e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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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 000-49929
Access National Corporation
(Exact name of registrant as specified in its charter)
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Virginia
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82-0545425 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
1800 Robert Fulton Drive, Suite 300, Reston, Virginia 20191
(Address of principal executive offices) (Zip Code)
(703) 871-2100
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
Common Stock $.835 par value
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Name of each exchange on which registered
The NASDAQ Stock Market LLC |
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Securities registered pursuant to Section 12(g) of the Act:
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(Title of class) None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
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 þ No o
Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) o Yes þ No
The aggregate market value of the registrants common voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which the stock was last
sold on the NASDAQ Global Market as of the last business day of the registrants most recently
completed second fiscal quarter, was approximately $47,997,630.
As of
March 19, 2009, there were 10,296,450 shares of Common Stock, par value $.835 per share, of
Access National Corporation issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the Corporations Annual Meeting of
Shareholders to be held on May 19, 2009, are incorporated by
reference in Part III of this Form 10-K.
Access
National Corporation
FORM 10-K
INDEX
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PART I |
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Item 1 Business |
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2 |
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Item 1A Risk Factors |
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11 |
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Item 1B Unresolved Staff Comments |
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16 |
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Item 2 Properties |
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16 |
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Item 3 Legal Proceedings |
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16 |
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Item 4 Submission of Matters to a Vote of Security Holders |
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17 |
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PART II |
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Item 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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17 |
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Item 6 Selected Financial Data |
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20 |
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Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations |
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21 |
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Item 7A Quantitative and Qualitative Disclosures About Market Risk |
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37 |
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Item 8 Financial Statements and Supplementary Data |
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38 |
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Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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75 |
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Item 9A Controls and Procedures |
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75 |
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Item 9B Other Information |
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75 |
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PART III |
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Item 10 Directors, Executive Officers and Corporate Governance |
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76 |
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Item 11 Executive Compensation |
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76 |
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Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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76 |
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Item 13 Certain Relationships and Related Transactions, and Director Independence |
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76 |
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Item 14 Principal Accountant Fees and Services |
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76 |
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PART IV |
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Item 15 Exhibits, Financial Statement Schedules |
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77 |
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Signatures |
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79 |
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1
PART I
In addition to historical information, the following report contains forward looking statements
that are subject to risks and uncertainties that could cause the Corporations actual results to
differ materially from those anticipated. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect managements analysis only as of the date of the
report. For discussion of factors that may cause our actual future results to differ materially
from those anticipated, please see Item 1A Risk Factors and Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations Forward-Looking Statements herein.
ITEM 1 BUSINESS
Access National Corporation, (the Corporation) was organized June 15, 2002 under the laws of
Virginia to operate as a bank holding company. The Corporation has three wholly owned
subsidiaries: Access National Bank, Access National Capital Trust I and Access National Capital
Trust II. Effective June 15, 2002, pursuant to an Agreement and Plan of Reorganization dated April
18, 2002 between the Corporation and Access National Bank (the Bank), the Corporation acquired
all of the outstanding stock of the Bank in a statutory share exchange transaction. The
Corporation does not have any significant operations and serves primarily as the parent company for
the Bank. Access National Capital Trust I and Access National Capital Trust II were formed for the
purpose of issuing redeemable capital securities. The Corporations income is primarily derived
from dividends received from the Bank. These dividends are determined by the Banks earnings and
capital position.
The Bank is the primary operating business of the Corporation. The Bank provides commercial
credit, deposit and mortgage services to middle market businesses and associated professionals,
primarily in the greater Washington, D.C. Metropolitan Area. The Bank was organized under federal
law as a national banking association to engage in a general banking business to serve the
communities in and around Northern Virginia. The Bank opened for business on December 1, 1999 at
14006 Lee-Jackson Memorial Highway in Chantilly, Virginia. Deposits with the Bank are insured to
the maximum amount provided by the Federal Deposit Insurance Corporation. The Bank offers a
comprehensive range of financial services and products and specializes in providing customized
financial services to small and medium sized businesses, professionals, and associated individuals.
The Bank provides its customers with personal customized service utilizing the latest technology
and delivery channels. The Bank has four wholly owned subsidiaries: Access National Mortgage
Corporation (the Mortgage Corporation), Access National Leasing Corporation (the Leasing
Corporation), Access National Real Estate LLC (Access Real Estate) and United First Mortgage
Corporation (UFM). The Leasing Corporation and UFM are both presently inactive.
The headquarters for the Corporation, the Bank, Access Real Estate and the Mortgage Corporation is
located at 1800 Robert Fulton Drive, Reston, Virginia.
Bank revenues are derived from interest and fees received in connection with loans, deposits and
investments. Interest paid on deposits and borrowings are the major expenses followed by
administrative and operating expenses. Revenues from the Mortgage Corporation consist primarily of
gains from the sale of loans and loan origination fees. Major expenses of the Mortgage Corporation
consist of personnel, interest, advertising and other operating expenses.
The economy, interest rates, monetary and fiscal policies of the federal government and regulatory
policies have a significant influence on the Corporation, the Bank, and the Mortgage Corporation,
and the banking industry as a whole.
The Bank has experienced consistent growth and profitability since inception. Our goal is to become
a leading provider of financial services to small to medium sized businesses and professionals in
Northern Virginia. Our strategy is to know the needs of our clients and to deliver the
corresponding financial services. We employ highly qualified personnel and emphasize the use of
the latest technology in operations and the services we provide. Our marketing efforts are
directed to prospective clients that value high quality service and that are, or have the potential
to become, highly profitable.
Assets at year end totaled over $702.3 million and net income amounted to $4.7 million. The Bank
operates from five banking centers located in Chantilly, Tysons Corner, Reston, Leesburg and
Manassas, Virginia and online at www.accessnationalbank.com. Additional offices may be added from
time to time based upon managements constant analysis of the market and opportunities.
On December 1, 1999, the Bank acquired Access National Mortgage Corporation, formerly known as
Mortgage Investment Corporation. The Mortgage Corporation is headquartered in Reston, Virginia. The
Mortgage Corporation specializes in the origination of conforming and non-conforming residential
mortgages primarily in the greater Washington, D.C. Metropolitan Area and the surrounding areas of
its branch locations. The Mortgage Corporation has established offices throughout Virginia, in
Reston, Roanoke, Richmond, and McLean. Offices outside the state of Virginia include Westminster,
Bowie, and Crofton in Maryland, Nashville in Tennessee, Denver in Colorado, and San Antonio, Texas.
On April 10, 2002 the Bank acquired the Leasing Corporation, formerly known as Commercial Finance
Corporation. The Leasing Corporation is presently inactive. However commercial and industrial
lease financing is offered through and managed by the Bank.
2
On May 19, 2003 the Bank formed Access Real Estate. The sole purpose of forming Access Real Estate
was to acquire and hold title to real estate for the Corporation. On July 10, 2003, Access Real
Estate acquired a 45,000 square foot, three story office building located at 1800 Robert Fulton
Drive in Reston, Virginia at a cost of approximately $7.1 million that serves as the corporate
headquarters for the Corporation, Bank, Mortgage Corporation, and Access Real Estate.
On July 19, 2004, the Corporations common stock commenced trading on the NASDAQ Global Market
under the ticker symbol ANCX.
On August 17, 2004, the Bank acquired 100% of the common stock in UFM from Community First Bank N.A
of Bluefield, Virginia in a stock purchase transaction. The operations of UFM have been merged
into that of the Mortgage Corporation and the corporate entity acquired is now inactive.
On July 25, 2005 Access Real Estate purchased Lot # 1 in the Fredericksburg Business Park at a cost
of $1.2 million. This property was purchased for future expansion of the Bank and Mortgage
Corporation. The property is presently undeveloped.
On December 23, 2005, the Corporation issued a 2 for 1 stock split. The authorized shares of
common stock increased from 30,000,000 to 60,000,000 and par value decreased from $1.67 to $.835.
Prior periods have been restated to reflect the stock split.
In August 2006, the Corporation sold 2,300,000 shares of common stock at $9.38 per share in a
public offering and netted
approximately $20.0 million in new capital.
Our Strategy historical and prospective
We consider our business to be a young and emerging enterprise that is well positioned to be an
effective competitor in the financial services industry over the long term. Our view of the
financial services market place is that community banks must be effective in select market niches
that are under-served and stay clear of competing with large national competitors on a head-to-head
basis for broad based consumer business. We started by organizing a de novo national bank in 1999.
The focus of the Bank was and is serving the small to medium sized businesses and their associated
professionals in the greater Washington, D.C. Metropolitan Area. We find that large national
competitors are ineffective at addressing this market as it is difficult to distinguish where a
businesss financial needs stop and the personal financial needs of that businesss professionals
start. We believe that emerging businesses and the finances of their owners are best served
hand-in-hand.
Our core competency is judgmental discipline of commercial lending based upon personnel and
practices that help our clients strategize and grow their businesses from a financial perspective.
As financial success takes hold in the business, personal goals and wealth objectives of the
business owners become increasingly important. Our second competency is a derivative of the first.
We have the personnel and know how to provide private banking services and the skills and strategy
that assist our individual clients to acquire assets, build wealth and manage their resources.
Mortgage banking and the related activities in our model goes hand-in-hand with supplying effective
private banking services. Unlike most banking companies, the heart of our Mortgage Corporation is
ingrained into our commercial bank, serving the same clients side-by-side in a coordinated and
seamless fashion. We believe that lending is not enough in todays environment to attract and
retain commercial and professional clients. The credit services must be backed up by competitive
deposit and cash management products and operational excellence. We have made significant
investments in skilled personnel and the latest technology to ensure we can deliver these services.
We generally expect to have fewer branch locations compared to similar size banking companies. We
do not view our branch network as a significant determinant of our growth. Our marketing
strategies focus on benefits other than branch location convenience.
The acquisition of the Mortgage Corporation in 1999 provided two key benefits to our strategy: 1)
it solidified our second competency from a personnel and operational perspective that would have
taken years to replicate with organic growth alone; and 2) it provided fee income from which to
launch a new banking business. Strong profits and cash flow from the Mortgage Corporation in the
early years subsidized the growth and development of the Bank and allowed for the acceleration of
its growth plans and, in time, its profitability.
The goal was and is to generate 70-80% of the Corporations earnings from the core business Bank,
with the rest of our consolidated earnings to be generated from related fee income activities. At
the present time, the sole related fee income activity remains our Mortgage Corporation. We will
consider entering other related fee income businesses that serve our target market as
opportunities, market conditions and our capacity dictate. See Note 19 to the consolidated
financial statements for additional information on segment performance.
We expect to grow our commercial Bank by continuing to hire skilled personnel, train our own and
provide a sound infrastructure that facilitates the success of businesses, their owners and key
personnel, not only today but tomorrow and on into the ensuing decades.
3
Lending Activities
The Banks lending activities involve commercial loans, commercial real estate loans, commercial
and residential real estate construction loans, residential mortgage loans, home equity loans, and
consumer loans. These lending activities provide access to credit to small to medium sized
businesses, professionals and consumers in the greater Washington, D.C. Metropolitan Area. Loans
originated by the Bank are classified as loans held for investment. The Mortgage Corporation
originates residential mortgages and home equity loans that are only held temporarily pending their
sale to third parties and in some cases the Bank. The Mortgage Corporation also brokers loans that
do not conform to their existing products. Each of our principal loan types are described below.
At December 31, 2008 loans held for investment totaled $485.9 million compared to $477.6 million at
year end 2007. The increase in loans is attributable to our customer base, referrals and new
business. The Bank is predominantly a secured lender. Secured loans comprise over 99% of the total
loan portfolio.
The Banks lending activities are subject to a variety of lending limits imposed by federal law.
While differing limits apply in certain circumstances based on the type of loan, in general, the
Banks lending limit to any one borrower on loans that are not fully secured by readily marketable
or other permissible collateral is equal to 15% of the Banks capital and surplus. The Bank has
established relationships with correspondent banks to participate in loans when loan amounts exceed
the Banks legal lending limits or internal lending policies.
We have an established credit policy that includes procedures for underwriting each type of loan
and lending personnel have been assigned specific authorities based upon their experience. Loans
in excess of an individual loan officers authority are presented to our Loan Committee for
approval. The Loan Committee meets weekly to facilitate a timely approval process for our clients.
Loans are approved based on the borrowers capacity for credit, collateral and sources of
repayment. Loans are actively monitored to detect any potential performance issues. We manage our
loans within the context of a risk grading system developed by management based upon extensive
experience in administering loan portfolios in our market. Payment performance is carefully
monitored for all loans. When loan repayment is dependent upon an operating business or investment
real estate, periodic financial reports, site visits and select asset verification procedures are
used to ensure that we accurately rate the relative risk of our assets. Based upon criteria that
are established by management and the Board of Directors, the degree of monitoring is escalated or
relaxed for any given borrower based upon our assessment of the future repayment risk.
Loan Portfolio Loans Held for Investment. The following outlines the composition of loans held
for investment.
Commercial Loans: Commercial Loans represent 14.3% of our held for investment portfolio as
of December 31, 2008. These loans are to businesses or individuals within our target market for
business purposes. Typically the loan proceeds are used to support working capital and the
acquisition of fixed assets of an operating business. These loans are underwritten based upon our
assessment of the obligor(s) ability to generate operating cash flow in the future necessary to
repay the loan. To address the risks associated with the uncertainties of future cash flow, these
loans are generally well secured by assets owned by the business or its principal shareholders and
the principal shareholders are typically required to guarantee the loan.
Real Estate Construction Loans: Real Estate Construction Loans, also known as construction
and land development loans, comprise 8.8% of our held for investment loan portfolio, as of December
31, 2008. These loans generally fall into one of four circumstances: first, loans to construct
owner occupied commercial buildings; second, loans to individuals that are ultimately used to
acquire property and construct an owner occupied residence; third, loans to builders for the
purpose of acquiring property and constructing homes for sale to consumers; and fourth, loans to
developers for the purpose of acquiring land that is developed into finished lots for the ultimate
construction of residential or commercial buildings. Loans of these types are generally secured by
the subject property within limits established by the Board of Directors based upon an assessment
of market conditions and up-dated from time to time. The loans typically carry recourse to
principal borrowers. In addition to the repayment risk associated with loans to individuals and
businesses, loans in this category carry construction completion risk. To address this additional
risk, loans of this type are subject to additional administrative procedures designed to verify and
ensure progress of the project in accordance with allocated funding, project specifications and
time frames.
Commercial Real Estate Loans: Also known as Commercial Mortgages, loans in this category
represent 45.0% of our loan portfolio held for investment, as of December 31, 2008. These loans
generally fall into one of three situations: first, loans supporting an owner occupied commercial
property; second, properties used by non-profit organizations such as churches or schools where
repayment is dependent upon the cash flow of the non-profit organizations; and third, loans
supporting a commercial property leased to third parties for investment. Commercial Real Estate
Loans are secured by the subject property and underwritten to policy standards. Policy standards
approved by the Board of Directors from time to time set forth, among other considerations, loan to
value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.
Residential Real Estate Loans: This category includes loans secured by first or second
mortgages on one to four family residential
properties, generally extended to Bank clients, and represents 31.6% of the portfolio, as of
December 31, 2008. Of this amount, the
following sub-categories exist as a percentage of the whole Residential Real Estate Loan portfolio:
Home Equity Lines of Credit 17.2%; First Trust Mortgage Loans 70.8%; Loans Secured by a Junior
Trust 9.4%; Multi-Family Loans and Loans Secured by Farmland 2.6%.
4
Home Equity Loans are extended to borrowers in our target market. Real estate equity is the
largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool
allows the borrower to access the equity in their home or investment property and use the proceeds
for virtually any purpose. Home Equity Loans are most frequently secured by a second lien on
residential property. One to Four Family Residential First Trust Loan, or First Mortgage Loan,
proceeds are used to acquire or refinance the primary financing on owner occupied and residential
investment properties. Junior Trust Loans, or Loans Secured by a Second Trust Loans, are to
consumers wherein the proceeds have been used for a stated consumer purpose. Examples of consumer
purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally
extended in a single disbursement and repaid over a specified period of time.
Loans in the Residential Real Estate portfolio are underwritten to standards within a traditional
consumer framework that is periodically reviewed and updated by our management and Board of
Directors: repayment source and capacity, value of the underlying property, credit history, savings
pattern and stability.
Consumer Loans: Consumer Loans make up approximately 0.3% of our loan portfolio. Most
loans are well secured with assets other than real estate, such as marketable securities or
automobiles. Very few loans are unsecured. As a matter of operation, management discourages
unsecured lending. Loans in this category are underwritten to standards within a traditional
consumer framework that is periodically reviewed and up dated by our management and Board of
Directors: repayment source and capacity, collateral value, credit history, savings pattern and
stability.
Loans Held for Sale (LHFS). Loans in this category are originated by the Mortgage Corporation and
comprised of residential mortgage loans extended to consumers and underwritten in accordance with
standards set forth by an institutional investor to whom we expect to sell the loan. Loan proceeds
are used for the purchase or refinance of the property securing the loan. Loans are sold with the
servicing released to the investor.
The LHFS loans are closed in our name and carried on our books until the loan is delivered to and
purchased by an investor. In 2008, we originated $775.2 million of loans processed in this manner.
At December 31, 2008 loans held for sale totaled $84.3 million compared to $39.1 million at year
end 2007. The increase in loans held for sale at year end 2008 was due to lower interest rates and
an increase in refinancing activity during the month of December.
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. We are paid a fee for
procuring and packaging brokered loans. In 2008, we originated a total volume of $78.6 million in
residential mortgage loans under this type of delivery method. Brokered loans accounted for 9.2%
of the total loan volume of the Mortgage Corporation. The risks associated with this activity are
limited to losses or claims arising from fraud.
Deposits
Deposits are the primary source of funding loan growth. Average deposits totaled $450.9 million up
from $445.0 million, a $5.9 million increase over 2007. At December 31, 2008 deposits totaled
$485.4 million compared to $473.4 million on December 31, 2007, an increase of $12.0 million.
Market Area
The Corporation, the Bank, and the Mortgage Corporation are headquartered in Fairfax County and
serve the Northern Virginia region. Fairfax County is a diverse and thriving urban county. As the
most populous jurisdiction in both Virginia and the greater Washington D.C. Metropolitan Area, the
Countys population exceeds that of seven states. The median household income of Fairfax County is
one of the highest in the nation. Northern Virginia had a population of 2.16 million according to
the 2000 Census. The proximity to Washington, D.C. and the influence of the federal government and
its spending provides somewhat of a recession shelter.
Competition
The Bank competes with virtually all banks and financial institutions which offer services in its
market area. Much of this competition comes from large financial institutions headquartered
outside the state of Virginia, each of which has greater financial and other resources to conduct
large advertising campaigns and offer incentives. To attract business in this competitive
environment, the Bank relies on personal contact by its officers and directors, local promotional
activities, and the ability to provide personalized custom services to small and medium sized
businesses and professionals. In addition to providing full service banking, the Bank offers and
promotes alternative and modern conveniences such as internet banking, automated clearinghouse
transactions, remote deposit capture, and courier services for commercial clients.
5
Because federal regulation of financial institutions changes regularly and is the subject of
constant legislative debate, we cannot foresee how federal regulation of financial institutions may
change in the future. However, it is possible that current and future governmental regulatory and
economic initiatives, such as the Emergency Economic Stabilization Act of 2008 (the EESA) enacted
in October 2008, could impact the competitive landscape in the Banks markets.
Employees
At December 31, 2008 the Corporation had 285 employees, 92 of whom were employed by the Bank and
193 of whom were employed by the Mortgage Corporation. None of the employees of the Corporation is
subject to a collective bargaining agreement. Management considers employee relations to be good.
Supervision and Regulation
Set forth below is a brief description of the material laws and regulations that affect the
Corporation. The description of these statutes and regulations is only a summary and does not
purport to be complete. This discussion is qualified in its entirety by reference to the statutes
and regulations summarized below. No assurance can be given that these statutes or regulations will
not change in the future.
General. The Corporation is subject to the periodic reporting requirements of the Securities and
Exchange Act of 1934, as amended (the Exchange Act), which include, but are not limited to, the
filing of annual, quarterly and other reports with the Securities and Exchange Commission (the
SEC). As an Exchange Act reporting company, the Corporation is directly affected by the
Sarbanes-Oxley Act of 2002 (the SOX), which aimed at improving corporate governance and reporting
procedures and requires expanded disclosure of the Corporations corporate operations and internal
controls.
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of
1956, and is registered as such with, and subject to the supervision of, the Board of Governors of
the Federal Reserve System and the Federal Reserve Bank of Richmond (the FRB). Generally, a bank
holding company is required to obtain the approval of the FRB before it may acquire all or
substantially all of the assets of any bank, and before it may acquire ownership or control of the
voting shares of any bank if, after giving effect to the acquisition, the bank holding company
would own or control more than 5% of the voting shares of such bank. The FRBs approval is also
required for the merger or consolidation of bank holding companies.
The Corporation is required to file periodic reports with the FRB and provide any additional
information as the FRB may require. The FRB also has the authority to examine the Corporation and
the Bank, as well as any arrangements between the Corporation and the Bank, with the cost of any
such examinations to be borne by the Corporation.
Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by
federal law in dealings with their holding companies and other affiliates. Subject to certain
restrictions set forth in the Federal Reserve Act, a bank can loan or extend credit to an
affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate
or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the
aggregate amount of such transactions of a bank and its subsidiaries with its affiliates does not
exceed 10% of the capital stock and surplus of the bank on a per affiliate basis or 20% of the
capital stock and surplus of the bank on an aggregate affiliate basis. In addition, such
transactions must be on terms and conditions that are consistent with safe and sound banking
practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate
a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank
holding company and its other affiliates from borrowing from a banking subsidiary of the bank
holding company unless the loans are secured by marketable collateral of designated amounts.
Additionally, the Corporation and its subsidiary are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of property or furnishing of
services.
A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company engaged in non-banking activities. A
bank holding company may, however, engage in or acquire an interest in a company that engages in
activities which the FRB has determined by regulation or order are so closely related to banking as
to be a proper incident to banking. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages to the public that
outweigh possible adverse effects.
As a national bank, the Bank is subject to regulation, supervision and regular examination by the
Office of the Comptroller of the Currency (the Comptroller). Each depositors account with the
Bank is insured by the Federal Deposit Insurance Corporation (the FDIC) to the maximum amount
permitted by law. The Bank is also subject to certain regulations promulgated by the FRB and
applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted by
federal banking law.
The regulations of the FDIC, the Comptroller and FRB govern most aspects of the Corporations
business, including deposit reserve requirements, investments, loans, certain check clearing
activities, issuance of securities, payment of dividends, branching, deposit interest
rate ceilings and numerous other matters.
6
As a consequence of the extensive regulation of commercial banking activities in the United States,
the Corporations business is particularly susceptible to changes in state and federal legislation
and regulations, which may have the effect of increasing the cost of doing business, limiting
permissible activities or increasing competition.
Governmental Policies and Legislation. Banking is a business that depends primarily on interest
rate differentials. In general, the difference between the interest rates paid by the Bank on its
deposits and its other borrowings and the interest rates received by the Bank on loans extended to
its customers and securities held in its portfolio comprise the major portion of the Corporations
earnings. These rates are highly sensitive to many factors that are beyond the Corporations
control. Accordingly, the Corporations growth and earnings are subject to the influence of
domestic and foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is affected not only by general economic conditions, but is also
influenced by the monetary and fiscal policies of the federal government and the policies of its
regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its open-market operations in U.S.
Government securities, by adjusting the required level of reserves for financial institutions
subject to its reserve requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans and paid on deposits. The
nature and impact of any future changes in monetary policies cannot be predicted. From time to
time, legislation is enacted which has the effect of increasing the cost of doing business,
limiting or expanding permissible activities or affecting the competitive balance between banks and
other financial institutions. Proposals to change the laws and regulations governing the operations
and taxation of bank holding companies, banks and other financial institutions are frequently made
in Congress, in the Virginia Legislature and brought before various bank holding company and bank
regulatory agencies. The likelihood of any major changes and the impact such changes might have are
impossible to predict. It is also not clear at this time what impact the EESA, as amended by the
American Recovery and Reinvestment Act of 2009 (the ARRA), enacted February 17, 2009, or other
initiatives of the U.S. Treasury and other bank regulatory agencies that have been announced, or
any additional programs that may be initiated in the future, will have on the financial markets,
the financial services industry, the Corporation or the Bank.
Dividends. There are both federal and state regulatory restrictions on dividend payments by both
the Bank and the Corporation that may affect the Corporations ability to pay dividends on its
common stock. As a bank holding company, the Corporation is a separate legal entity from the Bank.
Virtually all of the Corporations income results from dividends paid to the Corporation by the
Bank. The amount of dividends that may be paid by the Bank depends upon the Banks earnings and
capital position and is limited by federal and state law, regulations and policies. In addition to
specific regulations governing the permissibility of dividends, both the FRB and the Virginia
Bureau of Financial Institutions are generally authorized to prohibit payment of dividends if they
determine that the payment of dividends by the Bank would be an unsafe and unsound banking
practice. The Corporation meets all regulatory requirements and began paying dividends in February
2006. The Corporation paid dividends totaling $433 thousand in 2008. See Item 5 Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Capital Requirements. The FRB, the Comptroller and the FDIC have adopted risk-based capital
adequacy guidelines for bank holding companies and banks. These capital adequacy regulations are
based upon a risk-based capital determination, whereby a bank holding companys capital adequacy is
determined in light of the risk, both on- and off-balance sheet, contained in the companys assets.
Different categories of assets are assigned risk weightings and are counted at a percentage of
their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a bank
holding company, Tier 1 capital consists primarily of common stock, related surplus, non-cumulative
perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of
qualifying cumulative preferred securities. Goodwill and certain other intangibles are excluded
from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease
losses up to a maximum of 1.25% of risk weighted assets, limited other types of preferred stock not
included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in
and loans to unconsolidated banking and finance subsidiaries that constitute capital of those
subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying
total capital. The guidelines generally require banks to maintain a total qualifying capital to
weighted risk assets level of 8% (the Risk-based Capital Ratio). Of the total 8%, at least 4% of
the total qualifying capital to weighted risk assets (the Tier 1 Risk-based Capital Ratio) must
be Tier 1 capital.
The FRB, the Comptroller and the FDIC have adopted leverage requirements that apply in addition to
the risk-based capital requirements. Banks and bank holding companies are required to maintain a
minimum leverage ratio of Tier 1 capital to average total consolidated assets (the Leverage
Ratio) of at least 3.0% for the most highly-rated, financially sound banks and bank holding
companies and a minimum Leverage Ratio of at least 4.0% for all other banks. The FDIC and the FRB
define Tier 1 capital for banks in the same manner for both the Leverage Ratio and the Risk-based
Capital Ratio. However, the FRB defines Tier 1 capital for bank holding companies in a
slightly different manner. An institution may be required to maintain Tier 1 capital of at least 4%
or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors
deemed material by regulatory authorities. As of December 31, 2008, the Corporation and Bank both
met all applicable capital requirements imposed by regulation.
7
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). There are five capital
categories applicable to insured institutions, each with specific regulatory consequences. If the
appropriate federal banking agency determines, after notice and an opportunity for hearing, that an
insured institution is in an unsafe or unsound condition, it may reclassify the institution to the
next lower capital category (other than critically undercapitalized) and require the submission of
a plan to correct the unsafe or unsound condition. The Comptroller has issued regulations to
implement these provisions. Under these regulations, the categories are:
a. Well Capitalized The institution exceeds the required minimum level for each
relevant capital measure. A well capitalized institution is one (i) having a Risk-based Capital
Ratio of 10% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 6% or greater,
(iii) having a Leverage Ratio of 5% or greater and (iv) that is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
b. Adequately Capitalized The institution meets the required minimum level for each
relevant capital measure. No capital distribution may be made that would result in the institution
becoming undercapitalized. An adequately capitalized institution is one (i) having a Risk-based
Capital Ratio of 8% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 4% or greater and
(iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if the
institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity
and Sensitivity to market risk) rating system.
c. Undercapitalized The institution fails to meet the required minimum level for
any relevant capital measure. An undercapitalized institution is one (i) having a Risk-based
Capital Ratio of less than 8% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 4% or
(iii) having a Leverage Ratio of less than 4%, or if the institution is rated a composite 1 under
the CAMEL rating system, a Leverage Ratio of less than 3%.
d. Significantly Undercapitalized The institution is significantly below the
required minimum level for any relevant capital measure. A significantly undercapitalized
institution is one (i) having a Risk-based Capital Ratio of less than 6% or (ii) having a Tier 1
Risk-based Capital Ratio of less than 3% or (iii) having a Leverage Ratio of less than 3%.
e. Critically Undercapitalized The institution fails to meet a critical capital
level set by the appropriate federal banking agency. A critically undercapitalized institution is
one having a ratio of tangible equity to total assets that is equal to or less than 2%.
An institution which is less than adequately capitalized must adopt an acceptable capital
restoration plan, is subject to increased regulatory oversight, and is increasingly restricted in
the scope of its permissible activities. Each company having control over an undercapitalized
institution must provide a limited guarantee that the institution will comply with its capital
restoration plan. Except under limited circumstances consistent with an accepted capital
restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may
not acquire another institution, establish additional branch offices or engage in any new line of
business unless determined by the appropriate federal banking agency to be consistent with an
accepted capital restoration plan, or unless the FDIC determines that the proposed action will
further the purpose of prompt corrective action. The appropriate Federal banking agency may take
any action authorized for a significantly undercapitalized institution if an undercapitalized
institution fails to submit an acceptable capital restoration plan or fails in any material respect
to implement a plan accepted by the agency. A critically undercapitalized institution is subject to
having a receiver or conservator appointed to manage its affairs and for loss of its charter to
conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company
controlling that institution or any other person having control of the institution if, after making
the payment, the institution, would be undercapitalized. In addition, an institution cannot make a
capital distribution, such as a dividend or other distribution that is in substance a distribution
of capital to the owners of the institution if following such a distribution the institution would
be undercapitalized. Thus, if payment of such a management fee or the making of such would cause
the Bank to become undercapitalized, it could not pay a management fee or dividend to the
Corporation.
As of December 31, 2008, both the Corporation and the Bank were considered well capitalized.
Deposit Insurance Assessments. The Banks deposits are insured up to applicable limits by the
Deposit Insurance Fund (the DIF) of the FDIC. The FDIC amended its risk-based assessment system
for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005
(FDIRA). Under the revised system, insured institutions are assigned to one of four risk
categories
based on supervisory evaluations, regulatory capital levels and certain other factors. An
institutions assessment rate depends upon the
category to which it is assigned. Unlike the other categories, Risk Category I, which contains the
least risky depository institutions, contains further risk differentiation based on the FDICs
analysis of financial ratios, examination component ratings and other information. Assessment
rates are determined by the FDIC and currently range from five to seven basis points for the
healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk
Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no
single adjustment can exceed three basis points. FDIRA also provided for the possibility that the
FDIC may pay dividends to insured institutions if the DIF reserve ratio equals or exceeds 1.35% of
estimated insured deposits.
8
In an effort to restore capitalization levels and to ensure the DIF will adequately cover projected
losses from future bank failures, the FDIC, in October 2008, proposed a rule to alter the way in
which it differentiates for risk in the risk-based assessment system and to revise deposit
insurance assessment rates, including base assessment rates. The FDIC also proposed to introduce
three adjustments that could be made to an institutions initial base assessment rate, as well as a
uniform 7 basis point increase in rates for the first quarter of 2009. The proposal for first
quarter 2009 assessment rates was adopted as a final rule in December 2008, resulting in annualized
assessment rates for Risk Category 1 institutions ranging from 12 to 14 basis points. A final rule
related to the rest of the proposal was adopted on March 4, 2009 and will become effective on
April 1, 2009, applying to assessments for the second quarter of 2009 and thereafter. The new rule
provides for initial base assessment rates for Risk Category 1 institutions of 12 to 16 basis
points, subject to potential base-rate adjustments, including (i) a potential decrease of up to
5 basis points for long-term unsecured debt, including senior and subordinated debt, (ii) a
potential increase for secured liabilities in excess of 25% of domestic deposits and (iii) for
non-Risk Category 1 institutions, a potential increase for brokered deposits in excess of 10% of
domestic deposits. Taking into account these potential base-rate adjustments, the annualized
assessment rate for Risk Category 1 institutions would range from 7 to 24 basis points. Based on
certain assumptions regarding various assessment criteria, including future deposit levels, we
estimate FDIC premiums will increase from $350 thousand in 2008 to a range of $800 thousand to $1.0
million (pre-tax) during 2009. Assessment rates, however, are subject to change by the FDIC
throughout the year.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the GLBA) implemented major
changes to the statutory framework for providing banking and other financial services in the United
States. The GLBA, among other things, eliminated many of the restrictions on affiliations among
banks and securities firms, insurance firms and other financial service providers. A bank holding
company that qualifies as a financial holding company will be permitted to engage in activities
that are financial in nature or incidental or complimentary to financial activities. The activities
that the GLBA expressly lists as financial in nature include insurance underwriting, sales and
brokerage activities, providing financial and investment advisory services, underwriting services
and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a
financial holding company. To qualify as a financial holding company, each insured depository
institution controlled by the bank holding company must be well-capitalized, well-managed and have
at least a satisfactory rating under the CRA (discussed below). In addition, the bank holding
company must file with the Federal Reserve a declaration of its intention to become a financial
holding company. While the Corporation satisfies these requirements, the Corporation has not
elected for various reasons to be treated as a financial holding company under the GLBA.
We do not believe that the GLBA has had a material adverse impact on the Corporations or the
Banks operations. To the extent that it allows banks, securities firms and insurance firms to
affiliate, the financial services industry may experience further consolidation. The GLBA may have
the result of increasing competition that we face from larger institutions and other companies
offering financial products and services, many of which may have substantially greater financial
resources.
The GLBA and certain other regulations issued by federal banking agencies also provide new
protections against the transfer and use by financial institutions of consumer nonpublic personal
information. A financial institution must provide to its customers, at the beginning of the
customer relationship and annually thereafter, the institutions policies and procedures regarding
the handling of customers nonpublic personal financial information. These privacy provisions
generally prohibit a financial institution from providing a customers personal financial
information to unaffiliated third parties unless the institution discloses to the customer that the
information may be so provided and the customer is given the opportunity to opt out of such
disclosure.
Community Reinvestment Act. The Bank is subject to the requirements of the Community Reinvestment
Act (the CRA). The CRA imposes on financial institutions an affirmative and ongoing obligation to
meet the credit needs of their local communities, including low and moderate-income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial institutions
efforts in meeting community credit needs currently are evaluated as part of the examination
process pursuant to three performance tests. These factors also are considered in evaluating
mergers, acquisitions and applications to open a branch or facility.
Federal Home Loan Bank (FHLB) of Atlanta. The Bank is a member of the FHLB of Atlanta, which is
one of twelve regional FHLBS that provide funding to their members for making housing loans as well
as for affordable housing and community development lending.
Each FHLB serves as a reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. As a member the Bank is required to purchase and
maintain stock in the FHLB in an amount equal to 4.5% of aggregate outstanding advances in addition
to the membership stock requirement of 0.2% of the Banks total assets.
9
Mortgage Banking Regulation. The Banks mortgage banking subsidiary is subject to the rules and
regulations of, and examination by, the Department of Housing and Urban Development (HUD), the
Federal Housing Administration, the Department of Veterans Affairs and state regulatory authorities
with respect to originating, processing and selling mortgage loans. Those rules and regulations,
among other things, establish standards for loan origination, prohibit discrimination, provide for
inspections and appraisals of property, require credit reports on prospective borrowers and, in
some cases, restrict certain loan features and fix maximum interest rates and fees. In addition to
other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity
Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and
Home Ownership Equity Protection Act, and the regulations promulgated there under. These laws
prohibit discrimination, require the disclosure of certain basic information to mortgagors
concerning credit and settlement costs, limit payment for settlement services to the reasonable
value of the services rendered and require the maintenance and disclosure of information regarding
the disposition of mortgage applications based on race, gender, geographical distribution and
income level.
USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001 and provides for the
facilitation of information sharing among governmental entities and financial institutions for the
purpose of combating terrorism and money laundering. Among other provisions, the USA PATRIOT Act
permits financial institutions, upon providing notice to the United States Treasury, to share
information with one another in order to better identify and report to the federal government
concerning activities that may involve money laundering or terrorists activities. The USA PATRIOT
Act is considered a significant banking law in terms of information disclosure regarding certain
customer transactions. Certain provisions of the USA PATRIOT Act impose the obligation to establish
anti-money laundering programs, including the development of a customer identification program, and
the screening of all customers against any government lists of known or suspected terrorists.
Although it does create a reporting obligation and a cost of compliance, the Bank does not expect
the USA PATRIOT Act to materially affect its products, services or other business activities.
Reporting Terrorist Activities. The Federal Bureau of Investigation (FBI) has sent, and will
send, our banking regulatory agencies lists of the names of persons suspected of involvement in
terrorist activities. The Bank has been requested, and will be requested, to search its records for
any relationships or transactions with persons on those lists. If the Bank finds any relationships
or transactions, it must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control (OFAC), which is a division of the Department of the
Treasury, is responsible for helping to insure that United States entities do not engage in
transactions with enemies of the United States, as defined by various Executive Orders and Acts
of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of
persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank
finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze
such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC
compliance officer to oversee the inspection of its accounts and the filing of any notifications.
The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer
files. The Bank performs these checks utilizing software, which is updated each time a modification
is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and
Blocked Persons.
Consumer Laws and Regulations. The Bank is also subject to certain consumer laws and regulations
that are designed to protect consumers in transactions with banks. While the list set forth herein
is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Housing Act, among others.
These laws and regulations mandate certain disclosure requirements and regulate the manner in which
financial institutions transact business with customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of its ongoing customer
relations.
Emergency Economic Stabilization Act of 2008 (EESA).
On October 3, 2008, the EESA was enacted, which increased FDIC insurance coverage from $100,000 to
$250,000, as well as provided up to $700 billion in funding for the financial services industry.
Pursuant to the EESA, the U.S. Treasury was initially authorized by Congress to use $350 billion
for the Troubled Asset Relief Program (TARP). Of this amount, the U.S. Treasury allocated
$250 billion to the Capital Purchase Program (CPP). This program allows a qualifying institution
to apply for up to three percent of its total risk-weighted assets in capital, which will be in the
form of non-cumulative perpetual preferred stock of the institution with a dividend rate of 5%
until the fifth anniversary of the investment and 9% thereafter. The U.S. Treasury will also
receive warrants for common stock of the institution equal to 15% of the capital invested. On
January 15, 2009, the second $350 billion of TARP funding was released to the U.S. Treasury. The
Corporation applied in November, 2008 for TARP funding of up to three percent of its risk-weighted
assets and we were approved on January 6, 2009 for up to $16 million. On February 5, 2009 the
Corporation declined participation in these programs
due to the cost of participation in the CPP and the well capitalized position of both the Bank and
Corporation.
10
Temporary Liquidity Guarantee Program. On November 21, 2008, the Board of Directors of the FDIC
adopted a final rule relating to the Temporary Liquidity Guarantee Program (TLG Program). The
TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of
systemic risk by the Secretary of the Department of Treasury (after consultation with the
President), as an initiative to counter the system-wide crisis in the nations financial sector.
Under the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or December 31,
2012, certain newly issued senior unsecured debt issued by participating institutions on or after
October 14, 2008, and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage
for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (NOW)
accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at
participating FDIC insured institutions through December 31, 2009. Coverage under the TLG Program
was available for the first 30 days without charge. The fee assessment for coverage of senior
unsecured debt ranges from 50 basis points to 125 basis points per annum, depending on the initial
maturity of the debt and its date of issuance. The fee assessment for deposit insurance coverage is
10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Bank elected to
participate in both guarantee programs. On February 11, 2009 the Bank issued $30.0 million in new
senior unsecured debt at 2.74% maturing February 15, 2012 under the TLG Program.
ITEM 1A RISK FACTORS
Our future success will depend on our ability to compete effectively in the highly competitive
financial services industry.
We face substantial competition in all phases of our operations from a variety of different
competitors. In particular, there is very strong competition for financial services in Northern
Virginia and the greater Washington, D.C. Metropolitan Area in which we conduct a substantial
portion of our business. We compete with commercial banks, credit unions, savings and loan
associations, mortgage banking firms, consumer finance companies, securities brokerage firms,
insurance companies, money market funds and other mutual funds, as well as other local and
community, super-regional, national and international financial institutions that operate offices
in our primary market areas and elsewhere. Our future growth and success will depend on our
ability to compete effectively in this highly competitive financial services environment.
Many of our competitors are well-established, larger financial institutions and many offer products
and services that we do not. Many have substantially greater resources, name recognition and
market presence that benefit them in attracting business. Some of our competitors are not subject
to the same regulation as is imposed on bank holding companies and federally-insured national
banks, including credit unions which do not pay federal income tax, and, therefore, have regulatory
advantages over us in accessing funding and in providing various services. While we believe we
compete effectively with these other financial institutions in our primary markets, we may face a
competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic
diversification and inability to spread our marketing costs across a broader market. If we have to
raise interest rates paid on deposits or lower interest rates charged on loans to compete
effectively, our net interest margin and income could be negatively affected. Failure to compete
effectively to attract new or to retain existing, clients may reduce or limit our net income and
our market share and may adversely affect our results of operations, financial condition and
growth.
Our profitability depends on interest rates generally, and we may be adversely affected by changes
in government monetary policy.
Our profitability depends in substantial part on our net interest margin, which is the difference
between the rates we receive on loans and investments and the rates we pay for deposits and other
sources of funds. Our net interest margin depends on many factors that are partly or completely
outside of our control, including competition, federal economic, monetary and fiscal policies, and
economic conditions generally. Our net interest income will be adversely affected if market
interest rates change so that the interest we pay on deposits and borrowings increases faster than
the interest we earn on loans and investments.
Changes in interest rates, particularly by the Board of Governors of the Federal Reserve System,
which implements national monetary policy in order to mitigate recessionary and inflationary
pressures, also affect the value of our loans. In setting its policy, the Federal Reserve may
utilize techniques such as: (i) engaging in open market transactions in United States government
securities; (ii) setting the discount rate on member bank borrowings; and (iii) determining reserve
requirements. These techniques may have an adverse effect on our deposit levels, net interest
margin, loan demand or our business and operations. In addition, an increase in interest rates
could adversely affect borrowers ability to pay the principal or interest on existing loans or
reduce their desire to borrow more money. This may lead to an increase in our non-performing
assets, a decrease in loan originations, or a reduction in the value of and income from our loans,
any of which could have a material and negative effect on our results of operations. We try to
minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk.
Fluctuations in market rates and other market disruptions are neither predictable nor controllable
and may have a material and negative effect on our business, financial condition and results of
operations.
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Our profitability depends significantly on local economic conditions.
As a lender, we are exposed to the risk that our loan clients may not repay their loans according
to their terms and any collateral securing payment may be insufficient to fully compensate us for
the outstanding balance of the loan plus the costs we incur disposing of the collateral. Although
we have collateral for most of our loans, that collateral can fluctuate in value and may not always
cover the outstanding balance on the loan. With most of our loans concentrated in Northern
Virginia, a decline in local economic conditions could adversely affect the values of our real
estate collateral. Consequently, a decline in local economic conditions may have a greater effect
on our earnings and capital than on the earnings and capital of larger financial institutions whose
real estate loan portfolios are more geographically diverse.
In addition to assessing the financial strength and cash flow characteristics of each of our
borrowers, the Bank often secures loans with real estate collateral. At December 31, 2008,
approximately 85.4% of our Banks loans held for investment have real estate as a primary or
secondary component of collateral. The real estate collateral in each case provides an alternate
source of repayment in the event of default by the borrower and may deteriorate in value during the
time the credit is extended. If we are required to liquidate the collateral securing a loan to
satisfy the debt during a period of reduced real estate values, our earnings and capital could be
adversely affected.
Our business strategy includes the continuation of our growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or fail to manage our
growth effectively.
We intend to continue to grow in our existing banking markets (internally and through additional
offices) and to expand into new markets as appropriate opportunities arise. Our prospects must be
considered in light of the risks, expenses and difficulties frequently encountered by companies
that are experiencing growth. We cannot assure you we will be able to expand our market presence
in our existing markets or successfully enter new markets, or that any expansion will not adversely
affect our results of operations. Failure to manage our growth effectively could have a material
adverse effect on our business, future prospects, financial condition or results of operations, and
could adversely affect our ability to successfully implement our business strategy. Also, if our
growth occurs more slowly than anticipated or declines, our operating results could be materially
affected in an adverse way.
Our ability to successfully grow will depend on a variety of factors, including the continued
availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth. While we believe we have
the management resources and internal systems in place to successfully manage our future growth,
there can be no assurance growth opportunities will be available or growth will be successfully
managed.
We may face risks with respect to future acquisitions.
As a strategy, we have sought to increase the size of our business by pursuing business development
opportunities, and we have grown rapidly since our incorporation. As part of that strategy, we
have acquired three mortgage companies and a small equipment leasing company. We may acquire other
financial institutions and mortgage companies, or parts of those entities, in the future.
Acquisitions and mergers involve a number of risks, including:
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the time and costs associated with identifying and evaluating potential acquisitions and
merger partners; |
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the estimates and judgments used to evaluate credit, operations, management and market
risks with respect to the target entity may not be accurate; |
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the time and costs of evaluating new markets, hiring experienced local management and
opening new offices, and the time lags between these activities and the generation of
sufficient assets and deposits to support the costs of the expansion; |
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our ability to finance an acquisition and possible ownership or economic dilution to our
current shareholders; |
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the diversion of our managements attention to the negotiation of a transaction, and the
integration of the operations and personnel of the combining businesses; |
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entry into new markets where we lack experience; |
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the introduction of new products and services into our business; |
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the incurrence and possible impairment of goodwill associated with an acquisition and
possible adverse short-term effects on our results of operations; and |
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the potential loss of key employees and clients. |
12
We may incur substantial costs to expand, and we can give no assurance such expansion will result
in the levels of profits we seek. There can be no assurance that integration efforts for any
future mergers or acquisitions will be successful. Also, we may issue equity securities, including
common stock and securities convertible into shares of our common stock, in connection with future
acquisitions, which could cause ownership and economic dilution to our current shareholders. There
is no assurance that, following any future merger or acquisition, our integration efforts will be
successful or our company, after giving effect to the acquisition, will achieve profits comparable
to or better than our historical experience.
Our allowance for loan losses could become inadequate and reduce our earnings and capital.
We maintain an allowance for loan losses that we believe is adequate for absorbing any potential
losses in our loan portfolio. Management conducts a periodic review and consideration of the loan
portfolio to determine the amount of the allowance for loan losses based upon general market
conditions, credit quality of the loan portfolio and performance of our clients relative to their
financial obligations with us. The amount of future losses, however, is susceptible to changes in
borrowers circumstances and economic and other market conditions, including changes in interest
rates and collateral values that are beyond our control and these future losses may exceed our
current estimates. Our allowance for loan losses at December 31, 2008 was $7.5 million. Although
we believe the allowance for loan losses is adequate to absorb probable losses in our loan
portfolio, we cannot predict such losses or guarantee that our allowance will be adequate in the
future. Excessive loan losses could have a material impact on our financial performance and reduce
our earnings and capital.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from the Bank as our primary source of funds. The primary sources of funds of
the Bank are client deposits and loan repayments. While scheduled loan repayments are a relatively
stable source of funds, they are subject to the ability of borrowers to repay the loans. The
ability of borrowers to repay loans can be adversely affected by a number of factors, including
changes in economic conditions, adverse trends or events affecting business industry groups,
reductions in real estate values or markets, business closings or lay-offs, inclement weather,
natural disasters and international instability. Additionally, deposit levels may be affected by a
number of factors, including rates paid by competitors, general interest rate levels, regulatory
capital requirements, returns available to clients on alternative investments and general economic
conditions. Accordingly, we may be required from time to time to rely on secondary sources of
liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB
advances, sales of securities and loans, and federal funds lines of credit from correspondent
banks, as well as out-of-market time deposits. While we believe that these sources are currently
adequate, there can be no assurance they will be sufficient to meet future liquidity demands,
particularly if we continue to grow and experience increasing loan demand. We may be required to
slow or discontinue loan growth, capital expenditures or other investments or liquidate assets
should such sources not be adequate.
We are subject to extensive regulation that could limit or restrict our activities and adversely
affect our earnings.
We operate in a highly regulated industry, and both we and the Bank are subject to extensive
regulation and supervision by the FRB, the Comptroller, and the FDIC. Our compliance with these
regulations is costly and restricts certain of our activities, including payment of dividends,
mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on
deposits and locations of offices. We are also subject to capitalization guidelines established by
our regulators, which require us to maintain adequate capital to support our growth. Many of these
regulations are intended to protect depositors and the FDICs Deposit Insurance Fund rather than
our shareholders.
SOX, and the related rules and regulations promulgated by the SEC and NASDAQ that are applicable to
us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure
practices, including the cost of completing our audit and maintaining our internal controls. As a
result, we may experience greater compliance costs.
The laws and regulations that apply to us could change at any time. We cannot predict whether or
what form of proposed statute or regulation will be adopted or the extent to which such adoption
may affect our business. Regulatory changes may increase our costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to offer competing
financial services and products and thus place other entities that are not subject to similar
regulation in stronger, more favorable competitive positions, which could adversely affect our
growth and our ability to operate profitably. Failure to comply with existing or new laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have an adverse effect on our business, financial condition
and results of operations.
Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow our
business at all. In addition, our recent and rapid growth may distort some of our historical
financial ratios and statistics. In the future, we may not have the benefit of favorable
factors as we have in the past, such as a generally stable interest rate environment, a strong real
estate market, or the ability to find suitable
expansion opportunities. Various factors, such as economic conditions, regulatory and legislative
considerations and competition, may also impede or prohibit our ability to expand our market
presence. If we experience a significant decrease in our historical rate of growth, our results of
operations and financial condition may be adversely affected due to a high percentage of our
operating costs being fixed expenses.
13
Our hedging strategies may not be successful in managing our risks associated with interest rates.
We use various derivative financial instruments to provide a level of protection against interest
rate risks, but no hedging strategy can
protect us completely. When rates change, we expect to record a gain or loss on derivatives that
would be offset by an inverse change in the value of loans held for sale and mortgage-related
securities. We cannot assure you, however, that our hedging strategy and use of derivatives will
offset the risks related to changes in interest rates. See Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Item
7A Quantitative and Qualitative Disclosures About Market Risk.
The profitability of the Mortgage Corporation will be significantly reduced if we are not able to
sell mortgages.
Currently, we sell all of the mortgage loans originated by the Mortgage Corporation. We only
underwrite mortgages that we reasonably expect will have more than one potential purchaser. The
profitability of our mortgage company depends in large part upon our ability to originate or
purchase a high volume of loans and to quickly sell them in the secondary market. Thus, we are
dependent upon (i) the existence of an active secondary market and (ii) our ability to sell loans
into that market.
The Mortgage Corporations ability to sell mortgage loans readily is dependent upon the
availability of an active secondary market for single-family mortgage loans, which in turn depends
in part upon the continuation of programs currently offered by Fannie Mae and Freddie Mac and other
institutional and non-institutional investors. These entities account for a substantial portion of
the secondary market in residential mortgage loans. Some of the largest participants in the
secondary market, including Fannie Mae and Freddie Mac, are government-sponsored enterprises whose
activities are governed by federal law, and while we do not actively participate in their programs,
they do have substantial market influence. Any future changes in laws that significantly affect the
activity of these government-sponsored enterprises and other institutional and non-institutional
investors or any impairment of our ability to participate in such programs could, in turn,
adversely affect our operations.
Fannie Mae and Freddie Mac have recently reported substantial losses and a need for substantial
amounts of additional capital. Such losses are due to these entities business model being tied
extensively to the U.S. housing market which is in a severe contraction. In response to the
deteriorating financial condition of Fannie Mae and Freddie Mac from the U.S. housing market
contraction, Congress and the U.S. Treasury have undertaken a series of actions to stabilize these
entities. The Federal Housing Finance Agency, or FHFA, was established in July 2008 pursuant to
the Regulatory Reform Act in an effort to enhance regulatory oversight over Fannie Mae and Freddie
Mac. FHFA placed Fannie Mae and Freddie Mac into federal conservatorship in September 2008.
Although the federal government has committed capital to Fannie Mae and Freddie Mac, there is no
explicit guaranty of the obligations of these entities by the federal government and there can be
no assurance that these government credit facilities and other capital infusions will be adequate
for the needs of Fannie Mae and Freddie Mac. If the financial support is inadequate, these
companies could continue to suffer losses and could fail to offer programs necessary to an active
secondary market. If this were to occur, the Mortgage Corporations ability to sell mortgage loans
readily could be hampered, and the profitability of the Mortgage Corporation could be significantly
reduced.
We may be exposed to greater risks from offering non-conforming mortgage loans.
We are an originator of non-conforming residential mortgage loans for sale into the secondary
market. These are residential mortgages that do not qualify for purchase by government sponsored
agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected due to our
investments in non-conforming mortgage loans. Credit, liquidity and repurchase risks associated
with non-conforming mortgage loans may be greater than those for conforming mortgage loans. We,
therefore, may assume a greater risk of increased delinquency rates and/or credit losses, as well
as interest rate risk, by offering non-conforming products.
Our small-to medium-sized business target market may have fewer financial resources to weather a
downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and
financial services needs of small- and medium-sized businesses. These businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger entities. If
general economic conditions negatively impact this economic sector in the markets in which we
operate, our results of operations and financial condition may be adversely affected.
14
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and
counterparties, we may rely on information furnished to us by or on behalf of clients and
counterparties, including financial statements and other financial information. We also may rely
on representations of clients and counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to clients, we may assume that a customers audited
financial statements conform with generally accepted accounting principles (GAAP) and present
fairly, in all material respects, the financial condition, results of operations and cash flows of
the customer. Our financial condition and results of operations could be negatively impacted to
the extent we rely on financial statements or other information that does not comply with GAAP or
is materially misleading.
Negative public opinion could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is
inherent in our business. Negative public opinion can result from our actual or alleged conduct in
any number of activities, including lending practices, corporate
governance and acquisitions, and from actions taken by government regulators and community
organizations in response to those activities. Negative public opinion can adversely affect our
ability to keep and attract clients and employees and can expose us to litigation and regulatory
action. Because virtually all of our businesses operate under the Access National brand, actual
or alleged conduct by one business can result in negative public opinion about our other
businesses. Although we take steps to minimize reputation risk in dealing with our clients and
communities, this risk will always be present given the nature of our business.
We depend on the services of key personnel, and a loss of any of those personnel could disrupt our
operations and result in reduced revenues.
Our success depends upon the continued service of our senior management team and upon our ability
to attract and retain qualified financial services personnel. Competition for qualified employees
is intense. In our experience, it can take a significant period of time to identify and hire
personnel with the combination of skills and attributes required in carrying out our strategy. If
we lose the services of our key personnel, or are unable to attract additional qualified personnel,
our business, financial condition, results of operations and cash flows could be materially
adversely affected.
We may need to invest in new technology to compete effectively, and that could have a negative
effect on our operating results and the value of our common stock.
The market for financial services, including banking services, is increasingly affected by advances
in technology, including developments in telecommunications, data processing, computers, automation
and Internet-based banking. We depend on third-party vendors for portions of our data processing
services. In addition to our ability to finance the purchase of those services and integrate them
into our operations, our ability to offer new technology-based services depends on our vendors
abilities to provide and support those services. Future advances in technology may require us to
incur substantial expenses that adversely affect our operating results, and our limited capital
resources may make it impractical or impossible for us to keep pace with competitors possessing
greater capital resources. Our ability to compete successfully in our banking markets may depend
on the extent to which we and our vendors are able to offer new technology-based services and on
our ability to integrate technological advances into our operations.
Our ability to pay dividends is subject to regulatory restrictions, and we may be unable to pay
future dividends.
Our ability to pay dividends is subject to regulatory restrictions and the need to maintain
sufficient consolidated capital. Also, our only source of funds with which to pay dividends to our
shareholders is dividends we receive from our Bank, and the Banks ability to pay dividends to us
is limited by its own obligations to maintain sufficient capital and regulatory restrictions. If
these regulatory requirements are not satisfied, we will be unable to pay dividends on our common
stock. We paid our first cash dividends on February 24, 2006. We cannot guarantee that dividends
will not be reduced or eliminated in future periods.
Certain provisions under our articles of incorporation and applicable law, in addition to the
ownership position of certain shareholders, may make it difficult for others to obtain control of
our Corporation even if such a change in control may be favored by some shareholders.
In addition to the amount of common stock controlled by our chairman of the board and other
principal shareholders, certain provisions in our articles of incorporation and applicable Virginia
corporate and banking law may have the effect of discouraging a change of control of our company
even if such a transaction is favored by some of our shareholders and could result in shareholders
receiving a substantial premium over the current market price of our shares. The primary purpose
of these provisions is to encourage negotiations with our management by persons interested in
acquiring control of our Corporation. These provisions may also tend to perpetuate present
management and make it difficult for shareholders owning less than a majority of the shares to be
able to elect even a single director.
15
There can be no assurance that recent government actions will help stabilize the U.S. financial
system.
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, various branches and agencies
of the U.S. government have put in place laws, regulations, and programs to address capital and
liquidity issues in the banking system. There can be no assurance, however, as to the actual impact
that such laws, regulations, and programs will have on the financial markets, including the extreme
levels of volatility, liquidity and confidence issues, and limited credit availability currently
being experienced. The failure of such laws, regulations, and programs to help stabilize the
financial markets and a continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of operations, access to
credit or the trading price of our common stock.
Current levels of market volatility are unprecedented.
Although many markets have been experiencing volatility and disruption for months, in the past few
weeks, the volatility and disruption of financial and credit markets has reached unprecedented
levels for recent times. In some cases, the markets have produced downward pressure on stock prices
and credit availability for certain issuers without regard to those issuers underlying financial
strength. If current
levels of market disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to access capital and
on our business, financial condition, and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions
and commercial soundness of other financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different counterparties, and we routinely execute transactions with
counterparties in the financial services industry, including brokers, dealers, commercial banks,
investment banks, and government sponsored enterprises. Many of these transactions expose us to
credit risk in the event of default of our counterparty. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us. There is no assurance
that any such losses would not materially and adversely affect our financial condition and results
of operations.
Current market developments may adversely affect our industry, business, and results of operations.
Dramatic declines in the housing market during the prior year, with falling home prices and
increasing foreclosures and unemployment, have resulted in significant write-downs of asset values
by financial institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting
concern about the stability of the financial markets generally and the strength of counterparties,
many lenders and institutional investors have reduced, and in some cases, ceased to provide funding
to borrowers, including other financial institutions. The resulting lack of available credit, lack
of confidence in the financial sector, increased volatility in the financial markets, and reduced
business activity could materially and adversely, directly or indirectly, affect our business,
financial condition and results of operations.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
The Bank and the Mortgage Corporation lease offices that are used in the normal course of business.
The principal executive office of the Corporation, Bank, Access Real Estate and Mortgage
Corporation is owned by Access Real Estate, a subsidiary of the Bank, and is located at 1800 Robert
Fulton Drive, Reston, Virginia. The Bank leases offices in Chantilly, Tysons Corner, Leesburg, and
Manassas, Virginia. The Mortgage Corporation leases offices in McLean, Richmond, and Roanoke in
Virginia. The Mortgage Corporation leases three offices in Maryland located in Bowie, Crofton and
Westminster in addition to the offices in Tennessee, Texas and Colorado. Access Real Estate owns
an undeveloped commercial lot in Fredericksburg that is being held for future expansion of the Bank
and Mortgage Corporation.
All of the owned and leased properties are in good operating condition and are adequate for the
Corporations present and anticipated future needs.
ITEM 3 LEGAL PROCEEDINGS
The Bank is a party to legal proceedings arising in the ordinary course of business. Management is
of the opinion that these legal
proceedings will not have a material adverse effect on the Corporations financial condition or
results of operations. From time to time
the Bank may initiate legal actions against borrowers in connection with collecting defaulted
loans. Such actions are not considered material by management unless otherwise disclosed.
16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended December 31,
2008.
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
In July 2004, the Corporations common stock became listed on the NASDAQ Global Market of the
NASDAQ Stock Market LLC and is quoted under the symbol of ANCX. Set forth below is certain
financial information relating to the Corporations common stock price history. Prices reflect
transactions executed on NASDAQ.
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2008 |
| |
|
|
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2007 |
|
|
|
|
|
|
High |
|
Low |
|
Dividends |
|
High |
|
Low |
|
Dividends |
First Quarter |
|
$ |
8.10 |
|
|
$ |
5.11 |
|
|
$ |
0.01 |
|
|
$ |
9.82 |
|
|
$ |
9.10 |
|
|
$ |
0.01 |
|
Second Quarter |
|
|
8.35 |
|
|
|
6.25 |
|
|
|
0.01 |
|
|
|
9.59 |
|
|
|
8.60 |
|
|
|
0.01 |
|
Third Quarter |
|
|
6.85 |
|
|
|
4.99 |
|
|
|
0.01 |
|
|
|
8.91 |
|
|
|
6.89 |
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|
|
0.01 |
|
Fourth Quarter |
|
|
6.13 |
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|
|
4.42 |
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|
|
0.01 |
|
|
|
8.14 |
|
|
|
5.60 |
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|
|
0.01 |
|
As of March 10, 2009, the Corporation had 10,296,450 outstanding shares of Common Stock, par value
$.835 per share, held by approximately 387 shareholders of record and the closing price for the
Corporations common stock on the NASDAQ Global Market was $4.37.
The Corporation paid its thirteenth consecutive quarterly cash dividend on February 25, 2009 to
shareholders of record as of February 11, 2009. Payment of dividends is at the discretion of the
Corporations Board of Directors, and is also subject to various federal and state regulatory
limitations. Future dividends are dependent upon the overall performance and capital requirements
of the Corporation. See Item 1 Business Supervision and Regulation Dividends for a
discussion of regulatory requirements related to dividends. Issuer
Purchases of Equity Securities for the Quarter Ended December 31, 2008
The following table details the Corporations purchases of its common stock during the fourth
quarter pursuant to a Share Repurchase Program announced on March 20, 2007. On April 22, 2008 the
number of shares authorized for repurchase under the Share Repurchase Program was increased from
2,000,000 to 2,500,000 shares. The Share Repurchase Program does not have an expiration date.
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Issuer Purchases of Equity Securities |
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(c) Total Number of |
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(d) Maximum Number |
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Shares Purchased as |
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|
of Shares that may |
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|
|
(a) Total Number of |
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|
(b) Average Price |
|
|
Part of Publicly |
|
|
yet be Purchased |
|
Period |
|
Shares Purchased |
|
|
Paid Per Share |
|
|
Announced Plan |
|
|
Under the Plan |
|
October 1 - October 31, 2008 |
|
|
2,996 |
|
|
$ |
5.16 |
|
|
|
2,996 |
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|
|
442,969 |
|
November 1 - November 30, 2008 |
|
|
3,682 |
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|
|
5.49 |
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|
|
3,682 |
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|
|
439,287 |
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December 1 - December 31, 2008 |
|
|
9,747 |
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|
|
5.05 |
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9,747 |
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429,540 |
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16,425 |
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$ |
5.17 |
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|
|
16,425 |
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|
|
429,540 |
|
17
Stock Performance
The following graph compares the Corporations cumulative total shareholder return on its common
stock for the five year period ended December 31, 2008 with the cumulative return of a broad equity
market index, the Standard & Poors 500 Index (S&P 500 Index) and a peer group constructed by the
Corporation (the Peer Group). This presentation assumes $100 was invested in shares of the
Corporation and each of the indices on December 31, 2003, and that dividends, if any, were
immediately reinvested in additional shares. The graph plots the value of the initial $100
investment at one-year intervals from December 31, 2003 through December 31, 2008.
The Peer Group consists of five companies that, in the opinion of management, are similar to the
Corporation in ways relevant to a comparison of stock performance. Specifically, each company in
the Peer Group provides commercial banking services in the Mid-Atlantic Region, has existed for a
reasonably similar time period as has the Corporation, and is considered by our management to be in
an expansion mode. In calculating the relative index, the stock values of the Peer Group are
re-balanced at the beginning of each year by the weighted market capitalization.
The Peer Group consists of:
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Company, Headquarters |
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Exchange |
|
Trading Symbol |
|
Established |
|
Cardinal Financial Corporation
Fairfax, Virginia |
|
NASDAQ-GS |
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CFNL |
|
1998 |
|
|
|
|
|
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Eagle Bancorp, Inc.
Bethesda, Maryland |
|
NASDAQ-CM |
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EGBN |
|
1998 |
|
|
|
|
|
|
|
Towne Bank
Portsmouth, Virginia |
|
NASDAQ-GS |
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TOWN |
|
1999 |
|
|
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|
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|
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Valley Financial Corporation
Roanoke, Virginia |
|
NASDAQ-CM |
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VYFC |
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1995 |
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Virginia National Bank
Charlottesville, Virginia |
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OTC-BB |
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VABK |
|
1998 |
18
Access
National Corporation
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Period Ending |
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Index |
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12/31/03 |
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12/31/04 |
|
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|
12/31/05 |
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12/31/06 |
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12/31/07 |
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|
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12/31/08 |
|
|
|
Access National Corporation |
|
|
|
100.00 |
|
|
|
|
93.83 |
|
|
|
|
189.12 |
|
|
|
|
127.13 |
|
|
|
|
80.74 |
|
|
|
|
69.35 |
|
|
|
S&P 500 |
|
|
|
100.00 |
|
|
|
|
110.88 |
|
|
|
|
116.33 |
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|
|
134.70 |
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142.10 |
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|
89.53 |
|
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|
Peer Group Index* |
|
|
|
100.00 |
|
|
|
|
128.53 |
|
|
|
|
131.84 |
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|
132.84 |
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|
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109.88 |
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114.36 |
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* |
|
Access National Corporations peer group consists of the following: Cardinal Financial Corporation (CFNL),
Eagle Bancorp, Inc. (EGBN), Towne Bank (TOWN), Valley Financial Corporation (VYFC), and Virginia National
Bank (VABK). |
19
ITEM 6 SELECTED FINANCIAL DATA
The following consolidated selected financial data is derived from the Corporations audited
financial statements for the five years ended December 31. This information should be read in
conjunction with the following Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes thereto.
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Year Ended December 31, |
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2008 |
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2007 |
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2006 |
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2005 |
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2004 |
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|
|
(In Thousands, Except Per Share Data) |
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Income Statement Data: |
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|
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Net interest income |
|
$ |
21,052 |
|
|
$ |
20,122 |
|
|
$ |
18,256 |
|
|
$ |
15,273 |
|
|
$ |
11,694 |
|
Provision for loan losses |
|
|
5,423 |
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|
|
2,588 |
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|
|
232 |
|
|
|
1,196 |
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|
|
1,462 |
|
Non-interest income |
|
|
30,813 |
|
|
|
27,707 |
|
|
|
27,633 |
|
|
|
30,956 |
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|
|
25,952 |
|
Non-interest expense |
|
|
38,998 |
|
|
|
39,949 |
|
|
|
34,212 |
|
|
|
35,830 |
|
|
|
31,580 |
|
Income taxes |
|
|
2,700 |
|
|
|
1,590 |
|
|
|
3,853 |
|
|
|
3,305 |
|
|
|
1,619 |
|
|
|
|
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|
Net income before extraordinary items |
|
|
4,744 |
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|
|
3,702 |
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|
|
7,592 |
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|
5,898 |
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|
|
2,985 |
|
Extra ordinary income, net of income tax |
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|
|
|
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|
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|
|
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|
|
|
330 |
|
|
|
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|
Net Income |
|
$ |
4,744 |
|
|
$ |
3,702 |
|
|
$ |
7,592 |
|
|
$ |
5,898 |
|
|
$ |
3,315 |
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|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, before extraordinary income |
|
$ |
0.46 |
|
|
$ |
0.32 |
|
|
$ |
0.81 |
|
|
$ |
0.75 |
|
|
$ |
0.40 |
|
Basic |
|
|
0.46 |
|
|
|
0.32 |
|
|
|
0.81 |
|
|
|
0.75 |
|
|
|
0.44 |
|
Diluted, before extraordinary income |
|
|
0.46 |
|
|
|
0.31 |
|
|
|
0.72 |
|
|
|
0.63 |
|
|
|
0.33 |
|
Diluted |
|
|
0.46 |
|
|
|
0.31 |
|
|
|
0.72 |
|
|
|
0.63 |
|
|
|
0.36 |
|
Cash dividends paid |
|
|
0.04 |
|
|
|
0.04 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
Book value at period end |
|
|
5.66 |
|
|
|
5.35 |
|
|
|
5.27 |
|
|
|
3.92 |
|
|
|
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
702,324 |
|
|
$ |
622,376 |
|
|
$ |
644,782 |
|
|
$ |
537,050 |
|
|
$ |
420,098 |
|
Loans held for sale |
|
|
84,312 |
|
|
|
39,144 |
|
|
|
65,320 |
|
|
|
45,019 |
|
|
|
36,245 |
|
Total loans |
|
|
485,929 |
|
|
|
477,598 |
|
|
|
433,594 |
|
|
|
369,733 |
|
|
|
292,594 |
|
Total securities |
|
|
91,015 |
|
|
|
73,558 |
|
|
|
105,163 |
|
|
|
87,771 |
|
|
|
51,378 |
|
Total deposits |
|
|
485,401 |
|
|
|
473,418 |
|
|
|
438,932 |
|
|
|
419,629 |
|
|
|
317,393 |
|
Shareholders equity |
|
|
57,945 |
|
|
|
57,961 |
|
|
|
62,295 |
|
|
|
31,185 |
|
|
|
25,998 |
|
Average shares outstanding, basic |
|
|
10,298,631 |
|
|
|
11,620,130 |
|
|
|
9,429,074 |
|
|
|
7,867,135 |
|
|
|
7,509,536 |
|
Average shares outstanding, diluted |
|
|
10,423,555 |
|
|
|
11,866,468 |
|
|
|
10,541,873 |
|
|
|
9,423,087 |
|
|
|
9,155,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.76 |
% |
|
|
0.57 |
% |
|
|
1.29 |
% |
|
|
1.29 |
% |
|
|
0.97 |
% |
Return on average equity |
|
|
8.34 |
% |
|
|
5.84 |
% |
|
|
17.15 |
% |
|
|
20.63 |
% |
|
|
14.48 |
% |
Net interest margin (1) |
|
|
3.47 |
% |
|
|
3.18 |
% |
|
|
3.21 |
% |
|
|
3.49 |
% |
|
|
3.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access National Bank |
|
|
55.36 |
% |
|
|
50.87 |
% |
|
|
48.67 |
% |
|
|
52.21 |
% |
|
|
56.40 |
% |
Access National Mortgage Corp. |
|
|
86.65 |
% |
|
|
107.52 |
% |
|
|
92.42 |
% |
|
|
89.13 |
% |
|
|
94.18 |
% |
Access National Corporation |
|
|
75.19 |
% |
|
|
83.52 |
% |
|
|
75.06 |
% |
|
|
80.09 |
% |
|
|
87.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to period end loans |
|
|
1.54 |
% |
|
|
1.56 |
% |
|
|
1.26 |
% |
|
|
1.41 |
% |
|
|
1.37 |
% |
Allowance to nonperforming loans |
|
|
259.55 |
% |
|
|
449.25 |
% |
|
|
1514.60 |
% |
|
|
397.78 |
% |
|
|
185.07 |
% |
Net charge-offs to average loans |
|
|
1.06 |
% |
|
|
0.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net interest income divided by total average earning assets. |
Table continued on next page
20
ITEM 6 SELECTED FINANCIAL DATA continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In Thousands, Except Per Share Data) |
|
Average Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
624,450 |
|
|
$ |
649,584 |
|
|
$ |
589,834 |
|
|
$ |
457,251 |
|
|
$ |
341,153 |
|
Securities |
|
|
68,861 |
|
|
|
94,331 |
|
|
|
107,165 |
|
|
|
64,862 |
|
|
|
25,340 |
|
Loans held for sale |
|
|
25,757 |
|
|
|
49,750 |
|
|
|
53,935 |
|
|
|
45,688 |
|
|
|
42,416 |
|
Loans |
|
|
484,764 |
|
|
|
472,372 |
|
|
|
400,211 |
|
|
|
318,438 |
|
|
|
246,809 |
|
Allowance for loan losses |
|
|
8,248 |
|
|
|
6,170 |
|
|
|
5,363 |
|
|
|
4,433 |
|
|
|
2,945 |
|
Total deposits |
|
|
450,873 |
|
|
|
444,999 |
|
|
|
423,788 |
|
|
|
337,403 |
|
|
|
235,387 |
|
Junior subordinated debentures |
|
|
6,186 |
|
|
|
9,237 |
|
|
|
10,311 |
|
|
|
10,311 |
|
|
|
10,311 |
|
Total shareholders equity |
|
|
56,882 |
|
|
|
63,343 |
|
|
|
44,270 |
|
|
|
28,586 |
|
|
|
22,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
11.85 |
% |
|
|
12.41 |
% |
|
|
15.01 |
% |
|
|
10.78 |
% |
|
|
10.97 |
% |
Total risk-based capital |
|
|
13.11 |
% |
|
|
13.66 |
% |
|
|
16.18 |
% |
|
|
12.11 |
% |
|
|
12.80 |
% |
Leverage capital ratio |
|
|
9.71 |
% |
|
|
10.07 |
% |
|
|
11.53 |
% |
|
|
7.60 |
% |
|
|
8.83 |
% |
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide an overview of the significant factors
affecting the financial condition and the results of operations of the Corporation and its
subsidiaries for the year ended December 31, 2008 and 2007. The consolidated financial statements
and accompanying notes should be read in conjunction with this discussion and analysis.
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K may contain forward-looking
statements. For this purpose, any statements contained herein, including documents incorporated by
reference, that are not statements of historical fact may be deemed to be forward-looking
statements. Examples of forward-looking statements include discussions as to our expectations,
beliefs, plans, goals, objectives and future financial or other performance or assumptions
concerning matters discussed in this document. Forward-looking statements often use words such as
believes, expects, plans, may, will, should, projects, contemplates,
anticipates, forecasts, intends or other words of similar meaning. You can also identify them
by the fact that they do not relate strictly to historical or current facts. Forward-looking
statements are subject to numerous assumptions, risks and uncertainties, and actual results could
differ materially from historical results or those anticipated by such statements. Factors that
could have a material adverse effect on the operations and future prospects of the Corporation
include, but are not limited to, changes in: continued deterioration in general business and
economic conditions and in the financial markets and the impact of any policies or programs
implemented pursuant to the EESA, branch expansion plans, interest rates, general economic
conditions, monetary and fiscal policies of the U.S. Government, including policies of the
Comptroller, U.S. Treasury and the FRB, the economy of Northern Virginia, including governmental
spending and real estate markets, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating the forward-looking
statements contained herein, and readers are cautioned not to place undue reliance on such
statements. Any forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which it is made. For additional discussion of risk factors that may cause our
actual future results to differ materially from the results indicated within forward looking
statements, please see Item 1A Risk Factors herein.
In addition, a continuation of the recent turbulence in significant portions of the global
financial markets, particularly if it worsens, could impact our performance, both directly by
affecting our revenues and the value of our assets and liabilities, and indirectly by affecting our
counterparties and the economy generally. Dramatic declines in the housing market in the past year
have resulted in significant write-downs of asset values by financial institutions in the United
States. Concerns about the stability of the U.S. financial markets generally have reduced the
availability of funding to certain financial institutions, leading to a tightening of credit,
reduction of business activity, and increased market volatility. There can be no assurance that the
EESA, the ARRA or the actions taken by the U.S. Treasury will stabilize the U.S. financial system
or alleviate the industry or economic factors that may adversely affect our business. In addition,
our business and financial performance could be impacted as the financial industry restructures in
the current environment, both by changes in the creditworthiness and performance of our
counterparties and by changes in the competitive landscape.
21
CRITICAL ACCOUNTING POLICIES
The Corporations consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. In preparing the Corporations
financial statements management makes estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses. Our significant accounting policies are presented in
Note 1 to the consolidated financial statements. Management believes that the most significant
subjective judgments that it makes include the following:
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan
portfolio. The allowance is based on two basic principals of accounting: (i) Statement of
Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting
by Creditors for Impairment of a Loan, which requires that losses be accrued based on the
differences between the value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance.
An allowance for loan losses is established through a provision for loan losses based upon industry
standards, known risk characteristics, and managements evaluation of the risk inherent in the loan
portfolio and changes in the nature and volume of loan activity. Such evaluation considers among
other factors, the estimated market value of the underlying collateral, and current economic
conditions. For further information about our practices with respect to allowance for loan losses,
please see the subsection Loans below.
Other Than Temporary Impairment of Investment Securities
The Banks investment portfolio is classified as available-for-sale. The estimated fair value of
the portfolio fluctuates due to changes in market interest rates and other factors. Changes in
estimated fair value are recorded in stockholders equity as a component of comprehensive income.
Securities are monitored to determine whether a decline in their value is other-than-temporary.
Management evaluates the investment portfolio on a quarterly basis to determine the collectability
of amounts due per the contractual terms of the investment security. Once a decline in value is
determined to be other than temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized. At December 31, 2008 there were no securities with other than
temporary impairment.
Income Taxes
The Corporation uses the liability method of accounting for income taxes. This method results in
the recognition of deferred tax assets and liabilities that are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The deferred provision
for income taxes is the result of the net change in the deferred tax asset and deferred tax
liability balances during the year. This amount combined with the current taxes payable or
refundable results in the income tax expense for the current year.
Fair Value
Fair values of financial instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on and off balance sheet
financial instruments do not include the value of anticipated future business or the values of
assets and liabilities not considered financial instruments. For additional information about our
financial assets carried at fair value, refer to Note 18 to the consolidated financial statements.
FINANCIAL CONDITION
Summary
The Corporation completed its ninth year of operation and recorded net income of $4.7 million.
Total assets at December 31, 2008 were $702.3 million compared to $622.4 million in 2007. The
increase in total assets is primarily due to a $45.2 million increase in loans held for sale, a
$17.5 million increase in securities, and an increase in loans held for investment of approximately
$8.3 million.
The following discussions by major categories explain the changes in financial condition.
22
Investment Securities
The Corporations securities portfolio is comprised of U.S. Treasury securities, U.S. Government
Agency securities, municipal securities, CRA mutual fund, mortgage backed securities and FRB and
FHLB stock. The investment portfolio is used to provide liquidity and as a tool for managing
interest sensitivity in the balance sheet, while generating a reasonable return. At December 31,
2008 the estimated fair value of the securities portfolio totaled $91.0 million, up from $73.6
million in 2007. The increase is due to a decline in loan demand. All securities were classified
as available for sale. The Financial Accounting Standards Board (FASB) requires that securities
classified as available for sale be accounted for at fair market value. Unrealized gains and
losses are recorded directly to a separate component of stockholders equity. The Corporations
securities classified as available for sale had an unrealized gain net of deferred taxes of $827
thousand on December 31, 2008.
The following tables present the types, amounts and maturity distribution of the securities
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Investment Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes |
|
$ |
1,006 |
|
|
$ |
1,013 |
|
|
$ |
996 |
|
U.S. Government agency |
|
|
76,354 |
|
|
|
61,720 |
|
|
|
91,609 |
|
Mortgage backed |
|
|
1,391 |
|
|
|
799 |
|
|
|
1,040 |
|
Tax exempt municipals |
|
|
|
|
|
|
2,891 |
|
|
|
2,888 |
|
Taxable municipals |
|
|
4,920 |
|
|
|
1,099 |
|
|
|
1,275 |
|
CRA Mutual fund |
|
|
1,448 |
|
|
|
1,479 |
|
|
|
1,468 |
|
Restricted stock (1) |
|
|
5,896 |
|
|
|
4,557 |
|
|
|
5,887 |
|
|
|
|
|
|
|
|
|
|
|
Total Securities |
|
$ |
91,015 |
|
|
$ |
73,558 |
|
|
$ |
105,163 |
|
|
|
|
|
|
|
|
|
|
|
Maturity Schedule of Investment Securities Available for Sale 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands) |
|
|
|
|
|
|
|
|
|
|
After One Year |
|
After Five Years |
|
After Ten Years |
|
|
|
|
|
|
Within |
|
But Within |
|
But Within |
|
and |
|
|
|
|
|
|
One Year |
|
Five Years |
|
Ten Years |
|
Over |
|
Total |
|
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes |
|
$ |
1,006 |
|
|
|
4.97 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,006 |
|
|
|
4.97 |
% |
U.S. Government agency |
|
|
|
|
|
|
|
|
|
|
25,121 |
|
|
|
4.95 |
% |
|
|
51,233 |
|
|
|
5.38 |
% |
|
|
|
|
|
|
|
|
|
|
76,354 |
|
|
|
5.24 |
% |
Mortgage backed |
|
|
382 |
|
|
|
4.92 |
% |
|
|
127 |
|
|
|
4.66 |
% |
|
|
|
|
|
|
|
|
|
|
881 |
|
|
|
6.02 |
% |
|
|
1,390 |
|
|
|
5.59 |
% |
Tax exempt municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable municipals |
|
|
|
|
|
|
|
|
|
|
907 |
|
|
|
4.30 |
% |
|
|
|
|
|
|
|
|
|
|
4,012 |
|
|
|
6.65 |
% |
|
|
4,919 |
|
|
|
6.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,388 |
|
|
|
4.96 |
% |
|
$ |
26,155 |
|
|
|
4.93 |
% |
|
$ |
51,233 |
|
|
|
5.38 |
% |
|
$ |
4,893 |
|
|
|
6.54 |
% |
|
$ |
83,669 |
|
|
|
5.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes CRA Mutual Fund, FRB Stock and FHLB Stock |
23
Loans
Loans held for investment totaled $485.9 million at December 31, 2008 up from $477.6 million at
December 31, 2007, an increase of $8.3 million after charge offs of approximately $5.6 million and
transferring approximately $4.5 million to OREO. The rate of loan growth in 2008 was significantly
below that of prior years largely due to a decline in loan demand, reflecting the current economic
environment, and more restrictive underwriting standards. Credit quality of the portfolio remains
high with only five loans classified as non-performing. Commercial loans increased by approximately
$4.7 million from last year. Loans secured by commercial real estate increased $18.6 million, a
9.3% increase over 2007. The growth in commercial real estate loans reflects our continuing
commitment to local owner occupied commercial financing. Real estate construction loans
decreased $12.5 million, a 22.6% decrease over last year. This loan category is comprised of both
construction and land development loans. Residential real estate loans decreased $3.0 million from
$156.7 million in 2007 to $153.7 million in 2008. Consumer loans totaled $1.5 million in 2008 and
$1.0 million in 2007. The
Bank offers a complete line of consumer lending products, primarily as a service to the affiliates
of our commercial and professional clients.
The Bank does not actively market its consumer products at this time, which accounts for the
nominal amount of consumer loans. The
Bank concentrates on providing banking services to small to medium sized businesses and
professionals in our market area. Our loan officers maintain a professional relationship with our
clients and are responsive to their financial needs. They are directly involved in the
community and it is this involvement and commitment that leads to referrals and continued growth.
Loans held for sale totaled $84.3 million at December 31, 2008 compared to $39.1 million at
December 31, 2007, an increase of $45.2 million. The increase in loans held for sale is due to a
decrease in rates and an increase in loans being refinanced. Loan origination volume including
brokered loans totaled $1.07 billion in 2007 compared to $853.8 million in 2008, a 20.2% decrease.
The following tables present the major classifications and maturity distribution of loans held for
investment at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Loan Portfolio |
|
|
Year Ended December 31 |
|
|
(Dollars in Thousands) |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
69,537 |
|
|
|
14.31 |
% |
|
$ |
64,860 |
|
|
|
13.58 |
% |
|
$ |
51,825 |
|
|
|
11.95 |
% |
|
$ |
38,516 |
|
|
|
10.42 |
% |
|
$ |
48,427 |
|
|
|
16.55 |
% |
Commercial real estate |
|
|
218,539 |
|
|
|
44.97 |
|
|
|
199,894 |
|
|
|
41.85 |
|
|
|
159,996 |
|
|
|
36.90 |
|
|
|
137,423 |
|
|
|
37.17 |
|
|
|
96,939 |
|
|
|
33.13 |
|
Real estate construction |
|
|
42,600 |
|
|
|
8.77 |
|
|
|
55,074 |
|
|
|
11.53 |
|
|
|
68,570 |
|
|
|
15.81 |
|
|
|
37,054 |
|
|
|
10.02 |
|
|
|
33,073 |
|
|
|
11.30 |
|
Residential real estate |
|
|
153,740 |
|
|
|
31.64 |
|
|
|
156,731 |
|
|
|
32.82 |
|
|
|
152,648 |
|
|
|
35.21 |
|
|
|
156,185 |
|
|
|
42.24 |
|
|
|
113,432 |
|
|
|
38.77 |
|
Consumer |
|
|
1,513 |
|
|
|
0.31 |
|
|
|
1,039 |
|
|
|
0.22 |
|
|
|
555 |
|
|
|
0.13 |
|
|
|
555 |
|
|
|
0.15 |
|
|
|
723 |
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
485,929 |
|
|
|
100.00 |
% |
|
$ |
477,598 |
|
|
|
100.00 |
% |
|
$ |
433,594 |
|
|
|
100.00 |
% |
|
$ |
369,733 |
|
|
|
100.00 |
% |
|
$ |
292,594 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Maturity Distribution |
|
|
|
December 31, 2008 |
|
|
|
Three Months or |
|
|
Over Three Months |
|
|
Over One Year |
|
|
Over |
|
|
|
|
|
|
Less |
|
|
Through One Year |
|
|
Through Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
(In Thousands) |
|
Commercial |
|
$ |
17,812 |
|
|
$ |
19,142 |
|
|
$ |
21,392 |
|
|
$ |
11,191 |
|
|
$ |
69,537 |
|
Commercial real estate |
|
|
28,018 |
|
|
|
21,224 |
|
|
|
152,052 |
|
|
|
17,245 |
|
|
|
218,539 |
|
Real estate construction |
|
|
18,623 |
|
|
|
11,973 |
|
|
|
11,965 |
|
|
|
39 |
|
|
|
42,600 |
|
Residential real estate |
|
|
39,040 |
|
|
|
32,931 |
|
|
|
64,475 |
|
|
|
17,294 |
|
|
|
153,740 |
|
Consumer |
|
|
116 |
|
|
|
956 |
|
|
|
441 |
|
|
|
|
|
|
|
1,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
103,609 |
|
|
$ |
86,226 |
|
|
$ |
250,325 |
|
|
$ |
45,769 |
|
|
$ |
485,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Allowance for Loan Losses
The allowance for loan loss totaled approximately $7.5 million at December 31, 2008 and 2007. The
allowance for loan losses represents 1.54% of loans held for investment at December 31, 2008
compared to 1.56% in 2007. The provision for loan losses charged to expense was $ 5.4 million in
2008, up from $2.6 million in 2007. The increase in the provision charged to expense is primarily
due to two commercial real estate loans that were written down by approximately $4 million to
current market values and transferred to OREO. Both properties are in the process of being
liquidated.
The level of the allowance for loan losses is determined by management through an ongoing detailed
analysis of risk and loss potential
within the portfolio as a whole and they have concluded the amount of our reserve and the
methodology applied to arrive at the amount of the reserve is justified and appropriate. Outside of
our own analysis, our reserve adequacy and methodology are reviewed on a regular
basis by an internal audit program, and bank regulators and such reviews have not resulted in any
material adjustment to the reserve. The schedule below, Allocation of the Allowance for Loan
Losses, reflects the pro rata allocation by the different loan types. The methodology as to how
the allowance was derived is a combination of specific allocations and percentage allocations of
the allowance for loan losses, as discussed below.
The Bank has developed a comprehensive risk weighting system based on individual loan
characteristics that enables the Bank to allocate
the composition of the allowance for loan losses by types of loans. The methodology as to how the
allowance was derived is detailed below. Adequacy of the allowance is assessed monthly and
increased by provisions charged to expense. Charge-offs are taken, no less frequently than at the
close of each fiscal quarter. The methodology by which we systematically determine the amount of
our allowance is set forth by the Board of Directors in our Credit Policy, pursuant to which our
Chief Credit Officer is charged with ensuring that each loan is individually evaluated and the
portfolio characteristics are evaluated to arrive at an appropriate aggregate reserve. The results
of the analysis are documented, reviewed and approved by the Board of Directors no less than
quarterly. The following elements are
considered in this analysis: loss estimates on specific problem credits, individual loan risk
ratings, lending staff changes, loan review and board oversight, loan policies and procedures,
portfolio trends with respect to volume, delinquency, composition/concentrations of credit, risk
rating migration, levels of classified credit, off-balance sheet credit exposure, any other factors
considered relevant from time to time. All loans are graded or Risk Rated individually for loss
potential at the time of origination and as warranted thereafter, but no less frequently than
quarterly. Loss potential factors are applied based upon a blend of the following criteria: our
own direct experience at this Bank; our collective management experience in administering similar
loan portfolios in the market for nearly 150 years; and peer data contained in statistical releases
issued by both the Comptroller and the FDIC. Although looking only at peer data and the Banks
historically low write-offs would suggest a lower loan loss allowance, our managements experience
with similar portfolios in the same market combined with the fact that our portfolio is relatively
unseasoned, justify a conservative approach in contemplating external statistical resources.
Accordingly, managements collective experience at this Bank and other banks is the most heavily
weighted criterion, and the weighting is subjective and varies by loan type, amount, collateral,
structure, and repayment terms. Prevailing economic conditions generally and within each
individual borrowers business sector are considered, as well as any changes in the borrowers own
financial position and, in the case of commercial loans, management structure and business
operations. When deterioration develops in an individual credit, the loan is placed on a Watch
List and the loan is monitored more closely. All loans on the watch list are evaluated for
specific loss potential based upon either an evaluation of the liquidated value of the collateral
or cash flow deficiencies. If management believes that, with respect to a specific loan, an
impaired source of repayment, collateral impairment or a change in a debtors financial condition
presents a heightened risk of loss, the loan is classified as impaired and the book balance of the
loan is reduced to the expected liquidation value by charging the allowance for loan losses.
In addition to the reserves discussed above, the Mortgage Corporation maintains a separate reserve
in other liabilities for potential early payoff and fraud default penalties. At December 31, 2008
the balance in this reserve totaled approximately $1.4 million.
25
The following tables present an analysis of the allowance for loan losses for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In Thousands) |
|
Balance, beginning of period |
|
$ |
7,462 |
|
|
$ |
5,452 |
|
|
$ |
5,215 |
|
|
$ |
4,019 |
|
|
$ |
2,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
5,423 |
|
|
|
2,588 |
|
|
|
232 |
|
|
|
1,196 |
|
|
|
1,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical |
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Commercial real estate |
|
|
4,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction |
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
1,055 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
5,560 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
137 |
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(5,423 |
) |
|
|
(578 |
) |
|
|
5 |
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
7,462 |
|
|
$ |
7,462 |
|
|
$ |
5,452 |
|
|
$ |
5,215 |
|
|
$ |
4,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses |
|
|
Year Ended December 31, |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage |
|
|
2008 |
|
total |
|
2007 |
|
total |
|
2006 |
|
total |
|
2005 |
|
total |
|
2004 |
|
of total |
|
|
( Dollars In Thousands) |
Commercial |
|
$ |
1,816 |
|
|
|
24.34 |
% |
|
$ |
1,341 |
|
|
|
17.97 |
% |
|
$ |
802 |
|
|
|
14.71 |
% |
|
$ |
1,546 |
|
|
|
29.64 |
% |
|
$ |
1,475 |
|
|
|
36.70 |
% |
Commercial real estate |
|
|
2,948 |
|
|
|
39.51 |
|
|
|
3,487 |
|
|
|
46.73 |
|
|
|
2,296 |
|
|
|
42.11 |
|
|
|
1,896 |
|
|
|
36.36 |
|
|
|
1,235 |
|
|
|
30.73 |
|
Real estate construction |
|
|
805 |
|
|
|
10.79 |
|
|
|
929 |
|
|
|
12.45 |
|
|
|
1,055 |
|
|
|
19.35 |
|
|
|
499 |
|
|
|
9.58 |
|
|
|
438 |
|
|
|
10.90 |
|
Residential real estate |
|
|
1,880 |
|
|
|
25.19 |
|
|
|
1,695 |
|
|
|
22.72 |
|
|
|
1,293 |
|
|
|
23.72 |
|
|
|
1,267 |
|
|
|
24.30 |
|
|
|
862 |
|
|
|
21.45 |
|
Consumer |
|
|
13 |
|
|
|
0.17 |
|
|
|
10 |
|
|
|
0.13 |
|
|
|
6 |
|
|
|
0.11 |
|
|
|
6 |
|
|
|
0.12 |
|
|
|
9 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,462 |
|
|
|
100.00 |
% |
|
$ |
7,462 |
|
|
|
100.00 |
% |
|
$ |
5,452 |
|
|
|
100.00 |
% |
|
$ |
5,215 |
|
|
|
100.00 |
% |
|
$ |
4,019 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
26
Non-performing Assets And Loans Past Due
The following table presents information with respect to non-performing assets and 90 day
delinquencies for the years indicated.
Non-performing Assets and Accruing Loans Past Due 90 Days or More
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars In thousands) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Non-accrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
74 |
|
|
$ |
187 |
|
|
$ |
|
|
|
$ |
1,311 |
|
|
$ |
1,615 |
|
Commercial real estate |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction |
|
|
2,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
1,474 |
|
|
|
360 |
|
|
|
|
|
|
|
543 |
|
Consumer and other |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans |
|
|
2,875 |
|
|
|
1,661 |
|
|
|
360 |
|
|
|
1,311 |
|
|
|
2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
(OREO) |
|
|
4,455 |
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
7,330 |
|
|
$ |
2,702 |
|
|
$ |
360 |
|
|
$ |
1,311 |
|
|
$ |
2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of non-performing assets to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans plus OREO |
|
|
1.49 |
% |
|
|
0.56 |
% |
|
|
0.08 |
% |
|
|
0.35 |
% |
|
|
0.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1.04 |
|
|
|
0.43 |
|
|
|
0.06 |
|
|
|
0.24 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing past due loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 or more days past due |
|
$ |
|
|
|
$ |
|
|
|
$ |
914 |
|
|
$ |
|
|
|
$ |
|
|
Non-performing assets, which consist of non-accrual loans and other real estate owned (OREO)
totaled $7.3 million as of December 31, 2008, an increase of $4.6 million compared to December 31,
2007.
Non-accrual loans totaled $2.9 million as of December 31, 2008 and consisted of two residential
construction loans, one commercial loan, one consumer loan and one commercial real estate loan.
The accrual of interest is discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection. When a loan is placed on non-accrual, unpaid
interest is reversed against interest income. Subsequent receipts on non-accrual loans are
recorded as a reduction of principal and interest income is recorded only after principal recovery
is reasonably assured.
The loss potential for each loan has been evaluated and in managements opinion the risk of loss is
adequately reserved against. Management actively works with the borrowers to maximize the
potential for repayment and reports on the status to the Board of Directors, no less than on a
monthly basis.
27
Deposits
Deposits totaled $485.4 million at December 31, 2008 and were comprised of non-interest bearing
demand deposits in the amount of $75.0 million, savings and interest-bearing deposits in the amount
of $95.7 million and time deposits in the amount of $314.7 million. Total deposits increased
approximately $12.0 million over December 31, 2007, an increase of 2.5%. Non-interest bearing
deposits increased $15.6 million from $59.4 million at December 31, 2007 to $75.0 million at
December 31, 2008. This increase is due to a combination of balance fluctuations in existing
commercial accounts and new accounts. Savings and interest-bearing deposit accounts decreased
$47.1 million from $142.8 million at December 31, 2007 to $95.7 million at December 31, 2008. This
decrease occurred primarily in money market accounts due to a decrease in rates that caused
customers to move to higher yielding accounts at other banks or time
deposits at our bank. Time deposits increased $43.5 million and totaled $314.7 million at December
31, 2008 compared to $271.2 million in 2007. Our customer service focus is mainly on our business
and professional customers, which usually generate more referrals for additional new business than
do retail account holders.
Brokered or wholesale deposits included in time deposits totaled $189.1 million and $92.6 million
at December 31, 2008 and
2007 respectively. Brokered deposits include $61.4 million and $4.0 at December 31, 2008 and 2007
respectively, in certificates of deposits enrolled in the Certificate of Deposit Account Registry
Service (CDARS). Through CDARS depositors are able to obtain FDIC insurance of up to $50.0
million. Together with FHLB borrowings we use brokered deposits to fund the short term cash needs
associated with LHFS program discussed under Loans as well as other funding needs.
The daily average balances and weighted average rates paid on deposits for each of the years ended
December 31, 2008, 2007 and 2006 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits and Average Rates Paid |
|
|
|
(Dollars In Thousands) |
|
|
|
Year Ended December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
Interest-bearing demand deposits |
|
$ |
8,956 |
|
|
$ |
100 |
|
|
|
1.12 |
% |
|
$ |
9,507 |
|
|
$ |
199 |
|
|
|
2.09 |
% |
|
$ |
10,691 |
|
|
$ |
224 |
|
|
|
2.10 |
% |
Money market deposit accounts |
|
|
112,391 |
|
|
|
2,653 |
|
|
|
2.36 |
% |
|
|
111,344 |
|
|
|
4,888 |
|
|
|
4.39 |
% |
|
|
118,548 |
|
|
|
4,859 |
|
|
|
4.10 |
% |
Savings accounts |
|
|
3,137 |
|
|
|
101 |
|
|
|
3.22 |
% |
|
|
4,989 |
|
|
|
231 |
|
|
|
4.63 |
% |
|
|
2,147 |
|
|
|
88 |
|
|
|
4.10 |
% |
Time deposits |
|
|
263,175 |
|
|
|
11,197 |
|
|
|
4.25 |
% |
|
|
256,805 |
|
|
|
12,808 |
|
|
|
4.99 |
% |
|
|
230,896 |
|
|
|
10,605 |
|
|
|
4.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
387,659 |
|
|
|
14,051 |
|
|
|
3.62 |
% |
|
|
382,645 |
|
|
|
18,126 |
|
|
|
4.74 |
% |
|
|
362,282 |
|
|
|
15,776 |
|
|
|
4.35 |
% |
Non-interest bearing demand deposits |
|
|
63,214 |
|
|
|
|
|
|
|
|
|
|
|
62,354 |
|
|
|
|
|
|
|
|
|
|
|
61,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
450,873 |
|
|
|
|
|
|
|
|
|
|
$ |
444,999 |
|
|
|
|
|
|
|
|
|
|
$ |
423,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents the maturity distribution of time deposits at December 31, 2008.
Certificate of Deposit Maturity Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Three months |
|
|
Over three |
|
|
Over |
|
|
|
|
|
|
or less |
|
|
through twelve months |
|
|
twelve months |
|
|
Total |
|
|
|
(In Thousands) |
|
Less than $100,000 |
|
$ |
102,957 |
|
|
$ |
88,944 |
|
|
$ |
44,877 |
|
|
$ |
236,778 |
|
Greater than or equal to $100,000 |
|
|
18,197 |
|
|
|
43,627 |
|
|
|
16,069 |
|
|
|
77,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121,154 |
|
|
$ |
132,571 |
|
|
$ |
60,946 |
|
|
$ |
314,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Borrowings
Borrowed funds consist of advances from the FHLB, subordinated debentures (trust preferred),
securities sold under agreement to repurchase, U.S. Treasury demand notes, federal funds purchased
and commercial paper. At December 31, 2008 borrowed funds totaled $150.9 million, compared to $87.4
million at December 31, 2007. Short-term borrowings at December 31, 2008 increased $61.9 million
from December 31, 2007. The increase in short term borrowings is due in part to the $45.2 million
increase in loans held for sale and the remainder is due to other short term funding requirements.
The following table provides a break down of all borrowed funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed Funds Distribution |
|
|
|
Year Ended December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
44,333 |
|
|
$ |
15,500 |
|
|
$ |
45,000 |
|
Securities sold under agreements to repurchase |
|
|
21,395 |
|
|
|
14,814 |
|
|
|
14,541 |
|
Commercial paper |
|
|
26,136 |
|
|
|
9,454 |
|
|
|
20,599 |
|
U.S. Treasury demand notes |
|
|
1,718 |
|
|
|
1,907 |
|
|
|
|
|
FHLB long term borrowings |
|
|
41,107 |
|
|
|
39,524 |
|
|
|
42,572 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,186 |
|
|
|
10,311 |
|
Federal funds purchased |
|
|
9,993 |
|
|
|
|
|
|
|
4,811 |
|
|
|
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
150,868 |
|
|
$ |
87,385 |
|
|
$ |
137,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
13,524 |
|
|
$ |
60,224 |
|
|
$ |
61,066 |
|
Securities sold under agreements to repurchase |
|
|
16,269 |
|
|
|
11,695 |
|
|
|
4,644 |
|
Commercial paper |
|
|
19,836 |
|
|
|
15,679 |
|
|
|
17,586 |
|
U.S. Treasury demand notes |
|
|
861 |
|
|
|
234 |
|
|
|
|
|
FHLB long term borrowings |
|
|
54,173 |
|
|
|
41,932 |
|
|
|
23,722 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
9,237 |
|
|
|
10,311 |
|
Federal funds purchased |
|
|
164 |
|
|
|
716 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
111,013 |
|
|
$ |
139,717 |
|
|
$ |
117,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds |
|
|
3.32 |
% |
|
|
5.14 |
% |
|
|
5.02 |
% |
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
Shareholders equity totaled $57.9 million at December 31, 2008, compared to $58.0 million at
December 31, 2007. Changes in shareholders equity during 2008 include earnings of $4.7 million,
proceeds from stock options exercised of $.4 million, dividend reinvestment of $.5 million, shares
repurchased of $5.9 million, cash dividends paid of $.4 million, stock based compensation of $.1
million and other comprehensive income of $.6 million.
Banking regulators have defined minimum regulatory capital ratios that the Corporation and the
Bank are required to maintain. These risk based capital guidelines take into consideration risk
factors, as defined by the banking regulators, associated with various categories of assets, both
on and off the balance sheet. Both the Corporation and Bank are classified as well capitalized,
which is the highest rating.
29
The table below presents an analysis of risk based capital and outlines the regulatory components
of capital and risk based capital ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Based Capital Analysis |
|
|
|
Year Ended December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars In Thousands) |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
8,551 |
|
|
$ |
9,052 |
|
|
$ |
9,867 |
|
Capital surplus |
|
|
17,411 |
|
|
|
21,833 |
|
|
|
29,316 |
|
Retained earnings |
|
|
31,123 |
|
|
|
26,832 |
|
|
|
23,620 |
|
Subordinated debt (trust preferred debenture) |
|
|
6,000 |
|
|
|
6,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
|
63,085 |
|
|
|
63,717 |
|
|
|
72,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt not included in Tier 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
6,662 |
|
|
|
6,585 |
|
|
|
5,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital |
|
$ |
69,747 |
|
|
$ |
70,302 |
|
|
$ |
78,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
532,195 |
|
|
$ |
525,676 |
|
|
$ |
484,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
649,817 |
|
|
$ |
632,752 |
|
|
$ |
631,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk based capital ratio |
|
|
11.85 |
% |
|
|
12.12 |
% |
|
|
15.01 |
% |
Total risk based capital ratio |
|
|
13.11 |
% |
|
|
13.37 |
% |
|
|
16.18 |
% |
Leverage ratio |
|
|
9.71 |
% |
|
|
10.07 |
% |
|
|
11.53 |
% |
RESULTS OF OPERATIONS
Net income increased for 2008 and totaled $4.7 million, or $.46 per diluted common share compared
to $3.7 million or $.31 per diluted common share in 2007. Earnings in 2008 were directly impacted
by a $5.4 million provision for loan losses, up from $2.6 million in 2007 as a result of
non-performing loans being charged off or otherwise written down. Interest and dividend income
decreased $6.6 million from $45.4 million in 2007 to $38.8 million in 2008. The decrease in
interest income was largely due to lower yields on loans as a result of the prime rate decreasing
from 7.25% at the beginning of the year and ending the year at 3.25%. Approximately 62 % of the
Banks loans have variable interest rates. Interest expense decreased $7.6 million from $25.3
million in 2007 to $17.7 million in 2008. The decrease in interest expense was due to a $28.7
million decrease in average borrowed funds and lower interest rates paid on deposit accounts.
Non-interest income increased $3.1 million in 2008 as a result of increased gains on the sale of
loans. Non-interest expense decreased approximately $1.0 million as other operating expenses
declined.
Net income totaled $3.7 million for the year ended December 31, 2007, a decrease of $3.9 million
from $7.6 million in 2006. Diluted earnings per share for 2007 were $.31 compared to $.72 in 2006.
Earnings in 2007 reflect $2.9 million in expenses associated with the repurchase and subsequent
disposition of mortgage loans originated by the Mortgage Corporation. The other significant factor
impacting income in 2007 was an increase in the allowance for loan losses of $2.0 million due to
the $44.0 million growth in loans held for investment.
30
Net Interest Income
Net interest income, the principal source of Bank earnings, is the amount of income generated by
earning assets (primarily loans and investment securities) less the interest expense incurred on
interest bearing liabilities (primarily deposits) used to fund earning assets. Net interest income
and margin are influenced by many factors, primarily the volume and mix of earning assets, funding
sources and interest rate fluctuations. During 2008 our net interest margin increased 30 basis
points from 3.18% in 2007 to 3.48%. The weighted average yield on earning assets decreased 77
basis points while the weighted average rate paid on interest bearing liabilities decreased 128
basis points contributing to the increase in net interest margin. During 2008 we lowered rates on
all deposit accounts and reduced average
borrowings by $28.7 million. Interest sensitive time deposits were replaced with wholesale funds at
lower rates. The table below, Yield on Average Earning Assets and Rates on Average Interest Bearing
Liabilities, summarizes the major components of net interest income for the past three years and
also provides yields, rates and average balances.
Net interest income on a fully taxable equivalent basis increased from $20.2 million in 2007 to
$21.1 million in 2008. Net interest income depends upon the volume of earning assets and interest
bearing liabilities and the associated yields and rates. Fluctuation in
interest rates impacts the volume, mix and yield of average earning assets. The target federal
funds rate, the rate that dictates national prime rate and determines many other short-term loan
and liability rates, was 4.25% at December 31, 2007 and declined during 2008 as the economy
deteriorated and reached an effective rate of 0% at December 31, 2008.
Average interest earning assets decreased $27.9 million to $606.0 million in 2008, down from $633.9
million in 2007. The decline in average earning assets was due in part to a $25.8 million decrease
in average investment securities, primarily as a result of securities being called by the issuers.
Average loans outstanding in 2008 totaled $510.5 million compared to $522.1 million a decrease of
$11.6 million, primarily due to a $10.1 million decrease in construction loans. Average interest
bearing deposits and federal funds in federal funds sold increased $8.4 million in 2008.
Interest expense totaled $17.7 million in 2008, a decrease of $7.6 million from 2007. Interest
bearing deposits averaged $387.7 million in 2008 compared to $382.6 million in 2007. Borrowed funds
averaged $111.0 million, down from $139.7 million in 2007. The average cost of interest bearing
liabilities was 3.56% in 2008 compared to 4.84% in 2007. The decrease in the cost of funding being
greater than the decrease in earning asset yield, combined with a change in the mix and volume of
interest earning assets and interest-bearing liabilities is responsible for the improvement in net
interest margin. See the table below entitled Volume and Rate analysis for changes in earning
assets and interest bearing liabilities.
Net interest income increased in 2007 to $20.1 million compared to $18.3 million in 2006. Average
interest earning assets increased $64.4 million to $633.9 million in 2007, up from $569.5 million
in 2006.
During 2007 net interest margin decreased 3 basis points from 3.21% in 2006 to 3.18%. The weighted
average yield on earning assets increased 15 basis points and the weighted average rate paid on
interest bearing liabilities increased 32 basis points
Interest expense totaled $25.3 million for the year ended December 31, 2007, an increase of
approximately $3.6 million over 2006. Total interest bearing deposits averaged $382.6 million in
2006 compared to $362.3 million in 2006. Borrowed funds averaged $139.7 million, up from $117.7
million in 2006. The increase in deposits and borrowings funded the growth in earning assets. The
average cost of interest bearing liabilities was 4.84% in 2007 compared to 4.52% in 2006.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities* |
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(In Thousands) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
68,522 |
|
|
$ |
3,440 |
|
|
|
5.02 |
% |
|
$ |
94,331 |
|
|
$ |
4,324 |
|
|
|
4.58 |
% |
|
$ |
107,165 |
|
|
$ |
4,687 |
|
|
|
4.37 |
% |
Loans(3) |
|
|
510,521 |
|
|
|
34,875 |
|
|
|
6.83 |
% |
|
|
522,122 |
|
|
|
40,303 |
|
|
|
7.72 |
% |
|
|
454,146 |
|
|
|
34,899 |
|
|
|
7.68 |
% |
Interest bearing deposits and federal funds sold |
|
|
26,911 |
|
|
|
487 |
|
|
|
1.81 |
% |
|
|
17,474 |
|
|
|
846 |
|
|
|
4.84 |
% |
|
|
8,193 |
|
|
|
400 |
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
Total interest earning assets |
|
|
605,954 |
|
|
|
38,802 |
|
|
|
6.40 |
% |
|
|
633,927 |
|
|
|
45,473 |
|
|
|
7.17 |
% |
|
|
569,504 |
|
|
|
39,986 |
|
|
|
7.02 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
5,257 |
|
|
|
|
|
|
|
|
|
|
|
6,784 |
|
|
|
|
|
|
|
|
|
|
|
10,546 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
9,475 |
|
|
|
|
|
|
|
|
|
|
|
9,710 |
|
|
|
|
|
|
|
|
|
|
|
9,616 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
12,012 |
|
|
|
|
|
|
|
|
|
|
|
5,333 |
|
|
|
|
|
|
|
|
|
|
|
5,531 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(8,248 |
) |
|
|
|
|
|
|
|
|
|
|
(6,170 |
) |
|
|
|
|
|
|
|
|
|
|
(5,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
18,496 |
|
|
|
|
|
|
|
|
|
|
|
15,657 |
|
|
|
|
|
|
|
|
|
|
|
20,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
624,450 |
|
|
|
|
|
|
|
|
|
|
$ |
649,584 |
|
|
|
|
|
|
|
|
|
|
$ |
589,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
$ |
8,956 |
|
|
$ |
100 |
|
|
|
1.12 |
% |
|
$ |
9,507 |
|
|
$ |
199 |
|
|
|
2.09 |
% |
|
$ |
10,691 |
|
|
$ |
224 |
|
|
|
2.10 |
% |
Money market deposit accounts |
|
|
112,391 |
|
|
|
2,653 |
|
|
|
2.36 |
% |
|
|
111,344 |
|
|
|
4,888 |
|
|
|
4.39 |
% |
|
|
118,548 |
|
|
|
4,859 |
|
|
|
4.10 |
% |
Savings accounts |
|
|
3,137 |
|
|
|
101 |
|
|
|
3.22 |
% |
|
|
4,989 |
|
|
|
231 |
|
|
|
4.63 |
% |
|
|
2,147 |
|
|
|
88 |
|
|
|
4.10 |
% |
Time deposits |
|
|
263,175 |
|
|
|
11,197 |
|
|
|
4.25 |
% |
|
|
256,805 |
|
|
|
12,808 |
|
|
|
4.99 |
% |
|
|
230,896 |
|
|
|
10,605 |
|
|
|
4.59 |
% |
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
387,659 |
|
|
|
14,051 |
|
|
|
3.62 |
% |
|
|
382,645 |
|
|
|
18,126 |
|
|
|
4.74 |
% |
|
|
362,282 |
|
|
|
15,776 |
|
|
|
4.35 |
% |
FHLB Advances |
|
|
13,524 |
|
|
|
454 |
|
|
|
3.36 |
% |
|
|
60,224 |
|
|
|
3,197 |
|
|
|
5.31 |
% |
|
|
61,066 |
|
|
|
3,161 |
|
|
|
5.18 |
% |
Securities sold under agreements to repurchase and
federal funds purchased |
|
|
16,433 |
|
|
|
260 |
|
|
|
1.58 |
% |
|
|
12,410 |
|
|
|
516 |
|
|
|
4.16 |
% |
|
|
5,062 |
|
|
|
166 |
|
|
|
3.28 |
% |
Other short-term borrowings |
|
|
20,697 |
|
|
|
363 |
|
|
|
1.75 |
% |
|
|
15,913 |
|
|
|
641 |
|
|
|
4.03 |
% |
|
|
17,586 |
|
|
|
738 |
|
|
|
4.20 |
% |
Long-term borrowings |
|
|
54,173 |
|
|
|
2,195 |
|
|
|
4.05 |
% |
|
|
41,932 |
|
|
|
2,018 |
|
|
|
4.81 |
% |
|
|
23,722 |
|
|
|
962 |
|
|
|
4.06 |
% |
Subordinated debentures |
|
|
6,186 |
|
|
|
417 |
|
|
|
6.74 |
% |
|
|
9,237 |
|
|
|
806 |
|
|
|
8.73 |
% |
|
|
10,311 |
|
|
|
880 |
|
|
|
8.53 |
% |
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
498,672 |
|
|
|
17,740 |
|
|
|
3.56 |
% |
|
|
522,361 |
|
|
|
25,304 |
|
|
|
4.84 |
% |
|
|
480,029 |
|
|
|
21,683 |
|
|
|
4.52 |
% |
|
|
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
63,214 |
|
|
|
|
|
|
|
|
|
|
|
62,354 |
|
|
|
|
|
|
|
|
|
|
|
61,506 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
5,682 |
|
|
|
|
|
|
|
|
|
|
|
1,526 |
|
|
|
|
|
|
|
|
|
|
|
4,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
567,568 |
|
|
|
|
|
|
|
|
|
|
|
586,241 |
|
|
|
|
|
|
|
|
|
|
|
545,564 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
56,882 |
|
|
|
|
|
|
|
|
|
|
|
63,343 |
|
|
|
|
|
|
|
|
|
|
|
44,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
624,450 |
|
|
|
|
|
|
|
|
|
|
$ |
649,584 |
|
|
|
|
|
|
|
|
|
|
$ |
589,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(1) |
|
|
|
|
|
|
|
|
|
|
2.85 |
% |
|
|
|
|
|
|
|
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(2)* |
|
|
|
|
|
$ |
21,062 |
|
|
|
3.48 |
% |
|
|
|
|
|
$ |
20,169 |
|
|
|
3.18 |
% |
|
|
|
|
|
$ |
18,303 |
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities. |
|
(2) |
|
Net interest margin is net interest income, expressed as a percentage of average earning assets. |
|
(3) |
|
Loans placed on non-accrual status are included in loan balances |
|
* |
|
Note: Interest income and yields are presented on a fully taxable equivalent basis using 34% tax rate. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume and Rate Analysis |
|
|
Years Ended December 31 |
|
|
2008 compared to 2007 |
|
2007 compared to 2006 |
|
2006 compared to 2005 |
|
|
Change Due To: |
|
Change Due To: |
|
Change Due To: |
|
|
Increase / |
|
|
|
|
|
|
|
|
|
Increase / |
|
|
|
|
|
|
|
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
(Decrease) |
|
Volume |
|
Rate |
|
(Decrease) |
|
Volume |
|
Rate |
|
|
(In Thousands) |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
(884 |
) |
|
$ |
(1,267 |
) |
|
$ |
383 |
|
|
$ |
(363 |
) |
|
$ |
(584 |
) |
|
$ |
221 |
|
|
$ |
2,197 |
|
|
$ |
1,814 |
|
|
$ |
383 |
|
Loans |
|
|
(5,428 |
) |
|
|
(879 |
) |
|
|
(4,549 |
) |
|
|
5,404 |
|
|
|
5,226 |
|
|
|
178 |
|
|
|
9,856 |
|
|
|
6,713 |
|
|
|
3,143 |
|
Interest bearing deposits |
|
|
(356 |
) |
|
|
299 |
|
|
|
(655 |
) |
|
|
431 |
|
|
|
434 |
|
|
|
(3 |
) |
|
|
121 |
|
|
|
(18 |
) |
|
|
139 |
|
Federal funds sold |
|
|
(2 |
) |
|
|
18 |
|
|
|
(20 |
) |
|
|
15 |
|
|
|
16 |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in
Interest Income |
|
|
(6,670 |
) |
|
|
(1,829 |
) |
|
|
(4,841 |
) |
|
|
5,487 |
|
|
|
5,092 |
|
|
|
395 |
|
|
|
12,175 |
|
|
|
8,510 |
|
|
|
3,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
(99 |
) |
|
|
(11 |
) |
|
|
(88 |
) |
|
|
(25 |
) |
|
|
(24 |
) |
|
|
(1 |
) |
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Money market deposit accounts |
|
|
(2,235 |
) |
|
|
46 |
|
|
|
(2,281 |
) |
|
|
29 |
|
|
|
(304 |
) |
|
|
333 |
|
|
|
604 |
|
|
|
(406 |
) |
|
|
1,009 |
|
Savings accounts |
|
|
(130 |
) |
|
|
(71 |
) |
|
|
(59 |
) |
|
|
143 |
|
|
|
130 |
|
|
|
13 |
|
|
|
84 |
|
|
|
43 |
|
|
|
41 |
|
Time deposits |
|
|
(1,611 |
) |
|
|
311 |
|
|
|
(1,922 |
) |
|
|
2,203 |
|
|
|
1,240 |
|
|
|
963 |
|
|
|
6,046 |
|
|
|
4,376 |
|
|
|
1,669 |
|
|
|
|
|
|
|
|
Total interest-bearing
deposits |
|
|
(4,075 |
) |
|
|
275 |
|
|
|
(4,350 |
) |
|
|
2,350 |
|
|
|
1,042 |
|
|
|
1,308 |
|
|
|
6,758 |
|
|
|
4,013 |
|
|
|
2,743 |
|
FHLB Advances |
|
|
(2,743 |
) |
|
|
(1,861 |
) |
|
|
(882 |
) |
|
|
36 |
|
|
|
(42 |
) |
|
|
78 |
|
|
|
1,551 |
|
|
|
785 |
|
|
|
766 |
|
Securities sold under
agreements to repurchase |
|
|
(256 |
) |
|
|
132 |
|
|
|
(388 |
) |
|
|
350 |
|
|
|
304 |
|
|
|
46 |
|
|
|
147 |
|
|
|
124 |
|
|
|
23 |
|
Other short-term borrowings |
|
|
(278 |
) |
|
|
155 |
|
|
|
(433 |
) |
|
|
(97 |
) |
|
|
(54 |
) |
|
|
(43 |
) |
|
|
488 |
|
|
|
359 |
|
|
|
129 |
|
Long-term borrowings |
|
|
177 |
|
|
|
529 |
|
|
|
(352 |
) |
|
|
1,056 |
|
|
|
851 |
|
|
|
205 |
|
|
|
45 |
|
|
|
(12 |
) |
|
|
57 |
|
Trust Preferred |
|
|
(389 |
) |
|
|
(230 |
) |
|
|
(159 |
) |
|
|
(74 |
) |
|
|
(95 |
) |
|
|
21 |
|
|
|
173 |
|
|
|
1 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in
Interest Expense |
|
|
(7,564 |
) |
|
|
(1,000 |
) |
|
|
(6,564 |
) |
|
|
3,621 |
|
|
|
2,006 |
|
|
|
1,615 |
|
|
|
9,162 |
|
|
|
5,270 |
|
|
|
3,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Net
Interest Income |
|
$ |
894 |
|
|
|
(829 |
) |
|
$ |
1,723 |
|
|
$ |
1,866 |
|
|
|
3,086 |
|
|
$ |
(1,220 |
) |
|
$ |
3,013 |
|
|
|
3,240 |
|
|
$ |
(225 |
) |
|
|
|
|
|
|
|
Note: Interest income and yields are presented on a fully taxable equivalent basis using a 34% tax
rate.
Provision for Loan Losses
The provision for loan losses charged to operating expense in 2008 was $5.4 million, up from $2.6
million in 2007. This amount was determined by management to restore the allowance for loan losses
to a level believed to be adequate to absorb inherent losses in the loan portfolio based on an
evaluation as of December 31, 2008.
The provision for loan losses charged to operating expense in 2007 was $2.6 million up from $232
thousand in 2006. The increase in the provision for loan losses is primarily due to the $44.0
million increase in loans held for investment.
Non-Interest Income
Non-interest income consists of revenue generated from service fees on deposit accounts, gains on
sale of loans and other charges and fees. The Mortgage Corporation provides the most significant
contributions towards non-interest income and is subject to wide fluctuations due to the general
interest rate environment and economic conditions. Total non-interest income was $30.8 million in
2008 compared to $27.7 million in 2007. Gains on the sale of loans originated by the Mortgage
Corporation totaled $24.9 million in 2008 compared to $20.2 million in 2007. Gains on sale of
loans increased in 2008 despite a decrease in loan originations. The increase is largely due to an
increase in the profit margin on loans sold by the Mortgage Corporation. Mortgage broker fees
amounted to $1.7 million in 2008 down from $3.9 million in 2007 due to a decrease in loans
originated in this manner. Other income, comprised primarily of miscellaneous loan fees, totaled
$3.8 million in 2008 compared to $3.2 million in 2007.
Total non-interest income was $27.7 million in 2007, compared to $27.6 million in 2006. Gains on
the sale of loans totaled $20.2 million in 2007 compared to $19.8 million in 2006. Mortgage broker
fees amounted to $3.9 million in 2007 down from $5.3 million in 2006, as fewer loans were
originated in this manner.
Non-Interest Expense
Non-interest expense totaled $39.0 million in 2008 compared to $39.9 million in 2007. Compensation
and employee benefits, the largest component of non-interest expense, totaled $20.8 million in 2008
compared to $19.6 million in 2007, an increase of $1.2 million. The increase is primarily due to
increased staff and merit salary increases. Other operating expense totaled $15.7 million for the
period ended December 31, 2008 compared to $17.8 million in 2007, a decrease of $2.1 million. The
decrease is primarily attributable to a $3.4 million decrease in broker premiums as a result of
eliminating wholesale operations at the Mortgage Corporation in 2007. Management
fees increased approximately $820 thousand in 2008 and represent fees paid for managing certain
offices of the Mortgage Corporation.
33
The provision for losses on loans sold by the Mortgage Corporation increased $345 thousand and
represents amounts credited to the allowance for possible losses associated with loans sold.
Non-interest expense totaled $39.9 million in 2007 up $5.7 million from $34.2 million in 2006.
Occupancy expense increased $668 thousand in 2007 largely due to the opening of two new banking
offices and normal rent increases. Other operating expense increased $4.9 million due to a $755
thousand increase in broker premiums, a $2.0 million increase in the provision for losses on loans
sold and an $860 thousand increase in other expenses.
Note 17 to the consolidated financial statements provides the composition of other expense.
Income Taxes
Income tax expense totaled approximately $2.7 million in 2008 compared to $1.6 million in 2007, an
increase of $1.1 million. The increase in taxes is due to an increase of approximately $2.2 million
in pre tax earnings. Note 9 to the consolidated financial statements show the components of
federal income tax.
34
Quarterly Results (unaudited)
The following is a summary of the results of operations for each quarter of 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
YTD |
|
|
|
(In Thousands, Except Per Share Data) |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
10,019 |
|
|
$ |
9,511 |
|
|
$ |
9,727 |
|
|
$ |
9,535 |
|
|
$ |
38,792 |
|
Total interest expense |
|
|
5,237 |
|
|
|
4,262 |
|
|
|
4,172 |
|
|
|
4,069 |
|
|
|
17,740 |
|
Net interest income |
|
|
4,782 |
|
|
|
5,249 |
|
|
|
5,555 |
|
|
|
5,466 |
|
|
|
21,052 |
|
Provision for loan losses |
|
|
408 |
|
|
|
1,399 |
|
|
|
1,855 |
|
|
|
1,761 |
|
|
|
5,423 |
|
Net interest income after provision for loan losses |
|
|
4,374 |
|
|
|
3,850 |
|
|
|
3,700 |
|
|
|
3,705 |
|
|
|
15,629 |
|
Total noninterest income |
|
|
8,442 |
|
|
|
8,022 |
|
|
|
5,640 |
|
|
|
8,709 |
|
|
|
30,813 |
|
Total noninterest expense |
|
|
10,181 |
|
|
|
10,215 |
|
|
|
8,147 |
|
|
|
10,455 |
|
|
|
38,998 |
|
Income tax expense |
|
|
944 |
|
|
|
595 |
|
|
|
424 |
|
|
|
737 |
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,691 |
|
|
$ |
1,062 |
|
|
$ |
769 |
|
|
$ |
1,222 |
|
|
$ |
4,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.08 |
|
|
$ |
0.12 |
|
|
$ |
0.46 |
|
Diluted |
|
|
0.16 |
|
|
|
0.10 |
|
|
|
0.08 |
|
|
|
0.12 |
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
YTD |
|
|
|
(In Thousands, Except Per Share Data) |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
11,173 |
|
|
$ |
11,517 |
|
|
$ |
11,699 |
|
|
$ |
11,037 |
|
|
$ |
45,426 |
|
Total interest expense |
|
|
6,117 |
|
|
|
6,587 |
|
|
|
6,633 |
|
|
|
5,967 |
|
|
|
25,304 |
|
Net interest income |
|
|
5,056 |
|
|
|
4,930 |
|
|
|
5,066 |
|
|
|
5,070 |
|
|
|
20,122 |
|
Provision for loan losses |
|
|
291 |
|
|
|
465 |
|
|
|
942 |
|
|
|
890 |
|
|
|
2,588 |
|
Net interest income after provision for loan losses |
|
|
4,765 |
|
|
|
4,465 |
|
|
|
4,124 |
|
|
|
4,180 |
|
|
|
17,534 |
|
Total noninterest income |
|
|
8,161 |
|
|
|
7,920 |
|
|
|
6,117 |
|
|
|
5,509 |
|
|
|
27,707 |
|
Total noninterest expense |
|
|
10,967 |
|
|
|
10,096 |
|
|
|
10,020 |
|
|
|
8,866 |
|
|
|
39,949 |
|
Income tax expense |
|
|
633 |
|
|
|
782 |
|
|
|
(23 |
) |
|
|
198 |
|
|
|
1,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,326 |
|
|
$ |
1,507 |
|
|
$ |
244 |
|
|
$ |
625 |
|
|
$ |
3,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.11 |
|
|
$ |
0.13 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.32 |
|
Diluted |
|
|
0.11 |
|
|
|
0.12 |
|
|
|
0.02 |
|
|
|
0.06 |
|
|
|
0.31 |
|
Liquidity Management
Liquidity is the ability of the Corporation to meet current and future cash flow requirements. The
liquidity of a financial institution reflects its ability to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining the Corporations ability to meet the daily cash flow
requirements of both depositors and borrowers.
Asset and liability management functions not only serve to assure adequate liquidity in order to
meet the needs of the Corporations customers, but also to maintain an appropriate balance between
interest sensitive assets and interest sensitive liabilities so that the Corporation can earn an
appropriate return for its shareholders.
35
The asset portion of the balance sheet provides liquidity primarily through loan principal
repayments and maturities of investment securities. Other short-term investments such as federal
funds sold and interest bearing deposits with other banks are additional sources of liquidity
funding. At December 31, 2008, overnight interest bearing balances totaled $13.7 million and
securities available for sale net of restricted stock totaled $85.1 million.
The liability portion of the balance sheet provides liquidity through various interest bearing and
non-interest bearing deposit accounts, federal funds purchased, securities sold under agreement to
repurchase and other short-term borrowings. At December 31, 2008, the Corporation had a line of
credit with the FHLB totaling $196.7 million and outstanding variable rate loans of $30.0 million,
and an additional $55.4 million in term loans at fixed rates ranging from 2.55% to 5.07% leaving
approximately $111.3 million available on the line. In addition to the line of credit at the FHLB,
the Bank and Mortgage Corporation issue repurchase agreements and commercial paper. As of
December 31, 2008, outstanding repurchase agreements totaled $21.4 million and commercial paper
issued amounted to $26.1 million. The interest rate on these instruments is variable and subject
to change daily. The Bank also maintains federal funds lines of credit with its correspondent
banks and, at December 31, 2008, these lines amounted to $13.4 million. The Corporation also has
$6.2 million in subordinated debentures to support the growth of the organization.
The Bank relies on deposits and other short and long term resources for liquidity from a variety of
sources that substantially reduces reliance upon any single provider. The Corporation expects its
short and long term sources of liquidity and capital to remain adequate to support expected growth.
Contractual Obligations
The following table summarizes the Corporations contractual obligations to make future payments as
of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
December 31, 2008 |
|
|
|
Less Than |
|
|
1 - 3 |
|
|
More Than |
|
|
|
|
|
|
1 Year |
|
|
Years |
|
|
3 Years |
|
|
Total |
|
|
|
(In Thousands) |
|
Certificates of deposit |
|
$ |
253,726 |
|
|
$ |
51,934 |
|
|
$ |
9,011 |
|
|
$ |
314,671 |
|
FHLB advances |
|
|
44,333 |
|
|
|
|
|
|
|
|
|
|
|
44,333 |
|
Securities sold under agreements to repurchase |
|
|
21,395 |
|
|
|
|
|
|
|
|
|
|
|
21,395 |
|
Fed funds purchased |
|
|
9,993 |
|
|
|
|
|
|
|
|
|
|
|
9,993 |
|
FHLB long-term borrowings |
|
|
|
|
|
|
29,643 |
|
|
|
11,464 |
|
|
|
41,107 |
|
Commercial paper |
|
|
26,136 |
|
|
|
|
|
|
|
|
|
|
|
26,136 |
|
U.S. Treasury demand notes |
|
|
1,717 |
|
|
|
|
|
|
|
|
|
|
|
1,717 |
|
Subordinated debentures |
|
|
|
|
|
|
|
|
|
|
6,186 |
|
|
|
6,186 |
|
Leases |
|
|
365 |
|
|
|
594 |
|
|
|
617 |
|
|
|
1,576 |
|
Other contractual commitments |
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
360,465 |
|
|
$ |
82,171 |
|
|
$ |
27,278 |
|
|
$ |
469,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off Balance Sheet Items
During the ordinary course of business, the Bank issues commitments to extend credit and, at
December 31, 2008, these commitments amounted to $20.9 million. These commitments do not
necessarily represent cash requirements, since many commitments are expected to expire without
being drawn on. At December 31, 2008 the Bank had approximately $99.6 million in unfunded lines and
letters of credit. At December 31, 2007, loan commitments were $16.8 million and unfunded lines
and letters of credit were $115.0 million.
The Mortgage Corporation had open forward contracts at December 31, 2008 totaling $99.2 million and
$33.7 million at December 31, 2007. See Notes 10 and 11 to the consolidated financial statements.
Recent Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements.
36
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporations market risk is composed primarily of interest rate risk. The Funds Management
Committee is responsible for
reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate
the Corporations sources, uses and pricing of funds.
Interest Rate Sensitivity Management
The Corporation uses a simulation model to analyze, manage and formulate operating strategies that
address net interest income sensitivity to movements in interest rates. The simulation model
projects net interest income based on various interest rate scenarios over a twelve month period.
The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets
and liabilities. The model incorporates certain assumptions which management believes to be
reasonable regarding the impact of changing interest rates and the prepayment assumption of certain
assets and liabilities as of December 31, 2008. The model assumes changes in interest rates
without any management intervention to change the composition of the balance sheet. According to
the model run for the period ended December 31, 2008 over a twelve month period, an immediate 100
basis points increase in interest rates would result in an increase in net interest income by
1.00%. An immediate 200 basis points increase in interest rates would result in an increase in net
interest income by 2.89%. A 100 basis points decrease in interest rates would result in a negative
variance in net interest income and is considered remote given current interest rate levels. While
management carefully monitors the exposure to changes in interest rates and takes actions as
warranted to decrease any adverse impact, there can be no assurance about the actual effect of
interest rate changes on net interest income.
The Corporations net interest income and the fair value of its financial instruments are
influenced by changes in the level of interest rates. The Corporation manages its exposure to
fluctuations in interest rates through policies established by its Funds Management Committee. The
Funds Management Committee meets monthly and has responsibility for formulating and implementing
strategies to improve balance sheet positioning and earnings and reviewing interest rate
sensitivity.
The Mortgage Corporation is party to mortgage rate lock commitments to fund mortgage loans at
interest rates previously agreed (locked) by both the Corporation and the borrower for specified
periods of time. When the borrower locks their interest rate, the Corporation effectively extends a
put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement,
but the Corporation must honor the interest rate for the specified time period. The Corporation
is exposed to interest rate risk during the accumulation of interest rate lock commitments and
loans prior to sale. The Corporation utilizes either a best efforts sell forward or a mandatory
sell forward commitment to economically hedge the changes in fair value of the loan due to changes
in market interest rates. Failure to effectively monitor, manage and hedge the interest rate risk
associated with the mandatory commitments subjects the Corporation to potentially significant
market risk.
Throughout the lock period the changes in the market value of interest rate lock commitments, best
efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are
included in the statement of operations in mortgage revenue. The Corporations management has
made complex judgments in the recognition of gains and losses in connection with this activity.
The Corporation utilizes a third party and its proprietary simulation model to assist in
identifying and managing the risk associated with this activity.
Impact of Inflation and Changing Prices
A banks asset and liability structure is substantially different from that of a non financial
company in that virtually all assets and liabilities of a bank are monetary in nature. The impact
of inflation on financial results depends upon the Banks ability to react to changes in interest
rates and, by such reaction, reduce the inflationary impact on performance. Interest rates do not
necessarily move in the same direction, or at the same magnitude, as the prices of other goods and
services. Management seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide interest rate fluctuations, including those resulting
from inflation.
37
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Access National Corporation
Reston, Virginia
We have audited Access National Corporation and subsidiaries internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Access National Corporations management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporations
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Access National Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the accompanying consolidated balance sheets of Access National Corporation
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
income, shareholders equity and cash flows for each of the three years in the period ended
December 31, 2008, and our report dated March 27, 2009 expressed an unqualified opinion thereon.
/S/
BDO Seidman LLP
Richmond, Virginia
March 27, 2009
38
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders Access National Corporation Reston, Virginia
We have audited the accompanying consolidated balance sheets of Access National Corporation and
subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Corporations management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Access National Corporation and subsidiaries at
December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Access National Corporation and subsidiaries internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 27, 2009 expressed an unqualified opinion thereon.
/S/
BDO Seidman LLP
Richmond, Virginia
March 27, 2009
39
ACCESS NATIONAL CORPORATION
Consolidated Balance Sheets
December 31, 2008 and 2007
(In Thousands, Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
8,785 |
|
|
$ |
6,238 |
|
Interest bearing deposits in other banks and federal funds sold |
|
|
13,697 |
|
|
|
13,266 |
|
Securities available for sale, at fair value |
|
|
91,015 |
|
|
|
73,558 |
|
Loans held for sale, carried at fair value in 2008 |
|
|
84,312 |
|
|
|
39,144 |
|
Loans, net of allowance for loan losses 2008, $7,462; 2007, $7,462 |
|
|
478,467 |
|
|
|
470,136 |
|
Premises and equipment, net |
|
|
9,211 |
|
|
|
9,712 |
|
Other assets |
|
|
16,837 |
|
|
|
10,322 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
702,324 |
|
|
$ |
622,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
$ |
75,000 |
|
|
$ |
59,415 |
|
Savings and interest bearing deposits |
|
|
95,730 |
|
|
|
142,820 |
|
Time deposits |
|
|
314,671 |
|
|
|
271,183 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
485,401 |
|
|
|
473,418 |
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
103,575 |
|
|
|
41,676 |
|
Long-term borrowings |
|
|
41,107 |
|
|
|
39,524 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,186 |
|
Other liabilities and accrued expenses |
|
|
8,110 |
|
|
|
3,611 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
644,379 |
|
|
|
564,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Common stock, par value, $.835, authorized 60,000,000 shares,
issued and outstanding, 10,240,747 in 2008 and 10,840,730 in 2007 |
|
|
8,551 |
|
|
|
9,052 |
|
Additional paid in capital |
|
|
17,410 |
|
|
|
21,833 |
|
Retained earnings |
|
|
31,157 |
|
|
|
26,846 |
|
Accumulated other comprehensive income, net |
|
|
827 |
|
|
|
230 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
57,945 |
|
|
|
57,961 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
702,324 |
|
|
$ |
622,376 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
34,875 |
|
|
$ |
40,303 |
|
|
$ |
34,898 |
|
Interest-bearing deposits and federal funds sold |
|
|
486 |
|
|
|
846 |
|
|
|
399 |
|
Securities |
|
|
3,431 |
|
|
|
4,277 |
|
|
|
4,641 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
38,792 |
|
|
|
45,426 |
|
|
|
39,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
14,051 |
|
|
|
18,125 |
|
|
|
15,776 |
|
Short-term borrowings |
|
|
1,077 |
|
|
|
4,354 |
|
|
|
4,065 |
|
Long-term borrowings |
|
|
2,195 |
|
|
|
2,018 |
|
|
|
962 |
|
Trust preferred capital notes |
|
|
417 |
|
|
|
807 |
|
|
|
879 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
17,740 |
|
|
|
25,304 |
|
|
|
21,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
21,052 |
|
|
|
20,122 |
|
|
|
18,256 |
|
Provision for loan losses |
|
|
5,423 |
|
|
|
2,588 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
|
15,629 |
|
|
|
17,534 |
|
|
|
18,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service fees on deposit accounts |
|
|
438 |
|
|
|
365 |
|
|
|
359 |
|
Gain on sale of loans |
|
|
24,859 |
|
|
|
20,241 |
|
|
|
19,813 |
|
Mortgage broker fee income |
|
|
1,672 |
|
|
|
3,890 |
|
|
|
5,280 |
|
Other income |
|
|
3,844 |
|
|
|
3,211 |
|
|
|
2,181 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
30,813 |
|
|
|
27,707 |
|
|
|
27,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
20,781 |
|
|
|
19,578 |
|
|
|
19,404 |
|
Occupancy |
|
|
1,546 |
|
|
|
1,419 |
|
|
|
751 |
|
Furniture and equipment |
|
|
933 |
|
|
|
1,111 |
|
|
|
1,108 |
|
Other |
|
|
15,738 |
|
|
|
17,841 |
|
|
|
12,949 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
38,998 |
|
|
|
39,949 |
|
|
|
34,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,444 |
|
|
|
5,292 |
|
|
|
11,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
2,700 |
|
|
|
1,590 |
|
|
|
3,853 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
4,744 |
|
|
$ |
3,702 |
|
|
$ |
7,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.46 |
|
|
$ |
0.32 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.46 |
|
|
$ |
0.31 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,298,631 |
|
|
|
11,620,130 |
|
|
|
9,429,074 |
|
Diluted |
|
|
10,423,555 |
|
|
|
11,866,468 |
|
|
|
10,541,873 |
|
See accompanying notes to consolidated financial statements.
41
ACCESS NATIONAL CORPORATION
Consolidated Statements of Changes in Shareholders Equity
(In Thousands, Except for Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Compre- |
|
|
|
|
|
|
Common |
|
|
Paid in |
|
|
Retained |
|
|
hensive |
|
|
|
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
Balance, December 31, 2005 |
|
$ |
6,644 |
|
|
$ |
9,099 |
|
|
$ |
16,228 |
|
|
$ |
(785 |
) |
|
$ |
31,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
7,592 |
|
|
|
|
|
|
|
7,592 |
|
Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $132) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,848 |
|
Stock offering (2,300,000 Shares) |
|
|
1,920 |
|
|
|
18,063 |
|
|
|
|
|
|
|
|
|
|
|
19,983 |
|
Stock options & warrants exercised (1,462,286 shs) |
|
|
1,232 |
|
|
|
1,348 |
|
|
|
|
|
|
|
|
|
|
|
2,580 |
|
Dividend Reinvestment plan (103,449 Shares) |
|
|
77 |
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
882 |
|
Repurchase of common stock (7,362 Shares) |
|
|
(6 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
(51 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(179 |
) |
|
|
|
|
|
|
(179 |
) |
Stock-based compensation
expense recognized in earnings |
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
9,867 |
|
|
|
29,316 |
|
|
|
23,641 |
|
|
|
(529 |
) |
|
|
62,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
3,702 |
|
|
|
|
|
|
|
3,702 |
|
Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $391) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
759 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,461 |
|
Stock options exercised (178,320 Shares) |
|
|
149 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
300 |
|
Dividend Reinvestment plan
(91,105 Shares) |
|
|
76 |
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
805 |
|
Repurchase of common stock under share
repurchase program (1,245,624 Shares) |
|
|
(1,040 |
) |
|
|
(8,462 |
) |
|
|
|
|
|
|
|
|
|
|
(9,502 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
(497 |
) |
Stock-based Compensation
expense recognized in earnings |
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
9,052 |
|
|
|
21,833 |
|
|
|
26,846 |
|
|
|
230 |
|
|
|
57,961 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,744 |
|
|
|
|
|
|
|
4,744 |
|
Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $307) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
597 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,341 |
|
Stock options exercised (137,682 Shares) |
|
|
115 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Dividend Reinvestment plan
(87,171 Shares) |
|
|
73 |
|
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
471 |
|
Repurchase of common stock under share
repurchase program (824,836 Shares) |
|
|
(689 |
) |
|
|
(5,241 |
) |
|
|
|
|
|
|
|
|
|
|
(5,930 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(433 |
) |
|
|
|
|
|
|
(433 |
) |
Stock-based Compensation
expense recognized in earnings |
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
8,551 |
|
|
$ |
17,410 |
|
|
$ |
31,157 |
|
|
$ |
827 |
|
|
$ |
57,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,744 |
|
|
$ |
3,702 |
|
|
$ |
7,592 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
5,423 |
|
|
|
2,588 |
|
|
|
237 |
|
Deferred tax benefit |
|
|
(906 |
) |
|
|
(1,106 |
) |
|
|
(576 |
) |
Stock based compensation |
|
|
136 |
|
|
|
99 |
|
|
|
46 |
|
Valuation allowance on derivatives |
|
|
(231 |
) |
|
|
68 |
|
|
|
(24 |
) |
Net amortization on securities |
|
|
2 |
|
|
|
(20 |
) |
|
|
(5 |
) |
Depreciation and amortization |
|
|
747 |
|
|
|
839 |
|
|
|
846 |
|
Loss on disposal of assets |
|
|
5 |
|
|
|
1 |
|
|
|
2 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Originations of loans held for sale |
|
|
(777,966 |
) |
|
|
(886,433 |
) |
|
|
(807,549 |
) |
Proceed from sale of loans held for sale |
|
|
732,798 |
|
|
|
912,609 |
|
|
|
787,248 |
|
Increase in other assets |
|
|
(8,221 |
) |
|
|
(1,851 |
) |
|
|
(1,921 |
) |
Increase (decrease) in other liabilities |
|
|
4,499 |
|
|
|
(2,110 |
) |
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(38,970 |
) |
|
|
28,386 |
|
|
|
(14,325 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities available for sale |
|
|
61,357 |
|
|
|
66,612 |
|
|
|
21,591 |
|
Proceeds from sale of securities |
|
|
2,927 |
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
(80,840 |
) |
|
|
(33,838 |
) |
|
|
(38,590 |
) |
Net increase in loans |
|
|
(13,754 |
) |
|
|
(44,581 |
) |
|
|
(63,862 |
) |
Proceeds from sale of assets |
|
|
35 |
|
|
|
23 |
|
|
|
|
|
Proceeds from sales of other real estate owned |
|
|
2,449 |
|
|
|
1,363 |
|
|
|
|
|
Purchases of premises and equipment |
|
|
(199 |
) |
|
|
(970 |
) |
|
|
(692 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(28,025 |
) |
|
|
(11,391 |
) |
|
|
(81,553 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in demand, interest-bearing demand and savings deposits |
|
|
(31,505 |
) |
|
|
2,704 |
|
|
|
(30,596 |
) |
Net increase in time deposits |
|
|
43,488 |
|
|
|
31,782 |
|
|
|
49,899 |
|
Increase in securities sold under agreement to repurchase |
|
|
16,574 |
|
|
|
273 |
|
|
|
13,564 |
|
Net increase (decrease) in other short-term borrowings |
|
|
45,326 |
|
|
|
(43,548 |
) |
|
|
24,191 |
|
Net increase (decrease) in long-term borrowings |
|
|
1,583 |
|
|
|
(7,173 |
) |
|
|
19,786 |
|
Proceeds from issuance of common stock |
|
|
870 |
|
|
|
1,105 |
|
|
|
23,446 |
|
Repurchase of common stock |
|
|
(5,930 |
) |
|
|
(9,502 |
) |
|
|
(51 |
) |
Dividends paid |
|
|
(433 |
) |
|
|
(497 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
69,973 |
|
|
|
(24,856 |
) |
|
|
100,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
2,978 |
|
|
|
(7,861 |
) |
|
|
4,182 |
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
19,504 |
|
|
|
27,365 |
|
|
|
23,183 |
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
$ |
22,482 |
|
|
$ |
19,504 |
|
|
$ |
27,365 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
17,360 |
|
|
$ |
25,285 |
|
|
$ |
21,660 |
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
3,480 |
|
|
$ |
4,815 |
|
|
$ |
3,532 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale |
|
$ |
904 |
|
|
$ |
1,150 |
|
|
$ |
388 |
|
See accompanying notes to consolidated financial statements.
43
ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Nature of Operations - Access National Corporation (the Corporation ) is a bank holding company
incorporated under the laws of the Commonwealth of Virginia. The holding company was formed on June
15, 2002. The Corporation owns all of the stock of its subsidiaries including Access National Bank
(the Bank), Access National Capital Trust I and Access National Capital Trust II. The Bank is an
independent commercial bank chartered under federal laws as a national banking association. The
Trust subsidiaries were formed for the purpose of issuing redeemable capital securities.
The Bank has two active wholly-owned subsidiaries: the Mortgage Corporation, a mortgage banking
company, and Access Real Estate, a real estate company.
Basis of Presentation - The accompanying consolidated financial statements include the accounts of
Access National Corporation and its wholly-owned subsidiaries, Access National Bank, Access
National Capital Trust I and Access National Capital Trust II. All significant inter-company
accounts and transactions have been eliminated in consolidation. The accounting and reporting
policies of the Corporation and its subsidiaries conform to accounting principles generally
accepted in the United States of America and to predominant practices within the banking industry.
Use of Estimates - The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the fair values and impairments of financial
instruments, the status of contingencies and the valuation of deferred tax assets.
Cash Flow Reporting - For purposes of the statements of cash flows, cash and cash equivalents
consists of cash and due from banks, federal funds sold and interest bearing deposits in other
banks.
Restrictions on Cash and Cash Equivalents - As a member of the Federal Reserve System, the Bank is
required to maintain certain average reserve balances. Those balances include usable vault cash and
amounts on deposit with the FRB. At December 31, 2008 and 2007, the amount of daily average
required balances were approximately $350,000 and $25,000 respectively.
Securities - Debt securities that management has both the positive intent and ability to hold to
maturity are classified as held to maturity and are recorded at amortized cost. Securities not
classified as held to maturity, including equity securities with readily determinable fair values,
are classified as available for sale and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income. Restricted stock comprised of
FRB and FHLB stock is carried at cost.
Purchase premiums and discounts are recognized in interest income using the interest method over
the terms of the securities. Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method. All securities were classified as available
for sale at December 31, 2008 and 2007.
Loans - The Corporation grants commercial, real estate, and consumer loans to customers in the
community in and around Northern Virginia. The loan portfolio is well diversified and generally is
collateralized by assets of the customers. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers. The ability of the Corporations
debtors to honor their contracts is dependent upon the real estate and general economic conditions
in the Corporations market area.
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off generally are reported at their outstanding unpaid principal balances less the
allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield using the interest
method.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90
days delinquent unless the credit is well-secured and in process of collection. Consumer loans and
other loans are typically charged off no later than 180 days past due. In all cases, loans are
placed on non-accrual status or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
44
Notes to Consolidated Financial Statements
All interest accrued but not collected for loans that are placed on non-accrual status or
charged-off is reversed against interest income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all of the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loans Held for Sale - The Corporation adopted SFAS No. 159 January 1, 2008 for all one to four unit
residential loans originated and intended for sale in the secondary market. Loans held for sale
are recorded at fair value, determined individually, as of the balance sheet date. Prior to
January 1, 2008 loans held for sale were recorded at the lower of cost or fair value.
Allowance for Loan Losses - The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance represents an amount that, in managements judgment, will be adequate to absorb any
losses on existing loans that may become uncollectible. Managements judgment in determining the
adequacy of the allowance is based on evaluations of the collectability of loans while taking into
consideration such factors as changes in the nature and volume of the loan portfolio, current
economic conditions which may affect a borrowers ability to repay, overall portfolio quality, and
review of specific potential losses. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans
that are classified as doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that
the Corporation will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis by either the present value of the expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Derivative Financial Instruments - The Mortgage Corporation enters into commitments to fund
residential mortgage loans with the intention of selling them in the secondary market. The Mortgage
Corporation also enters into forward sales agreements for certain funded loans and loan
commitments. The Mortgage Corporation records unfunded commitments intended for loans held for sale
and forward sales agreements at fair value with changes in fair value recorded as a component of
other income. Loans originated and intended for sale in the secondary market are carried at fair
value.
For pipeline loans which are not pre-sold to an investor, the Mortgage Corporation manages the
interest rate risk on rate lock commitments by entering into forward sale contracts of mortgage
backed securities, whereby the Mortgage Corporation obtains the right to deliver securities to
investors in the future at a specified price. Such contracts are accounted for as derivatives and
are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded
in other income.
The Corporation has determined these derivative financial instruments do not meet the hedging
criteria required by SFAS 133 and has not designated these derivative financial instruments as
hedges. Accordingly, changes in fair value are recognized currently in income.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation.
Premises and equipment are depreciated over their estimated useful lives; leasehold improvements
are amortized over the lives of the respective leases or the estimated useful life of the leasehold
improvement, whichever is less. Depreciation is computed using the straight-line method over the
estimated useful lives of 39 years for office buildings and 3 to 15 years for furniture, fixtures,
and equipment. Costs of maintenance and
repairs are expensed as incurred; improvements and betterments are capitalized. When items are
retired or otherwise disposed of, the related costs and accumulated depreciation are removed from
the accounts and any resulting gains or losses are included in the determination of net income.
45
Notes to Consolidated Financial Statements
Real
Estate Owned - Real estate properties acquired through loan foreclosures are recorded
initially at fair value, less expected sales costs. Subsequent valuations are performed by
management, and the carrying amount of a property is adjusted by a charge to expense to reflect any
subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals
and current market conditions. Gains or losses on sales of real estate owned are recognized upon
disposition. Real estate owned is included in other assets. At December 31, 2008 real estate
owned totaled $4.5 million. At December 31, 2007 real estate owned totaled $1.0 million.
Income Taxes - Income tax expense is the total of the current year income tax due or refundable,
the change in deferred tax assets and liabilities, and any adjustments related to unrecognized tax
benefits. Deferred income tax assets and liabilities are determined using the balance sheet
method. Under this method, the net deferred tax asset or liability is determined based on the tax
effects of the temporary differences between the book and tax bases of the various balance sheet
assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation Plans - On January 1, 2006 the Corporation adopted the revised SFAS No.
123R, Share Based Payment (SFARS 123R) using the modified prospective method. In accordance with
SFAS 123R, the Corporation measures the cost of employee services received in exchange for an award
of equity instruments based on the fair value of the award on the grant date. That cost is
recognized over the period during which the employee is required to provide service in exchange for
the award, the requisite service period. No compensation expense is recognized for equity
instruments for which employees do not render the requisite service. The Corporation determines
the fair value of the employee stock options using the Black-Scholes option pricing model.
Earnings Per Share - Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of shares outstanding during the period. Diluted earnings
per share reflect additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would result from the
assumed issuance. Common equivalent shares are excluded from the computation if their effect is
antidilutive.
Fair Value Measurements - On January 1, 2008, the Corporation adopted the provisions of
SFAS No. 157, Fair Value Measurements, for financial assets and financial liabilities. In
accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2,
Effective Date of FASB Statement No. 157, the Corporation will delay application of SFAS 157 for
non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.
On January 1, 2008, the Corporation adopted SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115. This Statement
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Corporation elected to apply fair value accounting to loans held for sale originated
subsequent to December 31, 2007.
See Note
18 - Fair Value Measurements.
Advertising Costs - The Corporation follows the policy of charging the costs of advertising to
expense as incurred.
Recent Accounting Pronouncements
In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 109, Written Loan
Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 expresses the current
view of the SEC staff that the expected net future cash flows related to the associated
servicing of the loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. SEC registrants are expected to apply
this guidance on a prospective basis to derivative loan commitments issued or modified in the
first quarter of 2008 and thereafter. The adoption of this statement did not have a material
effect on the Corporations consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)) which
replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill
acquired in the business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for acquisitions
by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly,
a calendar year-end company is required to record and disclose business combinations following
existing accounting guidance until January 1, 2009. The Corporation will assess the impact of SFAS
141(R) if and when a future acquisition occurs.
46
Notes to Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. Before this statement, limited guidance existed for reporting non-controlling
interests (minority interest). As a result, diversity in practice exists. In some cases minority
interest is reported as a liability and in others it is reported in the mezzanine section between
liabilities and equity. Specifically, SFAS 160 requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financials statements and separate from
the parents equity. The amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement. SFAS 160 clarifies that
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling
equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure
requirements regarding the interests of the parent and its non-controlling interests. SFAS 160 is
effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Corporation is
currently evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated
financial statements.
In February 2008, the FASB issued FSP 157-2. The staff position delays the effective date of SFAS
157 for non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The delay is intended to
allow additional time to consider the effect of various implementation issues with regard to the
application of SFAS 157. The new staff position defers the effective date of SFAS 157 to January 1,
2009 for items within the scope of the staff position. The Corporation is currently evaluating the
impact of FSP 157-2 on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 clarifies the sources of accounting principles used in the preparation of
financial statements in the United States. This guidance became effective in 2008 and did not have
a material effect on the Corporations consolidated financial statements upon implementation.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of FAS
157 in a market that is not active. The FSP is intended to address the following application
issues: (a) how the reporting entitys own assumptions (that is, expected cash flows and
appropriately risk-adjusted discount rates) should be considered when measuring fair value when
relevant observable inputs do not exist; (b) how available observable inputs in a market that is
not active should be considered when measuring fair value; and (c) how the use of market quotes
(for example, broker quotes or pricing services for the same or similar financial assets) should be
considered when assessing the relevance of observable and unobservable inputs available to measure
fair value. FSP 157-3 is effective on issuance, including prior periods for which financial
statements have not been issued. The Corporation adopted FSP 157-3 for the year ended December 31,
2008 and the effect of adoption on the consolidated financial statements was not material.
47
Notes to Consolidated Financial Statements
Note 2. Securities
Amortized costs and fair values of the securities available for sale as of December 31, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
|
|
(In Thousands) |
|
U.S. Treasury Notes |
|
$ |
999 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
1,006 |
|
U.S. Governmental Agencies |
|
|
74,934 |
|
|
|
1,420 |
|
|
|
|
|
|
|
76,354 |
|
Mortgage Backed Securities |
|
|
1,428 |
|
|
|
2 |
|
|
|
(39 |
) |
|
|
1,391 |
|
Taxable Municipals |
|
|
5,006 |
|
|
|
3 |
|
|
|
(89 |
) |
|
|
4,920 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(52 |
) |
|
|
1,448 |
|
Restricted Stock - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,763 |
|
|
$ |
1,432 |
|
|
$ |
(180 |
) |
|
$ |
91,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
|
|
(In Thousands) |
|
U.S. Treasury Notes |
|
$ |
995 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
1,013 |
|
U.S. Governmental Agencies |
|
|
61,365 |
|
|
|
417 |
|
|
|
(62 |
) |
|
|
61,720 |
|
Mortgage Backed Securities |
|
|
793 |
|
|
|
6 |
|
|
|
|
|
|
|
799 |
|
Tax Exempt Municipals |
|
|
2,890 |
|
|
|
6 |
|
|
|
(5 |
) |
|
|
2,891 |
|
Taxable Municipals |
|
|
1,110 |
|
|
|
|
|
|
|
(11 |
) |
|
|
1,099 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(21 |
) |
|
|
1,479 |
|
Restricted Stock - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73,210 |
|
|
$ |
447 |
|
|
$ |
(99 |
) |
|
$ |
73,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Notes to Consolidated Financial Statements
Note 2. Securities (continued)
The amortized cost and estimated fair value of securities available for sale as of December 31,
2008 by contractual maturities are shown below. Actual maturities may differ from contractual
maturities because the securities may be called or prepaid without any penalties.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
US Treasury and agencies
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
999 |
|
|
$ |
1,006 |
|
Due after one through five years |
|
|
25,000 |
|
|
|
25,121 |
|
Due after five through ten years |
|
|
49,934 |
|
|
|
51,233 |
|
Municipals
|
|
|
|
|
|
|
|
|
Due after one through five years |
|
|
905 |
|
|
|
907 |
|
Due after five through ten years |
|
|
4,101 |
|
|
|
4,013 |
|
Mortgage backed securities: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
|
381 |
|
|
|
382 |
|
Due after one through five years |
|
|
127 |
|
|
|
128 |
|
Due after fifteen years |
|
|
920 |
|
|
|
881 |
|
Mutual fund |
|
|
1,500 |
|
|
|
1,448 |
|
Restricted stock: |
|
|
|
|
|
|
|
|
FRB stock |
|
|
894 |
|
|
|
894 |
|
FHLB stock |
|
|
5,002 |
|
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
$ |
89,763 |
|
|
$ |
91,015 |
|
|
|
|
|
|
|
|
The estimated fair value of securities pledged to secure public funds, securities sold under
agreements to repurchase, and for other purposes amounted to $62,779,000 at December 31, 2008 and
$58,516,000 at December 31, 2007.
49
Notes to Consolidated Financial Statements
Note 2. Securities (continued)
Investment securities available for sale that have an unrealized loss position at December 31, 2008
and December 31, 2007 are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a loss |
|
|
Securities in a loss |
|
|
|
|
|
|
Position for less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2008 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
$ |
881 |
|
|
$ |
(39 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
881 |
|
|
$ |
(39 |
) |
Municipals-taxable |
|
|
4,012 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
4,012 |
|
|
|
(89 |
) |
CRA mutual fund |
|
|
|
|
|
|
|
|
|
|
1,448 |
|
|
|
(52 |
) |
|
|
1,448 |
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,893 |
|
|
$ |
(128 |
) |
|
$ |
1,448 |
|
|
$ |
(52 |
) |
|
$ |
6,341 |
|
|
$ |
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a loss |
|
|
Securities in a loss |
|
|
|
|
|
|
Position for less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2007 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
19,812 |
|
|
$ |
(62 |
) |
|
$ |
19,812 |
|
|
$ |
(62 |
) |
Municipals-taxable |
|
|
|
|
|
|
|
|
|
|
1,100 |
|
|
|
(11 |
) |
|
|
1,100 |
|
|
|
(11 |
) |
Municipals-tax exempt |
|
|
457 |
|
|
|
(2 |
) |
|
|
915 |
|
|
|
(3 |
) |
|
|
1,372 |
|
|
|
(5 |
) |
CRA mutual fund |
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
(21 |
) |
|
|
1,479 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
457 |
|
|
$ |
(2 |
) |
|
$ |
23,306 |
|
|
$ |
(97 |
) |
|
$ |
23,763 |
|
|
$ |
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of December 31, 2008 and
December 31, 2007 is other than a temporary impairment. These unrealized losses are primarily
attributable to changes in interest rates. The Corporation has the ability to hold these
securities for a time necessary to recover the amortized cost or until maturity when full repayment
would be received.
50
Notes to Consolidated Financial Statements
Note 3. Loans
The composition of net loans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
Real estate construction |
|
$ |
42,600 |
|
|
$ |
55,074 |
|
Residential |
|
|
153,740 |
|
|
|
156,731 |
|
Commercial real estate |
|
|
218,539 |
|
|
|
199,894 |
|
Commercial |
|
|
69,537 |
|
|
|
64,860 |
|
Consumer loans |
|
|
1,513 |
|
|
|
1,039 |
|
|
|
|
|
|
|
|
Total loans |
|
|
485,929 |
|
|
|
477,598 |
|
Less allowance for loan losses |
|
|
7,462 |
|
|
|
7,462 |
|
|
|
|
|
|
|
|
Net loans |
|
$ |
478,467 |
|
|
$ |
470,136 |
|
|
|
|
|
|
|
|
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Balance at beginning of year |
|
$ |
7,462 |
|
|
$ |
5,452 |
|
|
$ |
5,215 |
|
Provision charged to operating expense |
|
|
5,423 |
|
|
|
2,588 |
|
|
|
232 |
|
Loan recoveries |
|
|
137 |
|
|
|
2 |
|
|
|
5 |
|
Loan charge-offs |
|
|
(5,560 |
) |
|
|
(580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
7,462 |
|
|
$ |
7,462 |
|
|
$ |
5,452 |
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans amounted to $2,874,708 at December 31, 2008 and $1,660,736 at December 31, 2007.
There were no non-accrual loans at December 31, 2006. If interest had been accrued, such income
would have been approximately $54,422 and $90,723 respectively.
51
Notes to Consolidated Financial Statements
Note 5. Non-performing Assets and Accruing Loans Past Due 90 Days or More
The following table summarizes non-performing assets.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Non-accrual loans: |
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
$ |
74 |
|
|
$ |
187 |
|
Commercial real estate |
|
|
22 |
|
|
|
|
|
Real estate construction |
|
|
2,678 |
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
1,474 |
|
Consumer and other |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans |
|
|
2,875 |
|
|
|
1,661 |
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
4,455 |
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
7,330 |
|
|
$ |
2,702 |
|
|
|
|
|
|
|
|
|
Ratio of non-performing assets to: |
|
|
|
|
|
|
|
|
Loans held for investment plus OREO |
|
|
1.49 |
% |
|
|
0.56 |
% |
|
Total assets |
|
|
1.04 |
|
|
|
0.43 |
|
|
Accruing past due loans: |
|
|
|
|
|
|
|
|
90 or more days past due |
|
$ |
|
|
|
$ |
|
|
Note 6. Premises and Equipment, Net
Premises and equipment, net, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Land |
|
$ |
2,549 |
|
|
$ |
2,549 |
|
Premises |
|
|
5,749 |
|
|
|
6,460 |
|
Leasehold improvements |
|
|
1,182 |
|
|
|
711 |
|
Furniture & equipment |
|
|
3,132 |
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
12,612 |
|
|
|
12,695 |
|
Less accumulated depreciation |
|
|
(3,401 |
) |
|
|
(2,983 |
) |
|
|
|
|
|
|
|
|
|
$ |
9,211 |
|
|
$ |
9,712 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense included in operating expenses for the years ended December
31, 2008, 2007 and 2006 was $747,000, $839,000, and $846,000 respectively.
52
Notes to Consolidated Financial Statements
Note 7. Deposits
The composition of deposits is summarized as follows at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Type of Account |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(In Thousands) |
|
Interest-bearing demand deposits |
|
$ |
9,854 |
|
|
|
2.03 |
% |
|
$ |
9,865 |
|
|
|
2.08 |
% |
Money market deposit accounts |
|
|
81,260 |
|
|
|
16.74 |
|
|
|
129,904 |
|
|
|
27.44 |
|
Savings accounts |
|
|
4,616 |
|
|
|
0.95 |
|
|
|
3,051 |
|
|
|
0.64 |
|
Time deposits |
|
|
314,671 |
|
|
|
64.83 |
|
|
|
271,183 |
|
|
|
57.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
410,401 |
|
|
|
84.55 |
|
|
|
414,003 |
|
|
|
87.45 |
|
Non-interest bearing demand deposits |
|
|
75,000 |
|
|
|
15.45 |
|
|
|
59,415 |
|
|
|
12.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
485,401 |
|
|
|
100.00 |
% |
|
$ |
473,418 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of time deposits with a minimum denomination of $100,000 was $77,893,000 and
$157,565,000 at December 31, 2008 and 2007, respectively.
At December 31, 2008, the scheduled maturities of time deposits were as follows:
|
|
|
|
|
Year |
|
Amount |
|
|
|
(In Thousands) |
|
2009 |
|
$ |
253,725 |
|
2010 |
|
|
47,157 |
|
2011 |
|
|
4,776 |
|
2012 |
|
|
5,123 |
|
2013 |
|
|
2,644 |
|
Later years |
|
|
1,246 |
|
|
|
|
|
|
|
$ |
314,671 |
|
|
|
|
|
Brokered deposits totaled $189,145,000 and $92,639,000 at December 31, 2008 and 2007 respectively.
53
Notes to Consolidated Financial Statements
Note 8. Borrowings
Short-term borrowings consist of the following at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(In Thousands) |
Securities sold under agreements to repurchase |
|
$ |
21,395 |
|
|
$ |
14,814 |
|
Commercial paper arrangements |
|
|
26,136 |
|
|
|
9,455 |
|
FHLB borrowings |
|
|
44,333 |
|
|
|
15,500 |
|
Federal funds purchased |
|
|
9,993 |
|
|
|
|
|
U.S. Treasury demand notes |
|
|
1,718 |
|
|
|
1,907 |
|
|
|
|
Total |
|
$ |
103,575 |
|
|
$ |
41,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted interest rate |
|
|
1.10 |
% |
|
|
3.66 |
% |
|
|
|
|
|
|
|
|
|
Average for the year ended December 31: |
|
|
|
|
|
|
|
|
Outstanding |
|
$ |
50,749 |
|
|
$ |
72,869 |
|
Interest rate |
|
|
2.26 |
% |
|
|
5.91 |
% |
|
|
|
|
|
|
|
|
|
Maximum month-end outstanding |
|
$ |
103,575 |
|
|
$ |
139,991 |
|
54
Notes to Consolidated Financial Statements
Note 8. Borrowings (continued)
Short-term borrowings consist of securities sold under agreements to repurchase, which are secured
transactions with customers and generally mature the day following the date sold. Short-term
borrowings also include short-term advances from the FHLB, which are secured by mortgage-related
loans and U.S. Government agencies securities. The carrying value of the loans pledged as
collateral for FHLB advances total $191,733,000 at December 31, 2008 and $153,375,000 at December
31, 2007. In addition, the Mortgage Corporation engaged in unsecured commercial paper arrangements
payable on demand with commercial customers of the Bank. U.S. Treasury demand notes are included
in short-term borrowings and are secured by securities issued by U.S. Government agencies.
At December 31, 2008, the Banks fixed-rate long-term debt with the FHLB totaled $41,107,000 and
matures through 2015. The interest rate on the fixed-rate notes payable ranges from 2.55% to 5.07%.
The contractual maturities of long-term debt at December 31, 2008 were as follows:
|
|
|
|
|
Due in 2010 |
|
$ |
20,893 |
|
Due in 2011 |
|
|
8,750 |
|
Due in 2013 |
|
|
4,250 |
|
Due in 2014 |
|
|
2,750 |
|
Due in 2015 |
|
|
4,464 |
|
|
|
|
|
Total Due |
|
$ |
41,107 |
|
|
|
|
|
The Bank has remaining lines of credit available with the FHLB which totaled $111,259,000 at
December 31, 2008.
Access National Capital Trust I, a wholly-owned subsidiary of the Corporation, was formed for the
purpose of issuing redeemable trust preferred securities. The principal asset of the Trust was $4.1
million of the Corporations junior subordinated debt securities with the like maturities and like
interest rates to the trust preferred securities. During September 2007, the Corporation redeemed
$4.1 million of trust preferred securities originally issued in 2002.
During 2003, Access National Capital Trust II, a wholly-owned subsidiary of the Corporation which
was formed for the purpose of issuing redeemable trust preferred securities. On September 29, 2003,
Access National Capital Trust II issued $6.2 million of trust preferred securities. The securities
have a LIBOR-indexed floating rate of interest. The interest rate at December 31, 2008 was 8.02%.
Interest is payable quarterly. The securities have a mandatory redemption date of September 29,
2034 and are subject to varying call provisions beginning January 7, 2009. The principal asset of
the Trust is $6.2 million of the Corporations junior subordinated debt securities with the like
maturities and like interest rates to the trust preferred securities.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy
determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the trust
preferred securities not considered as Tier 1 capital may be included in Tier 2 capital.
The obligations of the Corporation with respect to the issuance of the trust preferred securities
constitute a full and unconditional guarantee by the Corporation of the Trusts obligations with
respect to the trust preferred securities.
Subject to certain exceptions and limitations, the Corporation may elect from time to time to defer
interest payments on the junior subordinated debt securities, which would result in a deferral of
distribution payments on the related trust preferred securities.
55
Notes to Consolidated Financial Statements
Note 9. Income Taxes
Net deferred tax assets consisted of the following components as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
2,537 |
|
|
$ |
2,036 |
|
Deferred fees |
|
|
415 |
|
|
|
574 |
|
Other |
|
|
1,037 |
|
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
3,989 |
|
|
|
3,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
84 |
|
|
|
93 |
|
Securities available for sale |
|
|
426 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
510 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Net deferred tax assets included in other assets |
|
$ |
3,479 |
|
|
$ |
2,881 |
|
|
|
|
|
|
|
|
The provision for income taxes charged to operations for the years ended December 31, 2008, 2007
and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Current tax expense |
|
$ |
3,606 |
|
|
$ |
2,696 |
|
|
$ |
4,429 |
|
Deferred tax (benefit) |
|
|
(906 |
) |
|
|
(1,106 |
) |
|
|
(576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,700 |
|
|
$ |
1,590 |
|
|
$ |
3,853 |
|
|
|
|
|
|
|
|
|
|
|
56
Notes to Consolidated Financial Statements
The income tax provision differs from the amount of income tax determined by applying the U.S.
Federal income tax rate to pretax income for the years ended December 31, 2008, 2007 and 2006 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Computed expected tax expense |
|
$ |
2,531 |
|
|
$ |
1,799 |
|
|
$ |
3,888 |
|
Increase (decrease) in income
taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes |
|
|
144 |
|
|
|
(180 |
) |
|
|
12 |
|
Other |
|
|
25 |
|
|
|
(29 |
) |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,700 |
|
|
$ |
1,590 |
|
|
$ |
3,853 |
|
|
|
|
|
|
|
|
|
|
|
Note 10. Commitments and Contingent Liabilities
The Corporation is committed under non-cancelable and month-to-month operating leases for its
office locations. Rent expense associated with these operating leases for the years ended December
31, 2008, 2007 and 2006 totaled $957,852, $931,575 and $253,000 respectively.
The following is a schedule of future minimum lease payments required under operating leases that
have initial or remaining lease terms in excess of one year.
|
|
|
|
|
Year |
|
Amount |
|
|
|
(In Thousands) |
|
2009 |
|
$ |
365 |
|
2010 |
|
|
298 |
|
2011 |
|
|
297 |
|
2012 |
|
|
304 |
|
2013 |
|
|
313 |
|
|
|
|
|
|
|
$ |
1,577 |
|
|
|
|
|
In the normal course of business, there are outstanding various commitments and contingent
liabilities, which are not reflected in the accompanying financial statements. The Corporation does
not anticipate any material loss as a result of these transactions. See Note 11 for additional
information.
57
Notes to Consolidated Financial Statements
Note 10. Commitments and Contingent Liabilities (continued)
As part of its mortgage banking activities, the Mortgage Corporation enters into interest rate lock
commitments, which are commitments to originate loans whereby the interest rate on the loan is
determined prior to funding and the customers have locked into that interest rate. The Mortgage
Corporation then either locks the loan and rate in with an investor and commits to deliver the loan
if settlement occurs (Best Efforts) or commits to deliver the locked loan in a binding
(Mandatory) delivery program with an investor. Certain loans under rate lock commitments are
covered under, forward sales contracts of mortgage-backed securities (MBS), Forward sales contracts
of MBS are recorded at fair value with changes in fair value recorded in non-interest income.
Interest rate lock commitments and commitments to deliver loans to investors are considered
derivatives. The market value of interest rate lock commitments and best efforts contracts are not
readily ascertainable with precision because they not actively traded in stand-alone markets. The
Mortgage Corporation determines the fair value of rate lock commitments and delivery contracts by
measuring the fair value of the underlying asset, which is impacted by current interest rates and
taking into consideration the probability that the rate lock commitments will close or will be
funded.
Since the Mortgage Corporations derivative instruments are not designated as hedging instruments,
the fair value of the derivatives are recorded as a freestanding asset or liability with the change
in value being recognized in current earnings during the period of change.
At December 31, 2008 and 2007 the Mortgage Corporation had open forward contracts (Mandatory and
MBS) with a notional value of $99,179,000 and $33,672,000, respectively. The open forward delivery
contracts are composed of $74,929,000 and $8,672,000 under mandatory delivery programs and
$24,250,000 and $25,000,000 of forward sales of MBS at December 31, 2008 and 2007, respectively.
The fair value of these open forward contracts was $99,240,000 and $33,543,000, respectively.
Certain additional risks arise from these forward delivery contracts in that the counterparties to
the contracts may not be able to meet the terms of the contracts. The Mortgage Corporation does
not expect any counterparty to fail to meet its obligation. Additional risks inherent in mandatory
delivery programs include the risk that if the Mortgage Corporation does not close the loans
subject to interest rate risk lock commitments, they will be obligated to deliver MBS to the
counterparty under the forward sales agreement. Should this be required, the Mortgage Corporation
could incur significant costs in acquiring replacement loans or MBS and such costs could have an
adverse effect on mortgage banking operations in future periods.
Interest rate lock commitments made on a best efforts basis were $10,029,000 and $9,765,000 at
December 31, 2008 and 2007, respectively. Fair values of these commitments were $10,074,000 and
$9,765,000 at December 31, 2008 and 2007, respectively.
58
Notes to Consolidated Financial Statements
Note 11. Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
consist primarily of commitments to extend credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee by the customer. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the
Corporation upon extension of credit is based on managements credit evaluation of the
counterparty. Collateral normally consists of real property, liquid assets or business assets. The
Corporation had approximately $20,911,000 and $16,800,000 in outstanding commitments at December
31, 2008 and 2007, respectively.
The Corporations exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. The Corporation had
approximately $93,911,000 and $93,388,000 in unfunded lines of credit whose contract amounts
represent credit risk at December 31, 2008 and 2007, respectively.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those letters of credit are primarily issued to support
public and private borrowing arrangements. Essentially all letters of credit issued have expiration
dates within one year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Corporation generally holds
collateral supporting those commitments if deemed necessary. The Corporation had standby letters of
credit outstanding in the amount of $5,704,000 and $4,879,000 at December 31, 2008 and 2007,
respectively.
In addition to the above, the Corporation is subject to risks related to the mortgage origination
operations of the Mortgage Corporation. See Note 10 for a discussion of those risks.
59
Notes to Consolidated Financial Statements
Note 12. Related Party Transactions
The Corporation has had, and may be expected to have in the future, banking transactions in the
ordinary course of business with directors, principal officers, their immediate families and
affiliated companies in which they are principal shareholders (commonly referred to as related
parties), on the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others. These related parties were indebted to the
Corporation for loans totaling $13,984,000 and $10,062,000 at December 31, 2008 and 2007,
respectively. During 2008, total principal additions were $5,200,000 and total principal payments
and commitment changes were $1,278,000. The aggregate amount of deposits at December 31, 2008 and
2007 from directors and officers was $19,187,000 and $9,333,000 respectively.
Note 13. Stock Option Plan
The Corporations shareholders approved the Corporations 1999 Stock Option Plan (the Stock Plan)
at the 2000 Annual Meeting of Shareholders. At December 31, 2008 there were 1,122,358 shares
reserved under the Stock Plan. The Stock Plan allows for incentive stock options to be granted
with an exercise price equal to the fair market value at the date of grant. The expiration date on
options granted is three and one half years from the grant date.
Total compensation cost, net of taxes, for share-based payment arrangements recognized in 2008,
2007 and 2006 was $84,163, $61,445 and $28,348 respectively.
Cash received from option exercises under share-based payment arrangements for 2008, 2007 and 2006
was $399,000, $300,000 and $759,000 respectively.
60
Notes to Consolidated Financial Statements
Note 13. Stock Option Plan (continued)
Changes in the stock options outstanding under the Stock Plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
Number of |
|
|
Average |
|
|
Number of |
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
Outstanding at beginning of year |
|
|
713,624 |
|
|
$ |
6.07 |
|
|
|
815,244 |
|
|
$ |
4.80 |
|
|
|
1,277,408 |
|
|
$ |
3.76 |
|
Granted |
|
|
97,375 |
|
|
|
6.29 |
|
|
|
80,900 |
|
|
|
9.47 |
|
|
|
250 |
|
|
|
8.95 |
|
Exercised |
|
|
137,682 |
|
|
|
2.89 |
|
|
|
178,320 |
|
|
|
1.68 |
|
|
|
446,286 |
|
|
|
1.70 |
|
Lapsed or Canceled |
|
|
83,700 |
|
|
|
12.35 |
|
|
|
4,200 |
|
|
|
11.23 |
|
|
|
16,128 |
|
|
|
8.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
589,617 |
|
|
$ |
5.96 |
|
|
|
713,624 |
|
|
$ |
6.07 |
|
|
|
815,244 |
|
|
$ |
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
426,892 |
|
|
$ |
5.28 |
|
|
|
605,454 |
|
|
$ |
5.61 |
|
|
|
727,020 |
|
|
$ |
4.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at year end 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
Average |
|
Weighted |
Range of |
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Remaining |
|
Average |
Exercise |
|
Number |
|
Contractual |
|
Exercise |
|
Number |
|
Contractual |
|
Exercise |
Price |
|
Outstanding |
|
Life (in yrs) |
|
Price |
|
Exercisable |
|
Life (in yrs) |
|
Price |
$1.00-3.45
|
|
|
202,938 |
|
|
|
0.60 |
|
|
$ |
3.39 |
|
|
|
202,938 |
|
|
|
0.60 |
|
|
$ |
3.39 |
|
$3.46-6.94
|
|
|
213,345 |
|
|
|
2.44 |
|
|
|
6.44 |
|
|
|
125,270 |
|
|
|
2.33 |
|
|
|
6.58 |
|
$6.95-7.54
|
|
|
100,934 |
|
|
|
1.67 |
|
|
|
7.52 |
|
|
|
98,434 |
|
|
|
1.64 |
|
|
|
7.52 |
|
$7.55-9.58
|
|
|
72,400 |
|
|
|
1.58 |
|
|
|
9.58 |
|
|
|
250 |
|
|
|
0.71 |
|
|
|
8.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
589,617 |
|
|
|
1.57 |
|
|
$ |
5.96 |
|
|
|
426,892 |
|
|
|
1.35 |
|
|
$ |
5.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock options granted was determined using the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Expected life of options granted |
|
2.62 Years |
|
2.6 Years |
|
3 Years |
Risk-free interest rate |
|
|
3.04 |
% |
|
|
4.56 |
% |
|
|
4.76 |
% |
Expected volatility of stock |
|
|
35 |
% |
|
|
33 |
% |
|
|
18.70 |
% |
Annual expected dividend yield |
|
|
1 |
% |
|
|
1 |
% |
|
|
0 |
% |
Fair Value of Granted Options |
|
$ |
174,028 |
|
|
$ |
188,073 |
|
|
$ |
14,514 |
|
Nonvested Options |
|
|
162,725 |
|
|
|
108,170 |
|
|
|
88,224 |
|
The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and
2006 was $514,680, $1,357,329 and $3,885,204 respectively.
The total unrecognized compensation cost related to non-vested share based compensation
arrangements granted under the plan as of December 31, 2008 was
$134,720. The cost is expected to be recognized over a weighted average
period of 1.36 years.
61
Notes to Consolidated Financial Statements
Note 14. Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Corporations and the
Banks financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of the Corporations and the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Corporations and
the Banks capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation
and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of December 31, 2008 and 2007,
that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
At December 31, 2008 the Corporation and Bank exceeded the minimum required ratios for well
capitalized as defined by the federal banking regulators. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the table. There are no conditions or events that management believes have changed the
institutions category.
62
Notes to Consolidated Financial Statements
Note 14. Capital Requirements (continued)
The Corporations and Banks actual capital amounts and ratios as of December 31, 2008 and
2007, in thousands, are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
Minimum Capital |
|
Prompt Corrective |
|
|
Actual |
|
Requirement |
|
Action Provisions |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands) |
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
69,747 |
|
|
|
13.11 |
% |
|
$ |
42,576 |
|
|
|
8.00 |
% |
|
$ |
53,220 |
|
|
|
10.00 |
% |
Bank |
|
$ |
65,095 |
|
|
|
12.26 |
% |
|
$ |
42,489 |
|
|
|
8.00 |
% |
|
$ |
53,111 |
|
|
|
10.00 |
% |
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
63,085 |
|
|
|
11.86 |
% |
|
$ |
21,277 |
|
|
|
4.00 |
% |
|
$ |
31,915 |
|
|
|
6.00 |
% |
Bank |
|
$ |
58,433 |
|
|
|
11.00 |
% |
|
$ |
21,245 |
|
|
|
4.00 |
% |
|
$ |
31,867 |
|
|
|
6.00 |
% |
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
63,085 |
|
|
|
9.71 |
% |
|
$ |
25,993 |
|
|
|
4.00 |
% |
|
$ |
32,491 |
|
|
|
5.00 |
% |
Bank |
|
$ |
58,433 |
|
|
|
9.00 |
% |
|
$ |
25,961 |
|
|
|
4.00 |
% |
|
$ |
32,452 |
|
|
|
5.00 |
% |
December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
70,153 |
|
|
|
13.66 |
% |
|
$ |
41,088 |
|
|
|
8.00 |
% |
|
$ |
51,360 |
|
|
|
10.00 |
% |
Bank |
|
$ |
62,494 |
|
|
|
12.17 |
% |
|
$ |
41,068 |
|
|
|
8.00 |
% |
|
$ |
51,336 |
|
|
|
10.00 |
% |
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
63,717 |
|
|
|
12.41 |
% |
|
$ |
20,544 |
|
|
|
4.00 |
% |
|
$ |
30,816 |
|
|
|
6.00 |
% |
Bank |
|
$ |
56,051 |
|
|
|
10.92 |
% |
|
$ |
20,534 |
|
|
|
4.00 |
% |
|
$ |
30,801 |
|
|
|
6.00 |
% |
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
63,717 |
|
|
|
10.07 |
% |
|
$ |
25,310 |
|
|
|
4.00 |
% |
|
$ |
31,638 |
|
|
|
5.00 |
% |
Bank |
|
$ |
56,051 |
|
|
|
8.87 |
% |
|
$ |
25,266 |
|
|
|
4.00 |
% |
|
$ |
31,583 |
|
|
|
5.00 |
% |
63
Note 15. Earnings Per Share
The following shows the weighted average number of shares used in computing earnings per share and
the effect on weighted average number of shares of diluted potential common stock. Potential
dilutive common stock has no effect on income available to common shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
|
(In Thousands, Except Per Share Data) |
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
4,744 |
|
|
|
10,299 |
|
|
$ |
0.46 |
|
|
$ |
3,702 |
|
|
|
11,620 |
|
|
$ |
0.32 |
|
|
$ |
7,592 |
|
|
|
9,429 |
|
|
$ |
0.81 |
|
Effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
1,113 |
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share |
|
$ |
4,744 |
|
|
|
10,424 |
|
|
$ |
0.46 |
|
|
$ |
3,702 |
|
|
|
11,866 |
|
|
$ |
0.31 |
|
|
$ |
7,592 |
|
|
|
10,542 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16. Employee Benefits
The Corporation maintains a Defined Contribution 401(k) Profit Sharing Plan, which authorizes a
maximum voluntary salary deferral of up to IRS limitations. All full-time employees are eligible to
participate after 6 months of employment. The Corporation reserves the right to make an annual
discretionary contribution to the account of each eligible employee based in part on the
Corporations profitability for a given year, and on each participants yearly earnings.
Approximately $346,000, $367,000, and $245,000 were charged to expense under the Plan for 2008,
2007, and 2006 respectively.
64
Notes to Consolidated Financial Statements
Note 17. Other Expenses
The Corporation had the following other expenses as of December 31, 2008, 2007, and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Advertising and promotional expense |
|
$ |
3,760 |
|
|
$ |
3,921 |
|
|
$ |
4,190 |
|
Investor fees |
|
|
889 |
|
|
|
891 |
|
|
|
663 |
|
Broker premium |
|
|
3 |
|
|
|
3,443 |
|
|
|
2,688 |
|
Legal fees |
|
|
403 |
|
|
|
99 |
|
|
|
143 |
|
Other settlement fees |
|
|
146 |
|
|
|
251 |
|
|
|
164 |
|
Management fees |
|
|
2,380 |
|
|
|
1,560 |
|
|
|
1,227 |
|
Provision
for losses on loans sold |
|
|
2,095 |
|
|
|
1,750 |
|
|
|
(266 |
) |
Buy down expense |
|
|
332 |
|
|
|
(119 |
) |
|
|
(119 |
) |
Buy Back Expense |
|
|
142 |
|
|
|
409 |
|
|
|
|
|
Business and franchise tax |
|
|
406 |
|
|
|
458 |
|
|
|
251 |
|
Accounting and auditing service |
|
|
623 |
|
|
|
570 |
|
|
|
402 |
|
Consulting fees |
|
|
334 |
|
|
|
405 |
|
|
|
416 |
|
Early payoff and default penalties |
|
|
119 |
|
|
|
331 |
|
|
|
320 |
|
Office supplies-stationery print |
|
|
175 |
|
|
|
150 |
|
|
|
162 |
|
Telephone |
|
|
282 |
|
|
|
331 |
|
|
|
353 |
|
Postage |
|
|
157 |
|
|
|
223 |
|
|
|
250 |
|
Credit reports |
|
|
238 |
|
|
|
299 |
|
|
|
146 |
|
Other office expenses |
|
|
95 |
|
|
|
152 |
|
|
|
178 |
|
Other operating expenses |
|
|
139 |
|
|
|
179 |
|
|
|
169 |
|
Data processing |
|
|
472 |
|
|
|
374 |
|
|
|
355 |
|
Regulatory examinations |
|
|
155 |
|
|
|
159 |
|
|
|
112 |
|
FDIC insurance |
|
|
350 |
|
|
|
51 |
|
|
|
51 |
|
Other |
|
|
2,043 |
|
|
|
1,954 |
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,738 |
|
|
$ |
17,841 |
|
|
$ |
12,949 |
|
|
|
|
|
|
|
|
|
|
|
Note 18. Fair Value Measurements
Effective January 1, 2008, the Corporation adopted SFAS 157 and SFAS 159. SFAS 157 defines fair
value as the exchange price that would be received for an asset or paid to transfer a liability
(exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a companys own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the fair value of each type of financial
instrument:
Investment securities: The fair values for investment securities are determined by quoted
market prices from active markets (Level 1).
65
Residential loans held for sale: The fair value of loans held for sale is determined using
quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: Derivative instruments are used to hedge residential
mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage backed securities. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the
underlying value of mortgage loans for rate lock commitments (Level 3).
Impaired loans: The fair values of impaired loans are measured for impairment using the
fair value of the collateral for collateral-dependent loans on a non-recurring basis. Collateral
may be in the form of real estate or business assets including equipment, inventory and accounts
receivable. The use of discounted cash flow models and managements best judgment are significant
inputs in arriving at the fair value measure of the underlying collateral (Level 3).
Other real estate owned: The fair value of other real estate owned, which is included in
other assets on the balance sheet, consists of real estate that has been foreclosed. Foreclosed
real estate is recorded at the lower of fair value less selling expenses or the book balance prior
to foreclosure. Write downs are provided for subsequent declines in value and are recorded in
other non-interest expense (Level 2).
Assets and liabilities measured at fair value under SFAS 157 on a recurring and non-recurring
basis, including financial assets and liabilities for which the Corporation has elected the fair
value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement |
|
|
|
|
|
|
|
at December 31, 2008 Using |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Assets (Leve l |
|
|
Observable |
|
|
Unobservable |
|
Description |
|
Carrying Value |
|
|
1) |
|
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
|
|
|
|
Financial Assets-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale investment securities (1) |
|
$ |
85,119 |
|
|
$ |
85,119 |
|
|
$ |
|
|
|
$ |
|
|
Residential loans held for sale |
|
|
84,312 |
|
|
|
|
|
|
|
84,312 |
|
|
|
|
|
Derivative assets |
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
363 |
|
Financial Liabilities-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets-Non-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (2) |
|
|
2,875 |
|
|
|
|
|
|
|
|
|
|
|
2,875 |
|
Other real estate owned (3) |
|
|
4,455 |
|
|
|
|
|
|
|
4,455 |
|
|
|
|
|
|
|
|
(1) |
|
Excludes restricted stock. |
|
(2) |
|
Represents the carrying value of loans for which adjustments are based on the appraised value
of the collateral. |
|
(3) |
|
Represents appraised value and realtor comparables less estimated selling expenses. |
66
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are
summarized as follows for the three month period ended December 31, 2008.
|
|
|
|
|
|
|
Net Derivatives |
|
|
|
(In Thousands) |
|
Balance September 30, 2008 |
|
$ |
200 |
|
Realized and unrealized gains (losses) included in earnings |
|
|
(109 |
) |
Unrealized gains (losses) included in other comprehensive income |
|
|
|
|
Purchases, Settlements, paydowns, and maturities |
|
|
|
|
Transfer into Level 3 |
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
$ |
91 |
|
|
|
|
|
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are
summarized as follows for the twelve month period ended December 31, 2008.
|
|
|
|
|
|
|
Net Derivatives |
|
|
|
(In Thousands) |
|
Balance January 1, 2008 |
|
$ |
(140 |
) |
Realized and unrealized gains included in earnings |
|
|
231 |
|
Unrealized gains (losses) included in other comprehensive income |
|
|
|
|
Purchases, settlements, paydowns, and maturities |
|
|
|
|
Transfer into Level 3 |
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
$ |
91 |
|
|
|
|
|
Financial instruments recorded using SFAS 159
Under SFAS 159, the Corporation may elect to report most financial instruments and certain other
items at fair value on an instrument-by-instrument basis with changes in fair value reported in net
income. After the initial adoption of SFAS 159, the election is made at the acquisition of an
eligible financial asset, financial liability or firm commitment or when certain specified
reconsideration events occur. The fair value election, with respect to an item, may not be revoked
once an election is made. Additionally, the transaction provisions of SFAS 159 permit a one-time
election for existing positions at the adoption date with a cumulative-effect adjustment included
in beginning retained earnings and future changes in fair value reported in net income. The
Corporation elected the fair value option on all loans held
for sale transactions subsequent to December 31, 2007.
The following table reflects the differences between the fair value carrying amount of residential
mortgage loans held for sale at December 31, 2008, measured at fair value under SFAS 159, and the
aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
Contractual |
|
(In Thousands) |
|
Fair
Value |
|
|
Difference |
|
|
Principal |
|
Residential mortgage loans held for sale |
|
$ |
84,312 |
|
|
$ |
2,109 |
|
|
$ |
82,203 |
|
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the
fair value of financial assets and financial liabilities, including those financial assets and
financial liabilities that are not measured and reported at fair value on a recurring basis or
non-recurring basis. The methodologies for estimating the fair value of financial assets and
financial liabilities that are measured at fair value on a recurring or non-recurring basis are
discussed above. The estimated fair value approximates carrying value for cash and cash
equivalents, and accrued interest. The methodologies for other financial assets and financial
liabilities are discussed below:
67
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
For securities, fair values are based on quoted market prices or dealer quotes.
Loans Held for Sale
Loans held for sale and are recorded at fair value, determined individually, as of the balance
sheet date. Prior to January 1, 2008 loans held for sale were recorded at the lower of cost or
fair value.
Loan Receivables
For certain homogeneous categories of loans, such as some residential mortgages, and other
consumer loans, fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value of other types of
loans is estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of similar remaining
maturities. The fair value of all other deposits and borrowings is determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on similar products.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to
enter similar agreements, taking into account the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair value of
stand-by letters of credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the counterparties at the
reporting date.
At December 31, 2008 and 2007, the majority of off-balance-sheet items is variable rate instruments
or converts to variable rate instruments if drawn upon. Therefore, the fair value of these items is
largely based on fees, which are nominal and immaterial.
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(In Thousands) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term
investments |
|
$ |
22,482 |
|
|
$ |
22,482 |
|
|
$ |
19,504 |
|
|
$ |
19,504 |
|
Securities available for sale |
|
|
85,119 |
|
|
|
85,119 |
|
|
|
69,001 |
|
|
|
69,001 |
|
Restricted stock |
|
|
5,896 |
|
|
|
5,896 |
|
|
|
4,557 |
|
|
|
4,577 |
|
Loans, net of allowance |
|
|
562,779 |
|
|
|
562,430 |
|
|
|
509,280 |
|
|
|
506,056 |
|
Derivatives |
|
|
273 |
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Assets |
|
$ |
676,549 |
|
|
$ |
676,200 |
|
|
$ |
602,342 |
|
|
$ |
599,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
485,401 |
|
|
$ |
486,989 |
|
|
$ |
473,418 |
|
|
$ |
475,674 |
|
Short-term borrowings |
|
|
103,575 |
|
|
|
104,083 |
|
|
|
41,676 |
|
|
|
41,676 |
|
Long-term borrowings |
|
|
41,107 |
|
|
|
42,458 |
|
|
|
39,524 |
|
|
|
42,777 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,321 |
|
|
|
6,186 |
|
|
|
6,192 |
|
Derivatives |
|
|
182 |
|
|
|
182 |
|
|
|
140 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Liabilities |
|
$ |
636,451 |
|
|
$ |
640,033 |
|
|
$ |
560,944 |
|
|
$ |
566,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accounting pronouncements require disclosure of the estimated fair value of financial
instruments. Effective January 1, 2008, fair value is defined in accordance with SFAS No. 157 as
disclosed in Note 18. Given the current market conditions, a portion of our loan portfolio is not
readily marketable and market prices do not exist. We have not attempted to market our loans to
potential buyers, if any exist, to determine the fair value of those instruments in accordance with
the definition of SFAS No. 157. Since negotiated prices in illiquid markets depends upon the then
present motivations of the buyer and seller, it is reasonable to assume that actual sales prices
could vary widely from any estimate of fair value made without the benefit of negotiations.
Additionally, changes in market interest rates can dramatically impact the value of financial
instruments in a short period of time. Accordingly, the fair value measurements for loans included
in the table above are unlikely to represent the instruments liquidation values.
Note 19. Subsequent Event
On February 11, 2009 the Bank issued $30.0 million in new senior unsecured debt at 2.74% maturing
February 15, 2012 under the TLG Program.
69
Notes to Consolidated Financial Statements
Note 20. Segment Reporting
The Corporation has two reportable segments: traditional commercial banking and a mortgage banking
business. Revenues from commercial banking operations consist primarily of interest earned on loans
and investment securities and fees from deposit services. Mortgage banking operating revenues
consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in
the secondary mortgage market and loan origination fee income.
The commercial banking segment provides the mortgage banking segment with the short-term funds
needed to originate mortgage loans through a warehouse line of credit and charges the mortgage
banking segment interest based on a premium over their cost to borrow funds. These transactions are
eliminated in the consolidation process.
70
Notes to Consolidated Financial Statements
The following table presents segment information for the years ended December 31, 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
2008 |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(In Thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
37,910 |
|
|
$ |
1,778 |
|
|
$ |
71 |
|
|
$ |
(967 |
) |
|
$ |
38,792 |
|
Gain on sale of loans |
|
|
|
|
|
|
24,863 |
|
|
|
|
|
|
|
(4 |
) |
|
|
24,859 |
|
Other |
|
|
1,961 |
|
|
|
4,472 |
|
|
|
1,148 |
|
|
|
(1,627 |
) |
|
|
5,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
39,871 |
|
|
|
31,113 |
|
|
|
1,219 |
|
|
|
(2,598 |
) |
|
|
69,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
16,972 |
|
|
|
865 |
|
|
|
873 |
|
|
|
(970 |
) |
|
|
17,740 |
|
Salaries and employee benefits |
|
|
7,520 |
|
|
|
13,261 |
|
|
|
|
|
|
|
|
|
|
|
20,781 |
|
Other |
|
|
10,836 |
|
|
|
12,692 |
|
|
|
1,740 |
|
|
|
(1,628 |
) |
|
|
23,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
35,328 |
|
|
|
26,818 |
|
|
|
2,613 |
|
|
|
(2,598 |
) |
|
|
62,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
4,543 |
|
|
$ |
4,295 |
|
|
$ |
(1,394 |
) |
|
$ |
|
|
|
$ |
7,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
662,885 |
|
|
$ |
85,909 |
|
|
$ |
9,476 |
|
|
$ |
(55,946 |
) |
|
$ |
702,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
98 |
|
|
|
72 |
|
|
|
29 |
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
2007 |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(In Thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
45,176 |
|
|
$ |
3,594 |
|
|
$ |
665 |
|
|
$ |
(4,009 |
) |
|
$ |
45,426 |
|
Gain on sale of loans |
|
|
|
|
|
|
20,244 |
|
|
|
|
|
|
|
(3 |
) |
|
|
20,241 |
|
Other |
|
|
1,452 |
|
|
|
7,256 |
|
|
|
1,081 |
|
|
|
(2,323 |
) |
|
|
7,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
46,628 |
|
|
|
31,094 |
|
|
|
1,746 |
|
|
|
(6,335 |
) |
|
|
73,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
23,881 |
|
|
|
4,166 |
|
|
|
1,270 |
|
|
|
(4,013 |
) |
|
|
25,304 |
|
Salaries and employee benefits |
|
|
6,822 |
|
|
|
12,756 |
|
|
|
|
|
|
|
|
|
|
|
19,578 |
|
Other |
|
|
6,546 |
|
|
|
16,989 |
|
|
|
1,746 |
|
|
|
(2,322 |
) |
|
|
22,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37,249 |
|
|
|
33,911 |
|
|
|
3,016 |
|
|
|
(6,335 |
) |
|
|
67,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
9,379 |
|
|
$ |
(2,817 |
) |
|
$ |
(1,270 |
) |
|
$ |
|
|
|
$ |
5,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
599,835 |
|
|
$ |
46,184 |
|
|
$ |
9,115 |
|
|
$ |
(32,758 |
) |
|
$ |
622,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
554 |
|
|
|
111 |
|
|
|
305 |
|
|
|
|
|
|
|
970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
2006 |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
39,526 |
|
|
$ |
3,972 |
|
|
$ |
250 |
|
|
$ |
(3,810 |
) |
|
$ |
39,938 |
|
Gain on sale of loans |
|
|
|
|
|
|
19,865 |
|
|
|
|
|
|
|
(52 |
) |
|
|
19,813 |
|
Other |
|
|
1,644 |
|
|
|
7,435 |
|
|
|
1,331 |
|
|
|
(2,590 |
) |
|
|
7,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
41,170 |
|
|
|
31,272 |
|
|
|
1,581 |
|
|
|
(6,452 |
) |
|
|
67,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
20,092 |
|
|
|
4,053 |
|
|
|
1,352 |
|
|
|
(3,815 |
) |
|
|
21,682 |
|
Salaries and employee benefits |
|
|
6,371 |
|
|
|
13,033 |
|
|
|
|
|
|
|
|
|
|
|
19,404 |
|
Other |
|
|
4,120 |
|
|
|
12,123 |
|
|
|
1,434 |
|
|
|
(2,637 |
) |
|
|
15,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
30,583 |
|
|
|
29,209 |
|
|
|
2,786 |
|
|
|
(6,452 |
) |
|
|
56,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
10,587 |
|
|
$ |
2,063 |
|
|
$ |
(1,205 |
) |
|
$ |
|
|
|
$ |
11,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
591,973 |
|
|
$ |
69,749 |
|
|
$ |
9,876 |
|
|
$ |
(26,816 |
) |
|
$ |
644,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
248 |
|
|
$ |
444 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Notes to Consolidated Financial Statements
Note 21. Parent Corporation Only Statements
ACCESS NATIONAL CORPORATION
(Parent Corporation Only)
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
10 |
|
|
$ |
2 |
|
Other investments |
|
|
4,028 |
|
|
|
7,280 |
|
Investment in subsidiaries |
|
|
59,604 |
|
|
|
56,606 |
|
Other assets |
|
|
804 |
|
|
|
725 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
64,446 |
|
|
$ |
64,613 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
6,186 |
|
|
$ |
6,186 |
|
Other liabilities |
|
|
315 |
|
|
|
466 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,501 |
|
|
|
6,652 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Common stock |
|
|
8,551 |
|
|
|
9,052 |
|
Capital surplus |
|
|
17,410 |
|
|
|
21,833 |
|
Retained earnings |
|
|
31,157 |
|
|
|
26,846 |
|
Accumulated other comprehensive income |
|
|
827 |
|
|
|
230 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
57,945 |
|
|
|
57,961 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
64,446 |
|
|
$ |
64,613 |
|
|
|
|
|
|
|
|
72
Notes to Consolidated Financial Statements
ACCESS NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
3,203 |
|
|
$ |
1,260 |
|
|
$ |
1,005 |
|
Interest |
|
|
72 |
|
|
|
665 |
|
|
|
250 |
|
Other |
|
|
81 |
|
|
|
46 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,356 |
|
|
|
1,971 |
|
|
|
1,349 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on subordinated debentures |
|
|
418 |
|
|
|
807 |
|
|
|
879 |
|
Other expenses |
|
|
1,122 |
|
|
|
1,188 |
|
|
|
832 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,540 |
|
|
|
1,995 |
|
|
|
1,711 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and undistributed income of subsidiaries |
|
|
1,816 |
|
|
|
(24 |
) |
|
|
(362 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) |
|
|
(526 |
) |
|
|
(487 |
) |
|
|
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before undistributed income of subsidiaries |
|
|
2,342 |
|
|
|
463 |
|
|
|
156 |
|
Undistributed income of subsidiaries |
|
|
2,402 |
|
|
|
3,239 |
|
|
|
7,436 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,744 |
|
|
$ |
3,702 |
|
|
$ |
7,592 |
|
|
|
|
|
|
|
|
|
|
|
73
Notes to Consolidated Financial Statements
ACCESS NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,744 |
|
|
$ |
3,702 |
|
|
$ |
7,592 |
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed income of subsidiaries |
|
|
(2,402 |
) |
|
|
(3,239 |
) |
|
|
(7,436 |
) |
(Increase) decrease in other assets |
|
|
(79 |
) |
|
|
147 |
|
|
|
(592 |
) |
Increase (decrease) in other liabilities |
|
|
(150 |
) |
|
|
205 |
|
|
|
(273 |
) |
Stock Based Compensation |
|
|
136 |
|
|
|
99 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
2,249 |
|
|
|
914 |
|
|
|
(663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in investment in subsidiaries |
|
|
|
|
|
|
|
|
|
|
(5,000 |
) |
(Increase) decrease in other investments |
|
|
3,252 |
|
|
|
12,059 |
|
|
|
(17,514 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
3,252 |
|
|
|
12,059 |
|
|
|
(22,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(5,930 |
) |
|
|
(9,502 |
) |
|
|
(51 |
) |
Net proceeds from issuance of common stock |
|
|
870 |
|
|
|
1,105 |
|
|
|
23,446 |
|
Redemption of subordinated debentures |
|
|
|
|
|
|
(4,125 |
) |
|
|
|
|
Dividends paid |
|
|
(433 |
) |
|
|
(497 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(5,493 |
) |
|
|
(13,019 |
) |
|
|
23,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
8 |
|
|
|
(46 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
2 |
|
|
|
48 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
74
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
The Corporations management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Corporations disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Corporations disclosure controls and procedures are effective as of the end of the period
covered by this report to ensure that information required to be disclosed in the reports that the
Corporation files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to the Corporations management, including the 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 Corporations disclosure controls and procedures will detect or uncover
every situation involving the failure of persons within the Corporation to disclose material
information required to be set forth in the Corporations periodic and current reports.
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes
in our internal control over financial reporting occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Report of Managements Assessment of Internal Control over Financial Reporting
The Corporations management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
With the supervision and participation of its Chief Executive Officer and its Chief Financial
Officer, management evaluated the effectiveness of the Corporations internal control over
financial reporting as of December 31, 2008, using the framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission and based on this assessment has concluded the
Corporations internal control over financial reporting is effective as of that date.
No matter how well designed, internal control over financial reporting may not prevent or detect
all misstatements. Projection of the evaluation of effectiveness to future periods is subject to
risks, including but not limited to (a) controls may become inadequate due to changes in
conditions; (b) a deterioration in the degree of compliance with policies or procedures; and (c)
the possibility of control circumvention or override, any of which may lead to misstatements due to
undetected error or fraud. Effective internal control over financial reporting can provide only a
reasonable assurance with respect to financial statement preparation and reporting.
The Corporations independent registered public accounting firm, BDO Seidman LLP, has audited the
Consolidated Financial Statements included in this Annual Report and has issued an attestation
report on the Corporations internal control over financial reporting which is included in Item 8
Financial Statements and Supplementary Data herein.
ITEM 9B OTHER INFORMATION
None.
75
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the captions Election of Directors, Executive Officers Who Are
Not Directors, Corporate Governance and the Board of Directors, Certain Relationships and
Related Transactions and Section 16(a) Beneficial Ownership Reporting Compliance in the 2009
Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by
reference.
ITEM 11 EXECUTIVE COMPENSATION
The information contained under the captions Executive Compensation in the 2009 Proxy Statement
that is required to be disclosed in this Item 11 is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information contained under the captions Security Ownership of Management and Security
Ownership of Certain Beneficial Owners in the 2009 Proxy Statement that is required to be
disclosed in this Item 12 is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information regarding certain relationships between the Corporation and its directors and
officers is contained under the captions Certain Relationships and Related Transactions and
Corporate Governance and the Board of Directors in the 2009 Proxy Statement that is required to
be disclosed in this Item 13 is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the captions Audit and Non-Audit Fees and Audit Committee Pre-Approval
Policies in the 2009 Proxy Statement that is required to be disclosed in this Item 14 is
incorporated herein by reference.
76
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibit Index:
|
|
|
Exhibit No. |
|
Description |
3.1
|
|
Amended and Restated Articles of Incorporation of Access
National Corporation (incorporated by reference to Exhibit 3.1
to Form 8-K filed July 18, 2006) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Access National Corporation
(incorporated by reference to Exhibit 3.2 to Form 8-K Filed
October 24, 2007) |
|
|
|
4
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.0 to Form 10-KSB filed March 31, 2003) |
|
|
|
|
|
Certain instruments relating to long-term debt as to which the
total amount of securities authorized thereunder does not exceed
10% of Access National Corporations total assets have been
omitted in accordance with Item 601(b)(4)(iii) of Regulation
S-K. The registrant will furnish a copy of any such instrument
to the Securities and Exchange Commission upon its request. |
|
|
|
10.1+
|
|
Employment Letter Agreement between Access National Bank and
Michael W. Clarke (incorporated by reference to Exhibit 10.1 to
Form 10-K filed March 31, 2005) |
|
|
|
10.2+
|
|
Employment Letter Agreement between Access National Bank and
Robert C. Shoemaker (incorporated by reference to Exhibit 10.2
to Form 10-K filed March 31, 2005) |
|
|
|
10.3+
|
|
Employment Agreement between Access National Bank and Charles
Wimer (incorporated by reference to Exhibit 10.3 to Form 10-KSB
filed March 31, 2003) |
|
|
|
10.4+
|
|
Employment Agreement between Access National Mortgage
Corporation and Dean Hackemer (incorporated by reference to
Exhibit 10.4 to Form 10-K filed March 31, 2005) |
|
|
|
10.4.1+
|
|
Amendment #1 to Employment Agreement between Access National
Mortgage Corporation and Dean Hackemer (incorporated by
reference to Exhibit 10.2 to Form 10-Q filed May 15, 2007) |
|
|
|
10.5*+
|
|
Annual Compensation of Non-Employee Directors |
|
|
|
10.6*+
|
|
Base Salaries for Named Executive Officers |
|
|
|
10.7+
|
|
Access National Bank 1999 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Form 10-KSB filed March 31, 2003) |
|
|
|
10.7.1+
|
|
Form of Incentive Stock Option Agreement for Employee under 1999
Stock Option Plan (incorporated by reference to Exhibit 10.5.1
to Form 8-K filed January 31, 2007) |
|
|
|
10.7.2+
|
|
Form of Incentive Stock Option for Employee-Director under 1999
Stock Option Plan (incorporated by reference to Exhibit 10.5.2
to Form 8-K filed January 31, 2007) |
|
|
|
10.7.3+
|
|
Form of Non-Qualified Stock Option Agreement for Director under
1999 Stock Option Plan (incorporated by reference to Exhibit
10.5.3 to Form 8-K filed January 31, 2007) |
|
|
|
10.8
|
|
Lease agreement between Access National Bank and William and
Blanca Spencer (incorporated by reference to Exhibit 10.6 to
Form 10-KSB filed March 31, 2003) |
|
|
|
10.9
|
|
Lease agreement between Access National Mortgage Corporation and
WJG, LLC (incorporated by reference to Exhibit 10.7 to Form
10-KSB filed March 31, 2003) |
77
|
|
|
Exhibit No. |
|
Description |
14
|
|
Code of Ethics (incorporated by reference to Exhibit 14 to Form
10-KSB filed March 30, 2004) |
|
|
|
21*
|
|
Subsidiaries of Access National Corporation |
|
|
|
23*
|
|
Consent of BDO Seidman, LLP |
|
|
|
24*
|
|
Power of Attorney (included on the signature page of this report) |
|
|
|
31.1*
|
|
CEO Certification Pursuant to Rule 13a-14(a) |
|
|
|
31.2*
|
|
CFO Certification Pursuant to Rule 13a-14(a) |
|
|
|
32*
|
|
CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. § 1350) |
|
|
|
* |
|
filed herewith |
|
+ |
|
indicates a management contract or compensatory plan or arrangement |
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
Access National Corporation |
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
Date: March 27, 2009
|
|
By:
|
|
/s/ Michael W. Clarke
Michael W. Clarke
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: March 27, 2009
|
|
By:
|
|
/s/ Charles Wimer
Charles Wimer
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
79
SIGNATURES
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Michael W. Clarke his true and
lawful attorney-in-fact and agent with full power of substitution and re-substitution for him and
in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form
10-K and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full
power and authority to do fully and to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, and his substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ J. Randolph Babbitt |
|
|
|
|
|
|
Director
|
|
March 12,
2009 |
|
|
|
|
|
/s/ Michael W. Clarke |
|
|
|
|
|
|
Chairman,
President, Chief Executive
Officer &
|
|
March 12,
2009 |
|
|
Director |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ John W. Edgemond IV |
|
|
|
|
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
/s/ James L. Jadlos |
|
|
|
|
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
/s/ Thomas M. Kody |
|
|
|
|
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
/s/ Robert C. Shoemaker |
|
|
|
|
|
|
Director
|
|
March 12, 2009 |
|
|
|
|
|
/s/ Charles Wimer |
|
|
|
|
|
|
Executive
Vice President and Chief Financial
|
|
March 12, 2009 |
|
|
Officer |
|
|
|
|
(Principal Financial Officer and Principal |
|
|
|
|
Accounting Officer) |
|
|
80