[Greater Atlantic Financial Corp. Letterhead]
April 6, 2007
VIA EDGAR
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William C-L Friar
Senior Financial Analyst
Division of Corporation Finance
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-0408
Re: Greater Atlantic Financial Corp
Form 10-K for the period ended September 30, 2006,
filed February 2, 2007
File Number 0-26467
Dear Mr. Friar:
This is in reply to your letter of March 23, 2007, providing comments
with respect to the subject filing. For your convenience in reviewing this
matter, we have set forth your comment followed by our response.
Comment:
General
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1. We note that this Form 10-K and the Form 10-Q for June 30, 2006 were
filed significantly late. Every effort should be made to file all
reports timely in the future.
Response:
We understand the importance of filing our reports in a timely matter
and fully expect to file all reports timely in the future.
Comment:
2. We noted that the June 30, 2006 Form 10-Q filed January 12, 2007, is
reflected on the EDGAR system as being for the period ended September
30, 2006. Please have this corrected.
Response:
The EDGAR system was corrected on March 26, 2007, to reflect the
correct period end of June 30, 2006, for the Company's June 30, 2006 10-Q
filing.
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Comment:
3. We note from your Form 8-K for February 21, 2007, that the Company's
shares have been delisted from the Nasdaq Global Market and that
trading on that system ended on February 22, 2007. Please disclose in a
prompt manner how the Company's shares are currently traded and any
material impact of this on current shareholders. Also, disclose any
plans or lack of plans for changing this trading situation. Please
provide us with your expected disclosure.
Response:
In response to your comment, Greater Atlantic Financial Corp. intends
to make the following disclosure to be filed under cover of a Form 8-K.
Item 8.01 - Other Events.
As previously reported in a Current Report on Form 8-K filed on
February 21, 2007, the Company's common stock was delisted from the Nasdaq
Global Market effective February 22, 2007. Since delisting, the common stock has
been quoted and eligible for trading on the Pink Sheets Electronic Interdealer
Quotation and Trading System, commonly known as the "Pink Sheets," under the
symbol "GAFC.PK." In view of the limited trading activity in the common stock
while the common stock was listed on the Nasdaq Global Market, the Company does
not believe that the delisting of the common stock will have a material adverse
effect on the Company's shareholders. The Company has no current plans or
intention to re-apply to list its common stock on the Nasdaq Stock Market.
Comment:
4. We note your disclosure relating the Company's failure to maintain a
well capitalized status and the required suspension of dividends, the
control and procedures failures discussed on page 48 and your internal
failure to meet net interest income sensitivity measures, discussed on
page 40. Please refer to the requirements on Item 303 of Regulation S-K
relating to disclosure in the MD&A of any known trends, events or
uncertainties that will have or that are reasonably likely to have a
material effect on your liquidity, capital resources, or results of
operations. If you are aware of any current order, agreement,
recommendations or understandings with a regulatory agency which, if
implemented, would have such an effect, please disclose that fact and
the nature of the changes contemplated. Disclose the steps you have
taken to implement those recommendations and the extent to which such
implementation has been accomplished. If you believe that the issues
raised would not have a material impact, please supplementally tell us
the nature of each such matter and the basis for your belief that
disclosure is not required.
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Response:
There are currently no orders, agreements, recommendations or
understandings with our regulatory agency, which, if implemented, would affect
our liquidity, capital resources, or results of operations. However, as a result
of recording losses of $ 5.6 million during the year ended September 30, 2006,
the Bank ceased to be considered a well capitalized institution and is now
considered to be an adequately capitalized institution. As an adequately
capitalized institution, the Bank cannot issue brokered certificates of deposit
without OTS or FDIC permission. We do not believe that limitation will have a
material impact on the Bank's operations.
Comment:
Business, page 3
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5. Either here or in the MD&A section please disclose in your next
appropriate filing and in future filings management's understanding as
to the reasons for the ongoing net losses from continuing operations.
What is required is a clear description, discussion and analysis of the
root causes of your situation. Also, disclose what management is doing
and intends to do to achieve profitable operations and indicate how
long management believes it may take to achieve profitability. Please
take into account in this analysis the local economy and its impact on
your operations.
Response:
When preparing our next filing we will describe the reasons for the
ongoing net losses from continuing operations and what the intentions of
management are to achieve profitability. In so doing, we will take into
consideration the local economy and its impact on our operations.
Comment:
6. Related to the above comment, please disclose not only the primary
reasons for changes in financial condition, but also the underlying
reasons, and relate the consequences of the situation to your overall
condition. Currently, the disclosure in your filing relating to
operations is largely generic and without significant analysis for an
investor to understand how management views Company operations and the
economic and business environment. For example, please explain the
dynamics of your declining deposit base. Your general market area is
wealthy and growing, so it is unclear why your deposits are declining.
Include, if warranted, a discussion of your specific market for
deposits, the interest rates you are offering verses those of your
competitors and any other significant market factors. Also, discuss the
consequences of this decline on your need for higher priced funding
sources and the impact on income. Further, for example, we note that
non-performing assets decreased between 2006 and 2005. In future
reports discuss the reasons why management believes that the percentage
decreased.
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Response:
In future filings we will discuss more fully the primary reasons for
changes in our financial condition and the consequences of those increases or
decreases and how they may impact our income and respond to the matters outlined
in your comment.
Comment:
7. Given your concentration on construction lending, where appropriate in
future filings, describe more fully, with quantification, the
construction market in the Washington, DC metropolitan area over the
past several years and describe any recent material changes to that
industry. Also describe the overall market economy including population
growth and per capita income information.
Response:
In future filings we will describe more fully the construction market
in the Washington, D.C. metropolitan area in recent years and any material
changes to that industry.
Comment:
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, page 30
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Financial Condition, page 33
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General
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8. Please revise your discussion in future filings to describe any known
trends or uncertainties that have had or that you reasonably expect
will have a material favorable or unfavorable impact on net interest
margin. For example, we note your disclosure in the table on page 36
that changes in net interest income for the periods presented were
driven primarily by changes in rate rather than volume. Revise your
disclosure to discuss any known trends in interest rates, loans,
investments, deposits and borrowings. Explain how those trends have
impacted your net interest margin and discuss your expectations for the
future. Refer to Item 303(A)(3)(ii) of Regulation S-K. Provide us with
your proposed future disclosure.
Response:
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 at best. The increase in net interest income
is attributable to higher interest income from higher yielding loans funded with
cash flows from lower yielding securities. The higher interest income was offset
somewhat by higher interest expenses for deposits and borrowings. 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.
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We also believe, however, that our strategy of changing the balance sheet from
one more wholesale-like, as reflected in the Company's decline in relying on
brokered and internet deposits, to one which is more retail-like 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 spread would decline and
our net interest income would decrease. The Bank continues to monitor the
markets and its interest rate position to alleviate any material changes in net
interest margin.
Comment:
Liquidity and Capital Resources, page 46
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9. We note your disclosure that the Bank's primary sources of funds
include mortgage-backed and investment securities. Please revise your
future filings to quantify the fair values of available-for-sale
securities with unrealized loss positions that you have the intent and
ability to hold until you recover at least your investment. Quantify
your estimate of the period of time until this recovery. Provide us
with your proposed future disclosure.
Response:
All of our securities are classified as either available for sale or
held to maturity. The best information available to us on our investment
portfolio is obtained from various third party brokerage firms and we believe
our filings fairly quantify the value of those securities. These 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 due to changes
in market rates not the credit quality of the issuer. The Company has the
ability and the liquidity to hold those securities until such time as the value
recovers or the securities mature.
Comment:
Consolidated Financial Statements, page 59
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Consolidated Statements of Operations - page 62
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10. We note your disclosure on page 88 that your derivative instruments do
not meet the hedge accounting requirements under SFAS 133. We also note
your disclosures on pages 34 and 42 that the increases in net interest
margin during 2005 and 2004 resulted (in Part) from payments made on
certain interest rate swap and cap agreements. Please note that
realized gains and losses, represented by the periodic or final cash
settlements from economic hedges, should not be netted with revenue or
expense lines associated with the related exposure. We believe the
presentation described above is essentially a form of synthetic
instrument accounting from an income statement perspective. In future
filings, reclassify these gains and/or losses into non-interest income
for all periods presented. Revise your MD&A and yield tables as
necessary. Refer to the December 11, 2003 speech by SEC Staff (Gregory
Faucette): "2003 Thirty-First AICPA National Conference on Current SEC
Developments" on our website at www. sec.gov.
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Response:
In future filings we will combine both the periodic cash payments under
the caps and swaps and the change in fair value into one line under non-interest
income in our financials and reclassify the same for all periods presented.
Comment:
Note 1. Summary of Significant Accounting Policies
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Principles of Consolidation, page 66
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11. We note your disclosure that the consolidated financial statements
include the accounts of Greater Atlantic Capital Trust I. We also note
your disclosure on page 89 that this subsidiary was deconsolidated in
2004 in accordance with FIN 46-R. Please revise these disclosures in
future filings for consistency. Provide us with your proposed future
disclosure.
Response:
Greater Atlantic Financial Corp. expects to make the following
disclosure.
Footnote 1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of GAFC and
its wholly owned subsidiaries, GAB and GAMC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Footnote 22. Junior Subordinated Debt Securities
On March 20, 2002, Greater Atlantic Capital Trust I (the, "Trust"), a
Delaware statutory business trust, in which the Company owns all of the common
equity issued $9.6 million aggregate liquidation amount (963,038 shares) of
6.50% cumulative preferred securities maturing on December 31, 2031, with an
option to call 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.
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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 issued a news release announcing
that the first quarter distribution of 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, will be
deferred.
The announcement by the Company follows advice received by Greater
Atlantic Bank from the Office of Thrift Supervision that it would not approve
Greater Atlantic 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).
Comment:
Notes to Consolidated Financial Statements
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Note 12. Income Taxes, page 80
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12. We note you have provided a valuation allowance for approximately 65%
and 45% of your deferred tax asset balance as of September 30, 2006 and
September 30, 2005, respectively. We also note you incurred net losses
for the twelve months ended September 30, 2006, 2005 and 2004 and for
the three months ended December 31, 2006. In light of your past and
continuing net losses, please tell us how you determined you will have
sufficient taxable income available in future periods to realize the
portion of deferred tax assets not provided for and justify why a full
valuation allowance was not required for the periods presented. Refer
to paragraphs 21-26 of SFAS No. 109.
Response:
We consider the determination of this valuation allowance to be a
critical accounting policy because of the need to exercise significant judgment
in evaluating the amount and timing of recognition of deferred tax liabilities
and assets, including projections of future taxable income. These judgments and
estimates, which are inherently subjective, are reviewed on a continual basis by
management as regulatory and business factors change. In assessing the
realization of the deferred tax asset, management considers whether it is more
likely than not that some portion or the entire deferred tax asset will not be
realized. The ultimate realization of the deferred tax asset is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management's taxable income projections
in 2006 was based in part, upon hiring an investment banking firm to find
various strategic alternatives for the Company and the impact those strategies,
along with the closing of our subsidiary mortgage corporation and elimination of
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its ongoing losses, would have on the future operations of the Company. The
investment banking firm was hired in early 2006 and one of their strategies,
with which management concurred, was the sale of branches. The initial analysis
assumed the sale of only two locations that was subsequently expanded by
management to three locations which provided the greatest financial benefit and
still produced a viable banking enterprise. The resulting gains from the sale of
those branches, based on pricing provided by that firm, the reduced operating
expenses as a result of those sales, and the elimination of the losses incurred
by the mortgage corporation through its closing, lead management to conclude
that a portion of the net deferred tax asset would be realized.
Comment:
Note 13. Commitments and Contingencies, page 82
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13. We note your disclosure regarding the Demand for Arbitration filed by
the former manager of GAMC and the related $500,000 accrual as of
September 30, 2006. Please provide us with the following additional
information concerning this contingency:
o The total damages alleged at each balance sheet date;
o The total claims pending, filed, dismissed, settled at each
balance sheet date;
o An estimate of the possible loss or range of loss.
Refer to SAB Topic 5:Y, Item 103 of Regulation S-K and SFAS No. 5,
paragraph 8-11.
Response:
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, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the Company and the Bank. The Demand
for Arbitration was filed by Stamm Mortgage Management, Inc. ("Stamm Mortgage")
and T. Mark Stamm, President of Stamm Mortgage in connection with the Management
Agreement among Stamm Mortgage, the Bank, and GAMC that governed the management
of GAMC by Stamm Mortgage before the Bank terminated the operations of GAMC
earlier this year, and certain aspects of the Company's public disclosures of
that event. At September 30, 2006, the total damages alleged were $9.6 million
for breach of contract and $1.0 million in compensatory damages and $350,000 in
punitive damages for defamation.
On December 29, 2006, counsel for the Company, the Bank, GAMC and Mr.
Amos filed an Answering Statement and Counterclaim in Arbitration. In, January
2007, the parties entered into negotiations looking toward a mutually acceptable
and amicable resolution of their claims. The Company established a probable loss
of $500,000 to settle
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the litigation and since our 10-K had not been filed in accordance with SFAS No.
5, paragraph 8 the Company recorded the probable loss. On February 9, 2007, the
parties entered into a mutual release resolving any and all related claims and
controversies between the parties and obviating the need for all further
arbitration and legal proceedings.
Comment:
Note 21. Segment Reporting, page 88
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14. Please provide the following related to your impairment charge for long
-lived assets taken during 2006:
o A description of the impaired long-lived assets and the facts and
circumstances leading to the impairment;
o The method or methods for determining the fair value; and
o The segment in which the impaired long-lived assets is reported
under SFAS No. 131.
Refer to paragraph 26 of SFAS No. 144.
Response:
The long-lived assets consisted of various prepaid accounts, rental
escrows and fixed assets. The mortgage banking activities, to which the mortgage
banking segment applied, where discontinued effective March 29, 2006 with the
probability weighted approach used as the method for determining the fair value.
In responding to your comments, the Company acknowledges that we are
responsible for the adequacy and accuracy of the disclosure in the filing, the
staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing and
the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
Very truly yours,
/s/ David E. Ritter
David E. Ritter
Senior Vice President and
Chief Financial Officer
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