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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 March 31, 2005
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10700 PARKRIDGE BOULEVARD, SUITE P50 703-391-1300
RESTON, VIRGINIA 20191 (Registrant's Telephone Number,
---------------------- -------------------------------
(Address of Principal Executive Offices) Including Area Code
- ---------------------------------------- -------------------
(Zip 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At May 11, 2005, there were 3,012,434 shares of the registrant's Common Stock,
par value $0.01 per share outstanding.
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GREATER ATLANTIC FINANCIAL CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
As of March 31, 2005 (unaudited) and September 30, 2004 (audited)..............................................3
Consolidated Statements of Operations (unaudited) for the three and six
months ended March 31, 2005 and March 31, 2004.................................................................4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the
six months ended March 31, 2005 and March 31, 2004.............................................................5
Consolidated Statements of Changes in Stockholders' Equity (unaudited) for
the six months ended March 31, 2005 and March 31, 2004.........................................................5
Consolidated Statements of Cash Flows (unaudited) for the six months ended
March 31, 2005 and March 31, 2004..............................................................................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....................................................26
Item 4. Controls and Procedures.......................................................................................27
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings.............................................................................................27
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...........................................................28
Item 5. Other Information.............................................................................................28
Item 6. Exhibits......................................................................................................28
SIGNATURES.............................................................................................................29
CERTIFICATIONS.........................................................................................................30
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GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30,
----------------------------------
2005 2004
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(Unaudited)
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 2,514 $ 2,532
Interest bearing deposits 11,602 8,071
Investment securities
Available-for-sale 125,931 142,712
Held-to-maturity 8,662 10,295
Loans held for sale 11,617 5,528
Loans receivable, net 206,810 246,387
Accrued interest and dividends receivable 1,690 1,940
Deferred income taxes 2,081 2,034
Federal Home Loan Bank stock, at cost 2,638 4,085
Premises and equipment, net 4,782 7,275
Goodwill 956 1,284
Prepaid expenses and other assets 2,739 2,227
------------------------------------------------------------------------------------------------------------
Total assets $ 382,022 $ 434,370
============================================================================================================
Liabilities and stockholders' equity
Liabilities
Deposits $ 260,058 $ 288,956
Advance payments from borrowers for taxes and insurance 299 305
Accrued expenses and other liabilities 983 2,535
Advances from the FHLB and other borrowings 93,667 116,065
Junior subordinated debt securities 9,373 9,369
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Total liabilities 364,380 417,230
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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; 3,012,434 shares outstanding 30 30
Additional paid-in capital 25,205 25,152
Accumulated deficit (6,437) (6,963)
Accumulated other comprehensive loss (1,156) (1,079)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,642 17,140
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 382,022 $ 434,370
============================================================================================================
See accompanying notes to consolidated financial statements
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GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------------------------
2005 2004 2005 2004
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(Dollars in Thousands, Except Per Share Data)
Interest income
Loans $ 2,966 $ 3,375 $ 6,269 $ 6,517
Investments 1,175 1,614 2,277 3,010
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Total interest income 4,141 4,989 8,546 9,527
---------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 1,512 1,377 3,026 2,845
Borrowed money 1,162 1,720 2,465 3,380
---------------------------------------------------------------------------------------------------------------
Total interest expense 2,674 3,097 5,491 6,225
---------------------------------------------------------------------------------------------------------------
Net interest income 1,467 1,892 3,055 3,302
Provision for loan losses 1 2 3 81
---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,466 1,890 3,052 3,221
---------------------------------------------------------------------------------------------------------------
Noninterest income
Fees and service charges 214 247 449 481
Gain on sale of loans 1,249 2,307 2,327 4,264
Gain (loss) on sale of investment securities - (156) 538 156
Gain on derivatives 519 (830) 882 (441)
Other operating income 431 5 716 10
---------------------------------------------------------------------------------------------------------------
Total noninterest income 2,413 1,573 4,912 4,470
---------------------------------------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 1,330 2,181 2,561 4,174
Occupancy 434 510 895 1,010
Professional services 291 259 511 547
Advertising 579 525 1,138 946
Deposit insurance premium 21 11 32 22
Furniture, fixtures and equipment 284 257 583 515
Data processing 313 353 637 703
Other operating expenses 562 636 1,081 1,335
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Total noninterest expense 3,814 4,732 7,438 9,252
---------------------------------------------------------------------------------------------------------------
Net income (loss) before income tax provision 65 (1,269) 526 (1,561)
Income tax provision - - - -
---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 65 $ (1,269) $ 526 $ (1,561)
===============================================================================================================
Earnings (loss) per common share
Basic $ 0.02 $ (0.42) $ 0.17 $ (0.52)
Diluted $ 0.02 $ (0.42) $ 0.17 $ (0.52)
Weighted average common shares outstanding
Basic 3,012,434 3,012,434 3,012,434 3,012,434
Diluted 4,405,827 3,012,434 4,407,266 3,012,434
See accompanying notes to consolidated financial statements
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GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Six months ended March 31,
-----------------------------------
2005 2004
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(In Thousands)
-----------------------------------------------------------------------------------------
Net earnings (loss) $ 526 $ (1,561)
-----------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities (77) (777)
-----------------------------------------------------------------------------------------
Other comprehensive income (loss) (77) (777)
-----------------------------------------------------------------------------------------
Comprehensive income (loss) $ 449 $ (2,338)
=========================================================================================
GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2005 AND 2004
- ------------------------------------------------------------------------------------------------------------------------------
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, 2003 $- $ 30 $ 25,152 $ (3,771) $ (71) $ 21,340
Other comprehensive loss - - - - (777) (777)
Net loss for the period - - - (1,561) - (1,561)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $- $ 30 $ 25,152 $ (5,332) $ (848) $ 19,002
==============================================================================================================================
Balance at September 30, 2004 $- $ 30 $ 25,152 $ (6,963) $ (1,079) $ 17,140
Option compensation - - 53 - - 53
Other comprehensive loss - - - - (77) (77)
Net income for the period - - - 526 - 526
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2005 $- $ 30 $ 25,205 $ (6,437) $ (1,156) $ 17,642
==============================================================================================================================
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GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended March 31,
------------------------------------
2005 2004
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flow from operating activities
Net income (loss) $ 526 $ (1,561)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Provision for loan loss 3 81
Amortization of loan acquisition adjustment (14) (14)
Depreciation and amortization 511 443
Option compensation 53 -
Proceeds from sale of trading securities - 300
Net loss on trading securities - (300)
Realized loss on sale of investment securities - 143
Net gain on sale of mortgage-backed securities (538) -
(Gain) loss on derivatives (882) 441
Amortization of investment security premiums 448 774
Amortization of mortgage-backed securities premiums 430 655
Amortization of deferred fees (336) (201)
Discount accretion net of premium amortization (197) (208)
Amortization of convertible preferred stock costs 5 5
Gain on sale of loans held for sale (2,327) (4,264)
(Increase) decrease in assets
Disbursements for origination of loans (124,870) (210,203)
Proceeds from sales of loans 121,109 207,678
Accrued interest and dividend receivable 249 (14)
Prepaid expenses and other assets (184) (231)
Deferred loan fees collected, net of deferred costs incurred 90 305
Increase (decrease) in liabilities
Accrued expenses and other liabilities (1,553) (2,279)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,477) (8,450)
- ----------------------------------------------------------------------------------------------------------------
Continued....
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GREATER ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
Six months ended March 31,
-----------------------------------
2005 2004
- -----------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flow from investing activities
Net decrease (increase) in loans $ 40,032 $ (16,910)
Disposal (purchases) of premises and equipment 1,981 (865)
Purchases of investment securities (9,208) (16,619)
Proceeds from sale of investment securities - 24,400
Proceeds from repayments of investment securities 10,806 18,010
Purchases of mortgage-backed securities (24,224) (63,056)
Proceeds from repayments of mortgage-backed securities 18,656 24,483
Proceeds from the sale of mortgage-backed securities 22,802 -
Purchases of FHLB stock (3,009) (9,190)
Proceeds from sale of FHLB stock 4,456 7,505
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 62,292 (32,242)
- -----------------------------------------------------------------------------------------------------------
Cash flow from financing activities
Net decrease in deposits (28,899) (6,064)
Net advances from FHLB (10,200) 33,700
Net borrowings on reverse repurchase agreements (12,197) 15,895
Increase (decrease) in advance payments by borrowers
for taxes and insurance (6) 151
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (51,302) 43,682
- -----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 3,513 2,990
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of period 10,603 6,143
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 14,116 $ 9,133
===========================================================================================================
See accompanying notes to consolidated financial statements
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX MONTHS THEN ENDED IS 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") and its wholly owned
subsidiary, Greater Atlantic Mortgage Corp. ("GAMC"), 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 ("SEC") with respect to interim financial reporting. All
adjustments which, in the opinion of management, are necessary to a fair
presentation of the results for the interim periods presented (consisting of
normal recurring adjustments) have been made. It is recommended that these
unaudited consolidated financial statements be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Corporation's Annual Report on Form 10-K for the year ended September 30, 2004.
The results of operations for the six months ended March 31, 2005 are not
necessarily indicative of the results of operations that may be expected for the
year ending September 30, 2005 or any future periods.
(2) LOAN IMPAIRMENT AND LOAN LOSSES
In accordance with guidance in the Statements of Financial Accounting
Standards Nos. 114 and 118, the company prepares a quarterly review 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:
At or for the six months ended
March 31,
------------------------------------
2005 2004
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(Dollars in Thousands)
Balance at beginning of period $ 1,600 $ 1,550
Provisions 3 81
Total charge-offs (60) (173)
Total recoveries 9 18
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Net charge-offs (51) (155)
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Balance at end of period $ 1,552 $ 1,476
============================================================================================
Ratio of net charge-offs during the period
to average loans outstanding during the period 0.02% 0.06%
============================================================================================
Allowance for loan losses to total non-performing
loans at end of period 100.39% 157.52%
============================================================================================
Allowance for loan losses to total loans 0.71% 0.55%
============================================================================================
(3) REGULATORY MATTERS
The capital distribution regulation of the OTS requires that the institution
provide the applicable OTS District 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, 2004 and $327,000 to the company during the six months ended
March 31, 2005.
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED) INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX
MONTHS THEN ENDED IS 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%. At March 31, 2005, the bank was classified as a
well-capitalized financial institution.
The following presents the bank's capital position at March 31, 2005:
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Required Required Actual Actual
Balance Percent Balance Percent Surplus
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(Dollars in Thousands)
Leverage $19,080 5.00% $26,199 6.87% $ 7,119
Tier 1 Risk-based $13,694 6.00% $26,199 11.48% $12,505
Total Risk-based $22,823 10.00% $27,179 11.91% $ 4,356
===============================================================================================================
(4) 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 to employees and warrants for 94,685 shares to stockholders. The Plan was
amended effective March 14, 2000, to increase the number of options available
for grant 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 granted prior to October
6, 2004 vested immediately upon issuance and carried a maximum term of 10 years,
the exercise price for the stock options and warrants was the fair market value
at grant date. An additional 104,000 shares were granted on October 6, 2004 with
vesting extended over a 2-to 5-year term at a price in excess of the then
current market value of the shares. As of March 31, 2005, 94,685 warrants were
issued.
The following summary represents the activity under the Plan:
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Number of Exercise Expiration Date
Shares Price
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Balance outstanding and exercisable at September 30, 2002 190,000
Options granted -
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Balance outstanding and exercisable at September 30, 2003 190,000
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Options granted 36,000 $ 8.50 10-20-2013
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Balance outstanding and exercisable at September 30, 2004 226,000
Options granted 104,000 $ 6.75 10-6-2014
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Balance outstanding and exercisable at March 31, 2005 330,000
===============================================================================================================
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but it continues to measure compensation cost for
the stock options using the intrinsic value method prescribed by APB Opinion No.
25. As allowable under SFAS 123, the Company used the Black-Scholes method to
measure the compensation cost of stock options granted in the first quarter of
fiscal 2005 with the following assumptions: risk free interest rate of 4.23%, a
dividend payout rate of zero, and an expected option life of ten years. The
volatility is 72%. Using those assumptions, the average weighted fair value of
the stock options granted during fiscal 2005 was $4.93.
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX MONTHS THEN ENDED IS UNAUDITED
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
If the Company had elected to recognize compensation cost based on the
value at the grant dates with the method prescribed by SFAS 123, net income
(loss) would have been changed to the pro forma amounts indicated below:
Six months ended March
31,
---------------------------
2005 2004
-------------------------------------------------------------------------------------------------
(In Thousands, except per share data)
Net earnings (loss) $ 526 $ (1,561)
Deduct: Total stock-based employee compensation expense (318) (129)
-------------------------------------------------------------------------------------------------
Pro forma net earnings (loss) attributable to common stockholders $ 208 $ (1,690)
=================================================================================================
Earnings (loss) per common share
Basic $ 0.17 $ (0.52)
Diluted $ 0.17 $ (0.52)
Earnings (loss) per common share, pro forma
Basic $ 0.07 $ (0.60)
Diluted $ 0.05 $ (0.60)
(5) 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 reflects the potential dilution of
securities that could share in the earnings of an entity. The following table
presents a reconciliation between the weighted average shares outstanding for
basic and diluted earnings per share for the six months ended March 31, 2005.
The effect of the conversion of preferred securities and the impact of stock
options were antidilutive for the period ended March 31, 2004.
Six months ended March 31,
-----------------------------------
2005 2004
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(Dollars in Thousands, except per share data)
Net earnings $ 526 $ (1,561)
Effect of conversion of preferred securities 203 203
Diluted earnings per share 729 (1,358)
Weighted average common shares outstanding 3,012,434 3,012,434
Effect of conversion of preferred securities 1,371,429 1,371,429
Common stock equivalents due to dilutive effect of stock options 23,404 39,062
Total weighted average common shares and common
share equivalents outstanding 4,407,266 4,422,925
Basic earnings per common share $ 0.17 $ (0.52)
Diluted earnings per common share $ 0.17 $ (0.52)
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED) INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX
MONTHS THEN ENDED IS UNAUDITED
(6) SEGMENT REPORTING
The company has two reportable segments, banking and mortgage banking.
The bank operates retail deposit branches in the greater Washington,
D.C./Baltimore metropolitan area. The banking segment provides retail consumers
and small businesses with deposit products such as demand, transaction, savings
accounts and certificates of deposit and lending products, such as residential
and commercial real estate, construction and development, consumer and
commercial business loans. Further, the banking segment invests in residential
real estate loans purchased from GAMC and others, and also invests in
mortgage-backed and other securities. The mortgage banking segment activities,
which are conducted principally through GAMC, include the origination of
residential real estate loans either for the bank's portfolio or for sale into
the secondary market with servicing released.
The company evaluates performance based on net interest income,
noninterest income, and noninterest expense. The total of these three items is
the reportable segment's net contribution. The company's reportable segments are
strategic business units that offer different services in different geographic
areas. They are managed separately because each segment appeals to different
markets and, accordingly, requires different technology and marketing
strategies.
Since the company derives a significant portion of its banking revenue
from interest income as offset by interest expense, the segments are reported
below using net interest income. Because the company also evaluates performance
based on noninterest income and noninterest expense, these measures of segment
profit and loss are also presented.
- --------------------------------------------------------------------------------------------------------------------
Total
Mortgage Reportable Intersegment
For the six months ended March 31, Banking Banking Segments Eliminations Total
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
Net interest income: (1)
2005 $ 2,978 $ 74 $ 3,052 $ - $ 3,052
2004 2,937 284 3,221 - 3,221
Noninterest income:
2005 $ 2,586 $ 2,346 $ 4,932 $ (20) $ 4,912
2004 85 4,392 4,477 (7) 4,470
Noninterest expense:
2005 $ 4,985 $ 2,473 $ 7,458 $ (20) $ 7,438
2004 5,019 4,240 9,259 (7) 9,252
Net income (loss):
2005 $ 579 $ (53) $ 526 $ - $ 526
2004 (1,996) 435 (1,561) - (1,561)
Segment assets:
2005 $378,747 $13,653 $392,400 $(10,378) $ 382,022
2004 532,400 14,541 546,941 (8,912) 538,029
(1) Segment net interest income reflects income after provisions for loan losses.
The bank has entered into a new management agreement with its manager
of the mortgage-banking subsidiary. Under the agreement the manager will
reimburse operating expenses equal to approximately 100% of any operating loss
in return for an increase in his share of net earnings from 40% to 80%. The
manager has secured his performance under the management contract with
acceptable collateral and may terminate the agreement anytime after June 30,
2005 or when total losses exceed $1.7 million. Reflected in the mortgage banking
non-interest expense for 2005 of $2.5 million is a reduction of $972,000 by the
manager of the mortgage company.
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED) INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX
MONTHS THEN ENDED IS UNAUDITED
(7) RECENT ACCOUNTING STANDARDS
On December 16, 2004, the Financial Accounting Standards Board issued
Statement No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for either equity instruments of the
company or liabilities that are based on the fair value of the company's equity
instruments or that may be settled by the issuance of such equity instruments.
FAS 123R eliminates the ability to account for share-based compensation
transactions using the intrinsic method and requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in the
consolidated statement of income. The effective date of FAS 123R (as amended by
the SEC) is for annual periods beginning after June 15, 2005. The provisions of
FAS 123R do not have an impact on the company's results of operations at the
present time.
In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB
107). SAB 107 expresses the views of the SEC staff regarding the interaction of
FAS 123R and certain SEC rules and regulations and provides the SEC staff's view
regarding the valuation of share-based payment arrangements for public
companies. SAB 107 does not impact the company's results of operations at the
present time.
(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. All intercompany
interest and equity were eliminated in consolidation.
The Trust was formed for the sole purpose of investing the proceeds
from the sale of the convertible preferred securities in the corresponding
convertible debentures. 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 $9.2 million after deducting
offering expenses. The company retained approximately $1.5 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.
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GREATER ATLANTIC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INFORMATION AS OF MARCH 31, 2005 AND FOR THE SIX MONTHS THEN ENDED IS UNAUDITED
(9) DERIVATIVE FINANCIAL INSTRUMENTS
Beginning in fiscal 2002, the Bank utilized derivative financial
instruments to hedge its interest rate risk. Beginning in 2002, the Bank adopted
statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. The Bank bases the estimated fair values of these
agreements on the cost of interest-rate exchange agreements with similar terms
at available market prices, excluding accrued interest receivable and payable.
However, active markets do not exist for many types of financial instruments.
Consequently, fair values for these instruments must be estimated using
techniques such as discounted cash flow analysis and comparisons to similar
instruments. Estimates developed using these methods are highly subjective and
require judgments regarding significant matters such as the amount and timing of
future cash flows and the selection of discount rates that appropriately reflect
market and credit risks. Changes in these judgments often have a material effect
on the fair value estimates. Since those estimates are made as of a specific
time, they are susceptible to material near term changes.
The bank entered into various interest-rate swaps that total $57
million in notional principal. The swaps pay a fixed rate with the bank
receiving payments based upon one- to three-month floating rate LIBOR. The
capped range is between 1.31% - 4.41%, and expires between 1 and 5 years. The
bank also entered into various interest rate caps that total $30 million in
notional principal with terms between four and ten years that limit the float
between a floor of 2.00%, and capped between 5.00% - 8.00%. The bank accounts
for these derivatives, under the guidelines of SFAS 133.
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 six months ended March 31, 2005 and 2004 the instruments
did not meet hedge accounting requirements. The statement of operations includes
net gains of $882,000 and losses of $441,000 for the six months ended March 31,
2005 and 2004, respectively.
13
14
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.
MORTGAGE BANKING ACTIVITIES
The company adopted new accounting requirements relating to SFAS No.
149 which requires that mortgage loan commitments related to loans originated
for sale be accounted for as derivative instruments. In addition, forward loan
sale agreements also meet the definition of a derivative instrument under SFAS
No. 133.
Our mortgage banking activities include loans in our pipeline (from
application through sale). Loans in our pipeline are considered commitments once
the customers accept a rate lock. In a rate lock commitment, clients while in
the process of obtaining approval for residential loans can, at their own
determination, fix or "lock in" the rate on the loan. Those commitments are
generally for periods of 30 to 90 days and are at market rates. We generally
enter into forward sales contracts on rate lock commitments on either a best
efforts or mandatory basis.
Mortgage loans originated and intended for sale are carried at the
lower of aggregate cost or market value. To deliver closed loans and to control
interest rate risk prior to sale, the company enters into agreements to sell the
loans while the loans are still in the pipeline. Loan commitments related to the
origination of mortgage loans held for sale and the corresponding sales
contracts are considered derivative instruments. At March 31, 2005, the bank had
$30.2 million of loans held for sale and commitments outstanding related to
loans being originated for sale to investors. The effective portion of these
instruments as derivatives was recorded as a net gain of $32,000 in the
statement of operations at March 31, 2005.
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, Greater Atlantic Bank, a federally chartered savings bank, and its
wholly owned subsidiary, Greater Atlantic Mortgage Corp. Greater Atlantic Bank
is a member of the Federal Home Loan Bank system and the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation insures its deposits
up to applicable limits. We offer traditional banking services to customers
through seven Greater Atlantic Bank branches located throughout the greater
Washington, D.C./Baltimore metropolitan area. We also originate mortgage loans
for sale in the secondary market through Greater Atlantic Mortgage Corp.
14
15
The profitability of the company, and more specifically, the
profitability of its primary subsidiary Greater Atlantic Bank, 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 and available-for-sale investments,
service charge fees and commissions earned by non-bank subsidiaries
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.
At March 31, 2005 the company's total assets were $382.0 million,
compared to the $434.4 million held at September 30, 2004, representing a
decrease of 12.05%. Both the bank's overall asset size and customer base
decreased during the period and that decline is reflected in the consolidated
statements of financial condition and statements of operations. Net loans
receivable at March 31, 2005 were $206.8 million, a decrease of $39.6 million or
16.06% from the $246.4 million held at September 30, 2004. The decrease in loans
consisted primarily of single-family and commercial business loans due in part
to prepayments of principal and the bank's exchange of $23.3 million of
single-family loans for mortgage-backed securities which were sold during the
the period ended December 31, 2004. At March 31, 2005, investment securities
were $134.6 million, a decrease of $18.4 million or 12.03% from the $153.0
million held at September 30, 2004. Deposits at March 31, 2005 were $260.1
million, a decrease of $28.9 million, which resulted primarily from the sale of
the bank's branch offices located in Washington, D.C. and Winchester, Virginia.
The previously announced sale of the Sterling, Virginia, branch office was
completed on April 1, 2005 with the transfer of $6.7 million in deposits and
with the Bank recognizing a $269,000 gain on sale. That gain will be reflected
for the period ended June 30, 2005.
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 valuation of the loan portfolio.
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. Determining the
allowance for loan losses is a 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.
15
16
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2005 AND MARCH 31, 2004
NET INCOME. For the three months ended March 31, 2005, the company had
net earnings of $65,000 or $0.04 per diluted share compared to losses of $1.3
million or $0.42 per diluted share for the three months ended March 31, 2004.
The improvement in earnings of $1.3 million over the comparable period one-year
ago was positively impacted by an increase in non-interest income, a decrease in
non-interest expense and a decrease in the provision for loan losses. Those
improvements were offset by a decrease in net interest income.
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
-------------------------------
Three Months Ended March 31, 2005 2004 Amount %
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income:
Loans $ 2,966 $ 3,375 $ (409) (12.12)%
Investments 1,175 1,614 (439) (27.20)
- ---------------------------------------------------------------------------------------------------------------------
Total 4,141 4,989 (848) (17.00)
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 1,512 1,377 135 9.80
Borrowings 1,162 1,720 (558) (32.44)
- ---------------------------------------------------------------------------------------------------------------------
Total 2,674 3,097 (423) (13.66)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,467 $ 1,892 $ (425) (22.46)%
=====================================================================================================================
The decrease in net interest income during the quarter ended March 31,
2005, resulted primarily from a $142.3 million decrease in the bank's average
interest-earning assets offset in part by a decrease of $140.6 million in the
bank's average interest-bearing liabilities and an 11 basis point increase in
net interest margin (net interest income divided by average interest-earning
assets) from 1.47% for the quarter ended March 31, 2004 to 1.58% for the quarter
ended March 31, 2005. Contributing to the improvement in the banks net interest
margin was a $338,000 decline in interest expense resulting from payments made
on certain interest rate swap and cap agreements compared to a charge of
$492,000 in the comparable period one year ago. The progress in net interest
margin also resulted from the average yield on interest-earning assets
increasing 5 basis points more than the increase in the average cost on
interest-bearing liabilities and was partially offset by a decrease in the
bank's average interest-earning assets exceeding the decrease in average
interest-bearing liabilities by $1.7 million.
INTEREST INCOME. Interest income for the three months ended March 31,
2005 decreased $848,000 compared to the three months ended March 31, 2004,
primarily as a result of a decrease in the average outstanding balances of loans
and investment securities. That decrease was partially offset by an increase of
57 basis points in the average yield earned on interest earning assets.
16
17
INTEREST EXPENSE. The $423,000 decrease in interest expense for the
three months ended March 31, 2005 compared to the 2004 period was principally
the result of a $140.6 million decrease in average deposits and borrowed funds.
The decrease in the cost of those funds was partially offset by a 52 basis point
increase in the cost of funds on average deposits and borrowed funds. The
increase in interest expense on deposits was primarily due to a 35 basis point
increase in rates paid on certificates of deposit, savings and NOW and money
market accounts. That increase was partially offset by a decrease of $15.6
million, in certificates, savings and NOW and money market accounts from $264.5
million for the three months ended March 31, 2004 to $248.9 million for the
three months ended March 31, 2005. The increase in rates was primarily due to
higher rates paid on interest-bearing demand deposits, savings accounts and
certificates and elevated pricing on new and renewed time deposits.
The decrease in interest expense on borrowings for the three months
ended March 31, 2005 compared to the 2004 period was principally the result of a
$125.0 million decrease in average borrowed funds and was partially offset by a
142 basis point increase in the cost of borrowed funds. Components accountable
for the decrease of $558,000 in interest expense on borrowings were an $841,000
decrease relating to average volume, offset by a $283,000 increase relating to
average cost.
17
18
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 MARCH 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------------- ----------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE YIELD/RATE
-------------------------------------- ----------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans $ 107,218 $ 1,650 6.16% $ 159,264 $ 2,171 5.45%
Consumer loans 72,377 886 4.90 66,180 631 3.81
Commercial business loans 41,014 430 4.19 44,572 573 5.14
----------- --------- -------- ----------- --------- --------
Total loans 220,609 2,966 5.38 270,016 3,375 5.00
Investment securities 69,743 583 3.34 123,465 789 2.56
Mortgage-backed securities 80,913 592 2.93 120,126 825 2.75
----------- --------- -------- ----------- --------- --------
Total interest-earning assets 371,265 4,141 4.46 513,607 4,989 3.89
--------- -------- --------- --------
Non-earning assets 16,873 18,298
----------- -----------
Total assets $ 388,138 $ 531,905
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts $ 10,466 24 0.92 $ 10,867 26 0.96
Now and money market accounts 61,443 226 1.47 78,320 211 1.08
Certificates of deposit 176,982 1,262 2.85 175,275 1,140 2.60
----------- --------- -------- ----------- --------- --------
Total deposits 248,891 1,512 2.43 264,462 1,377 2.08
FHLB advances 44,722 483 4.32 137,810 751 2.18
Other borrowings 60,807 679 4.47 92,754 969 4.18
----------- --------- -------- ----------- --------- --------
Total interest-bearing
liabilities 354,420 2,674 3.02 495,026 3,097 2.50
--------- -------- --------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 14,458 13,575
Other liabilities 1,612 3,223
----------- -----------
Total liabilities 370,490 511,824
Stockholders' equity 17,648 20,081
----------- -----------
Total liabilities and
stockholders' Equity $ 388,138 $ 531,905
=========== ===========
Net interest income $ 1,467 $ 1,892
========= =========
Interest rate spread 1.44% 1.39%
======== ========
Net interest margin 1.58% 1.47%
======== ========
18
19
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
MARCH 31, 2005 COMPARED TO
MARCH 31, 2004
-----------------------------------------------
CHANGE ATTRIBUTABLE TO
-----------------------------------------------
VOLUME RATE TOTAL
-----------------------------------------------
(IN THOUSANDS)
Real estate loans $ (709) $ 188 $ (521)
Consumer loans 59 196 255
Commercial business loans (46) (97) (143)
--------------- ------------- -------------
Total loans (696) 287 (409)
Investments (343) 137 (206)
Mortgage-backed securities (269) 36 (233)
--------------- ------------- -------------
Total interest-earning assets $ (1,308) $ 460 $ (848)
=============== ============= =============
Savings accounts $ (1) $ (1) $ (2)
Now and money market accounts (45) 60 15
Certificates of deposit 11 111 122
--------------- ------------- -------------
Total deposits (35) 170 135
FHLB advances (507) 239 (268)
Other borrowings (334) 44 (290)
--------------- ------------- -------------
Total interest-bearing liabilities (876) 453 (423)
=============== ============= =============
Change in net interest income $ (432) $ 7 $ (425)
=============== ============= =============
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 and
assigns to them a reserve percentage that reflects the industry median.
Management then looks at its classified assets, which are loans 30 days or more
delinquent, and classifies those loans as special mention, substandard, doubtful
or loss based on the performance of the loans. Those classified loans are then
individually evaluated for impairment and measured by either the present value
of expected future cash flows, the loans observable market price, or the fair
value of the collateral. They are then segmented by type and assigned a reserve
that reflects the underlying quality of the loan. 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.
Non-performing assets were $1.5 million or 0.40% of total assets at
March 31, 2005, with $1.5 million classified as substandard, $32,000 classified
as doubtful and none classified as loss compared to non-performing assets of
$937,000 or 0.17% at March 31, 2004. The increase in non-performing assets from
the comparable period one-year ago, was due primarily to the Bank's $500,000
interest in a loan on a hotel property, located in Easton, Maryland, that became
non-performing during the quarter. As a result, the Bank provided an increase of
$112,000 in the required allowance for the Bank's non-performing loans. Overall,
the provision for loan losses decreased due primarily to a $176,000 reduction in
the required allowance based on the structure of the Bank's overall loan
portfolio.
19
20
NON-INTEREST INCOME. Non-interest income increased $840,000 during the
quarter ended March 31, 2005, over the comparable period one year ago. That
increase was primarily the result of increases of $1.5 million and $426,000 in
gain on sale of investments and derivatives and other operating income,
respectively, and was partially offset by a decrease of $1.1 million in gain on
sale of loans. The level of gain on sale of loans during the quarter ended March
31, 2005 resulted from lower loan origination and sales volumes at the bank's
mortgage banking subsidiary and lower margins than those obtained in the
year-ago period. The increase in other operating income reflects the gain of
$414,000 recognized from the sale of the bank's Winchester, Virginia, branch.
The following table presents a comparison of the components of
non-interest income.
Difference
--------------------------------------
Three Months Ended March 31, 2005 2004 Amount %
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-interest income:
Gain on sale of loans $ 1,249 $ 2,307 $ (1,058) (45.86)%
Service fees on loans 77 54 23 42.59
Service fees on deposits 137 193 (56) (29.02)
Gain (loss) on sale of investment - (156) 156 100.00
securities
Gain (loss) on derivatives 519 (830) 1,349 162.53
Other operating income 431 5 426 8,520.00
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 2,413 $ 1,573 $ 840 53.40%
===================================================================================================================
NON-INTEREST EXPENSE. Non-interest expense decreased $918,000 from $4.7
million for the quarter ended March 31, 2004 to $3.8 million for the three
months ended March 31, 2005. The decrease was primarily attributable to an
$875,000 decrease in the mortgage company's non-interest expense from that
incurred in the comparable period one year ago. The decrease in non-interest
expense at the mortgage company level was primarily $776,000 in compensation, of
which $401,000 was an expense reimbursement by the manager, coupled with
decreases in other operating expenses, professional services, data processing
and occupancy. Those decreases were offset by increases in advertising and
furniture fixtures and equipment. Mortgage related expenses should continue to
decline because of the lag in timing of such expenses compared to the decline in
origination and sales volumes and with the new compensation agreement entered
into with the manager of the mortgage banking subsidiary. Under the new
compensation agreement, the manager will absorb 100% of any operating loss in
return for an increase in his share of net earnings from 40% to 80%. The
decrease in the bank's non-interest expense was $44,000 distributed over various
non-interest expense categories.
The following table presents a comparison of the components of
non-interest expense.
Difference
---------------------------------
Three Months Ended March 31, 2005 2004 Amount %
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-interest expense:
Compensation and employee benefits $ 1,330 $ 2,181 $ (851) (39.02)%
Occupancy 434 510 (76) (14.90)
Professional services 291 259 32 12.36
Advertising 579 525 54 10.29
Deposit insurance premium 21 11 10 90.91
Furniture, fixtures and equipment 284 257 27 10.51
Data processing 313 353 (40) (11.33)
Other operating expense 562 636 (74) (11.64)
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 3,814 $ 4,732 $ (918) (19.40)%
=====================================================================================================================
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. Based on recent tax legislation, the company expects to
offset all taxable income in fiscal 2005 with existing net operating losses
carried forward from prior years.
20
21
Contractual Obligations and Off-Balance Sheet Financing Arrangements
The following table summarizes the bank's contractual obligations at
March 31, 2005 and the effect these obligations are expected to have on the
bank's liquidity and cash flows in future periods.
-----------------------------------------------------------------------------------------------------------------
Less Than One Two - Three Four - Five After Five
Total Year Years Years Years
-----------------------------------------------------------------------------------------------------------------
(In thousands)
FHLB Advances (1) $ 41,000 $ 8,000 $ 8,000 $ 20,000 $ 5,000
Reverse repurchase agreements (1) 52,667 52,667 - - -
Operating leases 6,260 1,071 2,070 1,950 1,169
-----------------------------------------------------------------------------------------------------------------
Total obligations $ 99,927 $ 61,738 $ 10,070 $ 21,950 $ 6,169
=================================================================================================================
(1) The company expects to refinance these short and medium-term obligations under substantially the same terms and conditions.
Other Commercial Commitments
-----------------------------------------------------------------------------------------------------------------
Less Than One Two - Three Four - Five After Five
Total Year Years Years Years
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
Certificate of deposit maturities(1) $ 174,463 $ 123,292 $ 40,886 $ 10,192 $ 93
Loan originations 64,002 64,002 - - -
Unfunded lines of credit 104,299 104,299 - - -
Standby letters of credit 492 492 - - -
-----------------------------------------------------------------------------------------------------------------
Total $ 343,256 $ 292,085 $ 40,886 $ 10,192 $ 93
=================================================================================================================
(1) The company expects to retain maturing deposits or replace amounts maturing with comparable certificates of
deposits based on current market interest rates.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED MARCH 31, 2005 AND MARCH 31, 2004
NET INCOME. For the six months ended March 31, 2005, the company had
net earnings of $526,000 or $0.17 per diluted share compared to a loss of $1.6
million or $0.52 per diluted share for the six months ended March 31, 2004. The
$2.1 million improvement in earnings over the comparable period one-year ago
resulted from an increase of $442,000 in non-interest income and was coupled
with decreases of $1.8 million in non-interest expense and $78,000 in provision
for loan losses. Those improvements to net income were offset in part by a
decrease in net interest income of $247,000. The decrease in provision was due
primarily to a reduction in the required allowance needed for the bank's overall
loan portfolio offset in part by an increase required for the bank's
non-performing loans.
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.
21
22
The following table presents a comparison of the components of interest
income and expense and net interest income.
Difference
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended March 31, 2005 2004 Amount %
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest income:
Loans $ 6,269 $ 6,517 $(248) (3.81)%
Investments 2,277 3,010 (733) (24.35)
- -----------------------------------------------------------------------------------------------------------------------
Total 8,546 9,527 (981) (10.30)
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 3,026 2,845 181 6.36
Borrowings 2,465 3,380 (915) (27.07)
- -----------------------------------------------------------------------------------------------------------------------
Total 5,491 6,225 (734) (11.79)
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,055 $ 3,302 $(247) (7.48)%
=======================================================================================================================
The decline in net interest income during the six months ended March
31, 2005, resulted primarily from a $125.6 million decrease in the bank's
average interest-earning assets offset in part by a decrease of $121.6 million
in the bank's average interest-bearing liabilities and an 30 basis point
increase in net interest margin (net interest income divided by average
interest-earning assets) from 1.29% for the six months ended March 31, 2004 to
1.59% for the six months ended March 31, 2005. Contributing to the improvement
in the bank's net interest margin was a $594,000 decline in interest expense
resulting from payments made on certain interest rate swap and cap agreements
compared to a charge of $1.1 million in the comparable period one year ago. The
improvement in net interest margin also resulted from the average yield on
interest-earning assets increasing 27 basis points more than the increase in the
average cost on average interest-bearing liabilities and was partially offset by
a decrease in the bank's average interest-earning assets exceeding the decrease
in average interest-bearing liabilities by $4.0 million.
INTEREST INCOME. Interest income for the six months ended March 31,
2005 decreased $981,000 compared to the six months ended March 31, 2004,
primarily as a result of a decrease in the average outstanding balances of loans
and investment securities. That decrease was partially offset by an increase of
71 basis points in the average yield earned on interest earning assets.
INTEREST EXPENSE. The $734,000 decrease in interest expense for the six
months ended March 31, 2005 compared to the 2004 period was principally the
result of a $121.6 million decrease in average deposits and borrowed funds. The
decrease in the cost of those funds was partially offset by a 44 basis point
increase in the cost of funds on average deposits and borrowed funds. The
increase in interest expense on deposits was primarily due to a 26 basis point
increase in rates paid on certificates of deposit, savings and NOW and money
market accounts. That increase was partially offset by a decrease of $14.0
million, in certificates, savings and NOW and money market accounts from $273.1
million for the six months ended March 31, 2004 to $259.1 million for the six
months ended March 31, 2005. The increase in rates was primarily due to higher
rates paid on interest-bearing demand deposits, savings accounts and
certificates and elevated pricing on new and renewed time deposits.
The decrease in interest expense on borrowings for the six months ended
March 31, 2005 compared to the 2004 period was principally the result of a
$107.7 million decrease in average borrowed funds and was partially offset by a
137 basis point increase in the cost of borrowed funds. Components accountable
for the decrease of $915,000 in interest expense on borrowings were a $1.5
million decrease relating to average volume, offset by a $565,000 increase
relating to average cost.
22
23
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 SIX MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------------- ----------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE YIELD/RATE
-------------------------------------- ----------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Real estate loans $110,915 $3,497 6.31% $154,933 $4,207 5.43%
Consumer loans 72,794 1,718 4.72 66,001 1,253 3.80
Commercial business loans 43,473 1,054 4.85 42,239 1,057 5.00
------------- -------- -------- --------- --------- --------
Total loans 227,182 6,269 5.52 263,173 6,517 4.95
Investment securities 70,791 1,092 3.09 133,485 1,688 2.53
Mortgage-backed securities 87,135 1,185 2.72 114,050 1,322 2.32
------------- -------- -------- --------- --------- --------
Total interest-earning assets 385,108 8,546 4.44 510,708 9,527 3.73
-------- -------- --------- --------
Non-earning assets 19,320 17,750
------------- ---------
Total assets $404,428 $528,458
============= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts $ 11,803 56 0.95 $10,915 51 0.93
Now and money market accounts 67,121 456 1.36 77,697 419 1.08
Certificates of deposit 180,201 2,514 2.79 184,479 2,375 2.57
------------- -------- -------- --------- --------- --------
Total deposits 259,125 3,026 2.34 273,091 2,845 2.08
FHLB advances 45,405 972 4.28 127,030 1,431 2.25
Other borrowings 64,558 1,493 4.63 90,603 1,949 4.30
------------- -------- -------- --------- --------- --------
Total interest-bearing liabilities 369,088 5,491 2.98 490,724 6,225 2.54
-------- -------- --------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 14,978 13,128
Other liabilities 1,651 4,106
------------- ---------
Total liabilities 385,717 507,958
Stockholders' equity 18,711 20,500
------------- ---------
Total liabilities and stockholders'
equity $404,428 $528,458
============= =========
Net interest income $3,055 $3,302
======== =========
Interest rate spread 1.46% 1.19%
======== ========
Net interest margin 1.59% 1.29%
======== ========
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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.
SIX MONTHS ENDED
MARCH 31, 2005 COMPARED TO
MARCH 31, 2004
-------------------------------------------------
CHANGE ATTRIBUTABLE TO
-------------------------------------------------
VOLUME RATE TOTAL
-------------------------------------------------
(IN THOUSANDS)
Real estate loans $ (1,195) $ 485 $ (710)
Consumer loans 129 336 465
Commercial business loans 31 (34) (3)
--------------- -------------- --------------
Total loans (1,035) 787 (248)
Investments (793) 197 (596)
Mortgage-backed securities (312) 175 (137)
--------------- -------------- --------------
Total interest-earning assets $ (2,140) $ 1,159 $ (981)
=============== ============== ==============
Savings accounts $ 4 $ 1 $ 5
Now and money market accounts (57) 94 37
Certificates of deposit (55) 194 139
--------------- -------------- --------------
Total deposits (108) 289 181
FHLB advances (920) 461 (459)
Other borrowings (560) 104 (456)
--------------- -------------- --------------
Total interest-bearing liabilities (1,588) 854 (734)
=============== ============== ==============
Change in net interest income $ (552) $ 305 $ (247)
=============== ============== ==============
PROVISION FOR LOAN LOSSES. Non-performing assets were $1.5 million or
0.40% of total assets at March 31, 2005, with $1.5 million classified as
substandard, $32,000 classified as doubtful and none classified as loss compared
to non-performing assets of $937,000 or 0.17% at March 31, 2004. The increase in
non-performing assets from the comparable period one-year ago, was due primarily
to the Bank's $500,000 interest in a loan on a hotel property, located in
Easton, Maryland, that became non-performing during the quarter. As a result,
the Bank provided an increase of $112,000 in the required allowance for the
Bank's non-performing loans. Overall, the provision for loan losses decreased
due primarily to a $176,000 reduction in the required allowance based on the
structure of the Bank's overall loan portfolio.
NON-INTEREST INCOME. Non-interest income increased $442,000 during the
six months ended March 31, 2005, over the comparable period one year ago. That
increase was primarily the result of increases of $1.7 million and $706,000 in
gain on sale of investments and gains on derivatives, and other operating
income, respectively, and was partially offset by a decrease of $1.9 million in
gain on sale of loans. The level of gain on sale of loans during the six months
ended March 31, 2005 resulted from lower than anticipated loan origination and
sales volumes at the bank's mortgage banking subsidiary and lower margins than
those obtained in the year-ago period. The increase in other operating income
reflects the gain of $683,000 recognized from the sale of the bank's Washington
D.C. and Winchester, Virginia branches.
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The following table presents a comparison of the components of
non-interest income.
Difference
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended March 31, 2005 2004 Amount %
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Non-interest income:
Gain on sale of loans $ 2,327 $ 4,264 $ (1,937) (45.43)%
Service fees on loans 144 113 31 27.43
Service fees on deposits 305 368 (63) (17.12)
Gain on sale of investment securities 538 156 382 244.87
Gain (loss) on derivatives 882 (441) 1,323 300.00
Other operating income 716 10 706 7,060.00
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 4,912 $ 4,470 $ 442 9.89%
==================================================================================================================
NON-INTEREST EXPENSE. Non-interest expense decreased $1.8 million from
$9.3 million for the six months ended March 31, 2004 to $7.4 million for the
comparable period in the current year. The decrease was primarily attributable
to a $1.8 million decrease in the mortgage company's non-interest expense from
the comparable period one year ago as a result of decreased loan origination and
sales and a new compensation agreement entered into with the manager of the
mortgage banking subsidiary. The decrease in non-interest expense at the
mortgage company level was primarily $1.6 million in compensation of which
$972,000 was an expense reimbursement by the manager, coupled with decreases in
other operating expenses, professional services, data processing and occupancy.
Those decreases were offset by increases in advertising and furniture fixtures
and equipment. Mortgage related expenses should continue to decline because of
the lag in timing of such expenses compared to the decline in origination and
sales volumes. The decrease in the bank's non-interest expense was a modest
$33,000 distributed over various non-interest expense categories.
The following table presents a comparison of the components of
non-interest expense.
Difference
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended March 31, 2005 2004 Amount %
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Noninterest expense:
Compensation and employee benefits $ 2,561 $ 4,174 $ (1,613) (38.64)%
Occupancy 895 1,010 (115) (11.39)
Professional services 511 547 (36) (6.58)
Advertising 1,138 946 192 20.30
Deposit insurance premium 32 22 10 45.45
Furniture, fixtures and equipment 583 515 68 13.20
Data processing 637 703 (66) (9.39)
Other operating expense 1,081 1,335 (254) (19.03)
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 7,438 $ 9,252 $ (1,814) (19.61)%
=======================================================================================================================
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. Based on recent tax legislation, the company expects to
offset all taxable income in fiscal 2005 with existing net operating losses
carried forward from prior years.
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 has continued to maintain the levels of
liquid assets as 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 March 31, 2005, cash and cash equivalents, interest bearing deposits
and securities available-for-sale totaled $140.0 million or 36.66% of total
assets.
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The primary investing activities of the bank are the origination of
residential one- to four-family loans, commercial real estate loans, real estate
construction and development loans, commercial borrowing and consumer loans and
the purchase of United States Treasury and agency securities, mortgage-backed
and mortgage-related securities and other investment securities. During the six
months ended March 31, 2005, the bank's loan purchases and originations totaled
$56.5 million. Purchases of United States Treasury and agency securities,
mortgage-backed and mortgage related securities and other investment securities
totaled $33.4 million for the six months ended March 31, 2005.
The bank has other sources of liquidity if a need for additional funds
arises. At March 31, 2005, the bank had $41.0 million in advances outstanding
from the FHLB and had an additional overall borrowing capacity from the FHLB of
$84.7 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 meet its needs.
At March 31, 2005, the bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $168.8 million. The bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from March 31, 2005, totaled
$60.3 million. Based upon experience, management believes the majority of
maturing certificates of deposit will remain with the bank. In addition,
management of the bank believes that it can adjust the rates offered on
certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the bank, the bank would be able to utilize FHLB advances and
reverse repurchase agreements to fund deposit withdrawals, which would result in
an increase in interest expense to the extent that the average rate paid on such
borrowings exceeds the average rate paid on deposits of similar duration.
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, particularly its mortgage
banking activities. 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 intend to attract a greater
proportion of short-term liabilities, which will 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 and the origination and sale of fixed-rate loans. We retain short-term
and adjustable-rate assets because they have re-pricing characteristics that
more closely match the re-pricing characteristics of our liabilities.
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To further mitigate the risk of timing differences in the re-pricing of
assets and liabilities, our interest-earning assets are matched with
interest-bearing liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed with
short-term deposits and borrowings. Periodically, mismatches are identified and
managed by adjusting the re-pricing characteristics of our interest-bearing
liabilities with derivatives, such as interest rate caps and interest rate
swaps.
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.
Should interest rates on deposits and borrowings rise, the interest
rate caps and pay-fixed interest rate swaps are designed to provide an
additional layer of protection by effectively lengthening the re-pricing period.
At March 31, 2005, we held an aggregate notional value of $30 million of caps
and $57 million of swaps that pay a fixed interest rate. None of the interest
rate caps had strike rates that were in effect at March 31, 2005, as current
LIBOR rates were below the strike rates.
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 depositor and other retail banking fees.
ITEM 4. CONTROLS AND PROCEDURES
(a). Evaluation of disclosure controls and procedures. The Company
------------------------------------------------
maintains controls and procedures designed to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures performed within the period, the chief executive and chief financial
officers of the Company concluded that the Company's disclosure controls and
procedures were effective.
(b). Changes in internal control. The company made no significant
---------------------------
changes in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of those controls
by the Chief Executive and Chief Financial officers.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
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ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Greater Atlantic Financial Corp. annual Stockholder's Meeting was
held on March 2, 2005.
(b) Omitted per instructions
(c) A brief description of each matter voted upon at the Annual
Stockholder's Meeting held on March 2, 2005 and number of votes cast
for, against or withheld.
1. Election of Directors.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
Charles W. Calomiris 1,983,341 0 542,245
Carroll E. Amos 1,983,341 0 542,245
James B. Vito 2,165,844 0 359,742
In addition to Charles W. Calomiris, Carroll E. Amos and James B. Vito,
the terms of office of Directors Paul Cinquegrana, Jeffrey W. Ochsman,
Jeffrey M. Gitelman and Sidney M. Bresler continued after the meeting.
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
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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: May 13, 2005
29