e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
For the quarterly period ended September 30, 2006
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o |
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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 310, Reston, Virginia 20191
(Address of principal executive office) (Zip Code)
(703) 871-2100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
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 number of shares outstanding of Access National Corporations common stock, par value $.835, as
of November 2, 2006, was 11,102,225 shares.
Table of Contents
ACCESS NATIONAL CORPORATION
FORM 10-Q
INDEX
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PART I |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Consolidated Balance Sheets September 30, 2006 (Unaudited) and December 31, 2005 |
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Page 2 |
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Consolidated Statements of Income (Unaudited) Three Months Ended September 30, 2006 and 2005 |
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Page 3 |
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Consolidated Statements of Income (Unaudited) Nine Months Ended September 30, 2006 and 2005 |
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Page 4 |
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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Nine Months Ended |
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September 30, 2006 and 2005 |
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Page 5 |
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Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2006 and 2005 |
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Page 6 |
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Notes to Consolidated Financial Statements (Unaudited) |
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Page 7 |
Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Page 18 |
Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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Page 30 |
Item 4. |
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Controls and Procedures |
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Page 31 |
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PART
II |
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OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
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Page 31 |
Item 1A. |
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Risk Factors |
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Page 31 |
Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Page 31 |
Item 3. |
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Defaults Upon Senior Securities |
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Page 31 |
Item 4. |
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Submission of Matters to a Vote of Security Holders |
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Page 31 |
Item 5. |
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Other Information |
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Page 31 |
Item 6. |
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Exhibits |
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Page 32 |
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Signatures |
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Page 33 |
- 1 -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share Data)
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Sept 30 |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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|
|
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Cash and due from banks |
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$ |
13,457 |
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$ |
9,854 |
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Interest bearing deposits in other banks and Federal Funds Sold |
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11,154 |
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13,329 |
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Securities available for sale, at fair value |
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106,418 |
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87,771 |
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Loans held for sale |
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55,713 |
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45,019 |
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Loans, net of allowance for loan losses of $5,393 and $5,215 respectively |
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411,875 |
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|
364,518 |
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Premises and equipment |
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9,551 |
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|
9,650 |
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Other assets |
|
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9,198 |
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6,909 |
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|
|
|
|
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Total assets |
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$ |
617,366 |
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$ |
537,050 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Deposits |
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Non-interest bearing deposits |
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$ |
90,346 |
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$ |
81,034 |
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Savings and interest-bearing deposits |
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125,186 |
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149,094 |
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Time deposits |
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257,929 |
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189,501 |
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Total deposits |
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473,461 |
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|
419,629 |
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Other liabilities |
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Short-term borrowings |
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52,042 |
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48,196 |
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Long-term borrowings |
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|
18,625 |
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|
21,786 |
|
Subordinated debentures |
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|
10,311 |
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|
10,311 |
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Other liabilities |
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4,651 |
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5,943 |
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|
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Total liabilities |
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559,090 |
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505,865 |
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SHAREHOLDERS EQUITY |
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Common stock, par value, $0.835; authorized, 60,000,000 shares;
issued and outstanding, 11,004,785 shares in 2006 and 7,956,556 shares
in 2005 |
|
|
9,189 |
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|
6,644 |
|
Surplus |
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|
28,338 |
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|
|
9,099 |
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Retained earnings |
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|
21,433 |
|
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|
16,227 |
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Accumulated other comprehensive income (loss), net |
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|
(684 |
) |
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(785 |
) |
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Total shareholders equity |
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58,276 |
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31,185 |
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Total liabilities and shareholders equity |
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$ |
617,366 |
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$ |
537,050 |
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|
See
accompanying notes to consolidated financial statements
(unaudited).
- 2 -
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
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Three Months Ended September 30, |
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2006 |
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2005 |
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Interest and Dividend Income |
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Interest and fees on loans |
|
$ |
9,285 |
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|
$ |
6,847 |
|
Interest on deposits in other banks |
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|
94 |
|
|
|
56 |
|
Interest and dividends on securities |
|
|
1,191 |
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|
658 |
|
|
|
|
|
|
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Total interest and dividend income |
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10,570 |
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|
7,561 |
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Interest Expense |
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Interest on deposits |
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4,398 |
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2,276 |
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Interest on short-term borrowings |
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|
917 |
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|
691 |
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Interest on long-term borrowings |
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|
188 |
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|
197 |
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Interest on subordinated debentures |
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|
237 |
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186 |
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Total interest expense |
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5,740 |
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|
3,350 |
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|
|
|
|
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|
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Net interest income |
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4,830 |
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4,211 |
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Provision for loan losses |
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|
325 |
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|
|
|
|
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Net interest income after provision for loan losses |
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|
4,830 |
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|
3,886 |
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|
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Noninterest Income |
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|
|
|
|
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Service fees on deposit accounts |
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|
91 |
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|
86 |
|
Gain on sale of loans |
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|
4,832 |
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|
6,889 |
|
Mortgage broker fee income |
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|
1,572 |
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|
1,516 |
|
Other income |
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|
757 |
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|
884 |
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|
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Total noninterest income |
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|
7,252 |
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|
9,375 |
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|
|
|
|
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Noninterest Expense |
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|
|
|
|
|
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Salaries and employee benefits |
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|
4,940 |
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|
5,994 |
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Occupancy and equipment |
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|
507 |
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|
603 |
|
Other operating expenses |
|
|
3,839 |
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|
4,044 |
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|
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Total noninterest expense |
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|
9,286 |
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|
10,641 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before income taxes |
|
|
2,796 |
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|
|
2,620 |
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|
|
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Income tax expense |
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|
895 |
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|
|
911 |
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NET INCOME |
|
$ |
1,901 |
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|
$ |
1,709 |
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|
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Earnings per common share: |
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Basic |
|
$ |
0.19 |
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$ |
0.22 |
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Diluted |
|
$ |
0.17 |
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|
$ |
0.18 |
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|
|
|
|
|
|
|
|
|
|
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|
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Average outstanding shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
10,080,708 |
|
|
|
7,933,850 |
|
Diluted |
|
|
11,141,358 |
|
|
|
9,530,014 |
|
See accompanying notes to consolidated financial statements (Unaudited).
- 3 -
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
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Nine Months Ended September 30, |
|
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|
2006 |
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|
2005 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
25,259 |
|
|
$ |
17,612 |
|
Interest on deposits in other banks |
|
|
282 |
|
|
|
175 |
|
Interest and dividends on securities |
|
|
3,450 |
|
|
|
1,761 |
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
28,991 |
|
|
|
19,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
11,423 |
|
|
|
6,186 |
|
Interest on short-term borrowings |
|
|
2,997 |
|
|
|
1,199 |
|
Interest on long-term borrowings |
|
|
585 |
|
|
|
694 |
|
Interest on subordinated debentures |
|
|
654 |
|
|
|
507 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
15,659 |
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
13,332 |
|
|
|
10,962 |
|
Provision for loan losses |
|
|
173 |
|
|
|
822 |
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
13,159 |
|
|
|
10,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
Service fees on deposit accounts |
|
|
247 |
|
|
|
183 |
|
Gain on sale of loans |
|
|
13,264 |
|
|
|
18,283 |
|
Mortgage broker fee income |
|
|
3,785 |
|
|
|
4,122 |
|
Other income |
|
|
2,673 |
|
|
|
2,087 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
19,969 |
|
|
|
24,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
14,489 |
|
|
|
15,770 |
|
Occupancy and equipment |
|
|
1,496 |
|
|
|
1,697 |
|
Other operating expenses |
|
|
9,110 |
|
|
|
10,829 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
25,095 |
|
|
|
28,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,033 |
|
|
|
6,519 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,703 |
|
|
|
2,271 |
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
5,330 |
|
|
$ |
4,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.61 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.53 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
8,773,268 |
|
|
|
7,924,172 |
|
Diluted |
|
|
10,112,357 |
|
|
|
9,421,536 |
|
See accompanying notes to consolidated financial statements (unaudited).
- 4 -
ACCESS NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Nine Months Ended September 30, 2006 and 2005
(In Thousands)
(Unaudited)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Income |
|
|
Total |
|
Balance, December 31, 2005 |
|
$ |
6,644 |
|
|
$ |
9,099 |
|
|
$ |
16,227 |
|
|
$ |
(785 |
) |
|
$ |
|
|
|
$ |
31,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
5,330 |
|
|
|
|
|
|
|
5,330 |
|
|
|
5,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss),
unrealized holdings gains arising
during the period, net of tax ($52) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
101 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend from DRSPP |
|
|
|
|
|
|
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
2,545 |
|
|
|
19,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,784 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
$ |
9,189 |
|
|
$ |
28,338 |
|
|
$ |
21,433 |
|
|
$ |
(684 |
) |
|
|
|
|
|
$ |
58,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
6,608 |
|
|
$ |
9,067 |
|
|
$ |
10,330 |
|
|
$ |
(7 |
) |
|
$ |
|
|
|
$ |
25,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,248 |
|
|
|
|
|
|
|
4,248 |
|
|
|
4,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss),
unrealized holdings losses arising
during the period, net of tax $255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495 |
) |
|
|
(495 |
) |
|
|
(495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for
exercise of warrants, shares |
|
|
32 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005 |
|
$ |
6,640 |
|
|
$ |
9,115 |
|
|
$ |
14,578 |
|
|
$ |
(502 |
) |
|
|
|
|
|
$ |
29,831 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements (unaudited)
- 5 -
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,330 |
|
|
$ |
4,248 |
|
Adjustments to reconcile net income to net cash (used in) |
|
|
|
|
|
|
|
|
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
178 |
|
|
|
822 |
|
Deferred tax (benefit) |
|
|
(86 |
) |
|
|
(10 |
) |
Stock Based Compensation |
|
|
46 |
|
|
|
|
|
Provision for hedging |
|
|
(51 |
) |
|
|
(107 |
) |
Net amortization (accretion) on securities |
|
|
2 |
|
|
|
|
|
Depreciation and amortization |
|
|
637 |
|
|
|
419 |
|
Loss on Disposal of assets |
|
|
1 |
|
|
|
75 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in loans held for sale |
|
|
(10,458 |
) |
|
|
(19,326 |
) |
(Increase) decrease in other assets |
|
|
(2,288 |
) |
|
|
(3,087 |
) |
Increase (decrease) in other liabilities |
|
|
(1,291 |
) |
|
|
3,063 |
|
|
|
|
|
|
|
|
Net cash (used in) operating activities |
|
$ |
(7,980 |
) |
|
$ |
(13,903 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities available for sale |
|
|
12,584 |
|
|
|
19,931 |
|
Purchases of securities available for sale |
|
|
(31,080 |
) |
|
|
(41,043 |
) |
Net (increase) in loans |
|
|
(47,771 |
) |
|
|
(60,380 |
) |
Purchases of premises and equipment |
|
|
(455 |
) |
|
|
(1,552 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
$ |
(66,722 |
) |
|
$ |
(83,044 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in demand, interest-bearing demand and
savings |
|
|
(14,596 |
) |
|
|
32,310 |
|
Net increase in time deposits |
|
|
68,427 |
|
|
|
16,999 |
|
Net increase (decrease) in securities sold under agreement to
repurchase |
|
|
5,642 |
|
|
|
(2,862 |
) |
Net increase (decrease) in short-term borrowings |
|
|
(796 |
) |
|
|
57,303 |
|
Net (decrease) in long term borrowings |
|
|
(4,161 |
) |
|
|
(4,161 |
) |
Proceeds from issuance of common stock |
|
|
21,779 |
|
|
|
80 |
|
Purchase of common stocks |
|
|
(41 |
) |
|
|
|
|
Dividends paid |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
76,130 |
|
|
$ |
99,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
1,428 |
|
|
|
2,722 |
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
23,183 |
|
|
|
30,532 |
|
|
|
|
|
|
|
|
Ending |
|
$ |
24,611 |
|
|
|
33,254 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
15,548 |
|
|
$ |
8,547 |
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
3,281 |
|
|
$ |
2,987 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale |
|
$ |
153 |
|
|
$ |
(749 |
) |
See accompanying notes to consolidated financial statements (unaudited)
- 6 -
ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 COMMENCEMENT OF OPERATIONS
Access National Corporation (the Corporation) is a bank holding company incorporated under the
laws of the Commonwealth of Virginia. The Corporation has three wholly owned subsidiaries, Access
National Bank (the Bank), which is an independent commercial bank chartered under federal laws as
a national banking association, Access Capital Trust I, and Access Capital Trust II. The
Corporation does not have any significant operations and serves primarily as the parent company for
the Bank. The Corporations income is primarily derived from dividends received from the Bank. The
amount of these dividends is determined by the Banks earnings and capital position.
The Corporation acquired all of the outstanding stock of the Bank in a statutory exchange
transaction on June 15, 2002, pursuant to an Agreement and Plan of Reorganization between the
Corporation and the Bank.
Access National Bank opened for business on December 1, 1999 and has four wholly-owned
subsidiaries: Access National Mortgage Corporation (the Mortgage Corporation) and United First
Mortgage Corporation (UFM), both Virginia corporations engaged in mortgage banking activities,
Access National Leasing Corporation, a Virginia corporation engaged in commercial and industrial
leasing services, and Access Real Estate LLC. The leasing subsidiary presently has no employees
and its affairs are managed as a part of the Banks commercial lending department. Access Real
Estate LLC is a limited liability corporation established in July, 2003 for the purpose of holding
title to the Corporations headquarters building, located at 1800 Robert Fulton Drive, Reston,
Virginia.
The Corporation formed Access Capital Trust I and Access Capital Trust II in 2002 and 2003,
respectively, for the purpose of issuing redeemable capital securities. On July 30, 2002 Access
Capital Trust I issued $4.1 million of trust preferred securities and on September 30, 2003, Access
Capital Trust II issued $6.2 million of trust preferred securities. Trust preferred securities may
be included in Tier 1 capital in an amount equal to 25% of Tier 1 capital and amounts in excess of
25% are includable as Tier 2 capital. As guarantor, the Corporation unconditionally guarantees
payment of all distributions required to be paid on the trust preferred securities.
In August 2004, The Bank acquired all of the common stock of UFM. The acquisition of UFM provided a
new location in the Richmond, Virginia market plus entry into the Fredericksburg and Staunton
markets. The new locations became branch offices of the Mortgage Corporation.
In July 2005 Access Real Estate LLC purchased an unimproved commercial building lot in Spotsylvania
County, Virginia where the Corporation is contemplating the construction of a combined banking and
mortgage center.
In August 2006, the corporation concluded a public stock offering of 2.3 million shares of common
stock that provided approximately $20 million in new capital.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with rules and regulations of the Securities and Exchange
Commission. The statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. All adjustments have
been made, which, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented. Such adjustments are all of a normal and recurring
nature. All significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to the current
period presentation. The results of operations for the three and nine months ended September 30,
2006 are not necessarily indicative of the results that may be expected for the entire year ending
December 31, 2006. These consolidated financial statements should be read in conjunction with the
Corporations audited financial statements and the notes thereto as of December 31, 2005, included
in the Corporations Annual Report for the fiscal year ended December 31, 2005.
- 7 -
NOTE 3 STOCK BASED COMPENSATION PLANS
Stock-Based Compensation Plans - On January 1, 2006, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which
requires the measurement and recognition of compensation expense for all stock-based awards made to
employees based on estimated fair values. SFAS No. 123(R) supersedes previous accounting under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees for
periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin (SAB)
No. 107, providing supplemental implementation guidance for SFAS 123(R). The Corporation has
applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
SFAS No. 123(R) requires companies to estimate the fair value of stock-based awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods. The Corporation
adopted SFAS No. 123(R) using the modified prospective application, which requires the application
of the standard starting from January 1, 2006, the first day of the current fiscal year.
The Corporations condensed consolidated financial statements for the three and nine months ended
September 30, 2006 reflect the impact of SFAS No. 123(R). Stock-based compensation expense related
to employee stock options recognized under SFAS No. 123(R) for the three and nine months ended
September 30, 2006 was $9 thousand and $46 thousand respectively and is included in other operating
expenses. The total income tax benefit recognized for share-based compensation arrangements for the
three and nine months ended September 30, 2006 was $3 thousand and $16 thousand respectively. As of
September 30, 2006, total unamortized stock-based compensation cost related to non-vested stock
options was $57 thousand, net of expected forfeitures, which is expected to be recognized over a
weighted-average period of 0.81 years.
Prior to the adoption of SFAS No. 123(R), the Corporation accounted for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, as allowed under SFAS No.
123, Accounting for Stock-Based Compensation. Under the intrinsic value method, no stock-based
compensation expense for employee stock options had been recognized in the Corporations
consolidated statements of operations because the exercise price of the Corporations stock options
granted to employees equaled the fair market value of the underlying stock at the date of grant. In
accordance with the modified prospective transition method the
Corporation used in adopting SFAS No. 123(R), the Corporations results of operations prior to fiscal 2006 have not been restated to
reflect, and do not include, the impact of
SFAS No. 123(R).
Stock-based compensation expense recognized during a period is based on the value of the portion of
stock-based awards that is ultimately expected to vest during the period. Stock-based compensation
expense recognized in the three and nine months ended September 30, 2006 included compensation
expense for stock-based awards granted prior to, but not yet vested as of December 31, 2005, based
on the fair value on the grant date estimated in accordance with the pro forma provisions of SFAS
No. 123. As stock-based compensation expense recognized for the second quarter of fiscal 2006 is
based on awards ultimately expected to vest, it has been reduced for forfeitures.
The following table illustrates the pro forma net income and earnings per share for the three
months and nine months ended September 30, 2005 as if compensation expense for stock options issued
to employees had been determined consistent with SFAS No. 123:
- 8 -
|
|
|
|
|
|
|
|
|
|
|
Three Month Ended |
|
|
Nine Month Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(In Thousands, Except Per Share Data) |
|
Net Income, as reported |
|
$ |
1,709 |
|
|
$ |
4,248 |
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation determined under fair value based method
for all awards, net of realized tax
effects |
|
|
(42 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net income |
|
$ |
1,667 |
|
|
$ |
4,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.22 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.21 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.18 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.17 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
- 9 -
NOTE 4 SECURITIES
Amortized costs and fair values of securities available for sale as of
September 30, 2006 and December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
U.S. Treasury Securities |
|
$ |
989 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
997 |
|
U.S. Government Agencies |
|
|
96,346 |
|
|
|
|
|
|
|
(964 |
) |
|
|
95,382 |
|
Mortgage Backed Securities |
|
|
1,114 |
|
|
|
|
|
|
|
(5 |
) |
|
|
1,109 |
|
Tax Exempt Municipals |
|
|
2,893 |
|
|
|
8 |
|
|
|
(9 |
) |
|
|
2,892 |
|
Taxable Municipals |
|
|
1,305 |
|
|
|
|
|
|
|
(37 |
) |
|
|
1,268 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(37 |
) |
|
|
1,463 |
|
Restricted Securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
720 |
|
FHLB Stock |
|
|
2,587 |
|
|
|
|
|
|
|
|
|
|
|
2,587 |
|
|
|
|
Total Securities |
|
$ |
107,454 |
|
|
$ |
16 |
|
|
$ |
(1,052 |
) |
|
$ |
106,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
|
|
|
( In Thousands) |
|
|
|
|
U.S. Treasury Notes |
|
$ |
1,606 |
|
|
$ |
|
|
|
$ |
(4 |
) |
|
$ |
1,602 |
|
U.S. Governmental Agencies |
|
|
76,329 |
|
|
|
|
|
|
|
(1,069 |
) |
|
|
75,260 |
|
Mortgage Backed Securities |
|
|
1,392 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
1,393 |
|
Tax Exempt Municipals |
|
|
2,895 |
|
|
|
|
|
|
|
(55 |
) |
|
|
2,840 |
|
Taxable Municipals |
|
|
1,500 |
|
|
|
|
|
|
|
(34 |
) |
|
|
1,466 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(29 |
) |
|
|
1,471 |
|
Restricted Stock - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
300 |
|
FHLB Stock |
|
|
3,439 |
|
|
|
|
|
|
|
|
|
|
|
3,439 |
|
|
|
|
|
|
$ |
88,961 |
|
|
$ |
3 |
|
|
$ |
(1,193 |
) |
|
$ |
87,771 |
|
|
|
|
- 10 -
The amortized cost and fair value of securities available for sale as of September 30, 2006 and
December 31, 2005 by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid without any penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
US Treasury & Govt. Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
23,015 |
|
|
$ |
22,841 |
|
|
$ |
3,606 |
|
|
$ |
3,570 |
|
Due after one through five years |
|
|
72,822 |
|
|
|
72,063 |
|
|
|
72,831 |
|
|
|
71,808 |
|
Due after five through ten years |
|
|
1,498 |
|
|
|
1,473 |
|
|
|
1,498 |
|
|
|
1,484 |
|
Municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five through ten years |
|
|
4,198 |
|
|
|
4,162 |
|
|
|
3,880 |
|
|
|
3,796 |
|
Due after ten through fifteen years |
|
|
|
|
|
|
|
|
|
|
515 |
|
|
|
510 |
|
Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
|
56 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
Due after one through five years |
|
|
1,058 |
|
|
|
1,053 |
|
|
|
1,392 |
|
|
|
1,393 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
1,463 |
|
|
|
1,500 |
|
|
|
1,471 |
|
Restricted Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank stock |
|
|
720 |
|
|
|
720 |
|
|
|
300 |
|
|
|
300 |
|
FHLB stock |
|
|
2,587 |
|
|
|
2,587 |
|
|
|
3,439 |
|
|
|
3,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,454 |
|
|
$ |
106,418 |
|
|
$ |
88,961 |
|
|
$ |
87,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 11 -
Investment securities available for sale that have an unrealized loss position at September 30, 2006 and December 31, 2005 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 |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Investment securities available
for sale: 9/30/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Mortgage Backed Securities |
|
|
757 |
|
|
|
(3 |
) |
|
|
211 |
|
|
|
(2 |
) |
|
|
967 |
|
|
|
(5 |
) |
U.S. Government Agencies |
|
|
25,950 |
|
|
|
(49 |
) |
|
|
69,430 |
|
|
|
(915 |
) |
|
|
95,380 |
|
|
|
(964 |
) |
Municipals-Taxable |
|
|
|
|
|
|
|
|
|
|
1,268 |
|
|
|
(37 |
) |
|
|
1,268 |
|
|
|
(37 |
) |
Municipals-Tax Exempt |
|
|
|
|
|
|
|
|
|
|
1,408 |
|
|
|
(9 |
) |
|
|
1,870 |
|
|
|
(9 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,463 |
|
|
|
(37 |
) |
|
|
1,463 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,169 |
|
|
$ |
(52 |
) |
|
$ |
73,780 |
|
|
$ |
(1,000 |
) |
|
$ |
100,948 |
|
|
$ |
(1,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Investment securities available
for sale: 12/31/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities |
|
$ |
1,602 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,602 |
|
|
$ |
(4 |
) |
Mortgage Backed Securities |
|
|
485 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
485 |
|
|
|
(2 |
) |
U.S. Government Agencies |
|
|
28,950 |
|
|
|
(377 |
) |
|
|
29,309 |
|
|
|
(691 |
) |
|
|
58,259 |
|
|
|
(1,068 |
) |
Municipals-Taxable |
|
|
1,465 |
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
1,465 |
|
|
|
(35 |
) |
Municipals-Tax Exempt |
|
|
2,840 |
|
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
2,840 |
|
|
|
(55 |
) |
CRA Mutual Fund |
|
|
1,471 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
1,471 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,813 |
|
|
$ |
(502 |
) |
|
$ |
29,309 |
|
|
$ |
(691 |
) |
|
$ |
66,122 |
|
|
$ |
(1,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of September 30, 2006 and
December 31, 2005 represents other than 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.
- 12 -
NOTE 5 LOANS
The following table presents the composition of the loan portfolio at September 30, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
|
2006 |
|
|
Total |
|
|
2005 |
|
|
Total |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Commercial |
|
$ |
47,083 |
|
|
|
11.28 |
% |
|
$ |
38,516 |
|
|
|
10.42 |
% |
Real estate non-residential |
|
|
149,335 |
|
|
|
35.79 |
|
|
|
137,423 |
|
|
|
37.17 |
|
Real estate construction |
|
|
64,392 |
|
|
|
15.43 |
|
|
|
37,054 |
|
|
|
10.02 |
|
Residential real estate |
|
|
154,935 |
|
|
|
37.13 |
|
|
|
156,185 |
|
|
|
42.24 |
|
Consumer |
|
|
1,523 |
|
|
|
0.37 |
|
|
|
555 |
|
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
417,268 |
|
|
|
100.00 |
% |
|
$ |
369,733 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
5,393 |
|
|
|
|
|
|
|
5,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
411,875 |
|
|
|
|
|
|
$ |
364,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 SEGMENT REPORTING
Access National 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 bank segment provides the mortgage 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 the prime rate. These transactions are eliminated in the consolidation
process.
Other includes the operations of Access National Corporation and Access Real Estate LLC. The
primary source of income for the Corporation is derived from dividends from the Bank and its
primary expense relates to interest on subordinated debentures. The primary source of income for
Access Real Estate is derived from rents received from the Bank and Mortgage Corporation.
- 13 -
The following table presents segment information for the three months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
10,468 |
|
|
$ |
1,019 |
|
|
$ |
31 |
|
|
$ |
(948 |
) |
|
$ |
10,570 |
|
Gain on sale of loans |
|
|
|
|
|
|
4,835 |
|
|
|
|
|
|
|
(3 |
) |
|
|
4,832 |
|
Other |
|
|
415 |
|
|
|
1,723 |
|
|
|
264 |
|
|
|
18 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,883 |
|
|
|
7,577 |
|
|
|
295 |
|
|
|
(933 |
) |
|
|
17,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,307 |
|
|
|
1,029 |
|
|
|
353 |
|
|
|
(949 |
) |
|
|
5,740 |
|
Salaries and employee benefits |
|
|
1,670 |
|
|
|
3,270 |
|
|
|
|
|
|
|
|
|
|
|
4,940 |
|
Other |
|
|
870 |
|
|
|
3,044 |
|
|
|
416 |
|
|
|
16 |
|
|
|
4,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,847 |
|
|
|
7,343 |
|
|
|
769 |
|
|
|
(933 |
) |
|
|
15,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
3,036 |
|
|
$ |
234 |
|
|
$ |
(474 |
) |
|
$ |
|
|
|
$ |
2,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
551,178 |
|
|
$ |
59,918 |
|
|
$ |
58,561 |
|
|
$ |
(52,291 |
) |
|
$ |
617,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
7,575 |
|
|
$ |
977 |
|
|
$ |
22 |
|
|
$ |
(1,013 |
) |
|
$ |
7,561 |
|
Gain on sale of loans |
|
|
|
|
|
|
6,930 |
|
|
|
|
|
|
|
(41 |
) |
|
|
6,889 |
|
Other |
|
|
393 |
|
|
|
2,161 |
|
|
|
262 |
|
|
|
(701 |
) |
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,968 |
|
|
|
10,068 |
|
|
|
284 |
|
|
|
(1,755 |
) |
|
|
16,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,096 |
|
|
|
961 |
|
|
|
307 |
|
|
|
(1,014 |
) |
|
|
3,350 |
|
Salaries and employee benefits |
|
|
1,608 |
|
|
|
4,386 |
|
|
|
|
|
|
|
|
|
|
|
5,994 |
|
Other |
|
|
1,243 |
|
|
|
3,692 |
|
|
|
407 |
|
|
|
(741 |
) |
|
|
4,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,947 |
|
|
|
9,039 |
|
|
|
714 |
|
|
|
(1,755 |
) |
|
|
13,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
2,021 |
|
|
$ |
1,029 |
|
|
$ |
(430 |
) |
|
$ |
|
|
|
$ |
2,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
497,301 |
|
|
$ |
101,599 |
|
|
$ |
36,995 |
|
|
$ |
(109,322 |
) |
|
$ |
526,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 14 -
The following table presents segment information for the nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
28,788 |
|
|
$ |
2,733 |
|
|
$ |
61 |
|
|
$ |
(2,591 |
) |
|
$ |
28,991 |
|
Gain on sale of loans |
|
|
|
|
|
|
13,280 |
|
|
|
|
|
|
|
(16 |
) |
|
|
13,264 |
|
Other revenues |
|
|
1,211 |
|
|
|
5,933 |
|
|
|
851 |
|
|
|
(1,290 |
) |
|
|
6,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
29,999 |
|
|
|
21,946 |
|
|
|
912 |
|
|
|
(3,897 |
) |
|
|
48,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,538 |
|
|
|
2,709 |
|
|
|
1,006 |
|
|
|
(2,594 |
) |
|
|
15,659 |
|
Salaries and employee benefits |
|
|
4,785 |
|
|
|
9,704 |
|
|
|
|
|
|
|
|
|
|
|
14,489 |
|
Other |
|
|
2,991 |
|
|
|
7,869 |
|
|
|
1,222 |
|
|
|
(1,303 |
) |
|
|
10,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
22,314 |
|
|
|
20,282 |
|
|
|
2,228 |
|
|
|
(3,897 |
) |
|
|
40,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,685 |
|
|
$ |
1,664 |
|
|
$ |
(1,316 |
) |
|
$ |
|
|
|
$ |
8,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
551,178 |
|
|
$ |
59,918 |
|
|
$ |
58,561 |
|
|
$ |
(52,291 |
) |
|
$ |
617,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
19,512 |
|
|
$ |
2,190 |
|
|
$ |
71 |
|
|
$ |
(2,225 |
) |
|
$ |
19,548 |
|
Gain on sale of loans |
|
|
|
|
|
|
18,386 |
|
|
|
|
|
|
|
(103 |
) |
|
|
18,283 |
|
Other |
|
|
1,205 |
|
|
|
5,302 |
|
|
|
858 |
|
|
|
(1,344 |
) |
|
|
6,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
20,717 |
|
|
|
25,878 |
|
|
|
929 |
|
|
|
(3,672 |
) |
|
|
43,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
7,922 |
|
|
|
2,022 |
|
|
|
868 |
|
|
|
(2,226 |
) |
|
|
8,586 |
|
Salaries and employee benefits |
|
|
4,320 |
|
|
|
11,450 |
|
|
|
|
|
|
|
|
|
|
|
15,770 |
|
Other |
|
|
3,199 |
|
|
|
10,117 |
|
|
|
1,107 |
|
|
|
(1,446 |
) |
|
|
12,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
15,441 |
|
|
|
23,589 |
|
|
|
1,975 |
|
|
|
(3,672 |
) |
|
|
37,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,276 |
|
|
$ |
2,289 |
|
|
$ |
(1,046 |
) |
|
$ |
|
|
|
$ |
6,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
497,301 |
|
|
$ |
101,599 |
|
|
$ |
36,995 |
|
|
$ |
(109,322 |
) |
|
$ |
526,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 15 -
NOTE 7 EARNINGS PER SHARE (EPS)
The following tables show the calculation of both Basic and Diluted earnings per share (EPS) for
the three and nine months ended September 30, 2006 and 2005 respectively. The numerator of both the
Basic and Diluted EPS is equivalent to net income. The weighted average number of shares
outstanding used in the denominator for Diluted EPS is increased over the denominator used for
Basic EPS by the effect of potentially dilutive common stock options and warrants utilizing the
treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
(In thousands, except per share data) |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,901 |
|
|
$ |
1,709 |
|
Weighted average shares outstanding |
|
|
10,080,708 |
|
|
|
7,933,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,901 |
|
|
$ |
1,709 |
|
Weighted average shares outstanding |
|
|
10,080,708 |
|
|
|
7,933,850 |
|
Stock options and warrants |
|
|
1,060,650 |
|
|
|
1,596,164 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
11,141,358 |
|
|
|
9,530,014 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
(In thousands, except per share data) |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,330 |
|
|
$ |
4,248 |
|
Weighted average shares outstanding |
|
|
8,773,268 |
|
|
|
7,924,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.61 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
5,330 |
|
|
$ |
4,248 |
|
Weighted average shares outstanding |
|
|
8,773,268 |
|
|
|
7,924,172 |
|
Stock options and warrants |
|
|
1,339,089 |
|
|
|
1,497,364 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
10,112,357 |
|
|
|
9,421,536 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.53 |
|
|
$ |
0.45 |
|
NOTE 8 DERIVATIVES
Access National Mortgage Corporation carries all derivative instruments at fair value as either
assets or liabilities in the consolidated balance sheets. Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities as amended (SFAS
133), provides
specific accounting provisions for derivative instruments that qualify for hedge accounting. The
Mortgage Corporation has not elected to apply hedge accounting to its derivative instruments as
provided in SFAS 133.
- 16 -
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 also has corresponding
forward sales commitments related to these interest rate lock commitments, which are recorded at
fair value with changes in fair value recorded in non-interest income. The market value of rate
lock commitments and best efforts contracts is not readily ascertainable with precision because
rate lock commitments and best efforts contracts are not actively traded in stand-alone markets.
The Mortgage Corporation determines the fair value of rate lock commitments and best efforts
contracts by measuring the change in the value of the underlying asset while taking into
consideration the probability that the rate lock commitments will close.
For derivative instruments not designated as hedging instruments, the derivative is recorded as a
freestanding asset or liability with the change in value being recognized in current earnings
during the period of change.
At September 30, 2006 and December 31, 2005 the Mortgage Corporation had derivative financial
instruments with a notional value of $121,636,000 and $96,809,000 respectively. The fair value of
these derivative instruments at September 30, 2006 and December 31, 2005 was $121,595,000 and
$96,731,000 respectively.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized under SFAS No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of an uncertain tax position taken or expected to be taken in a tax
return. The evaluation of an uncertain tax position in accordance with FIN 48 is a two-step
process. The first step is recognition, which requires a determination whether it is more likely
than not that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. The second
step is measurement: a tax position that meets the more-likely-than-not recognition threshold is
measured at the largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings
(or other appropriate components of equity or net assets) for that fiscal year. The Corporation is
still evaluating the applicability of FIN 48. Although that evaluation is not complete, the
Corporation anticipates that the adoption of FIN 48 on January 1, 2007 will not have a material
impact on its financial position.
On September 13, 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a potential
current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance sheet approach, with
the income statement approach focusing on new misstatements added in the current year, and the
balance sheet approach focusing on the cumulative amount of misstatement present in a companys
balance sheet. Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to either the income
statement or balance sheet approach. The Corporation has analyzed SAB 108 and determined that upon
adoption it will have no impact on its reported results of operations or financial conditions.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures
about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements
that require or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for interim periods
within those fiscal years. The Corporation is currently evaluating the potential impact, if any, of
the adoption of FASB Statement No. 157 on its consolidated financial position, results of
operations and cash flows.
- 17 -
Item 2. 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 Access National Corporation and
subsidiaries (the Corporation) for the three and nine months ended September 30, 2006 and 2005.
The consolidated financial statements and accompanying notes should be read in conjunction with
this discussion and analysis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q 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 the Corporations competitive position, competitive
actions by other financial institutions and the competitive nature of the financial services
industry and the Corporations ability to compete effectively against other financial institutions
in its banking markets; the Corporations potential growth, including its entrance or expansion
into new markets, the opportunities that may be presented to and pursued by it and the need for
sufficient capital to support that growth; the Corporations ability to manage growth; changes in
government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan
products and financial services; the strength of the economy in the Corporations target market
area, as well as general economic, market, or business conditions; changes in the quality or
composition of the Corporations loan or investment portfolios, including adverse developments in
borrower industries, decline in real estate values in the Corporations markets, or in the
repayment ability of individual borrowers or issuers; an insufficient allowance for loan losses as
a result of inaccurate assumptions; the Corporations reliance on dividends from the Bank as a
primary source of funds; the Corporations reliance on secondary sources, such as Federal Home Loan
Bank advances, sales of securities and loans, federal funds lines of credit from correspondent
banks and out-of-market time deposits, to meet the Banks liquidity needs; changes in laws,
regulations and the policies of federal or state regulators and agencies; the Corporations
mortgage loan business and the offering of non-conforming mortgage loans; and other circumstances,
many of which are beyond the Corporations control. 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.
CRITICAL ACCOUNTING POLICIES
General
The Corporations financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The financial information contained within our
statements is, to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability. Actual losses could differ significantly
from the historical factors that we monitor. Additionally, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our transactions would
be the same, the timing of events that would impact our transactions could change.
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) SFAS 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, 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 Allowance for Loan Losses below.
18
Derivative Financial Instruments Access National Mortgage Corporation carries all
derivative instruments at fair value as either assets or liabilities in the consolidated balance
sheets. SFAS 133 provides specific accounting provisions for derivative instruments that qualify
for hedge accounting. The Mortgage Corporation has not elected to apply hedge accounting to its
derivative instruments as provided in SFAS 133.
Off-Balance Sheet Items
In the ordinary course of business, the Bank issues commitments to extend credit and, at September
30, 2006, these commitments amounted to $21.5 million. These commitments do not necessarily
represent cash requirements, since many commitments are expected to expire without being drawn on.
At September 30 2006, the Bank had approximately $119.9 million in unfunded lines of credit and
letters of credit. These lines of credit, if drawn upon, would be funded from routine cash flows
and short term borrowings. As the Corporation continues the planned expansion of the loan
portfolio held for investment, the volume of commitments and unfunded lines of credit are expected
to increase accordingly.
FINANCIAL CONDITION (September 30, 2006 compared to December 31, 2005)
The Corporations assets increased $80.3 million from $537.1 million at December 31, 2005 to $617.4
million at September 30, 2006. The growth in assets occurred in loans and investments. Loans held
for investment increased $47.4 million over year end and investment securities grew by $18.6
million. Loans held for sale increased by $10.7 million. The growth in loans held for investment
is due to strong loan demand and our commitment to meeting the credit needs of our existing and new
clients. The volume of loans held for sale fluctuates as loans are being warehoused until they are
traded in the secondary market. This category of loans is also subject to volatility due to
changes in interest rates and the general economic outlook for the housing market. Management
continues to employ a strategy of attracting highly qualified professional lenders to support
future growth in the loans held for investment.
Asset growth during the period was funded by a combination of deposit growth, short term borrowings
and an increase in capital. Deposits increased $53.9 million and totaled $473.5 million at
September 30, 2006 up from $419.6 million at December 31, 2005. Shareholders equity increased $27.1
million as a result of retained earnings and approximately $21.8 million from a public stock
offering of 2.3 million shares of common stock and the exercise of stock options and warrants.
Short term borrowings at September 30, 2006 totaled $52.0, an increase of $3.8 million from
December 31, 2005. Short term borrowings are used to fund the loans held for sale activities and
to compensate for fluctuations in core deposits. In addition to short term borrowings, management
utilizes wholesale certificates of deposits as an additional funding source. The Bank concentrates
on commercial accounts and due to the nature of these accounts, balances can be subject to wide
fluctuations. In October the Bank filed applications with the regulators to open a new banking
office in Loudoun County and one in Prince William County. Both areas are experiencing exceptional
growth and the new locations will provide convenience to our existing customers as well as
providing an opportunity for expanding our deposit base. The new branches are expected to open
early in 2007.
Securities
The Corporations securities portfolio is comprised of U.S. Treasury securities, U.S. Government
Agency securities, mortgage backed securities, obligations of states and political subdivisions,
Federal Reserve and Federal Home Loan Bank stock. At September 30, 2006 the securities portfolio
totaled $106.4 million, up from $87.8 million on December 31, 2005. All securities were classified
as available for sale. Securities classified as available for sale are accounted for at fair market
value with unrealized gains and losses recorded directly to a separate component of shareholders
equity, net of associated tax effect. The Corporations securities classified as available for sale
had an unrealized loss net of deferred taxes of $0.7 million on September 30, 2006. Investment
securities are used to provide liquidity, generate income, and to temporarily supplement loan
growth as needed.
Loans
The loans held for investment portfolio constitutes the largest component of earning assets and is
comprised of commercial loans, real estate loans, construction loans, and consumer loans. These
lending activities provide access to credit to small businesses, professionals and consumers in the
greater Washington, D.C. metropolitan area. All lending activities of the Bank and its subsidiaries
are subject to the regulations and supervision of the Office of the Comptroller of Currency.
At September 30, 2006, net loans held for investment increased by $47.4 million from December 31,
2005 and totaled $411.9 million.
19
Commercial loans increased $8.6 million, real estate non-residential loan increased $11.9 million
and construction loans increased $27.3 million. See note 5 for a table that summarizes the
composition of the Corporations loan portfolio. The increase in loans is attributable to
servicing the needs of existing clients and new business originating from, referrals, community
involvement, and increased name recognition and acceptance of the Banks products and services
within the marketplace. Management intends to increase loan officer
staffing and support to facilitate continued growth in the portfolio. The following is a summary
of the Loan Portfolio Held for Investment at September 30, 2006.
Commercial Loans: Commercial Loans represent 11.3% of our held for investment portfolio.
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. We underwrite these loans based upon our assessment of the obligor(s)
ability to generate operating cash flows in the future necessary to repay the loan. To address the
risks associated with the uncertainties of future cash flows, 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 15.4% of our held for investment loan portfolio. These loans
generally fall into one of three circumstances: first, loans to individuals that are ultimately
used to acquire property and construct an owner occupied residence; second, loans to builders for
the purpose of acquiring property and constructing homes for sale to consumers; and third, 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 owners. 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 administration procedures designed to verify and
ensure progress of the project in accordance with allocated funding, project specifications and
time frames.
Real Estate Non-Residential Loans: Also known as Commercial Mortgages, loans in this
category represent 35.8% of our loan portfolio held for investment. These loans generally fall
into one of three situations in order of magnitude: 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.
Real Estate Residential Loans: This category includes loans secured by first or second
mortgages on one to four family residential properties and represent 37.1% of the portfolio. Of
this amount, the following sub-categories exist as a percentage of the whole Residential Real
Estate Loan portfolio: Home Equity Lines of Credit 17.5%; First Trust Mortgage Loans 74.0%; Loans
Secured by a Junior Trust 5.2%; Multi-family loans and loans secured by Farmland 3.3%.
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. 1-4 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 up-dated 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 less than 0.4% of our loan portfolio. Most loans
are well secured with assets other than real estate, such as marketable securities or automobiles.
Very few consumer 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 updated by our management and the Board of Directors:
repayment capacity, collateral value, savings pattern, credit history and stability.
20
Loans Held for Sale (LHFS)
Loans Held for Sale are originated by the Mortgage Corporation and carried on our books at the
lower of cost or market value. These loans are 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 loans for a profit. 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 the nine month period
ending September 30, 2006 we originated $552.1 million of loans processed in this manner.
Repayment risk of this activity is minimal since the loans are on the books for a short time
period. Loans are sold without recourse and subject to industry standard representations and warranties.
The risks associated with this activity center around borrower fraud and failure of our investors
to purchase the loans. These risks are addressed by the on-going maintenance of an extensive
quality control program, an internal audit and verification program, and a selective approval
process for investors. To date we have been able to absorb the financial impact of these risks
without material impact on our operating performance. At September 30, 2006 loans held for sale
totaled $55.7 million compared to $45.0 million at year end 2005. The increase in loans held for
sale that is primarily due to increase in loan originations during the month of September.
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. We are paid a fee for
procuring and packaging brokered loans. For the first nine months of 2006, we originated a total
volume of $153.7 million in residential mortgage loans under this type of delivery method, as
compared to $173.6 million for the same period of 2005. Brokered loans accounted for 21.8% of the
total loan volume for the first nine months of 2006.
Allowance for Loan Losses
The allowance for loan losses increased by $178 thousand which includes a $5 thousand recovery on a
previously charged off loan and totaled $5.4 million at September 30, 2006 compared to $5.2 million
at year end 2005. The allowance for loan losses at September 30, 2006 was 1.29% of total loans held
for investment compared to 1.41% at year end 2005. The allowance for Commercial loans as a percent
of the total Commercial loans amounted to 1.5%, compared to 4.0% at year end 2005. The allowance
for Construction Loans was 1.5% at September 30, 2006 and 1.3% at December 31, 2005. The allowance
for Commercial Real Estate loans was 1.6% of total Commercial Real Estate loans as of September 30,
2006 and 1.4% at year end 2005. The allowance for Residential Real Estate loans was 0.8% as a
percent of total Residential Real Estate loans at September 30, 2006 and December 31, 2005.
Although actual loan losses have been insignificant, our senior credit management, with over 60
years in collective experience in managing similar portfolios in our marketplace, concluded the
amount of our reserve and the methodology applied to arrive at the amount of the reserve is
justified and appropriate due to the lack of seasoning of the portfolio, the relatively large
dollar amount of a relatively small number of loans, portfolio growth, staffing changes, volume,
changes in individual risk ratings on new loans and trend analysis. Outside of our own analysis,
our reserve adequacy and methodology are reviewed on a regular basis by, internal audit program,
and bank regulators and such reviews have not resulted in any material adjustment to the reserve.
The Bank does not have a meaningful history of charge offs with which to establish trends in loan
losses by loan classifications. As of September 30, 2006 the total net charge offs for the six
years of operation was approximately $14 thousand. The overall allowance for loan losses is
equivalent to approximately 1.29% of total loans held for investment. The methodology as to how
the allowance was derived is a combination of specific allocations and percentages allocation of
the unallocated portion 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 loss risk of each loan within a particular classification, however, is not the same. The
methodology for arriving at the allowance is not dictated by loan classification. The methodology
as to how the allowance was derived is detailed below. Unallocated amounts included in the
allowance for loan losses have been applied to the loan classifications on a percentage basis.
Adequacy of the reserve is assessed, and appropriate expense and charge offs are taken, no less
frequently than at the close of each fiscal quarter end. The methodology by which we
systematically determine the amount of our reserve is set forth by the Board of Directors in our
Credit Policy. Under this Policy, 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 (the Specific Reserve) , 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 (the General Reserve) and, finally, an Unallocated
Reserve to cover any unforeseen factors not considered above in the appropriate magnitude. Each
of the reserve components, General, Specific and Unallocated are discussed in further detail below.
With respect to the General Reserve, 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 over 60 years; and peer data contained in statistical releases
issued by both the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation.
21
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 condition 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. As of
September 30, 2006 our evaluation of these factors supported approximately 89.1% of the total loss
reserve. As our portfolio ages and we gain more direct experience, the direct experience will
weigh more heavily in our evaluation.
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 non-performance of a particular loan, a portion of the reserve may be
specifically allocated to that individual loan. The aggregation of this loan by loan analysis
comprises the Specific Reserve and accounted for 0% of the total loss reserve at September 30,
2006.
The Unallocated Reserve is maintained to absorb risk factors outside of the General and Specific
Allocations. Maximum and minimum target limits are established by us on a quarterly basis for the
Unallocated Reserve. As of September 30, 2006 the threshold range for this component was 0.00% to
0.15% of the total loan portfolio and accounted for approximately 10.9% of the total loss reserve.
At September 30, 2006 the unallocated reserve amounted to $.6 million and equaled .14% of total
loans.
An analysis of the Corporations allowance for loan losses as of and for the period indicated is
set forth in the following tables:
Allowance for Loan Losses
(In Thousands)
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
5,215 |
|
|
Charge offs |
|
|
|
|
Recoveries |
|
|
5 |
|
Provision |
|
|
173 |
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
5,393 |
|
|
|
|
|
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
|
(Dollars In Thousands) |
Commercial |
|
$ |
47,083 |
|
|
|
11.28 |
% |
|
$ |
697 |
|
|
|
12.92 |
% |
|
|
38,516 |
|
|
|
10.42 |
% |
|
$ |
1,546 |
|
|
|
29.65 |
% |
Commercial real estate |
|
|
149,335 |
|
|
|
35.79 |
|
|
|
2,447 |
|
|
|
45.37 |
|
|
|
137,423 |
|
|
|
37.17 |
% |
|
|
1,896 |
|
|
|
36.36 |
|
Real estate construction |
|
|
64,392 |
|
|
|
15.43 |
|
|
|
958 |
|
|
|
17.76 |
|
|
|
37,054 |
|
|
|
10.02 |
% |
|
|
500 |
|
|
|
9.58 |
|
Residential real estate |
|
|
154,935 |
|
|
|
37.13 |
|
|
|
1,277 |
|
|
|
23.68 |
|
|
|
156,185 |
|
|
|
42.24 |
% |
|
|
1,267 |
|
|
|
24.30 |
|
Consumer |
|
|
1,523 |
|
|
|
0.37 |
|
|
|
14 |
|
|
|
0.27 |
|
|
|
555 |
|
|
|
15.00 |
% |
|
|
6 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
$ |
417,268 |
|
|
|
100.00 |
% |
|
$ |
5,393 |
|
|
|
100.00 |
% |
|
|
369,733 |
|
|
|
100.00 |
% |
|
$ |
5,215 |
|
|
|
100.00 |
% |
|
|
|
|
|
22
Nonperforming Loans And Past Due
At September 30, 2006 there were no loans in non accrual status. There was one loan past due more
than 30 days amounting to $914 thousand.
Deposits
Deposits are the primary source of funding loan growth. At September 30, 2006 deposits totaled
$473.5 million compared to $419.6 million on December 31, 2005, an increase of $53.9 million. Non-Interest Bearing accounts
increased $9.3 million, Savings and interest bearing accounts declined $23.9 million and Time
Deposits increased $68.4 million. The decline in Savings and interest bearing accounts was offset
by the increase in higher yielding Time Deposits. The Banks core deposit base is comprised
primarily of commercial accounts and, due to the inherent nature of these accounts; balances can be
subject to wide fluctuations.
In October the Bank applied to regulators for approval to open two new banking branches, one in
Loudoun County and one in Prince William County. The opening of these branches is scheduled for
early first quarter 2007. The new branches are expected to provide an opportunity to expand our
deposit base.
Shareholders Equity
Shareholders equity was $58.3 million at September 30, 2006. A strong capital position is vital to
the continued profitability of the Corporation. It also promotes depositor and investor confidence
and provides a solid foundation for the future growth of the organization. Shareholders equity
increased by $27.1 million during the nine months ended September 30, 2006. The increase is due to
the retention of $5.3 million in earnings and $21.8 million from the proceeds from the sale of 2.3
million shares of common stock in a public offering and the exercise of stock options and warrants,
less a $124 thousand dividend payment. Other comprehensive (loss), representing unrealized gains
and losses on available for sale securities, decreased $101 thousand net of taxes.
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. The following Risk Based Capital Analysis table outlines the
regulatory components of capital and risk based capital ratios.
23
Risk Based Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In Thousands) |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
9,189 |
|
|
$ |
6,644 |
|
Capital surplus |
|
|
28,338 |
|
|
|
9,099 |
|
Retained earnings |
|
|
21,433 |
|
|
|
16,227 |
|
Less: Net Unrealized loss on equity Securities |
|
|
(24 |
) |
|
|
(19 |
) |
Subordinated debentures |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
Total tier 1 capital |
|
|
68,936 |
|
|
|
41,951 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
5,615 |
|
|
|
4,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital |
|
$ |
74,551 |
|
|
$ |
46,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
479,386 |
|
|
$ |
388,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
604,913 |
|
|
$ |
552,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
|
|
|
|
|
|
|
|
|
|
Minimum |
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk based capital ratio |
|
|
14.38 |
% |
|
|
10.80 |
% |
|
|
4.00 |
% |
Total risk based capital ratio |
|
|
15.55 |
% |
|
|
12.06 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
11.40 |
% |
|
|
7.60 |
% |
|
|
4.00 |
% |
24
RESULTS OF OPERATIONS (September 30, 2006)
Summary
Net income for the three months and nine months ended September 30, 2006 totaled $1.9 million and
$5.3 million respectively compared to $1.7 million and $4.2 million respectively for the same
periods in 2005. Basic earnings per common share amounted to $0.19 and $0.61 per share for the
three and nine months ended September 30, 2006, compared to $0.22 and $0.54 per share for the same
periods in 2005. Diluted earnings per share were $0.17 and $0.53 for the three and nine month
period in 2006 compared to $0.18 and $0.45 per share for the same periods of 2005. Earnings per
share were impacted by a 38% increase in common shares outstanding from a public offering of 2.3
million shares and the exercise of stock options and warrants of approximately .8 million shares
which resulted in approximately $21.8 million in new capital for the Corporation.
Income before taxes for the three and nine months ended September 30, 2006 for the banking segment
was $3.0 million and $7.7 million respectively versus $2.0 million and $5.3 million respectively
for the same period in 2005. Income from the banking segment increased approximately $2.4 million
during the first nine months of 2006 compared to the same period last year. This increase in income
is attributable to the growth in earning assets. Earnings in 2006 were impacted by increased
interest expense associated with an increase in short term borrowings and higher interest rates on
deposits. Income before taxes from the mortgage segment was $234 thousand and $1.7 million for the
three months and nine months ended September 30, 2006 respectively, compared to $1.0 million and
$2.3 million for the corresponding period in 2005 respectively. The increase in income in 2006 is
due in part to a reduction in operating expenses associated with a decrease in loan originations.
The banking segment is the predominant contributor to growth and earnings. Revenue from the
mortgage segment is subject to fluctuations do to mortgage interest rates change and to the real
estate market cycle.
Interest and fees on loans increased by $7.6 million in the nine months ended September 30, 2006
over the same period of 2005 reflecting the $47.4 million increase in loans held for investment
over year end. Interest on investment securities increased $1.7 million due to $18.6 million
increase in investment securities over December 31, 2005. Noninterest income totaled $20.0 million
for the nine months ended September 30, 2006 compared to $24.7 million for the same period in 2005.
This decrease is primarily due to the decline in gains on mortgage loans held for sale. Interest
and fees on loans totaled approximately $9 million for the three months ended September 30, 2006
compared to $6.8 million for the same period in 2005, an increase $2.4 million. Income from
investment securities was up $533 thousand for the third quarter compared to the same period in
2005.
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. Our net interest
margin decreased 18 basis points during the first nine months from 3.39% in 2005 to 3.21% in 2006.
The decrease in net interest margin is due to higher interest rates on deposits and short term
borrowing rates. The decrease in net interest margin was offset by an increase in average earning
assets.
Net interest income for the nine months ended September 30, 2006 increased to $13.3 million
compared to $11.0 million for the same period in 2005. Net interest income for the third quarter
totaled $4.8 million compared to $4.2 million for the same period in 2005. Net interest income
depends upon the volume of earning assets and interest bearing liabilities and the associated
rates. Average interest earning assets increased $124.5 million from $431.5 million at September
30, 2005 to $556.0 million in 2006. The increase is attributed to the growth in average loans
which increased by approximately $80.1 million and the growth in average investment securities
which increased by $44.6 million. The yield on earning assets increased from 6.04% in 2005 to
6.96% in 2006 reflecting an increase in yield on all earning asset categories and reflects the
rising rate environment.
Total interest expense for the first nine months of 2006 increased $7.1 million over the total of
$8.6 million for the same period in 2005 as a result of increases in interest bearing deposits and
higher interest rates. Interest expense for the third quarter of 2006 was up $ 2.4 million over
the second quarter of 2005. Total interest bearing deposits averaged $358.5 million at period ended
September 30, 2006 compared to $258.4 million at September 30, 2005. Borrowed funds for nine
months ended September 30, 2006 averaged $113.7 million compared to $86.4 million for the
corresponding period in 2005. The increase in deposits and borrowings funded the growth in earning
assets. The average cost of interest bearing liabilities at September 30, 2006 was 4.42%, up 110
basis points from September 30, 2005.
25
Volume and Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2006 compared to 2005 |
|
|
Change Due To: |
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
1,716 |
|
|
$ |
1,430 |
|
|
$ |
286 |
|
Loans |
|
|
7,647 |
|
|
|
4,285 |
|
|
|
3,362 |
|
Interest bearing deposits |
|
|
107 |
|
|
|
(5 |
) |
|
|
112 |
|
|
|
|
Total Increase (Decrease) in Interest Income |
|
|
9,470 |
|
|
|
5,710 |
|
|
|
3,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
30 |
|
|
|
4 |
|
|
|
26 |
|
Money market deposit accounts |
|
|
659 |
|
|
|
(195 |
) |
|
|
854 |
|
Savings accounts |
|
|
24 |
|
|
|
9 |
|
|
|
15 |
|
Time deposits |
|
|
4,524 |
|
|
|
3,351 |
|
|
|
1,173 |
|
|
|
|
Total interest-bearing deposits |
|
|
5,237 |
|
|
|
3,169 |
|
|
|
2,068 |
|
FHLB Advances |
|
|
1,411 |
|
|
|
800 |
|
|
|
611 |
|
Securities sold under agreements to repurchase |
|
|
62 |
|
|
|
43 |
|
|
|
19 |
|
Other short-term borrowings |
|
|
325 |
|
|
|
97 |
|
|
|
228 |
|
Long-term borrowings |
|
|
(109 |
) |
|
|
(118 |
) |
|
|
9 |
|
Subordinated debentures |
|
|
147 |
|
|
|
|
|
|
|
147 |
|
|
|
|
Total Increase (Decrease) in Interest Expense |
|
|
7,073 |
|
|
|
3,991 |
|
|
|
3,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Net Interest Income |
|
$ |
2,397 |
|
|
$ |
1,719 |
|
|
$ |
678 |
|
|
|
|
26
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month |
|
|
|
Period Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars In Thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
106,588 |
|
|
$ |
3,485 |
|
|
|
4.36 |
% |
|
$ |
61,960 |
|
|
$ |
1,769 |
|
|
|
3.81 |
% |
Loans(2) |
|
|
441,509 |
|
|
|
25,259 |
|
|
|
7.63 |
% |
|
|
361,390 |
|
|
|
17,612 |
|
|
|
6.50 |
% |
Interest bearing balances |
|
|
7,936 |
|
|
|
282 |
|
|
|
4.74 |
% |
|
|
8,175 |
|
|
|
175 |
|
|
|
2.85 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
556,033 |
|
|
|
29,026 |
|
|
|
6.96 |
% |
|
|
431,525 |
|
|
|
19,556 |
|
|
|
6.04 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
10,620 |
|
|
|
|
|
|
|
|
|
|
|
10,261 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
9,626 |
|
|
|
|
|
|
|
|
|
|
|
9,068 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
5,282 |
|
|
|
|
|
|
|
|
|
|
|
5,826 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(5,340 |
) |
|
|
|
|
|
|
|
|
|
|
(4,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
20,188 |
|
|
|
|
|
|
|
|
|
|
|
20,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
576,221 |
|
|
|
|
|
|
|
|
|
|
$ |
452,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
10,966 |
|
|
|
175 |
|
|
|
2.13 |
% |
|
$ |
10,656 |
|
|
|
145 |
|
|
|
1.81 |
% |
Money market deposit accounts |
|
|
122,301 |
|
|
|
3,727 |
|
|
|
4.06 |
% |
|
|
130,199 |
|
|
|
3,068 |
|
|
|
3.14 |
% |
Savings accounts |
|
|
1,147 |
|
|
|
27 |
|
|
|
3.14 |
% |
|
|
445 |
|
|
|
3 |
|
|
|
0.90 |
% |
Time deposits |
|
|
224,073 |
|
|
|
7,494 |
|
|
|
4.46 |
% |
|
|
117,079 |
|
|
|
2,970 |
|
|
|
3.38 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
358,487 |
|
|
|
11,423 |
|
|
|
4.25 |
% |
|
|
258,379 |
|
|
|
6,186 |
|
|
|
3.19 |
% |
FHLB Advances |
|
|
64,132 |
|
|
|
2,437 |
|
|
|
5.07 |
% |
|
|
39,707 |
|
|
|
1,026 |
|
|
|
3.45 |
% |
Securities sold under agreements to
repurchase |
|
|
2,955 |
|
|
|
78 |
|
|
|
3.52 |
% |
|
|
1,020 |
|
|
|
15 |
|
|
|
1.96 |
% |
Other short-term borrowings |
|
|
15,818 |
|
|
|
483 |
|
|
|
4.07 |
% |
|
|
10,802 |
|
|
|
158 |
|
|
|
1.95 |
% |
Long-term borrowings |
|
|
20,435 |
|
|
|
585 |
|
|
|
3.82 |
% |
|
|
24,559 |
|
|
|
694 |
|
|
|
3.77 |
% |
Subordinated Debentures |
|
|
10,311 |
|
|
|
654 |
|
|
|
8.46 |
% |
|
|
10,311 |
|
|
|
507 |
|
|
|
6.56 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
472,138 |
|
|
|
15,660 |
|
|
|
4.42 |
% |
|
|
344,778 |
|
|
|
8,586 |
|
|
|
3.32 |
% |
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
61,278 |
|
|
|
|
|
|
|
|
|
|
|
76,028 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,913 |
|
|
|
|
|
|
|
|
|
|
|
4,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
537,329 |
|
|
|
|
|
|
|
|
|
|
|
425,014 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
38,892 |
|
|
|
|
|
|
|
|
|
|
|
27,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
576,221 |
|
|
|
|
|
|
|
|
|
|
$ |
452,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
2.54 |
% |
|
|
|
|
|
|
|
|
|
|
2.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4) |
|
|
|
|
|
$ |
13,366 |
|
|
|
3.21 |
% |
|
|
|
|
|
$ |
10,970 |
|
|
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income and yields are presented on a fully taxable equivalent basis using
34% tax rate. |
|
(2) |
|
Loans placed on nonaccrual status are included in loan balances |
|
(3) |
|
Interest spread is the average yield earned on earning assets, less the average
rate incurred on interest bearing liabilities. |
|
(4) |
|
Net interest margin is net interest income, expressed as a percentage of average
earning assets. |
27
Non-Interest Income
Non-interest income consists of revenue generated from other financial services and activities.
The Mortgage Corporation provides the most significant contributions towards non-interest income.
Total non-interest income was $20.0 million for the nine month period ending September 30, 2006
compared to $24.7 million for the same period in 2005, a decrease of $4.7 million. Noninterest
income for the three month period ending September 30, 2006 totaled approximately $7.3 million down
from $9.4 million for the same period of 2005. Gains on the sale of loans originated by the
Mortgage Corporation totaled $4.8 million and $13.3 million for the three and nine month periods
ending September 30, 2006, compared to $6.9 million and $18.3 million for the same periods of 2005.
Mortgage broker fees amounted to $1.6 million and $3.8 million for the three and nine month periods
ended September 30, 2006, respectively, down from $1.6 million and $4.1 million for the same
periods in 2005. Other income totaled $2.7 million, for the first nine months of 2006 up from $2.1
million for the same period in 2005. Other income totaled $757 thousand for the third quarter of
2006 down from $884 thousand for the third quarter of 2005.
Non-Interest Expense
Non-interest expense totaled $9.3 million and $25.1 million for the three and nine months ended
September 30, 2006 compared to $10.6 million and $28.3 million for the same periods in 2005.
Salaries and benefits totaled $14.5 million for the first nine months of 2006, compared to $15.8
million for the same period last year. Salaries and benefits totaled $4.9 million and $6.0 million
for the third quarter of 2006 and 2005, respectively. Other operating expenses totaled $9.1
million at September 30, 2006, down from $10.8 million at September 30, 2005. Other operating
expenses totaled $3.8 million and $4.0 million for the third quarter of 2006 and 2005,
respectively. As with other non interest income associated with the Mortgage Corporation non
interest expense also fluctuates with loan origination volumes.
Liquidity Management
Liquidity is the ability of the Corporation 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.
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 maturing interest bearing deposits with other banks are additional sources of
liquidity funding. At September 30, 2006, overnight interest bearing balances totaled $11.0
million and securities available for sale totaled $106.4 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 September 30, 2006, the Corporation had a line of
credit with the Federal Home Loan Bank of Atlanta totaling $177.6 million and outstanding variable
rate loans of $15.0 million, and an additional $18.6 million in term loans at fixed rates ranging
from 2.70% to 4.97% leaving $129.3 million available on the line. In addition to the line of
credit at the Federal Home Loan Bank, the Bank and its mortgage bank subsidiary also issue
repurchase agreements and commercial paper. As of September 30, 2006, outstanding repurchase
agreements totaled $6.6 million and commercial paper issued amounted to $48.1 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 September 30, 2006,
these lines amounted to $22.6 million. The Corporation also has $10.3 million in subordinated
debentures to support the growth of the organization.
28
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
15,000 |
|
|
$ |
36,000 |
|
FHLB long term borrowings |
|
|
18,625 |
|
|
|
21,786 |
|
Securities sold under agreements to repurchase |
|
|
6,620 |
|
|
|
977 |
|
Other short term borrowings |
|
|
30,423 |
|
|
|
11,219 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
80,979 |
|
|
$ |
80,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
64,132 |
|
|
$ |
43,375 |
|
FHLB long term borrowings |
|
|
20,435 |
|
|
|
24,028 |
|
Securities sold under agreements to repurchase |
|
|
2,955 |
|
|
|
925 |
|
Other short term borrowings |
|
|
15,819 |
|
|
|
8,520 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
113,652 |
|
|
$ |
87,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds |
|
|
4.97 |
% |
|
|
4.02 |
% |
|
|
|
|
|
|
|
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual
obligations disclosed in the Corporations annual report on Form 10-K for the fiscal year ended
December 31, 2005.
29
Item 3. 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 September 30, 2006. The table below reflects the outcome of these
analyses at September 30, 2006, assuming a flat balance sheet. According to the model run for the
period ended September 30, 2006 projecting forward over a twelve month period, an immediate 100
basis points increase in interest rates would result in a decline in net interest income by 0.10%.
An immediate 100 basis points decline in interest rates would result in a decline in net interest
income by .21%. 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 following table reflects the
Corporations earnings sensitivity profile as of September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Shock Analysis |
|
|
September 30, 2006 |
|
|
|
|
|
|
Hypothetical |
|
Hypothetical Percentage |
|
|
Change in Federal |
|
Percentage Change In |
|
Change In Economic |
|
|
Funds Target Rate |
|
Earnings |
|
Value of Equity |
|
|
|
3.00 |
% |
|
|
-0.42 |
% |
|
|
-16.94 |
% |
|
|
|
2.00 |
% |
|
|
-0.25 |
% |
|
|
-10.85 |
% |
|
|
|
1.00 |
% |
|
|
-0.10 |
% |
|
|
-5.46 |
% |
|
|
|
-1.00 |
% |
|
|
-0.21 |
% |
|
|
4.68 |
% |
|
|
|
-2.00 |
% |
|
|
-1.25 |
% |
|
|
9.10 |
% |
|
|
|
-3.00 |
% |
|
|
-2.49 |
% |
|
|
15.36 |
% |
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 periodically 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 to, as 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
commitment or a mandatory sell forward commitments 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. The Corporation did not have a
material gain or loss representing the amount of hedge ineffectiveness during the reporting periods
contained in this report.
30
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that is designed to ensure
that material information relating to the Corporation and its consolidated subsidiaries is
accumulated and communicated to management, including the Corporations Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As
required, management, with the participation of the Corporations Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Corporations
disclosure controls and procedures as of the end of the period covered by this report. Based on
this evaluation, the Corporations Chief Executive Officer and Chief Financial Officer concluded
that the Corporations disclosure controls and procedures were operating effectively to ensure that
information required to be disclosed by the Corporation in reports that it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the SEC.
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 otherwise required to be set forth in the Corporations periodic and current reports.
Changes in Internal Controls
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting 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. 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.
PART II OTHER INFORMATION
Item 1. 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.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed in Part 11 Item 1A. of Access
National Corporations 10Q for the period ended June 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
31
Item 6. Exhibits
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Exhibit No. |
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Description |
3.1 |
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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 (file number 000-49929)) |
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3.2 |
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Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K dated August 1, 2005 (file number 000-49929)) |
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10.12 |
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Underwriting Agreement, dated July 27, 2006, between the Company and Keefe, Bruyette&Woods, Inc. and Scott & Stringfellow, Inc. (incorporated by reference to Exhibit 10.12 to Form 8-K filed August 2, 2006 (file number 000-49929)). |
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31.1* |
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CEO Certification Pursuant to Rule 13a-14(a) |
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31.2* |
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CFO Certification Pursuant to Rule 13a-14(a) |
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32* |
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CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) |
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* |
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filed herewith |
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+ |
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indicates a management contract or compensatory plan or arrangement |
32
SIGNATURES
Pursuant to the requirements 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.
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Access National Corporation
(Registrant) |
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Date: November 10, 2006
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By: /s/
|
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Michael W. Clarke |
|
|
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|
|
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Michael W. Clarke |
|
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|
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President & Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 10, 2006
|
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By: /s/
|
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Charles Wimer |
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Charles Wimer |
|
|
|
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Executive Vice President & Chief Financial Officer |
|
|
|
|
(Principal Financial & Accounting Officer) |
33