10QSB 1 l90933ae10qsb.txt GRAND CENTRAL FINANCIAL CORP. 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark one) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to______________ Commission File Number 0-25045 ------- GRAND CENTRAL FINANCIAL CORP. ----------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 34-1877137 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 601 MAIN STREET, WELLSVILLE, OHIO 43968 ---------------------------------------- (Address of principal executive offices) (330) 532-1517 -------------- (Issuer's telephone number) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class: Outstanding at October 31, 2001 Common stock, $0.01 par value 1,744,831 common shares Transitional Small Business Disclosure Format (check one) Yes[ ] No[X] GRAND CENTRAL FINANCIAL CORP. FORM 10-QSB QUARTER ENDED SEPTEMBER 30, 2001 INDEX PART I. Financial Information
Page ---- Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 .............................................................................. 3 Consolidated Statements of Income for the three and nine months ended September 30, 2001 and 2000..................................................................... 4 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2001 and 2000 ....................................................... 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2001.................................................... 6 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000............................................................... 7 Notes to Consolidated Financial Statements ..................................................... 8 Item 2 - Management's Discussion and Analysis or Plan of Operation.................................... 14 PART II. Other Information Item 1. Legal Proceedings............................................................................ 19 Item 2. Changes in Securities ....................................................................... 19 Item 3. Defaults Upon Senior Securities.............................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 19 Item 5. Other Information............................................................................ 19 Item 6. Exhibits and Reports on Form 8-K............................................................. 20 Signatures ........................................................................................... 22
GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
September 30, December 31, 2001 2000 --------- --------- ASSETS Cash and amounts due from depository institutions $ 17,204 $ 2,928 Interest-bearing deposits in other banks 2 2 --------- --------- Total cash and cash equivalents 17,206 2,930 Time deposits with other banks -- 7,000 Securities available for sale 2,290 3,090 Securities held to maturity (estimated fair value of $26,621 in 2001 and $35,251 in 2000) 26,263 35,796 Loans held for sale 1,297 -- Loans, net 78,367 86,265 Federal Home Loan Bank ("FHLB") stock, at cost 3,283 3,113 Premises and equipment, net 856 1,094 Accrued interest receivable 621 1,106 Other assets 882 539 --------- --------- Total assets $ 131,065 $ 140,933 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest-bearing $ 475 $ 514 Interest-bearing 76,128 73,483 --------- --------- Total deposits 76,603 73,997 Federal Home Loan Bank advances 28,618 40,536 Loan payable 6,500 7,000 Advance payments by borrowers for taxes and insurance 376 656 Accrued interest payable 259 632 Other liabilities 492 279 --------- --------- Total liabilities 112,848 123,100 Preferred stock, authorized 1,000,000 shares, no shares issued and outstanding Common stock, $.01 par value, 6,000,000 shares authorized, 1,938,871 shares issued 19 19 Additional paid-in capital 8,314 8,322 Retained earnings, substantially restricted 14,007 13,846 Unearned stock based incentive plan shares (288) (365) Treasury stock at cost, 189,040 shares (2,151) (2,151) Unearned employee stock ownership plan shares (1,702) (1,853) Accumulated other comprehensive income 18 15 --------- --------- Total shareholders' equity 18,217 17,833 --------- --------- Total liabilities and shareholders' equity $ 131,065 $ 140,933 ========= =========
See accompanying notes to consolidated financial statements. 3. GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amount)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2001 2000 2001 2000 ------ ------ ------ ------ INTEREST INCOME Loans, including fees $1,523 $1,598 $5,083 $4,568 Securities: Taxable 658 849 2,209 2,552 Non-taxable -- -- -- 1 Interest-bearing deposits in banks 82 7 128 159 ------ ------ ------ ------ Total interest income 2,263 2,454 7,420 7,280 INTEREST EXPENSE Deposits 826 803 2,491 2,344 FHLB borrowings 341 596 1,333 1,594 Loan payable 116 129 385 279 ------ ------ ------ ------ Total interest expense 1,283 1,528 4,209 4,217 ------ ------ ------ ------ NET INTEREST INCOME 980 926 3,211 3,063 Provision for loan losses -- -- -- -- ------ ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 980 926 3,211 3,063 NONINTEREST INCOME Service charges 46 42 144 192 Gain on sale of loans 41 -- 60 3 Gain on sale of securities -- 4 4 10 Other income 7 22 21 36 ------ ------ ------ ------ Total non-interest income 94 68 229 241 NONINTEREST EXPENSE Salaries and employee benefits 413 422 1,311 1,803 Net occupancy expense 61 92 214 283 Data processing expense 33 35 104 108 FDIC assessments 4 4 11 12 Franchise taxes 84 97 235 263 Other expenses 60 153 735 542 ------ ------ ------ ------ Total non-interest expense 655 803 2,610 3,011 ------ ------ ------ ------ Income before income taxes 419 191 830 293 Income tax expense 144 52 284 55 ------ ------ ------ ------ Net income $ 275 $ 139 $ 546 $ 238 ====== ====== ====== ====== Basic and diluted earnings per share $ .18 $ .09 $ .35 $ .15
See accompanying notes to consolidated financial statements. 4. GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2001 2000 2001 2000 ----- ----- ----- ----- NET INCOME $ 275 $ 139 $ 546 $ 238 Other comprehensive income, net of tax Unrealized gain (loss) on securities available for sale arising during the period (1) 18 6 (2) Less: Reclassification adjustment for accumulated gains included in net income -- 3 3 7 ----- ----- ----- ----- Unrealized gains (losses) on securities (1) 15 3 (9) ----- ----- ----- ----- COMPREHENSIVE INCOME $ 274 $ 154 $ 549 $ 229 ===== ===== ===== =====
See accompanying notes to consolidated financial statements. 5. GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data) Unearned Unearned Employee Stock Additional Stock Based Common Paid in Retained Ownership Incentive Stock Capital Earnings Plan Shares Plan Shares ----- ------- -------- ----------- ----------- Balances at January 1, 2001 $ 19 $ 8,322 $ 13,846 $ (1,853) $ (365) Commitment to release ESOP shares (8) 151 Release of incentive shares 77 Cash dividends (385) Net income 546 Change in unrealized gain on securities available-for-sale, net of tax Total comprehensive income --------- --------- --------- --------- ------- Balances at September 30, 2001 $ 19 $ 8,314 $ 14,007 $ (1,702) $ (288) ========= ========= ========= ========= ======= Accumulated Other Total Treasury Comprehensive Shareholders Stock Income Equity ----- ------ ------ Balances at January 1, 2001 $ (2,151) $ 15 $ 17,833 Commitment to release ESOP shares 143 Release of incentive shares 77 Cash dividends (385) Net income 546 Change in unrealized gain on securities available-for-sale, net of tax 3 3 ---------- Total comprehensive income 549 --------- --------- ---------- Balances at September 30, 2001 $ (2,151) $ 18 $ 18,217 ========= ========= =========
See accompanying notes to consolidated financial statements. 6. GRAND CENTRAL FINANCIAL CORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended September 30, ------------- 2001 2000 -------- -------- NET CASH FROM OPERATING ACTIVITIES $ 1,280 $ 902 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Purchases (77) (174) Proceeds from sales -- 236 Proceeds from maturities and payments 882 624 Securities held to maturity Proceeds from maturities and payments 9,556 17,838 Net changes in time deposits with other banks 7,000 (7,000) Net change in loans 6,124 (8,386) Purchase of loans -- (1,200) Purchases of premises and equipment (13) -- -------- -------- Net cash from investing activities 23,472 1,938 CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 2,606 (1,754) Net change in escrow accounts (280) (90) Proceeds from loan payable -- 7,000 Repayment of loan payable (500) -- Return of capital -- (11,051) Cash dividends (385) (330) Purchase of treasury stock -- (866) Proceeds from long-term FHLB advances 29,110 29,266 Repayment of long-term FHLB advances (41,027) (27,398) -------- -------- Net cash from financing activities (10,476) (5,223) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,276 (2,383) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,930 4,928 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,206 $ 2,545 ======== ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 4,582 $ 3,728 Income taxes 119 10
See accompanying notes to consolidated financial statements. 7. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unless otherwise indicated, dollar amounts in thousands. BASIS OF PRESENTATION: These interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of Grand Central Financial Corp. ("Company") and its wholly owned subsidiary, Central Federal Savings and Loan Association of Wellsville ("Association"), at September 30, 2001, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying unaudited consolidated financial statements do not purport to contain all the necessary financial disclosures required by generally accepted accounting principles accepted in the United States of America that might otherwise be necessary in the circumstances. The results of operations for the three- and nine-month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results that may be expected or that have occurred for the entire year. The annual report for the Company for the year ended December 31, 2000, contains consolidated financial statements and related notes that should be read in conjunction with the accompanying unaudited consolidated financial statements. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and the Association. All significant intercompany balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS: The Company is engaged in the business of banking with operations and two offices in Wellsville, Ohio and surrounding areas, which are primarily light industrial areas. These communities are the source of substantially all of the Company's deposits and loan activities. The Company's primary source of revenue is single-family residential loans to middle income individuals. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 expense during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans. (Continued) 8. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SECURITIES: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income. Other securities such as FHLB stock are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. LOANS HELD FOR SALE: Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method. LOANS: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. ALLOWANCE FOR LOAN LOSSES: The allowance for loan loses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. (Continued) 9. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES: Income tax expense is based on the effective tax rate expected to be applicable for the entire year. The Company follows the liability method of accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded at enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as "temporary differences." A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. EARNINGS PER SHARE: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Stock based incentive plan shares are considered outstanding as they become vested. Diluted earnings per common share include the dilutive effect of stock based incentive plan shares and the additional potential common shares issuable under stock options. The basic weighted average shares were 1,558,563 and 1,606,679 and diluted weighted average share were 1,588,982 and 1,630,951 for the nine months ended September 30, 2001 and 2000, respectively. The basic weighted average shares were 1,547,490 and 1,558,563 and diluted weighted average shares were 1,561,819 and 1,586,365 for the three months ended September 30, 2001 and 2000, respectively. COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which is also recognized as a separate component of shareholders' equity. BUSINESS SEGMENTS: While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141. "Business Combinations." SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only impact the Company's financial statements if it enters into a business combination. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of SFAS No. 142, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized (Continued) 10. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) over their estimated useful lives. The Company is required to adopt SFAS No. 142 on January 1, 2002 and early adoption is not permitted. Because the company does not currently have any intangible assets, there will be no impact to the Company upon the adoption of SFAS No. 142. FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated financial statement amounts have been reclassified to conform to the 2001 presentation. NOTE 2 - SECURITIES The carrying values and estimated fair values of investment and mortgage-backed securities are summarized as follows:
September 30, 2001 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Loss Value ---- ----- ---- ----- (In thousands) AVAILABLE FOR SALE: Fannie Mae Stock $ 77 $ 3 $ - $ 80 Mortgage-backed securities: Freddie Mac 186 - (1) 185 Fannie Mae 799 2 (2) 799 Ginnie Mae 1,200 26 - 1,226 --------------- --------------- --------------- ---------------- Total $ 2,262 $ 31 $ (3) $ 2,290 =============== ============== ============== ================ HELD TO MATURITY: U.S. government and federal agencies $ 2,000 $ 40 $ - $ 2,040 Mortgage-backed securities: Freddie Mac 13,468 263 (2) 13,729 Fannie Mae 5,561 41 - 5,602 CMOs 5,234 16 - 5,250 --------------- -------------- --------------- --------------- Total $ 26,263 $ 360 $ (2) $ 26,621 =============== =============== =============== ================
(Continued) 11. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SECURITIES (Continued)
December 31, 2000 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Loss Value ---- ----- ---- ----- (In thousands) AVAILABLE FOR SALE: Mortgage-backed securities: Freddie Mac $ 217 $ (2) $ 215 Fannie Mae 1,223 $ 10 1,233 Ginnie Mae 1,627 15 1,642 --------------- -------------- --------------- --------------- Total $ 3,067 $ 25 (2) $ 3,090 =============== ============== =============== =============== HELD TO MATURITY: U.S. government and federal agencies $ 7,993 1 $ (128) $ 7,866 Mortgage-backed securities: Freddie Mac 15,442 $ 57 (258) 15,241 Fannie Mae 6,454 17 (85) 6,386 CMOs 5,907 (149) 5,758 --------------- -------------- --------------- --------------- Total $ 35,796 $ 75 $ (620) $ 35,251 =============== ============== =============== ===============
NOTE 3 - LOANS RECEIVABLE Loans are summarized as follows:
September 30, December 31, 2001 2000 ---- ---- (In thousands) Loans secured by real estate: Construction loans on single-family residences $ 743 $ 810 Single family 57,556 63,963 Multi-family and commercial 1,301 1,185 Commercial loans 103 331 Consumer loans 18,972 20,330 ------------ ------------ 78,675 86,619 Allowance for loan losses (308) (354) ------------ ------------ Total $ 78,367 $ 86,265 ============ ============
(Continued) 12. GRAND CENTRAL FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - LOANS RECEIVABLE (Continued) An analysis of the allowance for loan losses is as follows:
Nine months ended September 30, 2001 2000 ---- ---- (In thousands) Balance, beginning of period $ 354 $ 369 Loans charged off (51) (10) Recoveries 5 5 Provision for losses - - ----------- ----------- Balance, end of period $ 308 $ 364 =========== ===========
NOTE 4 - PAYABLE The Company has a note payable with a local institution for $6,500 at a rate of prime plus 50 basis points. Principal and interest is paid on the maturity date, December 5, 2001. The note is secured by stock the Company owns in the Association. 13. GRAND CENTRAL FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion compares the financial condition of the Company and the Association, at September 30, 2001 to December 31, 2000 and the results of operations for the three months ended September 30, 2001 and 2000 and nine months ended September 30, 2001 and 2000. This discussion should be read in conjunction with the interim financial statements and footnotes included herein. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions that are not subject to certain risks and uncertainties for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. The Company does not undertake - and specifically disclaims any obligation - to publicly release the result of any revisions that 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. GENERAL The Company does not transact any material business other than through the Association. The Company's results of operations are dependent primarily on net interest income, which is the difference ("spread") between the interest income earned on its loans, mortgage-backed 14. GRAND CENTRAL FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION securities, and securities portfolio and its cost of funds, consisting of interest paid on its deposits and borrowed funds. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Company's net income is also affected by, among other things, loan fee income, provisions for loan losses, service charges, operating expenses and franchise and income taxes. The Company's revenues are derived primarily from interest on mortgage loans, consumer loans, mortgage-backed securities and securities, as well as income from service charges and loan originations. The Company's operating expenses principally consist of employee compensation and benefits, occupancy, federal deposit-insurance premiums and other general and administrative expenses. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact the Company. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 Total assets of the Company were $131.1 million at September 30, 2001, compared to $140.9 million at December 31, 2000, representing a decrease of $9.8 million, or 7.0%. The primary components in the decrease in total assets were a $10.3 million, or 26.6%, decrease in total securities (including securities available for sale and held to maturity) and a $6.6 million, or 7.7%, decrease in loans (including loans held for sale) from December 31, 2000. The majority of the decrease in loans was in consumer and single family real estate loans. The Company sold long term, relatively low interest rate single-family real estate loans during the second and third quarters of fiscal year 2001 instead of holding them in its portfolio. Loans held for sale increased due to the Association's increase in originations resulting primarily from the drop in interest rates. The proceeds from the sale of securities and loans, as well as an increase in deposits were used to repay FHLB advances, which decreased from $40.5 million at December 31, 2000 to $28.6 million at September 30, 2001, and resulted in an increase in cash and cash equivalents from $2.9 million at December 31, 2000 to $17.2 million at September 30, 2001. Management anticipates it will continue to use excess liquidity to reduce the level of FHLB advances in the fourth quarter. The increase in deposits was due to normal fluctuations in customer balances and did not reflect any special rate promotions. In addition, management believes that the recent declines in the stock market have impacted the increase in deposits as customers view the deposit products offered by the Bank as more attractive. Shareholders' equity increased $384,000, or 2.15%, from $17.8 million at December 31, 2000 to $18.2 million at September 30, 2001. 15. GRAND CENTRAL FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 General. Net income for the three months ended September 30, 2001 increased by $136,000 from $139,000 for the three months ended September 30, 2000 to $275,000 for the three months ended September 30, 2001. Net income for the nine months ended September 30, 2001 was $546,000, which was an increase of $308,000 from the net income of $238,000 for the nine months ended September 30, 2000. Net Interest Income. Net interest income is the largest component of the Company's net income, and consists of the difference between interest income generated on interest-earnings assets and interest expense incurred on interest-bearing liabilities. Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities. Net interest income increased $54,000, or 5.8%, for the three months ended September 30, 2001 and $148,000, or 4.8%, for the nine months ended September 30, 2001 from the prior-year periods. The increase in net interest income for the three month period ended September 30, 2001 compared to the same period in 2000 was due to the reduction in interest expense exceeding the reduction in interest income. This reduction in interest income and interest expense was due to the decrease in average interest earning assets and interest bearing liabilities for the three month period ended September 30, 2001 compared to the same period in 2000, as well as from a decline in rates during the three months ended September 30, 2001 compared to the same period in 2000. An increase in interest income on loans, including fees, and a decline in the interest expense on FHLB borrowings were the primary reasons for the increase in net interest income for the nine month period ended September 30, 2001 compared to the same period in 2000. The increase in interest income on loans was due primarily to an increase in average loans from $79.1 million for the nine month period ended September 30, 2000 to $84.8 million during the nine month period ended September 30, 2001. In addition, while market interest rates have declined in recent months, increases in the rates in late 2000 and early 2001 also contributed to the increase in interest income, with the majority of the year to date increase occuring in the first six months of 2001. The increase in income on loans of $515,000 during the nine months ended September 30, 2001 compared to the same period in 2000 was offset in part by a decrease in interest income from securities of $343,000 during the nine months ended September 30, 2001 compared to the same period in 2000 as a result of securities maturing and being called. The Company used the proceeds from the maturing and called securities to payoff FHLB advances which decreased the related interest expense. Provision for Loan Losses. The provision for loan losses is based on management's regular evaluation of the adequacy of the allowance for loan losses, which considers factors such as past experience, prevailing general economic conditions and considerations applicable to specific loans, such as the ability of the borrower to repay the loan and the estimated value of the underlying collateral, as well as changes in the size and growth of the loan portfolio. 16. GRAND CENTRAL FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION No provision for loan losses was recorded during the three or nine months ended September 30, 2001 or 2000. Non-performing loans decreased to .42% of total loans at September 30, 2001 from 0.56% at December 31, 2000. The relative level of non-performing loans has decreased and management believes the loans are well collateralized and expects little or no loss. At September 30, 2001, the allowance for loan losses represented 0.39% of total loans compared to 0.41% at December 31, 2000. Management believes the allowance for loan losses is adequate to absorb probable losses; however, future additions to the allowance may be necessary based on changes in economic conditions. Noninterest Income. Noninterest income for the nine months ended September 30, 2001 decreased to $229,000 from $241,000 for the nine months ended September 30, 2000. The majority of the change is due to the decrease in service charges and other income. As the Company has closed branches, the number of customers has declined resulting in less banking activity from which fee income is generated. The decrease was partially offset by an increase in gains on sales of loans. Noninterest income for the three months ended September 30, 2001 increased $26,000 or 38.2% from the same period in 2000. The increase was mainly due to the gain on the sale of loans. Noninterest Expense. Noninterest expense decreased $148,000, or 18.4%, for the quarter ended September 30, 2001 and $401,000, or 13.3% for the nine months ended September 30, 2001 compared to the similar periods in 2000. The majority of the decrease was in salary and benefits expense due primarily to an expense of $465,000 from the acceleration of the stock based incentive plan expense recorded in conjunction with the return of capital in 2000 and which was immediately passed through to plan participants. The majority of the increase in other expense for the year to date period is due to charges taken related to the closing of a branch and the write-off of fixed assets of approximately $154,000 during the second quarter of 2001. The decrease in salary and benefit expense and occupancy expense for the three and nine months ended September 30, 2001, is also directly related to the closing of two in-store branches in the fourth quarter of 2000. Income Taxes. The provision for income taxes totaled $284,000 for the nine months ended September 30, 2001 compared to $55,000 for the nine months ended September 30, 2000, due to the increase in income before income taxes. The provision for income taxes totaled $144,000 for the three months ended September 30, 2001 compared to $52,000 for the three months ended September 30, 2000, due to the increase in income before income taxes. LIQUIDITY AND CAPITAL RESOURCES The Association's primary sources of funds are deposits, principal and interest payments on loans, mortgage-backed and investment securities and borrowings from the FHLB-Cincinnati. The Association uses the funds to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled 17. GRAND CENTRAL FINANCIAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION amortization of loans are predictable sources of funds, deposit flows, mortgage prepayments and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition. Recent legislation repealed the Office of Thrift Supervision's ("OTS") minimum liquidity ratio requirement. OTS regulations now require the Association to maintain sufficient liquidity to ensure its safe and sound operation. At September 30, 2001, the Association exceeded all of its regulatory capital requirements with a Tier 1 capital level of $23.0 million, or 17.61%, of total adjusted assets, which is above the required level of $5.2 million, or 4.0%; Tier 1 capital of $23.0 million, or 34.18%, of risk-weighted assets, which is above the required level of $2.7 million, or 4.0%; and risk-based capital of $23.3 million, or 34.63% of risk-weighted assets, which is above the required level of $5.4 million, or 8.0%. The Association's most liquid assets are cash and cash equivalents. The levels of those assets are dependent on the Association's operating, financing, lending and investing activities during any given period. At September 30, 2001, cash and cash equivalents totaled $17.2 million, or 13.1%, of total assets. The Association has other sources of liquidity if a need for additional funds arises, including FHLB advances. At September 30, 2001, the Association had an additional overall borrowing capacity from the FHLB of $37.0 million. Depending on market conditions, the pricing of deposit products and FHLB advances, the Association may rely on FHLB borrowing to fund asset growth. The Association relies primarily on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on the Association's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Association. 18. GRAND CENTRAL FINANCIAL CORP. FORM 10-QSB Quarter ended September 30, 2001 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None 19. GRAND CENTRAL FINANCIAL CORP. FORM 10-QSB Quarter ended September 30, 2001 PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K. (a) Exhibit Number Exhibit ------ ------- 3.1 Certificate of Incorporation of Grand Central Financial Corp. * 3.2 Bylaws of Grand Central Financial Corp. * 4.0 Form of Common Stock Certificate * (a). Exhibit Number Exhibit ------- ------- 11.1 Statement Re Computation of Earnings per common Share Basic earnings per share is computed by dividing net income by the weighted average number of share outstanding during the period, as restated for shares issued in business combinations accounted for as pooling-of-interests, stock splits and stock dividends. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period. The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
Three months ended Nine months ended ------------------ ----------------- September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Weighted average common shares outstanding for basic EPS 1,547,490 1,558,563 1,558,563 1,606,679 Add: Dilutive effects of assumed exercises of stock options 14,328 27,802 30,419 24,272 -------------- -------------- -------------- -------------- Average shares and dilutive potential common shares 1,561,818 1,586,365 1,588,982 1,630,951 ============ ============== ============= ==============
20. GRAND CENTRAL FINANCIAL CORP. FORM 10-QSB Quarter ended September 30, 2001 PART II - OTHER INFORMATION b) Reports on Form 8-K. The information reported is as follows: On September 27, 2001, The Company filed a current report on Form 8-K, reporting that on September 24, 2001 the Company reported the declaration of a cash dividend of $.08 per share payable October 23, 2001 to shareholders of record at the close of business on October 9, 2001. * Incorporated by reference into this document from the Exhibits filed with the Registration Statement in Form SB-2 and any amendments thereto, Registration No. 333-64089. 21. Quarter ended September 30, 2001 PART II - OTHER INFORMATION SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GRAND CENTRAL FINANCIAL CORP. Dated: November 12, 2001 By: /s/ William R. Williams ----------------------------------- William R. Williams President and Chief Executive Officer (principal executive officer) Dated: November 12, 2001 By: /s/ John A. Rife ----------------------------------- John A. Rife Executive Vice President and Treasurer (principal accounting and financial officer) 22.