UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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)
Delaware 54-1873112
(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
(Registrant's telephone number, including area code)
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 [ X ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [__] Accelerated filer [__] Non-accelerated filer [ X ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes [__] No [ X ]
At February 11, 2008 there were 3,024,220 shares of the registrant's
Common Stock, par value $0.01 per share outstanding
GREATER ATLANTIC FINANCIAL CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at December 31, 2007 and September 30, 2007........................3
Consolidated Statements of Operations
for the three months ended December 31, 2007 and December 31, 2006................................................4
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended December 31, 2007 and December 31, 2006................................................5
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended December 31, 2007 and December 31, 2006................................................5
Consolidated Statements of Cash Flows
for the three months ended December 31, 2007 and December 31, 2006................................................6
Notes to Consolidated Financial Statements........................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................................22
Item 4. Controls and Procedures.......................................................................................24
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings...........................................................................................24
Item 1A. Risk Factors................................................................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................................27
Item 3. Defaults Upon Senior Securities.............................................................................27
Item 4. Submission of Matters to a Vote of Security Holders.........................................................27
Item 5. Other Information...........................................................................................27
Item 6. Exhibits....................................................................................................27
SIGNATURES.............................................................................................................28
CERTIFICATIONS.........................................................................................................29
2
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
December 31, September 30,
----------------------------------
2007 2007
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) (Unaudited)
Assets
Cash and cash equivalents:
Non-interest bearing and vault $ 3,012 $ 3,146
Interest bearing 5,496 4,486
Investment securities
Available-for-sale 46,149 48,910
Held-to-maturity 2,845 3,053
Loans receivable, net 168,006 176,108
Accrued interest and dividends receivable 1,623 1,675
Deferred income taxes 2,151 2,096
Federal Home Loan Bank stock, at cost 1,731 1,731
Premises and equipment, net 2,188 2,285
Goodwill 956 956
Prepaid expenses and other assets 1,441 1,548
------------------------------------------------------------------------------------------------------------
Total assets $235,598 $245,994
============================================================================================================
Liabilities and Stockholders' equity
Liabilities
Deposits $188,937 $197,991
Advance payments from borrowers for taxes and insurance 175 229
Accrued expenses and other liabilities 1,769 1,601
Income taxes payable 16 36
Advances from the FHLB and other borrowings 26,687 27,192
Junior subordinated debt securities 9,376 9,374
------------------------------------------------------------------------------------------------------------
Total liabilities 226,960 236,423
------------------------------------------------------------------------------------------------------------
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 shares outstanding 30 30
Additional paid-in capital 25,273 25,273
Accumulated deficit (15,252) (14,408)
Accumulated other comprehensive loss (1,413) (1,324)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,638 9,571
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $235,598 $245,994
============================================================================================================
See accompanying notes to consolidated financial statements
3
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
December 31,
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2007 2006
- ----------------------------------------------------------------------------------------------
Interest income
Loans $ 3,110 $ 3,670
Investments 768 1,135
- ----------------------------------------------------------------------------------------------
Total interest income 3,878 4,805
- ----------------------------------------------------------------------------------------------
Interest expense
Deposits 2,029 2,239
Borrowed money 571 762
- ----------------------------------------------------------------------------------------------
Total interest expense 2,600 3,001
- ----------------------------------------------------------------------------------------------
Net interest income 1,278 1,804
Provision for loan losses 102 148
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,176 1,656
- ----------------------------------------------------------------------------------------------
Noninterest income
Fees and service charges 139 152
Loss on derivatives (14) (20)
Other operating income 12 6
- ----------------------------------------------------------------------------------------------
Total noninterest income 137 138
- ----------------------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 943 1,266
Occupancy 324 343
Professional services 182 400
Advertising 19 24
Deposit insurance premium 146 23
Furniture, fixtures and equipment 105 130
Data processing 224 220
Other operating expenses 214 280
- ----------------------------------------------------------------------------------------------
Total noninterest expense 2,157 2,686
- ----------------------------------------------------------------------------------------------
Net loss before income tax provision (844) (892)
Provision for income taxes - -
- ----------------------------------------------------------------------------------------------
Net loss $ (844) $ (892)
==============================================================================================
Loss per common share
BASIC AND DILUTED:
Basic $ (0.28) $ (0.30)
Diluted (0.28) (0.30)
Weighted average common shares outstanding
Basic and diluted 3,024,220 3,021,297
See accompanying notes to consolidated financial statements
4
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three months ended
------------------------------
December 31,
- ----------------------------------------------------------------------------------
(In Thousands) 2007 2006
Net (loss) earnings $ (844) $ (892)
- ----------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on securities (89) 116
- ----------------------------------------------------------------------------------
Other comprehensive (loss) income (89) 116
- ----------------------------------------------------------------------------------
Comprehensive loss $ (933) $ (776)
==================================================================================
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Accumulated Other Total
Preferred Common Paid-in Earnings Comprehensive Stockholders'
Stock Stock Capital (Deficit) Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at September 30, 2006 $- $ 30 $ 25,228 $ (15,359) $ (1,049) $ 8,850
Other comprehensive income - - - - 116 116
Net loss for the period - - - (892) - (892)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $- $ 30 $ 25,228 $ (16,251) $ (933) $ 8,074
============================================================================================================================
Balance at September 30, 2007 $- $ 30 $ 25,273 $ (14,408) $ (1,324) $ 9,571
Other comprehensive loss - - - - (89) (89)
Net loss for the period - - - (844) - (844)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $- $ 30 $ 25,273 $ (15,252) $ (1,413) $ 8,638
============================================================================================================================
See accompanying notes to consolidated financial statements
5
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
December 31,
------------------------------
2007 2006
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flow from operating activities
Net loss $ (844) $(892)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Provision for loan loss 102 148
Amortization of deferred loan acquisition cost, net 1 (7)
Depreciation and amortization 97 115
Loss from derivatives 14 20
Amortization of investment security premiums 118 155
Amortization of mortgage-backed securities premiums 35 106
Amortization of deferred fees (66) (99)
Discount accretion net of premium amortization 71 (72)
Amortization of convertible preferred stock costs 2 2
Gain on sale of fixed assets - (26)
(Increase) decrease in assets
Accrued interest and dividend receivable 52 51
Prepaid expenses and other assets 83 203
Deferred loan fees collected, net of deferred costs incurred 88 163
Increase (decrease) in liabilities
Accrued expenses and other liabilities 178 82
Income taxes payable (20) -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (89) (51)
- ----------------------------------------------------------------------------------------------------------------
Continued
6
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
Three months ended
December 31,
----------------------------
2007 2006
- ------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flow from investing activities
Net decrease (increase) in loans $7,906 $(1,997)
Disposal (purchase) of premises and equipment, net - 15
Proceeds from repayments of other investment securities 1,405 2,895
Proceeds from repayments of mortgage-backed securities 1,267 4,090
Purchases of FHLB stock - (225)
Proceeds from sale of FHLB stock - 180
- ------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 10,578 4,958
- ------------------------------------------------------------------------------------------------------------
Cash flow from financing activities
Net decrease in deposits (9,054) (12,294)
Net decrease in advances from the FHLB and other borrowings (505) (5,602)
Increase in advance payments by borrowers
for taxes and insurance (54) (4)
- ------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,613) (17,900)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 876 (12,993)
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of period 7,632 19,804
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $8,508 $ 6,811
============================================================================================================
See accompanying notes to consolidated financial statements
7
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which
include the accounts of Greater Atlantic Financial Corp. (the "company") and its
wholly owned subsidiary, Greater Atlantic Bank (the "bank") have been prepared
in accordance with the instructions for Form 10-Q. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") with respect to interim financial reporting. It
is recommended that these consolidated financial statements be read in
conjunction with the company's Annual Report on Form 10-K for the year ended
September 30, 2007. The results of operations for the three months ended
December 31, 2007 are not necessarily indicative of the results of operations
that may be expected for the year ending September 30, 2008 or any future
periods. In addition, other reclassifications have been made to prior periods to
place them on a basis comparable with the current period presentation.
(2) 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.
8
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
(3) LOAN IMPAIRMENT AND LOAN LOSSES
In accordance with guidance in the Statements of Financial Accounting
Standards Nos. 114 and 118, the company conducts a quarterly analysis to
determine the adequacy of the allowance for loan losses and to identify and
value impaired loans. An analysis of the change in the allowance for loan losses
follows (also see page 20 for discussion of non-performing loans):
At or for the three months
ended December 31,
------------------------------------
2007 2006
- ---------------------------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of period $ 2,305 $ 1,330
Provisions 102 148
Total charge-offs (5) (325)
Total recoveries 8 5
- ---------------------------------------------------------------------------------------------
Net recoveries (charge-offs) 3 (320)
- ---------------------------------------------------------------------------------------------
Balance at end of period $ 2,410 $ 1,158
=============================================================================================
Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the period (0.002)% 0.17%
=============================================================================================
Allowance for loan losses to total non-performing
loans at end of period 86.88% 247.44%
=============================================================================================
Allowance for loan losses to total loans 1.38% 0.58%
=============================================================================================
The company considers a loan to be impaired if it is probable that it
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 loans at December 31, 2007
was $4.8 million and the related allowance associated with impaired loans was
$1.6 million. There were no impaired loans in the comparable period one year
ago. At December 31, 2007, all impaired loans had a related allowance. We
recognize interest collected on these loans on a cost-recovery or cash-basis
method. The amount of interest income recognized during the time that those
loans were impaired amounted to $69,000.
(4) REGULATORY MATTERS
The capital distribution regulation of the OTS requires that the bank
provide the applicable OTS Regional Director with a 30-day advance written
notice of all proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during the year
ended September 30, 2006.
On December 19, 2006, the company issued a news release announcing 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 that the Office of Thrift Supervision 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).
9
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) created five categories of financial institutions based on the adequacy
of their regulatory capital levels: 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% and an adequately capitalized financial institution is one with
Tier 1 leverage capital of 4%, Tier 1 risk-based capital of 4% and total
risk-based capital of 8%. At December 31, 2007, the bank was classified as a
well capitalized financial institution.
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.
The following presents the bank's capital position at December 31,
2007:
- -------------------------------------------------------------------------------------------------------
Required
Percent to be
Required Well Actual Actual Surplus/
Balance Capitalized Balance Percent (Shortfall)
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Leverage $11,770 5.00% $18,191 7.73% $6,421
Tier 1 Risk-based $ 9,741 6.00% $18,104 11.15% $8,363
Total Risk-based $16,236 10.00% $20,138 12.40% $3,903
========================================================================================================
The company's common stock is currently quoted on the Pink Sheets under
the symbol GAFC.PK.
(5) STOCK OPTIONS
Effective November 14, 1998, the company established the 1997 Stock
Option and Warrant Plan (the "Plan"). The Plan reserves options for 76,667
shares for employees and warrants for 94,685 shares for stockholders. The Plan
was amended effective March 14, 2000, to increase the number of options
available for grant to employees from 76,667 to 225,000 shares and amended again
effective March 15, 2002, to increase the number of options available for grant
to employees from 225,000 to 350,000 shares 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 December 31,
2007, 221,333 options were outstanding. During the quarter ended December 31,
2007 all 88,016 warrants expired.
The following summary represents the activity under the Plan:
---------------------------------------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining
Average Contractual
Number of Exercise Term
Options Price (in Years)
---------------------------------------------------------------------------------------------------------------
Balance outstanding and exercisable at September 30, 2006 253,000 $ 6.72 5.70
Options expired (7,500) $ 6.75
---------------------------------------------------------------------------------------------------------------
Balance outstanding and exercisable at September 30, 2007 245,500 $ 6.72 4.63
Options expired (24,167) $ 7.27
---------------------------------------------------------------------------------------------------------------
Balance outstanding and exercisable at December 31, 2007 221,333 $ 6.66 4.64
===============================================================================================================
10
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
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 the pro forma impact
disclosed. 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 those assumptions, the fair value of stock options granted during fiscal
2006 was $2.92. There were no options granted during the three months ended
December 31, 2007 and 2006.
(6) EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity. The weighted average
shares outstanding for basic and diluted earnings per share for the three months
ended December 31, 2007 and 2006 were the same, as the effect of the conversion
of preferred securities and the impact of the exercised stock options of
1,375,137 and 1,380,300 in the periods ended December 31, 2007 and 2006,
respectively, were excluded as they would have been anti-dilutive for those
periods.
(7) 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.
11
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
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 a
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 that 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, that changes in ownership interest be
accounted for similarly, as equity transactions, and that, 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.
(8) 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 issued a news release announcing 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, will be
deferred. The announcement by the company follows 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 (also see Note 4 Regulatory Matters).
12
GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF DECEMBER 31, 2007 AND THREE MONTHS ENDED
DECEMBER 31, 2007 AND 2006 (UNAUDITED)
(9) DERIVATIVE FINANCIAL INSTRUMENTS
During fiscal years 2003 and 2002, the bank entered into various
interest rate caps that total $20 million in notional principal with terms
between five and ten years that limit the float between a floor of 2.00%, and
are capped between 6.50% - 8.00%. The bank accounts for these derivatives, under
the guidelines of SFAS 133, as amended.
Realized and unrealized gains and losses on those derivatives which
meet hedge accounting requirements are deferred and recognized when the hedge
transaction occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the three months ended December 31, 2007 and 2006 the
instruments did not meet hedge accounting requirements. The statements of
operations include net losses of $14,000 and $20,000 for the three months ended
December 31, 2007 and 2006, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes presented elsewhere in this
report.
This report contains forward-looking statements. When used in this 10-Q
report 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 result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The matters discussed in management's discussion and analysis of
financial condition and results of operations reflects continuing operations,
unless otherwise noted.
GENERAL
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, the bank, a federally chartered savings bank. The bank is a member
of the Federal Home Loan Bank ("FHLB") system and its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation. We offer
traditional banking services to customers through the five branches of the bank
located throughout the greater Washington, D.C. metropolitan area and the
Shenandoah Valley.
The profitability of the company depends primarily on its non-interest
income and net 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.
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. Subsequently, 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.
The sale of the Pasadena branch office, to Bay-Vanguard was completed
on August 24, 2007, with the bank recognizing a gain of $4.3 million.
14
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, the company and Summit amended their 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.
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.
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 those 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 those
estimates under different assumptions or conditions. The company believes that,
of its significant accounting policies, the most critical accounting policies we
apply are those related to the evaluation of the adequacy of the allowance for
loan losses.
A variety of factors impact the carrying value of the loan portfolio
including the calculation of the allowance for loan losses, valuation of
underlying collateral, the timing of loan charge-offs and the amount and
amortization of loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance is
established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments on
loans. Estimates for loan losses are arrived at by analyzing risks associated
with specific loans and the loan portfolio, current trends in delinquencies and
charge-offs, the views of our regulators, changes in the size and composition of
the loan portfolio and peer comparisons. The analysis also requires
consideration of the economic climate and direction, change in the interest rate
environment, which may impact a borrower's ability to pay, legislation impacting
the banking industry and economic conditions specific to our service area.
Because the calculation of the allowance for loan losses relies on estimates and
judgments relating to inherently uncertain events, results may differ from our
estimates.
FINANCIAL CONDITION
At December 31, 2007 the company's total assets were $235.6 million,
compared to the $246.0 million held at September 30, 2007, representing a
decrease of 4.23%. The decrease resulted primarily from a decrease in investment
securities and loans receivable and was offset in part by an increase in
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 its assets and liabilities to maintain
the bank in a well capitalized position.
Net loans receivable at December 31, 2007 were $168.0 million, a
decrease of $8.1 million or 4.60% from the $176.1 million held at September 30,
2007. The decrease in loans consisted primarily of a $378,000 decline in the
bank's single family loan portfolio, coupled with a decrease of $2.3 million in
the bank's consumer loan portfolio. Because the bank's single family and
consumer loan portfolios consist primarily of adjustable-rate loans, with the
current yield curve, customers are refinancing away from adjustable-rate loans
and into longer term, fixed-rate loans or curtailing outstanding balances.
Commercial real estate loans outstanding decreased by $3.4 million and
commercial business loans decreased by $2.3 million during the period. Those
decreases were offset in part by an increase of $507,000 in construction and
land loans. The increase in construction and land loans was primarily in the
single family residential sector of the market. The company anticipates that
lending in that area may slow as a result of the current slow sales pace
occurring in the single family market.
15
At December 31, 2007, investment securities were $49.0 million, a
decrease of $3.0 million or 5.71% from the $52.0 million held at September 30,
2007. The cash proceeds from the sale or payoff of investment securities were
used to reduce higher cost wholesale funding, including borrowings and wholesale
deposits.
Deposits at December 31, 2007 were $188.9 million, a decrease of $9.1
million from the $198.0 million held at September 30, 2007. Total deposits
decreased primarily due to a $7.7 million decline in our money fund accounts and
our reduced reliance on brokered deposits and wholesale deposits, which have a
higher cost. Those types of deposits have declined $16.0 million since December
31, 2006 while total retail deposits have increased $33.7 million. The increase
in retail deposits since December 31, 2006 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 2007 AND DECEMBER 31, 2006
NET INCOME. For the three months ended December 31, 2007, the company
had a net loss of $844,000 or $0.28 per diluted share, compared to a net loss of
$892,000 or $0.30 per diluted share for the three months ended December 31,
2006. The $48,000 decrease in the net loss over the comparable period one-year
ago was primarily the result of a decrease in non-interest expense and a
decrease in the provision for loan losses. Those decreases were offset by
decreases in net interest income and non-interest income. The ongoing net losses
reported in the company's Annual Report on Form 10-K for the year ended
September 30, 2007, remain a consistent problem for management because the loan
production needed to maintain the retail branch network has not been attained,
and 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 also presents a very challenging environment in which to seek to
increase our net interest margin.
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 re-pricing 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.
Difference
Net interest income from continuing operations -------------------------------
Three Months Ended December 31, 2007 2006 Amount %
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income:
Loans $ 3,110 $ 3,670 $ (560) (15.26)%
Investments 768 1,135 (367) (32.33)
- ---------------------------------------------------------------------------------------------------------------------
Total 3,878 4,805 (927) (19.29)
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 2,029 2,239 (210) (9.38)
Borrowings 571 762 (191) (25.07)
- ---------------------------------------------------------------------------------------------------------------------
Total 2,600 3,001 (401) (13.36)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,278 $ 1,804 $ (526) (29.16)%
=====================================================================================================================
16
The decrease in net interest income during the three months ended
December 31, 2007, from the comparable period one year ago, resulted primarily
from a $49.2 million decrease in the bank's interest-earning assets coupled with
average interest-earning assets declining by $2.8 million more than the decline
in average interest-bearing liabilities. That decrease was coupled with an 37
basis point decrease in net interest margin (net interest income divided by
average interest-earning assets) from 2.59% for the three months ended December
31, 2006 to 2.22% for the three months ended December 31, 2007. The decrease in
net interest margin also resulted from the average cost on interest-bearing
liabilities increasing by 21 basis point while the average yield on
interest-earning assets declined 14 basis points resulting in a change of 35
basis points.
The interest rate environment has been a difficult one for most
financial institutions. 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 company'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 three months ended December
31, 2007 decreased $927,000 compared to the three months ended December 31,
2006, primarily as a result of a $49.2 million decrease in the average balances
of outstanding loans and investment securities. The decreases in those balances
were coupled with a decrease of 14 basis points in the average yield earned on
interest earning assets.
INTEREST EXPENSE. The $401,000 decrease in interest expense for the
three months ended December 31, 2007 compared to the 2006 period was principally
the result of a $46.3 million decrease in the average amount of deposits and
borrowings. That decrease in the average interest-bearing liabilities was
partially offset by a 21 basis point increase in the cost of funds on average
deposits and borrowings. The decrease in interest expense on deposits was
primarily due to a decrease of $27.6 million in average deposits, primarily due
to the sale of the Pasadena branch. That decrease was offset by a 19 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.
The decrease in interest expense on borrowings for the three months
ended December 31, 2007, when compared to the 2006 period, was principally the
result of a $18.7 million decrease in average borrowed funds, partially offset
by a 63 basis point increase in the cost of borrowed funds. The components
accountable for the decrease of $191,000 in interest expense on borrowings were
a $251,000 decrease relating to average volume, partially offset by a $60,000
increase relating to average cost.
17
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.
FOR THE THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2007 2006
------------------------------------- ------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------------------------------- ------------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans $ 88,508 $ 1,540 6.96% $ 93,132 $ 1,717 7.37%
Consumer loans 51,242 914 7.13 59,504 1,180 7.93
Commercial business loans 33,904 656 7.74 39,550 773 7.82
----------- ----------- ----------- ------------ ------------- -------------
Total loans 173,654 3,110 7.16 192,186 3,670 7.64
Investment securities 40,223 541 5.38 57,168 800 5.60
Mortgage-backed securities 16,016 227 5.67 29,704 335 4.51
----------- ----------- ----------- ------------ ------------- -------------
Total interest-earning assets 229,893 3,878 6.75 279,058 4,805 6.89
----------- ----------- ------------- -------------
Non-earning assets 11,663 11,672
----------- ------------
Total assets $ 241,556 $ 290,730
=========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Savings accounts $ 2,073 5 0.96 $ 3,154 7 0.89
Now and money market accounts 56,309 465 3.30 79,378 711 3.58
Certificates of deposit 124,568 1,559 5.01 127,998 1,521 4.75
----------- ----------- ----------- ------------ ------------- -------------
Total deposits 182,950 2,029 4.44 210,530 2,239 4.25
FHLB advances 26,346 394 5.98 36,839 496 5.39
Other borrowings 11,775 177 6.01 20,019 266 5.31
----------- ----------- ----------- ------------ ------------- -------------
Total interest-bearing
liabilities 221,071 2,600 4.70 267,388 3,001 4.49
----------- ----------- ------------- -------------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 9,079 12,330
Other liabilities 1,921 2,266
----------- ------------
Total liabilities 232,071 281,984
Stockholders' equity 9,485 8,746
----------- ------------
Total liabilities and
stockholders' Equity $ 241,556 $ 290,730
=========== ============
Net interest income $ 1,278 $ 1,804
=========== =============
Interest rate spread 2.04% 2.40%
=========== =============
Net interest margin 2.22% 2.59%
=========== =============
18
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.
THREE MONTHS ENDED
DECEMBER 31, 2007 COMPARED TO
DECEMBER 31, 2006
-----------------------------------------------
CHANGE ATTRIBUTABLE TO
-----------------------------------------------
VOLUME RATE TOTAL
-----------------------------------------------
(IN THOUSANDS)
Real estate loans $ (85) $ (92) $ (177)
Consumer loans (164) (102) (266)
Commercial business loans (110) (7) (117)
---------------- -------------- --------------
Total loans (359) (201) (560)
Investments (237) (22) (259)
Mortgage-backed securities (154) 46 (108)
---------------- -------------- --------------
Total interest-earning assets $ (750) $ (177) $ (927)
================ ============== ==============
Savings accounts $ (2) $ - $ (2)
Now and money market accounts (207) (39) (246)
Certificates of deposit (41) 79 38
---------------- -------------- --------------
Total deposits (250) 40 (210)
FHLB advances (141) 39 (102)
Other borrowings (110) 21 (89)
---------------- -------------- --------------
Total interest-bearing liabilities (501) 100 (401)
================ ============== ==============
Change in net interest income $ (249) $ (277) $ (526)
================ ============== ==============
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 was to identify the extent of potential and actual risk in the bank's
commercial loan portfolio and in our underwriting and processing practices.
Observations made regarding the bank's portfolio risk are based upon review
evaluations, portfolio profiles and discussions with the operational staff,
including the line lenders and senior management. However, when we entered into
the definitive agreement for the company to merge with Summit, and based on the
due diligence performed by Summit, it was deemed unnecessary to continue such a
contract through the fiscal year ended September 30, 2007 and beyond.
19
Non-performing assets amounted to $2.8 million or 1.18% of total assets
at December 31, 2007, a $2.3 million increase from the $468,000 or 0.16% of
total assets classified as non-performing at December 31, 2006. At December 31,
2007, assets that were classified totaled $5.6 million, of which $430,000 were
classified as special mention, $4.1 million were classified as substandard and
$1.1 million were classified as doubtful. A $102,000 provision for loan losses
was recorded during the three months ended December 31, 2007, compared to a
provision of $148,000 during the three months ended December 31, 2006. Credit
quality at the bank remains a concern, with a ratio of non-performing assets to
total assets of 1.18%, and with significant classified and past-due loans. Those
factors combined with expected credit exposure growth and deteriorating economic
conditions, may result in an increase in the allowance for loan losses resulting
in an increase in the provision for loan losses in future periods.
NON-INTEREST INCOME. Non-interest income decreased $1,000 during the
three months ended December 31, 2007, over the comparable three months one year
ago. That decrease was primarily the result of a decrease of $13,000 in loan and
deposit fees offset by an increase in gains on derivatives and other operating
income.
The following table presents a comparison of the components of
non-interest income.
Difference
------------------------------------
Three Months Ended December 31, 2007 2006 Amount %
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-interest income:
Service fees on loans $ 37 $ 42 $ (5) (11.90)%
Service fees on deposits 102 110 (8) (7.27)
Loss on derivatives (14) (20) 6 30.00
Other operating income 12 6 6 100.00
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 137 $ 138 $ (1) (0.72)%
===================================================================================================================
NON-INTEREST EXPENSE. Non-interest expense decreased $529,000 from $2.7
million for the three months ended December 31, 2006 to $2.2 million for the
three months ended December 31 in the current year. The decrease was distributed
over various non-interest expense categories with the primary contributors being
compensation and employee benefits, and professional services. The decreases in
non-interest expense were partially offset by an increase of $123,000 in the
bank's deposit insurance premium.
The following table presents a comparison of the components of
non-interest expense.
Difference
---------------------------------
Three Months Ended December 31, 2007 2006 Amount %
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-interest expense:
Compensation and employee benefits $ 943 $ 1,266 $ (323) (25.51)%
Occupancy 324 343 (19) (5.54)
Professional services 182 400 (218) (54.50)
Advertising 19 24 (5) (20.83)
Deposit insurance premium 146 23 123 534.78
Furniture, fixtures and equipment 105 130 (25) (19.23)
Data processing 224 220 4 1.82
Other operating expense 214 280 (66) (23.57)
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 2,157 $ 2,686 $ (529) (19.69)%
=====================================================================================================================
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. Due to our operating losses, we did not record a provision
for income taxes for the three months ended December 31, 2007 or 2006. The
company believes that, in the unlikely event that the proposed merger is not
consummated, it will generate future taxable income through earnings and branch
sales, to assure utilization of a portion of the existing net operating losses.
20
Contractual Obligations and Off-Balance Sheet Financing Arrangements
The following table summarizes the bank's contractual obligations at
December 31, 2007 and the effect those obligations are expected to have on the
bank's liquidity and cash flows 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 1,687 1,687 - - -
Subordinated debt securities (2) 25,982 1,310 1,310 1,310 22,052
Operating leases 3,773 1,124 1,975 316 358
- -----------------------------------------------------------------------------------------------------------------
Total obligations $ 56,442 $ 4,121 $ 28,285 $ 1,626 $ 22,410
=================================================================================================================
(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)
Certificate of deposit maturities (1) $ 125,090 $ 111,979 $ 10,430 $ 2,588 $ 93
Loan originations 5,566 5,566 - - -
Unfunded lines of credit (2) 111,396 111,396 - - -
Standby letters of credit 310 310 - - -
- -----------------------------------------------------------------------------------------------------------------
Total $ 242,362 $ 229,251 $ 10,430 $ 2,588 $ 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, open-end loans on one-four dwelling units and commercial
lines that mostly remain unfunded. The committed amount of these
lines total $169.0 million.
LIQUIDITY AND CAPITAL RESOURCES. 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 continues to maintain the levels of liquid
assets previously required by OTS regulations. 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 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 December 31, 2007, cash and cash equivalents, interest bearing
deposits and securities available-for-sale totaled $54.7 million or 23.20% of
total assets.
The primary investing activities of the bank are the origination of
consumer loans, residential one- to four-family loans, commercial business
loans, commercial real estate loans, and real estate construction and
development loans and the purchase of United States Treasury and agency
securities, mortgage-backed and mortgage-related securities and other investment
securities. During the three months ended December 31, 2007, the bank's loan
originations totaled $13.6 million. The bank did not purchase any United States
Treasury or agency securities, mortgage-backed or mortgage related securities or
other investment securities during the three months ended December 31, 2007. All
of our investment securities are classified as either available for sale or held
to maturity and for the period ended December 31, 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
21
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 unrealized loss in the bank's investment portfolio
totaled $1.8 million at December 31, 2007. 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 December 31, 2007, the bank had $25.0 million in advances outstanding
from the FHLB and had an additional overall borrowing capacity from the FHLB of
$9.7 million. Depending on market conditions, the pricing of deposit products
and the pricing of FHLB advances, the bank may continue to rely on FHLB
borrowings to fund asset growth.
At December 31, 2007, the bank had commitments to fund loans of $3.4
million, unused outstanding lines of credit of $111.4 million, consisting
primarily of equity lines of credit, unused standby letters of credit of
$310,000 and undisbursed proceeds of construction mortgages of $2.2 million.
Unfunded lines of credit have remained relatively constant and have actually
decreased by $419,000 during the three months ended December 31, 2007. 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 December 31, 2007, totaled $112.0
million. Based upon experience, management believes the majority of maturing
deposits 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 those 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.
ITEM 3. 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. In
general, market risk reflects 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 those 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 will continue to attempt to
attract a greater proportion of short-term liabilities to help us 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. 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.
22
To mitigate further 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.
Through the use of these derivative instruments, management attempts to
reduce or offset increases in interest expense related to deposits and
borrowings. We use interest rate caps and pay-fixed interest rate swaps to
protect against rising interest rates.
The interest rate caps are designed to provide an additional layer of
protection, should interest rates on deposits and borrowings rise, by
effectively lengthening the re-pricing period. At December 31, 2007, we held an
aggregate notional value of $20 million of interest rate caps. None of the
interest rate caps had strike rates that were in effect at December 31, 2007, as
current LIBOR rates were below the strike rate.
We are also striving to increase the proportion of transaction deposits
to total deposits to diminish our exposure to adverse changes in interest rates.
In particular, non-interest-bearing checking accounts and custodial accounts are
less sensitive to interest rate fluctuations and provide a growing source of
non-interest income through deposit and other retail banking fees.
The following table, which is based on information that we provide to
the Office of Thrift Supervision, presents the change in our net portfolio value
at September 30, 2007 that would occur in the event of an immediate change in
interest rates based on Office of Thrift Supervision assumptions, with no effect
given to any steps that we might take to counteract that change.
Net Portfolio Value Net Portfolio Value as % of
(Dollars in thousands) Portfolio Value of Assets
----------------------------------------------- ----------------------------------
Basic Point ("bp")
Change in Rates $Amount $Change % Change NPV Ratio Change (bp)
- -------------------------- -------------- ----------------- -------------- ---------------- ----------------
+300 21,078 -3,195 -13% 8.58% -106bp
+200 22,219 -2,054 -8% 8.97% -67bp
+100 23,297 -976 -4% 9.33% -31bp
0 24,273 - 9.64% -
-100 24,555 282 1% 9.69% 5bp
-200 24,581 308 1% 9.66% 2bp
The Office of Thrift Supervision uses various assumptions in assessing
interest rate risk. Those assumptions relate to interest rates, loan prepayment
rates, deposit decay rates and the market values of certain assets under
differing interest rate scenarios, among others. As with any method of measuring
interest rate risk, certain shortcomings are inherent in the methods of analyses
presented in the foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table. Prepayment rates can have a significant impact
on interest income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect our rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe those assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment activity.
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ITEM 4. CONTROLS AND PROCEDURES.
The company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.
In connection with this Form 10-Q, the company's management, with the
participation of its Chief Executive Officer and Chief Financial Officer,
evaluated the company's disclosure controls and procedures as currently in
effect, and such officers have concluded that, as of this date, the company's
disclosure controls and procedures are effective.
Management of the company is also responsible for establishing and
maintaining adequate internal control over financial reporting and control of
the company's assets to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. There were no changes in the company's internal
control over financial reporting during the company's quarter ended December 31,
2007 that have materially affected, or are reasonably likely to materially
affect, the company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 1A. Risk Factors
OUR INCREASED EMPHASIS ON COMMERCIAL AND CONSTRUCTION LENDING MAY EXPOSE US TO
INCREASED LENDING RISKS.
At December 31, 2007, our loan portfolio consisted of $31.6 million, or
18.09% of commercial real estate loans, $18.5 million, or 10.62% of construction
and land development loans and $32.6 million, or 18.65% 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.
24
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, difficult 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. Those
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.
25
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. 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.
FAILURE TO REMAIN A WELL CAPITALIZED INSTITUTION.
As of December 31 and 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.
26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4.
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
27
GREATER ATLANTIC FINANCIAL CORP.
SIGNATURES
Pursuant to the requirement of the Securities and 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.
--------------------------------
(Registrant)
By: /s/ Carroll E. Amos
-------------------
Carroll E. Amos
President and Chief Executive Officer
By: /s/ David E. Ritter
-------------------
David E. Ritter
Senior Vice President and Chief Financial Officer
Date: February 13, 2008
28