described above, Greater Atlantic’s obligation
to complete the merger is subject to the satisfaction, unless waived, of the
following other conditions:
|
·
|
The
representations and warranties of Summit made in the merger agreement are
true and correct as of the date of the merger agreement and as of the
effective time of the merger and Greater Atlantic receives a certificate
of the chief executive officer and chief financial officer of Summit to
that effect;
|
|
·
|
Summit
performs in all material respects all obligations required to be performed
under the merger agreement prior to the effective time of the merger and
delivers to Greater Atlantic a certificate of its chief executive officer
and chief financial officer to that effect;
and
|
Representations and
Warranties
The
merger agreement contains representations and warranties by Summit and Greater
Atlantic. These representations and warranties are qualified by a
materiality standard, which means that Summit or Greater Atlantic is not in
breach of a representation or warranty unless the existence of any fact, event
or circumstance, individually, or taken together with other facts, events or
circumstances has had or is reasonably likely to have a material adverse effect
on Summit or Greater Atlantic. These include, among other things,
representations and warranties by Summit and Greater Atlantic to each other as
to:
|
·
|
organization
and good standing of each entity and its
subsidiaries;
|
|
·
|
each
entity’s capital structure;
|
|
·
|
each
entity’s authority relative to the execution and delivery of, and
performance of its obligations under, the merger
agreement;
|
|
·
|
absence
of material adverse changes since September 30, 2006, or December 31,
2006, for Greater Atlantic and Summit,
respectively;
|
|
·
|
consents
and approvals required;
|
|
·
|
accuracy
of documents, including financial statements and other reports, filed by
each company with the SEC;
|
|
·
|
absence
of defaults under contracts and
agreements;
|
|
·
|
absence
of environmental problems;
|
|
·
|
absence
of conflicts between each entity’s obligations under the merger agreement
and its charter documents and contracts to which it is a party or by which
it is bound;
|
|
·
|
litigation
and related matters;
|
|
·
|
taxes
and tax regulatory matters;
|
|
·
|
compliance
with the Sarbanes-Oxley Act and accounting
controls;
|
|
·
|
absence
of brokerage commissions, except as disclosed for financial
advisors;
|
|
·
|
employee
benefit matters;
|
|
·
|
books
and records fully and accurately maintained and fairly present events and
transactions; and
|
In
addition, Greater Atlantic represents and warrants to Summit that, except as
disclosed, neither Greater Atlantic nor any of its subsidiaries are parties to
any interest rate swaps, caps, floors, option agreements, futures and forward
contract and other similar risk management
agreements. Summit represents and warrants to Greater Atlantic that
Summit has taken all action to exempt the merger
agreement
and the merger from the requirements of takeover laws and has sources of capital
to pay the cash consideration and to effect the merger.
Termination of the Merger
Agreement
The
merger agreement may be terminated at any time prior to the closing in any of
the following ways.
The
merger agreement may be terminated by mutual written consent of Greater Atlantic
and Summit.
The
merger agreement may be terminated by either Greater Atlantic or Summit
if:
|
|
•
|
the
approval of any governmental entity required for consummation of the
merger is denied by a final nonappealable action of such governmental
entity;
|
|
|
•
|
the
merger has not been completed on or before March 31,
2008;
|
|
|
•
|
there
has been a breach by the other party of any of its obligations under the
merger agreement, which breach cannot be or has not been cured within 30
days following written notice to the breaching party of such breach;
or
|
|
|
•
|
the
merger agreement is not approved by the shareholders of Greater
Atlantic.
|
The
merger agreement may be terminated by Summit if Greater Atlantic’s board fails
to recommend the merger or withdraws, modifies or changes such recommendation in
a manner adverse to Summit.
The
merger agreement may be terminated by Greater Atlantic, if the Greater Atlantic
board of directors determines that Greater Atlantic has received an unsolicited
proposal that if consummated would result in a transaction more favorable to
Greater Atlantic’s shareholders from a financial point of view, provided
that Summit does not make a counteroffer that is at least as favorable to the
other proposal and Greater Atlantic pays the termination fee described
below.
Effect of Termination; Termination
Fee
The
provisions of the merger agreement relating to expenses and termination fees
will continue in effect not withstanding termination of the merger agreement.
If the merger agreement is validly terminated, the merger agreement will
become void without any liability on the part of any party except termination
will not relieve a breaching party from liability for any willful breach of the
merger agreement.
Greater
Atlantic has agreed to pay a cash termination fee to Summit equal to $750,000
if:
|
·
|
the merger agreement is terminated for failure to obtain the approval of
Greater Atlantic’s shareholders, and before such time a competing
acquisition proposal
for Greater Atlantic has been made public and not withdrawn;
or
|
|
·
|
Greater Atlantic terminates the merger agreement to accept a proposal by a
third party that it believes is superior to Summit’s offer set forth in
the merger agreement.
|
This termination fee would be payable as follows: (i) $250,000 no
later than two (2) business days after the date of termination, (ii) $100,000 on
the date that is one (1) year after the termination date, (iii) $100,000 on the
date that is two (2) years after the termination date, and (iv) $300,000 on the
date that is three (3) years after the termination date.
Greater
Atlantic also has agreed to pay a cash termination fee to Summit equal to
$250,000 if:
|
·
|
the
merger agreement is terminated because Greater Atlantic’s board fails to
recommend, withdraws, modifies, or changes its recommendation of the
merger before the special meeting;
|
|
·
|
Summit
terminates the merger agreement due to a breach by Greater Atlantic of any
representation, warranty, covenant or other agreement;
or
|
|
·
|
the
merger agreement is terminated due to a failure to consummate the merger
by March 31, 2008; unless the
failure of the merger to be consummated by that date arises out of or
results from the knowing action or inaction of Summit;
|
This
termination fee would be payable no later than two (2) business days after the
date of termination.
Waiver and
Amendment
Prior to
the effective time of the merger, any provision of the merger agreement may be
waived by the party benefiting by the provision or amended or modified by an
agreement in writing between the parties, except that, after the special
meeting, the merger agreement may not be amended if it would violate the
Delaware General Corporation Law or the West Virginia Business Corporation
Act.
Indemnification
Summit
has agreed to indemnify the directors, officers and employees of Greater
Atlantic for a period of three (3) years from the effective time of the merger
to the fullest extent that Greater Atlantic is permitted or required to
indemnify (and advance expenses to) its directors, officers and employees under
the laws of the State of Delaware and Greater Atlantic’s Articles of
Incorporation and Bylaws.
Acquisition
Proposals
Greater
Atlantic has agreed that it will not, and that it will cause its officers,
directors, agents, advisors, and affiliates not to: solicit or encourage
inquiries or proposals with respect to engage in any negotiations concerning, or
provide any confidential information to any person relating to
any proposal to acquire the stock or assets of Greater Atlantic or
other business combination transactions with Greater Atlantic, unless the
Greater Atlantic board of directors concludes in good faith, after consultation
with and consideration of the advice of outside counsel, that the failure to
enter into such discussions or negotiations or resolving to accept such
acquisition proposal, would constitute a breach of its fiduciary duties to
shareholders under applicable law. If the board of directors of
Greater Atlantic is obligated by its fiduciary duties to accept a third party
proposal that it believes is superior to Summit’s offer set forth in the merger
agreement, Greater Atlantic is obligated to pay to Summit the termination fee
equal to $750,000. See “– Effect of Termination; Termination Fee”
beginning on page 61 .
Closing Date; Effective
Time
The
merger will be consummated and become effective upon the issuance of a
certificate of merger by the West Virginia Secretary of State and the Delaware
Division of Corporations (or on such other date as may be specified in the
articles of merger to be filed with the West Virginia Secretary of
State and
the Delaware Division of Corporations). Unless otherwise agreed to by
Summit or Greater Atlantic, the closing of the merger will take place on the
fifth business day to occur after the last of the conditions to the merger has
been satisfied or waived, or, at the election of Summit, on the last business
day of the month in which such fifth business day occurs.
Regulatory
Approvals
The
merger and the other transactions contemplated by the merger agreement require
the approval of the Federal Reserve Board. As a bank holding company,
Summit is subject to regulation under the Bank Holding Company Act of
1956. Greater Atlantic Bank is a federally-chartered savings bank,
regulated by the Office of Thrift Supervision. Summit Community Bank
is a West Virginia banking corporation, is a non-member bank and is subject to
the State Banking Code of West Virginia. Summit and Greater Atlantic
have filed all required applications seeking approval of the merger with the
Federal Reserve.
Under the
Bank Holding Company Act, the Federal Reserve Board is required to examine the
financial and managerial resources and future prospects of the combined
organization and analyze the capital structure and soundness of the resulting
entity. The Federal Reserve Board has the authority to deny an
application if it concludes that the combined organization would have inadequate
capital. In addition, the Federal Reserve Board can withhold approval
of the merger if, among other things, it determines that the effect of the
merger would be to substantially lessen competition in the relevant
market. Further, the Federal Reserve must consider whether the
combined organization meets the requirements of the Community Reinvestment Act
of 1977 by assessing the involved entities’ records of meeting the credit needs
of the local communities in which they operate, consistent with the safe and
sound operation of such institutions. The Federal Reserve has
ninety (90) days from the date of filing the application to act on the
application.
On October 2, 2007, Summit filed an application with the Federal
Reserve seeking approval of the merger. On November 2, 2007, the
Federal Reserve requested additional information from Summit to complete the
processing of the application, including additional pro forma financial
information, cash flow projections, and an action plan with respect to the
integration of Greater Atlantic’s operations. At the time Summit
received the request for additional information, Summit was negotiating the
settlement of the Corinthian litigation and Summit was uncertain as to whether
it would exercise the cash alternative or elect to acquire Commonwealth
Savingshares Corporation. Accordingly, Summit was unable to respond
immediately to the Federal Reserve’s request for additional information.
On December 18, 2007, Summit requested the Federal Reserve to
suspend processing of the application until the staff of the Federal Reserve and
Summit consented to the continuation of the processing of the
application. Summit made that request in order to gain sufficient
time to respond to the Federal Reserve’s request for additional information, to
obtain a commitment for the issuance of $10 million in subordinated debt and to
provide sufficient time for the Federal Reserve to review the application within
the Federal Reserve’s established ninety (90) day processing period.
On
January 14, 2008, and January 28, 2008, Summit filed additional information with
the Federal Reserve, including updated pro forma financial information, which
included the proposed subordinated debt issuance, and cash flow projections that
the Federal Reserve has requested as of that date. As of the mailing date of
this proxy statement/prospectus, Summit has filed the supplementary information
that the Federal Reserve has requested as of that date. The Federal Reserve has
informed Summit that it will review the information that has been filed in
support of the application and if it deems the application complete, will
reactivate Summit’s application immediately before rendering a decision on it.
Summit has requested that the Federal Reserve render a decision on the
application before March 31, 2008.
The
merger cannot be consummated prior to receipt of all required
approvals. There can be no assurance that required regulatory
approvals for the merger will be obtained and, if the merger is approved, as to
the date of such approvals or whether the approvals will contain any
unacceptable conditions. Summit
and Greater Atlantic are not aware of any governmental approvals or actions that
may be required for consummation of the merger other than as described
above. Should any other approval or action be required, it is
presently contemplated that such approval or action would be
sought. There can be no assurance that any necessary regulatory
approvals or actions will be timely received or taken, that no action will be
brought challenging such approval or action or, if such a challenge is brought,
as to the result thereof, or that any such approval or action will not be
conditioned in a manner that would cause the parties to abandon the
merger.
The
approval of any application merely implies the satisfaction of regulatory
criteria for approval, which does not include review of the merger from the
standpoint of the adequacy of the cash consideration or the exchange ratio for
converting Greater Atlantic common stock to Summit common
stock. Furthermore, regulatory approvals do not constitute an
endorsement or recommendation of the merger.
Conduct of Business Pending the
Merger
The
merger agreement contains reciprocal forbearances made by Greater Atlantic and
Summit to each other. Greater Atlantic and Summit have agreed that,
until the effective time of the merger, each of them and each of their
subsidiaries, without the prior written consent of the other, will
not:
|
·
|
Conduct
business other than in the ordinary and usual course or fail to use
reasonable efforts to preserve intact their business organizations and
assets, or take any action reasonably likely to have an adverse effect
upon its ability to perform any of its material obligations under the
merger agreement;
|
|
·
|
Except
as required by applicable law or regulation, implement or adopt any
material change in its interest rate or other risk management policies,
practices or procedures, fail to follow existing policies or practices
with respect to managing exposure to interest rate and other risks, or
fail to use commercially reasonable means to avoid any material increase
in its aggregate exposure to interest rate risk;
or
|
|
·
|
Take
any action while knowing that such action would, or is reasonably likely
to, prevent or impede the merger from qualifying as a merger within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
or knowingly take any action that is intended or is reasonably likely to
result in any of its representations and warranties set forth in the
merger agreement being or becoming untrue in any material respect at any
time at or prior to the effective time, any of the conditions to the
merger not being satisfied, or a material violation of any provision of
the merger agreement except, in each case, as may be required by
applicable law or regulation.
|
Greater
Atlantic has also agreed that, prior to the effective time, without the prior
written consent of Summit it will not:
|
·
|
Other
than pursuant to rights previously disclosed and outstanding on the date
of the merger agreement, issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of
Greater Atlantic common stock or any rights to purchase Greater Atlantic
common stock, enter into any agreement with respect to the foregoing, or
permit any additional shares of Greater Atlantic common stock to become
subject to new grants of employee or director stock options, other rights
or similar stock-based employee
rights;
|
|
·
|
Make,
declare, pay or set aside for payment any dividend on or in respect of, or
declare or make any distribution on, any shares of Greater Atlantic stock
or directly or indirectly adjust, split, combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital
stock;
|
|
·
|
Enter
into or amend or renew any employment, consulting, severance or similar
agreements or arrangements with any director, officer or employee of
Greater Atlantic or its subsidiaries, or grant any salary or wage increase
or increase any employee benefit (including incentive or bonus payments),
except for (i) normal individual payments of incentives and bonuses to
employees in the ordinary course of business consistent with past
practice, not to exceed $10,000 in the aggregate, (ii) normal individual
payment of incentives and bonuses to employees under Greater Atlantic
Bank’s branch incentive plan, not to exceed $30,000 per quarter in the
aggregate, (iii) normal individual increases in compensation to employees
in the ordinary course of business consistent with past practices, (iv)
other changes required by applicable law, (v) to satisfy
previously
|
|
|
disclosed
contractual obligations, and (vi) grants of awards to newly hired
employees consistent with past
practices;
|
|
·
|
Enter
into, establish, adopt or amend (except as may be required by
applicable law or to satisfy previously disclosed contractual obligations
existing as of the date of the merger agreement) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement (or similar arrangement) related thereto, in respect of any
director, officer or employee of Greater Atlantic or its subsidiaries, or
take any action to accelerate the vesting or exercisability of stock
options, restricted stock or other compensation or benefits payable
thereunder;
|
|
·
|
Except
as previously disclosed or in connection with the consummation of the sale
of the Pasadena Branch, sell, transfer, mortgage, encumber or otherwise
dispose of or discontinue any of its assets, deposits, business or
properties except in the ordinary course of business and in a transaction
that is not material to it and its subsidiaries taken as a
whole;
|
|
·
|
Except
as previously disclosed, acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case in
the ordinary and usual course of business consistent with past practice)
all or any portion of the assets, business, deposits or properties of any
other entity;
|
|
·
|
Amend
Greater Atlantic’s certificate of incorporation or bylaws or the
articles of incorporation or bylaws (or similar governing documents) of
any of Greater Atlantic’s
subsidiaries;
|
|
·
|
Implement
or adopt any change in its accounting principles, practices or methods,
other than as may be required by generally accepted accounting
principles;
|
|
·
|
Except
in the ordinary course of business consistent with past practice, enter
into or terminate any material contract or amend or modify in any material
respect any of its existing material
contracts;
|
|
·
|
Except
in the ordinary course of business consistent with past practice, settle
any claim, action or proceeding, except for any claim, action or
proceeding that does not involve precedent for other material claims,
actions or proceedings and that involve solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material to Greater Atlantic and its subsidiaries, taken as a
whole;
|
|
·
|
Make
any loans in a principal amount in excess of $750,000, or make any loans
outside the District of Columbia, Delaware, Maryland, Pennsylvania,
Virginia and West Virginia;
|
|
·
|
Incur
any indebtedness for borrowed money other than in the ordinary course of
business; or
|
|
·
|
Agree
or commit to do any of the
foregoing.
|
Summit
has agreed that, prior to the effective time, without the prior written consent
of Greater Atlantic it will not:
· Make, declare, pay or set aside for payment any
extraordinary dividend;
|
·
|
Agree
or commit to do any of the
foregoing.
|
Accounting
Treatment
The
merger will be accounted for under the “purchase” method of
accounting. Under the purchase method of accounting, the tangible
assets and liabilities of Greater Atlantic, as of the completion of the merger,
will be recorded at their fair values as well as any identifiable intangible
assets. Any remaining excess purchase price will be allocated to
goodwill and will not be amortized. Instead, goodwill is evaluated
for impairment annually. Financial statements of Summit issued after
the consummation of the merger will reflect such values and will not be restated
retroactively to reflect the historical position or results of operations of
Greater Atlantic. The operating results of Greater Atlantic will be
reflected in Summit’s consolidated financial statements from and after the date
the merger is consummated.
Management and Operations after the
Merger
Board of
Directors. The current Board of Directors of Summit will
continue to serve as the Board of Directors after the Merger.
Management. The
current executive officers of Summit will continue to serve as executive
officers after the Merger.
Resales of Summit Common
Stock
The
shares of Summit common stock to be issued to shareholders of Greater Atlantic
under the merger agreement have been registered under the Securities Act of 1933
and may be freely traded without restriction by holders who will not be
affiliates of Summit after the merger and who were not affiliates of Greater
Atlantic on the date of the special meeting.
All
directors and executive officers of Greater Atlantic are considered affiliates
of Greater Atlantic for this purpose. They may resell shares of
Summit common stock received in the merger only if the shares are registered for
resale under the Securities Act or an exemption is available. They
may resell under the safe harbor provisions of Rule 145 under the
Securities Act or as otherwise permitted under the Securities
Act. Each Greater Atlantic director and each other person deemed to
be an affiliate will enter into an agreement with Summit providing that the
person will not transfer any shares of Summit common stock received in the
merger, except in compliance with the Securities Act. We encourage
any such person to obtain advice of securities counsel before reselling any
Summit common stock.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER
General
The
following summary sets forth the material U.S. federal income tax consequences
of the merger to the holders of Greater Atlantic common stock who exchange such
stock for a combination of the cash and Summit common stock. The tax
consequences under state, local and foreign laws are not addressed in this
summary. The following summary is based upon the Internal Revenue
Code of 1986, as amended, Treasury regulations, administrative rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Such a change could affect the
continuing validity of this summary. No assurance can be given that
the Internal Revenue Service would not
assert, or that a court would not sustain, a position contrary to any of the tax
consequences set forth below.
The
following summary addresses only shareholders who are citizens or residents of
the United States who hold their Greater Atlantic common stock as a capital
asset. It does not address all the tax consequences that may be
relevant to particular shareholders in light of their individual circumstances
or to shareholders that are subject to special rules, including, without
limitation: financial institutions; tax-exempt organizations; S corporations,
partnerships or other pass-through entities (or an investor in an S corporation,
partnership or other pass-through entities); insurance companies; mutual funds;
dealers in stocks or securities, or foreign currencies; foreign holders; a
trader in securities who elects the mark-to-market method of accounting for the
securities; persons that hold shares as a hedge against currency risk, a
straddle or a constructive sale or conversion transaction; holders who acquired
their shares pursuant to the exercise of employee stock options or otherwise as
compensation or through a tax-qualified retirement plan; holders of Greater
Atlantic stock options, stock warrants or debt instruments; and holders subject
to the alternative minimum tax.
The Merger
No ruling
has been, or will be, sought from the Internal Revenue Service as to the U.S.
federal income tax consequences of the merger. Consummation of the
merger is conditioned upon Summit’s receiving an opinion from Hunton &
Williams to the effect that, based upon facts, representations and assumptions
set forth in such opinions, the merger constitutes a reorganization within the
meaning of Section 368 of the Internal Revenue Code. The issuance of
the opinion is conditioned on, among other things, such tax counsel’s receipt of
representation letters from each of Greater Atlantic or Summit, in each
case in form and substance reasonably satisfactory to such
counsel. Opinions of counsel are not binding on the Internal Revenue
Service.
Based
upon the above assumptions and qualifications, for U.S. federal income tax
purposes the merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code. Each of Greater Atlantic
and Summit will be a party to the merger within the meaning of Section
368(b) of the Internal Revenue Code, and neither of Greater Atlantic
or Summit will recognize any gain or loss as a result of the
merger.
Consequences to
Shareholders
Exchange of Greater Atlantic Common Stock for Summit Common Stock and
Cash. A holder of Greater Atlantic common stock who exchanges
his or her Greater Atlantic common stock actually owned for a combination of
cash and common stock of Summit will recognize income or gain in an amount equal
to the lesser of (a) the amount of cash received, or (b) the gain
realized on the exchange. The gain realized on the exchange will
equal the fair market value of Summit common stock received plus the amount of
cash received, less the holder’s adjusted tax basis in the shares of Greater
Atlantic common stock exchanged by the holder. No loss may be
recognized by a holder of Greater Atlantic common stock from the combined
distribution of cash and Summit common stock or the stock
distribution.
Cash in Lieu of Fractional Shares.
Holders of Greater Atlantic common stock who receive cash in lieu of
fractional shares of Summit common stock in the merger generally will be treated
as if the fractional shares of Summit common stock had been distributed to them
as part of the merger, and then redeemed by Summit in exchange for the cash
actually distributed in lieu of the fractional shares, with the redemption
generally qualifying as an “exchange” under Section 302 of the Internal Revenue
Code, as described below. Consequently, those holders generally will
recognize capital gain or loss with respect to the cash payments they receive in
lieu of fractional shares measured by the difference between the amount of cash
received and the tax basis allocated to the fractional shares.
Possible
Treatment of Cash as a Dividend. Whether the cash received by a holder of
Greater Atlantic common stock, in those situations described in the immediately
preceding two paragraphs, will be treated as capital gain or as ordinary
dividend income is determined under the principles of
Section 302
of the Internal Revenue Code. In applying these principles, the
holder is treated as if shares of Summit common stock having a fair market value
equal to the cash paid to the holder had been distributed by Summit to the
holder with such shares of Summit common stock then being redeemed by Summit in
return for the cash. If this hypothetical redemption constitutes an
“exchange” under Section 302 of the Internal Revenue Code, taking into account
the holder’s actual and constructive ownership of Greater Atlantic common stock
under Section 318 of the Internal Revenue Code, the holder of Greater Atlantic
common stock who receives cash will recognize capital gain measured by the
difference between that holder’s adjusted basis for the Greater Atlantic common
stock exchanged and the cash received. If the hypothetical redemption
does not qualify as an “exchange” under Section 302 of the Internal Revenue
Code, the cash received by the holder will be treated as ordinary dividend
income, generally to the extent of the holder’s ratable share of accumulated
earnings and profits. To the extent the cash distribution exceeds the
holder’s ratable share of accumulated earnings and profits, the amount received
will be applied against and reduce the holder’s adjusted basis in his or her
stock and any excess will be treated as gain from the sale or exchange of the
stock.
In
general, whether this hypothetical redemption constitutes an “exchange” under
Section 302 of the Internal Revenue Code will depend upon whether and to what
extent the hypothetical redemption reduces the holder’s percentage stock
ownership in Summit. The hypothetical redemption will be treated as
an “exchange” if, under the principles of Section 302 of the Internal
Revenue Code, the hypothetical redemption is (a) ”substantially
disproportionate,” (b) ”not essentially equivalent to a dividend” or
(c) results in a “complete termination” of the holder’s interest in Summit
common stock.
In
general, the determination of whether the hypothetical redemption will be
“substantially disproportionate” will require a comparison of (x) the
percentage of the outstanding voting stock of Summit that the holder of Greater
Atlantic common stock is deemed to actually and constructively own immediately
before the hypothetical redemption by Summit and (y) the percentage of the
outstanding voting stock of Summit actually and constructively owned by the
holder immediately after the hypothetical redemption by
Summit. Generally, the hypothetical redemption will be “substantially
disproportionate” to a holder of Greater Atlantic common stock if the percentage
described in (y) above is less than 80% of the percentage described in
(x) above.
Whether
the hypothetical redemption is “not essentially equivalent to a dividend” with
respect to the holder will depend on the holder’s particular
circumstances. In order for the hypothetical redemption to be “not
essentially equivalent to a dividend,” the hypothetical redemption must result
in a “meaningful reduction” in the holder’s percentage stock ownership of the
merged company’s common stock. The Internal Revenue Service has ruled
that a minority shareholder in a publicly traded corporation whose relative
stock interest is minimal and who exercises no control with respect to corporate
affairs is considered to have a “meaningful reduction” generally if such
shareholder has some reduction in such shareholder’s percentage stock
ownership. Holders should consult their tax advisors as to the
applicability of the ruling to their own individual circumstances.
The
hypothetical redemption will result in a “complete termination” of the holder’s
interest in Summit common stock if all of the shares actually owned by the
holder are exchanged pursuant to the merger and the holder is eligible to waive,
and effectively waives, the attribution of shares constructively owned by the
holder in accordance with the procedures described in Section 302(c)(2) of the
Internal Revenue Code. Only family attribution, as referred to below,
may be waived under Section 302(c)(2) of the Internal Revenue
Code.
Taxation of Capital
Gain. Any capital gain recognized by any holder of Greater
Atlantic common stock under the above discussion will be long-term capital gain
if the holder has held the Greater Atlantic
common stock for more than twelve months at the time of the
exchange. In the case of a non-corporate holder, that long-term
capital gain may be subject to a maximum federal income tax of
15%. The deductibility of capital losses by shareholders may be
limited.
Basis in Summit Common Stock. Each
holder’s aggregate tax basis in Summit common stock received in the merger will
be the same as the holder’s aggregate tax basis in the Greater Atlantic common
stock exchanged, decreased by the amount of any cash received in the merger and
by the amount of any tax basis allocable to any fractional share interest for
which cash is received and increased by any gain recognized in the
exchange. The holding period of Summit common stock received by a
holder in the merger will include the holding period of the Greater Atlantic
common stock exchanged in the merger to the extent the Greater Atlantic common
stock exchanged is held as a capital asset at the time of the
merger.
Constructive
Ownership. In applying the constructive ownership provisions
of Section 318 of the Internal Revenue Code, a holder of Greater Atlantic common
stock may be deemed to own stock that is owned directly or indirectly by other
persons, such as certain family members and entities such as trusts,
corporations, partnerships or other entities in which the holder has an
interest. Since the constructive ownership provisions are complex,
holders should consult their tax advisors as to the applicability of these
provisions.
Backup Withholding and Reporting
Requirements
Holders
of Greater Atlantic common stock, other than certain exempt recipients, may be
subject to backup withholding at a rate of 28% with respect to any cash payment
received in the merger. However, backup withholding will not apply to
any holder who either (a) furnishes a correct taxpayer identification
number and certifies that he or she is not subject to backup withholding by
completing the substitute Form W-9 that will be included as part of the election
form and the transmittal letter, or (b) otherwise proves to Summit and its
exchange agent that the holder is exempt from backup withholding.
Shareholders
will also be required to file certain information with their federal income tax
returns and to retain certain records with regard to the merger.
The discussion of U.S. federal income
tax consequences set forth above is for general information only and does not
purport to be a complete analysis or listing of all potential tax effects that
may apply to a holder of Greater Atlantic common stock. We strongly
encourage shareholders of Greater Atlantic to consult their tax advisors to
determine the particular tax consequences to them of the merger, including the
application and effect of federal, state, local, foreign and other tax
laws.
INFORMATION ABOUT
SUMMIT FINANCIAL GROUP, INC.
AND
GREATER ATLANTIC FINANCIAL
CORP.
Summit Financial Group,
Inc.
Summit is
a West Virginia corporation registered as a bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended. Summit was incorporated
on March 3, 1987, organized on March 5, 1987, and began conducting business on
March 5, 1987. At December 31, 2006, Summit has one banking
subsidiary “doing business” under the name of Summit Community
Bank. Summit Community Bank offers a full range of commercial and
retail banking services and products.
As a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, Summit’s present business is community banking. As
of September 30, 2007 , Summit’s consolidated assets
approximated $1.3 billion and total shareholders’ equity approximated
$93.5 million. At June 30, 2007, Summit’s loan portfolio, net
of unearned income, was $949 million and its deposits were $850 million.
The principal executive offices of
Summit are located in Moorefield, West Virginia at 300 North Main
Street. The telephone number for Summit’s principal executive offices
is (304) 530-1000. Summit operates 15 full service offices - 9
located throughout West Virginia and 6 throughout Northern Virginia and the
Shenandoah Valley.
Greater Atlantic Financial
Corp.
Greater
Atlantic is a savings and loan holding company organized under the laws of the
State of Delaware and is registered under the federal Home Owners’ Loan
Act. It has one subsidiary – Greater Atlantic Bank, which has four
offices in Virginia and an office in Maryland through which all of its business
is conducted.
Greater
Atlantic is engaged in the business of offering banking services to the general
public. Through its subsidiary, Greater Atlantic offers checking
accounts, savings and time deposits, and commercial, real estate, personal, home
improvement, automobile and other installment and term loans. It also
offers financial services, travelers’ checks, safe deposit boxes, collection,
notary public and other customary bank services (with the exception of trust
services) to its customers. The principal types of loans that the
banks make are commercial loans, commercial and residential real estate loans
and loans to individuals for household, family and other consumer
expenditures.
As
of September 30, 2007, Greater Atlantic reported, on a
consolidated basis, total assets of approximately $246 million, net loans of
$176.1 million, deposits of $198 million and shareholders’ equity of $9.6
million.
The
principal executive offices of Greater Atlantic Financial Corp. are located at
10700 Parkridge Boulevard, Reston, Virginia 20191, telephone number
(703) 391-1300.
DESCRIPTION OF
SUMMIT FINANCIAL GROUP COMMON
STOCK
General
The
authorized capital stock of Summit consists of 20 million shares of common
stock, par value $2.50 per share. Summit has 7,402,666
shares of common stock issued (including no shares held as treasury shares) as
of September 30, 2007. The outstanding shares are held by
1,309 shareholders of record, as well as 1,056 shareholders in street
name as of September 30, 2007 . All outstanding shares of
Summit common stock are fully paid and nonassessable. The
unissued portion of Summit’s authorized common stock (subject to registration
approval by the SEC) and the treasury shares are available for issuance as the
board of directors of Summit determines advisable.
Summit
has also established a stock option plan as incentive for certain eligible
officers. It has 349,080 stock options issued and outstanding as
of September 30, 2007 .
Common Stock
Voting
Rights. Summit has only one class of stock and all voting
rights are vested in the holders of Summit stock. On all matters
subject to a vote of shareholders, the shareholders of Summit will be entitled
to one vote for each share of common stock owned. Shareholders of
Summit have cumulative voting rights with regard to election of
directors.
Dividend
Rights. The shareholders of Summit are entitled to receive
dividends when and as declared by its board of directors. Dividends
have been paid semi-annually. Summit paid a dividend of $0.17 per
share in the first half of 2007. Dividends were $0.32 per
share in 2006, $0.30 per share in 2005 and $0.26 per share in
2004. The payment of dividends is subject to the restrictions set
forth in the West Virginia Corporation Act and the limitations imposed by the
Federal Reserve Board.
Payment
of dividends by Summit is dependent upon receipt of dividends from its banking
subsidiary. Payment of dividends by Summit’s banking subsidiary is regulated by
the Federal Reserve System and generally, the prior approval of the Federal
Reserve Board is required if the total dividends declared by a state non-member
bank in any calendar year exceeds its net profits, as defined, for that year
combined with its retained net profits for the preceding two
years. Additionally, prior approval of the Federal Reserve is
required when a state non-member bank has deficit retained earnings but has
sufficient current year’s net income, as defined, plus the retained net profits
of the two preceding years. The Federal Reserve may prohibit dividends if it
deems the payment to be an unsafe or unsound banking practice. The
Federal Reserve has issued guidelines for dividend payments by state non-member
banks emphasizing that proper dividend size depends on the bank’s earnings and
capital.
Liquidation
Rights. Upon any liquidation, dissolution or winding up of its
affairs, the holders of Summit common stock are entitled to receive pro rata all
of the assets of Summit for distribution to shareholders. There are
no redemption or sinking fund provisions applicable to the common
stock.
Assessment and
Redemption. Shares of Summit common stock presently
outstanding are validly issued, fully paid and nonassessable. There
is no provision for any voluntary redemption of Summit common
stock.
Transfer Agent and
Registrar. The transfer agent and registrar for Summit’s
common stock is Registrar and Transfer Company.
Preemptive Rights
No holder of any share of the capital stock of Summit has any preemptive right
to subscribe to an additional issue of its capital stock or to any security
convertible into such stock.
Certain Provisions of the
Bylaws
Indemnification and Limitations on
Liability of Officers and Directors
As
permitted by the West Virginia Business Corporation Act, the articles of
incorporation of Summit contain provisions that indemnify its directors and
officers to the fullest extent permitted by West Virginia law. These
provisions do not limit or eliminate the rights of Summit or any shareholder to
seek an injunction or any other non-monetary relief in
the event of a breach of a director’s or officer’s fiduciary duty. In
addition, these provisions apply only to claims against a director or officer
arising out of his role as a director or officer and do not relieve a director
or officer from liability if he engaged in willful misconduct or a knowing
violation of the criminal law or any federal or state securities
law.
In
addition, the articles of incorporation of Summit provide for the
indemnification of both directors and officers for expenses that they incur in
connection with the defense or settlement of claims asserted against them in
their capacities as directors and officers. This right of
indemnification extends to judgments or penalties assessed against
them. Summit has limited its exposure to liability for
indemnification of directors and officers by purchasing directors and officers
liability insurance coverage.
The
rights of indemnification provided in the articles of incorporation of Summit
are not exclusive of any other rights that may be available under any insurance
or other agreement, by vote of shareholders or disinterested directors or
otherwise.
Shares Eligible for Future
Sale
All of
the shares that will be exchanged for shares of Summit common stock upon
consummation of the merger will be freely tradable without restriction or
registration under the Securities Act, except for shares owned by “affiliates”
as described under “– Resales of Summit Common Stock” on page
66 .
Summit
cannot predict the effect, if any, that future sales of shares of its common
stock, or the availability of shares for future sales, will have on the market
price prevailing from time to time. Sales of substantial amounts of
shares of our common stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the shares.
COMPARATIVE RIGHTS OF
SHAREHOLDERS
The
rights of Summit’s shareholders are governed by the West Virginia Business
Corporation Act and the rights of Greater Atlantic’s shareholders are governed
by the Delaware General Corporation Law. The rights of shareholders
under both corporations are also governed by their respective
articles/certificate of incorporation and bylaws. Following the
merger, the rights of Greater Atlantic’s shareholders that receive Summit common
stock will be governed by the articles of incorporation and bylaws of
Summit. This summary does not purport to be a complete discussion of,
and is qualified in its entirety by reference to, Greater Atlantic’s articles of
incorporation and bylaws, Summit’s articles of incorporation and bylaws and West
Virginia and Delaware law.
Authorized Capital
Stock
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
20,000,000 shares
of common stock, $2.50 par value per share, and 250,000 shares of
preferred stock, $1.00 par value per share.
|
10,000,000
shares of common stock, $0.01 par value per share, and 2,500,000 shares of
preferred stock, no par value per
share.
|
Size of Board of
Directors
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
bylaws provide that the board of directors shall consist of at least 9 and
no more than 21 directors. Summit’s board of directors
currently consists of 16 individuals, and immediately following the merger
will consist of 16 individuals.
|
The
bylaws of Greater Atlantic provide that the number of directors shall be
such number as the majority of the whole board shall from time to time
have designated, and in the absence of such designation, shall be
5. The board currently consists of 5 directors.
|
Cumulative Voting for
Directors
Cumulative
voting entitles each shareholder to cast an aggregate number of votes equal to
the number of voting shares held, multiplied by the number of directors to be
elected. Each shareholder may cast all of his or her votes for one
nominee or distribute them among two or more nominees, thus permitting holders
of less than a majority of the outstanding shares of voting stock to achieve
board representation. Where cumulative voting is not permitted,
holders of all outstanding shares of voting stock of a corporation elect the
entire board of directors of the corporation, thereby precluding the election of
any directors by the holders of less than a majority of the outstanding shares
of voting stock.
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit
stockholders are allowed to cumulate their votes in the election of
directors. Each share of Summit stock may be voted for as many
individuals as there are directors to be elected. Directors are
elected by a plurality of the votes cast by the holders entitled to vote
at the meeting.
|
Greater
Atlantic stockholders may not cumulate their votes for the election of
directors. Directors are elected by a plurality of the votes
cast by the holders entitled to vote at the
meeting.
|
Classes of
Directors
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
Articles provide that the board of directors shall be divided into three
(3) classes, consisting of an equal number of directors per
class. The term of office of directors of one class shall
expire at each annual meeting of shareholders.
|
The
bylaws of Greater Atlantic provide that the board of directors shall be
divided into three classes, with one class elected at each annual
meeting.
|
Qualifications of
Directors
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
bylaws require that a person own a minimum of 2,000 shares of stock of
Summit to be qualified as a director.
|
None.
|
Filling Vacancies on the
Board
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
bylaws provide that each vacancy existing on the board of directors and
any directorship to be filled by reason of an increase in the number of
directors, unless the articles of incorporation or bylaws provide that a
vacancy shall be filled in some other manner, may be filled by the
affirmative vote of a majority of the remaining directors though less than
a quorum of the board of directors at a regular or special
meeting of the board of directors. Any directorship to be filled by reason
of a vacancy may be filled for the
unexpired term of his predecessor in office.
|
Greater
Atlantic’s bylaws provide that, unless the board of directors otherwise
determines, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, retirement, disqualify-cation, removal
from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have
been elected expires and until such director's successor shall have been
duly elected and qualified.
|
Removal of
Directors
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Under
West Virginia law any member of the board may be removed, with or without
cause, by the affirmative vote of a majority of all the votes entitled to
be cast for the election of directors; provided, however, that a director
may not be removed if the number of votes sufficient to elect the director
under cumulative voting is voted against the director’s
removal.
|
Under
Delaware law, subject to the rights of preferred stockholders, any
director, or the entire board of directors, may be removed from office at
any time, but only for cause and only by the affirmative vote of at least
80% of the voting power of the then-outstanding shares of capital stock
entitled to vote generally in the election of directors voting together as
a single class.
|
Notice of Shareholder Proposals and
Director Nominations
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
Articles provide that shareholders may make a nomination for director
provided that such nomination or nominations must be made in writing and
delivered or mailed to, the President of Summit no later
than 30 days prior to any meeting of shareholders
called for the election of directors; provided, however, that if less than
thirty (30) days notice of the meeting is given to shareholders, such
nomination or nominations shall be mailed or delivered to the
President of Summit no later than the fifth (5th) day following the day on
which the notice of meeting was mailed.
|
For
business to be properly brought before an annual meeting by a stockholder,
the business must relate to a proper subject matter for stockholder action
and the stockholder must have given timely notice thereof in writing to
the Secretary of Greater Atlantic. To be timely, a
stockholder's notice must be delivered or mailed to and received at the
principal executive offices of Greater Atlantic not less than ninety (90)
days prior to the date of the annual meeting; provided, however, that
in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than the
close of business on the 10th day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure was
made. A stockholder's notice to the Secretary shall set forth
as to each matter such stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address, as they appear
on Greater Atlantic’s books, of the stockholder proposing such business;
(iii) the class and number of shares of Greater Atlantic's capital stock
that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business.
Nominations
of persons for election to the board of directors may be made by any
stockholder entitled to vote for the election of directors at the meeting
if made by timely notice in writing to the Secretary of Greater
Atlantic. To be timely, a stockholder's notice shall be
delivered or mailed to and received at the principal executive offices of
Greater Atlantic not less than ninety (90) days prior to the date of the
meeting; provided,
however, that in the event that less than one hundred (100) days'
notice or prior disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 10th day following the day on
which such notice of the date of the
|
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
meeting was
mailed or such public disclosure was made. Such stockholder's
notice
shall set forth: (i) as to each person
whom such stockholder proposes to nominate for
election or re-election as a director, all
information relating to such person that is
required to
be disclosed in solicitations of proxies for election
of directors, or is
otherwise required,
in each case pursuant to Regulation 14A under the
Securities
Exchange Act
of 1934, as amended (including such person's written
consent to being
named in the
proxy statement as a nominee and to serving as a
director if elected); and
(ii) as
to the stockholder giving the notice (x) the name and
address, as they appear on
Greater
Atlantic's books, of such stockholder and (y) the
class and number of shares of
Greater
Atlantic's capital stock that are beneficially owned
by such stockholder.
|
|
|
|
Anti-Takeover Provisions - Business
Combinations
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s Articles
of Incorporation provide that at least 66 2/3% of the authorized, issued
and outstanding voting shares of Summit must approve certain “business
combinations” unless the “business combination” has been previously
approved by at least 66 2/3% of the board of directors of Summit, in which
case only a simple majority vote of the shareholders shall be
required.
Summit’s
Articles of Incorporation additionally provide that neither Summit nor any
of its subsidiaries shall become a party to any “business combination”
unless certain fair price requirements are satisfied. West
Virginia corporate law does not contain statutory provisions concerning
restrictions on business combinations.
|
Greater
Atlantic’s certificate of incorporation provides that at least 80% of the
voting power of the then outstanding shares of voting stock must approve
certain “business combinations” involving an “interested stockholder.”
However, this vote requirement is not applicable to any particular
business combination, and such business combination shall require only the
vote of a majority of the outstanding shares of capital stock entitled to
vote, if a majority of directors not affiliated with the interested
stockholder approves the business combination, or certain price and
procedure requirements are met. An “interested stockholder” generally
means a person who is a greater than 10% stockholder of Greater Atlantic
or who is an affiliate of Greater Atlantic and at any time within the past
two years was a greater than 10% stockholder of Greater
Atlantic.
|
Shareholder Action Without a
Meeting
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
bylaws provide that any action required to be taken at a meeting of the
shareholders may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote on the matter at issue.
|
Under
Delaware law, unless limited by the certificate of incorporation, any
action that could be taken by shareholders at a meeting may be taken
without a meeting if a consent (or consents) in writing, setting forth the
action so taken, is signed by the holders of record of outstanding stock
having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled
to vote thereon were present and voted. Greater Atlantic’s certificate of
incorporation does not contain a provision limiting such
action.
|
Calling Special Meetings of
Shareholders
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Special
meetings of the shareholders may be called by the president or by the
board of directors, and shall be called by the President if the holders of
at least 10% of all the votes entitled to be cast on an issue to be
considered at the proposed special meeting sign, date and deliver to
Summit one or more written demands for the meeting describing the purpose
or purposes for which it shall be held.
|
Special
meetings of stockholders may be called only by the board of directors
pursuant to a resolution adopted by a majority of the total number of
directors which Greater Atlantic would have if there were no vacancies on
the board of directors.
|
Notice of
Meetings
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
bylaws require that the notice of annual and special meetings be given by
mailing to each shareholder a written notice specifying the time and place
of such meeting, and, in the case of special meetings, the business to be
transacted. The notice must be mailed to the last addresses of
the shareholders as they respectively appear upon the books of the Summit
not less than 10 nor more than 60 days before the date of such
meeting.
|
Greater
Atlantic’s bylaws provide that written notice of the place, date, and time
of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to
be held, to each stockholder entitled to vote at such meeting, except as
otherwise required by law (meaning, as required from time to time by the
Delaware General Corporation Law or the certificate of
incorporation).
|
Vote Required for Amendments to
Articles
of Incorporation and Certain
Transactions
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Summit’s
articles of incorporation require the affirmative vote of holders of at
least 66 2/3% of the then outstanding voting shares of Summit;
provided, however, such vote shall not be required for any such amendment,
change or repeal recommended to the stockholders by the favorable vote of
not less than 66 2/3% of the directors of Summit, and any such
amendment shall require only a majority vote.
West
Virginia law provides that on matters other than the election of directors
and certain extraordinary corporate actions, if a quorum is present, then
action on a matter is approved if the votes cast favoring the action
exceed the votes cast opposing the action, unless the vote of a greater
number is required by law or the articles of incorporation or
bylaws. The articles of incorporation or bylaws of Summit do
not require a greater number. An abstention is not considered a
“vote cast” for purposes of the voting requirements, but a stockholder who
abstains in person or by proxy is considered present for purposes of the
quorum requirement.
The
articles of incorporation of Summit provide that at least 66 2/3% of the
authorized, issued and outstanding voting shares of Summit must approve
any merger or consolidation of Summit with another corporation or any
sale, lease or exchange by liquidation or otherwise of all or
substantially all of the assets of Summit unless such transaction has been
previously approved by at least 66 2/3% of the board of directors in which
case a simple majority vote of the shareholders shall be
required.
|
Greater
Atlantic’s certificate of incorporation reserves the right to amend or
repeal any provision in the certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware; provided, however, that,
notwithstanding any other provision of the certificate of incorporation or
any provision of law which might otherwise permit a lesser vote or no
vote, the affirmative vote of the holders of at least 80% of the voting
power of all of the then-outstanding shares of the capital stock of the
corporation entitled to vote generally in the election of directors,
voting together as a single class, are required to amend or repeal certain
articles.
Delaware
law provides that any amendment to the certificate of incorporation must
first be proposed by the board of directors in a resolution setting forth
the proposed amendment, declaring its advisability and submitting it to
the stockholders entitled to vote on approval of the
amendment. It must then be submitted to the stockholders at the
next annual meeting, or at a special meeting called for the purpose of
considering the amendment or submitted for adoption by written consent.
The affirmative vote required is a majority of the outstanding shares
entitled to vote thereon.
|
Amendment of
Bylaws
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Under
West Virginia law both the board of directors and stockholders
have the power to amend the bylaws. Summit’s bylaws provide
that the bylaws may only be altered, amended or repealed and new bylaws
may only be adopted by the board of directors at a regular or special
meeting of the board of directors by a vote of three
|
The
bylaws of Greater Atlantic provide that the board of directors may amend,
alter or repeal the bylaws at any meeting of the board, provided notice of
the proposed change was given not less than two (2) days prior to the
meeting. The stockholders shall also have power to amend, alter
or repeal the bylaws at any meeting of
|
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
fourths
of the board of directors or by a majority of the
stockholders.
|
stockholders
provided notice of the proposed change was given in the notice of the
meeting, and provided there is the vote of at least 80% of the voting
power of all the then-outstanding shares of the voting stock, voting
together as a single class.
|
Appraisal Rights
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
Under
West Virginia law, stockholders are generally entitled to object and
receive payment of the fair value of their stock in the event of any of
the following corporate actions: merger, transfer of all or
substantially all of the corporation’s assets, participation in a share
exchange as the corporation the stock of which is to be acquired, or an
amendment to the articles of incorporation that reduces the number of
shares of a class or series owned by stockholders to a fraction of a share
if the corporation has the obligation or right to repurchase the
fractional shares.
|
Delaware
law provides that stockholders of a corporation who are voting on a merger
or consolidation generally are entitled to dissent from the transaction
and obtain payment of the fair value of their shares (so-called “appraisal
rights”). Appraisal rights do not apply if, however, (1) the shares
are listed on a national securities exchange or are held by 2,000 or more
holders of record (not currently the case with respect to Greater
Atlantic’s common stock) and (2) except for cash in lieu of
fractional share interests, the shares are being exchanged for the shares
of the surviving corporation of the merger or the shares of any other
corporation, which shares of such other corporation will, as of the
effective date of the merger or consolidation, be listed on a national
securities exchange or be held of record by more than 2,000 holders.
Appraisal rights also are not available to a corporation’s stockholders
when the corporation will be the surviving corporation and a vote of its
stockholders is not required to approve the merger.
Delaware
law also provides that any corporation may provide in its certificate of
incorporation that appraisal rights shall be available in connection with
amendments to its certificate of incorporation, any merger to which the
corporation is a party or the sale of all or substantially all of the
corporation’s assets .Greater Atlantic’s certificate of incorporation
contains no such provision.
|
Dividends
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
A
West Virginia corporation generally may pay dividends in cash, property or
its own shares except when the corporation is unable to pay its debts as
they become due in the usual course of business or the corporation’s total
assets would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to be dissolved at the time
of the dividend, to satisfy any stockholders who have rights superior to
those receiving the dividend. Summit’s Articles of
Incorporation provide that preferred stock will not pay any
dividends.
|
Under
Delaware law, stockholders are entitled, when declared by the board of
directors, to receive dividends, subject to any restrictions contained in
the certificate of incorporation and subject to any rights or preferences
of any series of preferred stock. There are no express restrictions
regarding dividends in Greater Atlantic’s certificate of
incorporation.
|
Discharge of Duties; Exculpation and
Indemnification
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
West
Virginia law requires that a director of a West Virginia corporation
discharge duties as a director in good faith, in a manner reasonably
believed to be in the best interest of the corporation and with the care
that a person in a like position would reasonably believe
appropriate under similar circumstances. Summit’s articles of
incorporation provide that each director or officer of Summit shall be
indemnified for costs and expenses arising out of any civil suit or
proceeding against the director or officer by reason of being a director
or officer of Summit provided the director or officer acted in good faith
and in a manner which the director or officer reasonably believed to be in
or not opposed to the best interests of the corporation.
With
respect to any criminal proceeding, a director or officer shall be
entitled to indemnification if such person had no reasonable cause to
believe his or her conduct was unlawful.
However,
a director or officer shall not be indemnified if he or she is adjudged in
such suit or proceeding to be liable for gross negligence or willful
misconduct in performance of a duty owed to the
corporation.
|
The
Delaware General Corporation Law requires directors to discharge their
duties as a director in good faith, on an informed basis, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances, and in a manner reasonably believed to be in the best
interests of the corporation.
Delaware
law provides that a corporation may indemnify any director made party to
any proceeding by reason of service in that capacity if the person acted
in good faith and in a manner the person reasonably believed to be in the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Delaware
law also provides that a corporation may not indemnify a director in
respect to any claim, issue or matter as to which the director has been
adjudged to be liable to the corporation unless and only to the extent
that, the Court of Chancery or court where such action was brought
determines indemnity is proper. Furthermore, directors shall be
indemnified where they have been successful on the merits or
otherwise.
Greater
Atlantic’s certificate of incorporation provides that the corporation
shall indemnify
|
|
Summit Financial Group,
Inc.
|
Greater Atlantic Financial
Corp.
|
|
|
any
director made party to a proceeding because he or she is or was serving as
director against all expense, liability and loss to the fullest extent
authorized by Delaware law.
Greater
Atlantic’s certificate of incorporation also provides that a director
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director’s duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law; (iii) for unlawful payment of dividends or unlawful stock purchases
or redemption; or (iv) for any transaction from which the director derived
an improper personal benefit.
|
ADJOURNMENT OF THE
MEETING
In the
event that there are not sufficient votes to constitute a quorum or to approve
the matters to be considered at the time of the special meeting, the merger
agreement will not be approved unless the special meeting is adjourned to a
later date or dates in order to permit further solicitation of
proxies. In order to allow proxies that have been received at the
time of the meeting to be voted for an adjournment, if necessary, Greater
Atlantic is submitting the question of adjournment to its shareholders as a
separate matter for their consideration. The board of directors of
Greater Atlantic recommends that its shareholders vote FOR the adjournment
proposal. If it is necessary to adjourn a meeting, no notice of such
adjourned meeting is required to be given to the company’s shareholders, other
than an announcement at the special meeting of the place, date and time to which
the meeting is adjourned, if the meeting is adjourned for 30 days or
less.
The board of directors of Greater
Atlantic recommends that you vote “FOR” approval of this
proposal.
LEGAL MATTERS
Hunton
& Williams will opine as to the qualification of the merger as a
reorganization and the tax treatment of the consideration paid in connection
with the merger under the Internal Revenue Code. Bowles Rice McDavid
Graff & Love LLP will opine as to the legality of the common stock of Summit
offered by this proxy statement/prospectus. Bowles Rice McDavid Graff
& Love LLP rendered legal services to Summit and its subsidiaries during
2006 and it is expected that the firm will continue to render certain services
to both in the future. The fees paid to Bowles Rice McDavid Graff & Love LLP
represented less than 5% of Bowles Rice McDavid Graff & Love LLP’s and
Summit’s revenues for 2006.
EXPERTS
The
consolidated financial statements of Summit appearing in Summit’s Annual Report
(Form 10-K) for the year ended December 31, 2006, as amended on September
26, 2007 on Form 10-K/A, and Summit management’s assessment of effectiveness of
internal control over financial reporting as of December 31, 2006, included
therein, have been audited by Arnett & Foster P.L.L.C., independent
registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference. Such
consolidated financial statements and management’s assessment are incorporated
herein by reference in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
The
consolidated financial statements of Greater Atlantic and subsidiaries as of
September 30, 2007 and 2006 and for each of the three years in the
period ended September 30, 2007 , attached to this proxy statement/prospectus
and the registration statement on Form S-4, as amended , as Annex D, have been
attached hereto and to the registration statement in reliance upon the report of
BDO Seidman, LLP, independent registered public accountants, and upon the
authority of BDO Seidman, LLP as experts in accounting and auditing.
WHERE YOU CAN FIND MORE
INFORMATION
Summit
has filed with the SEC under the Securities Act the registration statement on
Form S-4 to register the shares of Summit common stock to be issued to Greater
Atlantic’s shareholders in connection with the merger. The
registration statement, including the exhibits and schedules thereto, contains
additional relevant information about Summit and its common
stock. The rules and regulations of the SEC allow Summit and Greater
Atlantic to omit certain information included in the registration statement from
this proxy statement/prospectus. This proxy statement/prospectus is
part of the registration
statement
and is a prospectus of Summit in addition to being Greater Atlantic’s proxy
statement for its special meeting.
Both
Summit (File No. 0-16587) and Greater Atlantic (File No. 0-26467) file
reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934. You may read and copy this
information at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet web site that
contains reports, proxy statements and other information about issuers, like
Summit and Greater Atlantic, who file electronically with the
SEC. The address of that site is www.sec.gov. Each of
Summit and Greater Atlantic also posts its SEC filings on its web
site. The website addresses are www.summitfgi.com
and www.gab.com,
respectively. Information contained on the Summit website or the
Greater Atlantic website is not incorporated by reference into this proxy
statement/prospectus, and you should not consider information contained in its
website as part of this proxy statement/prospectus. You can also
inspect reports, proxy statements and other information that Summit and Greater
Atlantic have filed with the SEC at the National Association of Securities
Dealers, Inc., 1735 K Street, Washington, D.C. 20096.
The SEC
allows Summit to “incorporate by reference” information into this proxy
statement/prospectus. This means that we can disclose important
information to you by referring you to another document filed separately by
Summit with the SEC. The information incorporated by reference is
considered to be a part of this proxy statement/prospectus, except for any
information that is superceded by information that is included in this proxy
statement/prospectus.
This
proxy statement/prospectus incorporates by reference the documents listed below
that Summit previously filed with the SEC:
|
|
●
|
Quarterly
Report on Form 10-Q
|
Quarter
ended March 31, 2007, as amended September 26, 2007, Quarter ended
June 30, 2007, as amended on September 26, 2007, and Quarter ended
September 30, 2007 .
|
|
|
●
|
Annual
Report on Form 10-K
|
Year
ended December 31, 2006, as amended on September 26,
2007.
|
|
|
●
|
Definitive
Proxy Materials for
the 2007 Annual Meeting of
Shareholders
|
Filed
on April 11, 2007.
|
|
|
●
|
Current
Reports on Form 8-K
|
Filed
on January 26, 2007, April 13, 2007, April 20, 2007, April 30, 2007,
July 20, 2007, July 27, 2007, August 22, 2007, October 19, 2007,
October 30, 2007, November 23, 2007, December 10, 2007, December 20, 2007,
and February 5, 2008 .
|
Greater
Atlantic previously filed with the SEC the document listed below which is
attached to this proxy statement/prospectus for your reference:
|
|
●
|
Annual
Report on Form 10-K
|
Year ended September 30, 2007.
|
Neither
Summit nor Greater Atlantic has authorized anyone to give any information or
make any representation about the merger or the companies that is different
from, or in addition to, that contained in this proxy statement/prospectus or in
any of the materials that we have incorporated into this proxy
statement/prospectus. Therefore, if anyone does give you information
of this sort, you should not rely on
it. Information
in this proxy statement/prospectus about Summit has been supplied by Summit and
information about Greater Atlantic has been supplied by Greater
Atlantic. The information contained in this proxy
statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another
date applies.
OTHER MATTERS
The board
of directors knows of no other matters that may come before this
meeting. If any matters other than those referred to should properly
come before the meeting, it is the intention of the persons named in the
enclosed proxy to vote such proxy in accordance with their best
judgment.
By Order of the Board
of Directors
Edward C. Allen,
Secretary
ANNEX A
AGREEMENT AND PLAN OF
REORGANIZATION
dated as
of April 12, 2007
by and
between
SUMMIT FINANCIAL GROUP,
INC.
AND
GREATER ATLANTIC FINANCIAL
CORP.
Page
|
ARTICLE
I Certain
Definitions
|
1
|
|
1.01
|
Certain
Definitions
|
1
|
|
ARTICLE
II The
Merger
|
7
|
|
2.01
|
The
Merger
|
7
|
|
2.02
|
Effective
Date and Effective Time
|
7
|
|
ARTICLE
III The
Bank Merger
|
8
|
|
3.01
|
The
Bank Merger
|
8
|
|
3.02
|
Effective
Date and Effective Time
|
8
|
|
ARTICLE
IV Consideration;
Exchange Procedures
|
9
|
|
4.01
|
Merger
Consideration
|
9
|
|
4.02
|
Rights
as Stockholders; Stock Transfers
|
10
|
|
4.03
|
Fractional
Shares
|
10
|
|
4.04
|
Exchange
Procedures
|
10
|
|
4.05
|
Options
|
12
|
|
4.06
|
Warrants
|
12
|
|
4.07
|
Dissenters’
Rights
|
12
|
|
ARTICLE
V Actions
Pending the Effective Time
|
13
|
|
5.01
|
Forebearances
of GAFC
|
13
|
|
5.02
|
Forebearances
of Summit
|
15
|
|
ARTICLE
VI Representations
and Warranties
|
15
|
|
6.01
|
Disclosure
Schedules
|
15
|
|
6.02
|
Standard
|
16
|
|
6.03
|
Representations
and Warranties of GAFC
|
16
|
|
6.04
|
Representations
and Warranties of Summit
|
25
|
|
ARTICLE
VII Covenants
|
33
|
|
7.01
|
Reasonable
Best Efforts
|
33
|
|
7.02
|
Stockholder
Approval
|
33
|
|
7.03
|
Registration
Statement
|
33
|
|
7.04
|
Press
Releases
|
34
|
|
7.05
|
Access;
Information
|
34
|
|
7.06
|
Acquisition
Proposals
|
35
|
|
7.07
|
Affiliate
Agreements
|
35
|
|
7.08
|
Takeover
Laws
|
36
|
|
7.09
|
Certain
Policies
|
36
|
|
7.10
|
Regulatory
Applications
|
36
|
|
7.11
|
Indemnification
|
37
|
|
7.12
|
Benefit
Plans
|
37
|
|
7.13
|
Notification
of Certain Matters
|
38
|
|
7.14
|
Current
Public Information
|
38
|
|
7.15
|
Contractual
Rights of Current Employees |
38 |
|
7.16 |
GAFC
Trust Preferred
Securities |
38 |
|
7.17 |
Transition |
39 |
|
ARTICLE
VIII Conditions
to Consummation of the Merger
|
39
|
|
8.01
|
Conditions
to Each Party’s Obligation to Effect the Merger
|
39
|
|
8.02
|
Conditions
to Obligation of GAFC
|
40
|
|
8.03
|
Conditions
to Obligation of Summit
|
40
|
|
ARTICLE
IX Termination
|
41
|
|
9.01
|
Termination
|
41
|
|
9.02
|
Effect
of Termination and Abandonment
|
42
|
|
9.03
|
Fees
and Expenses
|
42
|
|
ARTICLE
X Miscellaneous
|
43
|
|
10.01
|
Survival
|
43
|
|
10.02
|
Waiver;
Amendment
|
43
|
|
10.03
|
Counterparts
|
43
|
|
10.04
|
Governing
Law
|
43
|
|
10.05
|
Expenses
|
43
|
|
10.06
|
Notices
|
43
|
|
10.07
|
Entire
Understanding; No Third Party Beneficiaries
|
44
|
|
10.08
|
Interpretation;
Effect
|
44
|
|
ANNEX
A.
|
FORM
OF SUPPLEMENT FOR MERGER SUB
ACCESSION
|
|
EXHIBIT
A.
|
FORM
OF GAFC AFFILIATE LETTER
|
AGREEMENT AND PLAN OF
REORGANIZATION, dated as of April 12, 2007 (this “Agreement”), by and
between GREATER ATLANTIC FINANCIAL CORP. (“GAFC”) and SUMMIT FINANCIAL GROUP,
INC. (“Summit”).
RECITALS
A. GAFC. GAFC
is a Delaware corporation, having its principal place of business in Reston,
Virginia.
B. Summit. Summit
is a West Virginia corporation, having its principal place of business in
Charleston, West Virginia.
C. Intentions of the
Parties. It is the intention of the parties to this Agreement
that the business combination contemplated hereby be treated as a
“reorganization” under Section 368 of the Internal Revenue Code of 1986, as
amended.
D. Board
Action. The respective Boards of Directors of each of Summit
and GAFC have determined that it is advisable and in the best interests of their
respective companies and their stockholders to consummate the strategic business
combination transaction provided for herein.
NOW, THEREFORE, in
consideration of the premises and of the mutual covenants, representations,
warranties and agreements contained herein the parties agree as
follows:
ARTICLE I
Certain
Definitions
1.01 Certain
Definitions. The following terms are used in this Agreement
with the meanings set forth below:
“Acquisition Proposal” means
any tender or exchange offer, proposal for a merger, consolidation or other
business combination involving GAFC or any of its Subsidiaries or any proposal
or offer to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets or deposits of, GAFC or any of its
Subsidiaries, other than the transactions contemplated by this
Agreement.
“Adjusted Shareholders’ Equity”
has the meaning set forth in Section 4.01(c).
“Adjustment Date” has the
meaning set forth in Section 4.01(c).
“Agreement” means this
Agreement, as amended or modified from time to time in accordance with Section
10.02.
“Average Closing Price” has
the meaning set forth in Section 4.01(a).
“Bank Merger” has the meaning
set forth in Section 3.01(a).
“Bank Merger Effective Date”
has the meaning set forth in Section 3.02.
“Benchmark Equity” has the
meaning set forth in Section 4.01(c).
“Cash Consideration” has the
meaning set forth in Section 4.01(a)
“Code” means the Internal
Revenue Code of 1986, as amended.
“Compensation and Benefit
Plans” has the meaning set forth in Section 6.03(m).
“Consultants” has the meaning
set forth in Section 6.03(m).
“Core Deposits” means all
deposits (as defined in 12 U.S.C. Section 1813(1)) of GAFC shown on the books
and records of GAB, including but not limited to all interest posted thereon
accrued but unpaid interest and both collected and uncollected funds (including
overdrawn accounts), together with GAB’s rights and responsibilities under any
customer agreement evidencing or relating thereto, but excluding (i) deposit
accounts associated with a public body, including but not limited to any
municipal, county, state or federal government, and (ii) brokered
deposits and (iii) wholesale deposits, but including corporate sweep
accounts.
“Costs” has the meaning set
forth in Section 7.11(a).
“Directors” has the meaning
set forth in Section 6.03(m).
“Disclosure Schedule” has the
meaning set forth in Section 6.01.
“Dissenters’ Shares” has the
meaning set forth in Section 4.07.
“DGCL” means the Delaware
General Corporation Law, as amended.
“DOL” means the United States
Department of Labor.
“Effective Date” has the
meaning set forth in Section 2.02(a).
“Effective Time” means the
effective time of the Merger, as provided for in Section 2.02(a).
“Employees” has the meaning
set forth in Section 6.03(m).
“Environmental Laws” means
all applicable local, state and federal environmental, health and safety laws
and regulations, including, without limitation, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation, and
Liability Act, the Clean Water Act, the Federal Clean Air Act, and the
Occupational Safety and Health Act, each as amended, regulations promulgated
thereunder, and state counterparts.
“ERISA” means the Employee
Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate” has the
meaning set forth in Section 6.03(m)(i).
“Exchange Act” means the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder.
“Exchange Agent” has the
meaning set forth in Sections 4.04(a).
“Exchange Fund” has the
meaning set forth in Section 4.04(a).
“Exchange Ratio” has the
meaning set forth in Section 4.01(a).
“GAB” means Greater Atlantic
Bank, a federally-chartered savings bank.
“GAAP” means generally accepted
accounting principles in the United States.
“GAFC” has the meaning set
forth in the preamble to this Agreement.
“GAFC Affiliate” has the
meaning set forth in Section 7.07(a).
“GAFC Board” means the Board
of Directors of GAFC.
“GAFC By-Laws” means the
By-laws of GAFC, as amended.
“GAFC Certificate” means the
Certificate of Incorporation of GAFC, as amended.
“GAFC Common Stock” means the
common stock, par value $0.01 per share, of GAFC.
“GAFC Meeting” has the
meaning set forth in Section 7.02.
“GAFC Stock Option” has the
meaning set forth in Section 4.05.
“GAFC Stock Plans” has the
meaning set forth in Section 4.05.
“GAFC Trust Preferred Securities”
means preferred shares of stock issued by Greater Atlantic Financial
Corporation Capital Trust I, a second tier business trust subsidiary of
GAFC.
“GAFC Warrant” has the meaning
set forth in Section 4.06.
“Governmental Authority”
means any court, administrative agency or commission or other federal,
state or local governmental authority or instrumentality.
“Guarantee” shall mean the
Guarantee executed by GAFC in connection with the issuance of the GAFC Trust
Preferred Securities.
“Indenture” shall mean the
Trust Indenture executed by GAFC in connection with the issuance of the GAFC
Trust Preferred Securities.
“IRS” has the meaning set
forth in Section 6.03(m).
“Indemnified Party” has the
meaning set forth in Section 7.11(a).
“Insurance Amount” has the
meaning set forth in Section 7.11(b).
“Lien” means any charge,
mortgage, pledge, security interest, restriction, claim, lien, or
encumbrance,
“Material Adverse Effect”
means, with respect to Summit or GAFC, any effect that (i) is material and
adverse to the financial position, results of operations or business of Summit
and its Subsidiaries taken as a whole or GAFC and its Subsidiaries taken as a
whole, respectively, or (ii) would materially impair the ability of either
Summit or GAFC to perform its obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the Merger and the
other transactions contemplated by this Agreement; provided, however, that
Material Adverse Effect shall not be deemed to include the impact of (a) changes
in banking and similar laws of general applicability or interpretations thereof
by courts or governmental authorities, except to the extent such changes have a
disproportionate impact on Summit or GAFC, as the case may be, relative to the
overall effects on the banking industry, (b) changes in generally accepted
accounting principles or regulatory accounting requirements applicable to banks
and their holding companies generally, except to the extent changes have a
disproportionate impact on Summit or GAFC, as the case may be, relative to the
overall effect on the banking industry, (c) any modifications or changes to
valuation policies and practices in connection with the Merger or restructuring
charges taken in connection with the Merger, in each case in accordance with
generally accepted accounting principles, (d) actions and omissions of Summit or
GAFC taken with the prior written consent of the other in contemplation of the
transactions contemplated hereby, (e) changes in economic conditions affecting
financial institutions generally, including, without limitation, changes in
market interest rates or the projected future interest rate environment, except
to the extent that such changes have a disproportionate impact on Summit or
GAFC, as the case may be, relative to the overall effect on the banking industry
or (f) direct effects of compliance with this Agreement on the financial
condition and operating performance of the parties, including, without
limitation, expenses incurred by the parties in consummating the transactions
contemplated by this Agreement.
“Merger” has the meaning set
forth in Section 2.01(b).
“Merger Consideration” has
the meaning set forth in Section 4.01(a).
“Merger Sub” means a Delaware
corporation, and/or one or more other corporations or limited liability
companies to be organized under the corporate laws of the State of Delaware by
Summit prior to the Effective Time.
“NASDAQ” means The NASDAQ
Stock Market, Inc.’s Capital Market.
“New Certificate” has the
meaning set forth in Section 4.04(a).
“Old Certificate” has the
meaning set forth in Section 4.04(a).
“Pasadena
Branch” means the branch banking office owned by GAFC and located in
Pasadena, Maryland.
“PBGC” means the Pension
Benefit Guaranty Corporation.
“Pension Plan” has the
meaning set forth in Section 6.03(m).
“Person” means any
individual, bank, corporation, limited liability company, partnership,
association, joint-stock company, business trust or unincorporated
organization.
“Previously Disclosed” by a
party shall mean information set forth in its Disclosure Schedule or in Summit’s
or GAFC’s SEC Documents.
“Proxy Statement” has the
meaning set forth in Section 7.03(a).
“Registration Statement” has
the meaning set forth in Section 7.03(a).
“Regulatory Authorities” has
the meaning set forth in Section 6.03(i).
“Rights” means, with respect
to any Person, securities or obligations convertible into or exercisable or
exchangeable for, or giving any person any right to subscribe for or acquire, or
any options, calls or commitments relating to, or any stock appreciation right
or other instrument the value of which is determined in whole or in part by
reference to the market price or value of, shares of capital stock of such
person.
“SEC” means the Securities
and Exchange Commission.
“Secretary of State” means
the Secretary of State of the State of Delaware.
“Section 9.03(a) Fee” has the
meaning set forth in Section 9.03(a).
“Section 9.03(b) Fee” has the
meaning set forth in Section 9.03(b).
“Securities Act” means the
Securities Act of 1933, as amended, and the rules and regulations
thereunder.
“Shareholders’ Equity” means the total
shareholders equity presented on GAFC’s balance sheet as of a given date as
calculated according to GAAP.
“Stock Consideration” has the
meaning set forth in Section 4.01(a).
“Stock Option Consideration”
has the meaning set forth in Section 4.05.
“Subsidiary” and “Significant Subsidiary” have
the meanings ascribed to them in Rule 1-02 Section 210.1-(2)(w) of Regulation
S-X of the SEC.
“Surviving Corporation” has
the meaning set forth in Section 2.01(b).
“Summit” has the meaning set
forth in the preamble to this Agreement.
“Summit Bank” means Summit
Community Bank, a commercial bank chartered under the laws of the State of West
Virginia.
“Summit Board” means the Board
of Directors of Summit.
“Summit Common Stock” means
the common stock, par value $2.50 per share, of Summit.
“Summit Compensation and Benefit
Plans” has the meaning set forth in Section 6.04(k)(i).
“Summit Consultants” has the
meaning set forth in Section 6.04(k)(i).
“Summit Directors” has the
meaning set forth in Section 6.04(k)(i).
“Summit Employees” has the
meaning set forth in Section 6.04(k)(i).
“Summit ERISA Affiliate” has
the meaning set forth in Section 6.04(k)(iii).
“Summit ERISA Affiliate Plan”
has the meaning set forth in Section 6.04(k)(iii).
“Summit Pension Plan” has the
meaning set forth in Section 6.04(k)(ii).
“Summit’s SEC Documents” has
the meaning set forth in Section 6.04(g).
“Superior Proposal” has the
meaning set forth in Section 9.01(f).
“Takeover Laws” has the
meaning set forth in Section 6.03(o).
“Tax” and “Taxes” means all federal,
state, local or foreign taxes, charges, fees, levies or other assessments,
however denominated, including, without limitation, all net income, gross
income, gains, gross receipts, sales, use, ad valorem, goods and services,
capital, production, transfer, franchise, windfall profits, license,
withholding, payroll, employment, disability, employer health, excise,
estimated, severance, stamp, occupation, property, environmental, unemployment
or other taxes, custom duties, fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority whether arising before, on or
after the Effective Date.
“Tax Returns” means any
return, amended return or other report (including elections, declarations,
disclosures, schedules, estimates and information returns) required to be filed
with respect to any Tax.
“Treasury Stock” shall mean
shares of GAFC Common Stock held by GAFC or any of its Subsidiaries in each case
other than in a fiduciary capacity or as a result of debts previously contracted
in good faith.
ARTICLE II
The Merger
2.01 The
Merger. (a) Prior to the Effective Time,
Summit shall take any and all action necessary (i) duly to organize the Merger
Sub for the purpose of consummating the Merger; (ii) to cause Merger Sub to
become a party to this Agreement, to be evidenced by the execution by the Merger
Sub of a supplement to this Agreement in substantially the form of Annex A and
delivery thereof to GAFC; and (iii) to cause Merger Sub to take all actions
necessary or proper to comply with the obligations of Summit and such Merger Sub
to consummate the transactions contemplated hereby.
(b) At
the Effective Time, GAFC shall merge with and into Merger Sub (the “Merger”), the separate
corporate existence of GAFC shall cease and Merger Sub shall survive and
continue to exist as a Delaware corporation (Merger Sub, as the surviving
corporation in the Merger, sometimes being referred to herein as the “Surviving
Corporation”). Summit may at any time prior to the Effective
Time change the method of effecting the combination with GAFC (including,
without limitation, the provisions of this Article II other than sub-sections
(i), (ii), (iii) and (iv) hereof) if and to the extent it deems such change to
be necessary, appropriate or desirable; provided, however, that no such change
shall (i) cause the approval of the stockholders of Summit to be required as a
condition to the Merger, (ii) alter or change the amount or kind of Merger
Consideration (as hereinafter defined), or the relative proportions of cash and
Summit Common Stock included therein, (iii) adversely affect the tax treatment
of GAFC’s stockholders as a result of receiving the Merger Consideration or (iv)
materially impede or delay consummation of the transactions contemplated by this
Agreement; and provided further, that Summit shall provide GAFC prior written
notice of such change and the reasons therefore. Immediately
following the Merger, Surviving Corporation shall merge with and into Summit,
the separate corporate existence of the Merger Sub shall cease and Summit shall
survive and continue to exist as a West Virginia corporation.
(c) Subject
to the satisfaction or waiver of the conditions set forth in Article VIII, the
Merger shall become effective upon the occurrence of the filing in the office of
the Secretary of State of a certificate of merger in accordance with Section 252
of the DGCL or such later date and time as may be set forth in such certificate
of merger. The Merger shall have the effects prescribed in the
DGCL.
(d) The
Certificate of Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable
law.
2.02 Effective Date and Effective
Time. (a) Subject
to the satisfaction or waiver of the conditions set forth in Article VIII, the
parties shall cause the effective date of the Merger (the “Effective Date”) to occur on
(i) the fifth business day to occur after the last of the conditions set forth
in Article VIII shall have been satisfied or waived in accordance with the terms
of this Agreement, other than those conditions that by their nature are to be
satisfied at the closing of the Merger (or, at the election of Summit, on the
last business day of the month in which such fifth business day occurs), or (ii)
such other date to which the parties may agree in writing. The time
on the Effective Date when the Merger shall become effective is referred to as
the “Effective
Time.”
(b) Notwithstanding
any other provision in this Agreement to the contrary, if Summit shall exercise
its right to delay the Effective Date pursuant to Section 2.02(a), and a record
date for any dividend or other distribution in respect of the Summit Common
Stock is taken during the period of such delay such that the GAFC stockholders
will not be entitled to participate in such dividend, each stockholder of GAFC
shall be entitled to receive, upon surrender of the Old Certificates and
compliance with the other provisions of Article IV, a payment equal to the
amount and kind of dividend or other distribution that such holder would have
received had such holder been a holder of record of the shares of Summit Common
Stock issuable to such holder in the Merger on the record date for such dividend
or other distribution.
ARTICLE
III
The Bank Merger
3.01 The Bank
Merger. (a) Immediately after the Effective
Time, GAB, a wholly-owned subsidiary of GAFC, shall merge with and into Summit
Bank, a wholly-owned subsidiary of Summit (the “Bank Merger”), the separate
existence of GAB shall cease and Summit Bank shall survive and continue to exist
as a state chartered banking corporation. Summit may at any time
prior to the Effective Time, change the method of effecting the combination with
GAB (including without limitation the provisions of this Article III other than
sub-sections (i), (ii) and (iii) hereof) if and to the extent it deems such
changes necessary, appropriate or desirable; provided, however that no such
change shall (i) alter or change the amount or kind of Merger Consideration, or
the relative proportions of cash and Summit Common Stock included therein, (ii)
adversely affect the tax treatment of GAFC’s stockholders as a result of
receiving the Merger Consideration or (iii) materially impede or delay
consummation of the transactions contemplated by this Agreement, and provided
further, that Summit shall provide GAFC with prior written notice of such change
and the reasons therefore.
(b) Subject
to the satisfaction or waiver of the conditions set forth in Article VIII, the
Bank Merger shall become effective upon the occurrence of the filing in the
Office of the Secretary of State of West Virginia of articles of merger in
accordance with the laws of the West Virginia or such later date and time as may
be set forth in such articles and the issuance of a certificate of merger by the
Secretary of State of West Virginia. The Bank Merger shall have the
effects prescribed in the West Virginia General Corporation Act.
3.02 Effective Date and Effective
Time. Subject to the satisfaction or waiver of the
conditions set forth in Article VIII, the parties shall cause the effective date
of the Bank Merger (the “Bank
Merger Effective Date”) to occur on the Effective Date or such later date
to which the parties may agree in writing.
ARTICLE IV
Consideration; Exchange
Procedures
4.01 Merger
Consideration. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any Person:
(a) Stock Consideration and Cash
Consideration. Each holder of a share of GAFC Common Stock
(other than GAFC or its subsidiaries or Summit and its subsidiaries, except for
shares held by them in a fiduciary capacity, and Dissenters’ Shares) shall
receive in respect thereof, subject to the limitations set forth in this
Agreement and any adjustment pursuant to Section 4.01 (c), (i) the number of
shares of Summit Stock (the “Stock Consideration”) equal
to $3.22, divided by the average closing price (the “Average Closing Price”) of Summit Common
Stock reported on the NASDAQ for the twenty (20) trading days prior to the
Closing (the “Exchange
Ratio”) and (ii) $1.38 in cash without interest (the “Cash
Consideration”). The Cash Consideration and the Stock
Consideration are sometimes referred to herein collectively as the “Merger
Consideration.”
(b) Stock Collar. If the
Average Closing Price is less than $17.82, then the Exchange Ratio shall be
seventy percent of the Merger Consideration divided by $17.82. If the
Average Closing Price is greater than $24.10 then the Exchange Ratio will be
seventy percent of the Merger Consideration divided by $24.10.
(c) Adjustment to Merger
Consideration for Decrease or Increase in GAFC’s Shareholder’s
Equity. If, as of the end of the month in which the sale of
the Pasadena Branch is consummated (the “Adjustment Date”), GAFC’s Shareholders’
Equity adjusted to exclude (i) accumulated other comprehensive income or loss,
(ii) Merger restructuring charges and/or Merger-related expenses incurred at the
request of Summit on or prior to the Adjustment Date, and (iii) employee
severance charges incurred by GAB on or prior to the Adjustment Date (excluding
any charges relating to employee terminations for “cause” as defined in GAB’s
Employee Severance Compensation Plan (the “Adjusted Shareholder’s Equity”)
is:
(i) less
than Six Million Seven Hundred Thousand Dollars ($6,700,000) (the “Benchmark Equity”), then the
aggregate value of the Merger Consideration shall be reduced one dollar for
every dollar by which the Adjusted Shareholders’ Equity is less than the
Benchmark Equity; or
(ii) more
than the Benchmark Equity, then the aggregate value of the Merger Consideration
shall be increased one dollar for every dollar by which the Adjusted
Shareholders’ Equity exceeds the Benchmark Equity, but only to the extent that
the amount by which the Adjusted Shareholders’ Equity exceeds the Benchmark
Equity is attributable to the sale of the Pasadena Branch after deducting all
Taxes, if any, due and payable with the Tax Returns filed by GAFC for the tax
year in which such sale is consummated.
If the
aggregate value of the Merger Consideration shall be adjusted pursuant to this
Section 4.01(c), then the Stock Consideration and the Cash Consideration
constituting the Merger Consideration, as so adjusted, shall be paid in the same
proportion as the Stock Consideration and the Cash Consideration would have been
paid pursuant to Section 4.01(a) without any adjustment pursuant to this Section
4.01(c).
(d) Outstanding Summit
Stock. Each share of Summit Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and unaffected by the Merger.
(e) Treasury
Shares. Each share of GAFC Common Stock held as Treasury Stock
immediately prior to the Effective Time shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange
therefore.
(f) Merger
Sub. Each share of capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time shall remain outstanding and
unaffected by the merger, and no consideration shall be issued in exchange
therefore.
4.02 Rights as Stockholders; Stock
Transfers. At the Effective Time, holders of GAFC
Common Stock shall cease to be, and shall have no rights as, stockholders of
GAFC, other than to receive the Merger Consideration and any dividend or other
distribution with respect to such GAFC Common Stock with a record date occurring
prior to the Effective Time, the payment, if any, in lieu of certain dividends
on Summit Common Stock provided for in Section 2.02(b), and the consideration
provided under this Article IV. After the Effective Time, there shall
be no transfers on the stock transfer books of GAFC or the Surviving Corporation
of shares of GAFC Common Stock.
4.03 Fractional
Shares. Notwithstanding any other provision hereof, no
fractional shares of Summit Common Stock and no certificates or scrip therefore,
or other evidence of ownership thereof, will be issued in the Merger; instead,
Summit shall pay to each holder of GAFC Common Stock who would otherwise be
entitled to a fractional share of Summit Common Stock (after taking into account
all Old Certificates registered in the name of such holder) an amount in cash
(without interest) determined by multiplying such fraction by the closing price
of Summit Common Stock as reported by NASDAQ reporting system (as reported in
the Wall Street
Journal) on the Effective Date.
4.04 Exchange
Procedures. (a) At
or prior to the Effective Time, Summit shall deposit, or shall cause to be
deposited, with Registrar and Transfer Company or a bank or trust company
designated by Summit and reasonably satisfactory to GAFC (the “Exchange Agent”), for the
benefit of the holders of certificates formerly representing shares of GAFC
Common Stock (“Old
Certificates”), for exchange in accordance with this Article IV, (i)
certificates representing the shares of Summit Common Stock (“New Certificates”), (ii) an
amount of cash necessary to pay the cash portion of the Merger Consideration and
any payments required by Section 2.02(b) and (iii) an amount of cash necessary
for payments required by Section 4.03 (the “Exchange
Fund”). The Exchange Fund will be distributed in accordance
with the Exchange Agent’s normal and customary procedures established in
connection with merger transactions.
(b) As
soon as practicable after the Effective Time, and in no event later than five
business days thereafter, Summit shall cause the Exchange Agent to mail to each
holder of record of one or more Old Certificates a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Old Certificates shall pass, only upon delivery of the Old Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of the Old
Certificates in exchange for New Certificates, if any, that the holders of the
Old Certificates are entitled to receive pursuant to Article IV, and the cash,
if any, that the holders of the Old Certificates are entitled to receive
pursuant to Article IV, any cash in lieu of fractional shares into which the
shares of GAFC Common Stock represented by the Old Certificates shall have been
converted pursuant to this Agreement and any payment required pursuant to
Section 2.02(b) of this Agreement. Upon proper surrender of an Old Certificate
for exchange and
cancellation
to the Exchange Agent, together with such properly completed letter of
transmittal, duly executed, the holder of such Old Certificates shall be
entitled to receive in exchange therefore (i) a New Certificate representing
that number of whole shares of Summit Common Stock that such holder has the
right to receive pursuant to Article IV, if any, (ii) a check representing the
amount of the cash that such holder is entitled to receive pursuant to Article
IV, if any, (iii) a check representing the amount of any cash in lieu of
fractional shares which such holder has the right to receive in respect of the
Old Certificates surrendered pursuant to the provisions of this Article IV, and
(iv) any payment required by Section 2.02(b), and the Old Certificates so
surrendered shall forthwith be cancelled.
(c) Neither
the Exchange Agent, if any, nor any party hereto shall be liable to any former
holder of GAFC Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
(d) No
dividends or other distributions with respect to Summit Common Stock with a
record date occurring after the Effective Time shall be paid to the holder of
any unsurrendered Old Certificate representing shares of GAFC Common Stock
converted in the Merger into the right to receive shares of such Summit Common
Stock until the holder thereof shall be entitled to receive New Certificates in
exchange therefore in accordance with the procedures set forth in this Section
4.05. After becoming so entitled in accordance with this Section
4.05, the record holder thereof also shall be entitled to receive any such
dividends or other distributions by the Exchange Agent, without any interest
thereon, which theretofore had become payable with respect to shares of Summit
Common Stock such holder had the right to receive upon surrender of the Old
Certificates.
(e) Any
portion of the Exchange Fund that remains unclaimed by the stockholders of GAFC
for twelve months after the Effective Time shall be paid to
Summit. Any stockholders of GAFC who have not theretofore complied
with this Article IV shall thereafter look only to Summit for payment of the
Merger Consideration, cash in lieu of any fractional shares and unpaid dividends
and distributions on Summit Common Stock deliverable in respect of each share of
GAFC Common Stock such stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
(f) In
the event any Old Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Old
Certificate to be lost, stolen or destroyed and, if reasonably required by
Summit or the Exchange Agent, the posting by such person of a bond in such
amount as Summit may determine is reasonably necessary as indemnity against any
claim that may be made against it with respect to such Old Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed Old
Certificate the Merger Consideration deliverable in respect thereof pursuant to
this Agreement.
4.05 Options. At
the Effective Time, each outstanding option (each, a “GAFC Stock Option”) to
purchase shares of GAFC Common Stock under any and all plans of GAFC under which
stock options have been granted and are outstanding (collectively, the “GAFC Stock Plans”) shall vest
and holders of GAFC Stock Options shall be entitled to receive cash in an amount
equal to the difference between the value of (a) the Merger
Consideration and (b) the applicable exercise price (rounded to the nearest
cent) for each outstanding GAFC Stock Option (the “Stock Option
Consideration”). At or prior to the Effective Time, GAFC shall
use its reasonable best efforts, including using its reasonable best efforts to
obtain any necessary consents from optionees, with respect to the GAFC Stock
Plans to permit Summit to pay the Stock Option Consideration pursuant to this
Section. At the Effective Time, Summit shall have no obligation to
make any additional grants or awards under the GAFC Stock Plans.
4.06 Warrants. At the Effective
Time, each outstanding warrant (each, a “GAFC Warrant “) to purchase
shares of GAFC Common Stock under any and all plans of GAFC under which warrants
have been granted and are outstanding (collectively, the “GAFC Warrants “) shall vest
and holders of GAFC Warrants shall be entitled to receive cash in an amount
equal to the difference between the value of (a) the Merger Consideration and
(b) the applicable exercise price (rounded to the nearest cent) for each
outstanding GAFC Warrant (the “Warrant
Consideration”). At or prior to the Effective Time, GAFC shall
use its reasonable best efforts, including using its reasonable best efforts to
obtain any necessary consents from optionees, with respect to the GAFC Stock
Plans to permit Summit to pay the Warrant Consideration pursuant to this
Section. At the Effective Time, Summit shall have shall have no
obligation to make any additional grants or awards under the GAFC
Warrants.
4.07 Dissenters’
Rights. Notwithstanding any other provision of this
Agreement to the contrary, shares of GAFC Common Stock that are outstanding
immediately prior to the Effective Time and which are held by
stockholders
who shall have not voted in favor of the Merger or consented thereto in writing
and who properly shall have demanded appraisal for such shares in accordance
with the DGCL (collectively, the “Dissenters’ Shares”) shall
not be converted into or represent the right to receive the Merger
Consideration. Such stockholders instead shall be entitled to receive
payment of the appraised value of such shares held by them in accordance with
the provisions of the DGCL, except that all Dissenters’ Shares held by
stockholders who shall have failed to perfect or who effectively shall have
withdrawn or otherwise lost their rights to appraisal of such shares under the
DGCL shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration upon surrender in the manner provided
in Section 4.05 of the Old Certificates that, immediately prior to the Effective
Time, evidenced such shares.
ARTICLE V
Actions Pending the Effective
Time
5.01 Forebearances of
GAFC. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement or Previously Disclosed,
without the prior written consent of Summit, GAFC will not, and will cause each
of its Subsidiaries not to:
(a) Ordinary
Course. Conduct the business of GAFC and its Subsidiaries
other than in the ordinary and usual course or fail to use reasonable efforts to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers, employees
and business associates, or take any action reasonably likely to have an adverse
affect upon GAFC’s ability to perform any of its material obligations under this
Agreement.
(b) Capital
Stock. Other than pursuant to Rights Previously Disclosed and
outstanding on the date hereof, (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of GAFC Common
Stock or any Rights, (ii) enter into any agreement with respect to the
foregoing, or (iii) permit any additional shares of GAFC Common Stock to become
subject to new grants of employee or director stock options, other Rights or
similar stock-based employee rights.
(c) Dividends,
Etc. (a) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any shares
of GAFC Common Stock, or (b) directly or indirectly adjust, split, combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock.
(d) Compensation; Employment Agreements;
Etc. Enter into or amend or renew any employment, consulting,
severance or similar agreements or arrangements with any director, officer or
employee of GAFC or its Subsidiaries, or grant any salary or wage increase or
increase any employee benefit (including incentive or bonus payments), except
(i) for normal individual payments of incentives and bonuses to employees in the
ordinary course of business consistent with past practice, not to exceed $10,000
in the aggregate, (ii) for normal individual payments of incentives and bonuses
to employees under GAB’s branch incentive plan, not to exceed $30,000 per
quarter in the aggregate, (iii) for normal individual increases in compensation
to employees in the ordinary course of business consistent with past practice,
(iv) for other changes that are required by applicable law, (v) to satisfy
Previously Disclosed contractual obligations existing as of the date hereof, or
(vi) for grants of awards to newly hired employees consistent with past
practice.
(e) Benefit
Plans. Enter into, establish, adopt or amend (except (i) as
may be required by applicable law or (ii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any director, officer or employee of
GAFC or its Subsidiaries, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder.
(f) Dispositions. Except
as Previously Disclosed or in connection with the consummation of the sale of
the Pasadena Branch, sell, transfer, mortgage, encumber or otherwise dispose of
or discontinue any of its assets, deposits, business or properties except in the
ordinary course of business and in a transaction that is not material to it and
its Subsidiaries taken as a whole.
(g) Acquisitions. Except
as Previously Disclosed, acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in satisfaction of
debts previously contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice) all or any portion of,
the assets, business, deposits or properties of any other entity.
(h) Governing
Documents. Amend the GAFC Certificate, GAFC By-laws or the
certificate of incorporation or by-laws (or similar governing documents) of any
of GAFC’s Subsidiaries.
(i) Accounting
Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by generally
accepted accounting principles.
(j) Contracts. Except
in the ordinary course of business consistent with past practice, enter into or
terminate any material contract (as defined in Section 6.03(k)) or amend or
modify in any material respect any of its existing material
contracts.
(k) Claims. Except in
the ordinary course of business consistent with past practice, settle any claim,
action or proceeding, except for any claim, action or proceeding which does not
involve precedent for other material claims, actions or proceedings and which
involve solely money damages in an amount, individually or in the aggregate for
all such settlements, that is not material to GAFC and its Subsidiaries, taken
as a whole.
(l) Adverse
Actions. (a) Take any action while knowing that such action
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code; or (b)
knowingly take any action that is intended or is reasonably likely to result in
(i) any of its representations and warranties set forth in this Agreement being
or becoming untrue subject to the standard set forth in Section 6.02, at any
time at or prior to the Effective Time, (ii) any of the conditions to the Merger
set forth in Article VIII not being satisfied or (iii) a material violation of
any provision of this Agreement except, in each case, as may be required by
applicable law or regulation.
(m) Risk
Management. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate and
other risk management policies, procedures or practices; (ii) fail to follow its
existing policies or practices with respect to managing its exposure to interest
rate and other risk; or (iii) fail to use commercially reasonable means to avoid
any material increase in its aggregate exposure to interest rate
risk.
(n) Indebtedness. Incur
any indebtedness for borrowed money other than in the ordinary course of
business.
(o) Loans. Make any
loans in a principal amount in excess of $750,000, or make any loans outside of
the District of Columbia, Delaware, Maryland, Pennsylvania, Virginia and West
Virginia.
(p) Commitments. Agree
or commit to do any of the foregoing.
5.02 Forebearances of
Summit. From the date hereof until the Effective Time,
except as expressly contemplated by this Agreement, without the prior written
consent of GAFC, Summit will not, and will cause each of its Subsidiaries not
to:
(a) Ordinary
Course. Conduct the business of Summit and its Subsidiaries
other than in the ordinary and usual course or fail to use reasonable efforts to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers, employees
and business associates, or take any action reasonably likely to have an adverse
effect upon Summit’s ability to perform any of its material obligations under
this Agreement.
(b) Extraordinary
Dividends. Make, declare, pay or set aside for payment any
extraordinary dividend.
(c) Adverse
Actions. (a) Take any action while knowing that such action
would, or is reasonably likely to, prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368 of the Code; or (b)
knowingly take any action that is intended or is reasonably likely to result in
(i) any of its representations
and
warranties set forth in this Agreement being or becoming untrue, subject to the
standard set forth in Section 6.02, at any time at or prior to the Effective
Time, (ii) any of the conditions to the Merger set forth in Article VIII not
being satisfied or (iii) a material violation of any provision of this Agreement
except, in each case, as may be required by applicable law or regulation;
provided.
(d) Commitments. Agree
or commit to do any of the foregoing.
ARTICLE VI
Representations and
Warranties
6.01 Disclosure
Schedules. On or prior to the date hereof, Summit has
delivered to GAFC a schedule and GAFC has delivered to Summit a schedule
(respectively, its “Disclosure
Schedule”) setting forth, among other things, items the disclosure of
which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in Section 6.03 or 6.04 or to one or
more of its covenants contained in Article V; provided, that (a) no such item is
required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence could not be reasonably likely to
result in the related representation or warranty being deemed untrue or
incorrect under the standard established by Section 6.02, and (b) the mere
inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to result in a Material Adverse Effect on the party
making the representation. All of GAFC’s representations, warranties
and covenants contained in this Agreement are qualified by reference to the
Disclosure Schedule and none thereof shall be deemed to be untrue or breached as
a result of effects arising solely from actions taken in compliance with a
written request of Summit.
6.02 Standard. No
representation or warranty of GAFC or Summit contained in Section 6.03 or 6.04
shall be deemed untrue or incorrect, and no party hereto shall be deemed to have
breached a representation or warranty, as a consequence of the existence of any
fact, event or circumstance unless such fact, circumstance or event,
individually or taken together with all other facts, events or circumstances
inconsistent with any representation or warranty contained in Section 6.03 or
6.04 has had or is reasonably likely to have a Material Adverse
Effect. For purposes of this Agreement, “knowledge” shall mean (i)
with respect to Summit, actual knowledge of H. Charles Maddy, III, and Robert S.
Tissue, and (ii) with respect to GAFC, actual knowledge of Carroll E. Amos,
Edward C. Allen, David E. Ritter, Robert W. Neff and Gary L.
Hobert.
6.03 Representations and Warranties of
GAFC. Subject to Sections 6.01 and 6.02 and except as
Previously Disclosed, GAFC hereby represents and warrants to
Summit:
(a) Organization and
Standing. GAFC is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware. GAFC is duly qualified to do business and is in good
standing in the Commonwealth of Virginia and in any foreign jurisdictions where
its ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified.
(b) Capitalization. As
of March 31, 2007, the authorized capital stock of GAFC consists of (i)
10,000,000 shares of GAFC Common Stock, of which 3,024,220 shares were
outstanding and no shares were held in treasury, and (ii) 2,500,000 shares of
preferred stock, $0.01 par value, none of which are issued and outstanding or
held in treasury as of the date hereof. As of the date hereof, except
pursuant to the terms of options, stock, and warrants issued pursuant to the
GAFC Stock and/or Warrant Plans, GAFC does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of GAFC
Common Stock or any other equity securities of GAFC or any of its Subsidiaries
or any securities representing the right to purchase or otherwise receive any
shares of GAFC Common Stock or other equity securities of GAFC or any of its
Subsidiaries. As of March 31, 2007, GAFC has 340,171 shares of GAFC
Common Stock (with a weighted average strike price of $6.94 per share) which are
issuable and reserved for issuance upon the exercise of GAFC Stock Options and
GAFC Warrants. The outstanding shares of GAFC Common Stock have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation of any preemptive rights).
(c) Subsidiaries. (i)
GAFC has Previously Disclosed a list of all of its Subsidiaries together with
the jurisdiction of organization of each such Subsidiary. (A) GAFC
owns, directly or indirectly, all the issued and outstanding equity securities
of each of its Subsidiaries, (B) no equity securities of any of its Subsidiaries
are or may become required to be issued (other than to it or its wholly-owned
Subsidiaries) by reason of any Right or otherwise, (C) there are no contracts,
commitments, understandings or arrangements by which any of such Subsidiaries is
or may be bound to sell or otherwise transfer any equity securities of any such
Subsidiaries (other than to it or its wholly-owned Subsidiaries), (D) there are
no contracts, commitments, understandings, or arrangements relating to its
rights to vote or to dispose of such securities and (E) all the equity
securities of each Subsidiary held by GAFC or its Subsidiaries are fully paid
and nonassessable and are owned by GAFC or its Subsidiaries free and clear of
any Liens.
(ii) GAFC
has Previously Disclosed a list of all equity securities, or similar interests
of any Person or any interest in a partnership or joint venture of any kind,
other than its Subsidiaries, that it beneficially owns, directly or indirectly,
as of March 28, 2007.
(iii) Each
of GAFC’s Subsidiaries has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization, and is duly
qualified to do business and in good standing in the jurisdictions where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified.
(d) Corporate
Power. Each of GAFC and its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its properties and assets; and GAFC has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
(e) Corporate
Authority. Subject to receipt of the requisite approval of
this Agreement (including the agreement of merger set forth herein) by the
holders of a majority of the outstanding shares of GAFC Common Stock entitled to
vote thereon (which is the only vote of GAFC stockholders required thereon), the
execution and delivery of this Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action of GAFC and the
GAFC Board. Assuming due authorization, execution and delivery by
Summit, this Agreement is a valid and legally binding obligation of GAFC,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors’ rights or by general equity principles). The
GAFC Board of Directors has received the written opinion of Sandler O’Neill
& Partners, L.P. to the effect that as of the date hereof the consideration
to be received by the holders of GAFC Common Stock in the Merger is fair to the
holders of GAFC Common Stock from a financial point of view.
(f) Consents and Approvals; No
Defaults. (i) No consents or approvals of, or filings or
registrations with, any Governmental Authority or with any third party are
required to be made or obtained by GAFC or any of its Subsidiaries in connection
with the execution, delivery or performance by GAFC of this Agreement or to
consummate the Merger except for (A) filings of applications or notices with
federal and state banking and insurance authorities and (B) the
filing of a certificate of merger with the Secretary of State pursuant to the
DGCL and the issuance of a certificate of merger in connection
therewith. As of the date hereof, GAFC is not aware of any reason why
the approvals set forth in Section 8.01(b) will not be received without the
imposition of a condition, restriction or requirement of the type described in
Section 8.01(b).
(ii) Subject
to receipt of the regulatory approvals referred to in the preceding paragraph,
and expiration of related waiting periods, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or violation of,
or a default under, or give rise to any Lien, any acceleration of remedies or
any right of termination under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or any agreement, indenture or
instrument of GAFC or of any of its Subsidiaries or to which GAFC or any of its
Subsidiaries or properties is subject or bound, (B) constitute a breach or
violation of, or a default under, the GAFC Certificate or the GAFC By-Laws, or
(C) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or any agreement,
indenture or instrument.
(g) Financial Reports; Absence
of Certain Changes or Events. (i) GAFC’s Annual Report on Form
10-K for the fiscal years ended September 30, 2004, 2005 and 2006, and all other
reports, registration statements,
definitive
proxy statements or information statements filed or to be filed by it or any of
its Subsidiaries subsequent to September 30, 2003, under the Securities Act or
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act in the form filed or
to be filed (collectively “GAFC’s SEC Documents”), as of
the date filed, (A) as to form complied or will comply in all material respects
with the applicable requirements under the Securities Act or the Exchange Act,
as the case may be, and (B) did not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and each of the balance sheets or
statements of condition of GAFC contained in or incorporated by reference into
any of GAFC’s SEC Documents (including the related notes and schedules thereto)
fairly presents, or will fairly present, the financial position of GAFC and its
Subsidiaries as of its date, and each of the statements of income or results of
operations and changes in stockholders’ equity and cash flows or equivalent
statements of GAFC in any of GAFC’s SEC Documents (including any related notes
and schedules thereto) fairly presents, or will fairly present, the results of
operations, changes in stockholders’ equity and cash flows, as the case may be,
of GAFC and its Subsidiaries for the periods to which they relate, and in each
case were prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved, except in each case as may be
noted therein, and subject to normal year-end audit adjustments in the case of
unaudited statements.
(ii) GAFC’s
Disclosure Schedule lists, and GAFC has delivered or previously made available
to Summit, copies of the documentation creating or governing all securitization
transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K) effected by GAFC or its Subsidiaries, since September 30,
2006. BDO Siedman, LLP, which has expressed its opinion with respect
to the financial statements of GAFC and its Subsidiaries (including the related
notes) included in the GAFC SEC Documents is and has been throughout the periods
covered by such financial statements (A) a registered public accounting firm (as
defined in Section 2(a)(12) of the Sarbanes-Oxley Act of 2002, (B) “independent”
with respect to GAFC within the meaning of Regulation S-X and C in compliance
with subsection (g) through (l) of Section 10A of the Exchange Act and the
related rules of the SEC and the Public Accounting Oversight Board.
(iii) Except
as disclosed on Disclosure Schedule 6.03(g), GAFC has on a timely basis filed
all forms, reports and documents required to be filed by it with the SEC since
September 30, 2004. GAFC’s Disclosure Schedule lists, and, except to
the extent available in full without redaction on the SEC’s web site through the
Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) two days
prior to the date of this Agreement, GAFC has delivered or previously made
available to Summit copies in the form filed with the SEC of (A) GAFC’s Annual
Reports on Form 10-K for each fiscal year of the Company beginning since
September 30, 2003, (B) it Quarterly Reports on form 10-Q for each of the first
three fiscal quarters in each of the fiscal years of the GAFC referred to in
clause (A) above, (C) all proxy statements relating to GAFC’s meetings of
stockholders (whether annual or special) held, and all information statements
relating to stockholder consents since the beginning of the first fiscal year
referred to in clause above, (D) all certifications and statements required by
(x) the SEC’s Order dated June 27, 2002, pursuant to Section 21(a)(1) of the
Exchange Act (File No. 4-460), (y) Rule 13a-14 or 15d-14 under the Exchange Act
or (z) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with
respect to any report referred to above, (E) all other forms, reports,
registration statements and other documents (other than preliminary materials if
the corresponding definitive materials have been provided to Summit pursuant to
this Section 6.03(g)(iii), filed by GAFC with the SEC since the beginning of the
first fiscal year referred above, and (E) all comment letters received by GAFC
from the Staff of the SEC since December 31, 2004, and all responses to such
comment letters by or on behalf of GAFC.
(iv) Except
as Previously Disclosed, GAFC maintains disclosure controls and procedures
required by Rule 13a-15 or 15d-15 under the Exchange Act; such controls and
procedures are effective to ensure that all material information concerning GAFC
and its subsidiaries is made known on a timely basis to the individuals
responsible for the preparation of the Company’s filings with the SEC and other
public disclosure documents. GAFC’s Disclosure Schedule lists, and
GAFC has delivered to Summit copies of, all written descriptions of, and all
policies, manuals and other documents promulgating, such disclosure controls and
procedures. To GAFC’s knowledge, each director and executive officer
of GAFC has filed with the SEC on a timely basis all statements required by
Section 16(a) of the Exchange Act and the rules and regulations thereunder since
September 30, 2004. As used in this Section 6.03(q), the term “file”
shall be broadly construed to include any manner in which a document or
information is furnished, supplied or otherwise made available to the
SEC.
(v) Since
September 30, 2006, GAFC and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past practice or
for legal, accounting, and financial advisory fees and out-of-pocket expenses in
connection with the transactions contemplated by this Agreement.
(vi) Since
September 30, 2006, (A) GAFC and its Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with past
practice (excluding matters related to this Agreement and the transactions
contemplated hereby) and (B) no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and events
(described in any paragraph of Section 6.03 or otherwise), is reasonably likely
to have a Material Adverse Effect with respect to GAFC.
(h) Litigation. No
litigation, claim or other proceeding before any court or Governmental Authority
is pending against GAFC or any of its Subsidiaries and, to GAFC’s knowledge, no
such litigation, claim or other proceeding has been threatened.
(i) Regulatory
Matters. (i) Neither GAFC nor any of its Subsidiaries or
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from, any federal
or state governmental agency or authority charged with the supervision or
regulation of financial institutions (or their holding companies) or issuers of
securities or engaged in the insurance of deposits (including, without
limitation, the Office of the Thrift Supervision, the Federal Reserve Board and
the Federal Deposit Insurance Corporation) or the supervision or regulation of
it or any of its Subsidiaries (collectively, the “Regulatory
Authorities”).
(ii) Except
as disclosed on Disclosure Schedule 6.03(i), neither GAFC nor any of its
Subsidiaries has been advised by any Regulatory Authority that such Regulatory
Authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum of understanding, commitment letter, supervisory letter or similar
submission.
(iii) GAFC
is not a financial holding company as defined by the Gramm-Leach-Bliley Act of
1999.
(j) Compliance with
Laws. Each of GAFC and its Subsidiaries:
(i) is
in compliance in all material respects with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, all Governmental Authorities that
are required in order to permit them to own or lease their properties and to
conduct their businesses as presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect
and, to GAFC’s knowledge, no suspension or cancellation of any of them is
threatened;
(iii) Except
as disclosed on Disclosure Schedule 6.03(j), GAFC has received, since December
31, 2005, no notification or communication from any Governmental Authority (A)
asserting that GAFC or any of its Subsidiaries is not in compliance with any of
the statutes, regulations, or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit, or
governmental authorization (nor, to GAFC’s knowledge, do any grounds for any of
the foregoing exist); and
(iv) Since
July 1, 2001, is in compliance with the privacy provisions of the
Gramm-Leach-Bailey Act, and all other applicable laws relating to consumer
privacy.
(k) Material Contracts;
Defaults. Except for this Agreement and the definitive
agreement with respect to the sale of the Pasadena Branch, neither GAFC nor any
of its Subsidiaries is a party to, bound by or subject to any agreement,
contract, arrangement, commitment or understanding (whether written or oral) (i)
that is a “material contract” within the meaning of Item 601(b)(10) of the SEC’s
Regulation S-K or (ii) that restricts or limits in any way
the
conduct of business by it or any of its Subsidiaries (including without
limitation a non-compete or similar provision). Neither GAFC nor any
of its Subsidiaries is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a party,
by which its respective assets, business, or operations may be bound or
affected, or under which it or its respective assets, business, or operations
receive benefits, and there has not occurred any event that, with the lapse of
time or the giving of notice or both, would constitute such a
default.
(l) No
Brokers. No action has been taken by GAFC that would give rise
to any valid claim against any party hereto for a brokerage commission, finder’s
fee or other like payment with respect to the transactions contemplated by this
Agreement, excluding a Previously Disclosed fee to be paid to Sandler O’Neill
& Partners, L.P.
(m) Employee Benefit
Plans. (i) GAFC has Previously Disclosed a complete and
accurate list of all existing bonus, incentive, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, severance, welfare and
fringe benefit plans, employment or severance agreements and all similar
practices, policies and arrangements in which any current or former employee
(the “Employees”),
current or former consultant (the “Consultants”) or current or
former director (the “Directors”) of GAFC or any of
its Subsidiaries participates or to which any such Employees, Consultants or
Directors are a party (the “Compensation and Benefit
Plans”). Neither GAFC nor any of its Subsidiaries has any
commitment to create any additional Compensation and Benefit Plan or to modify
or change any existing Compensation and Benefit Plan.
(ii) Each
Compensation and Benefit Plan has been operated and administered in all material
respects in accordance with its terms and with applicable law, including, but
not limited to, ERISA, the Code, the Securities Act, the Exchange Act, the Age
Discrimination in Employment Act, or any regulations or rules promulgated
thereunder, and all filings, disclosures and notices required by ERISA, the
Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment
Act and any other applicable law have been timely made. Each
Compensation and Benefit Plan which is an “employee pension benefit plan” within
the meaning of Section 3(2) of ERISA (a “Pension Plan”) and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter or has applied for a favorable determination
letter in compliance with the Code (including a determination that the related
trust under such Compensation and Benefit Plan is exempt from tax under Section
501(a) of the Code) from the Internal Revenue Service (“IRS”), and GAFC is not aware
of any circumstances likely to result in the revocation of any existing
favorable determination letter or in not receiving a favorable determination
letter. There is no material pending or, to the knowledge of GAFC,
threatened legal action, suit or claim relating to the Compensation and Benefit
Plans other than routine claims for benefits. Neither GAFC nor any of
its Subsidiaries has engaged in a transaction, or omitted to take any action,
with respect to any Compensation and Benefit Plan that would reasonably be
expected to subject GAFC or any of its Subsidiaries to a tax or penalty imposed
by either Section 4975 of the Code or Section 502 of ERISA, assuming for
purposes of Section 4975 of the Code that the taxable period of any such
transaction expired as of the date hereof.
(iii) No
Compensation and Benefit Plans currently maintained, or maintained within the
last six years, by GAFC or any of its Subsidiaries or any entity (and “ERISA Affiliate”) which is
considered one employer with GAFC under Section 4001(a)(14) of ERISA or Section
414(b) or (c) of the Code is or was subject to Title IV of ERISA or is or was a
multiemployer plan under Subtitle E of Title IV of ERISA. To the
knowledge of GAFC, there is no pending investigation or enforcement action by
the PBGC, the DOL or IRS or any other governmental agency with respect to any
Compensation and Benefit Plan.
(iv) All
contributions required to be made under the terms of any Compensation and
Benefit Plan or any employee benefit arrangements under any collective
bargaining agreement to which GAFC or any of its Subsidiaries is a party have
been timely made or have been reflected on GAFC’s financial
statements. None of GAFC, any of its Subsidiaries or any ERISA
Affiliate (x) has provided, or would reasonably be expected to be required to
provide, security to any Pension Plan pursuant to Section 401(a)(29) of the
Code, and (y) has taken any action, or omitted to take any action, that has
resulted, or would reasonably be expected to result, in the imposition of a lien
under Section 412(n) of the Code or pursuant to ERISA.
(v) Neither
GAFC nor any of its Subsidiaries has any obligations to provide retiree health
and life insurance or other retiree death benefits under any Compensation and
Benefit Plan, other than benefits mandated by Section 4980B of the Code, and
each such Compensation and Benefit Plan may be amended or
terminated
without
incurring liability thereunder. There has been no communication to
Employees by GAFC or any of its Subsidiaries that would reasonably be expected
to promise or guarantee such Employees retiree health or life insurance or other
retiree death benefits on a permanent basis.
(vi) GAFC
and its Subsidiaries do not maintain any Compensation and Benefit Plans covering
foreign Employees.
(vii) With
respect to each Compensation and Benefit Plan, if applicable, GAFC has provided
or made available to Summit, true and complete copies of existing: (A)
Compensation and Benefit Plan documents and amendments thereto; (B) trust
instruments and insurance contracts; (C) two most recent Forms 5500 filed with
the IRS; (D) most recent actuarial report and financial statement; (E) the most
recent summary plan description; (F) most recent determination letter issued by
the IRS; (G) any Form 5310 or Form 5330 filed with the IRS; and (H) most recent
nondiscrimination tests performed under ERISA and the Code (including 401(k) and
401(m) tests).
(viii) Except
as Previously Disclosed, the consummation of the transactions contemplated by
this Agreement would not, directly or indirectly (including, without limitation,
as a result of any termination of employment prior to or following the Effective
Time) reasonably be expected to (A) entitle any Employee, Consultant or Director
to any payment (including severance pay or similar compensation) or any increase
in compensation, (B) result in the vesting or acceleration of any benefits under
any Compensation and Benefit Plan or (C) result in any material increase in
benefits payable under any Compensation and Benefit Plan.
(ix) Neither
GAFC nor any of its Subsidiaries maintains any compensation plans, programs or
arrangements the payments under which would not reasonably be expected to be
deductible as a result of the limitations under Section 162(m) of the Code and
the regulations issued thereunder.
(x) As
a result, directly or indirectly, of the transactions contemplated by this
Agreement (including, without limitation, as a result of any termination of
employment prior to or following the Effective Time), none of Summit, GAFC or
the Surviving Corporation, or any of their respective Subsidiaries will be
obligated to make a payment that would be characterized as an “excess parachute
payment” to an individual who is a “disqualified individual” (as such terms are
defined in Section 280G of the Code), without regard to whether such payment is
reasonable compensation for personal services performed or to be performed in
the future.
(n) Labor
Matters. Neither GAFC nor any of its Subsidiaries is a party
to or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is GAFC
or any of its Subsidiaries the subject of a proceeding asserting that it or any
such Subsidiary has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel GAFC or any such
Subsidiary to bargain with any labor organization as to wages or conditions of
employment, nor is there any strike or other labor dispute involving it or any
of its Subsidiaries pending or, to GAFC’s knowledge, threatened, nor is GAFC
aware of any activity involving its or any of its Subsidiaries’ employees
seeking to certify a collective bargaining unit or engaging in other
organizational activity.
(o) Takeover
Laws. GAFC has taken all action required to be taken by it in
order to exempt this Agreement and the transactions contemplated hereby from,
and this Agreement and the transactions contemplated hereby are exempt from, the
requirements of any “moratorium”, “control share”, “fair price”, “affiliate
transaction”, “business combination” or other antitakeover laws and regulations
of any state applicable to GAFC (collectively, “Takeover Laws”), including,
without limitation, Section 203 of the DGCL.
(p) Environmental
Matters. To GAFC’s knowledge, neither the conduct nor
operation of GAFC or its Subsidiaries nor any condition of any property
presently or previously owned, leased or operated by any of them (including,
without limitation, in a fiduciary or agency capacity), or on which any of them
holds a Lien, violates or violated Environmental Laws and to GAFC’s knowledge,
no condition has existed or event has occurred with respect to any of them or
any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability under Environmental Laws. To
GAFC’s knowledge, neither GAFC nor any of its Subsidiaries has received any
notice from any person or entity that GAFC or its Subsidiaries or the operation
or condition of any property ever owned, leased, operated, or held as collateral
or in a fiduciary capacity by any of them are or were in violation of or
otherwise are alleged to have liability under any Environmental Law, including,
but not limited to, responsibility (or potential
responsibility)
for the cleanup or other remediation of any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on, beneath, or
originating from any such property.
(q) Tax
Matters. (i) All Tax Returns that are required to be filed by
or with respect to GAFC and its Subsidiaries have been duly filed, (ii) all
Taxes shown to be due on the Tax Returns referred to in clause (i) have been
paid in full, (iii) the Tax Returns referred to in clause (i) have been examined
by the Internal Revenue Service or the appropriate state, local or foreign
taxing authority or the period for assessment of the Taxes in respect of which
such Tax Returns were required to be filed has expired, (iv) all deficiencies
asserted or assessments made as a result of such examinations have been paid in
full, (v) no issues that have been raised by the relevant taxing authority in
connection with the examination of any of the Tax Returns referred to in clause
(i) are currently pending, and (vi) no waivers of statutes of limitation have
been given by or requested with respect to any Taxes of GAFC or its
Subsidiaries. GAFC has made available to Summit true and correct
copies of the United States Federal Income Tax Returns filed by GAFC and its
Subsidiaries for each of the three most recent fiscal years ended on or before
December 31, 2004. Neither GAFC nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on or
before December 31, 2005 in excess of the amounts accrued with respect thereto
that are reflected in the financial statements of GAFC as of December 31, 2002
for each of the three years in the period ended December 31, 2004. As
of the date hereof, neither GAFC nor any of its Subsidiaries has any reason to
believe that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
(ii) No
Tax is required to be withheld pursuant to Section 1445 of the Code as a result
of the transfer contemplated by this Agreement.
(r) Risk Management
Instruments. Except as disclosed on Disclosure Schedule
6.03(r), neither GAFC nor any of its Subsidiaries are parties to any interest
rate swaps, caps, floors, option agreements, futures and forward contracts and
other similar risk management arrangements, whether entered into for GAFC’s own
account, or for the account of one or more of GAFC’s Subsidiaries or their
customers.
(s) Books and
Records. The books and records of GAFC and its Subsidiaries
have been fully, properly and accurately maintained in all material respects,
and there are no material inaccuracies or discrepancies of any kind contained or
reflected therein and they fairly reflect the substance of events and
transactions included therein.
(t) Insurance. GAFC
Previously Disclosed all of the insurance policies, binders, or bonds maintained
by GAFC or its Subsidiaries. GAFC and its Subsidiaries are insured
with insurers believed to be reputable against such risks and in such amounts as
the management of GAFC reasonably has determined to be prudent in accordance
with industry practices. All such insurance policies are in full
force and effect; GAFC and its Subsidiaries are not in material default
thereunder; and all claims thereunder have been filed in due and timely
fashion.
(u) Disclosure. The
representations and warranties contained in this Section 6.03 do not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements and information contained in this Section 6.03,
in light of the circumstances in which they are made, not
misleading.
6.04 Representations and Warranties of
Summit. Subject to Sections 6.01 and 6.02 and except as
Previously Disclosed, Summit hereby represents and warrants to
GAFC:
(a) Organization and
Standing. Summit is a corporation duly organized, validly
existing and in good standing under the laws of the State of West
Virginia. Summit is duly qualified to do business and is in good
standing in the foreign jurisdictions where its ownership or leasing of property
or assets or the conduct of its business requires it to be so
qualified.
(b) Capitalization. (i)
As of December 31, 2006, the authorized capital stock of Summit consists solely
of 20,000,000 shares of Summit Common Stock, of which as of March 6, 2007,
7,084,980 shares, were outstanding, and 250,000 shares of Summit Preferred
Stock, of which none are issued and outstanding . As of the date
hereof, except as set forth in its Disclosure Schedule, Summit does not have and
is not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of Summit Common Stock or any other equity securities of Summit or
any of its Subsidiaries or any securities representing the right to purchase or
otherwise receive any shares of Summit Common Stock or other equity securities
of Summit or any of its Subsidiaries. As of December 31, 2006, Summit
has 349,080 shares of Summit
Common
Stock which are issuable and reserved for issuance upon exercise of Summit Stock
Options. The outstanding shares of Summit Common Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
and subject to no preemptive rights (and were not issued in violation of any
preemptive rights).
(ii) The
shares of Summit Common Stock to be issued in exchange for shares of GAFC Common
Stock in the Merger, when issued in accordance with the terms of this Agreement,
will be duly authorized, validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof, subject to no preemptive
rights and authorized for trading on the NASDAQ Capital Market.
(c) Subsidiaries. Each
of Summit’s Subsidiaries has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization, and is duly
qualified to do business and is in good standing in the jurisdictions where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified and it owns, directly or indirectly, all the issued and
outstanding equity securities of each of its Significant
Subsidiaries.
(d) Corporate
Power. Each of Summit and its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its properties and assets; and Summit has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
(e) Corporate
Authority. This Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action of Summit and the
Summit Board. Shareholder approval of the transactions contemplated
hereby is not required. Assuming due authorization, execution and
delivery by GAFC, this Agreement is a valid and legally binding agreement of
Summit, enforceable in accordance with its terms (except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors’ rights or by general equity principles).
(f) Consents and Approvals; No
Defaults. (i) No consents or approvals of, or filings or
registrations with, any Governmental Authority or with any third party are
required to be made or obtained by Summit or any of its Subsidiaries in
connection with the execution, delivery or performance by Summit of this
Agreement or to consummate the Merger except for (A) filings of applications and
notices with the federal and state banking and insurance authorities; (B)
filings with the NASDAQ Capital Market regarding the Summit Common Stock to be
issued in the Merger; (C) the filing and declaration of effectiveness of the
Registration Statement; (D) the filing of a certificate of merger with the
Secretary of State pursuant to the DGCL and the issuance of the related
certificate of merger; (E) such filings as are required to be made or approvals
as are required to be obtained under the securities or “Blue Sky” laws of
various states in connection with the issuance of Summit Stock in the Merger;
and (F) receipt of the approvals set forth in Section 8.01(b). As of
the date hereof, Summit is not aware of any reason why the approvals set forth
in Section 8.01(b) will not be received without the imposition of a condition,
restriction or requirement of the type described in Section
8.01(b).
(ii) Subject
to the satisfaction of the requirements referred to in the preceding paragraph
and expiration of the related waiting periods, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or violation of,
or a default under, or give rise to any Lien, any acceleration of remedies or
any right of termination under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or agreement, indenture or
instrument of Summit or of any of its Subsidiaries or to which Summit or any of
its Subsidiaries or properties is subject or bound, (B) constitute a breach or
violation of, or a default under, the certificate of incorporation or by-laws
(or similar governing documents) of Summit or any of its Subsidiaries, or (C)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument.
(g) Financial Reports and SEC
Documents; Absence of Certain Changes or
Events. (i) Summit’s Annual Report on Form 10-K for the
fiscal years ended December 31, 2004, 2005 and 2006, and all other reports,
registration statements, definitive proxy statements or information statements
filed or to be filed by it or any of its Subsidiaries subsequent to December 31,
2004, under the Securities Act or under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act in the form filed or to be filed (collectively “Summit’s SEC Documents”), as
of the date filed, (A) as to form complied or will comply in all material
respects with the applicable requirements under the Securities Act or
the
Exchange
Act, as the case may be, and (B) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and each of the
balance sheets or statements of condition of Summit contained in or incorporated
by reference into any of Summit’s SEC Documents (including the related notes and
schedules thereto) fairly presents, or will fairly present, the financial
position of Summit and its Subsidiaries as of its date, and each of the
statements of income or results of operations and changes in stockholders’
equity and cash flows or equivalent statements of Summit in any of Summit’s SEC
Documents (including any related notes and schedules thereto) fairly presents,
or will fairly present, the results of operations, changes in stockholders’
equity and cash flows, as the case may be, of Summit and its Subsidiaries for
the periods to which they relate, in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except in each case as may be noted therein, and subject to normal year-end
audit adjustments in the case of unaudited statements. Summit’s
Disclosure Schedule lists, and upon request, Summit has delivered to GAFC,
copies of the documentation creating or governing all securitization
transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K) effected by Summit or its Subsidiaries, since December 31,
2006. Arnett & Foster, which has expressed its opinion with
respect to the financial statements of Summit and its Subsidiaries (including
the related notes) included in the Summit SEC Documents is and has been
throughout the periods covered by such financial statements (x) a registered
public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act
of 2002), (y) “independent” with respect to Summit within the meaning of
Regulation S-Y, and Z in compliance with subsection (g) through (l) of Section
10A of the Exchange Act and the related rules of the SEC and the Public
Accounting Oversight Board.
(ii) Since
December 31, 2006, Summit and its Subsidiaries have not incurred any liability
other than in the ordinary course of business consistent with past
practice.
(iii) Since
December 31, 2006, (A) Summit and its Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with past
practice (excluding matters related to this Agreement and the transactions
contemplated hereby) and (B) no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and events
(described in any paragraph of Section 6.04 or otherwise), is reasonably likely
to have a Material Adverse Effect with respect to Summit.
(h) Litigation. Except
as Previously Disclosed, no litigation, claim or other proceeding before any
court or Governmental Authority is pending against Summit or any of its
Subsidiaries and, to the best of Summit’s knowledge, no such litigation, claim
or other proceeding has been threatened.
(i) Regulatory
Matters. (i) Neither Summit nor any of its Subsidiaries or
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from, any
Regulatory Authority.
(ii) Neither
Summit nor any of its Subsidiaries has been advised by any Regulatory Authority
that such Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission.
(j) Laws. Each
of Summit and its Subsidiaries:
(i) is
in compliance with all applicable federal, state, local and foreign statutes,
laws, regulations, ordinances, rules, judgments, orders or decrees applicable
thereto or to the employees conducting such businesses, including, without
limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the
Community Reinvestment Act, the Home Mortgage Disclosure Act and all other
applicable fair lending laws and other laws relating to discriminatory business
practices;
(ii) has
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, all Governmental Authorities that
are required in order to permit them to own or lease their properties and to
conduct their businesses substantially as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect and, to the best of its knowledge, no suspension or cancellation of any
of them is threatened;
(iii) has
received, since December 31, 2004, no notification or communication from any
Governmental Authority (A) asserting that Summit or any of its Subsidiaries is
not in compliance with any of the statutes, regulations, or ordinances which
such Governmental Authority enforces or (B) threatening to revoke any license,
franchise, permit, or governmental authorization (nor, to Summit’s knowledge, do
any grounds for any of the foregoing exist); and
(iv) since
July 1, 2001, is in compliance with the privacy provisions of the
Gramm-Leach-Bliley Act, and all other applicable laws relating to consumer
privacy.
(k) Employee Benefit
Plans. (i) Summit’s
Disclosure Schedule contains a complete and accurate list of all existing bonus,
incentive, deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase, restricted
stock, stock option, severance, welfare and fringe benefit plans, employment or
severance agreements and all similar practices, policies and arrangements in
which any current or former employee (the “Summit Employees”), current
or former consultant (the “Summit Consultants”) or
current or former director (the “Summit Directors”) of Summit
or any of its Subsidiaries participates or to which any Summit Employees, Summit
Consultants or Summit Directors are a party (the “Summit Compensation and Benefit
Plans”).
(ii) Each
Summit Compensation and Benefit Plan has been operated and administered in all
material respects in accordance with its terms and with applicable law,
including, but not limited to, ERISA, the Code, the Securities Act, the Exchange
Act, the Age Discrimination in Employment Act, or any regulations or rules
promulgated thereunder, and all filings, disclosures and notices required by
ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination in
Employment Act and any other applicable law have been timely
made. Each Compensation and Benefit Plan which is an “employee
pension benefit plan” within the meaning of Section 3(2) of ERISA (a “Summit Pension Plan”) and
which is intended to be qualified under Section 401(a) of the Code has received
a favorable determination letter (including a determination that the related
trust under such Summit Compensation and Benefit Plan is exempt from tax under
Section 501(a) of the Code) from the IRS, and Summit is not aware of any
circumstances likely to result in revocation of any such favorable determination
letter. There is no material pending or, to the knowledge of Summit,
threatened legal action, suit or claim relating to the Summit Compensation and
Benefit Plans other than routine claims for benefits. Neither Summit
nor any of its Subsidiaries has engaged in a transaction, or omitted to take any
action, with respect to any Summit Compensation and Benefit Plan that would
reasonably be expected to subject Summit or any of its Subsidiaries to a tax or
penalty imposed by either Section 4975 of the Code or Section 502 of ERISA,
assuming for purposes of Section 4975 of the Code that the taxable period of any
such transaction expired as of the date hereof.
(iii) No
liability (other than for payment of premiums to the PBGC which have been made
or will be made on a timely basis) under Title IV of ERISA has been or is
expected to be incurred by Summit or any of its Subsidiaries with respect to any
ongoing, frozen or terminated “single-employer plan”, within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or any single-employer plan of any entity (an “Summit ERISA Affiliate”)
which is considered one employer with Summit under Section 4001(a)(14) of ERISA
or Section 414(b) or (c) of the Code (an “Summit ERISA Affiliate
Plan”). None of Summit, any of its Subsidiaries or any Summit
ERISA Affiliate has contributed, or has been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any time since
September 26, 1980. No notice of a “reportable event”, within the
meaning of Section 4043 of ERISA for which the 30-day reporting requirement has
not been waived, has been required to be filed for any Summit Compensation and
Benefit Plan or by any Summit ERISA Affiliate Plan within the 12-month period
ending on the date hereof, and no such notice will be required to be filed as a
result of the transactions contemplated by this Agreement. The PBGC
has not instituted proceedings to terminate any Pension Plan or Summit ERISA
Affiliate Plan and, to Summit’s knowledge, no condition exists that presents a
material risk that such proceedings will be instituted. To the
knowledge of Summit, there is no pending investigation or enforcement action by
the PBGC, the DOL or IRS or any other governmental agency with respect to any
Summit Compensation and Benefit Plan. Under each Summit Pension Plan
and Summit ERISA Affiliate Plan, as of the date of the most recent actuarial
valuation performed prior to the date of this Agreement, the actuarially
determined present value of all “benefit liabilities”, within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in such actuarial valuation of such Summit Pension Plan or
Summit ERISA Affiliate Plan), did not exceed the then current value of the
assets of such Summit Pension Plan or Summit ERISA Affiliate Plan and since such
date there has been neither an adverse change in the financial condition of such
Summit Pension Plan or Summit
ERISA
Affiliate Plan nor any amendment or other change to such Pension Plan or ERISA
Affiliate Plan that would increase the amount of benefits thereunder which
reasonably could be expected to change such result.
(iv) All
contributions required to be made under the terms of any Summit Compensation and
Benefit Plan or Summit ERISA Affiliate Plan or any employee benefit arrangements
under any collective bargaining agreement to which Summit or any of its
Subsidiaries is a party have been timely made or have been reflected on Summit’s
financial statements. Neither any Summit Pension Plan nor any Summit
ERISA Affiliate Plan has an “accumulated funding deficiency” (whether or not
waived) within the meaning of Section 412 of the Code or Section 302 of ERISA
and all required payments to the PBGC with respect to each Summit Pension Plan
or Summit ERISA Affiliate Plan have been made on or before their due
dates. None of Summit, any of its Subsidiaries or any Summit ERISA
Affiliate (x) has provided, or would reasonably be expected to be required to
provide, security to any Summit Pension Plan or to any Summit ERISA Affiliate
Plan pursuant to Section 401(a)(29) of the Code, and (y) has taken any action,
or omitted to take any action, that has resulted, or would reasonably be
expected to result, in the imposition of a lien under Section 412(n) of the Code
or pursuant to ERISA.
(v) Neither
Summit nor any of its Subsidiaries has any obligations to provide retiree health
and life insurance or other retiree death benefits under any Summit Compensation
and Benefit Plan, other than benefits mandated by Section 4980B of the Code, and
each such Summit Compensation and Benefit Plan may be amended or terminated
without incurring liability thereunder. There has been no
communication to Employees by Summit or any of its Subsidiaries that would
reasonably be expected to promise or guarantee such Employees retiree health or
life insurance or other retiree death benefits on a permanent
basis.
(vi) Summit
and its Subsidiaries do not maintain any Summit Compensation and Benefit Plans
covering foreign Employees.
(vii) With
respect to each Summit Compensation and Benefit Plan, if applicable, Summit has
provided or made available to GAFC, true and complete copies of existing: (A)
Summit Compensation and Benefit Plan documents and amendments thereto; (B) trust
instruments and insurance contracts; (C) two most recent Forms 5500 filed with
the IRS; (D) most recent actuarial report and financial statement; (E) the most
recent summary plan description; (F) forms filed with the PBGC (other than for
premium payments); (G) most recent determination letter issued by the IRS; (H)
any Form 5310 or Form 5330 filed with the IRS; and (I) most recent
nondiscrimination tests performed under ERISA and the Code (including 401(k) and
401(m) tests).
(viii) The
consummation of the transactions contemplated by this Agreement would not,
directly or indirectly (including, without limitation, as a result of any
termination of employment prior to or following the Effective Time) reasonably
be expected to (A) entitle any Summit Employee, Summit Consultant or Summit
Director to any payment (including severance pay or similar compensation) or any
increase in compensation, (B) result in the vesting or acceleration of any
benefits under any Summit Compensation and Benefit Plan or (C) result in any
material increase in benefits payable under any Summit Compensation and Benefit
Plan.
(ix) Neither
Summit nor any of its Subsidiaries maintains any compensation plans, programs or
arrangements the payments under which would not reasonably be expected to be
deductible as a result of the limitations under Section 162(m) of the Code and
the regulations issued thereunder.
(x) As
a result, directly or indirectly, of the transactions contemplated by this
Agreement (including, without limitation, as a result of any termination of
employment prior to or following the Effective Time), none of Summit, GAFC or
the Surviving Corporation, or any of their respective Subsidiaries will be
obligated to make a payment that would be characterized as an “excess parachute
payment” to an individual who is a “disqualified individual” (as such terms are
defined in Section 280G of the Code), without regard to whether such payment is
reasonable compensation for personal services performed or to be performed in
the future.
(l) No
Brokers. No action has been or will be taken by Summit that
would give rise to any valid claim against any party hereto for a brokerage
commission, finder’s fee or other like payment with respect to the transactions
contemplated by this Agreement.
(m) Takeover
Laws. Summit has taken all action required to be taken by it
in order to exempt this Agreement and the transactions contemplated hereby from,
and this Agreement and the transactions contemplated hereby are exempt from, the
requirements of any Takeover Laws applicable to Summit.
(n) Environmental
Matters. To Summit’s knowledge, neither the conduct nor
operation of Summit or its Subsidiaries nor any condition of any property
presently or previously owned, leased or operated by any of them (including,
without limitation, in a fiduciary or agency capacity), or on which any of them
holds a Lien, violates or violated Environmental Laws and to Summit’s knowledge
no condition has existed or event has occurred with respect to any of them or
any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability under Environmental Laws. To
Summit’s knowledge, neither Summit nor any of its Subsidiaries has received any
notice from any person or entity that Summit or its Subsidiaries or the
operation or condition of any property ever owned, leased, operated, or held as
collateral or in a fiduciary capacity by any of them are or were in violation of
or otherwise are alleged to have liability under any Environmental Law,
including, but not limited to, responsibility (or potential responsibility) for
the cleanup or other remediation of any pollutants, contaminants, or hazardous
or toxic wastes, substances or materials at, on, beneath, or originating from
any such property.
(o) Tax
Matters. (i) All Tax Returns that are required to be filed by
or with respect to Summit and its Subsidiaries have been duly filed, (ii) all
Taxes shown to be due on the Tax Returns referred to in clause (i) have been
paid in full, (iii) the Tax Returns referred to in clause (i) have been examined
by the Internal Revenue Service or the appropriate state, local or foreign
taxing authority or the period for assessment of the Taxes in respect of which
such Tax Returns were required to be filed has expired, (iv) all deficiencies
asserted or assessments made as a result of such examinations have been paid in
full, (v) no issues that have been raised by the relevant taxing authority in
connection with the examination of any of the Tax Returns referred to in clause
(i) are currently pending, and (vi) no waivers of statutes of limitation have
been given by or requested with respect to any Taxes of Summit or its
Subsidiaries. Neither Summit nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on or
before the end of the most recent period covered by Summit’s SEC Documents filed
prior to the date hereof in excess of the amounts accrued with respect thereto
that are reflected in the financial statements included in Summit’s SEC
Documents filed on or prior to the date hereof. As of the date
hereof, neither Summit nor any of its Subsidiaries has any reason to believe
that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
(p) Books and
Records. The books and records of Summit and its Subsidiaries
have been fully, properly and accurately maintained in all material respects,
and there are no material inaccuracies or discrepancies of any kind contained or
reflected therein, and they fairly present the substance of events and
transactions included therein.
(q) Insurance. Summit’s
Disclosure Schedule lists all of the insurance policies, binders, or bonds
maintained by Summit or its Subsidiaries. Summit and its Subsidiaries
are insured with insurers believed to be reputable against such risks and in
such amounts as the management of Summit reasonably has determined to be prudent
in accordance with industry practices. All such insurance policies
are in full force and effect; Summit and its Subsidiaries are not in material
default thereunder; and all claims thereunder have been filed in due and timely
fashion.
(r) Disclosure. The
representations and warranties contained in this Section 6.04 do not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements and information contained in this Section 6.04,
in light of the circumstances under which they are made, not
misleading.
(s) Representations and Warranties of Summit with
Respect to Merger Sub.
(i) Organization, Standing and
Authority. The Merger Sub is or prior to the Effective Time
will be duly organized and validly existing in good standing under the laws of
the state of its organization, and is or prior to the Effective Time will be
duly qualified to do business and in good standing in the jurisdictions where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified. The Merger Sub will have been organized for the
purpose of the transactions contemplated by this Agreement, and no newly
chartered Merger Sub will have previously conducted any business or incurred any
liabilities.
(ii) Power. The Merger
Sub has, or prior to the Effective Time will have, the power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
(iii) Authority. This
Agreement and the transactions contemplated hereby have been, or prior to the
Effective Time will have been, authorized by all requisite action on the part of
the Merger Sub and its respective subsidiaries or members. Upon
execution and delivery of Annex A, this Agreement will be a valid and legally
binding agreement of the Merger Sub enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors’ rights or by general equity
principles).
ARTICLE VII
Covenants
7.01 Reasonable Best
Efforts. Subject to the terms and conditions of this
Agreement, each of GAFC and Summit agrees to use its reasonable best efforts in
good faith to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or desirable, or advisable under applicable
laws, so as to permit consummation of the Merger as promptly as practicable and
otherwise to enable consummation of the transactions contemplated hereby and
shall cooperate fully with the other party hereto to that end.
7.02 Stockholder Approval. GAFC agrees to
take, in accordance with applicable law and the GAFC Certificate and GAFC
By-laws, all action necessary to convene an appropriate meeting of its
stockholders to consider and vote upon the approval of this Agreement and any
other matters required to be approved by GAFC’s stockholders for consummation of
the Merger (including any adjournment or postponement, the “GAFC Meeting”), as promptly
as practicable after the Registration Statement is declared
effective. The GAFC Board will recommend that the GAFC stockholders
approve and adopt the Agreement and the transactions contemplated hereby,
provided that the GAFC Board may fail to make such recommendation, or withdraw,
modify or change any such recommendation, if the GAFC Board, after having
consulted with and considered the advice of outside counsel, has determined that
the making of such recommendation, or the failure to withdraw, modify or change
such recommendation, would be reasonably likely to constitute a breach of the
fiduciary duties of the members of the GAFC Board under applicable
law.
7.03 Registration
Statement. (a) Summit agrees to prepare a
registration statement on Form S-4 (the “Registration Statement”) to
be filed by Summit with the SEC in connection with the issuance of Summit Common
Stock in the Merger (including the prospectus of Summit and proxy solicitation
materials of GAFC constituting a part thereof (the “Proxy Statement”) and all
related documents). GAFC and Summit agree to cooperate, and to cause
their respective Subsidiaries to cooperate, with the other and its counsel and
its accountants in the preparation of the Registration Statement and the Proxy
Statement; and provided
that GAFC and its Subsidiaries have cooperated as required above, Summit agrees
to file the Registration Statement (including the Proxy Statement in preliminary
form) with the SEC as promptly as reasonably practicable and in any event within
forty-five (45) days from the date on which the sale of the Pasedena Branch is
consummated. Each of GAFC and Summit agrees to use all reasonable
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as reasonably practicable after filing
thereof. Summit also agrees to use all reasonable efforts to obtain,
prior to the effective date of the Registration Statement, all necessary state
securities law or “Blue Sky” permits and approvals required to carry out the
transactions contemplated by this Agreement. GAFC agrees to furnish
to Summit all information concerning GAFC, its Subsidiaries, officers, directors
and stockholders as may be reasonably requested in connection with the foregoing
and shall have the right to review and consult with Summit and approve the form
of, and any characterization of such information included in, the Registration
Statement prior to its being filed with the SEC.
(b) Each
of GAFC and Summit agrees, as to itself and its Subsidiaries, that none of the
information supplied or to be supplied by it for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Proxy Statement and any
amendment or supplement thereto will, at the date of mailing to stockholders and
at the time of the GAFC Meeting, as the case may be, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or any
statement which, in the light of the circumstances under which such statement is
made, will be false or misleading with respect to any material fact, or which
will omit to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier statement in the Proxy Statement or any amendment or supplement
thereto. Each of GAFC and Summit further agrees that if it shall
become aware prior to the Effective Date of any information furnished by it
that
would
cause any of the statements in the Proxy Statement to be false or misleading
with respect to any material fact, or to omit to state any material fact
necessary to make the statements therein not false or misleading, to promptly
inform the other party thereof and to take the necessary steps to correct the
Proxy Statement.
(c) Summit
agrees to advise GAFC, promptly after Summit receives notice thereof, of the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension of
the qualification of Summit Stock for offering or sale in any jurisdiction, of
the initiation or threat of any proceeding for any such purpose, or of any
request by the SEC for the amendment or supplement of the Registration Statement
or for additional information.
7.04 Press
Releases. Each of GAFC and Summit agrees that it will
not, without the prior approval of the other party, file any material pursuant
to SEC Rules 165 or 425, or issue any press release or written statement for
general circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law or regulation or NASDAQ rules.
7.05 Access;
Information. (a) Each of GAFC and Summit
agrees that upon reasonable notice and subject to applicable laws relating to
the exchange of information, it shall afford the other party and the other
party’s officers, employees, counsel, accountants and other authorized
representatives, such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, tax returns, and, subject to the consent of the independent
auditors, work papers of independent auditors), properties, personnel and to
such other information as any party may reasonably request and, during such
period, it shall furnish promptly to such other party (i) a copy of each
material report, schedule and other document filed by it pursuant to the
requirements of federal or state securities or banking laws, and (ii) all other
information concerning the business, properties and personnel of it as the other
may reasonably request.
(b) Each
agrees that it will not, and will cause its representatives not to, use any
information obtained pursuant to this Section 7.05 (as well as any other
information obtained prior to the date hereof in connection with the entering
into of this Agreement) for any purpose unrelated to the consummation of the
transactions contemplated by this Agreement. Subject to the
requirements of law, each party will keep confidential, and will cause its
representatives to keep confidential, all information and documents obtained
pursuant to this Section 7.05 (as well as any other information obtained prior
to the date hereof in connection with the entering into of this Agreement)
unless such information (i) was already known to such party, (ii) becomes
available to such party from other sources not known by such party to be bound
by a confidentiality obligation, (iii) is disclosed with the prior written
approval of the party to which such information pertains or (iv) is or becomes
readily ascertainable from published information or trade sources. In
the event that this Agreement is terminated or the transactions contemplated by
this Agreement shall otherwise fail to be consummated, each party shall promptly
cause all copies of documents or extracts thereof containing information and
data as to another party hereto to be returned to the party which furnished the
same. No investigation by either party of the business and affairs of
the other shall affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Agreement, or the conditions to either
party’s obligation to consummate the transactions contemplated by this
Agreement.
(c) During
the period from the date of this Agreement to the Effective Time, each party
shall promptly furnish the other with copies of all monthly and other interim
financial statements produced in the ordinary course of business as the same
shall become available.
7.06 Acquisition
Proposals. GAFC agrees that it shall not, and shall
cause its Subsidiaries and its Subsidiaries’ officers, directors, agents,
advisors and affiliates not to, solicit or encourage inquiries or proposals with
respect to, or engage in any negotiations concerning, or provide any
confidential information to, or have any discussions with any person relating
to, any Acquisition Proposal. It shall immediately cease and cause to
be terminated any activities, discussions or negotiations conducted prior to the
date of this Agreement with any parties other than Summit with respect to any of
the foregoing and shall use its reasonable best efforts to enforce any
confidentiality or similar agreement relating to an Acquisition
Proposal. Notwithstanding the foregoing, if, at any time the GAFC
Board determines in good faith, after consultation with outside counsel, that
failure to do so would be reasonably likely to constitute a breach of its
fiduciary duties under applicable law, GAFC, in response to a written
Acquisition Proposal that was unsolicited or that did not otherwise result from
a breach of this Section 7.06, may furnish non-public information with respect
to GAFC to the Person who made such Acquisition Proposal and participate in
negotiations regarding such Acquisition Proposal.
7.07 Affiliate
Agreements. (a) Not
later than the 15th day prior to the mailing of the Proxy Statement, GAFC shall
deliver to Summit a schedule of each person that, to the best of its knowledge,
is or is reasonably likely to be, as of the date of the GAFC Meeting, deemed to
be an “affiliate” of GAFC (each, a “GAFC Affiliate”) as that term
is used in Rule 145 under the Securities Act.
(b) GAFC
shall use its reasonable best efforts to cause each person who may be deemed to
be a GAFC Affiliate to execute and deliver to Summit on or before the date of
mailing of the Proxy Statement an agreement in the form attached hereto as
Exhibit A.
7.08 Takeover
Laws. No party hereto shall take any action that would
cause the transactions contemplated by this Agreement to be subject to
requirements imposed by any Takeover Law and each of them shall take all
necessary steps within its control to exempt (or ensure the continued exemption
of) the transactions contemplated by this Agreement from any applicable Takeover
Law, as now or hereafter in effect.
7.09 Certain
Policies. Immediately prior to the Effective Date, GAFC
shall, consistent with generally accepted accounting principles and on a basis
mutually satisfactory to it and Summit, modify and change its loan, litigation
and real estate valuation policies and practices (including loan classifications
and levels of reserves) so as to be applied on a basis that is consistent with
that of Summit and shall make appropriate accruals for any employee benefits,
plans, arrangements or obligations assumed by Summit under this Agreement;
provided, however, that GAFC shall not be obligated to take any such action
pursuant to this Section 7.09 unless and until Summit acknowledges that all
conditions to its obligation to consummate the Merger have been satisfied and
certifies to GAFC that Summit’s representations and warranties, subject to
Section 6.02, are true and correct as of such date and that Summit is otherwise
material in compliance with this Agreement. Summit and GAFC also
shall consult with respect to the character, amount, and timing of restructuring
and Merger-related expense charges to be taken by each of them in connection
with the transactions contemplated by this Agreement and shall take such charges
in accordance with GAAP as may be mutually agreed upon by
them. GAFC’s representations, warranties and covenants contained in
this Agreement shall not be deemed to be untrue or breached in any respect for
any purpose as a consequence of any modifications or changes undertaken solely
on account of this Section 7.09.
7.10 Regulatory
Applications. (a) Summit and GAFC and their
respective Subsidiaries shall cooperate and use their respective reasonable best
efforts to prepare all documentation, to effect all filings and to obtain all
permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary to consummate the transactions contemplated
by this Agreement. Each of Summit and GAFC shall have the right to
review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to, all material written information submitted to any
third party or any Governmental Authority in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right,
each of the parties hereto agrees to act reasonably and as promptly as
practicable. Each party hereto agrees that it will consult with the
other party hereto with respect to the obtaining of all material permits,
consents, approvals and authorizations of all third parties and Governmental
Authorities necessary or advisable to consummate the transactions contemplated
by this Agreement and each party will keep the other party apprised of the
status of material matters relating to completion of the transactions
contemplated hereby.
(b) Each
party agrees, upon request, to furnish the other party with all information
concerning itself, its Subsidiaries, directors, officers and stockholders and
such other matters as may be reasonably necessary or advisable in connection
with any filing, notice or application made by or on behalf of such other party
or any of its Subsidiaries to any third party or Governmental
Authority.
7.11 Indemnification. (a) Following
the Effective Date and for a period of three (3) years thereafter, Summit shall
indemnify, defend and hold harmless the present directors, officers and
employees of GAFC and its Subsidiaries (each, an “Indemnified Party”) against
all costs or expenses (including reasonable attorneys’ fees), judgments, fines,
losses, claims, damages or liabilities (collectively, “Costs”) incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement) to the fullest
extent that GAFC is permitted or required to indemnify (and advance expenses to)
its directors and officers under the laws of the State of Delaware,
the GAFC Certificate, the GAFC By-Laws and any agreement as in effect on the
date hereof; provided
that any determination required to be made with respect to whether an officer’s,
director’s or employee’s conduct complies with the standards set forth under
Delaware law, the GAFC
Certificate,
the GAFC By-Laws and any agreement shall be made by independent counsel (which
shall not be counsel that provides material services to Summit) selected by
Summit and reasonably acceptable to such officer or director.
(b) Any
Indemnified Party wishing to claim indemnification under Section 7.11(a), upon
learning of any claim, action, suit, proceeding or investigation described
above, shall promptly notify Summit thereof; provided that the failure so
to notify shall not affect the obligations of Summit under Section 7.11(a)
unless and to the extent that Summit is actually prejudiced as a result of such
failure.
(c) If
Summit or any of its successors or assigns shall consolidate with or merge into
any other entity and shall not be the continuing or surviving entity of such
consolidation or merger or shall transfer all or substantially all of its assets
to any entity, then and in each case, proper provision shall be made so that the
successors and assigns of Summit shall assume the obligations set forth in this
Section 7.11.
(d)
The provisions of this Section 7.11 shall survive the Effective Time and are
intended to be for the benefit of, and shall be enforceable by, each Indemnified
Party and his or her heirs and representatives.
7.12 Benefit
Plans. (a) It is the intention of Summit
that within a reasonable period of time following the Effective Time (i) it will
provide employees of GAFC with employee benefit plans substantially similar in
the aggregate to those provided to similarly situated employees of Summit, (ii)
Summit shall cause any and all pre-existing condition limitations (to the extent
such limitations did not apply to a pre-existing condition under the
Compensation and Benefit Plans) and eligibility waiting periods under group
health plans to be waived with respect to such participants and their eligible
dependents, and (iii) all GAB employees will receive credit for years of service
with GAFC and its predecessors prior to the Effective Time for purposes of
eligibility and vesting and not for purposes of benefit accrual under Summit’s
benefit plans. Summit shall maintain GAFC’s existing employee benefit
plans until such time as Summit has provided similar plans to GAFC’s employees
as contemplated in the preceding sentence. GAB employees shall not be
entitled to accrual of benefits or allocation of contributions under Summit’s
benefit plans based on years of service with GAFC and its predecessors prior to
the Effective Date.
(b) Immediately
prior to the Effective Date, GAFC shall take such action as may be necessary to
terminate its 401(k) plan, including accruing the estimated expense associated
with terminating the 401(k) plan. Following the receipt of a
favorable determination letter from the IRS relating to the termination of the
401(k) plan, the assets of the plan shall be distributed to participants as
provided in the plan. Notwithstanding the foregoing, the 401(k) plan
trustee may make distributions to all non-continuing GAB employees before the
receipt of a favorable determination letter. In the event a favorable
ruling is not issued, GAFC agrees that termination of the 401(k) plan shall not
occur and the 401(k) plan shall be merged with Summit’s 401(k)
plan.
7.13 Notification of Certain
Matters. Each of GAFC and Summit shall give prompt
notice to the other of any fact, event or circumstance known to it that (i) is
reasonably likely, individually or taken together with all other facts, events
and circumstances known to it, to result in any Material Adverse Effect with
respect to it or (ii) would cause or constitute a material breach of any of its
representations, warranties, covenants or agreements contained
herein.
7.14 Current Public
Information. Summit agrees that it
shall, for a period of three (3) years following the Effective Time, use its
best efforts to meet the current public information requirements as set forth in
paragraph (c) of Rule 144 promulgated under the Securities Act, and will provide
those persons providing affiliate letters pursuant to Section 7.07 with such
other information as they may reasonably require and to otherwise cooperate with
such persons to facilitate any sales of Summit Common Stock issued to such
persons pursuant to this Agreement in compliance with the provisions of Rule 144
and/or Rule 145 promulgated under the Securities Act. The provisions
of this Section 7.14 shall survive the Effective Time and are intended to be for
the benefit of, and shall be enforceable by, such affiliates of
GAFC.
7.15 Contractual Rights of Current
Employees. At and following the Effective Time, Summit
shall honor, and Summit shall continue to be obligated to perform, in accordance
with their terms, all benefit obligations to, and contractual rights of, current
and former employees of GAFC and its Subsidiaries existing as of the Effective
Date, as well as all employment, severance, deferred compensation, split dollar
life insurance or “change-in-control” agreements, plans or policies of GAFC and
its Subsidiaries which are Previously Disclosed. Summit acknowledges
that
the
consummation of the Merger will constitute a “change-in-control” of for purposes
of any employee benefit plans, agreements and arrangements of GAFC and its
Subsidiaries.
7.16 GAFC Trust Preferred
Securities.
(a) GAFC
shall cooperate with Summit to permit Summit to assume the obligations of GAFC
under the Indenture and the Guarantee and to receive the transfer of the Common
Securities, as provided in Section 2.03, and to enable Summit to exercise the
call feature of the GAFC Trust Preferred Stock, including by causing GAFC's
counsel to deliver such opinions as the Trustee may reasonably require with
respect to the assumption of the GAFC Trust Preferred Securities.
(b) From
and after the date hereof and until and including the Closing Date, GAFC shall
(i) pay, or accrue, as applicable , and cause the Trust to pay, or accrue, as
applicable, all amounts due (when and as due) and comply, and cause each Trust
to comply, with all of its obligations under the Indenture and the Guarantee,
and such other transaction documents (together the “Operative Documents”), and
(ii) not enter into any agreement (or amend, alter or agree to amend or alter
any Operative Document or other agreement) with the Trust.
7.17 Transition. Commencing on
the date hereof, and in all cases subject to applicable law and regulation, GAFC
shall, and shall cause its Subsidiaries to, cooperate with Summit and its
Subsidiaries to facilitate the integration of the parties and their respective
businesses effective as of the Closing Date or such later date as may be
determined by Summit. Without limiting the generality of the
foregoing, from the date hereof through the Closing Date and consistent with the
performance of their day-to-day operations and the continuous operation of GAFC
and its Subsidiaries in the ordinary course of business, GAFC shall cause the
employees and officers of GAFC and its Subsidiaries to use their reasonable best
efforts to provide support, including support from its outside contractors and
vendors, and to assist Summit in performing all tasks, including equipment
installation, reasonably required to result in a successful integration at the
Closing or such later date as may be determined by Summit. In
addition, GAFC shall cooperate with Summit in seeking to amend certain lease
arrangements of GAFC and its Subsidiaries as specified by Summit, such
amendments to be effective only upon consummation of the Merger.
ARTICLE VIII
Conditions to Consummation of the
Merger
8.01 Conditions to Each Party’s
Obligation to Effect the Merger. The respective
obligation of each of Summit and GAFC to consummate the Merger is subject to the
fulfillment by Summit and GAFC prior to the Effective Time of each of the
following conditions:
(a) Stockholder
Approval. This Agreement shall have been duly approved by the
requisite vote of the stockholders of GAFC.
(b) Regulatory
Approvals. All regulatory approvals required to consummate the
transactions contemplated hereby shall have been obtained and shall remain in
full force and effect and all statutory waiting periods in respect thereof shall
have expired and no such approvals shall contain any conditions, restrictions or
requirements (other than with respect to the sale of the Pasadena Branch) which
the Summit Board reasonably determines in good faith would either before or
after the Effective Time have a Material Adverse Effect on the Surviving
Corporation and its Subsidiaries taken as a whole.
(c) No
Injunction. No Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits
consummation of the transactions contemplated by this Agreement.
(d) Registration
Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) Blue Sky
Approvals. All permits and other authorizations under state
securities laws necessary to consummate the transactions contemplated hereby and
to issue the shares of Summit Common Stock to be issued in the Merger shall have
been received and be in full force and effect.
(f) Listing. To
the extent required, the shares of Summit Common Stock to be issued in the
Merger shall have been approved for listing on the NASDAQ Capital Market,
subject to official notice of issuance.
8.02 Conditions to Obligation of
GAFC. The obligation of GAFC to consummate the Merger
is also subject to the fulfillment or written waiver by GAFC prior to the
Effective Time of each of the following conditions:
(a) Representations and
Warranties. The representations and warranties of Summit set
forth in this Agreement shall be true and correct, subject to Section 6.02, as
of the date of this Agreement and as of the Effective Date as though made on and
as of the Effective Date (except that representations and warranties that by
their terms speak as of the date of this Agreement or some other date shall be
true and correct as of such date), and GAFC shall have received a certificate,
dated the Effective Date, signed on behalf of Summit by the Chief Executive
Officer and the Chief Financial Officer of Summit to such effect.
(b) Performance of Obligations
of Summit. Summit shall have performed in all material
respects all obligations required to be performed by it under this Agreement at
or prior to the Effective Time, and GAFC shall have received a certificate,
dated the Effective Date, signed on behalf of Summit by the Chief Executive
Officer and the Chief Financial Officer of Summit to such effect.
8.03 Conditions to Obligation of
Summit. The obligation of Summit to consummate the
Merger is also subject to the fulfillment or written waiver by Summit prior to
the Effective Time of each of the following conditions:
(a) Representations and
Warranties. The representations and warranties of GAFC set
forth in this Agreement shall be true and correct, subject to Section 6.02, as
of the date of this Agreement and as of the Effective Date as though made on and
as of the Effective Date (except that representations and warranties that by
their terms speak as of the date of this Agreement or some other date shall be
true and correct as of such date) and Summit shall have received a certificate,
dated the Effective Date, signed on behalf of GAFC by the Chief Executive
Officer and the Chief Financial Officer of GAFC to such effect.
(b) Performance of Obligations
of GAFC. GAFC shall have performed in all material respects
all obligations required to be performed by it under this Agreement at or prior
to the Effective Time, and Summit shall have received a certificate, dated the
Effective Date, signed on behalf of GAFC by the Chief Executive Officer and the
Chief Financial Officer of GAFC to such effect.
(c) Opinion of Summit’s
Counsel. Summit and GAFC shall have received an opinion of
Hunton &Williams, special counsel to Summit, dated the Effective Date, to
the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, (i) the Merger constitutes a reorganization under Section
368 of the Code (ii) no gain or loss will be recognized by stockholders of GAFC
who receive shares of Summit Common Stock in exchange for shares of GAFC Common
Stock, except that gain or loss may be recognized as to cash received as Merger
Consideration and/or in lieu of fractional share interests, and (iii) after the
Merger, Summit will be allowed to carry forward GAFC’s consolidated net
operating losses under Section 382 of the Code. In rendering its
opinion, Hunton &Williams may require and rely upon representations
contained in letters from Summit and others.
(d) Core
Deposits. The balance of Core Deposits shall not be less than
$144 million .
(e) Sale of
Branch. At least forty-five (45) days prior to
consummation of the Merger, GAB shall have consummated the sale of the Pasadena
Branch.
ARTICLE IX
Termination
9.01 Termination. This
Agreement may be terminated, and the Merger may be abandoned:
(a) Mutual
Consent. At any time prior to the Effective Time, by the
mutual consent of Summit and GAFC, if the Board of Directors of each so
determines by vote of a majority of the members of its entire
Board.
(b) Breach. At
any time prior to the Effective Time, by Summit or GAFC (provided that the party
seeking termination is not then in material breach of any representation,
warranty, covenant or other agreement contained herein), if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event of either: (i) a breach by the other party of any
representation or warranty contained herein (subject to the standard set forth
in Section 6.02), which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of such breach; or
(ii) a breach by the other party of any of the covenants or agreements contained
herein, which breach cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such breach, provided that
such breach (whether under (i) or (ii)) would be reasonably likely, individually
or in the aggregate with other breaches, to result in a Material Adverse
Effect.
(c) Delay. At
any time prior to the Effective Time, by Summit or GAFC, if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event that the Acquisition is not consummated by December 31,
2007, except to the extent that the failure of the Acquisition then to be
consummated arises out of or results from the knowing action or inaction of the
party seeking to terminate pursuant to this Section 9.01(c).
(d) No
Approval. By GAFC or Summit, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, in the
event (i) the approval of any Governmental Authority required for consummation
of the Merger and the other transactions contemplated by this Agreement shall
have been denied by final nonappealable action of such Governmental Authority or
(ii) the stockholder approval required by Section 8.01(a) herein is not obtained
at the GAFC Meeting.
(e) Failure to Recommend,
Etc. At any time prior to the GAFC Meeting, by Summit if the
GAFC Board shall have failed to make its recommendation referred to in Section
7.02, withdrawn such recommendation or modified or changed such recommendation
in a manner adverse in any respect to the interests of Summit.
(f) Superior
Proposal. By GAFC, if the GAFC Board so determines by a vote
of the majority of the members of its entire board, at any time prior to the
GAFC Meeting, in order to concurrently enter into an agreement with respect to
an unsolicited Acquisition Proposal that was received and considered by GAFC in
compliance with Section 7.06 and that would, if consummated, result in a
transaction that is more favorable to GAFC’s stockholders from a financial point
of view than the Merger (a “Superior Proposal”); provided, however, that
(i) this Agreement may be terminated by GAFC pursuant to this Section 9.01(f)
only after the fifth business day following Summit’s receipt of written notice
from GAFC advising Summit that GAFC is prepared to enter into an agreement with
respect to a Superior Proposal and only if, during such five business day period
Summit elects not to make an offer or Summit does not make an offer to GAFC that
the GAFC Board determines in good faith, after consultation with its financial
and legal advisors, is at least as favorable as the Superior
Proposal.
9.02 Effect of Termination and
Abandonment. In the event of termination of this
Agreement and the abandonment of the Merger pursuant to this Article IX, no
party to this Agreement shall have any liability or further obligation to any
other party hereunder except (i) as set forth in Section 9.03 and (ii) that
termination will not relieve a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
9.03 Fees and Expenses. (a) In
the event that this Agreement shall be terminated (i) by either party pursuant
to Section 9.01(d)(ii), and, at or prior to the time of the failure of GAFC’s
stockholders to approve this Agreement and the Merger, an Acquisition Proposal
shall have been made public and not withdrawn, or (ii) by GAFC pursuant to
Section 9.01(f), then GAFC shall pay Summit in immediately available funds a fee
of $750,000 (the “Section
9.03(a) Fee”) as follows: (i) $250,000 no later than two
(2) business days after the date of termination, (ii)
$100,000
on the date that is one (1) year after the termination date, (iii) $100,000 on
the date that is two (2) years after the termination date, and (iv) $300,000 on
the date that is three (3) years after the termination
date. Notwithstanding the foregoing, if GAFC consummates the
transaction that is the subject of the Acquisition Proposal, then the remaining
balance shall be due and payable no later than two (2) business days after
consummation.
(b) In
the event that (i) this Agreement is terminated pursuant to Section 9.01(e); or
(ii) this Agreement is terminated by Summit pursuant to Section 9.01(b); or
(iii) this Agreement is terminated pursuant to Section 9.01(c), then, in any
such event, GAFC shall pay Summit promptly (but in no event later than two
business days after the first of such events shall have occurred) a fee of
$250,000 (the “Section 9.03(b)
Fee”), which amount shall be payable in immediately available
funds.
(c) In
the event that GAFC shall fail to pay the Section 9.03(a) Fee or the Section
9.03(b) Fee when due, the applicable fee shall be deemed to include the costs
and expenses actually incurred or accrued by Summit (including, without
limitation, fees and expenses of counsel) in connection with the collection of
the applicable fee under the enforcement of this Section 9.03, together with
interest on such applicable unpaid fee, commencing on the date that the
applicable fee became due, at a rate equal to the rate of interest publicly
announced by Citibank, N.A., from time to time, in the City of New York, as such
bank’s Base Rate plus 2.00%.
(d) In
no event shall GAFC be obligated to pay both the Section 9.03(a) Fee and the
Section 9.03(b) Fee.
ARTICLE X
Miscellaneous
10.01 Survival. No
representations, warranties, agreements and covenants contained in this
Agreement shall survive the Effective Time (other than Sections 2.02(b), 4.04,
7.11, 7.12, 7.14, 7.15 and this Article X which shall survive the Effective
Time) or the termination of this Agreement if this Agreement is terminated prior
to the Effective Time (other than Sections 7.03(b), 7.05(b), 9.02, this Article
X which shall survive such termination).
10.02 Waiver;
Amendment. Prior to the Effective Time, any provision
of this Agreement may be (i) waived by the party benefited by the provision, or
(ii) amended or modified at any time, by an agreement in writing between the
parties hereto executed in the same manner as this Agreement, except that after
the GAFC Meeting, this Agreement may not be amended if it would violate the
DGCL.
10.03 Counterparts. This
Agreement may be executed in one or more counterparts, each of which shall be
deemed to constitute an original.
10.04 Governing
Law. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State (except to the
extent that mandatory provisions of Federal law are applicable).
10.05 Expenses. Each party hereto will bear
all expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby, except that printing expenses shall be shared
equally between GAFC and Summit.
10.06 Notices. All
notices, requests and other communications hereunder to a party shall be in
writing and shall be deemed given if personally delivered, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to such party at its address set forth below or such other address as
such party may specify by notice to the parties hereto.
If to
GAFC, to:
GREATER
ATLANTIC FINANCIAL CORP.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Attn: Carroll
E. Amos
President and Chief Executive
Officer
With a
copy to:
Muldoon
Murphy & Aguggia LLP
5101
Wisconsin Avenue, NW
Washington,
DC 20016
Facsimile: (202)
966-9409
Attn: George
W. Murphy, Jr., Esq.
If to
Summit, to:
SUMMIT
FINANCIAL GROUP, INC.
300 North
Main Street
P. O. Box
179
Moorefield,
West Virginia 26836
Attn:
H. Charles Maddy, III
President and Chief Executive
Officer
Robert S. Tissue
Chief Financial Officer
With a
copy to:
Bowles
Rice McDavid Graff & Love LLP
600
Quarrier Street
P. O. Box
1386
Charleston,
West Virginia 25325-1386
Facsimile: (305)
343-3058
Attn: Sandra
M. Murphy, Esq.
10.07 Entire Understanding; No Third Party
Beneficiaries. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and this Agreement supersedes any and all other
oral or written agreements heretofore made. Except for Sections 7.11
and 7.12, nothing in this Agreement expressed or implied, is intended to confer
upon any person, other than the parties hereto or their respective successors,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.08 Interpretation;
Effect. When a reference is made in this Agreement to
Sections, Exhibits or Disclosure Schedules, such reference shall be to a Section
of, or Exhibit or Disclosure Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and are not part of this
Agreement. Whenever the words “include,” “includes” or “including”
are used in this Agreement, they shall be deemed to be followed by the words
“without limitation.” No provision of this Agreement shall be
construed to require GAFC, Summit or any of their respective Subsidiaries,
affiliates or directors to take any action which would violate applicable law
(whether statutory or common law), rule or regulation.
IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be executed in counterparts by
their duly authorized officers, all as of the day and year first above
written.
GREATER ATLANTIC
FINANCIAL CORP.
By: /s/ Carroll E.
Amos
Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT FINANCIAL
GROUP, INC.
By: /s/ H. Charles Maddy,
III
H. Charles Maddy,
III
Title: President
and Chief Executive Officer
ANNEX A
SUPPLEMENT FOR MERGER SUB
ACCESSION
TO MERGER
AGREEMENT
This
SUPPLEMENT FOR MERGER SUB ACCESSION TO MERGER AGREEMENT, dated as of the 22nd day of October,
2007 (this “Supplement”), to the Agreement and Plan of Reorganization, dated as
of April 12, 2007 (as may be amended from time to time in accordance with the
terms thereof, the “Agreement”), by and between SUMMIT FINANCIAL GROUP, INC., a
West Virginia corporation (“Summit”) and GREATER ATLANTIC FINANCIAL CORP., a
Delaware corporation (“GAFC”).
WHEREAS,
terms used but not otherwise defined herein have the meanings specified in the
Agreement; and
WHEREAS,
pursuant to Section 2.01 of the Agreement, Summit has determined to consummate
the Merger in part through the merger of GAFC with and into SFG II, Inc., a West
Virginia corporation (the “Merger Sub”).
NOW,
THEREFORE, in consideration of the premises and of the mutual covenants,
representations and warranties contained in the Agreement, the parties agree as
follows:
1. Agreement. Merger
Sub agrees (i) to be bound by and subject to the terms of the Agreement, (ii) to
become a party to the Agreement, as provided by Section 2.01 thereof, (iii) to
perform all obligations and agreements set forth therein, and (iv) to adopt the
Agreement with the same force and effect as if the undersigned were originally a
party thereto.
2. Notice. Any
notice required to be provided pursuant to Section 10.06 of the Agreement shall
be given to the Merger Sub at the following address:
300 North Main Street
P.O. Box 179
Moorefield, West Virginia
26836
IN
WITNESS WHEREOF, this Supplement has been duly executed and delivered by the
undersigned, duly authorized thereunto as of the date first hereinabove
written.
SFG II,
INC.
By:
/s/ Robert S.
Tissue______________________
Name:
Robert S. Tissue
Title:
Vice President
GREATER
ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E.
Amos__________________
Name: Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT
FINANCIAL GROUP, INC.
By: /s/ Robert S.
Tissue_________________
Name: Robert
S. Tissue
Title: Senior
Vice President and
Chief Financial
Officer
EXHIBIT A
FORM OF GAFC AFFILIATE
LETTER
______________,
2007
SUMMIT
FINANCIAL GROUP, INC.
300 North
Main Street
Moorefield,
West Virginia 26836
Attention: Robert
S. Tissue
Chief Financial Officer
Ladies
and Gentlemen:
I have
been advised that I may be deemed to be, but do not admit that I am, an
“affiliate” of GREATER ATLANTIC FINANCIAL CORP. a Delaware
corporation (“GAFC”), as that term is defined in Rule 145 promulgated by the
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended (the “Securities Act”). I understand that pursuant to the
terms of the Agreement and Plan of Reorganization, dated as of ______, 2007 (the
“Agreement”), by and between SUMMIT FINANCIAL GROUP, INC., a West Virginia
corporation (“Summit”), and GAFC, GAFC plans to merge with and into a
wholly-owned subsidiary of Summit (the “Merger”).
I further
understand that as a result of the Merger, I may receive shares of common stock,
par value $2.50 per share, of Summit (“Summit Stock”) in exchange for shares of
common stock, par value $0.01 per share, of GAFC (“GAFC Stock”).
I have
carefully read this letter and reviewed the Agreement and discussed their
requirements and other applicable limitations upon my ability to sell, transfer,
or otherwise dispose of Summit Stock, to the extent I felt necessary, with my
counsel or counsel for GAFC.
I
represent, warrant and covenant with and to Summit that in the event I receive
any Summit Stock as a result of the Merger:
1. I
shall not make any sale, transfer, or other disposition of such Summit Stock
unless (i) such sale, transfer or other disposition has been registered under
the Securities Act, (ii) such sale, transfer or other disposition is made in
conformity with the provisions of Rule 145 under the Securities Act (as such
rule may be amended from time to time), or (iii) in the opinion of counsel in
form and substance reasonably satisfactory to Summit, or under a “no-action”
letter obtained by me from the staff of the SEC, such sale, transfer or other
disposition will not violate or is otherwise exempt from registration under the
Securities Act.
2. I
understand that Summit is under no obligation to register the sale, transfer or
other disposition of shares of Summit Stock by me or on my behalf under the
Securities Act or to take any other action necessary in order to make compliance
with an exemption from such registration available.
3. I
understand that stop transfer instructions will be given to Summit’s transfer
agent with respect to shares of Summit Stock issued to me as a result of the
Merger and that there will be placed on the certificates for such shares, or any
substitutions therefor, a legend stating in substance:
The shares represented by this
certificate were issued in a transaction to which Rule 145 promulgated under the
Securities Act of 1933 applies. The shares represented by this
certificate may be transferred only in accordance with the terms of a letter
agreement, dated _____________, between the registered holder hereof and SUMMIT
FINANCIAL GROUP, INC., a copy of which agreement is on file at the principal
offices of SUMMIT FINANCIAL GROUP, INC.”
4. I
understand that, unless transfer by me of the Summit Stock issued to me as a
result of the Merger has been registered under the Securities Act or such
transfer is made in conformity with the provisions of Rule
145(d)
under the Securities Act, Summit reserves the right, in its sole discretion, to
place the following legend on the certificates issued to my
transferee:
The shares represented by this
certificate have not been registered under the Securities Act of 1933 and were
acquired from a person who received such shares in a transaction to which Rule
145 under the Securities Act of 1933 applies. The shares have been
acquired by the holder not with a view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities Act of 1933 and may
not be offered, sold, pledged or otherwise transferred except in accordance with
an exemption from the registration requirements of the Securities Act of
1933.”
It is
understood and agreed that the legends set forth in paragraphs (3) and (4) above
shall be removed by delivery of substitute certificates without such legends if
I shall have delivered to Summit (i) a copy of a “no action” letter from the
staff of the SEC, or an opinion of counsel in form and substance reasonably
satisfactory to Summit, to the effect that such legend is not required for
purposes of the Act, or (ii) evidence or representations satisfactory to Summit
that the Summit Stock represented by such certificates is being or has been sold
in conformity with the provisions of Rule 145(d).
I further
understand and agree that this letter agreement shall apply to all shares of
Summit Stock that I am deemed to beneficially own pursuant to applicable federal
securities law.
Very truly
yours,
By
____________________________________
Accepted
this ____ day of ______________, 2007.
GREATER ATLANTIC FINANCIAL
CORP.
By
Name: Carroll
E. Amos
Title: President
and Chief Executive Officer
SUMMIT FINANCIAL GROUP,
INC.
By
|
Name:
|
H.
Charles Maddy, III
|
|
Title:
|
President
and
|
Chief
Executive Officer
|
ANNEX A-1
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this
“Amendment”), dated as of December 6, 2007, is made and entered into by and
among SUMMIT FINANCIAL GROUP, INC., a West Virginia
corporation (“Summit”), GREATER ATLANTIC FINANCIAL CORP., a Delaware
corporation (“Greater Atlantic”) and SFG II, INC., a West Virginia corporation
(“SFG”).
WHEREAS, Summit and Greater Atlantic entered into an Agreement and
Plan of Reorganization dated as of April 12, 2007 (the “Agreement”); and
WHEREAS, SFG became a party to the Agreement by executing that
certain Supplement for Merger Sub Accession to Merger Agreement dated October
22, 2007; and
WHEREAS, pursuant to the terms of the Agreement Greater Atlantic
will be merged into SFG with SFG surviving the merger (the “Merger”); and
WHEREAS, the Agreement provides that the Board of Directors of
Greater Atlantic or Summit may terminate the Agreement in the event the Merger
is not consummated by December 31, 2007; and
WHEREAS, pursuant to Section 10.02 of the Agreement, Summit,
Greater Atlantic and SFG have agreed to amend Section 9.01(c) of the Agreement
to extend the date on which the Agreement may be terminated if the Merger is not
consummated to March 31, 2008.
NOW THEREFORE, for valid consideration, the parties hereto
agree as follows:
1. Amendment to the
Agreement. Effective as of the date of this Amendment, Section
9.01(c) of the Agreement is amended to read as follows:
“(c) Delay. At
any time prior to the Effective Time, by Summit or GFAC, if its Board of
Directors so determines by vote of a majority of the members of its entire
Board, in the event that the Acquisition is not consummated by March 31, 2008,
except to the extent that the failure of the Acquisition then to be consummated
arises out of or results from the knowing action or inaction of the party
seeking to terminate pursuant to this Section 9.01(c).”
2. Enforceable
Documents. Except as modified herein, all terms and conditions
of the Agreement, and any and all other documents executed or delivered by or on
behalf of Summit, Greater Atlantic or SFG in connection with the Agreement, as
the same may be supplemented, modified, amended or extended from time to time,
are and shall remain in full force and effect.
3. Counterparts. This
Amendment may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument, any party hereto may
execute this Amendment by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Amendment as of the date first written above.
SUMMIT FINANCIAL GROUP, INC.
By:
/s/ H. Charles Maddy,
III
Name: H.
Charles Maddy,
III
Title: President
and Chief Executive Officer
GREATER ATLANTIC FINANCIAL CORP.
By:
/s/ Carroll E.
Amos
Name: Carroll
E.
Amos
Title:
President and Chief Executive Officer
SFG II, INC.
By:
/s/ H. Charles Maddy,
III
Name: H.
Charles Maddy,
III
Title: President
Section
262 of the Delaware General Corporation Law
DELAWARE
CODE ANNOTATED
TITLE
8. CORPORATIONS
CHAPTER
1. GENERAL CORPORATION LAW
SUBCHAPTER
IX. MERGER, CONSOLIDATION OR CONVERSION
8 Del. C. § 262 (
2008 )
§ 262.
Appraisal rights
(a) Any
stockholder of a corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares through the effective
date of the merger or consolidation, who has otherwise complied with subsection
(d) of this section and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to § 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair value of
the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the
word "stockholder" means a holder of record of stock in a stock corporation and
also a member of record of a nonstock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the
depository.
(b)
Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this
title), § 252, § 254, § 257, § 258, § 263 or § 264 of this title:
(1)
Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of § 251 of this
title.
(2)
Notwithstanding paragraph (1) of this subsection, appraisal rights under this
section shall be available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263
and 264 of this title to accept for such stock anything except:
a.
Shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b.
Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of record by more than
2,000 holders;
c.
Cash in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a. and b. of this paragraph; or
d.
Any combination of the shares of stock, depository receipts and cash in lieu of
fractional shares or fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3)
In the event all of the stock of a subsidiary Delaware corporation party to a
merger effected under § 253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c) Any
corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any class or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d)
Appraisal rights shall be perfected as follows:
(1)
If a proposed merger or consolidation for which appraisal rights are provided
under this section is to be submitted for approval at a meeting of stockholders,
the corporation, not less than 20 days prior to the meeting, shall notify each
of its stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2)
If the merger or consolidation was approved pursuant to § 228 or § 253 of this
title, then either a constituent corporation before the effective date of the
merger or consolidation or the surviving or resulting corporation within 10 days
thereafter shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of the
merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is
given.
(e)
Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) of this section hereof and who is otherwise entitled to
appraisal rights, may commence an appraisal proceeding by filing a petition in
the Court of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder who has
not commenced an appraisal proceeding or joined that proceeding as a named party
shall have the right to withdraw such stockholder's demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within 120 days after
the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) of this section
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) of this section hereof, whichever is
later. Notwithstanding subsection (a) of this section, a person who is the
beneficial owner of shares of such stock
held
either in a voting trust or by a nominee on behalf of such person may, in such
person's own name, file a petition or request from the corporation the statement
described in this subsection.
(f) Upon
the filing of any such petition by a stockholder, service of a copy thereof
shall be made upon the surviving or resulting corporation, which shall within 20
days after such service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names and addresses
of all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At
the hearing on such petition, the Court shall determine the stockholders who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After
the Court determines the stockholders entitled to an appraisal, the appraisal
proceeding shall be conducted in accordance with the rules of the Court of
Chancery, including any rules specifically governing appraisal proceedings.
Through such proceeding the Court shall determine the fair value of the shares
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. Unless the Court in its
discretion determines otherwise for good cause shown, interest from the
effective date of the merger through the date of payment of the judgment shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve discount
rate (including any surcharge) as established from time to time during the
period between the effective date of the merger and the date of payment of the
judgment. Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, proceed to trial upon the appraisal prior to the final
determination of the stockholders entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The
Court shall direct the payment of the fair value of the shares, together with
interest, if any, by the surviving or resulting corporation to the stockholders
entitled thereto. Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any
state.
(j) The
costs of the proceeding may be determined by the Court and taxed upon the
parties as the Court deems equitable in the circumstances. Upon application of a
stockholder, the Court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From
and after the effective date of the merger or consolidation, no stockholder who
has demanded appraisal rights as provided in subsection (d) of this section
shall be entitled to vote such stock for any purpose or to receive payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that if no
petition for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of such stockholder's demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right of any
stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party to withdraw such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation within 60 days
after the effective date of the merger or consolidation, as set forth in
subsection (e) of this section.
(l) The
shares of the surviving or resulting corporation to which the shares of such
objecting stockholders would have been converted had they assented to the merger
or consolidation shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
February _, 2008
Board of
Directors
Greater
Atlantic Financial Corp.
10700
Parkridge Boulevard
Suite
P50
Reston,
Virginia 20191
Ladies
and Gentlemen:
Greater
Atlantic Financial Corp. (“Greater Atlantic”) and Summit Financial Group, Inc.
(“Summit”) have entered into an Agreement and Plan of Reorganization, dated as
of April 12, 2007 (the “Agreement”), pursuant to which Greater Atlantic will
merge with and into a to-be-formed subsidiary of Summit (the “Merger Sub”) with
Merger Sub as the surviving entity (the “Merger”). Under the terms of
the Agreement, Greater Atlantic sold a branch office located in Pasadena, MD to
Bay-Vanguard Federal Savings Bank (the “Branch Sale” and together with the
Merger, the “Transactions”). Pursuant to the Agreement, each share of
Greater Atlantic common stock, par value $0.01 per share, issued and outstanding
immediately prior to the Merger (the “GAFC Common Stock”), other than certain
shares specified in the Agreement, will be converted into the right to receive
(a) cash in an amount equal to $1.80 per share (the “Cash Consideration”) and
(b) that number of shares of Summit common stock, $2.50 par value per share,
(the “Summit Common Stock”) equal to $4.20 (the “Stock Consideration” and
together with the Cash Consideration, the “Merger Consideration”), divided by
the average closing price (the “Average Closing Price”) of Summit Common Stock
reported on the NASDAQ for the twenty (20) trading days prior to the closing of
the Merger (the “Exchange Ratio”), provided, however, if the Average Closing
Price is less than $17.82, the Exchange Ratio will be seventy percent of the
Merger Consideration divided by $17.82. If the Average Closing Price
is greater than $24.10 then the Exchange Ratio will be seventy percent of the
Merger Consideration divided by $24.10. Capitalized terms used herein
without definition shall have the meanings given to such term in the
Agreement. You have requested our opinion as to the fairness, from a
financial point of view, of the Merger Consideration to be received in the
Merger to the holders of GAFC Common Stock.
Sandler
O’Neill & Partners, L.P., as part of its investment banking business, is
regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed,
among other things: (i) the Agreement; (ii) certain publicly available financial
statements and other historical financial information of Greater Atlantic that
we deemed relevant; (iii) certain publicly available financial statements and
other historical financial information of Summit Financial that we deemed
relevant; (iv) internal financial projections for Greater Atlantic for the year
ending December 31, 2007 prepared by and reviewed with management of Greater
Atlantic and growth and performance projections for Greater Atlantic for the
years ending December 31, 2008, 2009 and 2010 as provided by and reviewed with
management of Greater Atlantic; (v) internal financial projections for Summit
for the years ending December 31, 2007 and 2008 prepared by and
reviewed with management of Summit and growth and performance projections for
Summit for the year ending December 31, 2009 and 2010 as provided by and
reviewed with management of Summit; (vi) the pro forma financial impact of the
Branch Sale on Greater Atlantic; (vii) the pro forma financial impact of the
Merger on Summit, based on assumptions relating to transaction expenses,
purchase accounting adjustments and cost savings determined by the senior
managements of Greater Atlantic and Summit; (viii) the publicly reported
historical price and trading activity for Greater Atlantic’s and Summit’s common
stock, including a comparison of certain financial and stock market information
for Greater Atlantic and Summit with similar publicly
available
information for certain other companies the securities of which are publicly
traded; (ix) the financial terms of certain recent business combinations in the
commercial banking industry, to the extent publicly available; (x) the current
market environment generally and the banking environment in particular; and (xi)
such other information, financial studies, analyses and investigations and
financial, economic and market criteria as we considered relevant. We
also discussed with certain members of senior management of Greater Atlantic the
business, financial condition, results of operations and prospects of Greater
Atlantic and held similar discussions with certain members of senior management
of Summit regarding the business, financial condition, results of operations and
prospects of Summit.
In
performing our review, we have relied upon the accuracy and completeness of all
of the financial and other information that was available to us from public
sources, that was provided to us by Greater Atlantic and Summit or their
respective representatives or that was otherwise reviewed by us and have assumed
such accuracy and completeness for purposes of rendering this
opinion. We have further relied on the assurances of the respective
managements of Greater Atlantic and Summit that they are not aware of any facts
or circumstances that would make any of such information inaccurate or
misleading. We have not been asked to and have not undertaken an
independent verification of any of such information and we do not assume any
responsibility or liability for the accuracy or completeness
thereof. We did not make an independent evaluation or appraisal of
the specific assets, the collateral securing assets or the liabilities
(contingent or otherwise) of Greater Atlantic, Summit or any of their respective
subsidiaries, or the collectibility of any such assets, nor have we been
furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of
Greater Atlantic and Summit nor have we reviewed any individual credit files
relating to Greater Atlantic and Summit. We have assumed, with your
consent, that the respective allowances for loan losses for both Greater
Atlantic and Summit are adequate to cover such losses and will be adequate on a
pro forma basis for the combined entity.
With
respect to the internal projections for Greater Atlantic and Summit and the
projections of transaction costs, purchase accounting adjustments and expected
cost savings prepared by and/or reviewed with the managements of Greater
Atlantic and Summit and used by Sandler O’Neill in its analyses, Greater
Atlantic’s and Summit’s management confirmed to us that they reflected the best
currently available estimates and judgments of management of the future
financial performance of Greater Atlantic and Summit and we assumed that such
performance would be achieved. We express no opinion as to such
financial projections and estimates or the assumptions on which they are
based. We have also assumed that there has been no material change in
Greater Atlantic’s and Summit’s assets, financial condition, results of
operations, business or prospects since the date of the most recent financial
statements made available to us. We have assumed in all respects
material to our analysis that Greater Atlantic and Summit will remain as going
concerns for all periods relevant to our analyses, that all of the
representations and warranties contained in the Agreement are true and correct,
that each party to the Agreement will perform all of the covenants required to
be performed by such party under the Agreement, that the conditions precedent in
the Agreement are not waived. Finally, with your consent, we have
relied upon the advice Greater Atlantic has received from its legal, accounting
and tax advisors as to all legal, accounting and tax matters relating to the
Merger and the other transactions contemplated by the Agreement.
Our
opinion is necessarily based on financial, economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. Events occurring after the date hereof could materially
affect this opinion. We have not undertaken to update, revise,
reaffirm or withdraw this opinion or otherwise comment upon events occurring
after the date hereof. We are expressing no opinion herein as to what
the value of Greater Atlantic’s and Summit’s common stock will be when shares of
Summit’s common stock will be issued to Greater Atlantic’s shareholders pursuant
to the Agreement or the prices at which Greater Atlantic’s and Summit’s common
stock may trade at any time.
We have
acted as Greater Atlantic’s financial advisor in connection with the
Transactions and will receive a fee for our services, a substantial portion of
which is contingent upon consummation of the Merger. We will also
receive a fee for rendering this opinion. Greater Atlantic has also
agreed to indemnify us against certain liabilities arising out of our
engagement.
In the
ordinary course of our business as a broker-dealer, we may purchase securities
from and sell securities to Greater Atlantic and Summit and their respective
affiliates. We may also actively trade the equity or debt securities
of Greater Atlantic and Summit or their respective affiliates for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
Our
opinion is directed to the Board of Directors of Greater Atlantic in connection
with its consideration of the Merger and does not constitute a recommendation to
any shareholder of Greater Atlantic as to how such shareholder should vote at
any meeting of shareholders called to consider and vote upon the Merger or the
form of consideration such shareholder should elect. Our opinion is
directed only to the fairness, from a financial point of view, of the Merger
Consideration to be received in the Merger to holders of GAFC Common Stock and
does not address the underlying business decision of Greater Atlantic to engage
in the Merger, the relative merits of the Merger as compared to any other
alternative business strategies that might exist for Greater Atlantic or the
effect of any other transaction in which Greater Atlantic might
engage. Our opinion is not to be quoted or referred to, in whole or
in part, in a registration statement, prospectus, proxy statement or in any
other document, nor shall this opinion be used for any other purposes, without
Sandler O'Neill’s prior written consent.
Based
upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration to be received in the Merger is fair to the
holders of GAFC’s Common Stock from a financial point of view.
Very
truly yours,
ANNEX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ √
] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2007
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION
13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
______________.
Commission file number: 0-26467
GREATER ATLANTIC FINANCIAL
CORP.
(Exact Name of Registrant as Specified in its Charter)
|
(State or
other jurisdiction of
|
(I.R.S. Employer
|
|
incorporation
or organization)
|
Identification No.)
|
10700 Parkridge Boulevard, Suite P50,
Reston, Virginia 20191
(Address of Principal Executive
Offices)
(Zip Code)
703-391-1300
egistrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [ √ ].
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 of Section 15(d) of the Act. Yes
[ ] No [ √ ].
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [√ ]No
[ ]
Indicate by check mark whether disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ √
]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act. Yes
[ ]. No [ √ ].
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes
[ ] No [ √ ]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant computed by reference to the
price at which the common equity was sold, or the average bid and asked prices
of such stock, as of the last business day of the registrant’s most recently
completed second fiscal quarter was $15.7 million.
As of December 21, 2007, there were 3,024,220 shares of the
registrant’s Common
Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
|
PART I
|
|
Page
|
|
Item 1.
|
Business
|
3
|
| |
Description of
Business
|
3
|
| |
Proposed
Acquisition
|
3
|
| |
Market Area and
Competition
|
3
|
| |
Market
Risk
|
3
|
| |
Lending
Activities
|
4
|
| |
Mortgage Banking
Activities
|
7
|
| |
Asset
Quality
|
7
|
| |
Allowance for Loan
Losses
|
9
|
| |
Investment
Activities
|
11
|
| |
Sources of
Funds
|
14
|
| |
Subsidiary
Activities
|
16
|
| |
Personnel
|
16
|
| |
Regulation and
Supervision
|
17
|
| |
Federal and State
Taxation
|
23
|
|
Item 1A.
|
Risk
Factors
|
24
|
|
Item 1B.
|
Unresolved Staff
Comments
|
26
|
|
Item 2.
|
Properties
|
27
|
|
Item 3.
|
Legal
Proceedings
|
27
|
|
Item 4.
|
Submission of Matters to a Vote of Security
Holders
|
27
|
|
PART II
|
|
|
|
Item 5.
|
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
28
|
|
Item 6.
|
Selected Financial
Data
|
29
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operation
|
31
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market
Risk
|
49
|
|
Item 8.
|
Consolidated Financial Statements and Supplementary
Data
|
50
|
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
|
50
|
|
Item 9A.
|
Controls and
Procedures
|
50
|
|
Item 9B.
|
Other
Information
|
51
|
|
PART III
|
|
|
|
Item 10.
|
Directors and Executive Officers of the
Registrant
|
51
|
|
Item 11.
|
Executive
Compensation
|
53
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
|
56
|
|
Item 13.
|
Certain Relationships and Related
Transactions
|
59
|
|
Item 14.
|
Principal Accountant Fees and
Services
|
59
|
|
PART IV
|
|
|
|
Item 15.
|
Exhibits and Financial Statement
Schedules
|
59
|
| |
|
|
|
Signatures
|
|
60
|
PART I
ITEM
1. BUSINESS
Description of Business
We are a savings and loan holding company which was organized in
June 1997. We conduct substantially all of our business through our
wholly-owned subsidiary, Greater Atlantic Bank, a federally-chartered savings
bank. We offer traditional banking services to customers through our
bank branches located throughout the greater Washington, DC metropolitan
area. We established the Greater Atlantic Capital Trust I (“Trust”)
in January 2002 to issue certain convertible preferred securities which we
completed in March 2002.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, subject to regulatory and shareholder
approvals. Immediately following the merger, the bank intends to
merge with and into Summit Community Bank.
Under
the agreement to sell its leased branch office located at 8070 Ritchie
Highway, Pasadena, Maryland, to Bay-Vanguard, Bay-Vanguard paid the bank an 8.5%
premium on the balance of deposits assumed at closing. At August 24,
2007, the closing date of that transaction, the deposits at our Pasadena branch
office on which the deposit premium would apply totaled approximately $51.5
million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
Market Area and Competition
We operate in a competitive environment, competing for deposits
and loans with other thrifts, commercial banks and other financial entities.
Numerous mergers and consolidations involving banks in the market in which we
operate have occurred resulting in an intensification of competition in the
banking industry in our geographic market. Many of the financial
intermediaries operating in our market area offer certain services, such as
trust, investment and international banking services, which we do not offer. In
addition, banks with a larger capitalization than ours, and financial
intermediaries not subject to bank regulatory restrictions, have larger lending
limits and are thereby able to serve the needs of larger customers.
Market Risk
Market risk is the risk of loss from adverse changes in market
prices and rates. Our market risk arises primarily from interest-rate
risk inherent in our lending and deposit taking activities. To that
end, management actively monitors and manages interest-rate risk
exposure. The measurement of market risk associated with financial
instruments is meaningful only when all related and offsetting on- and
off-balance-sheet transactions are aggregated, and the resulting net positions
are identified. Disclosures about the fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 16 of Notes to Consolidated Financial Statements.
Our primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on our net interest
income and capital, while adjusting our asset-liability structure to obtain the
maximum yield-cost spread on that structure. We rely primarily on our
asset-liability structure to control interest-rate risk. However, a
sudden and substantial increase in interest rates may adversely impact our
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
Lending Activities
General. Net loans
receivable at September 30, 2007 were $176.1 million, a decrease of $17.2
million or 8.90% from the $193.3 million held at September 30,
2006. The decrease in loans consisted of real estate loans secured by
consumer loans, construction and land loans, first mortgages on residential
properties and commercial business loans, offset in part by an increase in
commercial real estate loans and multi-family loans. Because the
bank’s single family and consumer loan portfolios consist primarily of
adjustable-rate loans, and with the current yield curve, where short-term rates
are only slightly lower than rates for longer terms, customers are able to
refinance and extend the terms of their mortgages. Customers are also
refinancing away from adjustable-rate loans and into longer term, fixed-rate
loans or curtailing outstanding balances. The decrease in
construction and land loans was primarily in the single-family residential
sector of the market. The company anticipates that lending in that
area will continue to decline as a result of the current slow sales pace
occurring in the single-family market.
The following table shows the bank's loan originations, purchases,
sales and principal repayments during the periods indicated:
| |
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Total loans at beginning of period (1)
|
|
$ |
201,971 |
|
|
$ |
224,733 |
|
|
$ |
262,598 |
|
|
Originations of loans for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
|
|
5,169 |
|
|
|
12,559 |
|
|
|
6,624 |
|
|
Multifamily
|
|
|
3,215 |
|
|
|
625 |
|
|
|
- |
|
|
Commercial real estate
|
|
|
5,781 |
|
|
|
9,210 |
|
|
|
9,977 |
|
|
Construction
|
|
|
6,449 |
|
|
|
13,089 |
|
|
|
19,991 |
|
|
Land loans
|
|
|
240 |
|
|
|
8,494 |
|
|
|
10,530 |
|
|
Second trust
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Commercial business
|
|
|
28,967 |
|
|
|
21,170 |
|
|
|
21,083 |
|
|
Consumer
|
|
|
29,604 |
|
|
|
39,048 |
|
|
|
44,205 |
|
|
Total originations and
purchases for investment
|
|
|
79,425 |
|
|
|
104,195 |
|
|
|
112,410 |
|
|
Loans originated for resale by Greater Atlantic Bank
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loans originated for resale by Greater Atlantic Mortgage
|
|
|
- |
|
|
|
91,477 |
|
|
|
276,038 |
|
|
Total originations
|
|
|
79,425 |
|
|
|
195,672 |
|
|
|
388,448 |
|
|
Repayments
|
|
|
(98,921 |
) |
|
|
(117,440 |
) |
|
|
(154,263 |
) |
|
Sale of loans originated for resale by Greater Atlantic
Mortgage
|
|
|
- |
|
|
|
(100,994 |
) |
|
|
(272,050 |
) |
|
Net activity in loans
|
|
|
(19,496 |
) |
|
|
(22,762 |
) |
|
|
(37,865 |
) |
|
Total loans at end of period (1)
|
|
$ |
182,475 |
|
|
$ |
201,971 |
|
|
$ |
224,733 |
|
(1) Includes loans held for sale of $9.5 million at
September 30, 2005.
Loan
Portfolio. The following table sets forth the composition of
the bank's loan portfolio in dollar amounts and as a percentage of the portfolio
at the dates indicated.
|
|
|
At September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
| |
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family (1)
|
|
$ |
37,972 |
|
|
|
20.81 |
% |
|
$ |
43,473 |
|
|
|
21.52 |
% |
|
$ |
41,434 |
|
|
|
19.25 |
% |
|
$ |
74,620 |
|
|
|
29.02 |
% |
|
$ |
95,818 |
|
|
|
38.20 |
% |
|
Multi-family
|
|
|
3,983 |
|
|
|
2.18 |
|
|
|
813 |
|
|
|
0.40 |
|
|
|
751 |
|
|
|
0.35 |
|
|
|
1,074 |
|
|
|
0.42 |
|
|
|
1,445 |
|
|
|
0.58 |
|
|
Construction
|
|
|
9,939 |
|
|
|
5.45 |
|
|
|
14,245 |
|
|
|
7.05 |
|
|
|
24,273 |
|
|
|
11.28 |
|
|
|
16,696 |
|
|
|
6.49 |
|
|
|
11,996 |
|
|
|
4.78 |
|
|
Commercial real estate
|
|
|
34,984 |
|
|
|
19.17 |
|
|
|
28,403 |
|
|
|
14.06 |
|
|
|
25,531 |
|
|
|
11.86 |
|
|
|
23,023 |
|
|
|
8.95 |
|
|
|
20,533 |
|
|
|
8.19 |
|
|
Land
|
|
|
8,097 |
|
|
|
4.44 |
|
|
|
13,829 |
|
|
|
6.86 |
|
|
|
18,421 |
|
|
|
8.55 |
|
|
|
20,668 |
|
|
|
8.04 |
|
|
|
17,258 |
|
|
|
6.88 |
|
|
Total mortgage loans
|
|
|
94,975 |
|
|
|
52.05 |
|
|
|
100,763 |
|
|
|
49.89 |
|
|
|
110,410 |
|
|
|
51.29 |
|
|
|
136,081 |
|
|
|
52.92 |
|
|
|
147,050 |
|
|
|
58.63 |
|
|
Commercial business and consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
34,844 |
|
|
|
19.09 |
|
|
|
39,794 |
|
|
|
19.70 |
|
|
|
35,458 |
|
|
|
16.47 |
|
|
|
47,654 |
|
|
|
18.53 |
|
|
|
39,043 |
|
|
|
15.57 |
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
52,262 |
|
|
|
28.64 |
|
|
|
61,031 |
|
|
|
30.22 |
|
|
|
69,006 |
|
|
|
32.06 |
|
|
|
72,814 |
|
|
|
28.32 |
|
|
|
63,888 |
|
|
|
25.47 |
|
|
Automobile
|
|
|
48 |
|
|
|
.03 |
|
|
|
81 |
|
|
|
.04 |
|
|
|
100 |
|
|
|
.05 |
|
|
|
271 |
|
|
|
0.11 |
|
|
|
428 |
|
|
|
0.17 |
|
|
Other
|
|
|
346 |
|
|
|
.19 |
|
|
|
302 |
|
|
|
.15 |
|
|
|
274 |
|
|
|
.13 |
|
|
|
315 |
|
|
|
0.12 |
|
|
|
409 |
|
|
|
0.16 |
|
|
Total
commercial business and
consumer
loans
|
|
|
87,500 |
|
|
|
47.95 |
|
|
|
101,208 |
|
|
|
50.11 |
|
|
|
104,838 |
|
|
|
48.71 |
|
|
|
121,054 |
|
|
|
47.08 |
|
|
|
103,768 |
|
|
|
41.37 |
|
|
Total loans
|
|
|
182,475 |
|
|
|
100.00 |
% |
|
|
201,971 |
|
|
|
100.00 |
% |
|
|
215,248 |
|
|
|
100.00 |
% |
|
|
257,135 |
|
|
|
100.00 |
% |
|
|
250,818 |
|
|
|
100.00 |
% |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,305 |
) |
|
|
|
|
|
|
(1,330 |
) |
|
|
|
|
|
|
(1,212 |
) |
|
|
|
|
|
|
(1,600 |
) |
|
|
|
|
|
|
(1,550 |
) |
|
|
|
|
|
Loans in process
|
|
|
(4,947 |
) |
|
|
|
|
|
|
(8,517 |
) |
|
|
|
|
|
|
(20,386 |
) |
|
|
|
|
|
|
(10,453 |
) |
|
|
|
|
|
|
(8,394 |
) |
|
|
|
|
|
Unearned premium
|
|
|
885 |
|
|
|
|
|
|
|
1,183 |
|
|
|
|
|
|
|
1,270 |
|
|
|
|
|
|
|
1,305 |
|
|
|
|
|
|
|
1,379 |
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
176,108 |
|
|
|
|
|
|
$ |
193,307 |
|
|
|
|
|
|
$ |
194,920 |
|
|
|
|
|
|
$ |
246,387 |
|
|
|
|
|
|
$ |
242,253 |
|
|
|
|
|
(1) Includes loans secured by second trusts on
single-family residential property.
Loan
Maturity. The following table shows the remaining contractual
maturity of the bank's total loans, net of loans-in-process (LIP) at September
30, 2007. Loans that have adjustable rates are shown as amortizing
when the interest rates are next subject to change. The table does
not include the effect of future principal prepayments.
|
|
|
At September 30, 2007
|
|
| |
|
One- to
Four-
Family
|
|
|
Multi-
Family and
Commercial
Real Estate
|
|
|
Commercial
Business
and
Consumer
|
|
|
Total Loans, (net of LIP)
|
|
|
(In Thousands)
|
|
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$ |
20,377 |
|
|
$ |
11,762 |
|
|
$ |
73,608 |
|
|
$ |
105,747 |
|
|
After one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than one year to three years
|
|
|
8,185 |
|
|
|
9,881 |
|
|
|
3,047 |
|
|
|
21,113 |
|
|
More than three years to five years
|
|
|
1,103 |
|
|
|
12,547 |
|
|
|
3,351 |
|
|
|
17,001 |
|
|
More than five years to 15 years
|
|
|
5,692 |
|
|
|
5,526 |
|
|
|
4,192 |
|
|
|
15,410 |
|
|
More than 15 years
|
|
|
12,980 |
|
|
|
1,974 |
|
|
|
3,303 |
|
|
|
18,257 |
|
|
Total amount due
|
|
$ |
48,337 |
|
|
$ |
41,690 |
|
|
$ |
87,501 |
|
|
$ |
177,528 |
|
The following table sets forth, at September 30, 2007, the dollar
amount of loans contractually due after September 30, 2008, identifying whether
such loans have fixed interest rates or adjustable interest
rates. The risk of default on ARMs the industry is experiencing
should not affect our portfolio because it is a seasoned
portfolio. At September 30, 2007, the bank had $13.7 million of
construction, acquisition and development, land and commercial business loans
that were contractually due after September 30, 2008.
|
|
|
Due After September 30, 2008
|
|
| |
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
(In Thousands)
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$ |
18,155 |
|
|
$ |
9,805 |
|
|
$ |
27,960 |
|
|
Multi-family and commercial
|
|
|
14,944 |
|
|
|
14,984 |
|
|
|
29,928 |
|
|
Total real estate
loans
|
|
|
33,099 |
|
|
|
24,789 |
|
|
|
57,888 |
|
|
Commercial business and consumer loans
|
|
|
8,431 |
|
|
|
5,462 |
|
|
|
13,893 |
|
|
Total loans
|
|
$ |
41,530 |
|
|
$ |
30,251 |
|
|
$ |
71,781 |
|
One- to
Four-Family Mortgage Lending. The bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by single-family residences, which term includes real property
containing from one to four residences. At September 30, 2007, the
bank's one- to four-family mortgage loans totaled $38.0 million, or 20.81% of
total loans. Of the one- to four-family mortgage loans outstanding at
that date, 47.96% were fixed-rate loans and 52.04% were ARM loans.
Construction and
Development Lending. The bank originates construction and
development loans primarily to finance the construction of one- to four-family,
owner-occupied residential real estate properties located in the bank’s primary
market area. The bank also originates land loans to local contractors
and developers for the purpose of making improvements thereon, including small
residential subdivisions in the bank’s primary market area or for the purpose of
holding or developing land for sale. At September 30, 2007,
construction and development loans (including land loans) totaled $18.0 million,
or 9.89%, of the bank’s total loans, of which, land loans totaled $8.1 million
or 4.44% of total loans. Such loans are secured by a lien on the
property, are limited to 75% of the lower of the acquisition price or the
appraised value of the land and have a term of up to three years with a floating
interest rate generally based on the prime rate as reported in The Wall Street
Journal. All the bank's land loans are secured by property in
its primary market area.
Multi-family and
Commercial Real Estate Lending. The bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings or retail facilities located primarily in the bank’s
market area. The bank’s multi-family and commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
of up to 75-80% of the appraised value of the property. The bank’s multi-family
and commercial real estate loan portfolio at September 30, 2007 was $39.0
million, or 21.35% of total loans. The largest multi-family or
commercial real estate loan in the bank’s portfolio at September 30, 2007,
consisted of a $3.9 million commercial real estate loan secured by real property
in Alabama. The property is a skilled nursing facility on which the
bank has participated $2.1 million of the $6.0 million note to another bank.
Commercial
Business Lending. At September 30, 2007, the bank had $34.8
million in commercial business loans which amounted to 19.09% of total loans.
The bank makes commercial business loans primarily in its market area to a
variety of professionals, sole proprietorships and small
businesses. The bank offers a variety of commercial lending products,
including term loans for fixed assets and working capital, revolving lines of
credit and letters of credit. Term loans are generally offered with
initial fixed rates of interest for the first five years and with terms of up to
7 years. Business lines of credit have adjustable rates of interest
with some being payable on demand, and all subject to annual review and
renewal. Business loans with variable rates of interest adjust on a
monthly basis and are generally indexed to the prime rate as published in The Wall Street Journal.
Consumer
Lending. Consumer loans at September 30, 2007 amounted to
$52.7 million or 28.86% of the bank's total loans, and consisted primarily of
home equity loans, home equity lines of credit, and, to a significantly lesser
extent, secured and unsecured personal loans and loans on new and used
automobiles. These loans are generally made to residents of the
bank's primary market area and generally are secured by real estate, deposit
accounts and automobiles. These loans are typically shorter term and
generally have higher interest rates than one- to four-family mortgage
loans.
The bank offers home equity loans and home equity lines of credit
(collectively, "home equity loans"). Most of the bank's home equity
loans are secured by second mortgages on one- to four-family residences located
in the bank's primary market area. At September 30, 2007, those loans
totaled $52.3 million or 28.64% of the bank's total loans. Other
types of consumer loans consisted primarily of secured and unsecured personal
loans and loans on new and used automobiles, totaling $394,000, or 0.22% of the
bank's total loans and 0.45% of commercial business and consumer loans at
September 30, 2007.
Mortgage Banking Activities
The bank’s mortgage banking activities primarily consisted of
originating mortgage loans secured by single-family properties and were
conducted in Greater Atlantic Mortgage Corporation, a subsidiary of the
bank. That activity was discontinued effective March 29, 2006,
because it was unprofitable, and no longer fit our strategy. Mortgage
banking involves the origination and sale of mortgage loans for the purpose of
generating gains on sale of loans and fee income on the origination of loans, in
addition to loan interest income. In recent years, the volume of the
mortgage banking subsidiary’s originations had been declining, resulting in
losses from mortgage banking operations.
Asset Quality
Delinquent Loans
and Classified Assets. Reports listing all delinquent accounts are
generated and reviewed monthly by management and the board of directors and all
loans or lending relationships delinquent 30 days or more and all real estate
owned are reviewed monthly by the board of directors. The
procedures taken by the bank with respect to delinquencies vary depending on the
nature of the loan, the length and cause of delinquency and whether the borrower
has previously been delinquent.
Federal regulations and the bank's asset classification policy
require that the bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The bank has
incorporated the internal asset classifications of the Office of Thrift
Supervision as a part of its credit monitoring system. The bank
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not
warranted. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
The bank’s management reviews and classifies the bank's assets on
a regular basis and the board of directors reviews management’s reports on a
monthly basis. The bank classifies assets in accordance with the
management guidelines described above. At September 30, 2007, the
bank had $4.7 million of loans designated as Substandard which consisted of one
residential loan, three commercial business loans, two construction development
and one land loan. At that same date, the bank had $675,000 of assets
classified as Doubtful, consisting of one commercial business loan and one
construction development loan. At September 30, 2007, the bank had no
loans classified as Loss and one $887,000 construction loan classified as
Special Mention.
The following table sets forth delinquencies in the bank’s loans
as of the dates indicated.
| |
|
At September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
| |
|
60 – 89 Days
|
|
|
90 Days or More
|
|
|
60 – 89 Days
|
|
|
90 Days or More
|
|
|
60 – 89 Days
|
|
|
90 Days or More
|
|
| |
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
Number of Loans
|
|
|
Principal Balance of Loans
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
19 |
|
|
|
- |
|
|
$ |
- |
|
|
|
2 |
|
|
$ |
835 |
|
|
|
2 |
|
|
$ |
168 |
|
|
|
4 |
|
|
$ |
10 |
|
|
Home equity
|
|
|
2 |
|
|
|
347 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
229 |
|
|
Construction & Land
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
1,330 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
31 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
233 |
|
|
Commercial real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
25 |
|
|
Commercial business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
216 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
1,105 |
|
|
Consumer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
2 |
|
|
Total
|
|
|
2 |
|
|
$ |
347 |
|
|
|
4 |
|
|
$ |
1,349 |
|
|
|
- |
|
|
$ |
- |
|
|
|
7 |
|
|
$ |
1,110 |
|
|
|
2 |
|
|
$ |
168 |
|
|
|
13 |
|
|
$ |
1,604 |
|
Non-Performing
Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and real estate owned. The
bank’s policy is to cease accruing interest on mortgage loans 90 days or more
past due, to cease accruing interest on consumer loans 60 days or more past due
(unless the loan principal and interest are determined by management to be fully
secured and in the process of collection), and to charge off any accrued and
unpaid interest.
|
|
|
At September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans accounted for on a non-accrual basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
16 |
|
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
563 |
|
|
$ |
637 |
|
|
Home equity
|
|
|
- |
|
|
|
- |
|
|
|
229 |
|
|
|
96 |
|
|
|
- |
|
|
Commercial real estate
|
|
|
- |
|
|
|
25 |
|
|
|
25 |
|
|
|
29 |
|
|
|
31 |
|
|
Construction and Land
|
|
|
1,330 |
|
|
|
31 |
|
|
|
233 |
|
|
|
31 |
|
|
|
34 |
|
|
Commercial business
|
|
|
- |
|
|
|
216 |
|
|
|
1,105 |
|
|
|
228 |
|
|
|
716 |
|
|
Consumer
|
|
|
- |
|
|
|
3 |
|
|
|
2 |
|
|
|
6 |
|
|
|
- |
|
|
Total non-accrual loans
|
|
|
1,346 |
|
|
|
275 |
|
|
|
1,604 |
|
|
|
953 |
|
|
|
1,418 |
|
|
Accruing loans which are contractually past due 90 days or
more
|
|
|
3 |
|
|
|
835 |
|
|
|
- |
|
|
|
- |
|
|
|
28 |
|
|
Total of non-accrual and 90 days past due loans
|
|
|
1,349 |
|
|
|
1,110 |
|
|
|
1,604 |
|
|
|
953 |
|
|
|
1,446 |
|
|
Foreclosed real estate, net
|
|
|
- |
|
|
|
- |
|
|
|
232 |
|
|
|
- |
|
|
|
- |
|
|
Total non-performing assets
|
|
$ |
1,349 |
|
|
$ |
1,110 |
|
|
$ |
1,836 |
|
|
$ |
953 |
|
|
$ |
1,446 |
|
|
Non-accrual loans as a percentage of loans
held for investment, net
|
|
|
0.76 |
% |
|
|
0.14 |
% |
|
|
0.82 |
% |
|
|
0.39 |
% |
|
|
0.59 |
% |
|
Non-accrual and 90 days or more past due loans
as a percentage of loans held for investment,
net
|
|
|
0.77 |
% |
|
|
0.57 |
% |
|
|
0.82 |
% |
|
|
0.39 |
% |
|
|
0.60 |
% |
|
Non-accrual and 90 days or more past due loans
as a percentage of total assets
|
|
|
0.55 |
% |
|
|
0.36 |
% |
|
|
0.47 |
% |
|
|
0.22 |
% |
|
|
0.29 |
% |
|
Non-performing assets as a percentage of total assets
|
|
|
0.55 |
% |
|
|
0.36 |
% |
|
|
0.54 |
% |
|
|
0.22 |
% |
|
|
0.29 |
% |
During the year ended September 30, 2007, the amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$110,000.
The company considers a loan to be impaired if it is probable that
the company will be unable to collect all amounts due (both principal and
interest) according to the contractual terms of the loan
agreement. When a loan is deemed impaired, the company computes the
present value of the loan's future cash flows, discounted at the effective
interest rate. As an alternative, creditors may account for impaired
loans at the fair value of the collateral or at the observable market price of
the loan if one exists. If the present value is less than the
carrying value of the loan, a valuation allowance is recorded. For
collateral dependent loans, the company uses the fair value of the collateral,
less estimated costs to sell on a discounted basis, to measure impairment.
Our total recorded investment in impaired collateral dependent
loans at September 30, 2007 was $2.5 million and the related allowance
associated with impaired loans was $627,000. There were no impaired
loans in the comparable period one year ago. At September 30, 2007,
all impaired loans had a related allowance.
Allowance for Loan Losses
The allowance for loan losses is established through a provision
for loan losses based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses in loans receivable which are deemed probable and estimable based on
information currently known to management. The allowance is based
upon a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the bank's allowance for loan losses. Such agencies may require the
bank to make additional provisions for estimated loan losses based upon their
judgment about information available to them at the time of their
examination. There can be no assurance that the bank will not
sustain credit losses in future periods, which could be substantial in relation
to the size of the allowance. As of September 30, 2007, the bank's
allowance for loan losses amounted to $2.3 million or 1.26% of total
loans. The allowance for loan losses to total non-performing loans at
September 30, 2007 was 170.87%; as a percentage of total loans, the allowance
was increased 60 basis points when compared to September 30, 2006. A
$685,000 provision for loan losses was recorded during the year ended September
30, 2007, compared to a provision of $126,000 during the year ended September
30, 2006. The $559,000 increase in the provision for loan losses from
the year ago period resulted from the increase in non-performing assets, an
increase in the outstanding balance of the bank’s commercial real estate loans
and an increase of $3.9 million in loans classified as substandard each of which
requires an additional allocation of the bank’s overall
provision. Those were coupled with an increase of $356,000 in loans
classified as doubtful. That increase in provision for those loans
was offset with an overall decline in the size of the bank’s loan
portfolio. On an annual basis, or more often if deemed necessary, the
bank had contracted with an independent outside third party to have its loan
portfolio reviewed. The focus of their review is to identify the
extent of potential and actual risk in the bank’s commercial loan portfolio, in
addition to evaluating the underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior
management. However, because we entered into a
definitive agreement for the company to merge with Summit, and based on the due
diligence performed by Summit, it was deemed unnecessary to enter into such a
contract for the fiscal year ended September 30, 2007.
The following table sets forth activity in the bank's allowance
for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any differences between the loss allowances and
the amount of loss realized has been charged or credited to current
operations.
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
|
$ |
1,600 |
|
|
$ |
1,550 |
|
|
$ |
1,699 |
|
|
Provisions
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
|
209 |
|
|
|
855 |
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
128 |
|
|
|
- |
|
|
|
33 |
|
|
|
20 |
|
|
|
162 |
|
|
Commercial real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
Commercial business
|
|
|
210 |
|
|
|
78 |
|
|
|
584 |
|
|
|
177 |
|
|
|
828 |
|
|
Consumer
|
|
|
15 |
|
|
|
2 |
|
|
|
8 |
|
|
|
3 |
|
|
|
8 |
|
|
Total charge-offs
|
|
|
353 |
|
|
|
80 |
|
|
|
625 |
|
|
|
200 |
|
|
|
1,020 |
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
8 |
|
|
|
2 |
|
|
|
2 |
|
|
|
29 |
|
|
|
6 |
|
|
Commercial real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Commercial business
|
|
|
635 |
|
|
|
69 |
|
|
|
15 |
|
|
|
10 |
|
|
|
4 |
|
|
Consumer
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
6 |
|
|
Total recoveries
|
|
|
643 |
|
|
|
72 |
|
|
|
18 |
|
|
|
41 |
|
|
|
16 |
|
|
Net charge-offs (recoveries)
|
|
|
(290 |
) |
|
|
8 |
|
|
|
607 |
|
|
|
159 |
|
|
|
1,004 |
|
|
Balance at end of period
|
|
$ |
2,305 |
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
|
$ |
1,600 |
|
|
$ |
1,550 |
|
|
Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the
period
|
|
|
(0.16 |
)% |
|
|
0.00 |
% |
|
|
0.28 |
% |
|
|
0.06 |
% |
|
|
0.36 |
% |
|
Allowance for loan losses to total non-performing
loans at end of period
|
|
|
170.87 |
% |
|
|
119.82 |
% |
|
|
75.56 |
% |
|
|
167.89 |
% |
|
|
109.31 |
% |
|
Allowance for loan losses to total loans
|
|
|
1.26 |
% |
|
|
0.66 |
% |
|
|
0.56 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
The following table sets forth the bank's allowance for loan
losses in each of the categories listed and the percentage of loans in each
category to total loans. Management believes that the allowance can
be allocated by category only on an approximate basis. The allocation
of the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any other
categories.
| |
|
At September 30,
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
| |
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
21 |
|
|
|
20.81 |
% |
|
$ |
177 |
|
|
|
21.52 |
% |
|
$ |
35 |
|
|
|
19.25 |
% |
|
$ |
110 |
|
|
|
29.02 |
% |
|
$ |
141 |
|
|
|
38.20 |
% |
|
Multi-family
|
|
|
30 |
|
|
|
2.18 |
|
|
|
6 |
|
|
|
0.40 |
|
|
|
6 |
|
|
|
0.35 |
|
|
|
8 |
|
|
|
0.42 |
|
|
|
11 |
|
|
|
0.58 |
|
|
Construction
|
|
|
177 |
|
|
|
5.45 |
|
|
|
67 |
|
|
|
7.05 |
|
|
|
72 |
|
|
|
11.28 |
|
|
|
78 |
|
|
|
6.49 |
|
|
|
80 |
|
|
|
4.78 |
|
|
Commercial real estate
|
|
|
350 |
|
|
|
19.17 |
|
|
|
286 |
|
|
|
14.06 |
|
|
|
328 |
|
|
|
11.86 |
|
|
|
233 |
|
|
|
8.95 |
|
|
|
208 |
|
|
|
8.19 |
|
|
Land
|
|
|
562 |
|
|
|
4.44 |
|
|
|
109 |
|
|
|
6.86 |
|
|
|
155 |
|
|
|
8.55 |
|
|
|
175 |
|
|
|
8.04 |
|
|
|
132 |
|
|
|
6.88 |
|
|
Total mortgage loans
|
|
|
1,140 |
|
|
|
52.05 |
|
|
|
645 |
|
|
|
49.89 |
|
|
|
596 |
|
|
|
51.29 |
|
|
|
604 |
|
|
|
52.92 |
|
|
|
572 |
|
|
|
58.63 |
|
|
Commercial and Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
959 |
|
|
|
19.09 |
|
|
|
525 |
|
|
|
19.70 |
|
|
|
407 |
|
|
|
16.47 |
|
|
|
515 |
|
|
|
18.53 |
|
|
|
770 |
|
|
|
15.57 |
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
131 |
|
|
|
28.64 |
|
|
|
152 |
|
|
|
30.22 |
|
|
|
195 |
|
|
|
32.06 |
|
|
|
213 |
|
|
|
28.32 |
|
|
|
159 |
|
|
|
25.47 |
|
|
Automobile
|
|
|
6 |
|
|
|
0.22 |
|
|
|
6 |
|
|
|
0.19 |
|
|
|
5 |
|
|
|
0.18 |
|
|
|
9 |
|
|
|
0.23 |
|
|
|
13 |
|
|
|
0.33 |
|
|
Total commercial
and
consumer loans
|
|
|
1,096 |
|
|
|
47.95 |
|
|
|
683 |
|
|
|
50.11 |
|
|
|
607 |
|
|
|
48.71 |
|
|
|
737 |
|
|
|
47.08 |
|
|
|
942 |
|
|
|
41.37 |
|
|
Unallocated
|
|
|
69 |
|
|
|
N/A |
|
|
|
2 |
|
|
|
N/A |
|
|
|
9 |
|
|
|
N/A |
|
|
|
259 |
|
|
|
N/A |
|
|
|
36 |
|
|
|
N/A |
|
|
Total
|
|
$ |
2,305 |
|
|
|
100.00 |
% |
|
$ |
1,330 |
|
|
|
100.00 |
% |
|
$ |
1,212 |
|
|
|
100.00 |
% |
|
$ |
1,600 |
|
|
|
100.00 |
% |
|
$ |
1,550 |
|
|
|
100.00 |
% |
Investment Activities
The investment policy of the bank, as approved by the board of
directors, requires management to maintain adequate liquidity and generate a
favorable return on investments to complement the bank's lending activities
without incurring undue interest rate and credit risk. The bank
primarily utilizes investments in securities for liquidity management, as a
source of income and as a method of deploying excess funds not utilized for
investment in loans. The bank does not hold any securities bought and
held principally for sale in the near term, which would be, classified as held
for trading.
At September 30, 2007, the bank had invested $16.5 million in
mortgage-backed securities, or 6.71% of total assets, of which $16.3 million
were classified as available-for-sale and $207,000 were classified as
held-to-maturity. This portfolio is seasoned with no purchases during
fiscal year 2007. Investments in mortgage-backed securities involve a
risk that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment
risk associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates.
The following table sets forth information regarding the amortized
cost and estimated market value of the bank's investment portfolio at the dates
indicated.
| |
|
At September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
| |
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Market
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$ |
7,300 |
|
|
$ |
6,748 |
|
|
$ |
7,280 |
|
|
$ |
7,142 |
|
|
$ |
6,736 |
|
|
$ |
6,736 |
|
|
CMOs
|
|
|
7,191 |
|
|
|
7,087 |
|
|
|
9,735 |
|
|
|
9,755 |
|
|
|
14,446 |
|
|
|
14,454 |
|
|
U.S. Government SBA’s
|
|
|
19,395 |
|
|
|
18,754 |
|
|
|
27,629 |
|
|
|
27,199 |
|
|
|
30,239 |
|
|
|
29,781 |
|
|
FHLMC MBS’s
|
|
|
2,961 |
|
|
|
2,920 |
|
|
|
5,549 |
|
|
|
5,463 |
|
|
|
9,044 |
|
|
|
8,969 |
|
|
FNMA MBS’s
|
|
|
8,357 |
|
|
|
8,141 |
|
|
|
18,350 |
|
|
|
17,986 |
|
|
|
35,548 |
|
|
|
34,947 |
|
|
GNMA MBS’s
|
|
|
5,382 |
|
|
|
5,260 |
|
|
|
8,133 |
|
|
|
7,916 |
|
|
|
13,097 |
|
|
|
12,942 |
|
|
Total
available-for-sale
|
|
|
50,586 |
|
|
|
48,910 |
|
|
|
76,676 |
|
|
|
75,461 |
|
|
|
109,110 |
|
|
|
107,829 |
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
1,000 |
|
|
|
1,020 |
|
|
U.S. Government SBA’s
|
|
|
2,846 |
|
|
|
2,742 |
|
|
|
4,461 |
|
|
|
4,230 |
|
|
|
6,531 |
|
|
|
6,213 |
|
|
FHLMC MBS’s
|
|
|
104 |
|
|
|
102 |
|
|
|
128 |
|
|
|
125 |
|
|
|
236 |
|
|
|
235 |
|
|
FNMA MBS’s
|
|
|
103 |
|
|
|
101 |
|
|
|
107 |
|
|
|
105 |
|
|
|
202 |
|
|
|
198 |
|
|
Total
held-to-maturity
|
|
|
3,053 |
|
|
|
2,945 |
|
|
|
4,696 |
|
|
|
4,460 |
|
|
|
7,969 |
|
|
|
7,666 |
|
|
Total investment
securities
|
|
$ |
53,639 |
|
|
$ |
51,855 |
|
|
$ |
81,372 |
|
|
$ |
79,921 |
|
|
$ |
117,079 |
|
|
$ |
115,495 |
|
|
Investment securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
1,020 |
|
|
Adjustable rates
|
|
|
36,732 |
|
|
|
35,331 |
|
|
|
49,105 |
|
|
|
48,326 |
|
|
|
57,952 |
|
|
|
57,184 |
|
|
Mortgage-backed securities with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
|
174 |
|
|
|
168 |
|
|
|
243 |
|
|
|
236 |
|
|
|
393 |
|
|
|
376 |
|
|
Adjustable rates
|
|
|
16,733 |
|
|
|
16,356 |
|
|
|
32,024 |
|
|
|
31,359 |
|
|
|
57,734 |
|
|
|
56,915 |
|
|
Total
|
|
$ |
53,639 |
|
|
$ |
51,855 |
|
|
$ |
81,372 |
|
|
$ |
79,921 |
|
|
$ |
117,079 |
|
|
$ |
115,495 |
|
As of September 30, 2007, the bank held investments in available
for sale with unrealized holding losses totaling $1.7 million. All
losses are considered temporary and consisted of the following:
| |
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$ |
2,048 |
|
|
$ |
149 |
|
|
$ |
4,700 |
|
|
$ |
403 |
|
|
$ |
6,748 |
|
|
$ |
552 |
|
|
CMOs
|
|
|
4,124 |
|
|
|
108 |
|
|
|
1,934 |
|
|
|
28 |
|
|
|
6,058 |
|
|
|
136 |
|
|
U.S. Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
3,196 |
|
|
|
38 |
|
|
|
15,558 |
|
|
|
603 |
|
|
|
18,754 |
|
|
|
641 |
|
|
GNMA
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
|
|
122 |
|
|
|
5,260 |
|
|
|
122 |
|
|
U.S. Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
41 |
|
|
|
2,920 |
|
|
|
41 |
|
|
FNMA MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
8,141 |
|
|
|
216 |
|
|
|
8,141 |
|
|
|
216 |
|
|
Total
|
|
$ |
9,368 |
|
|
$ |
295 |
|
|
$ |
38,513 |
|
|
$ |
1,413 |
|
|
$ |
47,881 |
|
|
$ |
1,708 |
|
The table below sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the bank's
investment securities and mortgage-backed securities available-for-sale.
| |
|
At September 30, 2007
|
|
| |
|
One Year or Less
|
|
|
More than One
Year to Five Years
|
|
|
More than Five
Years to Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
| |
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO’s
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
7,087 |
|
|
|
6.52 |
% |
|
$ |
7,087 |
|
|
|
6.52 |
% |
|
Corporate debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,760 |
|
|
|
5.08 |
|
|
|
3,988 |
|
|
|
6.83 |
|
|
|
6,748 |
|
|
|
6.12 |
|
|
U.S. Government SBA’s
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
485 |
|
|
|
7.54 |
|
|
|
18,269 |
|
|
|
4.86 |
|
|
|
18,754 |
|
|
|
4.92 |
|
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,245 |
|
|
|
5.45 |
|
|
|
29,344 |
|
|
|
5.53 |
|
|
|
32,589 |
|
|
|
5.52 |
|
|
MBS’s available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
6.95 |
|
|
|
2,920 |
|
|
|
6.95 |
|
|
FNMA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,995 |
|
|
|
5.77 |
|
|
|
7,995 |
|
|
|
5.77 |
|
|
GNMA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
|
|
5.57 |
|
|
|
5,260 |
|
|
|
5.57 |
|
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,175 |
|
|
|
6.01 |
|
|
|
16,175 |
|
|
|
6.01 |
|
|
MBS’S fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
- |
|
|
|
- |
|
|
|
146 |
|
|
|
7.00 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
146 |
|
|
|
7.00 |
|
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
146 |
|
|
|
7.00 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
146 |
|
|
|
7.00 |
|
|
Total mortgage-backed securities available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
146 |
|
|
|
7.00 |
|
|
|
- |
|
|
|
- |
|
|
|
16,175 |
|
|
|
6.01 |
|
|
|
16,321 |
|
|
|
6.02 |
|
|
Total investment portfolio
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
146 |
|
|
|
7.00 |
% |
|
$ |
3,245 |
|
|
|
5.45 |
% |
|
$ |
45,519 |
|
|
|
5.70 |
% |
|
$ |
48,910 |
|
|
|
5.69 |
% |
The table below sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the bank's
investment securities and mortgage-backed securities held to maturity.
|
|
|
At September 30, 2007
|
|
|
|
|
One Year or Less
|
|
|
More than One
Year to Five Years
|
|
|
More than Five
Years to Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
| |
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
Carrying
Value
|
|
|
Weighted
Average
Yield
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Investment securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government SBA’s
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
$ |
380 |
|
|
|
6.62 |
% |
|
$ |
2,466 |
|
|
|
4.32 |
% |
|
$ |
2,846 |
|
|
|
4.63 |
% |
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total investment securities held-to-maturity
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
380 |
|
|
|
6.62 |
|
|
|
2,466 |
|
|
|
4.32 |
|
|
|
2,846 |
|
|
|
4.63 |
|
|
MBS’s held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
104 |
|
|
|
7.23 |
|
|
|
104 |
|
|
|
7.23 |
|
|
FNMA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
81 |
|
|
|
7.26 |
|
|
|
81 |
|
|
|
7.26 |
|
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
185 |
|
|
|
7.24 |
|
|
|
185 |
|
|
|
7.24 |
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
6.50 |
|
|
|
22 |
|
|
|
6.50 |
|
|
Total
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
6.50 |
|
|
|
22 |
|
|
|
6.50 |
|
|
Total mortgage-backed securities
held-to-maturity-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
207 |
|
|
|
7.16 |
|
|
|
207 |
|
|
|
7.16 |
|
|
Total held-to-maturity investments
|
|
$ |
- |
|
|
|
- |
% |
|
$ |
-0 |
|
|
|
- |
% |
|
$ |
380 |
|
|
|
6.62 |
% |
|
$ |
2,673 |
|
|
|
4.54 |
% |
|
$ |
3,053 |
|
|
|
4.80 |
% |
Sources of Funds
General. Deposits,
loan repayments and prepayments, cash flows generated from operations, Federal
Home Loan Bank (“FHLB”) advances and reverse repurchase agreements are the
primary sources of the bank's funds for use in lending, investing and for other
general purposes.
Deposits. Deposits
are attracted from within the bank’s market area by offering a broad selection
of deposit instruments, including checking, savings, money market and time
deposits. Deposit account terms vary, differentiated by the minimum
balance required, the time periods that the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its
deposit accounts, the bank considers current interest rates, profitability to
the bank, interest rate risk characteristics, competition and its customer
preferences and concerns. The bank may pay above-market interest
rates to attract or retain deposits when less expensive sources of funds are not
available. The bank reviews its deposit composition and pricing
weekly.
At September 30, 2007, $107.7 million, or 85.70% of the bank's
certificate of deposit accounts were to mature within one year.
The following table sets forth the distribution and the rates paid
on each category of the bank’s deposits.
|
|
|
At September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
Balance
|
|
|
Percent of
Total
Deposits
|
|
|
Rate
Paid
|
|
|
Balance
|
|
|
Percent of
Total
Deposits
|
|
|
Rate
Paid
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
2,468 |
|
|
|
1.25 |
% |
|
|
0.97 |
% |
|
$ |
3,679 |
|
|
|
1.60 |
% |
|
|
0.98 |
% |
|
Now and money market accounts
|
|
|
60,625 |
|
|
|
30.62 |
|
|
|
3.61 |
|
|
|
73,334 |
|
|
|
31.86 |
|
|
|
3.51 |
|
|
Certificates of deposit
|
|
|
125,717 |
|
|
|
63.49 |
|
|
|
5.00 |
|
|
|
127,939 |
|
|
|
55.58 |
|
|
|
4.55 |
|
|
Noninterest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
9,181 |
|
|
|
4.64 |
|
|
|
- |
|
|
|
25,222 |
|
|
|
10.96 |
|
|
|
- |
|
|
Total
deposits
|
|
$ |
197,991 |
|
|
|
100.00 |
% |
|
|
4.29 |
% |
|
$ |
230,174 |
|
|
|
100.00 |
% |
|
|
3.67 |
% |
The following table presents information concerning the amounts,
the rates and the periods to maturity of the bank’s certificate accounts
outstanding.
|
|
|
At September 30, 2007
|
|
| |
|
Amount
|
|
|
Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Balance maturing:
|
|
|
|
|
|
|
|
Three months or less
|
|
$ |
52,127 |
|
|
|
5.04 |
% |
|
Three months to one year
|
|
|
55,609 |
|
|
|
5.04 |
|
|
One year to three years
|
|
|
15,098 |
|
|
|
4.70 |
|
|
Over three years
|
|
|
2,883 |
|
|
|
4.97 |
|
|
Total
|
|
$ |
125,717 |
|
|
|
5.00 |
% |
At September 30, 2007, the bank had $43.1 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
|
Maturity Period
|
|
Amount
|
|
|
Weighed
Average
Rate
|
|
| |
|
|
|
|
|
|
|
Three months or less
|
|
$ |
20,526 |
|
|
|
5.13 |
% |
|
Over 3 through 6 months
|
|
|
10,372 |
|
|
|
5.13 |
|
|
Over 6 through 12 months
|
|
|
7,664 |
|
|
|
5.08 |
|
|
Over 12 months
|
|
|
4,542 |
|
|
|
4.71 |
|
|
Total
|
|
$ |
43,104 |
|
|
|
5.07 |
% |
The following table sets forth the deposit activity of the bank
for the periods indicated.
|
|
|
At or For the Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
230,174 |
|
|
$ |
237,794 |
|
|
$ |
288,956 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deposits (withdrawals) before interest credited
|
|
|
(41,514 |
) |
|
|
(15,329 |
) |
|
|
(57,499 |
) |
|
Interest credited
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
6,337 |
|
|
Net increase (decrease) in deposits
|
|
|
(32,183 |
) |
|
|
(7,620 |
) |
|
|
(51,162 |
) |
|
Ending balance
|
|
$ |
197,991 |
|
|
$ |
230,174 |
|
|
$ |
237,794 |
|
Borrowings. At
September 30, 2007, borrowings consisted of FHLB advances and reverse repurchase
agreements totaling $27.2 million. FHLB advances amounted to $25.0
million at September 30, 2007, a decrease from the $36.0 million outstanding at
September 30, 2006, and other borrowings (reverse repurchase agreements)
amounted to $2.2 million, a decrease of $16.4 million compared to
$18.6 million at September 30, 2006. During the fiscal year
ended September 30, 2007, all reverse repurchase agreements represented
agreements to repurchase the same securities.
The following table sets forth information regarding the bank’s
borrowed funds:
| |
|
At or For the Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$ |
33,064 |
|
|
$ |
44,894 |
|
|
$ |
44,422 |
|
|
Maximum amount outstanding at any month-end during the
period
|
|
|
39,000 |
|
|
|
51,000 |
|
|
|
49,200 |
|
|
Balance outstanding at end of period
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
|
Weighted average interest rate during the period
|
|
|
5.46 |
% |
|
|
5.05 |
% |
|
|
4.47 |
% |
|
Weighted average interest rate at end of period
|
|
|
5.92 |
% |
|
|
5.28 |
% |
|
|
4.85 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
|
15,264 |
|
|
|
31,624 |
|
|
|
58,837 |
|
|
Maximum amount outstanding at any month-end during the
period
|
|
|
10,857 |
|
|
|
35,641 |
|
|
|
62,846 |
|
|
Balance outstanding at end of period
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
|
Weighted average interest rate during the period
|
|
|
5.61 |
% |
|
|
4.21 |
% |
|
|
4.37 |
% |
|
Weighted average interest rate at end of period
|
|
|
2.52 |
% |
|
|
4.65 |
% |
|
|
3.69 |
%
|
Subsidiary Activities
We
have two subsidiaries, the bank and Greater Atlantic Capital Trust
I. We established the Trust in January 2002 to issue certain
convertible preferred securities which we completed in March
2002. See discussion of the Trust in Note 20 to the financial
statements.
Personnel
As of September 30, 2007, we had 54 full-time employees and 9
part-time employees. The employees are not represented by a
collective bargaining unit and the company considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the company is required by
federal law to report to, and otherwise comply with the rules and regulations
of, the Office of Thrift Supervision. The bank, an insured federal
savings association, is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision, as its primary federal
regulator, and the Federal Deposit Insurance Corporation, as the deposit
insurer. The bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund managed by the Federal Deposit Insurance Corporation. The bank
must file reports with the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and/or the Federal
Deposit Insurance Corporation conduct periodic examinations to test the bank's
safety and soundness and compliance with various regulatory
requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or Congress, could have a material adverse
impact on the company, the bank and their operations. Certain regulatory
requirements applicable to the bank and to the company are referred to below or
elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth below, and elsewhere in this document does not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the company and is qualified in its entirety by reference to the actual laws and
regulations.
Holding Company Regulation
The company is a nondiversified unitary savings and loan holding
company within the meaning of federal law. Under prior law, a unitary
savings and loan holding company, such as the company, was not generally
restricted as to the types of business activities in which it may engage,
provided that the bank continued to be a qualified thrift lender. See
"Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999
provides that no company may acquire control of a savings institution after May
4, 1999 unless it engages only in the financial activities permitted for
financial holding companies under the law or for multiple savings and loan
holding companies as described below. Further, the Gramm-Leach-Bliley
Act specifies that existing savings and loan holding companies may only engage
in such activities. The Gramm-Leach-Bliley Act, however,
grandfathered the unrestricted authority for activities with respect to unitary
savings and loan holding companies existing prior to May 4, 1999, so long as the
holding company’s savings institution subsidiary continues to comply with the
QTL Test. The company does not qualify for the grandfathering. Upon
any non-supervisory acquisition by the company of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the Office of Thrift Supervision, the company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain activities authorized by Office of Thrift Supervision
regulation. However, the OTS has issued an interpretation concluding
that multiple savings and loan holding companies may also engage in activities
permitted for financial holding companies.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to
acquire savings institutions, the Office of Thrift Supervision considers factors
such as the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the deposit insurance funds, the convenience and needs of the community and
competitive effects.
The Office of Thrift Supervision may not approve any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions
by savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not currently
subject to specific regulatory capital requirements or specific restrictions on
the payment of dividends or other capital distributions, federal regulations do
prescribe such restrictions on subsidiary savings associations. The bank must
notify the Office of Thrift Supervision (30) days before declaring any dividend
to the company and comply with the additional restrictions described
below. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Acquisition of
the Company. On October 4, 2007, Summit filed an application
with the Federal Reserve Bank of Richmond to acquire the company and thereby,
indirectly, to acquire the bank pursuant to Section 4 of the Bank Holding
Company Act and Federal Reserve Regulation Y. The Reserve Bank referred the
application to the Board because action under delegated authority was not
appropriate. Accordingly, the application is being processed by the
Division of Banking Supervision and Regulation of the Board of Governors in
Washington, D.C. Summit was notified that, based on the staff’s
review of the record, additional information was being
requested. Subsequently, in order to respond to the request from the
Board of Governors and comply with internal application processing guidelines,
Summit requested that processing of the application be suspended until such time
as the staff of the Board of Governors and Summit consent to the continuation of
processing.
Federal
Savings Institution
Regulation
Business
Activities. The activities of federal savings banks are
governed by federal law and regulations. These laws and regulations
delineate the nature and extent of the business activities in which federal
savings banks may engage. In particular, certain lending authority
for federal savings banks, e.g., commercial,
non-residential real property loans and consumer loans, is limited to a
specified percentage of the institution’s capital or assets.
Capital
Requirements. The Office of Thrift Supervision capital
regulations require savings associations to meet three minimum capital
standards: a 1.5% tangible capital to total assets ratio, a 4% tier 1
capital to total assets leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS system) and, together with the risk-based capital
standard itself, a 4% Tier 1 risk-based capital standard. The Office
of Thrift Supervision regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.
The risk-based capital standard for savings associations requires
the maintenance of Tier 1 (core) capital and total capital (which is defined as
core capital and supplementary capital less certain specified deductions from
total capital such as reciprocal holdings of depository institution capital,
instruments and equity investments) to risk-weighted assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet activities, recourse
obligations, residual interests and direct credit substitutes, are multiplied by
a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of
asset. Core (Tier 1) capital is generally defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The
components of supplementary capital (Tier 2) currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible debt
securities, subordinated debt and intermediate preferred stock, the allowance
for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets,
and up to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The Office of Thrift Supervision also has authority to establish
individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in
light of the particular circumstances. At September 30, 2007, the
bank met each of its capital requirements.
The following table presents the bank's capital position at
September 30, 2007.
| |
|
|
|
|
|
Excess
(Deficiency)
Amount
|
|
Capital
|
| |
|
Actual
Capital
|
|
Required
Capital
|
|
|
Actual
Percent
|
|
Required
Percent
|
|
(Dollars in Thousands)
|
|
|
|
Tangible
|
|
$18,830
|
|
$ 3,684
|
|
$15,146
|
|
7.67%
|
|
1.50%
|
|
Core (Leverage)
|
|
18,830
|
|
9,825
|
|
9,005
|
|
7.67
|
|
4.00
|
|
Risk-based
|
|
20,874
|
|
13,630
|
|
7,244
|
|
12.25
|
|
8.00
|
Prompt
Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
1 (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for associations with the
highest examination rating) is considered to be "undercapitalized." A
association that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the
Office of Thrift Supervision is required to appoint a receiver or conservator
within specified time frames for an institution that is "critically
undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the Office of Thrift Supervision within 45
days of the date a savings association is deemed to have received notice that it
is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any
parent holding company in the amount of up to the lesser of 5% of the savings
association’s total assets when it was deemed to be undercapitalized or the
amount necessary to achieve compliance with applicable capital
requirements. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision
could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors. Significantly and critically
undercapitalized institutions are subject to additional mandatory and
discretionary measures.
Insurance of
Deposit Accounts. The bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation. The Deposit Insurance Fund is the successor to the Bank
Insurance Fund and the Savings Association Insurance Fund, which were merged in
2006. The Federal Deposit Insurance Corporation amended its
risk-based assessment system for 2007 to implement authority granted by the
Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under
the revised system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and
certain other factors. An institution’s assessment rate depends upon
the category to which it is assigned. Risk category I, which contains
the least risky depository institutions, is expected to include more than 90% of
all institutions. Unlike the other categories, Risk Category I
contains further risk differentiation based on the Federal Deposit Insurance
Corporation’s analysis of financial ratios, examination component ratings and
other information. Assessment rates are determined by the Federal
Deposit Insurance Corporation and currently range from five to seven basis
points for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV). The Federal
Deposit Insurance Corporation may adjust rates uniformly from one quarter to the
next, except that no single adjustment can exceed three basis
points. No institution may pay a dividend if in default of its FDIC
assessment.
The Reform Act also provided for a one-time credit for eligible
institutions based on their assessment base as of December 31,
1996. Subject to certain limitations, credits could be used beginning
in 2007 to offset assessments until exhausted. The bank’s one-time
credit approximated $65,529. The Reform Act also provided for the
possibility that the Federal Deposit Insurance Corporation may pay dividends to
insured institutions once the Deposit Insurance fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.
In addition to the assessment for deposit insurance, institutions
are required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize a predecessor deposit insurance
fund. That payment is established quarterly and during fiscal 2007,
Financing Corporation payments for savings associations approximated 1.18 basis
points of assessable deposits.
The Reform Act provided the Federal Deposit Insurance Corporation
with authority to adjust the Deposit Insurance Fund ratio to insured deposits
within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed
ratio of 1.25%. The ratio, which is viewed by the Federal Deposit
Insurance Corporation as the level that the fund should achieve, has been
established by the agency at 1.25% for 2008, which was unchanged from 2007.
The bank's total assessment paid for this period (including the
FICO assessment) was $204,021. The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A
significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of the
bank. Management cannot predict what insurance assessment rates will
be in the future.
Insurance of deposits may be terminated by the Federal Deposit
Insurance Corporation upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation or the Office of
Thrift Supervision. The management of the bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
Loans to One
Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, subject to certain exceptions, a savings
association may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if secured by specified readily marketable collateral. At September
30, 2007,the bank’s limit on loans to one borrower was $3.2 million, and the
bank’s largest aggregate outstanding loan to one borrower was $4.0
million. Part of that loan and any other loan in excess of the loans
to one borrower limit will be sold in the form of a participation.
QTL
Test. Federal law requires savings institutions to meet a
qualified thrift lender test. Under the test, a savings association
is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio
assets” (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain “qualified thrift investments” (primarily
residential mortgages and related investments, including certain mortgage-backed
securities but also defined to include education, credit card and small business
loans) in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test
is subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2007, Greater Atlantic maintained
71% of its portfolio assets in qualified thrift investments and, therefore, met
the qualified thrift lender test.
Limitation on
Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out
merger. An application to and the prior approval of the Office of
Thrift Supervision is required prior to any capital distribution if the
institution does not meet the criteria for “expedited treatment” of applications
under Office of Thrift Supervision regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with Office of
Thrift Supervision. If an application is not required, the
institution must still provide prior notice to Office of Thrift Supervision of
the capital distribution if, like the bank, it is a subsidiary of a holding
company. In the event the bank’s capital fell below its regulatory
requirements or the Office of Thrift Supervision notified it that it was in need
of increased supervision, Greater Atlantic’s ability to make capital
distributions could be restricted. In addition, the Office of Thrift
Supervision could prohibit a proposed capital distribution by any institution,
which would otherwise be permitted by the regulation, if the Office of Thrift
Supervision determines that such distribution would constitute an unsafe or
unsound practice. On December 13, 2006, the bank was advised by the
Office of Thrift Supervision that it would not approve the bank’s application to
pay a cash dividend to the company, and the company exercised its right to defer
the next scheduled quarterly distribution on the cumulative convertible trust
preferred securities for an indefinite period (which can be no longer than 20
consecutive quarterly periods). The amount accrued at September 30,
2007, totaled $644,000.
Assessments. Savings
associations are required to pay assessments to the Office of Thrift Supervision
to fund the agency’s operations. The general assessments, paid on a
semi-annual basis, are computed based upon the savings association’s total
assets, including consolidated subsidiaries, its financial condition and
complexity of its portfolio. The assessments paid by the bank for the
fiscal year ended September 30, 2007, totaled $139,095.
Transactions
with Related Parties. The bank’s authority to engage in
transactions with “affiliates” (e.g., any company that
controls or is under common control with an institution, including the company)
is limited by federal law. The aggregate amount of covered
transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings association. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings association’s
capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type specified in
federal law. The purchase of low quality assets from affiliates is
generally prohibited. The transactions with affiliates must be on
terms and under circumstances, that are at least as favorable to the institution
as those prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings associations are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings association may purchase the
securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the
company to its executive officers and directors. However, that law
contains a specific exception for loans by a depository institution to its
executive officers and directors in compliance with federal banking
laws. Under such laws, the bank's authority to extend credit to
executive officers, directors and 10% shareholders ("insiders"), as well as
entities such persons control, is limited. The law limits both the
individual and aggregate amount of loans the bank may make to insiders based, in
part, on the bank's capital position and requires certain board approval
procedures to be followed. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Loans to executive
officers are subject to additional limitations based on the type of loan
involved.
Enforcement. The
Office of Thrift Supervision has primary enforcement responsibility over savings
associations and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations
and can amount to $25,000 per day, or even $1.0 million per day in especially
egregious cases. The Federal Deposit Insurance Corporation has the
authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action be taken with respect to a particular savings
institution. The Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for
Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness in
various areas such as internal controls and information systems, internal audit,
loan documentation and credit underwriting, interest rate exposure, asset growth
and quality, earnings and compensation, fees and benefits.. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the Office of Thrift Supervision
determines that a savings institution fails to meet any standard prescribed by
the guidelines, the Office of Thrift Supervision may require the institution to
submit an acceptable plan to achieve compliance with the standard.
Federal Home Loan Bank System
The bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home
Loan Bank provides a central credit facility primarily for member
institutions. As a member of the Federal Home Loan Bank,
the bank is required to acquire and hold shares of capital stock in that Federal
Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal
amount of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the Federal
Home Loan Bank, whichever is greater. The bank was in compliance with
this requirement with an investment in Federal Home Loan Bank stock at September
30, 2007 of $1.7 million.
The Federal Home Loan Banks are required to provide funds used for
the resolution of insolvent thrifts in the late 1980s and to contribute funds
for affordable housing programs. Those requirements could reduce the
amount of dividends that the Federal Home Loan Banks pay to their members and
could also result in the Federal Home Loan Banks imposing a higher rate of
interest on advances to their members. If dividends were reduced, or
interest on future Federal Home Loan Bank advances increased, Greater Atlantic’s
net interest income would likely also be reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations
generally provide that reserves be maintained against aggregate transaction
accounts as follows: a 3% reserve ratio is assessed on net transaction accounts
up to $43.9 million; for a 10% ratio is applied above $43.9
million. The first $9.3 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) is exempted from the
reserve requirements. The amounts are adjusted
annually. The bank complies with the foregoing requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Office of
Thrift Supervision regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with its examination of
an institution, to assess the institution’s record of meeting the credit needs
of its community and to take such record into account in its evaluation of
applications by such institution. The Community Reinvestment Act
requires public disclosure of an institution’s Community Reinvestment Act
rating. Greater Atlantic’s latest Community Reinvestment Act rating,
received from the Office of Thrift Supervision was “Satisfactory.”
FEDERAL AND STATE TAXATION
General. The
company and the bank report their income on a fiscal year basis using the
accrual method of accounting and are subject to federal income taxation in the
same manner as other corporations with some exceptions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the bank or the
company. The bank has not been audited by the IRS or the Virginia Department of
Taxation ("DOT") in the past five years.
Distributions. To the extent
that the bank makes "non-dividend distributions” to the company that are
considered as made (i) from the reserve for losses on qualifying real property
loans, to the extent the reserve for such losses exceeds the amount that would
have been allowed under the experience method, or (ii) from the supplemental
reserve for losses on loans ("Excess Distributions”), then an amount based on
the amount distributed will be included in the bank's taxable income.
Non-dividend distributions include distributions in excess of the bank's current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the bank's bad debt reserve. Thus, any dividends to the company that would
reduce amounts appropriated to the bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the bank. The
amount of additional taxable income created by an Excess Distribution is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the bank makes a
"non-dividend distribution,” then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, presumably taxed at a 34% corporate income tax rate (exclusive of
state and local taxes). See "Regulation” and "Dividend Policy” for limits on the
payment of dividends of the bank. The bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserve.
Corporate
Alternative Minimum Tax ("AMT”). The Code imposes a tax on alternative
minimum taxable income (“AMTI”) at a rate of 20%. Only 90% of AMTI
could be offset by net operating loss carryovers. AMTI is increased
by an amount equal to 75% of the amount by which the bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). Since the company and
the bank have net operating losses for the 2007 fiscal year, except for the AMT,
they have not recorded a provision for income taxes.
Dividends
Received Deduction and Other Matters. The company may exclude from its
income 100% of dividends received from the bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the company and the bank will not file a consolidated tax return,
except that if the company or the bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
State and Local Taxation
Commonwealth of
Virginia. The Commonwealth of Virginia imposes a tax at the
rate of 6.0% on the "Virginia taxable income" of the
company. Virginia taxable income is equal to federal taxable income
with certain adjustments. Significant modifications include the
subtraction from federal taxable income of interest or dividends on obligations
or securities of the United States that are exempt from state income taxes.
Delaware
Taxation. As a Delaware company not earning income in
Delaware, the company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. However, to the extent that the company conducts
business outside of Delaware, the company may be considered doing business and
subject to additional taxing jurisdictions outside of Delaware.
ITEM
1A. RISK
FACTORS
Our increased emphasis on commercial and construction lending may
expose us to increased lending risks.
At September 30, 2007, our loan portfolio consisted of $35.0
million, or 19.17% of commercial real estate loans, $18.0 million, or 9.89% of
construction and land development loans and $34.8 million, or 19.10% of
commercial business loans. These types of loans generally expose a
lender to greater risk of non-payment and loss than one-to-four-family
residential mortgage loans because repayment of the loans often depends on the
successful operation of the property, the income stream of the borrowers and,
for construction loans, the accuracy of the estimate of the property’s value at
completion of construction and the estimated cost of
construction. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans. Commercial business loans expose us to
additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time. In addition, since such loans generally entail greater risk
than one- to four-family residential mortgage loans, we may need to increase our
allowance for loan losses in the future to account for the likely increase in
probable incurred credit losses associated with the growth of such
loans. Also, many of our commercial and construction borrowers have
more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
Strong competition within our market area could hurt our ability
to compete and could slow our growth.
We face intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make
new loans and has occasionally forced us to offer higher deposit
rates. Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which reduces net
interest income. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to
compete successfully in our market area.
An increase in loan prepayments and on prepayment of loans
underlying mortgage-backed securities and small business administration
certificates may adversely affect our profitability.
Prepayment rates are affected by consumer behavior, conditions in
the housing and financial markets, general economic conditions and the relative
interest rates on fixed-rate and adjustable-rate mortgage
loans. Although changes in prepayment rates are, therefore, difficult
for us to predict, prepayment rates tend to increase when market interest rates
decline relative to the rates on the prepaid instruments.
We recognize our deferred loan origination costs and premiums paid
on originating these loans by adjusting our interest income over the contractual
life of the individual loans. As prepayments occur, the rate at which
net deferred loan origination costs and premiums are expensed
accelerates. The effect of the acceleration of deferred costs and
premium amortization may be mitigated by prepayment penalties paid by the
borrower when the loan is paid in full within a certain period of time, which
varies between loans. If prepayment occurs after the period of time
when the loan is subject to a prepayment penalty, the effect of the acceleration
of premium and deferred cost amortization is no longer mitigated.
We recognize premiums we pay on mortgage-backed securities and
Small Business Administration Certificates as an adjustment to interest income
over the life of the security based on the rate of repayment of the securities.
Acceleration of prepayment on the loans underlying a mortgage-backed security or
Small Business Administration Certificate shortens the life of the security,
increases the rate at which premiums are expensed and further reduces interest
income.
We may not be able to reinvest loan and security prepayments at
rates comparable to the prepaid instruments particularly in periods of declining
interest rates.
A Downturn in the Washington D.C. Metropolitan Area Economy, a
Decline in Real Estate Values or Disruptions in the Secondary Mortgage Markets
Could Reduce Our Earnings and Financial Condition.
Most of our loans are secured by real estate. As a result, a
downturn in this market area could cause significant increases in nonperforming
loans, which would reduce our profits. Additionally, a decrease in asset quality
could require additions to our allowance for loan losses through increased
provisions for loan losses, which would also reduce our profits. In prior years,
there had been significant increases in real estate values in our market area.
As a result of rising home prices, our loans have been well collateralized.
However, a decline in real estate values could cause some of our mortgage loans
to become inadequately collateralized, which would expose us to a greater risk
of loss.
The secondary mortgage markets are experiencing disruptions
resulting from reduced investor demand for mortgage loans and mortgaged-backed
securities and increased investor yield requirements for those loans and
securities. These conditions may continue or worsen in the
future. As a result, a prolonged period of secondary market
illiquidity could have an adverse impact on our future earnings and financial
condition.
Consequences if merger with Summit doesn’t occur.
The company entered into an agreement, to merge with and into
Summit. In approving the merger agreement, the board of directors
consulted with Sandler O’Neill regarding the fairness of the transaction to the
company’s stockholders from a financial point of view and with the company’s
legal counsel regarding its legal duties and the terms of the merger agreement
and ancillary documents. The understanding of the board of directors
of the options available to the company and the assessment of those options with
respect to the prospects and estimated results of the implementation by the
company of its business plan as an independent entity under various scenarios,
and the determination that none of those options or the realization of the
business plan under the best case scenarios were likely to create greater
present value for the company’s stockholders than the value to be paid by
Summit. On the other hand, if the merger is not consummated the
company’s ability to achieve consistent profitability by selling a number of
branches to increase capital and reduce overall operating cost would be the next
option and, if that option was not successful, the prospects for regulatory
action would be the most likely.
We operate in a highly regulated environment and we may be
adversely affected by changes in laws and regulations.
The bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision and by the Federal Deposit
Insurance Corporation, as insurer of its deposits. Such regulation
and supervision govern the activities in which the bank and the company may
engage, and are intended primarily for the protection of the insurance fund and
for the depositors and borrowers of the bank. The regulation and
supervision by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation are not intended to protect the interests of investors in
the common stock of the company. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including
the imposition of restrictions on our operations, the classification of our
assets and determination of the level of our allowance for loan
losses. Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may
have a material impact on our operations.
A breach of information security could negatively affect our
earnings.
Increasingly, we depend upon data processing, communication and
information exchange on a variety of computing platforms and networks and over
the Internet. We cannot be certain all our systems are entirely free
from vulnerability to attack, despite safeguards we have
instituted. In addition, we rely on the services of a variety of
vendors to meet data processing and communication needs. If
information security is breached, information can be lost or misappropriated,
resulting in financial loss or costs to us or damages to
others. These costs or losses could materially exceed the amount of
insurance coverage, if any, which would adversely affect our earnings.
We are subject to heightened regulatory scrutiny with respect to
bank secrecy and anti-money laundering statutes and regulations.
Recently, regulators have intensified their focus on the USA
PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance
requirements. There is also increased scrutiny of our compliance with
the rules enforced by the Office of Foreign Assets Control. In order
to comply with regulations, guidelines and examination procedures in this area,
we have been required to adopt new policies and procedures and to install new
systems. We cannot be certain that the policies, procedures and
systems we have in place are flawless. Therefore, there is no
assurance that in every instance we are in full compliance with these
requirements.
Failure to pay interest on our debt may adversely impact us.
Deferral of interest payments where allowed on our convertible
preferred securities may affect our ability to issue additional debt.
Failure to remain a well capitalized institution.
As of September 30, 2007, the bank was considered a well
capitalized institution. Should the bank be classified as an
adequately capitalized institution, the bank could not issue brokered
certificates of deposit without the permission of the Office of Thrift
Supervision or the Federal Deposit Insurance Corporation. At
September 30, 2006, the bank was classified as an adequately capitalized
institution and the Office of Thrift Supervision limited the payment of
dividends from the bank to the company. Without the payment of a dividend from
the bank, the company was unable to make a distribution on the cumulative
convertible trust preferred securities. When, on December 13, 2006,
the bank was advised by the Office of Thrift Supervision that it would not
approve the bank’s application to pay a cash dividend to the company, the
company exercised its right to defer the scheduled quarterly distributions on
the cumulative convertible trust preferred securities.
ITEM 1B.UNRESOLVED STAFF COMMENTS
The company has no unresolved staff comments for the period ended
September 30, 2007.
During fiscal year 2007, we conducted our business from five
full-service banking offices and our administrative office. The
following table sets forth certain information concerning the bank’s offices as
of September 30, 2007.
|
Location
|
|
Leased or
Owned
|
|
Original
Year
Leased or
Acquired
|
|
Date of
Lease
Expiration
|
|
Net Book Value
of Property or
Leasehold
Improvements
at
September 30, 2007
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Administrative offices:
|
|
|
|
|
|
|
|
|
|
10700 Parkridge Boulevard
Reston, Virginia 20191
|
|
Leased
|
|
1998
|
|
01-31-11
|
|
$ 65
|
|
Branch offices:
|
|
|
|
|
|
|
|
|
|
11834 Rockville Pike
Rockville, Maryland 20852
|
|
Leased
|
|
1998
|
|
06-30-09
|
|
4
|
|
10700 Parkridge Boulevard
Reston, Virginia 20191
|
|
Leased
|
|
2004
|
|
01-31-11
|
|
303
|
|
43086 Peacock Market Plaza
South Riding, Virginia 20152
|
|
Leased
|
|
2000
|
|
06-30-15
|
|
201
|
|
1 South Royal Avenue
Front Royal, Virginia 22630
|
|
Owned
|
|
1977
|
|
|
|
687
|
|
9484 Congress Street
New Market, Virginia 22844
|
|
Owned
|
|
1989
|
|
|
|
405
|
|
Loan Offices:
2200 Defense Highway
Crofton, Maryland 21114
|
|
Leased
|
|
2002
|
|
11-30-08
|
|
1
|
|
12530 Parklawn Drive, Suite 170
Rockville, Maryland 20852
|
|
Leased
|
|
2005
|
|
06-30-10
|
|
36
|
|
Total
|
$1,702
|
The total net book value of the company’s furniture, fixtures and
equipment at September 30, 2007 was $2.3 million. The properties are
considered by management to be in good condition.
|
ITEM
3.
|
LEGAL PROCEEDINGS
|
The company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the company’s financial condition,
results of operations or cash flows.
|
ITEM
4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of the stockholders during the
fourth quarter of the fiscal year ended September 30, 2007, through the
solicitation of proxies or otherwise.
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
information. The Pink Sheets report
trades of the company’s stock under the symbol GAFC.PK. At September
30, 2007, there were approximately 278 stockholders of
record. The following table sets forth the range of reported
high and low bid quotations as reported in the Pink Sheets for the common stock
for the periods indicated.
| |
First
Quarter Ended
December 31
|
Second
Quarter Ended
March
31
|
Third
Quarter Ended
June 30
|
Fourth
Quarter Ended
September 30
|
|
Fiscal Year 2007
|
|
|
|
|
|
High
|
5.10
|
4.26
|
5.05
|
5.35
|
|
Low
|
4.26
|
2.25
|
2.25
|
4.69
|
| |
|
|
|
|
|
Fiscal Year 2006
|
|
|
|
|
|
High
|
5.41
|
5.95
|
5.76
|
5.35
|
|
Low
|
4.84
|
4.60
|
5.00
|
4.60
|
| |
|
|
|
|
These market quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not necessarily represent
actual transactions.
The company has not sold any unregistered securities and did not
repurchase any of its equity securities in the fiscal year ended September 30,
2007.
|
ITEM
6.
|
SELECTED FINANCIAL DATA
|
The following Selected Consolidated Financial Data should be
read in conjunction with our Consolidated Financial Statements and the notes
thereto, the information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this Annual Report.
|
At or For the Years Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
18,421 |
|
|
$ |
18,794 |
|
|
$ |
16,958 |
|
|
$ |
18,085 |
|
|
$ |
19,361 |
|
|
Interest expense
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
10,013 |
|
|
|
11,970 |
|
|
|
12,277 |
|
|
Net interest income
|
|
|
6,428 |
|
|
|
7,211 |
|
|
|
6,945 |
|
|
|
6,115 |
|
|
|
7,084 |
|
|
Provision for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
|
209 |
|
|
|
791 |
|
|
Net interest income after provision for
loan losses
|
|
|
5,743 |
|
|
|
7,085 |
|
|
|
6,726 |
|
|
|
5,906 |
|
|
|
6,293 |
|
|
Noninterest income
|
|
|
615 |
|
|
|
917 |
|
|
|
1,695 |
|
|
|
547 |
|
|
|
766 |
|
|
Gain on branch sales
|
|
|
4,255 |
|
|
|
- |
|
|
|
945 |
|
|
|
- |
|
|
|
- |
|
|
Noninterest expense
|
|
|
9,626 |
|
|
|
11,085 |
|
|
|
9,889 |
|
|
|
10,370 |
|
|
|
10,014 |
|
|
Income (loss) from continuing operations
before taxes
|
|
|
987 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
Provision for income taxes
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Income (loss) from continuing
operations
|
|
|
951 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
|
(3,917 |
) |
|
|
(2,955 |
) |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations
|
|
|
- |
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
|
428 |
|
|
|
4,898 |
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
$ |
(3,489 |
) |
|
$ |
1,943 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.65 |
|
|
Diluted
|
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
$ |
(1.16 |
) |
|
$ |
0.44 |
|
|
Book value
|
|
|
3.17 |
|
|
|
2.93 |
|
|
|
4.76 |
|
|
|
5.29 |
|
|
|
6.79 |
|
|
Tangible book value
|
|
|
3.29 |
|
|
|
2.96 |
|
|
|
4.80 |
|
|
|
5.22 |
|
|
|
6.38 |
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,023,407 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
|
|
3,012,434 |
|
|
|
3,012,434 |
|
|
Diluted
|
|
|
4,395,008 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
|
|
3,012,434 |
|
|
|
4,413,462 |
|
|
Shares outstanding
|
|
|
3,024,220 |
|
|
|
3,020,934 |
|
|
|
3,020,934 |
|
|
|
3,012,434 |
|
|
|
3,012,434 |
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
245,994 |
|
|
$ |
305,219 |
|
|
$ |
339,542 |
|
|
$ |
433,174 |
|
|
$ |
498,456 |
|
|
Total loans receivable, net
|
|
|
176,108 |
|
|
|
193,307 |
|
|
|
194,920 |
|
|
|
246,387 |
|
|
|
242,253 |
|
|
Allowance for loan losses
|
|
|
2,305 |
|
|
|
1,330 |
|
|
|
1,212 |
|
|
|
1,600 |
|
|
|
1,550 |
|
|
Mortgage-loans held for sale
|
|
|
- |
|
|
|
- |
|
|
|
9,517 |
|
|
|
5,528 |
|
|
|
6,554 |
|
|
Investment securities (1)
|
|
|
35,435 |
|
|
|
48,557 |
|
|
|
58,502 |
|
|
|
60,285 |
|
|
|
138,049 |
|
|
Mortgage-backed securities
|
|
|
16,528 |
|
|
|
31,600 |
|
|
|
57,296 |
|
|
|
92,722 |
|
|
|
86,735 |
|
|
Total deposits
|
|
|
197,991 |
|
|
|
230,174 |
|
|
|
237,794 |
|
|
|
288,956 |
|
|
|
297,876 |
|
|
FHLB advances
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
|
|
51,200 |
|
|
|
86,800 |
|
|
Other borrowings
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
|
|
64,865 |
|
|
|
77,835 |
|
|
Guaranteed convertible preferred
securities of subsidiary trust
|
|
|
9,374 |
|
|
|
9,388 |
|
|
|
9,378 |
|
|
|
9,369 |
|
|
|
9,359 |
|
|
Total stockholders’ equity
|
|
|
9,571 |
|
|
|
8,850 |
|
|
|
14,375 |
|
|
|
15,944 |
|
|
|
20,442 |
|
|
Tangible capital
|
|
|
9,939 |
|
|
|
8,943 |
|
|
|
14,514 |
|
|
|
15,379 |
|
|
|
19,228 |
|
SELECTED FINANCIAL DATA - (continued)
|
At or For the Years Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Consolidated Statements of Financial Condition
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
284,136 |
|
|
$ |
315,133 |
|
|
$ |
370,729 |
|
|
$ |
504,039 |
|
|
$ |
477,882 |
|
|
Investment securities(1)
|
|
|
64,011 |
|
|
|
66,789 |
|
|
|
70,633 |
|
|
|
123,198 |
|
|
|
161,161 |
|
|
Mortgage-backed securities(1)
|
|
|
23,848 |
|
|
|
43,979 |
|
|
|
77,424 |
|
|
|
111,016 |
|
|
|
51,046 |
|
|
Total loans
|
|
|
184,570 |
|
|
|
193,688 |
|
|
|
210,152 |
|
|
|
253,772 |
|
|
|
251,386 |
|
|
Allowance for loan losses
|
|
|
1,559 |
|
|
|
1,264 |
|
|
|
1,609 |
|
|
|
1,498 |
|
|
|
1,696 |
|
|
Total deposits
|
|
|
214,118 |
|
|
|
210,311 |
|
|
|
245,518 |
|
|
|
275,636 |
|
|
|
279,469 |
|
|
Total stockholders’ equity
|
|
|
7,871 |
|
|
|
12,164 |
|
|
|
13,830 |
|
|
|
15,236 |
|
|
|
15,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.33 |
% |
|
|
(1.77 |
)% |
|
|
(0.44 |
)% |
|
|
(0.69 |
)% |
|
|
0.41 |
% |
|
Return on average equity
|
|
|
12.08 |
|
|
|
(45.80 |
) |
|
|
(11.79 |
) |
|
|
(22.90 |
) |
|
|
12.83 |
|
|
Equity to assets
|
|
|
3.89 |
|
|
|
2.90 |
|
|
|
4.23 |
|
|
|
3.68 |
|
|
|
4.10 |
|
|
Net interest margin
|
|
|
2.36 |
|
|
|
2.37 |
|
|
|
1.94 |
|
|
|
1.68 |
|
|
|
1.53 |
|
|
Efficiency ratio(3)
|
|
|
85.20 |
|
|
|
136.38 |
|
|
|
103.17 |
|
|
|
155.66 |
|
|
|
127.58 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets, at
period end
|
|
|
0.55 |
|
|
|
0.36 |
|
|
|
0.54 |
|
|
|
0.22 |
|
|
|
0.28 |
|
|
Non-performing loans to total loans, at
period end
|
|
|
0.74 |
|
|
|
0.55 |
|
|
|
0.75 |
|
|
|
0.37 |
|
|
|
0.57 |
|
|
Net charge-offs (recoveries) to average
total loans
|
|
|
(0.16 |
) |
|
|
0.00 |
|
|
|
0.28 |
|
|
|
0.06 |
|
|
|
0.36 |
|
|
Allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1.26 |
% |
|
|
0.66 |
% |
|
|
0.56 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
Non-performing loans
|
|
|
170.87 |
|
|
|
119.82 |
|
|
|
75.56 |
|
|
|
167.89 |
|
|
|
109.31 |
|
|
Non-performing loans
|
|
$ |
1,349 |
|
|
$ |
1,110 |
|
|
$ |
1,604 |
|
|
$ |
953 |
|
|
$ |
1,418 |
|
|
Non-performing assets
|
|
|
1,349 |
|
|
|
1,110 |
|
|
|
1,836 |
|
|
|
953 |
|
|
|
1,446 |
|
|
Allowance for loan losses
|
|
|
2,305 |
|
|
|
1,330 |
|
|
|
1,212 |
|
|
|
1,600 |
|
|
|
1,550 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios of the Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
7.67 |
% |
|
|
5.51 |
% |
|
|
6.66 |
% |
|
|
5.59 |
% |
|
|
5.68 |
% |
|
Tier 1 risk-based capital ratio
|
|
|
11.00 |
|
|
|
8.59 |
|
|
|
10.25 |
|
|
|
9.81 |
|
|
|
12.08 |
|
|
Total risk-based capital ratio
|
|
|
12.25 |
|
|
|
9.11 |
|
|
|
10.75 |
|
|
|
10.42 |
|
|
|
12.70 |
|
|
(1)
|
Consists of securities classified as available-for-sale,
held-to-maturity and for trading.
|
|
(2)
|
Ratios are presented on an annualized basis where
appropriate.
|
|
(3)
|
Efficiency ratio consists of noninterest expense
divided by net interest income and noninterest income
|
|
ITEM
7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
|
Forward-Looking Statements
When
used in this Annual Report on Form 10-K and in future filings by the
company with the Securities and Exchange Commission (the “SEC”), in the
company’s press releases or other public or shareholder communications, and in
oral statements made with the approval of an authorized executive officer, the
words or phrases “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project” or similar expressions are intended to
identify “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties, including, among other things, changes in
economic conditions in the company’s market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
company’s market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The company wishes to advise readers that the factors
listed above could affect the company’s financial performance and could cause
the company’s actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The company does not undertake and specifically declines any
obligation to publicly release the results of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, subject to regulatory and shareholder
approvals. Immediately following the merger, the bank intends to
merge with and into Summit Community Bank.
General
The profitability of the company depends primarily on its
net-interest income and non-interest income. Net interest income is
the difference between the interest income it earns on its loans and investment
portfolio, and the interest it pays on interest-bearing liabilities, which
consist mainly of interest paid on deposits and
borrowings. Non-interest income consists primarily of gain on sales
of loans, derivatives and available-for-sale investments and fees from service
charges on deposits and loans.
The level of its operating expenses also affects the company’s
profitability. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and technology-related
expenses and other general operating expenses.
Critical Accounting Policies, Estimates and Judgments
The company’s financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses as well as the disclosure of contingent
liabilities. Management continually evaluates its estimates and
judgments including those related to the allowance for loan losses and income
taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The company believes that of its
significant accounting policies, the following may involve a higher degree of
judgment or complexity.
Allowance for Loan Losses
The company maintains an allowance for loan losses based on
management’s evaluation of the risks inherent in its loan portfolio and the
general economy. Management classifies loans as substandard, doubtful
or loss as required by federal regulations. Management provides a
100% reserve for all assets classified as loss. Further, management
bases its estimates of the allowance on current economic conditions, actual loss
experience and industry trends. Also, the company discontinues
recognizing interest income on loans with principal and/or interest past due 90
days.
Income Taxes
The provision (or benefit) for income taxes is based on taxable
income, tax credits and available net operating losses. The company
records deferred tax assets and liabilities using enacted tax rates for the
effect of temporary differences between the book and tax bases of assets and
liabilities. If enacted tax rates change, the company would adjust
the deferred tax assets and liabilities, through the provision for income taxes
in the period of change, to reflect the enacted tax rate expected to be in
effect when the deferred tax items reverse. The company records a
valuation allowance on deferred tax assets to reflect the future tax benefits
expected to be realized. In determining the appropriate valuation
allowance, the company considers the expected level of future taxable income and
available tax planning strategies. At September 30, 2007, the company
had deferred tax assets of $2.1 million, which is net of a valuation allowance
of $3.5 million.
Recent Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. For financial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15, 2008. We do not believe
the adoption of SFAS 157 will have a material impact on the consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" (SFAS 159).This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective of this Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The fair value option established by this
Statement permits all entities to choose to measure eligible items at fair value
at specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. The company
is in the process of evaluating the impact SFAS 159 may have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations”, to create greater consistency in the accounting and financial
reporting of business combinations. SFAS 141 (R) requires a company
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquired entity to be measured at their fair
values as of the acquisition date. SFAS 141 (R) also requires companies to
recognize and measure goodwill acquired in a business combination or a gain from
a bargain purchase and how to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies to fiscal years
beginning after December 15, 2008 and is adopted
prospectively. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51”, to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
requires company to clearly identify and present ownership interests in
subsidiaries held by parties other than the company in the consolidated
financial statements within the equity section but separate from the company’s
equity. It also requires the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income;
changes in ownership interest be accounted for similarly, as equity
transactions; and when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary and the gain or loss
on the deconsolidation of the subsidiary be measured at fair
value. SFAS No. 160 applies to fiscal years beginning after December
15, 2008. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
Discontinued mortgage banking operations
On March 29, 2006, we began the process of discontinuing the
operations of the bank’s subsidiary, Greater Atlantic Mortgage
Corporation. It was determined that, because it was unprofitable,
this business no longer fit our strategy.
Due to the unprofitable operations of Greater Atlantic Mortgage
Corporation, the company recognized an additional loss of $1.5 million during
fiscal 2006. In addition to the loss from operations, a non-recurring
pre-tax impairment charge on long-lived assets related to Greater Atlantic
Mortgage Corporation of $996,000 was recorded and also included in discontinued
operations in the consolidated statements of operations for fiscal 2006.
As a result of the above action, we applied discontinued
operations accounting in the third quarter of 2006, as we completed the closing
of the Greater Atlantic Mortgage Corporation business. The table
below summarizes Greater Atlantic Mortgage Corporation results which were
treated as discontinued operations for the periods indicated.
|
|
|
Year Ended September 30,
|
|
| |
|
2006
|
|
|
2005
|
|
|
(Dollars in Thousands, Except Per Share Data
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
280 |
|
|
$ |
478 |
|
|
Interest expense
|
|
|
256 |
|
|
|
347 |
|
|
Net interest income
|
|
|
24 |
|
|
|
131 |
|
|
Noninterest income
|
|
|
2,149 |
|
|
|
5,072 |
|
|
Noninterest expense
|
|
|
4,661 |
|
|
|
6,310 |
|
|
Provision for income taxes
|
|
|
- |
|
|
|
- |
|
|
Net income (loss)
|
|
$ |
(2,488 |
) |
|
$ |
(1,107 |
) |
|
Earnings per share – basic
|
|
$ |
(0.82 |
) |
|
$ |
(0.37 |
) |
|
Earnings per share – diluted
|
|
|
(0.82 |
) |
|
|
(0.37 |
)
|
Financial Condition
2007 Compared to 2006
At September 30, 2007 the company’s total assets were $246.0
million, compared to the $305.2 million held at September 30, 2006, representing
a decrease of 19.40%. The decrease resulted primarily from a decrease
in investment securities, loans receivable and interest bearing
deposits. The decline in the bank’s overall asset size is reflected
in the consolidated statements of financial condition and statements of
operations as we continued to manage the bank’s assets and liabilities to
maintain the bank in a well capitalized position.
Net loans receivable at September 30, 2007 were $176.1 million, a
decrease of $17.2 million or 8.90% from the $193.3 million held at September 30,
2006. The decrease in loans consisted primarily of a $5.5 million decline in the
bank’s single-family loan portfolio, coupled with a decrease of $8.8 million in
the Bank’s consumer loan portfolio. Because the Bank’s single family
and consumer loan portfolios consist primarily of adjustable-rate loans, and
with the yield curve that existed throughout our fiscal 2007 period, reflecting
short-term rates only slightly lower than rates for longer terms, customers were
able to extend the terms of their mortgages. Customers were also
refinancing away from adjustable-rate loans and into longer term, fixed-rate
loans or curtailing outstanding balances. Multifamily loans
outstanding increased by $3.2 million and commercial real estate loans increased
by $6.6 million during the period. Those increases were offset in
part by decreases of $10.0 million in construction and land loans and $5.0
million in commercial business loans. The decrease in construction
and land loans was primarily in the single family residential sector of the
market. The company anticipates that lending in that area will
continue to decline as a result of the current slow sales pace occurring in the
single-family market.
At September 30, 2007, investment securities were $52.0 million, a
decrease of $28.2 million or 35.17% from the $80.2 million held at September 30,
2006. The cash proceeds from the sale or payoff of investment
securities were used to reduce higher cost wholesale funding, including
borrowings, brokered deposits and wholesale deposits, and to retain cash for the
sale of our Pasadena branch office which occurred on August 24, 2007.
Deposits at September 30, 2007 were $198.0 million, a decrease of
$32.2 million from the $230.2 million held at September 30,
2006. Total deposits decreased primarily due the sale of our Pasadena
branch office and our reduced reliance on brokered deposits and wholesale
deposits, both of which have a higher cost. The combination of the
branch sale and the elimination of brokered deposits and wholesale deposits
contributed to a $75.6 million decrease in deposits since September 30, 2006
while total retail deposits increased $40.4 million. The increase in
retail deposits is primarily in certificates of deposits and money fund accounts
which have been obtained through the bank’s marketing efforts and are at a lower
cost than brokered and wholesale deposits.
On February 22, 2006, the company announced that it had engaged
Sandler O’Neill & Partners, L.P. to advise on the financial aspects of the
company’s review of its strategic options and assist the company in evaluating
the financial aspects of all strategic alternatives available.
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, subject to regulatory and shareholder
approvals. Immediately following the merger, the bank intends to
merge with and into Summit Community Bank.
Under
the agreement to sell its leased branch office located at 8070 Ritchie
Highway, Pasadena, Maryland, to Bay-Vanguard, Bay-Vanguard paid the bank an 8.5%
premium on the balance of deposits assumed at closing. At August 24,
2007, the closing date of that transaction, the deposits at our Pasadena branch
office on which the deposit premium would apply totaled approximately $51.5
million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
Results of Operations
2007 Compared to 2006
Net
Income. For the fiscal year ended September 30, 2007, the
company had a net income from continuing operations of $951,000 or $0.31 per
diluted share compared to a loss from continuing operations of $3.1 million or
$1.02 per diluted share for fiscal year 2006. The $4.0 million
improvement in earnings over the comparable period one-year ago was primarily
the result of an increase in non-interest income and a decrease in non-interest
expense. That increase in non-interest income and decrease in
non-interest expense were partially offset by a decrease in net interest income
and increases in the provision for loan losses and the provision for income
taxes. The ongoing net losses from continuing operations remain a
consistent problem for management because the loan production needed to maintain
the retail branch network has not been attained. Due to the gain
arising from the sale of the bank’s Pasadena branch office in August of this
year, the bank is currently managing its assets and liabilities to maintain a
well capitalized status. Because of the bank’s loans to one borrower
limit it cannot aggressively expand its commercial loan portfolio and maintain a
consistent level of outstanding loans to larger customers. Those
factors have caused earning assets to decline, impacting
earnings. Further, margin pressure from the yield curve, which had
been inverted since the spring of 2006 and remains inverted from three months to
three years and only recently moved to a positive pattern from three to ten
years, presents a very challenging environment in which to seek to increase our
net interest margin.
Accordingly, during 2007, the company entered into an agreement to
merge with and into Summit. In approving the merger agreement, the
board of directors consulted with Sandler O’Neill regarding the fairness of the
transaction to the company’s stockholders from a financial point of view and
with the company’s legal counsel regarding its legal duties and the terms of the
merger agreement and ancillary documents. The understanding of the
board of directors of the options available to the company and the assessment of
those options with respect to the prospects and estimated results of the
implementation by the company of its business plan as an independent entity
under various scenarios, and the determination that none of those options or the
realization of the business plan under the best case scenarios were likely to
create greater present value for the company’s stockholders than the value to be
paid by Summit. On the other hand, the board of directors considered
the company’s ability to achieve consistent profitability by selling a number of
branches to increase capital and reduce overall operating cost and the prospects
for regulatory action if it failed to do so.
Net Interest
Income. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing liabilities such as deposits and
borrowings. The level of net interest income is determined primarily
by the relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon
them. The correlation between the repricing of interest rates on
assets and on liabilities also influences net interest income.
The following table presents a comparison of the components of
interest income and expense and net interest income.
|
|
|
Years ended September 30,
|
|
|
Difference
|
|
| |
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
14,173 |
|
|
$ |
13,866 |
|
|
$ |
307 |
|
|
|
2.21 |
% |
|
Investments
|
|
|
4,248 |
|
|
|
4,928 |
|
|
|
(680 |
) |
|
|
(13.80 |
) |
|
Total
|
|
|
18,421 |
|
|
|
18,794 |
|
|
|
(373 |
) |
|
|
(1.98 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
1,622 |
|
|
|
21.04 |
|
|
Borrowings
|
|
|
2,662 |
|
|
|
3,874 |
|
|
|
(1,212 |
) |
|
|
(31.29 |
) |
|
Total
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
410 |
|
|
|
3.54 |
|
|
Net interest income
|
|
$ |
6,428 |
|
|
$ |
7,211 |
|
|
$ |
(783 |
) |
|
|
(10.86 |
)% |
The decrease in net interest income for fiscal year 2007, from the
comparable period one year ago, resulted primarily from a $32.0 million decrease
in the bank’s interest-earning assets coupled with average interest-earning
assets declining by $7.6 million more than the decline in average
interest-bearing liabilities. That decrease was coupled with a 1
basis point decrease in net interest margin (net interest income divided by
average interest-earning assets) from 2.37% for fiscal year 2006 to 2.36% for
fiscal year 2007. The decrease in net interest margin was offset by
the average yield on interest-earning assets increasing by 6 basis point more
than the increase in the average cost on interest-bearing liabilities.
The interest rate environment has been a difficult one for most
financial institutions. With short-term rates close to or at times
even higher than long-term rates, the prospects of expanding interest rate
spread and net interest margin has been difficult. We expect the
interest rate environment to remain challenging and we believe it will continue
to have an impact on our net interest margin and net interest rate
spread. We also believe, however, that our strategy of changing the
balance sheet from one that was wholesale oriented, as reflected in the bank’s
former reliance on brokered and internet deposits, to one which is more retail
oriented, will benefit us over time. We believe that change will
position us to realize a benefit when the interest rate environment
improves. If market interest rates were to rise, given our asset
sensitivity position, we would also expect our net interest margin to
improve. However, in a declining rate environment our interest rate
spread and our net interest income would decline. The bank continues
to monitor the markets and its interest rate position to alleviate any material
changes in net interest margin.
Interest
Income. Interest income for the fiscal year ended September
30, 2007 decreased $373,000 compared to fiscal year 2006, primarily as a result
of a $32.0 million decrease in the average balances of outstanding loans and
investment securities. The decreases in those balances were partially
offset by an increase of 59 basis points in the average yield earned on interest
earning assets.
Interest
Expense. The $410,000 increase in interest expense for fiscal
year 2007 compared to the 2006 period was principally the result of an 53 basis
point increase in the cost of funds on average deposits and
borrowings. That increase in the cost of funds was partially offset
by a $24.4 million decrease in average deposits and borrowings. The
increase in interest expense on deposits was primarily due to a 69 basis point
increase in rates paid on deposits, primarily due to higher rates paid on
interest-bearing demand deposits and certificates and elevated pricing on new
and renewed time deposits. That increase was coupled with an increase
of $3.8 million in average deposits from $210.3 million for fiscal 2006 to
$214.1 million for fiscal 2007. The increase in rates was primarily
due to market rates requiring higher rates on interest-bearing demand deposits,
savings accounts and certificates and increased pricing on new and renewed time
deposits.
The decrease in interest expense on borrowings for fiscal 2007,
when compared to the 2006 period, was principally the result of a $28.2 million
decrease in average borrowed funds and was partially offset by a 45 basis point
increase in the cost of borrowed funds. Components accountable for
the decrease of $1.2 million in interest expense on borrowings were a $1.4
million decrease relating to average volume, offset in part by a $217,000
increase relating to average cost.
Comparative
Average Balances and Interest Income Analysis. The following table
presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all
average balances are average daily balances. Non-accruing loans have
been included in the tables as loans carrying a zero yield.
|
|
|
Year
Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average Balance
|
|
|
Interest Income/
Expense
|
|
|
Average Yield/ Rate
|
|
|
Average Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
Average Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$ |
91,132 |
|
|
$ |
6,693 |
|
|
|
7.34 |
% |
|
$ |
93,390 |
|
|
$ |
6,699 |
|
|
|
7.17 |
% |
|
$ |
98,217 |
|
|
$ |
6,379 |
|
|
|
6.49 |
% |
|
Consumer loans
|
|
|
55,420 |
|
|
|
4,353 |
|
|
|
7.85 |
|
|
|
65,338 |
|
|
|
4,701 |
|
|
|
7.19 |
|
|
|
71,817 |
|
|
|
3,748 |
|
|
|
5.22 |
|
|
Commercial business
loans
|
|
|
38,018 |
|
|
|
3,127 |
|
|
|
8.23 |
|
|
|
34,960 |
|
|
|
2,466 |
|
|
|
7.05 |
|
|
|
40,118 |
|
|
|
2,303 |
|
|
|
5.74 |
|
|
Total loans
|
|
|
184,570 |
|
|
|
14,173 |
|
|
|
7.68 |
|
|
|
193,688 |
|
|
|
13,866 |
|
|
|
7.16 |
|
|
|
210,152 |
|
|
|
12,430 |
|
|
|
5.91 |
|
|
Investment securities
|
|
|
64,011 |
|
|
|
3,184 |
|
|
|
4.97 |
|
|
|
66,789 |
|
|
|
3,353 |
|
|
|
5.02 |
|
|
|
70,633 |
|
|
|
2,414 |
|
|
|
3.42 |
|
|
Mortgage-backed
securities
|
|
|
23,848 |
|
|
|
1,064 |
|
|
|
4.46 |
|
|
|
43,979 |
|
|
|
1,575 |
|
|
|
3.58 |
|
|
|
77,424 |
|
|
|
2,114 |
|
|
|
2.73 |
|
|
Total
interest-earning
assets
|
|
|
272,429 |
|
|
|
18,421 |
|
|
|
6.76 |
|
|
|
304,456 |
|
|
|
18,794 |
|
|
|
6.17 |
|
|
|
358,209 |
|
|
|
16,958 |
|
|
|
4.73 |
|
|
Non-earning assets
|
|
|
11,707 |
|
|
|
|
|
|
|
|
|
|
|
10,677 |
|
|
|
|
|
|
|
|
|
|
|
12,520 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
284,136 |
|
|
|
|
|
|
|
|
|
|
$ |
315,133 |
|
|
|
|
|
|
|
|
|
|
$ |
370,729 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
2,969 |
|
|
|
27 |
|
|
|
0.91 |
|
|
$ |
5,190 |
|
|
|
48 |
|
|
|
0.92 |
|
|
$ |
10,202 |
|
|
|
94 |
|
|
|
0.92 |
|
|
Now and money market
accounts
|
|
|
77,997 |
|
|
|
2,791 |
|
|
|
3.58 |
|
|
|
73,485 |
|
|
|
2,430 |
|
|
|
3.31 |
|
|
|
64,723 |
|
|
|
1,197 |
|
|
|
1.85 |
|
|
Certificates of deposit
|
|
|
133,152 |
|
|
|
6,513 |
|
|
|
4.89 |
|
|
|
131,636 |
|
|
|
5,231 |
|
|
|
3.97 |
|
|
|
170,593 |
|
|
|
5,046 |
|
|
|
2.96 |
|
|
Total deposits
|
|
|
214,118 |
|
|
|
9,331 |
|
|
|
4.36 |
|
|
|
210,311 |
|
|
|
7,709 |
|
|
|
3.67 |
|
|
|
245,518 |
|
|
|
6,337 |
|
|
|
2.58 |
|
|
FHLB advances
|
|
|
33,064 |
|
|
|
1,806 |
|
|
|
5.46 |
|
|
|
44,894 |
|
|
|
2,266 |
|
|
|
5.05 |
|
|
|
44,422 |
|
|
|
1,985 |
|
|
|
4.47 |
|
|
Other borrowings
|
|
|
15,264 |
|
|
|
856 |
|
|
|
5.61 |
|
|
|
31,624 |
|
|
|
1,608 |
|
|
|
5.08 |
|
|
|
51,388 |
|
|
|
1,691 |
|
|
|
3.29 |
|
|
Total interest-bearing
liabilities
|
|
|
262,446 |
|
|
|
11,993 |
|
|
|
4.57 |
|
|
|
286,829 |
|
|
|
11,583 |
|
|
|
4.04 |
|
|
|
341,328 |
|
|
|
10,013 |
|
|
|
2.93 |
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
11,595 |
|
|
|
|
|
|
|
|
|
|
|
14,993 |
|
|
|
|
|
|
|
|
|
|
|
14,138 |
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,224 |
|
|
|
|
|
|
|
|
|
|
|
1,147 |
|
|
|
|
|
|
|
|
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
276,265 |
|
|
|
|
|
|
|
|
|
|
|
302,969 |
|
|
|
|
|
|
|
|
|
|
|
356,899 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
7,871 |
|
|
|
|
|
|
|
|
|
|
|
12,164 |
|
|
|
|
|
|
|
|
|
|
|
13,830 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$ |
284,136 |
|
|
|
|
|
|
|
|
|
|
$ |
315,133 |
|
|
|
|
|
|
|
|
|
|
$ |
370,729 |
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
6,428 |
|
|
|
|
|
|
|
|
|
|
$ |
7,211 |
|
|
|
|
|
|
|
|
|
|
$ |
6,945 |
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.19 |
% |
|
|
|
|
|
|
|
|
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
|
|
1.80 |
% |
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.36 |
% |
|
|
|
|
|
|
|
|
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
1.94 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis. The following table presents certain information
regarding changes in interest income and interest expense attributable to
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities for the periods indicated. The change in
interest attributable to both rate and volume has been allocated to the changes
in rate and volume on a pro rata basis.
| |
|
Year Ended September 30, 2007
Compared to Year
Ended September 30, 2006
Change Attributable to
|
|
|
Year Ended September 30, 2006
Compared to Year
Ended September 30, 2005
Change Attributable to
|
|
| |
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$ |
(162 |
) |
|
$ |
156 |
|
|
$ |
(6 |
) |
|
$ |
(314 |
) |
|
$ |
634 |
|
|
$ |
320 |
|
|
Consumer loans
|
|
|
(714 |
) |
|
|
366 |
|
|
|
(348 |
) |
|
|
(338 |
) |
|
|
1,291 |
|
|
|
953 |
|
|
Commercial business loans
|
|
|
216 |
|
|
|
445 |
|
|
|
661 |
|
|
|
(296 |
) |
|
|
459 |
|
|
|
163 |
|
|
Total loans
|
|
|
(660 |
) |
|
|
967 |
|
|
|
307 |
|
|
|
(948 |
) |
|
|
2,384 |
|
|
|
1,436 |
|
|
Investments
|
|
|
(139 |
) |
|
|
(30 |
) |
|
|
(169 |
) |
|
|
(131 |
) |
|
|
1,070 |
|
|
|
939 |
|
|
Mortgage-backed securities
|
|
|
(721 |
) |
|
|
210 |
|
|
|
(511 |
) |
|
|
(913 |
) |
|
|
374 |
|
|
|
(539 |
) |
|
Total interest-earning assets
|
|
$ |
(1,520 |
) |
|
$ |
1,147 |
|
|
$ |
(373 |
) |
|
$ |
(1,992 |
) |
|
$ |
3,828 |
|
|
$ |
1,836 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
(21 |
) |
|
$ |
- |
|
|
$ |
(21 |
) |
|
$ |
(46 |
) |
|
$ |
- |
|
|
$ |
(46 |
) |
|
Now and money market accounts
|
|
|
149 |
|
|
|
212 |
|
|
|
361 |
|
|
|
162 |
|
|
|
1,071 |
|
|
|
1,233 |
|
|
Certificates of deposit
|
|
|
60 |
|
|
|
1,222 |
|
|
|
1,282 |
|
|
|
(1,152 |
) |
|
|
1,337 |
|
|
|
185 |
|
|
Total deposits
|
|
|
188 |
|
|
|
1,434 |
|
|
|
1,622 |
|
|
|
(1,036 |
) |
|
|
2,408 |
|
|
|
1,372 |
|
|
FHLB advances
|
|
|
(597 |
) |
|
|
137 |
|
|
|
(460 |
) |
|
|
21 |
|
|
|
260 |
|
|
|
281 |
|
|
Other borrowings
|
|
|
(832 |
) |
|
|
80 |
|
|
|
(752 |
) |
|
|
(650 |
) |
|
|
567 |
|
|
|
(83 |
) |
|
Total interest-bearing liabilities
|
|
$ |
(1,241 |
) |
|
$ |
1,651 |
|
|
$ |
410 |
|
|
$ |
(1,665 |
) |
|
$ |
3,235 |
|
|
$ |
1,570 |
|
|
Change in net interest income
|
|
$ |
(279 |
) |
|
$ |
(504 |
) |
|
$ |
(783 |
) |
|
$ |
(327 |
) |
|
$ |
593 |
|
|
$ |
266 |
|
Provision
for Loan Losses. The allowance for loan losses, which is
established through provisions for losses charged to expense, is increased by
recoveries on loans previously charged off and is reduced by charge-offs on
loans. Determining the proper reserve level or allowance involves
management’s judgment based upon a review of factors, including the company’s
internal review process, which segments the loan portfolio into groups based on
loan type. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard or doubtful, based on the performance of the loans. Those
classified loans are then individually evaluated for
impairment. Those loans that are not individually evaluated are then
segmented by type and assigned a reserve percentage that reflects the industry
loss experience. The loans individually evaluated for impairment are
measured by either, the present value of expected future cash flows, the loans
observable market price, or the fair value of the
collateral. Although management utilizes its best judgment in
providing for probable losses, there can be no assurance that the bank will not
have to increase its provisions for loan losses in the future. An
increase in provision may result from an adverse market for real estate and
economic conditions generally in the company’s primary market area, future
increases in non-performing assets or for other reasons which would adversely
affect the company’s results of operations. On an annual basis, or
more often if deemed necessary, the bank had contracted with an independent
outside third party to have its loan portfolio reviewed. The focus of
their review is to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio, in addition to the underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior
management. However, because we entered into a
definitive agreement for the company to merge with Summit, and based on the due
diligence performed by Summit, it was deemed unnecessary to enter into such a
contract for the fiscal year ended September 30, 2007.
Non-performing assets were $1.3 million or 0.55% of total assets
at September 30, 2007, compared to non-performing assets of $1.1 million or
0.36% of total assets at September 30, 2006. At September 30, 2007,
assets of $4.7 million were classified as substandard and $675,000 classified as
doubtful. A $685,000 provision for loan losses was recorded during
the year ended September 30, 2007, compared to a provision of $126,000 during
the year ended September 30, 2006. The increase in the provision for
loan losses of $559,000 from the year ago period resulted from the increase in
non-performing assets, an increase in the outstanding balance of the bank’s
commercial real estate loan’s which require a larger allocated allowance
provision and an increase of $3.9 million in loans classified as substandard
which also require an additional allocation of the bank’s overall provision
coupled with an increase of $356,000 in loans classified as
doubtful. That increase in provision for those loans was offset with
an overall decline in the size of the bank’s loan portfolio.
Non-interest
income. Non-interest income
increased $4.0 million during fiscal 2007, over fiscal 2006. That
increase was primarily the result of increases in other operating income and
service fees on deposits. Those increases were partially offset by
losses on derivatives, real estate owned and service fees on
loans. The increase in other operating income reflects the $4.3 gain
recognized from the sale of the bank’s Pasadena, Maryland
branch. As previously reported in a Form 8-K filed on April
16, 2007, and noted previously, on April 12, 2007, the company announced that it
and Summit entered into a definitive agreement for the company to merge with and
into Summit and that the bank and Bay-Vanguard entered into a definitive
agreement for Bay-Vanguard to purchase the bank’s branch office in Pasadena,
Maryland. The sale of the Pasadena branch office was a condition to
the completion of the pending merger of GAFC with and into Summit Financial
Group, Inc.
The following table presents a comparison of the components of
non-interest income.
| |
Years Ended September 30,
|
|
Difference
|
| |
2007
|
|
2006
|
|
Amount
|
|
%
|
|
(Dollars in Thousands)
|
|
|
Noninterest income:
|
|
|
Service fees on loans
|
$ 169
|
|
$ 186
|
|
$ (17)
|
|
(9.14)%
|
|
Service fees on deposits
|
444
|
|
424
|
|
20
|
|
4.72
|
|
Gain (loss) on derivatives
|
(21)
|
|
212
|
|
(233)
|
|
(107.89)
|
|
Gain on sale of real estate owned
|
-
|
|
65
|
|
(65)
|
|
(100.00)
|
|
Other operating income
|
23
|
|
30
|
|
(7)
|
|
(23.33)
|
|
Gain on branch sale
|
4,255
|
|
-
|
|
4,255
|
|
n/a
|
|
Total noninterest
income
|
$ 4,870
|
|
$ 917
|
|
$ 3,953
|
|
431.08%
|
Non-interest
expense. Noninterest expense for fiscal 2007 amounted to $9.6
million, a decrease of $1.5 million or 13.16% from the $11.1 million incurred in
fiscal 2006. The decrease was distributed over various non-interest
expense categories with the contributors being compensation, professional
services, advertising, deposit insurance premiums, furniture, fixtures and
equipment, data processing and other operating expense. The decreases in those
categories of expense were offset by an increase of $57,000 in occupancy
expense. The decrease in other operating expense is the result of a
settlement offer which required a $500,000 payment by the company during fiscal
2006.
The following table presents a comparison of the components of
noninterest expense.
| |
|
Years Ended September 30,
|
|
|
Difference
|
|
| |
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$ |
4,446 |
|
|
$ |
4,718 |
|
|
$ |
(272 |
) |
|
|
(5.77 |
)% |
|
Occupancy
|
|
|
1,394 |
|
|
|
1,337 |
|
|
|
57 |
|
|
|
4.26 |
|
|
Professional services
|
|
|
1,128 |
|
|
|
1,227 |
|
|
|
(99 |
) |
|
|
(8.07 |
) |
|
Advertising
|
|
|
130 |
|
|
|
628 |
|
|
|
(498 |
) |
|
|
(79.30 |
) |
|
Deposit insurance premium
|
|
|
69 |
|
|
|
101 |
|
|
|
(32 |
) |
|
|
(31.68 |
) |
|
Furniture, fixtures and equipment
|
|
|
516 |
|
|
|
554 |
|
|
|
(38 |
) |
|
|
(6.86 |
) |
|
Data processing
|
|
|
877 |
|
|
|
919 |
|
|
|
(42 |
) |
|
|
(4.57 |
) |
|
Other operating expense
|
|
|
1,066 |
|
|
|
1,601 |
|
|
|
(535 |
) |
|
|
(33.42 |
) |
|
Total noninterest expense
|
|
$ |
9,626 |
|
|
$ |
11,085 |
|
|
$ |
(1,459 |
) |
|
|
(13.16 |
)% |
Income
Taxes. The company files a consolidated federal income tax
return with its subsidiaries and computes its income tax provision or benefit on
a consolidated basis. We recorded a provision for income taxes for
fiscal 2007 of $36,000 which was due to the alternative minimum
tax. We did not record a provision for income taxes for fiscal 2006
and 2005 due to our operating losses. The company believes that it will generate
future taxable income through earnings and branch sales, to assure utilization
of a certain portion of the existing net operating losses.
Contractual Commitments and Obligations
The following summarizes the company’s contractual cash
obligations and commercial commitments, including maturing certificates of
deposit, as of September 30, 2007 and the effect such obligations may have on
liquidity and cash flow in future periods.
| |
|
|
|
|
Less Than
|
|
|
Two-Three
|
|
|
Four-Five
|
|
|
After Five
|
|
| |
|
Total
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances (1)
|
|
$ |
25,000 |
|
|
$ |
- |
|
|
$ |
25,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Reverse repurchase agreements
|
|
|
2,192 |
|
|
|
2,192 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Subordinated debt securities (2)
|
|
|
25,982 |
|
|
|
655 |
|
|
|
1,310 |
|
|
|
1,310 |
|
|
|
22,707 |
|
|
Operating leases
|
|
|
3,779 |
|
|
|
1,062 |
|
|
|
1,858 |
|
|
|
469 |
|
|
|
390 |
|
|
Total obligations
|
|
$ |
56,953 |
|
|
$ |
3,909 |
|
|
$ |
28,168 |
|
|
$ |
1,779 |
|
|
$ |
23,097 |
|
|
(1)
|
The company expects to refinance these short and
medium-term obligations under substantially the same terms and
conditions.
|
|
(2)
|
Includes principal and interest due on our junior
subordinated debt securities.
|
Other Commercial Commitments
| |
|
|
|
|
Less Than
|
|
|
Two-Three
|
|
|
Four-Five
|
|
|
After Five
|
|
| |
|
Total
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit maturities (1)
|
|
$ |
125,717 |
|
|
$ |
111,990 |
|
|
$ |
10,922 |
|
|
$ |
2,712 |
|
|
$ |
93 |
|
|
Loan originations
|
|
|
9,527 |
|
|
|
9,527 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Unfunded lines of credit (2)
|
|
|
111,815 |
|
|
|
111,815 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Standby letter of credit
|
|
|
310 |
|
|
|
310 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
247,369 |
|
|
$ |
233,642 |
|
|
$ |
10,922 |
|
|
$ |
2,712 |
|
|
$ |
93 |
|
|
(1)
|
The company expects to retain maturing deposits or
replace amounts maturing with comparable certificates of deposit based on
current market interest rates.
|
|
(2)
|
Revolving lines of credit secured by one-to-four dwelling
units and commercial lines that remain unfunded. The committed
amount of these lines total $174.1 million.
|
Asset-Liability Management
The primary objective of asset/liability management is to ensure
the steady growth of the company’s primary earnings component, net interest
income, and the maintenance of reasonable levels of capital independent of
fluctuating interest rates. Interest rate risk can be defined as the
vulnerability of an institution’s financial condition and/or results of
operations to movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities. Management endeavors to structure the balance sheet so
that repricing opportunities exist for both assets and liabilities in roughly
equivalent amounts at approximately the same time intervals to maintain interest
rate risk at an acceptable level.
Management oversees the asset/liability management function and
meets periodically to monitor and manage the structure of the balance sheet,
control interest rate exposure, and evaluate pricing strategies for the
company. The asset mix of the balance sheet is continually evaluated
in terms of several variables: yield, credit quality, appropriate funding
sources and liquidity. Management of the liability mix of the balance
sheet focuses on expanding the company's various funding sources. At
times, depending on the general level of interest rates, the relationship
between long- and short-term interest rates, market conditions and competitive
factors, the bank may determine to increase our interest rate risk position in
order to increase our net interest margin.
The bank manages its exposure to interest rates by structuring the
balance sheet in the ordinary course of business. The bank currently
emphasizes adjustable rate loans and/or loans that mature in a relatively short
period when compared to single-family residential loans. In addition,
to the extent possible, the bank attempts to attract longer-term
deposits. While the bank has entered into interest rate swaps and
caps to assist in managing interest rate risk, it has not entered into
instruments such as leveraged derivatives, structured notes, financial options,
financial futures contracts or forward delivery contracts to manage interest
rate risk.
One of the ways the bank monitors interest rate risk is through an
analysis of the relationship between interest-earning assets and
interest-bearing liabilities to measure the impact that future changes in
interest rates will have on net interest income. An interest rate
sensitive asset or liability is one that, within a defined time period, either
matures or experiences an interest rate change in line with general market
interest rates. The management of interest rate risk is performed by
analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time (“GAP”) and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments.
The table below illustrates the maturities or repricing of the
company’s assets and liabilities, including noninterest-bearing sources of
funds, to specific periods, at September 30, 2007. Estimates and
assumptions concerning allocating prepayment rates of major asset categories are
based on information obtained from Farin and Associates on projected prepayment
levels on mortgage-backed and related securities and decay rates on savings, NOW
and money market accounts. The bank believes that such information is
consistent with our current experience.
|
Maturing or Repricing Periods
|
|
90 Days or Less
|
|
|
91 Days to 180 Days
|
|
|
181 Days to One Year
|
|
|
One Year to Three Years
|
|
|
Three Years to Five Years
|
|
|
Five Years or More
|
|
|
Total
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable and balloon
|
|
$ |
23,647 |
|
|
$ |
3,042 |
|
|
$ |
7,709 |
|
|
$ |
12,385 |
|
|
$ |
7,697 |
|
|
$ |
151 |
|
|
$ |
54,631 |
|
|
Fixed-rate
|
|
|
700 |
|
|
|
703 |
|
|
|
1,881 |
|
|
|
8,169 |
|
|
|
5,765 |
|
|
|
15,708 |
|
|
|
32,926 |
|
|
Commercial business
|
|
|
22,734 |
|
|
|
431 |
|
|
|
1,163 |
|
|
|
7,526 |
|
|
|
1,540 |
|
|
|
1,704 |
|
|
|
35,098 |
|
|
Consumer
|
|
|
52,362 |
|
|
|
93 |
|
|
|
164 |
|
|
|
427 |
|
|
|
188 |
|
|
|
154 |
|
|
|
53,388 |
|
|
Investment securities
|
|
|
36,444 |
|
|
|
4,755 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41,199 |
|
|
Mortgage-backed securities
|
|
|
3,833 |
|
|
|
12,546 |
|
|
|
37 |
|
|
|
48 |
|
|
|
8 |
|
|
|
10 |
|
|
|
16,482 |
|
|
Total
|
|
|
139,720 |
|
|
|
21,570 |
|
|
|
10,954 |
|
|
|
28,555 |
|
|
|
15,198 |
|
|
|
17,727 |
|
|
|
233,724 |
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
709 |
|
|
|
505 |
|
|
|
363 |
|
|
|
410 |
|
|
|
223 |
|
|
|
258 |
|
|
|
2,468 |
|
|
NOW accounts
|
|
|
2,336 |
|
|
|
1,802 |
|
|
|
1,772 |
|
|
|
1,974 |
|
|
|
1,040 |
|
|
|
1,286 |
|
|
|
10,210 |
|
|
Money market accounts
|
|
|
16,091 |
|
|
|
10,957 |
|
|
|
8,496 |
|
|
|
8,379 |
|
|
|
3,597 |
|
|
|
2,907 |
|
|
|
50,427 |
|
|
Certificates of deposit
|
|
|
52,130 |
|
|
|
30,140 |
|
|
|
25,476 |
|
|
|
15,097 |
|
|
|
2,803 |
|
|
|
93 |
|
|
|
125,739 |
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
- |
|
|
|
25,000 |
|
|
Other borrowings
|
|
|
2,192 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,374 |
|
|
|
11,566 |
|
|
Total
|
|
|
73,458 |
|
|
|
43,404 |
|
|
|
36,107 |
|
|
|
25,860 |
|
|
|
32,663 |
|
|
|
13,918 |
|
|
$ |
225,410 |
|
|
GAP
|
|
$ |
66,262 |
|
|
$ |
(21,834 |
) |
|
$ |
(25,153 |
) |
|
$ |
2,695 |
|
|
$ |
(17,465 |
) |
|
$ |
3,809 |
|
|
$ |
8,314 |
|
|
Cumulative GAP
|
|
$ |
66,262 |
|
|
$ |
44,428 |
|
|
$ |
19,275 |
|
|
$ |
21,970 |
|
|
$ |
4,505 |
|
|
$ |
8,314 |
|
|
|
|
|
|
Ratio of Cumulative GAP
to total interest earning assets
|
|
|
28.35 |
% |
|
|
19.01 |
% |
|
|
8.25 |
% |
|
|
9.40 |
% |
|
|
1.93 |
% |
|
|
3.56 |
% |
|
|
|
|
As indicated in the interest rate sensitivity table, the 181 day
to one-year cumulative gap, representing the total net assets and liabilities
that are projected to re-price over the next year, was asset sensitive in the
amount of $19.3 million at September 30, 2007.
While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on the GAP
measure without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. The GAP position reflects only the prepayment
assumptions pertaining to the current rate environment, and assets tend to
prepay more rapidly during periods of declining interest rates than they do
during periods of rising interest rates.
Management uses two other analyses to manage interest rate risk:
(1) an earnings-at-risk analysis to develop an estimate of the direction and
magnitude of the change in net interest income if rates move up or down 200
basis points; and (2) a value-at-risk analysis to estimate the direction and
magnitude of the change in net portfolio value if rates move up 200 basis points
or
down 200 basis points. Currently the bank uses a
sensitivity of net interest income analysis prepared by Farin and Associates to
measure earnings-at-risk and the Office of Thrift Supervision Interest Rate Risk
Exposure Report to measure value-at-risk.
The following table sets forth the earnings at risk analysis that
measures the sensitivity of net interest income to changes in interest rates at
September 30, 2007:
|
Net Interest Income Sensitivity Analysis
|
|
Changes in Rate by Basis Point
|
|
Net Interest Margin
|
|
Basis Point Change
From Base
|
|
Percent Change From Base
|
|
+200
|
|
3.15%
|
|
0.14%
|
|
4.65%
|
|
+100
|
|
3.08%
|
|
0.07%
|
|
2.33%
|
|
+0
|
|
3.01%
|
|
-
|
|
-
|
|
-100
|
|
2.90%
|
|
(0.11)%
|
|
(3.65)%
|
|
-200
|
|
2.75%
|
|
(0.26)%
|
|
(8.64)%
|
In a declining rate scenario the bank is not within the limits
established by the board of directors. Management will monitor the
situation over the next several quarters to determine if a change should be made
in our position.
The above table indicates that, based on an immediate and
sustained 200 basis point increase in market interest rates, net interest
margin, as measured as a percent of total assets, would increase by 14 basis
points or 4.65% and, if interest rates decrease 200 basis points, net interest
margin, as a percent of total assets, would decrease by 26 basis points or
8.64%.
The net interest income sensitivity analysis does not represent a
forecast and should not be relied upon as being indicative of expected operating
results. The estimates used are based upon assumptions as to the
nature and timing of interest rate levels including the shape of the yield
curve. Those estimates have been developed based upon current
economic conditions; the company cannot make any assurances as to the predictive
nature of those assumptions including how customer preferences or competitor
influences might change.
Presented below is an analysis of our interest rate risk, as of
September 30, 2007, as measured by changes in net portfolio value for parallel
shifts of up 200 and down 200 basis points in market interest rates:
| |
|
Net Portfolio Value
|
|
Net Portfolio Value as a Percent of the Present Value of
Assets
|
|
Changes in Rates (bp)
|
|
Dollar
Change
|
|
Percent Change
|
|
Net
Portfolio Value
Ratio
|
|
Change
in NPV
Ratio
|
| |
|
(Dollars in thousands)
|
|
|
|
|
|
+200
|
|
$ (2,054)
|
|
(8.46)%
|
|
8.97%
|
|
(0.67)%
|
|
+100
|
|
(976)
|
|
(4.02)
|
|
9.33
|
|
(0.31)
|
|
+0
|
|
-
|
|
-
|
|
9.64
|
|
-
|
|
-100
|
|
282
|
|
1.16
|
|
9.69
|
|
0.06
|
|
-200
|
|
308
|
|
1.27
|
|
9.66
|
|
0.02
|
The decline in net portfolio value of $2.0 million or 8.46% in the
event of a 200 basis point increase in rates is a result of the current amount
of adjustable rate loans and investments held by the bank as of September 30,
2007 and currently is within the limits established by the board of
directors. The foregoing increase in net portfolio value, in the
event of a decrease in interest rates of 200 basis points, currently exceeds the
company’s internal board guidelines.
In addition to the strategies set forth above, in 2002, the bank
began using derivative financial instruments, such as interest rate swaps, to
help manage interest rate risk. The bank does not use derivative
financial instruments for trading or speculative purposes. All
derivative financial instruments are used in accordance with board-approved risk
management policies.
The bank enters into interest rate swap and cap agreements
principally to manage its exposure to the impact of rising short-term interest
rates on its earnings and cash flows. Since short-term interest rates
have stabilized, the bank has unwound its interest rate swaps during fiscal
2006.
Financial Condition
2006 Compared to 2005
At September 30, 2006, the company had total assets of $305.2
million, a decrease of $34.3 million or 10.11% from the $339.5 million recorded
at the close of the comparable period one-year ago. Investments and
mortgage-backed securities at September 30, 2006, amounted to $80.2 million a
decrease of $35.6 million or 30.78% from the $115.8 million held at September
30, 2005, as a result of prepayments of $42.0 million offset in part by
purchases of $7.7 million. Loans receivable and loans held for sale
at September 30, 2006, amounted to $193.3 million, a decrease of 5.44% from the
$204.4 million held at September 30, 2005, primarily as a result a $9.5 million
decrease in loans held for sale, coupled with a $12.6 million decline in land
and consumer loans outstanding. Those declines were due primarily to
discontinuing the operations of the bank’s subsidiary, GAMC as it was determined
that, because it was unprofitable, this business no longer fit our strategy and
was coupled with payoffs and lower than anticipated loan
originations. Deposits amounted to $230.2 million at September 30,
2006, a decrease of $7.6 million from the $237.8 million held one year
ago. That decline was primarily the result of decreases in our
checking, savings and certificates of deposit accounts, and was offset by
increases in non-interest checking and our money funds accounts.
Results of Operations
2006 Compared to 2005
Net
Income. For the fiscal year ended September 30, 2006, the
company had a net loss from continuing operations of $3.1 million or $1.02 per
diluted share compared to a loss from continuing operations of $523,000 or $0.17
per diluted share for fiscal year 2005. The $2.6 million decline in
earnings over the comparable period one-year ago was primarily the result of an
increase in non-interest expense and a decrease in non-interest
income. That increase in non-interest expense and decrease in
non-interest income were partially offset by an increase in net interest income
and a decrease in the provision for loan losses.
Net Interest
Income. An important source of our earnings is net interest
income, which is the difference between income earned on interest-earning
assets, such as loans, investment securities and mortgage-backed securities, and
interest paid on interest-bearing liabilities such as deposits and
borrowings. The level of net interest income is determined primarily
by the relative average balances of interest-earning assets and interest-bearing
liabilities in combination with the yields earned and rates paid upon
them. The correlation between the repricing of interest rates on
assets and on liabilities also influences net interest income.
The following table presents a comparison of the components of
interest income and expense and net interest income.
|
|
|
Years ended September 30,
|
|
|
Difference
|
|
| |
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
(Dollars in
thousands)
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
13,866 |
|
|
$ |
12,430 |
|
|
$ |
1,436 |
|
|
|
11.55 |
% |
|
Investments
|
|
|
4,928 |
|
|
|
4,528 |
|
|
|
400 |
|
|
|
8.83 |
|
|
Total
|
|
|
18,794 |
|
|
|
16,958 |
|
|
|
1,836 |
|
|
|
10.83 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,709 |
|
|
|
6,337 |
|
|
|
1,372 |
|
|
|
21.65 |
|
|
Borrowings
|
|
|
3,874 |
|
|
|
3,676 |
|
|
|
198 |
|
|
|
5.39 |
|
|
Total
|
|
|
11,583 |
|
|
|
10,013 |
|
|
|
1,570 |
|
|
|
15.68 |
|
|
Net interest income
|
|
$ |
7,211 |
|
|
$ |
6,945 |
|
|
$ |
266 |
|
|
|
3.83 |
% |
Our increase in net interest income for fiscal year 2006, resulted
primarily from a 43 basis point increase in net interest margin (net interest
income divided by average interest-earning assets) from 1.94% for fiscal year
2005 to 2.37% for fiscal year 2006, offset in part by a $53.8 million decrease
in the bank’s interest-earning assets. The increase in net interest
margin also resulted from the average yield on interest-earning assets
increasing by 33 basis points more than the increase in the average cost on
interest-bearing liabilities and was coupled with average interest earning
assets decreasing by $746,000 less than the decline in average interest-bearing
liabilities.
Interest
Income. Interest income for the fiscal year ended September
30, 2006 increased $1.8 million compared to fiscal year 2005, primarily as a
result of a 144 basis point increase in the average yield earned on interest
earning assets. That increase was partially offset by a decrease of
$53.8 million in the average outstanding balances of loans and securities.
Interest
Expense. The $1.6 million increase in interest expense for
fiscal year 2006 compared to the 2005 period was principally the result of an
111 basis point increase in the cost of funds on average deposits and
borrowings. That increase in the cost of funds was partially offset
by a $54.5 million decrease in average deposits and borrowings. The
increase in interest expense on deposits was primarily due to a 109 basis point
increase in rates paid on deposits, primarily due to higher rates paid on
interest-bearing demand deposits, savings accounts and certificates and elevated
pricing on new and renewed time deposits. That increase was partially
offset by a decrease of $35.2 million in average deposits from $245.5 million
for fiscal 2005 to $210.3 million for fiscal 2006. The increase in
rates was primarily due to market rates moving rates higher on interest-bearing
demand deposits, savings accounts and certificates and the pricing on new and
renewed time deposits.
The decrease in interest expense on borrowings for fiscal 2006,
when compared to the 2005 period, was principally the result of a $19.3 million
decrease in average borrowed funds and was partially offset by a 122 basis point
increase in the cost of borrowed funds. Components accountable for
the increase of $198,000 in interest expense on borrowings were a $629,000
decrease relating to average volume, offset in part by a $827,000 increase
relating to average cost.
Comparative
Average Balances and Interest Income Analysis. The following table
presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all
average balances are average daily balances. Non-accruing loans have
been included in the tables as loans carrying a zero yield.
|
|
|
Year Ended September 30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Average Balance
|
|
|
Interest Income/
Expense
|
|
|
Average Yield/ Rate
|
|
|
Average Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
Average Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Yield/
Rate
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$ |
93,390 |
|
|
$ |
6,699 |
|
|
|
7.17 |
% |
|
$ |
98,217 |
|
|
$ |
6,379 |
|
|
|
6.49 |
% |
|
$ |
138,655 |
|
|
$ |
7,705 |
|
|
|
5.56 |
% |
|
Consumer loans
|
|
|
65,338 |
|
|
|
4,701 |
|
|
|
7.19 |
|
|
|
71,817 |
|
|
|
3,748 |
|
|
|
5.22 |
|
|
|
68,268 |
|
|
|
2,566 |
|
|
|
3.76 |
|
|
Commercial business
loans
|
|
|
34,960 |
|
|
|
2,466 |
|
|
|
7.05 |
|
|
|
40,118 |
|
|
|
2,303 |
|
|
|
5.74 |
|
|
|
46,849 |
|
|
|
2,358 |
|
|
|
5.03 |
|
|
Total loans
|
|
|
193,688 |
|
|
|
13,866 |
|
|
|
7.16 |
|
|
|
210,152 |
|
|
|
12,430 |
|
|
|
5.91 |
|
|
|
253,772 |
|
|
|
12,629 |
|
|
|
4.98 |
|
|
Investment securities
|
|
|
66,789 |
|
|
|
3,353 |
|
|
|
5.02 |
|
|
|
70,633 |
|
|
|
2,414 |
|
|
|
3.42 |
|
|
|
123,198 |
|
|
|
3,077 |
|
|
|
2.50 |
|
|
Mortgage-backed
securities
|
|
|
43,979 |
|
|
|
1,575 |
|
|
|
3.58 |
|
|
|
77,424 |
|
|
|
2,114 |
|
|
|
2.73 |
|
|
|
111,016 |
|
|
|
2,379 |
|
|
|
2.14 |
|
|
Total
interest-earning
assets
|
|
|
304,456 |
|
|
|
18,794 |
|
|
|
6.17 |
|
|
|
358,209 |
|
|
|
16,958 |
|
|
|
4.73 |
|
|
|
487,986 |
|
|
|
18,085 |
|
|
|
3.71 |
|
|
Non-earning assets
|
|
|
10,677 |
|
|
|
|
|
|
|
|
|
|
|
12,520 |
|
|
|
|
|
|
|
|
|
|
|
16,053 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
315,133 |
|
|
|
|
|
|
|
|
|
|
$ |
370,729 |
|
|
|
|
|
|
|
|
|
|
$ |
504,039 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
5,190 |
|
|
|
48 |
|
|
|
0.92 |
|
|
$ |
10,202 |
|
|
|
94 |
|
|
|
0.92 |
|
|
$ |
11,978 |
|
|
|
113 |
|
|
|
0.94 |
|
|
Now and money market
accounts
|
|
|
73,485 |
|
|
|
2,430 |
|
|
|
3.31 |
|
|
|
64,723 |
|
|
|
1,197 |
|
|
|
1.85 |
|
|
|
77,981 |
|
|
|
852 |
|
|
|
1.09 |
|
|
Certificates of deposit
|
|
|
131,636 |
|
|
|
5,231 |
|
|
|
3.97 |
|
|
|
170,593 |
|
|
|
5,046 |
|
|
|
2.96 |
|
|
|
185,677 |
|
|
|
4,786 |
|
|
|
2.58 |
|
|
Total deposits
|
|
|
210,311 |
|
|
|
7,709 |
|
|
|
3.67 |
|
|
|
245,518 |
|
|
|
6,337 |
|
|
|
2.58 |
|
|
|
275,636 |
|
|
|
5,751 |
|
|
|
2.09 |
|
|
FHLB advances
|
|
|
44,894 |
|
|
|
2,266 |
|
|
|
5.05 |
|
|
|
44,422 |
|
|
|
1,985 |
|
|
|
4.47 |
|
|
|
116,155 |
|
|
|
2,779 |
|
|
|
2.39 |
|
|
Other borrowings
|
|
|
31,624 |
|
|
|
1,608 |
|
|
|
5.08 |
|
|
|
51,388 |
|
|
|
1,691 |
|
|
|
3.29 |
|
|
|
78,979 |
|
|
|
1,373 |
|
|
|
1.74 |
|
|
Total interest-bearing
liabilities
|
|
|
286,829 |
|
|
|
11,583 |
|
|
|
4.04 |
|
|
|
341,328 |
|
|
|
10,013 |
|
|
|
2.93 |
|
|
|
470,770 |
|
|
|
9,903 |
|
|
|
2.10 |
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
|
14,993 |
|
|
|
|
|
|
|
|
|
|
|
14,138 |
|
|
|
|
|
|
|
|
|
|
|
15,243 |
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
1,147 |
|
|
|
|
|
|
|
|
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
2,790 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
302,969 |
|
|
|
|
|
|
|
|
|
|
|
356,899 |
|
|
|
|
|
|
|
|
|
|
|
488,803 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
12,164 |
|
|
|
|
|
|
|
|
|
|
|
13,830 |
|
|
|
|
|
|
|
|
|
|
|
15,236 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$ |
315,133 |
|
|
|
|
|
|
|
|
|
|
$ |
370,729 |
|
|
|
|
|
|
|
|
|
|
$ |
504,039 |
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
7,211 |
|
|
|
|
|
|
|
|
|
|
$ |
6,945 |
|
|
|
|
|
|
|
|
|
|
$ |
8,182 |
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
|
|
1.80 |
% |
|
|
|
|
|
|
|
|
|
|
1.61 |
% |
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
1.94 |
% |
|
|
|
|
|
|
|
|
|
|
1.68 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis. The following table presents certain information
regarding changes in interest income and interest expense attributable to
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities for the periods indicated. The change in
interest attributable to both rate and volume has been allocated to the changes
in rate and volume on a pro rata basis.
| |
|
Year Ended September 30, 2006
Compared to Year
Ended September 30, 2005
Change Attributable to
|
|
|
Year Ended September 30, 2005
Compared to Year
Ended September 30, 2004
Change Attributable to
|
|
| |
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
$ |
(314 |
) |
|
$ |
634 |
|
|
$ |
320 |
|
|
$ |
(2,247 |
) |
|
$ |
921 |
|
|
$ |
(1,326 |
) |
|
Consumer loans
|
|
|
(338 |
) |
|
|
1,291 |
|
|
|
953 |
|
|
|
133 |
|
|
|
1,049 |
|
|
|
1,182 |
|
|
Commercial business loans
|
|
|
(296 |
) |
|
|
459 |
|
|
|
163 |
|
|
|
(339 |
) |
|
|
284 |
|
|
|
(55 |
) |
|
Total loans
|
|
|
(948 |
) |
|
|
2,384 |
|
|
|
1,436 |
|
|
|
(2,453 |
) |
|
|
2,254 |
|
|
|
(199 |
) |
|
Investments
|
|
|
(131 |
) |
|
|
1,070 |
|
|
|
939 |
|
|
|
(1,313 |
) |
|
|
650 |
|
|
|
(663 |
) |
|
Mortgage-backed securities
|
|
|
(913 |
) |
|
|
374 |
|
|
|
(539 |
) |
|
|
(720 |
) |
|
|
455 |
|
|
|
(265 |
) |
|
Total interest-earning assets
|
|
$ |
(1,992 |
) |
|
$ |
3,828 |
|
|
$ |
1,836 |
|
|
$ |
(4,486 |
) |
|
$ |
3,359 |
|
|
$ |
(1,127 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
(46 |
) |
|
$ |
- |
|
|
$ |
(46 |
) |
|
$ |
(17 |
) |
|
$ |
(2 |
) |
|
$ |
(19 |
) |
|
Now and money market accounts
|
|
|
162 |
|
|
|
1,071 |
|
|
|
1,233 |
|
|
|
(145 |
) |
|
|
490 |
|
|
|
345 |
|
|
Certificates of deposit
|
|
|
(1,152 |
) |
|
|
1,337 |
|
|
|
185 |
|
|
|
(389 |
) |
|
|
649 |
|
|
|
260 |
|
|
Total deposits
|
|
|
(1,036 |
) |
|
|
2,408 |
|
|
|
1,372 |
|
|
|
(551 |
) |
|
|
1,137 |
|
|
|
586 |
|
|
FHLB advances
|
|
|
21 |
|
|
|
260 |
|
|
|
281 |
|
|
|
(1,716 |
) |
|
|
922 |
|
|
|
(794 |
) |
|
Other borrowings
|
|
|
(650 |
) |
|
|
567 |
|
|
|
(83 |
) |
|
|
(480 |
) |
|
|
798 |
|
|
|
318 |
|
|
Total interest-bearing liabilities
|
|
$ |
(1,665 |
) |
|
$ |
3,235 |
|
|
$ |
1,570 |
|
|
$ |
(2,747 |
) |
|
$ |
2,857 |
|
|
$ |
110 |
|
|
Change in net interest income
|
|
$ |
(327 |
) |
|
$ |
593 |
|
|
$ |
266 |
|
|
$ |
(1,739 |
) |
|
$ |
502 |
|
|
$ |
(1,237 |
) |
Provision
for Loan Losses. The allowance for loan losses, which is
established through provisions for losses charged to expense, is increased by
recoveries on loans previously charged off and is reduced by charge-offs on
loans. Determining the proper reserve level or allowance involves
management’s judgment based upon a review of factors, including the company’s
internal review process, which segments the loan portfolio into groups based on
loan type. Management then looks at its classified assets, which are
loans 30 days or more delinquent, and classifies those loans as special mention,
substandard or doubtful, based on the performance of the loans. Those
classified loans are then individually evaluated for
impairment. Those loans that are not individually evaluated are then
segmented by type and assigned a reserve percentage that reflects the industry
loss experience. The loans individually evaluated for impairment are
measured by either, the present value of expected future cash flows, the loans
observable market price, or the fair value of the
collateral. Although management utilizes its best judgment in
providing for probable losses, there can be no assurance that the bank will not
have to increase its provisions for loan losses in the future. An
increase in provision may result from an adverse market for real estate and
economic conditions generally in the company’s primary market area, future
increases in non-performing assets or for other reasons which would adversely
affect the company’s results of operations. On an annual basis, or
more often if deemed necessary, the bank has contracted with an independent
outside third party to have its loan portfolio reviewed. The focus of
their review is to identify the extent of potential and actual risk in the
bank’s commercial loan portfolio, in addition to the underwriting and processing
practices. Observations made regarding the bank’s portfolio risk are
based upon review evaluations, portfolio profiles and discussion with the
operational staff, including the line lenders and senior management.
Non-performing assets were $1.1 million or 0.36% of total assets
at September 30, 2006, compared to non-performing assets of $1.8 million or
0.54% of total assets at September 30, 2005. At September 30, 2006,
assets of $791,000 were classified as substandard and $319,000 classified as
doubtful. The decrease in the provision for loan losses of $93,000
resulted from declines in non-performing assets and the outstanding balance of
the bank’s land loans, commercial business loans, home equity loans and real
estate owned. The decrease in provision was due primarily to the
decreases in the required provisions for those loans coupled with an overall
decline in the size of the bank’s loan portfolio.
Non-interest
income. Non-interest income decreased $2.5 million during
fiscal 2006, over fiscal 2005. That decrease was primarily the result
of decreases in gain on sale of loans, gains on derivatives, gain on sale of
investment securities and declines in other operating income and service fees on
deposits. Those decreases in income were partially offset by an
increase of $65,000 in gain on sale of real estate owned. The
decrease in other operating income reflects the $946,000 gain recognized one
year ago from the sale of the bank’s Washington, D.C., Winchester and Sterling,
Virginia, branches.
The following table presents a comparison of the components of
non-interest income.
|
|
|
Years Ended September 30,
|
|
Difference
|
|
| |
|
2006
|
|
|
2005
|
|
Amount
|
|
|
%
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Noninterest income:
|
|
|
|
|
Gain on sale of loans
|
|
$ |
- |
|
|
$ |
53 |
|
|
$ |
(53 |
) |
|
|
(100.00 |
)% |
|
Service fees on loans
|
|
|
186 |
|
|
|
182 |
|
|
|
4 |
|
|
|
2.20 |
|
|
Service fees on deposits
|
|
|
424 |
|
|
|
552 |
|
|
|
(128 |
) |
|
|
(23.19 |
) |
|
Gain (loss) on sale of investment
securities
|
|
|
- |
|
|
|
539 |
|
|
|
(539 |
) |
|
|
(100.00 |
) |
|
Gain (loss) on derivatives
|
|
|
212 |
|
|
|
303 |
|
|
|
(91 |
) |
|
|
(30.03 |
) |
|
Gain on sale of real estate owned
|
|
|
65 |
|
|
|
- |
|
|
|
65 |
|
|
|
n/a |
|
|
Other operating income
|
|
|
30 |
|
|
|
1,011 |
|
|
|
(981 |
) |
|
|
(97.03 |
) |
|
Total noninterest
income
|
|
$ |
917 |
|
|
$ |
2,640 |
|
|
$ |
(1,723 |
) |
|
|
(65.27 |
)% |
Non-interest
expense. Noninterest expense for fiscal 2006 amounted to $11.1
million, an increase of $1.2 million or 12.09% from the $9.9 million incurred in
fiscal 2005. The
increase in non-interest expense was distributed over various non-interest
expense categories with the major contributors being compensation, professional
services, advertising and other operating and was offset in part by decreases
in, furniture fixtures and equipment and data processing. As
previously reported in a Form 8-K filed on September 8, 2006, the company
announced that a Demand for Arbitration before the American Arbitration
Association was filed against the company, the bank, Greater Atlantic Mortgage
Corporation, and Carroll E. Amos, President and Chief Executive Officer of the
company and the bank. The increase in other operating expense is the
result of a settlement offer which required a contribution of $500,000 by the
company toward the settlement. That offer was accepted conditioned on
the execution of a mutual release by the parties. That mutual release
was executed and as a result, the company established a liability for the
settlement and charged $500,000 as other operating expense in fiscal 2006.
The following table presents a comparison of the components of
noninterest expense.
|
|
|
Years Ended September 30,
|
|
|
Difference
|
|
| |
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
(Dollars in Thousands)
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$ |
4,718 |
|
|
$ |
4,213 |
|
|
$ |
505 |
|
|
|
11.99 |
% |
|
Occupancy
|
|
|
1,337 |
|
|
|
1,337 |
|
|
|
- |
|
|
|
- |
|
|
Professional services
|
|
|
1,227 |
|
|
|
969 |
|
|
|
258 |
|
|
|
26.63 |
|
|
Advertising
|
|
|
628 |
|
|
|
301 |
|
|
|
327 |
|
|
|
108.64 |
|
|
Deposit insurance premium
|
|
|
101 |
|
|
|
100 |
|
|
|
1 |
|
|
|
1.00 |
|
|
Furniture, fixtures and equipment
|
|
|
554 |
|
|
|
641 |
|
|
|
(87 |
) |
|
|
(13.57 |
) |
|
Data processing
|
|
|
919 |
|
|
|
1,054 |
|
|
|
(135 |
) |
|
|
(12.81 |
) |
|
Other operating expense
|
|
|
1,601 |
|
|
|
1,274 |
|
|
|
327 |
|
|
|
25.67 |
|
|
Total noninterest expense
|
|
$ |
11,085 |
|
|
$ |
9,889 |
|
|
$ |
1,196 |
|
|
|
12.09 |
% |
Income
Taxes. The company files a consolidated federal income tax
return with its subsidiaries and computes its income tax provision or benefit on
a consolidated basis. We did not record a provision for income taxes
for fiscal 2006 and 2005 due to our operating losses. The company believes that
it will generate future taxable income through earnings and branch sales, to
assure utilization of a certain portion of the existing net operating
losses.
Liquidity and Capital Resources
Liquidity. The
bank’s primary sources of funds are deposits, principal and interest payments on
loans, mortgage-backed and investment securities and
borrowings. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and
competition. The bank has continued to maintain the levels of liquid
assets as previously required by regulations of the Office of Thrift
Supervision. The bank manages its liquidity position and demands for
funding primarily by investing excess funds in short-term investments and
utilizing FHLB advances and reverse repurchase agreements in periods when the
bank’s demands for liquidity exceed funding from deposit inflows.
The bank’s most liquid assets are cash and cash equivalents,
interest bearing deposits and securities available-for-sale. The
levels of those assets are dependent on the bank’s operating, financing, lending
and investing activities during any given period. At September 30,
2007, cash and cash equivalents, interest bearing deposits and securities
available-for-sale totaled $56.5 million, or 22.99% of total assets.
The primary investing activities of the bank are the origination
of residential one- to four-family loans, commercial real estate loans, real
estate construction and development loans, commercial business and consumer
loans and the purchase of United States Treasury and agency securities,
mortgage-backed and mortgage-related securities and other investment
securities. During the year ended September 30, 2007, the bank’s loan
originations and purchases totaled $79.4 million. The bank did not
purchase any United States Treasury or agency securities, mortgage-backed and
mortgage related securities or other investment securities during the year ended
September 30, 2007. All of our investment securities are classified
as either available for sale or held to maturity and for the period ended
September 30, 2007 were considered temporarily impaired. The market
value of our investment portfolio is obtained from various third party brokerage
firms and we believe our filing fairly quantifies the value of those
securities. The investments are debt securities that pay principal
and interest monthly to maturity at such time as principal is
repaid. The fluctuation in value of our portfolio is primarily the
result of changes in market rates rather than due to the credit quality of the
issuer. The Company has the ability and liquidity to hold those
securities until such time as the value recovers or the securities mature.
The bank has other sources of liquidity if a need for additional
funds arises. At September 30, 2007, the bank had $25.0 million in
advances outstanding from the FHLB and had an additional overall borrowing
capacity from the FHLB of $18.3 million at that date. Depending on
market conditions, the pricing of deposit products and FHLB advances, the bank
may continue to rely on FHLB borrowings to fund asset growth.
At September 30, 2007, the bank had commitments to fund loans and
unused outstanding lines of credit, unused standby letters of credit and
undisbursed proceeds of construction mortgages totaling $121.3
million. The bank anticipates that it will have sufficient funds
available to meet its current loan origination
commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from September 30, 2007,
totaled $107.7 million. Based upon experience, management believes
the majority of maturing certificates of deposit will remain with the
bank. In addition, management of the bank believes that it can adjust
the rates offered on certificates of deposit to retain deposits in changing
interest rate environments. In the event that a significant portion
of these deposits are not retained by the bank, the bank would be able to
utilize FHLB advances and reverse repurchase agreements to fund deposit
withdrawals, which would result in an increase in interest expense to the extent
that the average rate paid on such borrowings exceeds the average rate paid on
deposits of similar duration.
Capital
Resources. At September 30, 2007, the bank exceeded minimum
regulatory capital requirements with a tangible capital level of $18.8 million,
or 7.67% of total adjusted assets, which exceeds the required level of $3.7
million, or 1.50%; core capital of $18.8 million, or 7.67% of total adjusted
assets, which exceeds the required level of $9.8 million, or 4.00%; and
risk-based capital of $20.9 million, or 12.25% of risk-weighted assets, which
exceeds the required level of $13.6 million, or 8.00%.
On March 20, 2002, Greater Atlantic Capital Trust I (the,
“Trust”), a Delaware statutory business trust and a wholly owned Trust
subsidiary of the company, issued $9.6 million aggregate liquidation amount
(963,038 shares) of 6.50% cumulative preferred securities maturing on December
31, 2031, retaining an option to call the securities on or after December 31,
2003. Conversion of the preferred securities into the company’s
common stock may occur at any time on or after 60 days after the closing of the
offering. The company may redeem the preferred securities, in whole
or in part, at any time on or after December 31, 2003. Distributions
on the preferred securities are payable quarterly on March 31, June 30,
September 30 and December 31 of each year beginning on June 30,
2002. The Trust also issued 29,762 common securities to the company
for $297,620. The proceeds from the sale of the preferred securities
and the proceeds from the sale of the trust’s common securities were utilized to
purchase from the company junior subordinated debt securities of $9,928,000
bearing interest of
6.50% and maturing December 31, 2031. The Company has fully and
unconditionally guaranteed the preferred securities along with all obligations
of the trust related thereto. The sale of the preferred securities
yielded $9.3 million after deducting offering expenses.
To comply with FIN46, the trust preferred subsidiary was
deconsolidated in 2004, and the related securities have been presented as
obligations of the Company and titled “Junior Subordinated Debt Securities” in
the financial statements.
On December 19, 2006, the Company announced that the first quarter
distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, would be
deferred. The announcement by the Company followed advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the Company.
Accordingly, the Company exercised its right to defer the payment
of interest on its 6.50% Convertible Junior Subordinated Debentures Due 2031
related to the Trust Preferred Securities, for an indefinite period (which can
be no longer than 20 consecutive quarterly periods).
The company retained approximately $1.3 million of the proceeds
for general corporate purposes, investing the retained funds in short-term
investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market
prices and rates. The company’s market risk arises primarily from
interest rate risk inherent in its lending and deposit taking
activities. The company has little or no risk related to trading
accounts, commodities or foreign exchange.
Changes in
levels of interest rates may adversely affect us. In general, market risk
is the sensitivity of income to variations in interest rates and other relevant
market rates or prices. The company’s market rate sensitive
instruments include interest-earning assets and interest-bearing
liabilities. The company enters into market rate sensitive
instruments in connection with its various business operations. Loans
originated, and the related commitments to originate loans that will be sold,
represent market risk that is realized in a short period of time, generally two
or three months.
The company’s primary source of market risk exposure arises from
changes in United States interest rates and the effects thereof on mortgage
prepayment and closing behavior, as well as depositors’ choices (“interest rate
risk”). Changes in these interest rates will result in changes in the
company’s earnings and the market value of its assets and
liabilities. We expect to continue to realize income from the
differential or "spread" between the interest earned on loans, securities and
other interest-earning assets, and the interest paid on deposits, borrowings and
other interest-bearing liabilities. That spread is affected by the
difference between the maturities and re-pricing characteristics of
interest-earnings assets and interest-bearing liabilities. Loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with fewer loan
originations. Management expects that a substantial portion of our
assets will continue to be indexed to changes in market interest rates and we
intend to attract a greater proportion of short-term liabilities, which will
help address our interest rate risk. The lag in implementation of
re-pricing terms on our adjustable-rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be
no assurance that our interest rate risk will be minimized or
eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels
of market interest rates, (primarily increases in market interest rates), could
materially adversely affect our interest rate spread, asset quality, loan
origination volume and overall financial condition and results of
operations.
To mitigate the impact of changes in market interest rates on our
interest-earning assets and interest-bearing liabilities, we actively manage the
amounts and maturities of these assets and liabilities. A key
component of this strategy is the origination and retention of short-term and
adjustable-rate assets and the origination and sale of fixed-rate
loans. We retain short-term and adjustable-rate assets because they
have re-pricing characteristics that more closely match the re-pricing
characteristics of our liabilities.
To further mitigate the risk of timing differences in the
re-pricing of assets and liabilities, our interest-earning assets are matched
with interest-bearing liabilities that have similar re-pricing
characteristics. For example, the interest rate risk of holding
fixed-rate loans is managed with long-term deposits and borrowings, and the risk
of holding ARMs is managed with short-term deposits and
borrowings. Periodically, mismatches are identified and managed by
adjusting the re-pricing characteristics of our interest-bearing liabilities
with derivatives, such as interest rate caps and interest rate swaps.
ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Please refer to the index on page 61 for the Consolidated
Financial Statements of Greater Atlantic Financial Corp. and subsidiaries,
together with the report thereon by BDO Seidman, LLP.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Registrant’s accountants
on any matters of accounting principles or practices or financial statement
disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation of the company's disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the
"Act")) as of September 30, 2007, was carried out under the supervision and with
the participation of the company's Chief Executive Officer, Chief Financial
Officer and several other members of the company's senior management. The
company's Chief Executive Officer and Chief Financial Officer concluded that the
company's disclosure controls and procedures currently in effect are effective
in ensuring that the information required to be disclosed by the company in the
reports it files or submits under the Act is: (i) accumulated and communicated
to the company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. In
addition, there have been no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the
quarter ended September 30, 2007, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
The company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all error
and all fraud. A control procedure, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls may be circumvented by the individual
acts of some persons, by collusion of two or more people, or by override of the
control. The design of any control procedure also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be
detected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
companies evaluate and annually report on their systems of internal control over
financial reporting. In addition, our independent accountants must report on
management's evaluation for the fiscal year ending September 30, 2010. We are in
the process of evaluating, documenting and testing our system of internal
control over financial reporting to provide the basis for our report that will,
for the first time, be a required part of our annual report on Form 10-K for the
fiscal year ending September 30, 2008. Due to the ongoing evaluation and testing
of our internal controls, there can be no assurance that if any control
deficiencies are identified they will be remediated before the end of the 2008
fiscal year, or that there will not be significant deficiencies or material
weaknesses that would be required to be reported.
ITEM 9B. OTHER INFORMATION
During the quarter ended September 30, 2007, the company filed a
Current Report on Form 8-K for all information required to be disclosed in a
report on Form 8-K.
PART III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors
The following table sets forth information regarding the board of
directors of the company. Each of the directors of the company is
also a director of the bank.
|
Name
|
|
Age
|
|
Position(s) Held With the Company
|
|
Director Since
|
|
Term Expires
|
|
Carroll E. Amos
|
|
60
|
|
Director, President and Chief Executive Officer
|
|
1997
|
|
2008
|
|
Sidney M. Bresler
|
|
53
|
|
Director
|
|
2003
|
|
2010
|
|
Charles W. Calomiris
|
|
50
|
|
Director, Chairman of the Board of Directors
|
|
2001
|
|
2008
|
|
Jeffrey W. Ochsman
|
|
55
|
|
Director
|
|
1999
|
|
2009
|
|
James B. Vito
|
|
82
|
|
Director
|
|
1998
|
|
2008
|
Executive Officers Who are Not Directors
The following table sets forth information regarding the executive
officers of the company and the bank who are not also directors.
|
Name
|
|
Age
|
|
Position(s) Held With the Company
|
|
Edward C. Allen
|
|
59
|
|
Senior Vice President and Chief Operating Officer of the
Bank and Corporate Secretary of the Company and the Bank
|
|
Justin R. Golden
|
|
57
|
|
Senior Vice President, Consumer Lending, of the Bank
|
|
Gary L. Hobert
|
|
58
|
|
Senior Vice President, Commercial Business Lending, of the
Bank
|
|
Robert W. Neff
|
|
60
|
|
Senior Vice President, Commercial Real Estate Lending, of
the Bank
|
|
David E. Ritter
|
|
57
|
|
Senior Vice President and Chief Financial Officer of the
Company and the Bank
|
Each of the executive officers of the company and the bank holds
his or her office until his or her successor is elected and qualified or until
removed or replaced. Officers are subject to re-election by the board
of directors annually.
Biographical Information
Directors
Charles W. Calomiris, Chairman of the Board of Directors of the
company and the bank. Mr. Calomiris is currently the Henry Kaufman
Professor of Finance and Economics at the Columbia University Graduate School of
Business and a professor at the School of International and Public Affairs at
Columbia. During the last five years he has served as a
consultant to the Federal Reserve Board as well as to Federal Reserve Banks and
the World Bank, to the governments of states and foreign countries and to major
U. S. corporations.
Carroll E. Amos is President and Chief Executive Officer of the
company and of the bank. He is a private investor who until 1996
served as President and Chief Executive Officer of 1st Washington Bancorp and
Washington Federal Saving Bank.
Sidney M. Bresler is Chief Executive Officer of Bresler &
Reiner Inc., engaged in residential land development and construction and rental
property ownership and management.
Jeffrey W. Ochsman is a partner in the law firm of Friedlander,
Misler, Sloan, Kletzkin & Ochsman, PLLC, Washington, D.C.
James B. Vito is a managing general partner of James Properties,
engaged in the sale and management of property.
Executive Officers Who are Not Directors
Edward C. Allen joined the bank as a Senior Vice President and
Chief Financial Officer in mid 1996 and became Chief Operating Officer in
1997. Prior to joining the bank, Mr. Allen was the Chief Financial
Officer of Servus Financial Corp. from 1994 to 1996 and Senior Vice President of
NVR Savings Bank from 1992 to 1994.
Justin R. Golden joined the bank as Senior Vice President of the
Consumer Lending Department in 1998. From 1984 until 1997 he served
in various capacities at Citizens Bank, most recently having responsibility for
reorganizing and operating that bank’s home equity lending function.
Gary L. Hobert joined the bank as Senior Vice President of the
Commercial Business Lending Department in 2001. From 2000 until
joining the bank, Mr. Hobert was the Senior Vice President of Adams National
Bank. From 1998 until 2000 he served as Executive Vice President and
Senior Loan Officer for Grandbank.
Robert W. Neff joined the bank in 1997 as Senior Vice President,
Commercial Real Estate Lending. Prior to joining the bank, Mr. Neff
served as a Consultant on commercial real estate loan brokerage with the First
Financial Group of Washington after serving from 1984 until 1996 as an Executive
Vice President for Commercial Real Estate Lending at Washington Federal Savings
Bank.
David E. Ritter joined the bank and the company as a Senior Vice
President and Chief Financial Officer in 1998. From 1996 to 1997, Mr.
Ritter was a Senior Financial Consultant with Peterson
Consulting. From 1988 until 1996, he was the Executive Vice President
and Chief Financial Officer of Washington Federal Savings Bank.
Compliance with Section 16 (a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act requires the
company's executive officers and directors, and persons who own more than ten
percent of a registered class of the company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc., and to
furnish the company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by
it, or written representations from certain reporting persons that no Forms 5
were required for those persons, the company believes that all filing
requirements applicable to its executive officers and directors were met during
fiscal 2007.
Code of Ethics and Business Conduct
The company has adopted a Code of Ethics and Business Conduct
applicable to all
employees, officers and directors of the company and its
subsidiaries. A copy of the Code of Ethics and Business Conduct
will be furnished without charge to stockholders of record upon written request
to Greater Atlantic Financial Corp., Mr. Edward C. Allen, Corporate Secretary,
10700 Parkridge Boulevard, Suite P50, Reston, Virginia 20191.
Audit Committee Financial Expert
No current member of the Audit Committee qualifies as an “audit
committee financial expert” as defined in the rules of the Securities and
Exchange Commission. The company is currently seeking an additional
director who will qualify as an “audit committee financial expert,” but has not
found a qualified candidate who is willing to serve in that capacity.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash compensation paid by the
company for services rendered in all capacities during the fiscal year ended
September 30, 2007, to the Chief Executive Officer, and for each of the other
executive officers of the company who received salary and bonus in excess of
$100,000 (collectively, the "Named Executive Officers").
|
Name and Principal Position
|
Fiscal Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Non-Equity Incentive Plan Compen-sation
($)
|
|
|
Change in Pension Value and Nonqual-ified Deferred
Compen-sation Earnings
($)
|
|
|
All Other Compensation
($)
|
|
|
Total
($)
|
|
|
Carroll E. Amos
|
2007
|
|
$ |
182,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
182,000 |
|
|
President and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward C. Allen
|
2007
|
|
$ |
121,320 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
121,320 |
|
|
Senior Vice President, Chief Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Officer and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Ritter
|
2007
|
|
$ |
114,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
114,000 |
|
|
Senior Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning
option awards held by the named executive officers that were outstanding as of
September 30, 2007. There were no other equity awards held by the
named executive officers at September 30, 2007. All of the option
awards set forth in the table below were immediately exercisable by the
recipient upon grant.
|
Name and Principal Position
|
|
Number of Securities Underlying Unexercised Options
(#) Exercisable
|
|
|
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Option Exercise Price
|
|
Option Expiration Date
|
|
Carroll E. Amos
|
|
|
16,667 |
|
|
|
-
|
|
|
$ |
7.50 |
|
10/01/07
|
|
President and Chief
|
|
|
16,667 |
|
|
|
- |
|
|
|
8.37 |
|
10/29/08
|
|
Executive Officer
|
|
|
3,000 |
|
|
|
- |
|
|
|
6.00 |
|
12/01/09
|
| |
|
|
8,666 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
| |
|
|
20,000 |
|
|
|
- |
|
|
|
9.00 |
|
01/01/12
|
| |
|
|
10,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward C. Allen
|
|
|
2,000 |
|
|
|
- |
|
|
$ |
6.00 |
|
12/01/09
|
|
Senior Vice President, Chief Operating
|
|
|
9,000 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
|
Officer and Secretary
|
|
|
4,000 |
|
|
|
- |
|
|
|
7.00 |
|
01/01/12
|
| |
|
|
3,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Ritter
|
|
|
3,000 |
|
|
|
- |
|
|
$ |
6.00 |
|
12/01/09
|
|
Senior Vice President and
|
|
|
8,000 |
|
|
|
- |
|
|
|
4.00 |
|
12/14/10
|
|
Chief Financial Officer
|
|
|
4,000 |
|
|
|
- |
|
|
|
7.00 |
|
01/01/12
|
| |
|
|
3,000 |
|
|
|
- |
|
|
|
8.50 |
|
10/20/13
|
Employment
Agreement. The company has entered into an employment
agreement with Mr. Carroll E. Amos. The employment agreement is intended to
ensure that the bank and the company will be able to maintain a stable and
competent management base. The continued success of the bank and the
company depends to a significant degree on the skills and competence of its
executive officers, particularly the Chief Executive Officer.
The employment agreement provides for a three-year term for Mr.
Amos and provides that commencing on the first anniversary date and continuing
each anniversary date thereafter the board of directors will conduct a
performance appraisal of Mr. Amos and may extend the employment agreement for an
additional year so that the remaining term shall be three years, unless the
board of directors determines that there is no basis upon which to extend the
employment agreement, it will be extended for an additional year. The
employment agreement provides that Mr. Amos’s base salary will be reviewed
annually. The base salary provided for in the employment agreement
for Mr. Amos was increased to $165,400 at the fourth anniversary date and to
$182,000 on January 1, 2003. In addition to the base salary, the
employment agreement provides for, among other things, participation in various
employee benefit plans and stock-based compensation programs, as well as
furnishing fringe benefits available to similarly situated executive
personnel.
The employment agreement provides for termination by the bank
for cause (as defined in the employment agreement) at any time. In he
event the bank chooses to terminate Mr. Amos’s employment for reasons other than
for cause or, in the event of Mr. Amos’s resignation from the bank
upon: (i) the failure to re-elect Mr. Amos to his current office;
(ii) a material change in Mr. Amos’s functions, duties or responsibilities;
(iii) a relocation of Mr. Amos’s principal place of employment by more than 30
miles, or a material reduction in the benefits and perquisites to Mr. Amos from
those being provided as of the effective date of the employment agreement ; (iv)
liquidation or dissolution of the bank or the company; or (v) a breach of the
employment agreement by the bank, Mr. Amos or, in the event of death, Mr. Amos's
beneficiary, would be entitled to receive an amount equal to the greater of (i)
the remaining base salary and bonus payments that would have been paid to Mr.
Amos during the remaining term of the employment agreement or (ii) thirty-six
(36) times the highest monthly base salary received by Mr. Amos during the term
of the employment agreement. The bank would also continue and pay for
Mr. Amos's life, health and disability coverage for the remaining term of the
employment agreement. Upon any termination of Mr. Amos’s employment
for any reason other than a change in control, Mr. Amos is subject to a covenant
not to compete with the bank for one year.
Under the employment agreement, if involuntary termination or
voluntary termination follows a change in control of the bank or the company,
Mr. Amos or, in the event of his death, his beneficiary, would receive a
severance payment equal to the greater of: (i) the payments due for
the remaining term of the employment agreement; or (ii) two times the average of
the three preceding taxable years’ annual compensation. The bank
would also continue Mr. Amos’s life, health, and disability coverage for
thirty-six months. In the event of a change in control of the bank,
the total amount of payment due under the employment agreement, based solely on
the base salary paid to Mr. Amos, and excluding any benefits under any employee
benefit plan which may otherwise become payable, would equal approximately
$364,000.
All reasonable costs and legal fees paid or incurred by Mr. Amos
pursuant to any dispute or question of interpretation relating to the employment
agreement is to be paid by the bank, if he is successful on the merits pursuant
to a legal judgment, arbitration or settlement. The employment
agreement also provides that the bank will indemnify Mr. Amos to the fullest
extent allowable under federal law.
Directors' Compensation
Fees. Since the
formation of the company, the executive officers, directors and other personnel
have been compensated for services by the bank and have not received additional
remuneration from the company. Beginning on October 1, 1998, the
Chairman was made a salaried officer of the bank and the company and in those
capacities received compensation at the rate of $3,000 per
month. Since January 1, 2003, each outside directors of the bank has
received $750 for each Board meeting and $350 for each committee meeting
attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Persons and groups owning in excess of five percent of the
company's Common Stock are required to file certain reports regarding such
ownership with the company and with the Securities and Exchange Commission
("SEC"), in accordance with the Securities Exchange Act of 1934 (the "Exchange
Act").
The following table sets forth information regarding persons
known to be beneficial owners of more than five percent of the company's
outstanding Common Stock as of December 21, 2007.
|
Title of Class
|
Name and Address
of Beneficial Owner
|
Amount and Nature of
Beneficial
Ownership
|
Percent
of Class
|
| |
|
|
|
|
Common Stock
|
Charles W. Calomiris
251 Fox Meadow Road
Scarsdale, New York 10583
|
176,807 shares(1)(2)
|
5.85%
|
|
Common Stock
|
Robert I. Schattner, DDS
121 Congressional Lane
Rockville, MD 20852
|
432,328 shares(1)(3)
|
14.30%
|
|
Common Stock
|
The Ochsman Children Trust
1650 Tysons Boulevard
McLean, VA 22102
|
238,597 shares(1)(4)
|
7.89%
|
|
Common Stock
|
George W. Calomiris
4848 Upton Street, N.W.
Washington, DC 20016
|
199,715 shares(5)
|
6.40%
|
|
Common Stock
|
Jenifer Calomiris
4919 Upton Street, N.W.
Washington, D.C. 20016
|
190,438 shares(6)
|
6.12%
|
|
Common Stock
|
Katherine Calomiris Tompros
5100 Van Ness Street, N.W.
Washington, D.C. 20016
|
190,638 shares(7)
|
6.12%
|
_________________
|
(1)
|
Does not include warrants exercisable at September 30,
2007 to purchase 9,166, 20,000 and 13,334 shares held, respectively, by
Charles W. Calomiris, Dr. Schattner, and The Ochsman Children Trust under
the Greater Atlantic Financial Corp. 1997 Stock Option Plan, or shares of
preferred securities presently convertible into 114,841, 330,099 and
69,545 shares of common stock held, respectively, by Charles W. Calomiris
Dr. Schattner and the Ochsman Children Trust.
|
|
(2)
|
The information furnished is derived from a Schedule
13D filed by Charles W. Calomiris on July 25, 2003, and a Form 4 filed on
July 24, 2003.
|
|
(3)
|
The information furnished is derived from a Schedule
13D and a Form 4 filed by Robert I Schattner filed on September 6,
2005.
|
(4) The information
furnished is derived from a Schedule 13D filed by The Ochsman Children Trust on
April 9, 2002.
|
|
(5)
|
Includes warrants exercisable at September 30, 2007 to
purchase 9,167 shares and shares of preferred securities presently
convertible into 85,754 shares of common stock held by George W.
Calomiris. The information furnished is derived from a Schedule
13D filed by George Calomiris on December 7, 2004.
|
|
|
(6)
|
Includes warrants exercisable at September 30, 2007 to
purchase 9,167 shares and shares of preferred securities presently
convertible into 79,747 shares of common stock held by Jenifer
Calomiris. The information furnished is derived from a Schedule
13D filed by Jenifer Calomiris on March 21, 2003.
|
|
|
(7)
|
Includes warrants exercisable at September 30, 2007 to
purchase 9,167 shares and shares of preferred securities presently
convertible into 79,747 shares of common stock held by Katherine Calomiris
Tompros. The information furnished is derived from a Schedule
13D filed by Katherine Calomiris Tompros on March 21, 2003.
|
Information with Respect to Directors and Executive Officers
The following table sets forth, as of December 21, 2007, the
names of the directors, and executive officers of the company as well as their
ages; a brief description of their recent business experience, including present
occupations and employment; certain directorships held by each; the year in
which each became a director of the company and the year in which his term as
director of the company expires. This table also sets forth the
amount of Common Stock and the percent thereof beneficially owned as of the
December 21, 2007 by each director and all directors and executive officers as a
group as of the December 21, 2007.
Name and Principal
Occupation at Present
|
|
|
|
Shares of
Common Stock
Beneficially Owned (1)
|
Ownership as a
Percent of
|
| |
|
|
|
|
|
|
Charles W. Calomiris, Chairman of the Board of the Company,
is the Henry Kaufman Professor of Finance and Economics at the Columbia
University Graduate School of Business.
|
50
|
2001
|
2008
|
176,807(2)(3)
|
5.85%
|
|
Carroll E. Amos, President and Chief
Executive Officer of the company, is a private investor who
until 1996 served as President and Chief Executive Officer of 1st
Washington Bancorp and Washington Federal Savings Bank.
|
60
|
1997
|
2008
|
44,060(4)
|
1.46%
|
|
James B. Vito is Managing General
Partner, James Properties, engaged in the sale and
management of property.
|
82
|
1998
|
2008
|
79,042(2)
|
2.61%
|
| |
|
|
|
|
|
|
Jeffrey W. Ochsman is an attorney and partner of the law
firm of Friedlander, Misler, Sloan, Kletzkin & Ochsman, PLLC.
|
55
|
1999
|
2009
|
500
|
*
|
|
Sidney M. Bresler is a Director, Chief Executive Officer and
Chief Operating Officer of Bresler & Reiner, Inc. engaged in
residential land development and construction and rental property
ownership and management.
|
53
|
2003
|
2010
|
500
|
*
|
|
Name and Principal
Occupation
at Present and
for Past Five Years
|
|
Shares of
Common Stock
|
Ownership as A
Percent of Class
|
|
Executive Officers
Who Are Not Directors
|
|
|
|
|
Edward C. Allen joined the bank as Chief Financial Officer
and became Chief Operating Officer in 1997.
|
59
|
550(4)
|
*
|
|
David E. Ritter joined the bank and the company as a Senior
Vice President and Chief Financial Officer in 1998.
|
57
|
300(4)
|
*
|
| |
|
|
|
| |
|
|
|
|
All directors and executive officers as a group (seven
persons)(3)
|
|
301,759
|
9.98%
|
|
(1)
|
Each person effectively exercises sole voting or
dispositive power as to shares reported.
|
|
(2)
|
Does not include warrants exercisable at September 30,
2007 to purchase 9,166 and 2,000 shares, respectively, held by Messrs.
Calomiris and Vito under the Greater Atlantic Financial Corp. 1997 Stock
Option Plan, or shares of preferred securities presently convertible into
114,841, 34,970, and 6,431 shares of common stock held, respectively, by
Messrs. Calomiris, Vito, and Amos.
|
|
(3)
|
Includes 128,727 shares held directly, 10,000 shares
held by his spouse and 38,080 shares held as custodian for minor
children.
|
|
(4)
|
Does not include presently exercisable options to
purchase 75,000 shares granted to Mr. Amos or 18,000 granted to Mr. Allen
and Mr. Ritter under the Greater Atlantic Financial Corp. 1997 Stock
Option and Warrant Plan.
|
|
*
|
Does not exceed 1.0% of the company's Common Stock.
|
The following table summarizes share and exercise price
information about the company’s equity compensation plans as of September 30,
2007.
|
Plan category
|
Number of securities to be issued upon exercise of
outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future
issuance under equity compensation plans (excluding securities reflected
in column (a))
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
1997 Stock Option and Warrant Plan
|
333,516
|
$6.93
|
91,000
|
|
Equity compensation plans not approved by security
holders
|
N/A
|
N/A
|
N/A
|
|
Total
|
333,516
|
$6.93
|
91,000
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Federal regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable
features. In addition, loans made to a director or executive officer
in excess of the greater of $25,000 or 5% of the bank's capital and surplus (up
to a maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the board of directors.
The bank currently makes loans to its executive officers and
directors on the same terms and conditions offered to the general
public. The bank's policy provides that all loans made by the bank to
its executive officers and directors be made in the ordinary course of business,
on substantially the same terms, including collateral, as those prevailing at
the time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable
features. As of September 30, 2007, one of the bank's directors had
loans with the bank which had outstanding balances totaling
$73,000. Such loans were made by the bank in the ordinary course of
business, with no favorable terms and do not involve more than the normal risk
of collectibility or present unfavorable features.
The company’s policy is that all transactions between the company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the company than could have been obtained by it in arm's length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the company not having any interest in the
transaction.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
BDO Seidman, LLP billed the company aggregate fees of $106,703 and
$225,076 for professional services rendered for the audit of the company's
annual consolidated financial statements and for the reviews of the condensed
consolidated financial statements included in the company's Forms 10-Q for the
fiscal year ended September 30, 2007 and 2006, respectively. Before
the company or any subsidiary engages an accountant, the company’s audit
committee approves the engagement.
Audit-Related Fees
BDO Seidman, LLP did not provide any such services to the company
for the fiscal year ended September 30, 2007 or 2006.
Tax Fees
BDO Seidman billed the company $30,358 and $35,600 for tax
services for the fiscal year ended September 30, 2007 and 2006,
respectively. Tax fees represented 22.15% of the fees paid to BDO
Seidman, LLP in fiscal year 2007 and 13.66% in fiscal year 2006.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
See Index to Consolidated Financial Statements on page
61
|
2.
|
Financial Statement Schedules
|
|
|
All schedules are omitted because they are not required
or applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
|
(b)
Exhibits
23.1 Consent of BDO Seidman, LLP
|
|
31.1 Certification of Chief Executive Officer
|
|
|
31.2 Certification of Chief Financial Officer
|
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. 1350
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. 1350
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GREATER
ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E.
Amos
Carroll E. Amos
Chief
Executive Officer, President and Director
Dated: December 28, 2007
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons of the registrant and
in the capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
|
/s/ Charles W.
Calomiris
Charles W. Calomiris
|
Chairman of the Board
|
December 28, 2007
|
|
/s/ Carroll E.
Amos
Carroll E. Amos
|
Chief Executive Officer,
And President and Director
|
December 28, 2007
|
|
/s/ Sidney M.
Bresler
Sidney M. Bresler
|
Director
|
December 28, 2007
|
|
/s/ Jeffrey W.
Ochsman
Jeffrey W. Ochsman
|
Director
|
December 28, 2007
|
|
/s/ James B.
Vito
James B. Vito
|
Director
|
December 28, 2007
|
|
/s/ David E.
Ritter
David E. Ritter
|
Senior Vice President and
Chief Financial Officer
|
December 28, 2007
|
Consolidated Financial Statements of
Greater Atlantic Financial Corp.
|
Index
|
|
| |
Page
|
|
Report of Independent Registered Public Accounting Firm
|
62
|
|
Consolidated Statements of Financial Condition as of
September 30, 2007 and 2006
|
63
|
|
Consolidated Statements of Operations for the Years Ended
September 30, 2007, 2006 and 2005
|
64
|
|
Consolidated Statements of Comprehensive Income (Loss) for
the Years Ended
September 30, 2007, 2006 and 2005
|
65
|
|
Consolidated Statements of Stockholders’ Equity for the
Years Ended September 30, 2007, 2006 and 2005
|
65
|
|
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2007, 2006 and 2005
|
66
|
|
Notes to Consolidated Financial Statements
|
68
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Greater Atlantic Financial Corp.
Reston, Virginia
We have audited the accompanying consolidated statements of
financial condition of Greater Atlantic Financial Corp. and Subsidiaries as of September 30, 2007
and 2006, and the related consolidated statements of operations, comprehensive
income (loss), stockholders’ equity, and cash flows for each of the three years
in the period ended September 30, 2007. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Greater Atlantic Financial Corp. and Subsidiaries at September 30, 2007 and 2006
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2007 in conformity with accounting
principles generally accepted in the United States of America.
/s/
BDO Seidman,
LLP
Richmond, Virginia
December 17, 2007
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
| |
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,146 |
|
|
$ |
2,516 |
|
|
Interest bearing deposits
|
|
|
4,486 |
|
|
|
17,288 |
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
48,910 |
|
|
|
75,461 |
|
|
Held-to-maturity
|
|
|
3,053 |
|
|
|
4,696 |
|
|
Loans receivable, net
|
|
|
176,108 |
|
|
|
193,307 |
|
|
Accrued interest and dividends receivable
|
|
|
1,675 |
|
|
|
2,073 |
|
|
Deferred income taxes
|
|
|
2,096 |
|
|
|
1,928 |
|
|
Federal Home Loan Bank stock, at cost
|
|
|
1,731 |
|
|
|
2,388 |
|
|
Premises and equipment, net
|
|
|
2,285 |
|
|
|
2,764 |
|
|
Goodwill
|
|
|
956 |
|
|
|
956 |
|
|
Prepaid expenses and other assets
|
|
|
1,548 |
|
|
|
1,842 |
|
|
Total Assets
|
|
$ |
245,994 |
|
|
$ |
305,219 |
|
|
Liabilities and stockholders’ equity
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
197,991 |
|
|
$ |
230,174 |
|
|
Advance payments from borrowers for taxes and insurance
|
|
|
229 |
|
|
|
270 |
|
|
Accrued expenses and other liabilities
|
|
|
1,601 |
|
|
|
1,963 |
|
|
Income taxes payable
|
|
|
36 |
|
|
|
- |
|
|
Advances from the FHLB and other borrowings
|
|
|
27,192 |
|
|
|
54,574 |
|
|
Junior subordinated debt securities
|
|
|
9,374 |
|
|
|
9,388 |
|
|
Total liabilities
|
|
|
236,423 |
|
|
|
296,369 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock $.01 par value - 2,500,000
shares authorized, none outstanding
|
|
|
- |
|
|
|
- |
|
|
Common stock, $.01 par value –
10,000,000
|
|
|
|
|
|
|
|
|
|
shares authorized;
3,024,220 and 3,020,934 shares outstanding
|
|
|
30 |
|
|
|
30 |
|
|
Additional paid-in capital
|
|
|
25,273 |
|
|
|
25,228 |
|
|
Accumulated deficit
|
|
|
(14,408 |
) |
|
|
(15,359 |
) |
|
Accumulated other comprehensive loss
|
|
|
(1,324 |
) |
|
|
(1,049 |
) |
|
Total stockholders’ equity
|
|
|
9,571 |
|
|
|
8,850 |
|
|
Total liabilities and stockholders’ equity
|
|
$ |
245,994 |
|
|
$ |
305,219 |
|
See accompanying notes to consolidated financial statements.
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Operations
| |
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
14,173 |
|
|
$ |
13,866 |
|
|
$ |
12,430 |
|
|
Investments
|
|
|
4,248 |
|
|
|
4,928 |
|
|
|
4,528 |
|
|
Total interest income
|
|
|
18,421 |
|
|
|
18,794 |
|
|
|
16,958 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,331 |
|
|
|
7,709 |
|
|
|
6,337 |
|
|
Borrowed money
|
|
|
2,662 |
|
|
|
3,874 |
|
|
|
3,676 |
|
|
Total interest expense
|
|
|
11,993 |
|
|
|
11,583 |
|
|
|
10,013 |
|
|
Net interest income
|
|
|
6,428 |
|
|
|
7,211 |
|
|
|
6,945 |
|
|
Provision for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
Net interest income after provision for loan losses
|
|
|
5,743 |
|
|
|
7,085 |
|
|
|
6,726 |
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and service charges
|
|
|
613 |
|
|
|
610 |
|
|
|
734 |
|
|
Gain (loss) on sale of loans
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
|
Gain (loss)on sale of investment
securities
|
|
|
- |
|
|
|
- |
|
|
|
539 |
|
|
Gain (loss) on derivatives
|
|
|
(21 |
) |
|
|
212 |
|
|
|
303 |
|
|
Gain on sale of real estate owned
|
|
|
- |
|
|
|
65 |
|
|
|
- |
|
|
Gain on branch sales
|
|
|
4,255 |
|
|
|
- |
|
|
|
945 |
|
|
Other operating income
|
|
|
23 |
|
|
|
30 |
|
|
|
66 |
|
|
Total noninterest income
|
|
|
4,870 |
|
|
|
917 |
|
|
|
2,640 |
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
4,446 |
|
|
|
4,718 |
|
|
|
4,213 |
|
|
Occupancy
|
|
|
1,394 |
|
|
|
1,337 |
|
|
|
1,337 |
|
|
Professional services
|
|
|
1,128 |
|
|
|
1,227 |
|
|
|
969 |
|
|
Advertising
|
|
|
130 |
|
|
|
628 |
|
|
|
301 |
|
|
Deposit insurance premium
|
|
|
69 |
|
|
|
101 |
|
|
|
100 |
|
|
Furniture, fixtures and equipment
|
|
|
516 |
|
|
|
554 |
|
|
|
641 |
|
|
Data processing
|
|
|
877 |
|
|
|
919 |
|
|
|
1,054 |
|
|
Other operating expenses
|
|
|
1,066 |
|
|
|
1,601 |
|
|
|
1,274 |
|
|
Total noninterest expense
|
|
|
9,626 |
|
|
|
11,085 |
|
|
|
9,889 |
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
987 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
Provision for income taxes
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
Income (loss) from continuing
operations
|
|
|
951 |
|
|
|
(3,083 |
) |
|
|
(523 |
) |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
- |
|
|
|
(2,488 |
) |
|
|
(1,107 |
) |
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations basic
|
|
$ |
0.31 |
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
|
Discontinued operations basic
|
|
|
- |
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
| |
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations basic
|
|
$ |
0.31 |
|
|
$ |
(1.02 |
) |
|
$ |
(0.17 |
) |
|
Discontinued operations basic
|
|
|
- |
|
|
|
(0.82 |
) |
|
|
(0.37 |
) |
| |
|
$ |
0.31 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.54 |
) |
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,023,407 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
|
Diluted
|
|
|
4,395,008 |
|
|
|
3,020,934 |
|
|
|
3,015,509 |
|
See accompanying notes to consolidated financial statements.
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) income on securities
|
|
|
(275 |
) |
|
|
46 |
|
|
|
(16 |
) |
|
Other comprehensive (loss) income
|
|
|
(275 |
) |
|
|
46 |
|
|
|
(16 |
) |
|
Comprehensive (loss) income
|
|
$ |
676 |
|
|
$ |
(5,525 |
) |
|
$ |
(1,646 |
) |
See accompanying notes to consolidated financial statements.
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
| |
Preferred
Stock
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Earnings
(Deficit)
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
Stockholders’
Equity
|
|
Balance at September 30, 2004
|
|
$ |
- |
|
|
$ |
30 |
|
|
$ |
25,152 |
|
|
$ |
(8,158 |
) |
|
$ |
(1,079 |
) |
|
$ |
15,945 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,630 |
) |
|
|
- |
|
|
|
(1,630 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
- |
|
|
|
30 |
|
|
|
25,228 |
|
|
|
(9,788 |
) |
|
|
(1,095 |
) |
|
|
14,375 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
|
46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,571 |
) |
|
|
- |
|
|
|
(5,571 |
) |
|
Balance at September 30, 2006
|
|
|
- |
|
|
|
30 |
|
|
|
25,228 |
|
|
|
(15,359 |
) |
|
|
(1,049 |
) |
|
|
8,850 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of trust preferred securities
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(275 |
) |
|
|
(275 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
951 |
|
|
|
- |
|
|
|
951 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$ |
- |
|
|
$ |
30 |
|
|
$ |
25,273 |
|
|
$ |
(14,408 |
) |
|
$ |
(1,324 |
) |
|
$ |
9,571 |
|
See accompanying notes to consolidated financial statements
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
| |
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
Adjustments to reconcile net income (loss) to net
cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided (used) by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
Amortization of deferred loan acquisition
costs, net
|
|
|
38 |
|
|
|
(50 |
) |
|
|
(27 |
) |
|
Depreciation and amortization
|
|
|
445 |
|
|
|
658 |
|
|
|
930 |
|
|
Gain on branch sale
|
|
|
(4,255 |
) |
|
|
- |
|
|
|
(945 |
) |
|
(Gain) loss on disposal of fixed assets
|
|
|
- |
|
|
|
(26 |
) |
|
|
91 |
|
|
Option compensation
|
|
|
- |
|
|
|
- |
|
|
|
42 |
|
|
Realized gain on sale of mortgaged-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
(539 |
) |
|
Loss (gain) on derivatives
|
|
|
21 |
|
|
|
(212 |
) |
|
|
(303 |
) |
|
Amortization of other investment securities
premiums
|
|
|
862 |
|
|
|
753 |
|
|
|
853 |
|
|
Amortization of mortgage-backed security
premiums
|
|
|
397 |
|
|
|
662 |
|
|
|
937 |
|
|
Amortization of deferred fees
|
|
|
(325 |
) |
|
|
(496 |
) |
|
|
(635 |
) |
|
Discount accretion net of premium
amortization
|
|
|
287 |
|
|
|
(277 |
) |
|
|
(361 |
) |
|
Amortization of convertible preferred stock
costs
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
Conversion of Trust Preferred Securities
|
|
|
(23 |
) |
|
|
- |
|
|
|
- |
|
|
(Gain) loss on sale of foreclosed real
estate
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
Gain on sale of loans held for sale
|
|
|
- |
|
|
|
(1,522 |
) |
|
|
(4,720 |
) |
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disbursements for origination of loans
|
|
|
- |
|
|
|
(91,477 |
) |
|
|
(276,038 |
) |
|
Proceeds from sales of loans
|
|
|
- |
|
|
|
102,518 |
|
|
|
276,770 |
|
|
Accrued interest and dividend receivable
|
|
|
399 |
|
|
|
(327 |
) |
|
|
193 |
|
|
Prepaid expenses and other assets
|
|
|
177 |
|
|
|
1,156 |
|
|
|
360 |
|
|
Deferred loan fees collected, net of deferred
costs incurred
|
|
|
435 |
|
|
|
431 |
|
|
|
172 |
|
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
(265 |
) |
|
|
649 |
|
|
|
(451 |
) |
|
Income taxes payable
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
Net cash provided by (used in) operating activities
|
|
$ |
(126 |
) |
|
$ |
6,939 |
|
|
$ |
(5,073 |
) |
(Continued)
Greater Atlantic Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows – (Continued)
| |
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans
|
|
$ |
16,079 |
|
|
$ |
1,879 |
|
|
$ |
51,867 |
|
|
Disposal (purchases) of premises and
equipment
|
|
|
34 |
|
|
|
792 |
|
|
|
2,055 |
|
|
Proceeds from sales of foreclosed real
estate
|
|
|
- |
|
|
|
297 |
|
|
|
- |
|
|
Purchases of investment securities
|
|
|
- |
|
|
|
(7,707 |
) |
|
|
(21,684 |
) |
|
Proceeds from repayments of investment
securities
|
|
|
11,528 |
|
|
|
17,105 |
|
|
|
21,841 |
|
|
Purchases of mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
(24,224 |
) |
|
Proceeds from sale of mortgage-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
21,921 |
|
|
Proceeds from repayments of mortgage-backed
securities
|
|
|
14,963 |
|
|
|
25,198 |
|
|
|
37,548 |
|
|
Purchases of FHLB stock
|
|
|
(742 |
) |
|
|
(3,015 |
) |
|
|
(5,169 |
) |
|
Proceeds from sale of FHLB stock
|
|
|
1,399 |
|
|
|
3,130 |
|
|
|
6,751 |
|
|
Net cash provided by investing activities
|
|
|
43,261 |
|
|
|
37,679 |
|
|
|
90,906 |
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(27,928 |
) |
|
|
(7,620 |
) |
|
|
(50,217 |
) |
|
Net (repayments) advances from FHLB
|
|
|
(11,000 |
) |
|
|
(2,000 |
) |
|
|
(13,200 |
) |
|
Net borrowings (repayments) on reverse
repurchase agreements and other borrowings
|
|
|
(16,383 |
) |
|
|
(19,905 |
) |
|
|
(26,386 |
) |
|
Increase (decrease) in advance payments by
borrowers for taxes and insurance
|
|
|
(41 |
) |
|
|
2 |
|
|
|
(37 |
) |
|
Conversion of trust preferred securities
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
Exercise of stock options
|
|
|
- |
|
|
|
- |
|
|
|
34 |
|
|
Net cash (used in) financing activities
|
|
|
(55,307 |
) |
|
|
(29,523 |
) |
|
|
(89,806 |
) |
|
Increase (decrease) in cash and cash equivalents
|
|
|
(12,172 |
) |
|
|
15,095 |
|
|
|
(3,973 |
) |
|
Cash and cash equivalents, at beginning of year
|
|
|
19,804 |
|
|
|
4,709 |
|
|
|
8,682 |
|
|
Cash and cash equivalents, at end of year
|
|
$ |
7,632 |
|
|
$ |
19,804 |
|
|
$ |
4,709 |
|
See accompanying notes to consolidated financial
statements.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Operations
Greater Atlantic Financial Corp. (“GAFC” or the “Company”) is a
bank holding company whose principal activity is the ownership and management of
Greater Atlantic Bank (“GAB” or the “Bank”). The Bank originates commercial,
mortgage and consumer loans and receives deposits from customers located
primarily in Virginia, Washington, D.C. and Maryland. The Bank
operates under a federal bank charter and provides full banking services.
Proposed Acquisition
As previously reported in a Form 8-K filed on April 16, 2007, we
announced that the company and Summit Financial Group, Inc., entered into a
definitive agreement for the company to merge with and into
Summit. We also announced that the bank and Bay-Vanguard Federal
Savings Bank entered into a definitive agreement for Bay-Vanguard to purchase
the bank’s branch office in Pasadena, Maryland. The sale of the
Pasadena branch office was established as a condition to the completion of the
pending merger of the company with and into Summit Financial Group,
Inc.
Originally the merger was expected to be completed in the fourth
calendar quarter of 2007; however, as reported in a Form 8-K filed on December
10, 2007, effective December 6, 2007, the company and Summit amended their
agreement to implement the parties' agreement to extend to March 31, 2008, the
date on which the agreement may be terminated if the merger is not consummated
by that date, subject to regulatory and shareholder
approvals. Immediately following the merger, the bank intends to
merge with and into Summit Community Bank.
Under
the agreement to sell its leased branch office located at 8070 Ritchie
Highway, Pasadena, Maryland, to Bay-Vanguard, Bay-Vanguard paid the bank an 8.5%
premium on the balance of deposits assumed at closing. At August 24,
2007, the closing date of that transaction, the deposits at our Pasadena branch
office on which the deposit premium would apply totaled approximately $51.5
million with the bank recognizing a gain of $4.3
million. Bay-Vanguard also purchased the branch office’s fixed
assets, but did not acquire any loans as part of the transaction.
Principles of Consolidation
The consolidated financial statements include the accounts of GAFC
and its wholly owned subsidiaries, the bank and Greater Atlantic Capital Trust
I. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Risk and Uncertainties
In its normal course of business, the Company encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice more rapidly, or on a
different basis, than its interest-earning assets. Credit risk is the
risk of default on the Company's loan portfolio that results from the borrowers'
inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate held by the
Company. The determination of the allowance for loan losses and the valuation of
real estate are based on estimates that are particularly susceptible to
significant changes in the economic environment and market
conditions. Management believes that, as of September 30, 2007 and
September 30, 2006, the allowance for loan losses and valuation of real estate
are adequate based on information currently available. A worsening or
protracted economic decline would increase the likelihood of losses due to
credit and market risks and could create the need for substantial additional
loan loss reserves. See discussion of regulatory matters in Note
12.
Concentration of Credit Risk
The Company's primary business activity is with customers located
in Maryland, Virginia and the District of Columbia. The Company
primarily originates residential loans to customers throughout these areas, most
of whom are residents local to the Company's business locations. The
Company has a diversified loan portfolio consisting of residential, commercial
and consumer loans. Commercial and consumer loans generally provide
for higher interest rates and shorter terms; however, such loans have a higher
degree of credit risk. Management monitors all loans, including, when
possible, making inspections of the properties, maintaining current operating
statements, and performing net realizable value calculations with allowances for
losses established as necessary to properly reflect the value of the
properties. Management believes the current loss allowances are
sufficient to cover the credit risk estimated to exist at September 30,
2007.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Investment Securities
Investment securities, which the Company has the intent and
ability to hold to maturity, are carried at amortized cost. The
amortization of premiums and accretion of discounts are recorded on the level
yield (interest) method, over the period from the date of purchase to
maturity. When sales do occur, gains and losses are recognized at the
time of sale and the determination of cost of securities sold is based upon the
specific identification method. Investment securities which the Company intends
to hold for indefinite periods of time, use for asset/liability management or
that are to be sold in response to changes in interest rates, prepayment risk,
the need to increase regulatory capital or other similar factors are classified
as available-for-sale and carried at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders’
equity. If a sale does occur, gains and losses are recognized as a
component of earnings at the time of the sale. The amortization of
premiums and accretion of discounts are recorded on the level yield (interest)
method.
Investment securities that are bought and held principally for the
purpose of selling them in the near term would be classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings.
Loans and Allowance for Loan Losses
Loans receivable are stated at unpaid principal balances, net of
unearned discounts resulting from add-on interest, participation or whole-loan
interests owned by others, undisbursed loans in process, deferred loan fees, and
allowances for loan losses.
Loans are placed on non-accrual status when the principal or
interest is past due more than 90 days or when, in management’s opinion,
collection of principal and interest is not likely to be made in accordance with
a loan’s contractual terms unless the loan principal and interest are determined
by management to be fully secured and in the process of collection.
The allowance for loan losses provides for the risk of losses
inherent in the lending process. The allowance for loan losses is
based on periodic reviews and analyses of the loan portfolio which include
consideration of such factors as the risk rating of individual credits, the size
and diversity of the portfolio, economic conditions, prior loss experience and
results of periodic credit reviews of the portfolio. The allowance
for loan losses is increased by provisions for loan losses charged against
income and reduced by charge-offs, net of recoveries. In management’s
judgment, the allowance for loan losses is considered adequate to absorb losses
inherent in the loan portfolio at September 30, 2007.
The Company considers a loan to be impaired if it is probable that
they will be unable to collect all amounts due (both principal and interest)
according to the contractual terms of the loan agreement. When a loan
is deemed impaired, the Company computes the present value of the loan's future
cash flows, discounted at the effective interest rate. As an
expedient, creditors may account for impaired loans at the fair value of the
collateral or at the observable market price of the loan if one
exists. If the present value is less than the carrying value of the
loan, a valuation allowance is recorded. For collateral dependent
loans, the Company uses the fair value of the collateral, less estimated costs
to sell on a discounted basis, to measure impairment.
Mortgage loans originated and intended for sale are carried at the
lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
Derivative Financial Instruments
The Company uses derivative financial instruments to mitigate
market risk from changes in interest rates. Our derivative financial
instruments are contracted in the over-the-counter market and currently includes
interest rate caps. Derivative financial instruments are
accounted for in accordance with Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133),
which requires that all derivative instruments be recorded on the balance sheet
at fair value. Changes in the fair value of derivatives are recorded
each period either in current results of operations or other comprehensive
income (loss). For a derivative designated as part of a hedge transaction, where
it is recorded is dependent on whether it is a fair value hedge or a cash flow
hedge. For a derivative designated as a fair value hedge, the gain or
loss of the derivative in the period of change and the offsetting loss or gain
of the hedged item attributed to the hedged risk are recognized in results of
operations. For a derivative designated as a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income (loss) and subsequently reclassified into results of
operations when the hedged exposure affects results of operations. The
ineffective portion of the gain or loss of a cash flow hedge is recognized
currently in results of operations. For a derivative not designated as a hedging
instrument, the gain or loss is recognized currently in results of
operations. The Company’s derivatives do not meet hedge accounting
requirements under SFAS 133, and, therefore, the Company carries the derivatives
at their fair value on the balance sheet, recognizing changes in their fair
value in current-period earnings.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Mortgage Loan Income, Discounts and Premiums
Interest income on loans is recorded on the accrual
method. Discounts and premiums relating to mortgage loans purchased
are deferred and amortized against or accreted into income over the estimated
lives of the loans using the level yield (interest) method. Accrual
of interest is discontinued and an allowance for uncollected interest is
established and charged to interest income for the full amount of accrued
interest receivable on loans, which are delinquent for a period of 90 days or
more.
Loan Origination and Commitment Fees
Loan origination and commitment fees and certain incremental
direct loan origination costs are being deferred with the net amount being
amortized as an adjustment of the related loan's yield. The Company
is amortizing those amounts over the contractual life of the related loans as
adjusted for anticipated prepayments using current and past payment trends.
Mortgage Loan Sales and Servicing
The Company sells loans and participation interests in loans on
which it retains servicing.
When servicing is retained on a loan that is sold, the Company
recognizes a gain or loss based on the present value of the difference between
the average constant rate of interest it receives, adjusted for a normal
servicing fee, and the yield it must pay to the purchaser of the loan over the
estimated remaining life of the loan. Any resulting net premium is
deferred and amortized over the estimated life of the loan using a method
approximating the level yield (interest) method. There were no loans
sold with servicing rights retained during the years ended September 30, 2007
and September 30, 2006. The Company also sells participation
interests in loans that it services.
Premises and Equipment
Premises and equipment are recorded at
cost. Depreciation is computed on the straight-line method over
useful lives ranging from five to ten years. Leasehold improvements
are capitalized and amortized using the straight-line method over the life of
the related lease.
Foreclosed Real Estate
Real estate acquired through foreclosure is recorded at the lower
of cost or fair value less estimated selling costs. Subsequent to the
date of foreclosure, valuation adjustments are made, if required, to the lower
of cost or fair value less estimated selling costs. Costs related to
holding the real estate, net of related income, are reflected in operations when
incurred. Recognition of gains on sale of real estate is dependent
upon the transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale.
Guaranteed Convertible Preferred Securities
On July 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 150, “Accounting for Mandatorily Redeemable Securities”
(“SFAS 150”). SFAS 150 requires that the Company classify redeemable
securities with a mandatory redemption date as liabilities in its balance sheet
and classify distributions related to such securities as interest
expense. Also, SFAS 150 requires that the redeemable securities be
reflected at fair market value when reclassified as a
liability. Accordingly, the guaranteed convertible preferred
securities are presented as a liability in the Statements of Financial
Condition. The Company has consistently accounted for distributions
related to these securities as interest expense, and since the Company sold the
securities in a public offering, there was no fair market value adjustment
necessary.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Income Taxes
Income taxes are calculated using the liability method specified
by Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes”. The net deferred tax asset is reduced, if necessary, by a
valuation allowance for the amount of any tax benefits that, based on available
evidence, are not expected to be realized (See Note 10).
Cash and Cash Equivalents
The Company considers cash and interest bearing deposits in other
banks as cash and cash equivalents for purposes of preparing the statement of
cash flows.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, “Reporting
Comprehensive Income” (“SFAS 130”), establishes standards for the reporting and
display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items
that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial
statements. Presently, the Company’s comprehensive income and loss is
from unrealized gains and losses on certain investment securities.
Stock-Based Compensation
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS
123R”), to measure compensation cost for stock options effective after October
1, 2005. Prior to its adoption, the Company accounted for its options
under APB 25 “Accounting for Stock Issued to Employees” with pro forma
disclosed. There were no stock options granted in 2007; however, as
allowable under SFAS 123R, the Company used the Black-Scholes method to measure
the compensation cost of stock options granted in 2006 with the following
assumptions: risk-free interest rate of 4.88%, a dividend payout rate of zero,
and an expected option life of nine years. The volatility is
32%. Using these assumptions, the fair value of stock options granted
during fiscal 2006 was $2.92. In 2005 the Company used the following
assumptions: risk-free interest rate of 4.23%, a dividend payout rate of zero,
and an expected option life of nine years. The volatility is
47%. Using these assumptions, the fair value of stock options granted
during fiscal 2005 was $3.70. There were 12,000 options granted
during fiscal 2006 with an estimated fair value of $22,000. If the
Company had elected to recognize compensation cost based on the value at the
grant dates with the method prescribed by SFAS 123, net income (loss) and
earnings (loss) per share for 2005 would have been changed to the pro forma
amounts indicated in the following table:
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
| |
|
Year Ended September 30,
|
|
| |
|
2005
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
Net (loss) income as reported
|
|
$ |
(1,630 |
) |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of related
tax effects
|
|
|
(239 |
) |
|
Pro Forma net income (loss)
|
|
$ |
(1,869 |
) |
|
Basic income (loss) per common share:
|
|
|
|
|
|
As reported
|
|
$ |
(0.54 |
) |
|
Pro Forma
|
|
|
(0.62 |
) |
|
Diluted income (loss) per common share:
|
|
|
|
|
|
As reported
|
|
$ |
(0.54 |
) |
|
Pro Forma
|
|
|
(0.62 |
) |
Reclassifications
Certain immaterial reclassifications related to interest expense
and derivative gains have been made to prior periods to place them on a basis
comparable with the current period presentation. These
reclassifications have no effect on the results of operations previously
reported.
2. Discontinued operations
On March 29, 2006, we began the process of discontinuing the
operations of the Bank’s subsidiary, Greater Atlantic Mortgage
Corporation. It was determined that, because it was unprofitable,
this business no longer fit our strategy.
As a result of the above action, we applied discontinued
operations accounting in the financial statements, as we completed the closing
of the Greater Atlantic Mortgage Corporation business. The table
below summarizes Greater Atlantic Mortgage Corporation results which were
treated as discontinued operations for the periods indicated.
|
|
|
Year Ended September 30,
|
|
| |
|
2006
|
|
|
2005
|
|
|
(Dollars in Thousands, Except Per Share Data
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
280 |
|
|
$ |
478 |
|
|
Interest expense
|
|
|
256 |
|
|
|
347 |
|
|
Net interest income
|
|
|
24 |
|
|
|
131 |
|
|
Noninterest income
|
|
|
2,149 |
|
|
|
5,072 |
|
|
Noninterest expense
|
|
|
4,661 |
|
|
|
6,310 |
|
|
Provision for income taxes
|
|
|
- |
|
|
|
- |
|
|
Net income (loss)
|
|
$ |
(2,488 |
) |
|
$ |
(1,107 |
) |
|
Earnings per share – basic
|
|
$ |
(0.82 |
) |
|
$ |
(0.37 |
) |
|
Earnings per share – diluted
|
|
|
(0.82 |
) |
|
|
(0.37 |
)
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
|
3. Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale, September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA notes
|
|
$ |
19,395 |
|
|
$ |
- |
|
|
$ |
641 |
|
|
$ |
18,754 |
|
|
CMOs
|
|
|
7,191 |
|
|
|
32 |
|
|
|
136 |
|
|
|
7,087 |
|
|
Corporate debt securities
|
|
|
7,300 |
|
|
|
- |
|
|
|
552 |
|
|
|
6,748 |
|
| |
|
|
33,886 |
|
|
|
32 |
|
|
|
1,329 |
|
|
|
32,589 |
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
8,357 |
|
|
|
- |
|
|
|
216 |
|
|
|
8,141 |
|
|
GNMA notes
|
|
|
5,382 |
|
|
|
- |
|
|
|
122 |
|
|
|
5,260 |
|
|
FHLMC notes
|
|
|
2,961 |
|
|
|
- |
|
|
|
41 |
|
|
|
2,920 |
|
| |
|
|
16,700 |
|
|
|
- |
|
|
|
379 |
|
|
|
16,321 |
|
| |
|
$ |
50,586 |
|
|
$ |
32 |
|
|
$ |
1,708 |
|
|
$ |
48,910 |
|
|
Held-to-Maturity, September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA notes
|
|
$ |
2,846 |
|
|
$ |
- |
|
|
$ |
104 |
|
|
$ |
2,742 |
|
|
Corporate debt securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
2,846 |
|
|
|
- |
|
|
|
104 |
|
|
|
2,742 |
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
104 |
|
|
|
- |
|
|
|
2 |
|
|
|
102 |
|
|
FHLMC notes
|
|
|
103 |
|
|
|
- |
|
|
|
2 |
|
|
|
101 |
|
| |
|
|
207 |
|
|
|
- |
|
|
|
4 |
|
|
|
203 |
|
| |
|
$ |
3,053 |
|
|
$ |
- |
|
|
$ |
108 |
|
|
$ |
2,945 |
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
|
Available-for-sale, September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
(In Thousands)
|
|
|
|
|
Investment securities
|
|
|
|
|
SBA notes
|
|
$ |
27,629 |
|
|
$ |
106 |
|
|
$ |
536 |
|
|
$ |
27,199 |
|
|
CMOs
|
|
|
9,735 |
|
|
|
48 |
|
|
|
28 |
|
|
|
9,755 |
|
|
Corporate debt securities
|
|
|
7,280 |
|
|
|
36 |
|
|
|
174 |
|
|
|
7,142 |
|
| |
|
|
44,644 |
|
|
|
190 |
|
|
|
738 |
|
|
|
44,096 |
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
18,350 |
|
|
|
- |
|
|
|
364 |
|
|
|
17,986 |
|
|
GNMA notes
|
|
|
8,133 |
|
|
|
- |
|
|
|
217 |
|
|
|
7,916 |
|
|
FHLMC notes
|
|
|
5,549 |
|
|
|
- |
|
|
|
86 |
|
|
|
5,463 |
|
| |
|
|
32,032 |
|
|
|
- |
|
|
|
667 |
|
|
|
31,365 |
|
| |
|
$ |
76,676 |
|
|
$ |
190 |
|
|
$ |
1,405 |
|
|
$ |
75,461 |
|
|
Held-to-maturity, September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
(In Thousands)
|
|
|
|
|
Investment securities
|
|
|
|
|
SBA notes
|
|
$ |
4,461 |
|
|
$ |
- |
|
|
$ |
231 |
|
|
$ |
4,230 |
|
|
Corporate notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
4,461 |
|
|
|
- |
|
|
|
231 |
|
|
|
4,230 |
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA notes
|
|
|
107 |
|
|
|
- |
|
|
|
2 |
|
|
|
105 |
|
|
FHLMC notes
|
|
|
128 |
|
|
|
- |
|
|
|
3 |
|
|
|
125 |
|
| |
|
|
235 |
|
|
|
- |
|
|
|
5 |
|
|
|
230 |
|
| |
|
$ |
4,696 |
|
|
$ |
- |
|
|
$ |
236 |
|
|
$ |
4,460 |
|
The weighted average interest rate on investments was 5.47% and
5.03% for the years ended September 30, 2007 and 2006, respectively.
Trading Activities
There were no net gains (losses) on trading activities included in
earnings for the years ended September 30, 2007, 2006 and 2005.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Proceeds from the sale of available for sale securities were
zero, zero and $21.9 million for the years ended September 30, 2007, 2006 and
2005, respectively. Gross realized gains were zero, zero and $539,000
for the years ended September 30, 2007, 2006 and 2005, respectively.
As of September 30, 2007, the Bank held investments in available
for sale securities with unrealized holding losses totaling $1.7 million,
consisting of the following:
| |
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$ |
2,048 |
|
|
$ |
149 |
|
|
$ |
4,700 |
|
|
$ |
403 |
|
|
$ |
6,748 |
|
|
$ |
552 |
|
|
CMOs
|
|
|
4,124 |
|
|
|
108 |
|
|
|
1,934 |
|
|
|
28 |
|
|
|
6,058 |
|
|
|
136 |
|
|
U.S. Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
|
3,196 |
|
|
|
38 |
|
|
|
15,558 |
|
|
|
603 |
|
|
|
18,754 |
|
|
|
641 |
|
|
GNMA
|
|
|
- |
|
|
|
- |
|
|
|
5,260 |
|
|
|
122 |
|
|
|
5,260 |
|
|
|
122 |
|
|
U.S. Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
2,920 |
|
|
|
41 |
|
|
|
2,920 |
|
|
|
41 |
|
|
FNMA MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
8,141 |
|
|
|
216 |
|
|
|
8,141 |
|
|
|
216 |
|
|
Total
|
|
$ |
9,368 |
|
|
$ |
295 |
|
|
$ |
38,513 |
|
|
$ |
1,413 |
|
|
$ |
47,881 |
|
|
$ |
1,708 |
|
As of September 30, 2007, the Bank held investments in
held-to-maturity with unrealized holding losses totaling $108,000, consisting of
the following:
| |
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,742 |
|
|
$ |
104 |
|
|
$ |
2,742 |
|
|
$ |
104 |
|
|
U.S. Government agency securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
101 |
|
|
|
2 |
|
|
|
101 |
|
|
|
2 |
|
|
FNMA MBS’s
|
|
|
- |
|
|
|
- |
|
|
|
102 |
|
|
|
2 |
|
|
|
102 |
|
|
|
2 |
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,945 |
|
|
$ |
108 |
|
|
$ |
2,945 |
|
|
$ |
108 |
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Such unrealized holding losses are the result of an increase in
market interest rates during fiscal 2007 and are not the result of credit or
principal risk. Based on the nature of the investments and other
considerations discussed above, management concluded that such unrealized losses
were not other than temporary as of September 30, 2007
The amortized cost and estimated fair value of securities at
September 30, 2007 and 2006, by contractual maturity, are as follows:
| |
|
September 30, 2007
|
|
|
September 30, 2006
|
|
| |
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
49 |
|
|
$ |
33 |
|
|
After one year through five years
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
After five years through ten years
|
|
|
3,499 |
|
|
|
3,245 |
|
|
|
3,891 |
|
|
|
3,753 |
|
|
After ten years
|
|
|
30,387 |
|
|
|
29,344 |
|
|
|
40,704 |
|
|
|
40,310 |
|
|
Mortgage-backed securities
|
|
|
16,700 |
|
|
|
16,321 |
|
|
|
32,032 |
|
|
|
31,365 |
|
| |
|
|
50,586 |
|
|
|
48,910 |
|
|
|
76,676 |
|
|
|
75,461 |
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
After one year through five years
|
|
|
- |
|
|
|
- |
|
|
|
110 |
|
|
|
94 |
|
|
After five years through ten years
|
|
|
380 |
|
|
|
366 |
|
|
|
553 |
|
|
|
534 |
|
|
After ten years
|
|
|
2,466 |
|
|
|
2,376 |
|
|
|
3,798 |
|
|
|
3,602 |
|
|
Mortgage-backed securities
|
|
|
207 |
|
|
|
203 |
|
|
|
235 |
|
|
|
230 |
|
| |
|
|
3,053 |
|
|
|
2,945 |
|
|
|
4,696 |
|
|
|
4,460 |
|
|
Total investment securities
|
|
$ |
53,639 |
|
|
$ |
51,855 |
|
|
$ |
81,372 |
|
|
$ |
79,921 |
|
Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. All investment securities currently
considered liquid.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Loans receivable consists of the following:
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
Single-family
|
|
$ |
37,972 |
|
|
$ |
43,473 |
|
|
Multi-family
|
|
|
3,983 |
|
|
|
813 |
|
|
Construction
|
|
|
9,939 |
|
|
|
14,245 |
|
|
Commercial real estate
|
|
|
34,984 |
|
|
|
28,403 |
|
|
Land loans
|
|
|
8,097 |
|
|
|
13,829 |
|
|
Total mortgage loans
|
|
|
94,975 |
|
|
|
100,763 |
|
|
Commercial loans
|
|
|
34,844 |
|
|
|
39,794 |
|
|
Consumer loans
|
|
|
52,656 |
|
|
|
61,414 |
|
|
Total loans
|
|
|
182,475 |
|
|
|
201,971 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Due borrowers on loans-in process
|
|
|
(4,947 |
) |
|
|
(8,517 |
) |
|
Deferred loan fees origination
costs
|
|
|
832 |
|
|
|
944 |
|
|
Allowance for loan losses
|
|
|
(2,305 |
) |
|
|
(1,330 |
) |
|
Unearned (discounts) premium
|
|
|
53 |
|
|
|
239 |
|
| |
|
$ |
176,108 |
|
|
$ |
193,307 |
|
The activity in allowance for loan losses is summarized as
follows:
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
|
$ |
1,600 |
|
|
Provision for loan losses
|
|
|
685 |
|
|
|
126 |
|
|
|
219 |
|
|
Charge-offs
|
|
|
(353 |
) |
|
|
(80 |
) |
|
|
(625 |
) |
|
Recoveries
|
|
|
643 |
|
|
|
72 |
|
|
|
18 |
|
|
Balance, ending
|
|
$ |
2,305 |
|
|
$ |
1,330 |
|
|
$ |
1,212 |
|
The amount of loans serviced for others totaled $32.0 million and
$34.4 million as of September 30, 2007 and September 30, 2006, respectively.
The allowance for uncollected interest, established for mortgage
loans which are delinquent for a period of 90 days or more, amounted to
$110,000, $204,000 and $134,000 as of September 30, 2007, 2006 and 2005,
respectively. This is the entire amount of interest income that would
have been recorded in these periods under the contractual terms of such
loans. Principal balances of non-performing loans related to reserves
for uncollected interest totaled $1.3 million, $274,000 and $1.6 million as of
September 30, 2007, 2006, and September 30, 2005, respectively.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
5. Accrued Interest and Dividends Receivable
Accrued interest and dividends receivable consist of the
following:
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Investments
|
|
$ |
491 |
|
|
$ |
751 |
|
|
Loans receivable
|
|
|
1,159 |
|
|
|
1,282 |
|
|
Accrued dividends on FHLB stock
|
|
|
25 |
|
|
|
40 |
|
| |
|
$ |
1,675 |
|
|
$ |
2,073 |
|
6. Premises and Equipment
Premises and equipment consists of the following:
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
$ |
2,283 |
|
|
$ |
2,621 |
|
|
Leasehold improvements
|
|
|
2,804 |
|
|
|
2,835 |
|
|
Land
|
|
|
377 |
|
|
|
377 |
|
| |
|
|
5,464 |
|
|
|
5,833 |
|
|
Less: Allowances for depreciation and amortization
|
|
|
3,179 |
|
|
|
3,069 |
|
| |
|
$ |
2,285 |
|
|
$ |
2,764 |
|
7. Foreclosed Real Estate
There was no activity in the allowance for losses on foreclosed
real estate in fiscal 2007, 2006 or 2005.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. Deposits
Deposits are summarized as follows:
| September
30, 2007 |
|
|
|
|
|
|
|
|
|
| |
|
Amount
|
|
|
Ranges of
Contractual
Interest Rates
|
|
|
%
of Total
|
|
|
(In Thousands)
|
|
|
|
|
Savings accounts
|
|
$ |
2,468 |
|
|
|
0.00 – 1.09 |
% |
|
|
1.3 |
% |
|
NOW/money market accounts
|
|
|
60,625 |
|
|
|
0.00 – 4.40 |
% |
|
|
30.6 |
|
|
Certificates of deposit
|
|
|
125,717 |
|
|
|
0.94 – 9.00 |
% |
|
|
63.5 |
|
|
Non-interest bearing demand deposits
|
|
|
9,181 |
|
|
|
0.00 |
% |
|
|
4.6 |
|
| |
|
$ |
197,991 |
|
|
|
|
|
|
|
100.0 |
% |
|
September 30, 2006
|
|
| |
|
Amount
|
|
|
Ranges of
Contractual
Interest Rates
|
|
|
%
of Total
|
|
|
(In Thousands)
|
|
|
|
|
Savings accounts
|
|
$ |
3,679 |
|
|
|
0.00 – 1.09 |
% |
|
|
1.6 |
% |
|
NOW/money market accounts
|
|
|
73,334 |
|
|
|
0.00 – 4.40 |
% |
|
|
31.9 |
|
|
Certificates of deposit
|
|
|
127,939 |
|
|
|
0.94 – 9.00 |
% |
|
|
55.6 |
|
|
Non-interest bearing demand deposits
|
|
|
25,222 |
|
|
|
0.00 |
% |
|
|
10.9 |
|
| |
|
$ |
230,174 |
|
|
|
|
|
|
|
100.0 |
% |
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Certificates of deposit as of September 30, 2007 mature as
follows:
|
Year ending September 30,
|
|
Amount
|
|
|
(In Thousands)
Thousands
|
|
|
|
|
2008
|
|
$ |
107,736 |
|
|
2009
|
|
|
12,079 |
|
|
2010
|
|
|
3,019 |
|
|
2011
|
|
|
985 |
|
|
2012 and after
|
|
|
1,898 |
|
| |
|
$ |
125,717 |
|
Interest expense on deposit accounts consists of the
following:
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
NOW/money market accounts
|
|
$ |
2,791 |
|
|
$ |
2,430 |
|
|
$ |
1,197 |
|
|
Savings accounts
|
|
|
27 |
|
|
|
48 |
|
|
|
94 |
|
|
Certificates of deposit
|
|
|
6,513 |
|
|
|
5,231 |
|
|
|
5,046 |
|
| |
|
$ |
9,331 |
|
|
$ |
7,709 |
|
|
$ |
6,337 |
|
Deposits, including certificates of deposit, with balances in
excess of $100,000 totaled $68.0 million and $85.2 million at September 30,
2007, and September 30, 2006, respectively.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
9. Advances from Federal Home Loan Bank and Other
Borrowings
The Bank has $43.3 million credit availability as of September
30, 2007 from the Federal Home Loan Bank of Atlanta (FHLB). Any
advances in excess of $10 million are required to be collateralized with
eligible securities. The credit availability is at the discretion of
the FHLB.
The following table sets forth information regarding the Bank’s
borrowed funds:
| |
|
At or For the Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
FHLB advances:
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
$ |
33,064 |
|
|
$ |
44,894 |
|
|
$ |
44,422 |
|
|
Maximum amount outstanding at any month-end during the
period
|
|
|
39,000 |
|
|
|
51,000 |
|
|
|
49,200 |
|
|
Balance outstanding at end of period
|
|
|
25,000 |
|
|
|
36,000 |
|
|
|
38,000 |
|
|
Weighted average interest rate during the period
|
|
|
5.46 |
% |
|
|
5.05 |
% |
|
|
4.47 |
% |
|
Weighted average interest rate at end of period
|
|
|
5.92 |
% |
|
|
5.28 |
% |
|
|
4.85 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance outstanding
|
|
|
15,264 |
|
|
|
31,624 |
|
|
|
51,388 |
|
|
Maximum amount outstanding at any month-end during the
period
|
|
|
10,857 |
|
|
|
35,641 |
|
|
|
62,846 |
|
|
Balance outstanding at end of period
|
|
|
2,192 |
|
|
|
18,574 |
|
|
|
38,479 |
|
|
Weighted average interest rate during the period
|
|
|
5.61 |
% |
|
|
4.21 |
% |
|
|
4.33 |
% |
|
Weighted average interest rate at end of period
|
|
|
2.52 |
% |
|
|
4.65 |
% |
|
|
3.69 |
%
|
The Bank has pledged certain investments with carrying values of
$24.9 million at September 30, 2007, to collateralize advances from the
FHLB.
First mortgage loans in the amount of $18.4 million are also
available to be pledged as collateral for the advances at September 30,
2007.
10. Income Taxes
The provision (benefit) for income taxes differs from the
amount of income tax determined by applying the applicable U.S. statutory
federal income tax rate to pre-tax income (loss) as a result of the following
differences:
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Federal tax provision (benefit)
|
|
$ |
335 |
|
|
$ |
(1,894 |
) |
|
$ |
(554 |
) |
|
State tax provision (benefit)
|
|
|
39 |
|
|
|
(223 |
) |
|
|
(65 |
) |
|
Changes in provision resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation changes
|
|
|
(313 |
) |
|
|
1,867 |
|
|
|
613 |
|
|
Other
|
|
|
(25 |
) |
|
|
250 |
|
|
|
6 |
|
|
Income tax provision
|
|
$ |
36 |
|
|
$ |
- |
|
|
$ |
- |
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Significant components of the Company's deferred tax assets and
liabilities are as follows:
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
4,398 |
|
|
$ |
5,039 |
|
|
Unrealized (gains) losses on
derivatives
|
|
|
141 |
|
|
|
178 |
|
|
Allowance for loan losses
|
|
|
876 |
|
|
|
505 |
|
|
Available for sale securities
|
|
|
648 |
|
|
|
433 |
|
|
Core deposit intangible
|
|
|
- |
|
|
|
65 |
|
|
Deferred loan fees
|
|
|
108 |
|
|
|
125 |
|
|
Other
|
|
|
79 |
|
|
|
86 |
|
|
Total deferred tax assets
|
|
|
6,250 |
|
|
|
6,431 |
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Tax over book depreciation
|
|
|
410 |
|
|
|
478 |
|
|
Other
|
|
|
172 |
|
|
|
140 |
|
|
Total deferred tax liabilities
|
|
|
582 |
|
|
|
618 |
|
|
Net deferred tax assets
|
|
|
5,668 |
|
|
|
5,813 |
|
|
Less: Valuation allowance
|
|
|
3,572 |
|
|
|
3,885 |
|
|
Total
|
|
$ |
2,096 |
|
|
$ |
1,928 |
|
Management has provided a valuation allowance for net deferred tax
assets, due to the timing of the generation of future taxable
income. The Company believes that it will generate future taxable
income through earnings and branch sales to assure utilization of a certain
portion of the existing net operating losses.
At September 30, 2007, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $11.5 million,
which expire in the years 2008 to 2026. As a result of the change in
ownership of the bank, approximately $1.5 million of the total net operating
loss carryforwards are subject to an annual usage limitation of
$114,000. In addition certain additional limitations will exist
should the merger with Summit occur.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
11. Commitments and Contingencies
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. Those financial instruments include commitments to
extend credit, standby letters of credit, and financial
guarantees. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
In the event of nonperformance by the other party to financial
instrument for commitments to extend credit, for standby letters of credit or
for written financial guarantees the Company's exposure to credit loss is
represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
At September 30, 2007, the Company had outstanding commitments to
originate loans and undisbursed construction mortgages aggregating approximately
$9.5 million. Fixed rate commitments are at market rates as of the
commitment dates and generally expire within 60 days. In addition,
the Company was contingently liable under unused lines of credit for
approximately $111.8 million and standby letters of credit for approximately
$310,000.
Rental Commitments
The Company has entered into lease agreements for the rental of
certain properties expiring on various dates through October 31,
2015. The future minimum rental commitments as of September 30, 2007,
for all non-cancelable lease agreements, are as follows:
|
Years ending
September 30,
|
|
Rental
Commitments
|
|
|
(In Thousands)
|
|
|
|
|
2008
|
|
$ |
1,062 |
|
|
2009
|
|
|
1,003 |
|
|
2010
|
|
|
855 |
|
|
2011
|
|
|
344 |
|
|
2012
|
|
|
125 |
|
|
Thereafter
|
|
|
390 |
|
|
Total
|
|
$ |
3,779 |
|
Net rent expense for the years ended September 30, 2007, 2006 and
2005 was $1.1 million, $1.1 million and $1.0 million, respectively.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
12. Regulatory Matters
Generally, annual dividends by the Bank to the Company as its sole
shareholder are limited to the amount of current year net income, plus the total
net income for the preceding two years, adjusted for any prior year
distributions. Under certain circumstances, regulatory approval would
be required before making a capital distribution. The Bank did not
pay any cash dividends during the years ended September 30, 2007, 2006 or
2005.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) created five categories of financial institutions based on the adequacy
of their regulatory capital level: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Under FDICIA, a well-capitalized financial
institution is one with Tier 1 leverage capital of 5%, Tier 1 risk-based capital
of 6% and total risk-based capital of 10%. At September 30, 2007 the
Bank was classified as a well capitalized financial institution and was
classified as an adequately capitalized financial institution at September 30,
2006.
As part of FDICIA, the minimum capital requirements that the Bank
is subject to are as follows: 1) tangible capital equal to at least 1.5% of
adjusted total assets, 2) core capital equal to at least 4% of adjusted total
assets and 3) total risk-based capital equal to at least 8% of risk-based
assets.
The following presents the Bank’s capital position at September
30, 2007 and September 30, 2006:
|
At September 30, 2007
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
$ |
3,684 |
|
|
|
1.50 |
% |
|
$ |
18,830 |
|
|
|
7.67 |
% |
|
$ |
15,146 |
|
|
Core
|
|
$ |
9,825 |
|
|
|
4.00 |
% |
|
$ |
18,830 |
|
|
|
7.67 |
% |
|
$ |
9,005 |
|
|
Risk-based
|
|
$ |
13,630 |
|
|
|
8.00 |
% |
|
$ |
20,874 |
|
|
|
12.25 |
% |
|
$ |
7,244 |
|
|
At September 30, 2006
|
|
Required
Balance
|
|
|
Required
Percent
|
|
|
Actual
Balance
|
|
|
Actual
Percent
|
|
|
Surplus
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
$ |
4,560 |
|
|
|
1.50 |
% |
|
$ |
16,738 |
|
|
|
5.51 |
% |
|
$ |
12,178 |
|
|
Core
|
|
$ |
12,159 |
|
|
|
4.00 |
% |
|
$ |
16,738 |
|
|
|
5.51 |
% |
|
$ |
4,579 |
|
|
Risk-based
|
|
$ |
15,487 |
|
|
|
8.00 |
% |
|
$ |
17,636 |
|
|
|
9.11 |
% |
|
$ |
2,149 |
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a reconciliation of the Bank's net worth as
reported to the OTS on GAAP capital as presented in the accompanying financial
statements (unaudited).
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
GAAP capital
|
|
$ |
11,661 |
|
|
$ |
10,161 |
|
|
Guaranteed convertible preferred securities
|
|
|
8,000 |
|
|
|
8,000 |
|
|
Unrealized losses on available for sale securities
|
|
|
1,324 |
|
|
|
1,049 |
|
|
Excluded deferred tax asset
|
|
|
(1,199 |
) |
|
|
(1,516 |
) |
|
Goodwill
|
|
|
(956 |
) |
|
|
(956 |
) |
|
Tangible capital
|
|
|
18,830 |
|
|
|
16,738 |
|
|
Adjustments
|
|
|
- |
|
|
|
- |
|
|
Core capital
|
|
|
18,830 |
|
|
|
16,738 |
|
|
Allowance for general loss reserves
|
|
|
2,132 |
|
|
|
1,011 |
|
|
Adjustments to arrive at Risk-Weighted
Assets
|
|
|
(88 |
) |
|
|
(113 |
) |
|
Risk-based capital
|
|
$ |
20,874 |
|
|
$ |
17,636 |
|
Failure to meet any of the three capital requirements causes
savings institutions to be subject to certain regulatory restrictions and
limitations including a limit on asset growth, and the requirement to obtain
regulatory approval before certain transactions or activities are entered
into.
13. Stockholders’ Equity
Effective November 14, 1998, the Company established the 1997
Stock Option and Warrant Plan (the “Plan”). The Plan reserves options
for 76,667 shares to employees and warrants for 94,685 shares to
stockholders. The Plan was amended effective March 14, 2000, to
increase the number of options available for grant from 76,667 to 225,000 shares
to employees and amended again effective March 15, 2002, to increase the number
of options available for grant from 225,000 to 350,000 shares to employees and
to limit its application to officers and employees. The stock options
and warrants vest immediately upon issuance and carry a maximum term of 10
years. The exercise price for the stock options and warrants is the
fair market value at grant date. As of September 30, 2007, 88,016
warrants were outstanding.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The following summary represents the activity under the
Plan:
| |
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
|
Balance outstanding and exercisable at September 30,
2004
|
|
|
226,000 |
|
|
|
|
|
|
|
|
Options granted
|
|
|
104,000 |
|
|
$ |
6.75 |
|
|
|
10-6-14 |
|
|
Options exercised
|
|
|
(8,500 |
) |
|
$ |
4.00 |
|
|
|
|
|
|
Options expired
|
|
|
(55,500 |
) |
|
$ |
6.52 |
|
|
|
|
|
|
Balance outstanding and exercisable at September 30,
2005
|
|
|
266,000 |
|
|
$ |
6.91 |
|
|
|
|
|
|
Options granted
|
|
|
12,000 |
|
|
$ |
6.00 |
|
|
|
3-31-2016 |
|
|
Options expired
|
|
|
(25,000 |
) |
|
$ |
8.37 |
|
|
|
|
|
|
Balance outstanding and exercisable at September 30,
2006
|
|
|
253,000 |
|
|
$ |
6.72 |
|
|
|
|
|
|
Options expired
|
|
|
(7,500 |
) |
|
$ |
6.75 |
|
|
|
|
|
|
Balance outstanding and exercisable at September 30,
2007
|
|
|
245,500 |
|
|
$ |
6.72 |
|
|
|
|
|
Fair value of options issued in 2006 was $22,000 net of related
tax effects.
A summary of the stock options outstanding and exercisable as
of September 30, 2007 is as follows:
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining Life
(years)
|
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
|
|
$7.50
|
16,667
|
0.2
|
|
$7.50
|
16,667
|
|
|
$8.38
|
16,667
|
1.2
|
|
$8.38
|
16,667
|
|
|
$6.00
|
13,000
|
2.2
|
|
$6.00
|
13,000
|
|
|
$4.00
|
41,666
|
3.2
|
|
$4.00
|
41,666
|
|
|
$5.31
|
10,000
|
3.2
|
|
$5.31
|
10,000
|
|
|
$7.00
|
17,000
|
4.3
|
|
$7.00
|
17,000
|
|
|
$9.00
|
20,000
|
4.3
|
|
$9.00
|
20,000
|
|
|
$8.50
|
30,000
|
6.1
|
|
$8.50
|
30,000
|
|
|
$6.75
|
68,500
|
7.1
|
|
$6.75
|
68,500
|
|
|
$6.00
|
12,000
|
8.5
|
|
$6.00
|
12,000
|
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
14. Earnings (Loss) Per Share of Common Stock
The Company reports earning per share in accordance with Statement
of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS
128”). SFAS 128 requires two presentations of earning per share –
“basic” and “diluted.” Basic earnings per share are computed by
dividing income available to common stockholders (the numerator) for the period
by the weighted average number of shares of common stock outstanding during the
year (the denominator). The computation of diluted earnings per share is similar
to basic earnings per share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potentially dilutive common shares had been issued.
The following table presents a reconciliation between the basic
and diluted earnings (loss) per share for the year ended September 30, 2007,
2006 and 2005:
| |
For the Year Ended September 30,
|
| |
2007
|
|
2006
|
|
2005
|
| |
Income
|
Shares
|
Per Share Amount
|
|
Income (loss)
|
Shares
|
Per Share Amount
|
|
Income (loss)
|
Shares
|
Per Share Amount
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$951
|
3,023,407
|
$0.31
|
|
$(5,571)
|
3,020,934
|
$(1.84)
|
|
$(1,630)
|
3,015,509
|
$(0.54)
|
|
Effect of conversion of preferred securities
|
405
|
1,368,143
|
-
|
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|
Effect of dilutive stock options
|
-
|
3,458
|
-
|
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|
Diluted
|
$1,356
|
4,395,008
|
$0.31
|
|
$(5,571)
|
3,020,934
|
$(1.84)
|
|
$(1,630)
|
3,015,509
|
$(0.54)
|
The effect of the conversion of preferred securities and stock
options of 1,381,079 and 1,386,030 were excluded in 2006 and 2005, respectively,
as they would have been anti-dilutive.
15. Related Party Transactions
The Bank offers loans to its officers, directors, employees and
related parties of such persons. These loans are made in the ordinary
course of business and, in the opinion of management, do not involve more than
the normal risk of collectibility, or present other unfavorable
features. Such loans are made on the same terms as those prevailing
at the time for comparable transactions with non-affiliated
persons. The aggregate balance of loans to directors, officers and
other related parties is $181,000 and $263,000 as of September 30, 2007 and
September 30, 2006, respectively.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
16. Market Value Disclosure of Financial
Instruments
The fair value information for financial instruments, which is
provided below, is based on the requirements of Financial Accounting Standard
Board Statement of Financial Accounting Standards No. 107, “Disclosures about
Fair Value of Financial Instruments,” and does not represent the aggregate net
fair value of the Bank.
Much of the information used to determine fair value is subjective
and judgmental in nature; therefore, fair value estimates, especially for less
marketable securities, may vary. The amounts actually realized or
paid upon settlement or maturity could be significantly different.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument for which it is reasonable to
estimate that value:
A. Cash and interest bearing deposits - Fair value is
estimated to be carrying value.
B. Investment securities - Fair value is estimated
using quoted market prices or market estimates.
C. Loans receivable - Fair value is estimated by
discounting future cash flows using the current rate for similar loans.
D. Deposits - For passbook savings, checking and money
market accounts, fair value is estimated at carrying value. For fixed
maturity certificates of deposit, fair value is estimated by discounting future
cash flows at the currently offered rates for deposits of similar remaining
maturities.
E. Advances from the FHLB of Atlanta and reverse
repurchase agreements - Fair value is estimated by discounting future cash flows
at the currently offered rates for advances of similar remaining maturities.
F. Off-balance sheet instruments - The fair value of
commitments is determined by discounting future cash flows using the current
rate for similar loans. Commitments to extend credit for other types
of loans and standby letters of credit were determined by discounting future
cash flows using current rates.
The carrying value and estimated fair value of financial
instruments is summarized as follows:
| |
|
For the Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
| |
|
Carrying value
|
|
|
Estimated fair value
|
|
|
Carrying value
|
|
|
Estimated fair value
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and interest bearing deposits
|
|
$ |
7,632 |
|
|
$ |
7,632 |
|
|
$ |
19,804 |
|
|
$ |
19,804 |
|
|
Investment securities
|
|
|
51,963 |
|
|
|
51,855 |
|
|
|
80,157 |
|
|
|
79,921 |
|
|
Loans receivable
|
|
|
176,108 |
|
|
|
176,833 |
|
|
|
193,307 |
|
|
|
193,049 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
197,991 |
|
|
|
198,368 |
|
|
|
230,174 |
|
|
|
229,818 |
|
|
Borrowings
|
|
|
27,192 |
|
|
|
27,980 |
|
|
|
54,574 |
|
|
|
55,333 |
|
|
Off-balance sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
- |
|
|
|
31 |
|
|
|
- |
|
|
|
10 |
|
17. Employee Benefit Plans
The Company operates a 401(k) Retirement Plan covering all
full-time employees meeting the minimum age and service
requirements. Contributions to the Retirement Plan are at the
discretion of the Company. The Company made no contributions for the
years ended September 30, 2007, 2006 and 2005.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
18. Supplemental Cash Flow Information
| |
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for interest on deposits and
borrowings
|
|
$ |
3,318 |
|
|
$ |
5,331 |
|
|
$ |
5,861 |
|
19. Segment Reporting and discontinued operations
The Company had two reportable segments, banking and mortgage
banking. However, the mortgage-banking activities conducted in GAMC,
to which the mortgage-banking segment applied, were discontinued effective March
29, 2006. The Bank operates retail deposit branches in the greater
Washington, D.C./Baltimore metropolitan area. The banking segment
provides retail consumers and small businesses with deposit products such as
demand, transaction, and savings accounts and certificates of deposit and
lending products, such as residential and commercial real estate, construction
and development, consumer and commercial business loans. Further, the
banking segment invests in residential real estate loans purchased from GAMC and
others, and also invests in mortgage-backed and other securities. The
mortgage banking activities, which were conducted principally through GAMC,
included the origination of residential real estate loans either for sale into
the secondary market, with servicing released or for the Bank’s portfolio.
On March 29, 2006, we began the process of discontinuing the
operations of the Bank’s subsidiary, GAMC. It was determined that,
because it was unprofitable, this business no longer fit our
strategy. In the third quarter of 2006, we applied discontinued
operations accounting for GAMC.
Due to the unprofitable operations of GAMC, the Company recognized
an additional loss of $1.5 million for the year ended September 30,
2006. In addition to the loss from operations, a non-recurring
pre-tax impairment charge for long-lived assets related to GAMC of $996,000 was
recorded and also included in discontinued operations in the consolidated
statements of operations for fiscal 2006.
20. Junior Subordinated Debt Securities
On March 20, 2002, Greater Atlantic Capital Trust I (the,
“Trust”), a Delaware statutory business trust and a wholly owned Trust
subsidiary of the company, issued $9.6 million aggregate liquidation amount
(963,038 shares) of 6.50% cumulative preferred securities maturing on December
31, 2031, retaining an option to call the securities on or after December 31,
2003. Conversion of the preferred securities into the company’s
common stock may occur at any time on or after 60 days after the closing of the
offering. The company may redeem the preferred securities, in whole
or in part, at any time on or after December 31, 2003. Distributions
on the preferred securities are payable quarterly on March 31, June 30,
September 30 and December 31 of each year beginning on June 30,
2002. The Trust also issued 29,762 common securities to the company
for $297,620. The proceeds from the sale of the preferred securities
and the proceeds from the sale of the trust’s common securities were utilized to
purchase from the company junior subordinated debt securities of $9,928,000
bearing interest of 6.50% and maturing December 31, 2031. The Company has fully
and unconditionally guaranteed the preferred securities along with all
obligations of the trust related thereto. The sale of the preferred
securities yielded $9.3 million after deducting offering expenses.
To comply with FIN46, the trust preferred subsidiary was
deconsolidated in 2004, and the related securities have been presented as
obligations of the Company and titled “Junior Subordinated Debt Securities” in
the financial statements.
On December 19, 2006, the Company announced that the first quarter
distribution on the Greater Atlantic Capital Trust I 6.50% Cumulative
Convertible Trust Preferred Securities scheduled for December 31, 2006, as well
as future distributions on the Trust Preferred Securities, would be
deferred. The announcement by the Company followed advice received by
the bank from the Office of Thrift Supervision that it would not approve the
bank’s application to pay a cash dividend to the Company.
Accordingly, the Company exercised its right to defer the payment
of interest on its 6.50% Convertible Junior Subordinated Debentures Due 2031
related to the Trust Preferred Securities, for an indefinite period (which can
be no longer than 20 consecutive quarterly periods). At September 30,
2007, the quarterly distribution amount that is unpaid and accrued totals
$644,000.
The company retained approximately $1.3 million of the proceeds
for general corporate purposes, investing the retained funds in short-term
investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
21. Derivative Financial Instruments
Beginning in fiscal 2002, the Bank utilized derivative financial
instruments to hedge its interest rate risk. Beginning in 2002,
the Bank adopted statement of Financial Accounting Standard No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS 133”) which requires
that an entity recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. The Bank bases the estimated
fair values of these agreements on the cost of interest-rate exchange agreements
with similar terms at available market prices, excluding accrued interest
receivable and payable. However, active markets do not exist for many
types of financial instruments. Consequently, fair values for these
instruments must be estimated using techniques such as discounted cash flow
analysis and comparisons to similar instruments. Estimates developed
using these methods are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash flows and the
selection of discount rates that appropriately reflect market and credit
risks. Changes in these judgments often have a material effect on the
fair value estimates. Since those estimates are made as of a specific
time, they are susceptible to material near term changes.
The Bank entered into various interest-rate swaps during fiscal
year 2003 and 2002 that were sold during the fourth quarter of fiscal 2006 and
totaled at that time $21 million in notional principal. The swaps paid a fixed
rate with the Bank receiving payments based upon one-to three-month floating
rate LIBOR. The capped range was between 1.67% - 3.01%, and expired
between 1 and 5 years. The Bank also entered into various interest
rate caps during fiscal year 2003 and 2002 that total $20 million in notional
principal with terms between eight and ten years that limit the float between a
floor of 2.00%, and capped between 6.50% - 8.00%. The Bank accounts
for these derivatives, under the guidelines of SFAS 133.
The Company’s derivatives do not meet hedge accounting
requirements under SFAS 133, and therefore, the Company carries the derivatives
at their fair value on the balance sheet, recognizing changes in their fair
value in current-period earnings. The Company recognized a loss of
$21,000 in fiscal 2007, a gain of $212,000 in fiscal 2006 and a gain of $303,000
in fiscal 2005 related to its derivatives.
22. Recent Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. This statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. For financial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15, 2008. We do not believe
the adoption of SFAS 157 will have a material impact on the consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" (SFAS 159).This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective of this Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The fair value option established by this
Statement permits all entities to choose to measure eligible items at fair value
at specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. The Company
is in the process of evaluating the impact SFAS 159 may have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations”, to create greater consistency in the accounting and financial
reporting of business combinations. SFAS 141 (R) requires a company
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquired entity to be measured at their fair
values as of the acquisition date. SFAS 141 (R) also requires companies to
recognize and measure goodwill acquired in a business combination or a gain from
a bargain purchase and how to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies to fiscal years
beginning after December 15, 2008 and is adopted
prospectively. Earlier adoption is prohibited. We have not
determined the effect, if any, the adoption of this statement will have on our
results of operations or financial position.
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
23. Parent Company – Only Financial Statements
Parent Company – Only Condensed Statements of Financial
Condition
|
|
|
September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
13 |
|
|
$ |
60 |
|
|
Loans receivable
|
|
|
- |
|
|
|
- |
|
|
Investment in subsidiary
|
|
|
21,167 |
|
|
|
19,423 |
|
|
Prepaid expenses and other assets
|
|
|
316 |
|
|
|
309 |
|
|
Total assets
|
|
$ |
21,496 |
|
|
$ |
19,792 |
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Accrued interest payable on subordinated debt
|
|
$ |
644 |
|
|
$ |
- |
|
|
Other liabilities
|
|
|
117 |
|
|
|
8 |
|
|
Total liabilities
|
|
|
761 |
|
|
|
8 |
|
|
Subordinated debt
|
|
|
9,905 |
|
|
|
9,928 |
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
30 |
|
|
|
30 |
|
|
Additional paid-in capital
|
|
|
25,208 |
|
|
|
25,185 |
|
|
Accumulated deficit
|
|
|
(14,408 |
) |
|
|
(15,359 |
) |
|
Total stockholders’ equity
|
|
|
10,830 |
|
|
|
9,856 |
|
|
Total liabilities and stockholders’ equity
|
|
$ |
21,496 |
|
|
$ |
19,792 |
|
| |
|
|
|
|
|
|
|
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Parent Company – Only Condensed Statements of Operations
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
Other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total interest income
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
Interest expense
|
|
|
644 |
|
|
|
645 |
|
|
|
645 |
|
|
Total interest expense
|
|
|
644 |
|
|
|
645 |
|
|
|
645 |
|
|
Net interest income (expense)
|
|
|
(643 |
) |
|
|
(644 |
) |
|
|
(645 |
) |
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of investment
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other operating income
|
|
|
19 |
|
|
|
19 |
|
|
|
19 |
|
|
Total noninterest income
|
|
|
19 |
|
|
|
19 |
|
|
|
19 |
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
|
169 |
|
|
|
149 |
|
|
|
142 |
|
|
Total noninterest expense
|
|
|
169 |
|
|
|
149 |
|
|
|
142 |
|
|
Loss before income from subsidiaries
|
|
|
(793 |
) |
|
|
(774 |
) |
|
|
(768 |
) |
|
Equity in income (loss) from subsidiaries
|
|
|
1,744 |
|
|
|
(4,797 |
) |
|
|
(862 |
) |
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
Parent Company – Only Condensed Statements of Cash Flows
|
|
|
Year Ended September 30,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
(5,571 |
) |
|
$ |
(1,630 |
) |
|
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from subsidiaries
|
|
|
(1,744 |
) |
|
|
4,797 |
|
|
|
862 |
|
|
(Increase) decrease in assets
|
|
|
(7 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
Increase (decrease) in other
liabilities
|
|
|
753 |
|
|
|
18 |
|
|
|
(12 |
) |
|
Net cash used in
operating activities
|
|
|
(47 |
) |
|
|
(761 |
) |
|
|
(781 |
) |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations in excess of
repayments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Investment in subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net cash provided by
investing activities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend from subsidiary
|
|
|
- |
|
|
|
755 |
|
|
|
800 |
|
|
Stock options exercised
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
Net cash provided by
financing activities
|
|
|
- |
|
|
|
755 |
|
|
|
833 |
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(47 |
) |
|
|
(6 |
) |
|
|
52 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
60 |
|
|
|
66 |
|
|
|
14 |
|
|
Cash and cash equivalents at end of year
|
|
$ |
13 |
|
|
$ |
60 |
|
|
$ |
66 |
|
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
|
24.
|
Quarterly Results of Operations (In Thousands, Except
Share Information) (Unaudited)
|
The following tables set forth the quarterly financial data, which
was derived from the consolidated financial statements presented in Forms 10-Q,
for the fiscal years ended September 30, 2007 and 2006.
|
|
|
For Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended September 30, 2007
|
|
|
Fourth Quarter
|
|
|
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
|
Interest income
|
|
$ |
18,421 |
|
|
$ |
4,338 |
|
|
|
|
|
$ |
4,684 |
|
|
$ |
4,594 |
|
|
$ |
4,805 |
|
|
Interest expense
|
|
|
11,993 |
|
|
|
3,017 |
|
|
|
|
|
|
3,076 |
|
|
|
2,899 |
|
|
|
3,001 |
|
|
Net interest income
|
|
|
6,428 |
|
|
|
1,321 |
|
|
|
|
|
|
1,608 |
|
|
|
1,695 |
|
|
|
1,804 |
|
|
Provision (recapture) for loan losses
|
|
|
685 |
|
|
|
396 |
|
|
|
|
|
|
(4 |
) |
|
|
145 |
|
|
|
148 |
|
|
Net interest income, after provision for loan losses
|
|
|
5,743 |
|
|
|
925 |
|
|
|
|
|
|
1,612 |
|
|
|
1,550 |
|
|
|
1,656 |
|
|
Noninterest income
|
|
|
4,870 |
|
|
|
4,398 |
|
|
|
(1 |
) |
|
|
186 |
|
|
|
148 |
|
|
|
138 |
|
|
Noninterest expense
|
|
|
9,626 |
|
|
|
2,112 |
|
|
|
|
|
|
|
2,306 |
|
|
|
2,522 |
|
|
|
2,686 |
|
|
Income (loss) before income taxes
|
|
|
987 |
|
|
|
3,211 |
|
|
|
|
|
|
|
(508 |
) |
|
|
(824 |
) |
|
|
(892 |
) |
|
Provision for income taxes
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Net income (loss)
|
|
$ |
951 |
|
|
$ |
3,175 |
|
|
|
|
|
|
$ |
(508 |
) |
|
$ |
(824 |
) |
|
$ |
(892 |
) |
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31 |
|
|
$ |
1.05 |
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.30 |
) |
|
Diluted
|
|
$ |
0.31 |
|
|
$ |
0.74 |
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.30 |
) |
(1) Includes effect of gain on sale of Pasadena branch of $4.3
million
Greater Atlantic Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
| |
|
For Fiscal Year 2006
|
|
| |
|
For the Year Ended September 30, 2006
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
|
Interest income
|
|
$ |
18,794 |
|
|
$ |
4,851 |
|
|
$ |
4,753 |
|
|
$ |
4,600 |
|
|
$ |
4,590 |
|
|
Interest expense
|
|
|
11,583 |
|
|
|
3,021 |
|
|
|
2,941 |
|
|
|
2,839 |
|
|
|
2,782 |
|
|
Net interest income
|
|
|
7,211 |
|
|
|
1,830 |
|
|
|
1,812 |
|
|
|
1,761 |
|
|
|
1,808 |
|
|
Provision for loan losses
|
|
|
126 |
|
|
|
39 |
|
|
|
13 |
|
|
|
3 |
|
|
|
71 |
|
|
Net interest income, after provision for loan losses
|
|
|
7,085 |
|
|
|
1,791 |
|
|
|
1,799 |
|
|
|
1,758 |
|
|
|
1,737 |
|
|
Noninterest income
|
|
|
917 |
|
|
|
(63 |
) |
|
|
307 |
|
|
|
330 |
|
|
|
343 |
|
|
Noninterest expense
|
|
|
11,085 |
|
|
|
3,217 |
|
|
|
2,722 |
|
|
|
2,626 |
|
|
|
2,520 |
|
|
Income (loss) before income taxes
|
|
|
(3,083 |
) |
|
|
(1,489 |
) |
|
|
(616 |
) |
|
|
(538 |
) |
|
|
(440 |
) |
|
Provision for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss) from continuing operations
|
|
|
(3,083 |
) |
|
|
(1,489 |
) |
|
|
(616 |
) |
|
|
(538 |
) |
|
|
(440 |
) |
|
Income (loss) from discontinued operations
|
|
|
(2,488 |
) |
|
|
11 |
|
|
|
(19 |
) |
|
|
(698 |
) |
|
|
(1,782 |
) |
|
Net income (loss)
|
|
$ |
(5,571 |
) |
|
$ |
(1,478 |
) |
|
$ |
(635 |
) |
|
$ |
(1,236 |
) |
|
$ |
(2,222 |
) |
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(1.02 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.15 |
) |
|
Discontinued operations
|
|
|
(0.82 |
) |
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
(0.23 |
) |
|
|
(0.59 |
) |
|
Net income (loss)
|
|
$ |
(1.84 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.41 |
) |
|
$ |
(0.74 |
) |
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GREATER ATLANTIC FINANCIAL CORP.
By: /s/ Carroll E.
Amos
Carroll E. Amos
Chief
Executive Officer, President and Director
Dated: December 28, 2007
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Board of Directors
Greater Atlantic Financial Corp.
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (333-76169 and 333-92342) of our report
dated December 17, 2007, relating to the consolidated financial statements of
Greater Atlantic Financial Corp. appearing in the Company’s Annual Report on
Form 10-K for the year ended September 30, 2007.
/s/ BDO Seidman, LLP
Richmond, Virginia
December 28, 2007
Exhibit 31.1
CERTIFICATION
I, Carroll E. Amos, Chief Executive Officer of Greater Atlantic
Financial Corp., certify that:
1. I have reviewed this annual report on Form
10-K of Greater Atlantic Financial Corp.;
|
2.
|
Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
|
|
3.
|
Based on my knowledge, the financial statements, and
other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in
this annual report;
|
|
4.
|
The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e) for
the registrant and have:
|
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that
material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report
is being prepared;
(b)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls
and procedures as of the end of the period covered by this based on
such; and
(c) Disclosed in this report
any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the
registrant’s
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting;
and;
|
5.
|
The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
|
|
|
(a) All significant deficiencies and material
weaknesses in
the design or operation of internal control over financial
reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
|
|
|
b)
|
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.;
|
|
Date: December
28, 2007
|
/s/ Carroll E.
Amos
|
Chief
Executive Officer
Exhibit 31.2
CERTIFICATION
I, David E. Ritter, Chief Financial Officer of Greater Atlantic
Financial Corp., certify that:
1. I have reviewed this annual report on Form 10-K of
Greater Atlantic Financial Corp.;
|
2.
|
Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
|
|
3.
|
Based on my knowledge, the financial statements, and
other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in
this annual report;
|
|
4.
|
The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e) for
the registrant and have:
|
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this report is being
prepared;
(b)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls
and procedures as of the end of the period covered by this based on such;
and
(c) Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s
fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant’s internal control
over financial reporting;
and;
|
5.
|
The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
|
|
|
a) All significant deficiencies and material
weaknesses in
the design or operation of internal control over financial
reporting which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
|
|
|
b)
|
Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
|
|
Date: December
28, 2007
|
/s/ David E.
Ritter
|
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Greater Atlantic Financial Corp.
(the “Company”) on Form
10-K for the year ended September 30, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Carroll E.
Amos, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C.'
1350, as adopted pursuant to '
906 of the Sarbanes-Oxley Act of 2002, that:
(A) The
Report fully complies with the requirements of Section 13(a) – 15(e) or 15(d)
–15(e) of the Securities Exchange Act of 1934; and
(B) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of and for
the period covered by the Report.
/s/ Carroll E.
Amos
Carroll E. Amos
Chief Executive Officer
December 28, 2007
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Greater Atlantic Financial Corp.
(the "Company") on Form 10-K for the year ended September 30, 2007 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
David E. Ritter, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(A) The
Report fully complies with the requirements of Section 13(a) –15(e) or 15(d)
-15(e) of the Securities Exchange Act of 1934; and
(B) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of and for
the period covered by the Report.
/s/ David
E. Ritter
David E. Ritter
Chief Financial Officer
December 28, 2007
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Under
Article X, Section I of its Articles of Incorporation, Summit is required
under certain circumstances to indemnify its directors and officers and
directors and officers of any majority or wholly owned subsidiary of Summit, for
claims and liabilities, including costs and expenses of defending
such claim or liability to which they are made a party by reason of any action
alleged to have been taken, omitted, or neglected by him or her as such director
or officer of Summit, provided that he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. These provisions are in addition to all other rights which
any director or officer may be entitled as a matter of law. The full
text of Article X, Section I is set forth below. Reference is made to West
Virginia Code § 31D-8-851 through § 31D-8-856 which sets forth the
indemnification rights permitted under West Virginia law. The full text of the
relevant codes are set forth below.
Article X,
Section I of the Articles of Incorporation of Summit contains the following
indemnification provision:
Unless
otherwise prohibited by law, each director and officer of the corporation now or
hereafter serving as such, and each director and officer of any majority or
wholly owned subsidiary of the corporation that has been designated as entitled
to indemnification by resolution of the board of directors of the corporation as
may be from time to time determined by said board, shall be indemnified by the
corporation against any and all claims and liabilities (other than an action by
or in the right of the corporation or any majority or wholly owned subsidiary of
the corporation) including expenses of defending such claim of liability to
which he or she has or shall become subject by reason of any action alleged to
have been taken, omitted, or neglected by him or her as such director or officer
provided the director or officer acted in good faith and in a manner which the
director or officer reasonably believed to be in or not opposed to the best
interests of the corporation. With respect to any criminal
proceeding, a director or officer shall be entitled to indemnification if such
person had no reasonable cause to believe his or her conduct was
unlawful. The corporation shall reimburse each such person as
provided above in connection with any claim or liability brought or arising by
or in the right of the corporation or any majority or wholly owned subsidiary of
the corporation provided, however, that such person shall be not indemnified in
connection with, any claim or liability brought by or in the right of the
corporation or any majority or wholly owned subsidiary of the corporation as to
which the director or officer shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation or any majority or wholly owned subsidiary of the corporation unless
and only to the extent that the court in which such action or proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which such court shall
deem proper.
The
determination of eligibility for indemnification shall be made by those board
members not party to the action or proceeding or in the absence of such board
members by a panel of independent shareholders appointed for such purpose by a
majority of the shareholders of the corporation or in any other manner provided
by law.
The right
of indemnification hereinabove provided for shall not be exclusive of any rights
to which any director or officer of the corporation may otherwise be entitled by
law.
The board
of directors may by resolution, by law or other lawful manner from time to time
as it shall determine extend the indemnification provided herein to agents and
employees of the corporation, to directors, officers, agents or employees of
other corporations or entities owned in whole or in part by the
corporation. The corporation may purchase and maintain insurance for
the purposes hereof.
W. Va.
Code § 31D-8-851 through § 31D-8-856 provide:
§31D-8-851. Permissible
indemnification.
(a) Except
as otherwise provided in this section, a corporation may indemnify an individual
who is a party to a proceeding because he or she is a director against liability
incurred in the proceeding if:
(1)
(A) He or she conducted himself or herself in good faith; and
(B) He
or she reasonably believed: (i) In the case of conduct in his or
her official capacity, that his or her conduct was in the best interests of the
corporation; and (ii) in all other cases, that his or her conduct was at
least not opposed to the best interests of the corporation; and
(C) In
the case of any criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was unlawful; or
(2) He
or she engaged in conduct for which broader indemnification has been made
permissible or obligatory under a provision of the articles of incorporation as
authorized by subdivision (5), subsection (b), section two hundred two, article
two of this chapter.
(b) A
director’s conduct with respect to an employee benefit plan for a purpose he or
she reasonably believed to be in the interests of the participants in, and the
beneficiaries of, the plan is conduct that satisfies the requirement of
subparagraph (ii), paragraph (B), subdivision (1), subsection (a) of this
section.
(c) The
termination of a proceeding by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, is not determinative that the
director did not meet the relevant standard of conduct described in this
section.
(d) Unless
ordered by a court under subdivision (3), subsection (a), section eight hundred
fifty-four of this article, a corporation may not indemnify a
director:
(1) In
connection with a proceeding by or in the right of the corporation, except for
reasonable expenses incurred in connection with the proceeding if it is
determined that the director has met the relevant standard of conduct under
subsection (a) of this section; or
(2) In
connection with any proceeding with respect to conduct for which he or she was
adjudged liable on the basis that he or she received a financial benefit to
which he or she was not entitled, whether or not involving action in his or her
official capacity.
§31D-8-852. Mandatory
Indemnification.
A
corporation must indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which he or she was a party
because he or she was a director of the corporation against reasonable expenses
incurred by him or her in connection with the proceeding.
§31D-8-853. Advance for
expenses.
(a) A
corporation may, before final disposition of a proceeding, advance funds to pay
for or reimburse the reasonable expenses incurred by a director who is a party
to a proceeding because he or she is a director if he or she delivers to the
corporation:
(1) A
written affirmation of his or her good faith belief that he or she has met the
relevant standard of conduct described in section eight hundred fifty-one of
this article or that the proceeding involves conduct for which liability has
been eliminated under a provision of the articles of incorporation as authorized
by subdivision (4), subsection (b), section two hundred two, article two of this
chapter; and
(2) His
or her written undertaking to repay any funds advanced if he or she is not
entitled to mandatory indemnification under section eight hundred fifty-two of
this article and it is ultimately determined under section eight hundred
fifty-four or eight hundred fifty-five of this article that he or she has not
met the relevant standard of conduct described in section eight hundred
fifty-one of this article.
(b) The
undertaking required by subdivision (2), subsection (a) of this section
must be an unlimited general obligation of the director but need not be secured
and may be accepted without reference to the financial ability of the director
to make repayment.
(c) Authorizations
under this section are to be made:
(1) By
the board of directors:
(A) If
there are two or more disinterested directors, by a majority vote of all the
disinterested directors, a majority of whom constitute a quorum for this
purpose, or by a majority of the members of a committee of two or more
disinterested directors appointed by a vote; or
(B) If
there are fewer than two disinterested directors, by the vote necessary for
action by the board in accordance with subsection (c), section eight hundred
twenty-four of this article in which authorization directors who do not qualify
as disinterested directors may participate; or
(2) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted on
the authorization; or
(3) By
special legal counsel selected in a manner in accordance with subdivision (2),
subsection (b), section eight hundred fifty-five of this article.
§31D-8-854. Circuit court-ordered indemnification
and advance for expenses.
(a) A
director who is a party to a proceeding because he or she is a director may
apply for indemnification or an advance for expenses to the circuit court
conducting the proceeding or to another circuit court of competent
jurisdiction. After receipt of an application and after giving any
notice it considers necessary, the circuit court shall:
(1) Order indemnification if the circuit court determines that the director
is entitled to mandatory indemnification under section eight hundred fifty-two
of this article;
(2) Order
indemnification or advance for expenses if the circuit court determines that the
director is entitled to indemnification or advance for expenses pursuant to a
provision authorized by subsection (a), section eight hundred fifty-eight of
this article; or
(3) Order
indemnification or advance for expenses if the circuit court determines, in view
of all the relevant circumstances, that it is fair and reasonable:
(A) To
indemnify the director; or
(B) To
advance expenses to the director, even if he or she has not met the relevant
standard of conduct set forth in subsection (a), section eight hundred fifty-one
of this article, failed to comply with section eight hundred fifty-three of this
article or was adjudged liable in a proceeding referred to in subdivision
(1) or (2), subsection (d), section eight hundred fifty-one of this
article, but if he or she was adjudged so liable his or her indemnification is
to be limited to reasonable expenses incurred in connection with the
proceeding.
(b) If
the circuit court determines that the director is entitled to indemnification
under subdivision (1), subsection (a) of this section or to indemnification
or advance for expenses under subdivision (2) of said subsection, it shall
also order the corporation to pay the director’s reasonable expenses incurred in
connection with obtaining circuit court-ordered indemnification or advance for
expenses. If the circuit court determines that the director is
entitled to indemnification or advance for expenses under subdivision
(3) of said subsection, it may also order the corporation to pay the
director’s reasonable expenses to obtain circuit court-ordered indemnification
or advance for expenses.
§31D-8-855. Determination and
authorization of indemnification.
(a) A
corporation may not indemnify a director under section eight hundred fifty-one
of this article unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is permissible
because he or she has met the relevant standard of conduct set forth in section
eight hundred fifty-one of this article.
(b) The
determination is to be made:
(1) If
there are two or more disinterested directors, by the board of directors by a
majority vote of all the disinterested directors, a majority of whom constitute
a quorum for this purpose, or by a majority of the members of a committee of two
or more disinterested directors appointed by a vote;
(2) By
special legal counsel:
(A) Selected
in the manner prescribed in subdivision (1) of this subsection;
or
(B) If
there are fewer than two disinterested directors, selected by the board of
directors in which selection directors who do not qualify as disinterested
directors may participate; or
(3) By
the shareholders, but shares owned by or voted under the control of a director
who at the time does not qualify as a disinterested director may not be voted on
the determination.
(c) Authorization
of indemnification is to be made in the same manner as the determination that
indemnification is permissible, except that if there are fewer than two
disinterested directors or if the determination is made by special legal
counsel, authorization of indemnification is to be made by those entitled under
paragraph (B), subdivision (2), subsection (b) of this section to select
special legal counsel.
§31D-8-856. Indemnification of
officers.
(a) A
corporation may indemnify and advance expenses under this part to an officer of
the corporation who is a party to a proceeding because he or she is an officer
of the corporation:
(1) To
the same extent as a director; and
(2) If
he or she is an officer but not a director, to a further extent as may be
provided by the articles of incorporation, the bylaws, a resolution of the board
of directors or contract except for:
(A) Liability
in connection with a proceeding by or in the right of the corporation other than
for reasonable expenses incurred in connection with the proceeding;
or
(B) Liability
arising out of conduct that constitutes:
(i) Receipt
by him or her of a financial benefit to which he or she is not
entitled;
(ii) An
intentional infliction of harm on the corporation or the shareholders;
or
(iii) An
intentional violation of criminal law.
(b) The
provisions of subdivision (2), subsection (a) of this section apply to an
officer who is also a director if the basis on which he or she is made a party
to the proceeding is an act or omission solely as an officer.
(c) An
officer of a corporation who is not a director is entitled to mandatory
indemnification under section eight hundred fifty-two of this article and may
apply to a court under section eight hundred fifty-four of this article for
indemnification or an advance for expenses in each case to the same extent to
which a director may be entitled to indemnification or advance for expenses
under those provisions.
Certain
rules of the Federal Deposit Insurance Corporation limit the ability of certain
depository institutions, their subsidiaries and their affiliated depository
institution holding companies to indemnify affiliated parties, including
institution directors. In general, subject to the ability to purchase
directors’ and officers’ liability insurance and to advance professional
expenses under certain circumstances, the rules prohibit such institutions from
indemnifying a director for certain costs incurred with regard to an
administrative or enforcement action commenced by any federal banking agency
that results in a final order or settlement pursuant to which the director is
assessed a civil money penalty, removed from office, prohibited from
participating in the affairs of an insured depository institution or required to
cease and desist from or take an affirmative action described in
Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. §
1818(b)).
Item 21. Exhibits and
Financial Statement Schedules.
|
Exhibit
|
|
|
|
Number
|
|
Description of
Exhibits
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization, dated as of April 12, 2007, by and between
Summit Financial Group, Inc., and Greater Atlantic Financial Corp.
(included as Annex A to the proxy
statement/prospectus).
|
|
|
|
|
|
2.2 |
|
Amendment to
Agreement and Plan of Reorganization, dated as of December 6, 2007 by and
among Summit Financial Group, Inc., Greater Atlantic Financial Corp. and
SFG II, Inc. |
| |
|
|
|
5.1
|
|
Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
|
|
|
|
|
|
8.1
|
|
Tax
Opinion of Hunton & Williams, including consent.
|
|
|
|
|
|
21
*
|
|
Subsidiaries
of Registrant
|
|
|
|
|
|
23.1
|
|
Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
|
|
|
|
|
|
23.2
|
|
Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
|
|
|
|
|
|
23.3
|
|
Consent
of Arnett & Foster, P.L.L.C.
|
|
|
|
|
|
23.4
|
|
Consent
of BDO Seidman, LLP
|
| |
|
|
|
23.5
|
|
Consent
of Sandler O’Neill & Partners, L.P.
|
|
|
|
|
|
24
*
|
|
Powers
of Attorney (signature page).
|
|
|
|
|
|
99.1
|
|
Form
of Proxy for Greater Atlantic Financial Corp.
|
|
|
|
|
|
99.2
|
|
Form
of Affiliate Letter (included as Exhibit A to Agreement and Plan of
Reorganization which is included as Annex to the proxy
statement/prospectus).
|
*
Previously Filed
(b) Financial
Statement Schedules
(c) Opinion
of Sandler O’Neill & Partners, L.P.
The
opinion of Sandler O’Neill & Partners, L.P. to the board of directors of
Greater Atlantic Financial Corp. is included in Annex C to the proxy
statement/prospectus.
Item 22.
Undertakings.
1. The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters in addition to the information called for by the
other items of the applicable form.
2. The
registrant undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415 (230.415),
will be filed as a part of an amendment to the registration statement and will
not be used until
such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. Insofar
as indemnification for liabilities under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
4. The
undersigned registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
5. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration when it became effective.
6. The
undersigned registrant hereby undertakes:
a. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
b. That
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
c. To
remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
7. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant’s
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is attached to the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Signatures
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Moorefield, State of West
Virginia, on February 8, 2008.
|
|
|
SUMMIT
FINANCIAL GROUP, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ H. Charles Maddy,
III
|
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
| |
|
|
|
|
| |
|
By:
|
|
/s/ Robert S.
Tissue
|
| |
|
|
|
Senior
Vice President, Chief Financial
Officer
|
POWER OF ATTORNEY
Each of the undersigned hereby appoints
H. Charles Maddy, III as attorney-in-fact and agent for the undersigned, with
full power of substitution, for and in the name, place and stead of the
undersigned, to sign and file with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, any and all amendments (including
post-effective amendments) to this Registration Statement, with any schedules or
exhibits thereto, and any and all supplements or other documents to be filed
with the Securities and Exchange Commission pertaining to the registration of
securities covered hereby, with full power and authority to do and perform any
and all acts and things as may be necessary or desirable in furtherance of such
registration.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title
Date
* Director
February 8, 2008
Oscar M.
Bean
____________________________ Director
Frank A.
Baer, III
* Director
February 8, 2008
Dewey S.
Bensenhaver, M.D.
* Director
February 8, 2008
James M.
Cookman
____________________________ Director
John W.
Crites
* Director
February 8, 2008
Patrick
N. Frye
* Director
February 8, 2008
James
Paul Geary, II
____________________________ Director
Thomas J.
Hawse, III
* Director
February 8, 2008
Phoebe
Fisher Heishman
* Director
February 8, 2008
Gary L.
Hinkle
____________________________ Director
Gerald W.
Huffman
* Director
February 8, 2008
Duke A.
McDaniel
* Director
February 8, 2008
Ronald F.
Miller
____________________________ Director
G.R.
Ours, Jr.
* Director
February 8, 2008
Charles
S. Piccirillo
* Signed pursuant to Powers of Attorney dated October
22, 2007, included as part of the signature page to the Registration Statement
on Form S-4 for Summit Financial Group, Inc. filed October 23, 2007.
/s/ H. Charles Maddy
III
H. Charles Maddy III
President and Chief Executive
Officer
EXHIBIT INDEX
|
Exhibit
|
|
|
|
Number
|
|
Description of
Exhibits
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization, dated as of April 12, 2007, by and between
Summit Financial Group, Inc., and Greater Atlantic Financial Corp.
(included as Annex A to the proxy
statement/prospectus).
|
|
|
|
|
|
2.2
|
|
Amendment to Agreement and
Plan of Reorganization dated as of December 6, 2007, by and among Summit
Financial Group, Inc., Greater Atlantic Financial Corp. and SFG II,
Inc. |
| |
|
|
|
5.1
|
|
Opinion
of Bowles Rice McDavid Graff & Love LLP, including
consent.
|
|
|
|
|
|
8.1
|
|
Tax
Opinion of Hunton & Williams,including consent.
|
| |
|
|
|
21
*
|
|
Subsidiaries
of Registrant
|
|
|
|
|
|
23.1
|
|
Consent
of Bowles Rice McDavid Graff & Love LLP (included in Legal Opinion,
Exhibit 5.1).
|
|
|
|
|
|
23.2
|
|
Consent
of Hunton & Williams (included in Legal Opinion,
Exhibit 8.1).
|
|
|
|
|
|
23.3
|
|
Consent
of Arnett & Foster, P.L.L.C.
|
|
|
|
|
|
23.4
|
|
Consent
of BDO Seidman, LLP
|
| |
|
|
|
23.5
|
|
Consent
of Sandler O’Neill & Partners, L.P.
|
|
|
|
|
|
24
*
|
|
Powers
of Attorney (signature page).
|
| |
|
|
|
99.1
|
|
Form
of Proxy for Greater Atlantic Financial Corp.
|
|
|
|
|
|
99.2
|
|
Form
of Affiliate Letter (included as Exhibit A to Agreement and Plan of
Reorganization which is included as Annex to the proxy
statement/prospectus).
|
| |
* Previously filed