3
GREATER ATLANTIC FINANCIAL CORP.
10700 Parkridge Boulevard - Suite P50 - Reston, Virginia 20191 - (703) 391-1300
- - Fax: (703) 391-1506
NEWS RELEASE
Date: May 18, 2004
Contact: Carroll E. Amos
(703) 390-0340
GREATER ATLANTIC FINANCIAL ANNOUNCES RESTATEMENT OF PRIOR PERIOD EARNINGS AND
PROVIDES GUIDANCE ON EARNINGS FOR SECOND FISCAL QUARTER
Reston, Virginia - May 18, 2004 -Greater Atlantic Financial Corp. (NASDAQ:
GAFC), the holding company for Greater Atlantic Bank, announced today that the
Company will be restating earnings for fiscal years 2002 and 2003 and for the
fiscal quarter ended December 31, 2003, to reflect the correction of errors in
accounting for the Company's mortgage loan hedge program and its purchase of
interest rate swaps and caps.
In making the announcement, Carroll E. Amos, President and CEO noted that the
recently identified errors stemmed from the inception of the Company's programs
to hedge a portion of its portfolio of fixed-rate residential mortgage loans and
to enter into certain interest rate swaps and caps. The interest rate swaps and
caps were used to assist in managing the interest rate risk in connection with
certain adjustable rate loans and investments, as well as, certain short-term
deposits and borrowings. Mr. Amos estimated that the restatements would reduce
the Company's capital by $1.1 million and reduce aggregate net earnings from the
prior periods by $3.1 million. Because the Company does not qualify to use hedge
accounting, any accumulated gains or losses in those instruments will be
recognized in the restated earnings. The financial instruments used in the
hedging program become free-floating instruments and will be marked up or down
through earnings as the fair value of the instruments change.
Mr. Amos indicated that, following the restatement, he expected the Bank to
continue to be well capitalized under applicable regulatory capital requirements
and pointed out that the restatement would not have any impact on the cash flow
of the Company or Greater Atlantic Bank. He noted that the errors in accounting
were due to documentation issues, in that the documentation did not meet the
strict technical requirements of Statement of Financial Accounting Standards No.
133, "Derivative Instruments and Hedging
4
Activities," and not to the appropriateness of the Company's interest rate risk
management practices. Management also confirmed that the errors would not have
any impact on the Bank's loan or deposit customers and indicated that no similar
system errors have occurred which has not been uncovered by the Company's
internal controls. Mr. Amos stated that changes in procedures are being put in
place to make sure such errors do not recur.
Mr. Amos also affirmed that the deposits at the Bank continue to be insured by
the Federal Deposit Insurance Corporation. He pointed out that the Bank intends
to move quickly to a decision on what is the most prudent and appropriate
decision as to whether to re-establish the hedges, liquidate them or let them
float. No hedges will be re-established until they have been reviewed and
approved by the Board of Directors.
Statements contained in this news release, which are not historical facts, are
forward-looking statements as that term is defined in 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
advises 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.