e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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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 March 31, 2009
or
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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 offices) (Zip Code)
(703) 871-2100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding twelve months (or for such shorter
period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
The number of shares outstanding of Access National Corporations common stock, par value $0.835,
as of May 5, 2009 was 10,297,840 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 (unaudited) |
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Consolidated Balance Sheets, March 31, 2009 and December 31, 2008 (audited) |
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Page 2 |
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Consolidated Statements of Income, three months ended March 31, 2009 and 2008 |
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Page 3 |
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Consolidated Statements of Changes in Shareholders Equity, three months ended March
31, 2009 and 2008 |
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Page 4 |
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Consolidated Statements of Cash Flows, three months ended March 31, 2009 and 2008 |
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Page 5 |
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Notes to Consolidated Financial Statements (unaudited) |
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Page 6 |
Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Page 19 |
Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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Page 32 |
Item 4. |
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Controls and Procedures |
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Page 33 |
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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 34 |
Item1A. |
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Risk Factors |
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Page 34 |
Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Page 34 |
Item 3. |
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Defaults Upon Senior Securities |
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Page 34 |
Item 4. |
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Submission of Matters to a Vote of Security Holders |
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Page 34 |
Item 5. |
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Other Information |
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Page 34 |
Item 6. |
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Exhibits |
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Page 35 |
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Signatures |
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Page 36 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share Data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
6,483 |
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$ |
8,785 |
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Interest-bearing deposits in other banks and federal funds sold |
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66,877 |
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13,697 |
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Securities available for sale, at fair value |
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83,802 |
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91,015 |
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Loans held for sale, at fair value |
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93,829 |
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84,312 |
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Loans |
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485,623 |
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485,929 |
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Allowance for loan losses |
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(7,641 |
) |
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(7,462 |
) |
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Net loans |
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477,982 |
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478,467 |
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Premises and equipment |
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9,081 |
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9,211 |
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Accrued interest receivable |
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3,143 |
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3,193 |
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Other real estate owned |
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4,453 |
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4,455 |
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Other assets |
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9,585 |
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9,189 |
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Total assets |
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$ |
755,235 |
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$ |
702,324 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Deposits |
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Noninterest-bearing deposits |
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$ |
114,316 |
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$ |
75,000 |
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Savings and interest-bearing deposits |
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91,472 |
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95,730 |
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Time deposits |
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340,850 |
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314,671 |
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Total deposits |
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546,638 |
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485,401 |
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Other liabilities |
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Short-term borrowings |
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76,999 |
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103,575 |
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Long-term borrowings |
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54,240 |
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41,107 |
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Subordinated debentures |
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6,186 |
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6,186 |
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Other liabilities and accrued expenses |
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10,261 |
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8,110 |
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Total liabilities |
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694,324 |
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644,379 |
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SHAREHOLDERS EQUITY |
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Common stock, par value, $0.835; authorized, 60,000,000 shares; issued and
outstanding,10,294,229 shares in March 31, 2009 and 10,240,747 shares in
December 31, 2008 |
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8,596 |
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8,551 |
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Surplus |
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17,611 |
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17,410 |
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Retained earnings |
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33,719 |
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31,157 |
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Accumulated other comprehensive income (loss), net |
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985 |
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827 |
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Total shareholders equity |
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60,911 |
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57,945 |
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Total liabilities and shareholders equity |
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$ |
755,235 |
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$ |
702,324 |
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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 March 31, |
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2009 |
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2008 |
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Interest and Dividend Income |
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Interest and fees on loans |
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$ |
8,667 |
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$ |
8,903 |
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Interest on deposits in other banks |
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32 |
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265 |
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Interest and dividends on securities |
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980 |
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851 |
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Total interest and dividend income |
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9,679 |
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10,019 |
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Interest Expense |
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Interest on deposits |
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3,081 |
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4,268 |
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Interest on short-term borrowings |
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316 |
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306 |
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Interest on long-term borrowings |
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476 |
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550 |
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Interest on subordinated debentures |
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63 |
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113 |
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Total interest expense |
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3,936 |
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5,237 |
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Net interest income |
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5,743 |
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4,782 |
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Provision for loan losses |
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1,369 |
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408 |
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Net interest income after
provision for loan losses |
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4,374 |
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4,374 |
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Non-interest Income |
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Service fees on deposit accounts |
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134 |
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103 |
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Gain on sale of loans |
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13,789 |
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6,854 |
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Mortgage broker fee income |
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140 |
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|
562 |
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Other income |
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1,097 |
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923 |
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Total non-interest income |
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15,160 |
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8,442 |
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Non-interest Expense |
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Salaries and employee benefits |
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7,505 |
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5,930 |
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Occupancy and equipment |
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632 |
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636 |
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Other operating expenses |
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6,743 |
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3,615 |
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Total noninterest expense |
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14,880 |
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10,181 |
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Income before income taxes |
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4,654 |
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2,635 |
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Income tax expense |
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1,990 |
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944 |
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NET INCOME |
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$ |
2,664 |
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$ |
1,691 |
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Earnings per common share: |
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Basic |
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$ |
0.26 |
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$ |
0.16 |
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Diluted |
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$ |
0.26 |
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$ |
0.16 |
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Average outstanding shares: |
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Basic |
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10,267,385 |
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10,619,830 |
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Diluted |
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10,311,653 |
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10,795,800 |
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See accompanying notes to consolidated financial statements (Unaudited).
3
ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Three Months Ended March 31, 2009 and 2008
(In Thousands)
(Unaudited)
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Accumulated |
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Other |
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Common |
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Retained |
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Comprehensive |
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Stock |
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Surplus |
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Earnings |
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Income |
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Total |
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Balance, December 31, 2008 |
|
$ |
8,551 |
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$ |
17,410 |
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$ |
31,157 |
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|
$ |
827 |
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$ |
57,945 |
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Comprehensive income: |
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Net income |
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2,664 |
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2,664 |
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Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $82) |
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|
|
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|
158 |
|
|
|
158 |
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|
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Total comprehensive income |
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2,822 |
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Stock option exercises (27,744 shares) |
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23 |
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|
71 |
|
|
|
|
|
|
|
|
|
|
|
94 |
|
Dividend reinvestment plan (46,279 shares) |
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|
39 |
|
|
|
156 |
|
|
|
|
|
|
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|
195 |
|
Repurchased under share repurchase program
(20,542 shares) |
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(17 |
) |
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(76 |
) |
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|
(93 |
) |
Cash dividend |
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(102 |
) |
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(102 |
) |
Stock-based compensation
expense recognized in earnings |
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|
50 |
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|
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|
50 |
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Balance, March 31, 2009 |
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$ |
8,596 |
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|
$ |
17,611 |
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$ |
33,719 |
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$ |
985 |
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|
$ |
60,911 |
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Balance, December 31, 2007 |
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$ |
9,052 |
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|
$ |
21,833 |
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|
$ |
26,846 |
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|
$ |
230 |
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|
$ |
57,961 |
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|
|
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Comprehensive income: |
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|
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|
|
|
|
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Net income |
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|
|
|
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|
1,691 |
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|
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|
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|
|
1,691 |
|
Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $255) |
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|
|
|
|
|
|
|
|
|
|
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|
|
495 |
|
|
|
495 |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total comprehensive income |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,186 |
|
Stock option exercises (85,398 Shares) |
|
|
71 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
208 |
|
Dividend reinvestment plan |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Repurchased under share repurchase program
(587,387 shares) |
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|
(490 |
) |
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|
(3,787 |
) |
|
|
|
|
|
|
|
|
|
|
(4,277 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(227 |
) |
|
|
|
|
|
|
(227 |
) |
Stock-based compensation
expense recognized in earnings |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
8,633 |
|
|
$ |
18,215 |
|
|
$ |
28,310 |
|
|
$ |
725 |
|
|
$ |
55,883 |
|
|
|
|
See accompanying notes to consolidated financial statements (Unaudited).
4
ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
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|
|
|
|
|
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|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,664 |
|
|
$ |
1,691 |
|
Adjustments to reconcile net income to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Provision for loan losses net of recoveries |
|
|
1,369 |
|
|
|
408 |
|
Deferred tax expense |
|
|
383 |
|
|
|
255 |
|
Stock based compensation |
|
|
50 |
|
|
|
32 |
|
Valuation allowance on derivatives |
|
|
(175 |
) |
|
|
(359 |
) |
Net amortization accretion on securities |
|
|
(4 |
) |
|
|
(4 |
) |
Depreciation and amortization |
|
|
163 |
|
|
|
192 |
|
Loss on disposal of assets |
|
|
|
|
|
|
5 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Valuation of loans held for sale carried at fair value |
|
|
1,881 |
|
|
|
1,486 |
|
Increase in loans held for sale |
|
|
(11,398 |
) |
|
|
(20,385 |
) |
(Increase) decrease in other assets |
|
|
(659 |
) |
|
|
1 |
|
Increase in other liabilities |
|
|
2,148 |
|
|
|
1,511 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,578 |
) |
|
|
(15,167 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities available for sale |
|
|
18,027 |
|
|
|
27,238 |
|
Purchases of securities available for sale |
|
|
(10,568 |
) |
|
|
(17,213 |
) |
Net (increase) decrease in loans |
|
|
(884 |
) |
|
|
13,312 |
|
Increase in federal fund sold |
|
|
|
|
|
|
(123 |
) |
Proceeds from sale of equipment |
|
|
|
|
|
|
32 |
|
Proceeds from sales of other real estate owned |
|
|
|
|
|
|
567 |
|
Purchases of premises and equipment |
|
|
(7 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
6,568 |
|
|
|
23,705 |
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in non-interest bearing and interest-bearing
deposits |
|
|
35,058 |
|
|
|
(1,624 |
) |
Net increase (decrease) in time deposits |
|
|
26,180 |
|
|
|
(14,689 |
) |
Net (decrease) in securities sold under agreement to repurchase |
|
|
(4,961 |
) |
|
|
|
|
Net decrease in other short-term borrowings |
|
|
(21,615 |
) |
|
|
(5,409 |
) |
Net increase in long-term borrowings |
|
|
13,132 |
|
|
|
27,113 |
|
Proceeds from issuance of common stock |
|
|
289 |
|
|
|
208 |
|
Purchases of common stock |
|
|
(93 |
) |
|
|
(4,278 |
) |
Dividends Paid |
|
|
(102 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
47,888 |
|
|
|
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
50,878 |
|
|
|
9,740 |
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
22,482 |
|
|
|
19,502 |
|
|
|
|
|
|
|
|
Ending |
|
$ |
73,360 |
|
|
$ |
29,242 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
3,966 |
|
|
$ |
5,249 |
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
|
|
|
$ |
850 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale |
|
$ |
241 |
|
|
$ |
750 |
|
See accompanying notes to consolidated financial statements (Unaudited).
5
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.
The Bank opened for business on December 1, 1999 and has two active wholly-owned subsidiaries:
Access National Mortgage Corporation (the Mortgage Corporation), a Virginia corporation engaged
in mortgage banking activities, and Access Real Estate LLC. Access Real Estate LLC is a limited
liability company established in July, 2003 for the purpose of holding title to the Corporations
headquarters building, located at 1800 Robert Fulton Drive, Reston, Virginia.
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 (SEC). 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 months ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the entire year ending December 31,
2009. These consolidated financial statements should be read in conjunction with the Corporations
audited financial statements and the notes thereto as of December 31, 2008, included in the
Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
6
NOTE 3 STOCK-BASED COMPENSATION PLANS
During the first three months of 2009, the Corporation granted 99,250 stock options to officers,
directors, and employees under the 1999 Stock Option Plan (the Plan). Options granted under the
Plan have an exercise price equal to the fair market value as of the grant date. Options granted
have a vesting period of two and one half years and expire three and one half years after the issue
date. Stockbased compensation expense recognized in other operating expense during the first
three months of 2009 was approximately $50 thousand and $32 thousand for the same period in 2008.
The fair value of options is estimated on the date of grant using a Black-Scholes option-pricing
model with the assumptions noted below.
A summary of stock option activity under the Plan for the three months ended March 31, 2009 is
presented as follows:
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2009 |
|
|
|
|
|
Expected life of options granted |
|
|
3.33 |
|
Risk-free interest rate |
|
|
1.07 |
% |
Expected volatility of stock |
|
|
47 |
% |
Annual expected dividend yield |
|
|
1 |
% |
|
|
|
|
|
Fair Value of Granted Options |
|
$ |
171,393 |
|
Non-Vested Options |
|
|
259,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
Number of |
|
Weighted Avg. |
|
Remaining |
|
Aggregate Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Term |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
589,617 |
|
|
$ |
5.96 |
|
|
|
1.57 |
|
|
$ |
284,885 |
|
Granted |
|
|
99,250 |
|
|
$ |
3.99 |
|
|
|
3.33 |
|
|
$ |
|
|
Exercised |
|
|
27,744 |
|
|
$ |
3.37 |
|
|
|
0.03 |
|
|
$ |
|
|
Lapsed or Canceled |
|
|
18,800 |
|
|
$ |
7.40 |
|
|
|
0.25 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
642,323 |
|
|
$ |
5.72 |
|
|
|
1.73 |
|
|
$ |
272,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2009 |
|
|
382,348 |
|
|
$ |
5.32 |
|
|
|
1.24 |
|
|
$ |
212,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
NOTE 4 SECURITIES
Amortized costs and fair values of securities available for sale as of March 31, 2009 and
December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
U.S. Treasury Securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
U.S. Government Agencies |
|
|
69,903 |
|
|
|
1,092 |
|
|
|
|
|
|
|
70,995 |
|
Mortgage Backed Securities |
|
|
1,333 |
|
|
|
3 |
|
|
|
(73 |
) |
|
|
1,263 |
|
Municipals taxable |
|
|
5,015 |
|
|
|
495 |
|
|
|
|
|
|
|
5,510 |
|
CRA Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(23 |
) |
|
|
1,477 |
|
Restricted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities |
|
$ |
82,308 |
|
|
$ |
1,590 |
|
|
$ |
(96 |
) |
|
$ |
83,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
U.S. Treasury Securities |
|
$ |
999 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
1,006 |
|
U.S. Governmental Agencies |
|
|
74,934 |
|
|
|
1,420 |
|
|
|
|
|
|
|
76,354 |
|
Mortgage Backed Securities |
|
|
1,428 |
|
|
|
2 |
|
|
|
(39 |
) |
|
|
1,391 |
|
Municipals taxable |
|
|
5,006 |
|
|
|
3 |
|
|
|
(89 |
) |
|
|
4,920 |
|
CRA Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(52 |
) |
|
|
1,448 |
|
Restricted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities |
|
$ |
89,763 |
|
|
$ |
1,432 |
|
|
$ |
(180 |
) |
|
$ |
91,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NOTE 4 SECURITIES (continued)
The amortized cost and fair value of securities available for sale as of March 31, 2009 and
December 31, 2008 by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid without any penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
U.S. Treasury and Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
|
$ |
999 |
|
|
$ |
1,006 |
|
Due after one through five years |
|
|
10,000 |
|
|
|
10,052 |
|
|
|
25,000 |
|
|
|
25,121 |
|
Due after five through ten years |
|
|
59,903 |
|
|
|
60,943 |
|
|
|
49,934 |
|
|
|
51,233 |
|
Municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years |
|
|
905 |
|
|
|
909 |
|
|
|
905 |
|
|
|
907 |
|
Due after ten years |
|
|
4,110 |
|
|
|
4,601 |
|
|
|
4,101 |
|
|
|
4,013 |
|
Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
|
450 |
|
|
|
454 |
|
|
|
381 |
|
|
|
382 |
|
Due after one through five years |
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
128 |
|
Due after ten years |
|
|
883 |
|
|
|
809 |
|
|
|
920 |
|
|
|
881 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
1,477 |
|
|
|
1,500 |
|
|
|
1,448 |
|
Restricted Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank stock |
|
|
894 |
|
|
|
894 |
|
|
|
894 |
|
|
|
894 |
|
FHLB stock |
|
|
3,663 |
|
|
|
3,663 |
|
|
|
5,002 |
|
|
|
5,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,308 |
|
|
$ |
83,802 |
|
|
$ |
89,763 |
|
|
$ |
91,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 4 SECURITIES (continued)
Investment securities available for sale that have an unrealized loss position at March 31, 2009
and December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
March 31, 2009 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
809 |
|
|
$ |
(73 |
) |
|
$ |
809 |
|
|
$ |
(73 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,477 |
|
|
|
(23 |
) |
|
|
1,477 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,286 |
|
|
$ |
(96 |
) |
|
$ |
2,286 |
|
|
$ |
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a Loss |
|
|
Securities in a Loss |
|
|
|
|
|
|
Position for less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2008 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities |
|
$ |
881 |
|
|
$ |
(39 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
881 |
|
|
$ |
(39 |
) |
Municipals-Taxable |
|
|
4,012 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
4,012 |
|
|
|
(89 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,448 |
|
|
|
(52 |
) |
|
|
1,448 |
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,893 |
|
|
$ |
(128 |
) |
|
$ |
1,448 |
|
|
$ |
(52 |
) |
|
$ |
6,341 |
|
|
$ |
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of March 31, 2009 and December
31, 2008 is other than a temporary impairment. These unrealized losses are primarily attributable
to changes in interest rates. The Corporation has the ability to hold these securities for a time
necessary to recover the amortized cost or until maturity when full repayment would be received.
10
NOTE 5 LOANS
The following table presents the composition of the loan portfolio at March 31, 2009 and December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
|
2009 |
|
|
Total |
|
|
2008 |
|
|
Total |
|
|
|
(In Thousands) |
|
Commercial |
|
$ |
64,714 |
|
|
|
13.33 |
% |
|
$ |
69,537 |
|
|
|
14.31 |
% |
Commercial real estate |
|
|
223,090 |
|
|
|
45.94 |
|
|
|
218,539 |
|
|
|
44.97 |
|
Real estate construction |
|
|
45,755 |
|
|
|
9.42 |
|
|
|
42,600 |
|
|
|
8.77 |
|
Residential real estate |
|
|
150,684 |
|
|
|
31.03 |
|
|
|
153,740 |
|
|
|
31.64 |
|
Consumer |
|
|
1,380 |
|
|
|
0.28 |
|
|
|
1,513 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
485,623 |
|
|
|
100.00 |
% |
|
$ |
485,929 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
7,641 |
|
|
|
|
|
|
|
7,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
477,982 |
|
|
|
|
|
|
$ |
478,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 SEGMENT REPORTING
The Corporation has two reportable segments: traditional commercial banking and a mortgage banking
business. Revenues from commercial banking operations consist primarily of interest earned on loans
and investment securities and fees from deposit services. Mortgage banking operating revenues
consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in
the secondary mortgage market and loan origination fee income.
The commercial banking segment provides the mortgage 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 the 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 LLC is
derived from rents received from the Bank and Mortgage Corporation.
11
NOTE 6 SEGMENT REPORTING (continued)
The following table presents segment information for the three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
2009 |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
(In Thousands) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,197 |
|
|
$ |
915 |
|
|
$ |
10 |
|
|
$ |
(443 |
) |
|
$ |
9,679 |
|
Gain on sale of loans |
|
|
|
|
|
|
13,789 |
|
|
|
|
|
|
|
|
|
|
|
13,789 |
|
Other revenues |
|
|
376 |
|
|
|
1,258 |
|
|
|
308 |
|
|
|
(571 |
) |
|
|
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
9,573 |
|
|
|
15,962 |
|
|
|
318 |
|
|
|
(1,014 |
) |
|
|
24,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,816 |
|
|
|
390 |
|
|
|
173 |
|
|
|
(443 |
) |
|
|
3,936 |
|
Salaries and employee
benefits |
|
|
1,848 |
|
|
|
5,657 |
|
|
|
|
|
|
|
|
|
|
|
7,505 |
|
Other |
|
|
2,897 |
|
|
|
5,963 |
|
|
|
455 |
|
|
|
(571 |
) |
|
|
8,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,561 |
|
|
|
12,010 |
|
|
|
628 |
|
|
|
(1,014 |
) |
|
|
20,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,012 |
|
|
$ |
3,952 |
|
|
$ |
(310 |
) |
|
$ |
|
|
|
$ |
4,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
709,741 |
|
|
$ |
96,427 |
|
|
$ |
44,471 |
|
|
$ |
(95,404 |
) |
|
$ |
755,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
2008 |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,837 |
|
|
$ |
514 |
|
|
$ |
38 |
|
|
$ |
(370 |
) |
|
$ |
10,019 |
|
Gain on sale of loans |
|
|
|
|
|
|
6,858 |
|
|
|
|
|
|
|
(4 |
) |
|
|
6,854 |
|
Other revenues |
|
|
552 |
|
|
|
1,329 |
|
|
|
265 |
|
|
|
(558 |
) |
|
|
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,389 |
|
|
|
8,701 |
|
|
|
303 |
|
|
|
(932 |
) |
|
|
18,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,029 |
|
|
|
351 |
|
|
|
227 |
|
|
|
(370 |
) |
|
|
5,237 |
|
Salaries and employee
benefits |
|
|
1,963 |
|
|
|
3,967 |
|
|
|
|
|
|
|
|
|
|
|
5,930 |
|
Other |
|
|
1,759 |
|
|
|
3,078 |
|
|
|
384 |
|
|
|
(562 |
) |
|
|
4,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,751 |
|
|
|
7,396 |
|
|
|
611 |
|
|
|
(932 |
) |
|
|
15,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,638 |
|
|
$ |
1,305 |
|
|
$ |
(308 |
) |
|
$ |
|
|
|
$ |
2,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
584,560 |
|
|
$ |
62,560 |
|
|
$ |
43,711 |
|
|
$ |
(63,630 |
) |
|
$ |
627,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
NOTE 7 EARNINGS PER SHARE (EPS)
The following tables show the calculation of both basic and diluted earnings per share (EPS) for
the three months ended March 31, 2009 and 2008, respectively. The numerator of both the basic and
diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as
the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect
of potentially dilutive common stock options utilizing the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
|
(In thousands except for share data) |
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,664 |
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
10,267,385 |
|
|
|
10,619,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.26 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,664 |
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
10,267,385 |
|
|
|
10,619,830 |
|
Stock options and warrants |
|
|
44,268 |
|
|
|
175,970 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
10,311,653 |
|
|
|
10,795,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.26 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
13
NOTE 8 DERIVATIVES
As part of its mortgage banking activities, the Mortgage Corporation enters into interest rate lock
commitments, which are commitments to originate loans whereby the interest rate on the loan is
determined prior to funding and the customers have locked into that interest rate. The Mortgage
Corporation then either locks the loan and rate in with an investor and commits to deliver the loan
if settlement occurs (Best Efforts) or commits to deliver the locked loan in a binding
(Mandatory) delivery program with an investor. Certain loans under rate lock commitments are
covered under forward sales contracts of mortgage-backed securities (MBS). Forward sales contracts
of MBS are recorded at fair value with changes in fair value recorded in non-interest income.
Interest rate lock commitments and commitments to deliver loans to investors are considered
derivatives. The market value of interest rate lock commitments and best efforts contracts are not
readily
ascertainable with precision because they not actively traded in stand-alone markets. The Mortgage
Corporation determines the fair value of rate lock commitments and delivery contracts by measuring
the fair value of the underlying asset, which is impacted by current interest rates and taking into
consideration the probability that the rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to
the contracts may not be able to meet the terms of the contracts. The Mortgage Corporation does
not expect any counterparty to fail to meet its obligation. Additional risks inherent in mandatory
delivery programs include the risk that if the Mortgage Corporation does not close the loans
subject to interest rate risk lock commitments, they will be obligated to deliver MBS to the
counterparty under the forward sales agreement. Should this be required, the Mortgage Corporation
could incur significant costs in acquiring replacement loans or MBS and such costs could have an
adverse effect on mortgage banking operations in future periods.
Since the Mortgage Corporations derivative instruments are not designated as hedging instruments,
the fair value of the derivatives are recorded as a freestanding asset or liability with the change
in value being recognized in current earnings during the period of change. The Mortgage Corporation
has not elected to apply hedge accounting to its derivative instruments as provided in SFAS 133.
At March 31, 2009 and December 31, 2008, the Mortgage Corporation had derivative financial
instruments with a notional value of $239.2 million and $131.8 million respectively. The fair
value of these derivative instruments at March 31, 2009 and December 31, 2008 was $265 thousand and
$100 thousand respectively and included in other assets.
Included in other non-interest income at March 31, 2009 and March 31, 2008 was a net loss of $290
and a net gain of $100 thousand respectively relating to derivative instruments.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In February 2008, the FASB issued FASB Staff Position No. 157-2. The staff position delays the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring basis.
The delay is intended to allow additional time to consider the effect of various implementation
issues with regard to the application of SFAS 157. The new staff position defers the effective date
of SFAS 157 to January 1, 2009 for items within the scope of the staff position. The expiration of
the delay did not have a material impact on the Corporations consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) replaces
SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any controlling
interest; recognizes and measures goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is
effective for acquisitions by the Corporation taking place on or after January 1, 2009. Early
adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009. The Corporation will
assess the impact of SFAS 141(R) if and when a future acquisition occurs.
14
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51. SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. Before this statement, limited guidance existed for reporting non-controlling
interests (minority interest). As a result, diversity in practice exists. In some cases minority
interest is reported as a liability and in others it is reported in the mezzanine section between
liabilities and equity. Specifically, SFAS 160 requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financials statements and
separate from the parents equity. The amount of net income attributable to the non-controlling
interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a
parents ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated.
Such gain or loss will be measured using the fair value of the non-controlling equity investment on
the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interests. SFAS 160 is effective for the
Corporation on January 1, 2009. Earlier adoption is prohibited. The adoption of SFAS 160 did not
have a material impact on the Corporations consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB statement No. 133. SFAS 161 requires enhanced disclosures
about how and why an entity uses derivative instruments, how derivative instruments and related
items are accounted for under SFAS 133 and how derivative instruments and related hedged items
affect an entitys financial position, financial performance and cash flows. The new standard
became effective for the Corporation on January 1, 2009. The adoption of SFAS 161 did not have a
material impact on the Corporations consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of
Financial Instruments (FSP FAS 107-1) which amends SFAS No. 107, Disclosures about Fair Value
of Financial Instruments to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual financial statements.
This FSP also amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim reporting periods. FSP FAS
107-1 is effective for interim reporting periods ending after June 15, 2009, and will be effective
June 30, 2009, for the Corporation.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary-Impairment (FSP FAS 115-2) which amends the other-than-temporary impairment
guidance under GAAP for debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP requires that the annual disclosures in FAS 115 and FSP FAS
115-1 and FAS 124-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments be made for interim periods. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS
115-2 is effective for interim and annual reporting periods ending after June 15, 2009 and will be
effective June 30, 2009, for the Corporation. Management does not anticipate that this FSP will
have a material impact on the Corporations consolidated financial condition or results of
operations.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability has Significantly Decreased and Identifying
Transactions that are Not Orderly (FSP FAS 157-4) which provides additional guidance for
estimating fair value in accordance with SFAS No. 157 Fair Value Measurement when the volume and
level of activity for the asset or liability have significantly decreased. This FSP also includes
guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009 and will be effective
June 30, 2009, for the Corporation, and should be applied prospectively. Management does not
anticipate that this FSP will have a material impact on the Corporations consolidated financial
condition or results of operations.
NOTE 10 FAIR VALUE
Fair Value Pursuant to SFAS No. 157, Fair Value Measurements (SFAS 157), the fair value is the
exchange price in an orderly transaction, that is not a forced liquidation or distressed sale,
between market participants to sell an asset or transfer
15
a liability in the market in which the
reporting entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset/liability. The transaction to sell the asset or transfer the
liability is a hypothetical transaction at the measurement date, considered from the perspective of
a market participant that holds the asset/liability. SFAS 157 provides a consistent definition of
fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use
of market-based inputs over entity-specific inputs. In addition, SFAS 157 provides a framework for
measuring fair value and establishes a three-level hierarchy for fair value measurements based upon
the
transparency of inputs to the valuation of an asset or liability as of the measurement date. The
standard describes three levels of inputs that may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a companys own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the fair value of each type of financial
instrument:
Investment securities: The fair values for investment securities are determined by quoted
market prices from active markets (Level 1).
Residential loans held for sale: The fair value of loans held for sale is determined using
quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: Derivative instruments are used to hedge residential
mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage backed securities. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the
underlying value of mortgage loans for rate lock commitments (Level 3).
Impaired loans: The fair values of impaired loans are measured for impairment using the
fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral
may be in the form of real estate or business assets including equipment, inventory and accounts
receivable. The use of discounted cash flow models and managements best judgment are significant
inputs in arriving at the fair value measure of the underlying collateral. (Level 3).
Other real estate owned: The fair value of other real estate owned, which is included in
other assets on the balance sheet, consists of real estate that has been foreclosed. Foreclosed
real estate is recorded at the lower of fair value less selling expenses or the book balance prior
to foreclosure. Write downs are provided for subsequent declines in value and are recorded in
other non-interest expense (Level 2).
16
Assets and liabilities measured at fair value under SFAS 157 on a recurring and non-recurring
basis, including financial assets and liabilities for which the Corporation has elected the fair
value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement |
|
|
|
|
|
|
at March 31, 2009 Using |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Identical Assets |
|
Other Observable |
|
Unobservable Inputs |
Description |
|
Carrying Value |
|
(Level 1) |
|
Inputs (Level 2) |
|
(Level 3) |
|
|
|
Financial Assets-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale investment
securities (1) |
|
$ |
79,245 |
|
|
$ |
79,245 |
|
|
$ |
|
|
|
$ |
|
|
Residential loans held for sale |
|
|
93,829 |
|
|
|
|
|
|
|
93,829 |
|
|
|
|
|
Derivative assets |
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
737 |
|
Financial Liabilities-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets-Non-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (2) |
|
|
5,538 |
|
|
|
|
|
|
|
|
|
|
|
5,538 |
|
Other real estate owned (3) |
|
|
4,453 |
|
|
|
|
|
|
|
4,453 |
|
|
|
|
|
|
|
|
(1) |
|
Excludes restricted stock. |
|
(2) |
|
Represents the carrying value of loans for which adjustments are based on the appraised
value of the collateral. |
|
(3) |
|
Represents appraised value and realtor comparables less estimated selling expenses. |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are
summarized as follows for three month period ended March 31, 2009.
|
|
|
|
|
|
|
Net Derivatives |
|
|
|
(In Thousands) |
|
Balance December 31, 2008 |
|
$ |
91 |
|
Realized and unrealized gains
(losses) included in earnings |
|
|
174 |
|
Unrealized gains (losses)
included in other
comprehensive income |
|
|
|
|
Purchases, Settlements,
paydowns, and maturities |
|
|
|
|
Transfer into Level 3 |
|
|
|
|
|
|
|
|
Balance March 31, 2009 |
|
$ |
265 |
|
|
|
|
|
17
Financial instruments recorded using SFAS 159
Under SFAS 159, the Corporation may elect to report most financial instruments and certain other
items at fair value on an instrument-by-instrument basis with changes in fair value reported in net
income. After the initial adoption of SFAS 159, the election is made at the acquisition of an
eligible financial asset, financial liability or firm commitment or when certain specified
reconsideration events occur. The fair value election, with respect to an item, may not be revoked
once an election is made.
The following table reflects the differences between the fair value carrying amount of residential
mortgage loans held for sale at March 31, 2009, measured at fair value under SFAS 159 and the
aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
Contractual |
(In Thousands) |
|
Fair Value |
|
Difference |
|
Principal |
Residential mortgage loans held for sale |
|
$ |
93,829 |
|
|
$ |
1,881 |
|
|
$ |
91,948 |
|
The Corporation elected to account for residential loans held for sale to eliminate the mismatch in
recording changes in market value on derivative instruments used to hedge loans held for sale while
carrying the loans at the lower of cost or market. The change to fair value accounting for loans
held for sale resulted in a pre-tax increase in income of $612 thousand after considering loan
origination fees and costs that were previously deferred in accordance with SFAS No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases-an amendment of FASB Statements No. 13, 60, and 65 and a rescission
of FASB Statement No. 17.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Corporations consolidated
financial statements, and notes thereto, included in the Corporations Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. Operating results for the three months ended March
31, 2009 are not necessarily indicative of the results for the year ending December 31, 2009 or any
future period.
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: continued deterioration in general business and
economic conditions and in the financial markets and the impact of any policies or programs
implemented pursuant to the Emergency Economic Stabilization Act of 2008 (the EESA), as amended
by the American Recovery and Reinvestment Act of 2009 (the ARRA), branch expansion plans,
interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government,
including policies of the Office of the Comptroller of the Currency (Comptroller), the U.S.
Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal
Reserve Bank of Richmond,
the economy of Northern Virginia, including governmental spending and real estate markets, the
quality or composition of the loan or investment portfolios, demand for loan products, deposit
flows, competition, and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating the forward-looking statements contained herein,
and readers are cautioned not to place undue reliance on such statements. Any forward-looking
statement speaks only as of the date on which it is made, and we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which it is
made.
In addition, a continuation of the recent turbulence in significant portions of the global
financial markets, particularly if it worsens, could impact our performance, both directly by
affecting our revenues and the value of our assets and liabilities, and indirectly by affecting our
counterparties and the economy generally. Dramatic declines in the housing market in the past year
have resulted in significant write-downs of asset values by financial institutions in the United
States. Concerns about the stability of the U.S. financial markets generally have reduced the
availability of funding to certain financial institutions, leading to a tightening of credit,
reduction of business activity, and increased market volatility. There can be no assurance that the
EESA, the ARRA or the actions taken by the U.S. Treasury thereunder will stabilize the U.S.
financial system or alleviate the industry or economic factors that may adversely affect our
business. In addition, our business and financial performance could be impacted as the financial
industry restructures in the current environment, both by changes in the creditworthiness and
performance of our counterparties and by changes in the competitive landscape. For additional
discussion of risk factors that may cause our actual future results to differ materially from the
results indicated within forward looking statements, please see Item 1A Risk Factors of the
Corporations 2008 Form 10-K.
CRITICAL ACCOUNTING POLICIES
The Corporations consolidated financial statements have been prepared in accordance with GAAP. In
preparing the Corporations financial statements management makes estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes
that the most significant subjective judgments that it makes include the following:
19
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan
portfolio. The allowance is based on two basic principals of accounting: (i) Statement of
Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimatable and (ii) SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on
the differences between the value of collateral, present value of future cash flows or values that
are observable in the secondary market and the loan balance. An allowance for loan losses is
established through a provision for loan losses based upon industry standards, known risk
characteristics, and managements evaluation of the risk inherent in the loan portfolio and changes
in the nature and volume of loan activity. Such evaluation considers among other factors, the
estimated market value of the underlying collateral, and current economic conditions. For further
information about our practices with respect to allowance for loan losses, please see the
subsection Allowance for Loan Losses below.
Other Than Temporary Impairment of Investment Securities
The Banks investment portfolio is classified as available-for-sale. The estimated fair value of
the portfolio fluctuates due to changes in market interest rates and other factors. Changes in
estimated fair value are recorded in stockholders equity as a component of comprehensive income.
Securities are monitored to determine whether a decline in their value is other-than-temporary.
Management evaluates the investment portfolio on a quarterly basis to determine the collectability
of amounts due per the contractual terms of the investment security. Once a decline in value is
determined to be other than temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized. At March 31, 2009 there were no securities with other than
temporary impairment.
Income Taxes
The Corporation uses the liability method of accounting for income taxes. This method results in
the recognition of deferred tax assets and liabilities that are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The deferred provision
for income taxes is the result of the net change in the deferred tax asset and deferred tax
liability balances during the year. This amount combined with the current taxes payable or
refundable results in the income tax expense for the current year.
Fair Value
Fair values of financial instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on and off balance sheet
financial instruments do not include the value of anticipated future business or the values of
assets and liabilities not considered financial instruments. For additional information about our
financial assets carried at fair value, refer to Note 10 of the accompanying notes to the
consolidated financial statements.
Off-Balance Sheet Items
In the ordinary course of business, the Bank issues commitments to extend credit and, at March 31,
2009, these commitments amounted to $33.3 million. These commitments do not necessarily represent
cash requirements, since many commitments are expected to expire without being drawn on.
At March 31, 2009, the Bank had approximately $160.5 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
20
Off-Balance Sheet Items (continued)
the planned expansion of the loans held for investment portfolio, the volume of commitments and
unfunded lines of credit are expected to increase accordingly. The Bank maintains a reserve for
potential off-balance sheet credit losses that is included in other liabilities on the balance
sheet. At March 31, 2009 and December 31, 2008 the balance in this account totaled $277 thousand.
The Mortgage Corporation maintains a similar reserve for standard representations and warranties
issued in connection with loans sold that totaled $2.0 million at March 31, 2009 and $1.4 million
at December 31, 2008.
FINANCIAL CONDITION (March 31, 2009 compared to December 31, 2008)
At March 31, 2009, the Corporations assets totaled $755.2 million compared to $702.3 million at
December 31, 2008, an increase of $52.9 million. Loans held for investment totaled $485.6 million
down slightly from $485.9 million at year end 2008 primarily due to a decrease in loan demand.
Loans held for sale totaled $93.8 million, up from $84.3 million at December 31, 2008, an increase
of $9.5 million, due to lower interest rates and increased refinancing activity. Total deposits
increased $61.2 million to $546.6 million, compared to $485.4 million at December 31, 2008.
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, a
Community Reinvestment Act mutual fund and Federal Reserve Bank and FHLB stock. At March 31, 2009
the securities portfolio totaled $83.8 million, down from $91.0 million on December 31, 2008, as a
result of maturities and called securities that were not reinvested. 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. Investment securities are used to provide
liquidity, to 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 Comptroller. At March 31, 2009, loans held
for investment totaled $485.6 million, down $0.3 million from $485.9 million at December 31, 2008.
Commercial loans decreased $4.8 million and residential real estate loans decreased $3.1 million.
Commercial real estate loans increased $4.6 million and construction loans increased $3.2 million.
See Note 5 of the accompanying notes to the consolidated financial statements for a table that
summarizes the composition of the Corporations loan portfolio. The following is a summary of the
loans held for investment portfolio at March 31, 2009.
Commercial Loans: Commercial Loans represent 13.3% of the loans held for investment
portfolio as of March 31, 2009. These loans are made 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.
Commercial Real Estate Loans: Also known as commercial mortgages, loans in this category
represent 45.9% of the loans held for investment portfolio as of March 31, 2009. 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
21
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 Construction Loans: Real estate construction loans, also known as construction
and land development loans, comprise 9.4% of the loans held for investment portfolio as of March
31, 2009. These loans generally fall into one of three categories: 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 updated 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.
Residential Real Estate Loans: This category includes loans secured by first or second
mortgages on one to four family residential properties and represents 31.0% of the loans held for
investment portfolio as of March 31, 2009. Of this amount, the following sub-categories exist as a
percentage of the whole residential real estate loan portfolio: home equity lines of credit,
16.9%; first trust mortgage loans, 70.5%; junior trust loans, 10.4%; and multi-family loans and
loans secured by farmland 2.2%.
Home equity lines of credit 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 borrowers to access the equity in their home or investment property and use the
proceeds for virtually any purpose. Home equity lines of credit are most frequently secured by a
second lien on residential property. The proceeds of first trust mortgage loans are used to acquire
or refinance the primary financing on owner occupied and residential investment properties. Junior
trust loans are loans to consumers wherein the proceeds have been used for a stated consumer
purpose. Examples of consumer purposes are education, refinancing debt, or purchasing consumer
goods. The loans are generally extended in a single disbursement and repaid over a specified
period of time.
Loans in the residential real estate portfolio are underwritten to standards within a traditional
consumer framework that is periodically reviewed and updated by management and Board of Directors:
repayment source and capacity, value of the underlying property, credit history, savings pattern
and stability.
Consumer Loans: Consumer Loans make up approximately 0.3% of the loans held for investment
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 management and
the Board of Directors and takes into consideration, repayment capacity, collateral value, savings
pattern, credit history and stability.
Loans Held for Sale (LHFS)
LHFS are residential mortgage loans originated by the Mortgage Corporation 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 by the Mortgage Corporation and carried on its books until the loan is delivered
to and purchased by an investor. In the three months ended March 31, 2009 we originated $439.1
million of loans processed in this manner. Loans are sold without recourse and subject to
industry standard representations and warranties that may require the repurchase, by the Mortgage
Corporation, of loans previously sold. The repurchase risks associated with this activity center
around early payment defaults and borrower fraud. There is also a risk that loans originated may
not be purchased by our investors. The Mortgage Corporation attempts to manage these risks by the
on-going maintenance of an extensive quality control program, an internal audit and verification
program, and a selective approval process for investors and programs offered. At March 31, 2009,
LHFS at fair value totaled $93.8 million compared to $84.3 million at December 31, 2008.
22
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. The Mortgage Corporation is
paid a fee for procuring and packaging brokered loans. For the first three months of 2009, $8.4
million in residential mortgage loans were originated under this type of delivery method, as
compared to $27.9 million for the same period of 2008. Brokered loans accounted for 1.9% of the
total loan volume for the first three months of 2009 compared to 12.8% for the same period of 2008.
We
typically broker loans that do not conform to the products offered by the Mortgage Corporation and
for this reason the level of brokered loans is subject to wide fluctuations.
Allowance for Loan Losses
The allowance for loan losses totaled $7.6 million at March 31, 2009 compared to $7.5 million at
year end 2008. The allowance for loan losses is equivalent to approximately 1.6% of total
consolidated loans held for investment at March 31, 2009. The level of the allowance for loan
losses is determined by management through an ongoing detailed analysis of risk and loss potential
within the portfolio as a whole and they have concluded the amount of our reserve and the
methodology applied to arrive at the amount of the reserve is justified and appropriate. Outside of
our own analysis, our reserve adequacy and methodology are reviewed on a regular basis by an
internal audit program, and bank regulators and such reviews have not resulted in any material
adjustment to the reserve. The schedule below, Allocation of the Allowance for Loan Losses,
reflects the allocation by the different loan types. The methodology as to how the allowance was
derived is a combination of specific allocations and percentage allocations of the allowance for
loan losses, as discussed below.
The Bank has developed a comprehensive risk weighting system based on individual loan
characteristics that enables the Bank to allocate the composition of the allowance for loan losses
by types of loans. The methodology as to how the allowance was derived is detailed below. Adequacy
of the allowance is assessed monthly and increased by provisions charged to expense. Charge-offs
are taken, no less frequently than at the close of each fiscal quarter. The methodology by which we
systematically determine the amount of our allowance is set forth by the Board of Directors in our
Credit Policy, pursuant to which our Chief Credit Officer is charged with ensuring that each loan
is individually evaluated and the portfolio characteristics are evaluated to arrive at an
appropriate aggregate reserve. The results of the analysis are documented, reviewed and approved
by the Board of Directors no less than quarterly. The following elements are considered in this
analysis: loss estimates on specific problem credits, individual loan risk ratings, lending staff
changes, loan review and board oversight, loan policies and procedures, portfolio trends with
respect to volume, delinquency, composition/concentrations of credit, risk rating migration, levels
of classified credit, off-balance sheet credit exposure, any other factors considered relevant from
time to time. All loans are graded or Risk Rated individually for loss potential at the time of
origination and as warranted thereafter, but no less frequently than quarterly. Loss potential
factors are applied based upon a blend of the following criteria: our own direct experience at
this Bank; our collective management experience in administering similar loan portfolios in the
market; and peer data contained in statistical releases issued by both the Comptroller and the
Federal Deposit Insurance Corporation (FDIC).Managements collective experience at this Bank and
other banks is the most heavily weighted criterion, and the weighting is subjective and varies by
loan type, amount, collateral, structure, and repayment terms. Prevailing economic conditions
generally and within each individual borrowers business sector are considered, as well as any
changes in the borrowers own financial position and, in the case of commercial loans, management
structure and business operations. When deterioration develops in an individual credit, the loan
is placed on a Watch List and the loan is monitored more closely. All loans on the watch list
are evaluated for specific loss potential based upon either an evaluation of the liquidated value
of the collateral or cash flow deficiencies. If management believes that, with respect to a
specific loan, an impaired source of repayment, collateral impairment or a change in a debtors
financial condition presents a heightened risk of loss, the loan is classified as impaired and the
book balance of the loan is reduced to the expected liquidation value by charging the allowance for
loan losses.
23
An analysis of the Banks allowance for loan losses as of and for the periods indicated is set
forth in the following tables:
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
(In Thousands) |
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
7,462 |
|
|
$ |
7,462 |
|
|
|
|
|
|
|
|
|
|
Charge offs |
|
|
(1,195 |
) |
|
|
(87 |
) |
Recoveries |
|
|
5 |
|
|
|
123 |
|
Provision |
|
|
1,369 |
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 and 2008 |
|
$ |
7,641 |
|
|
$ |
7,906 |
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
|
(Dollars In Thousands) |
Commercial |
|
$ |
64,714 |
|
|
|
13.33 |
% |
|
$ |
1,696 |
|
|
|
22.20 |
% |
|
$ |
69,537 |
|
|
|
14.31 |
% |
|
$ |
1,816 |
|
|
|
24.34 |
% |
Commercial real estate |
|
|
223,090 |
|
|
|
45.94 |
|
|
|
3,172 |
|
|
|
41.51 |
|
|
|
218,539 |
|
|
|
44.97 |
|
|
|
2,948 |
|
|
|
39.51 |
|
Real estate
construction |
|
|
45,755 |
|
|
|
9.42 |
|
|
|
874 |
|
|
|
11.44 |
|
|
|
42,600 |
|
|
|
8.77 |
|
|
|
805 |
|
|
|
10.79 |
|
Residential real estate |
|
|
150,684 |
|
|
|
31.03 |
|
|
|
1,888 |
|
|
|
24.71 |
|
|
|
153,740 |
|
|
|
31.64 |
|
|
|
1,880 |
|
|
|
25.19 |
|
Consumer |
|
|
1,380 |
|
|
|
0.28 |
|
|
|
11 |
|
|
|
0.14 |
|
|
|
1,513 |
|
|
|
0.31 |
|
|
|
13 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
$ |
485,623 |
|
|
|
100.00 |
% |
|
$ |
7,641 |
|
|
|
100.00 |
% |
|
$ |
485,929 |
|
|
|
100.00 |
% |
|
$ |
7,462 |
|
|
|
100.00 |
% |
|
|
|
|
|
Non-performing Assets
At March 31, 2009, the Bank had non-performing assets totaling $10.0 million consisting of
non-accrual loans and other real estate owned. Non-accrual loans totaled approximately $5.5 million
and are composed of a commercial loan in the amount of $478 thousand, a commercial real estate loan
in the amount of $2.0 million, two residential construction loans totaling $2.6 million, and a real
estate residential first trust loan in the amount of $457 thousand. Other real estate owned
consists of two commercial properties totaling $4.5 million. Subsequent to March 31, 2009 a payoff
was received on one construction loan in the amount of $.6 million.
Deposits
Deposits are one of the primary sources of funding loan growth. At March 31, 2009, deposits
totaled $546.6 million compared to $485.4 million on December 31, 2008, an increase of $61.2
million. Savings and interest-bearing deposits decreased $4.3 million from December 31, 2008. Time
deposits increased $26.2 million from $314.7 million at December 31, 2008 to $340.9 million at
March 31, 2009. Non-interest-bearing deposits increased $39.3 million from $75.0 million at
December 31, 2008 to $114.3 million at March 31, 2009. The increase in non-interest-bearing
deposits is largely due to
fluctuations in balances of commercial accounts.
24
Shareholders Equity
Shareholders equity was $60.9 million at March 31, 2009 compared to approximately $57.9 million at
December 31, 2008. Shareholders equity increased by $3.0 million during the three month period
ended March 31, 2009. The increase in shareholders equity is primarily due to net income for the
three months ended March 31, 2009 of $2.7 million.
Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank
are required to maintain. These risk based capital guidelines take into consideration risk
factors, as defined by the banking regulators, associated with various categories of
assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well
capitalized, which is the highest rating.
25
The following table outlines the regulatory components of capital and risk based capital ratios.
Risk Based Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, |
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
8,596 |
|
|
$ |
8,551 |
|
|
|
|
|
Capital surplus |
|
|
17,611 |
|
|
|
17,411 |
|
|
|
|
|
Retained earnings |
|
|
33,719 |
|
|
|
31,157 |
|
|
|
|
|
Less: Net unrealized loss on equity securities |
|
|
(15 |
) |
|
|
(34 |
) |
|
|
|
|
Subordinated debentures |
|
|
6,000 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
|
65,911 |
|
|
|
63,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures not included in Tier 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
6,741 |
|
|
|
6,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital |
|
$ |
72,652 |
|
|
$ |
69,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
538,086 |
|
|
$ |
532,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
733,758 |
|
|
$ |
649,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
Regulatory Minimum |
Tier 1 risk based capital ratio |
|
|
12.25 |
% |
|
|
11.85 |
% |
|
|
4.00 |
% |
Total risk based capital ratio |
|
|
13.50 |
% |
|
|
13.11 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
8.98 |
% |
|
|
9.71 |
% |
|
|
4.00 |
% |
RESULTS OF OPERATIONS
Summary
Net income for the three months ended March 31, 2009 totaled $2.7 million, compared to $1.7 million
for the same period in 2008, an increase of 58%. Diluted earnings per share were $0.26 for the
three month period ended March 31, 2009 compared to $0.16 for the same period in 2008. The quarter
was highlighted with strong earnings contributed by the Mortgage Corporation and continued
profitability of commercial banking operations. Earnings were impacted during the first quarter of
2009 by the provision for loan losses of $1.4 million, up from $408 thousand for the same period in
2008.
26
Net Interest Income
Net interest income, the principal source of earnings, is the amount of income generated by earning
assets (primarily loans and investment securities) less the interest expense incurred on
interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income
increased $961 thousand for the three months ended March 31, 2009 over the same period in 2008. Net
interest margin increased from 3.19% in first quarter of 2008 to 3.24% for the same period in 2009.
The yield on interest earning assets decreased 1.22% from 6.68% for the first quarter of 2008 to
5.46% for the same period in 2009. The cost of interest-bearing liabilities decreased 1.5% from
4.19% for the first quarter of 2008 to 2.69% during the same period in 2009. Average earning
assets for the three month period ending March 31, 2009 totaled $708.4 million compared to $600.3
million for the same period in 2008, an increase of $108.1 million. The increase in average
earning assets is due to a $7.0 million increase in investment securities, a $59.0 million increase
in loans, and a $42.1 million increase in interest-bearing balances.
Total interest expense for the three months ended March 31, 2009 decreased approximately $1.3
million from $5.2 million in 2008 to $3.9 million. Total interest-bearing deposits averaged
approximately $453.7 million for the three month period ended March 31, 2009 compared to $402.9
million for the same three month period in 2008. Borrowed funds for the quarter ended March 31,
2009 averaged $131.7 million compared to $96.5 million for the corresponding period in 2008. The
average cost of interest-bearing deposits and liabilities for the three months ended March 31, 2009
was 2.69%, down from 4.19% during the three months ended March 31, 2008. The decrease in interest
expense is primarily due to lower interest rates.
27
The following table presents volume and rate analysis for the three months ended March 31, 2009 and
2008:
Volume and Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 compared to 2008 |
|
|
Change Due To: |
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
|
(In Thousands) |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
117 |
|
|
$ |
87 |
|
|
$ |
30 |
|
Loans |
|
|
(236 |
) |
|
|
997 |
|
|
|
(1,233 |
) |
Interest-bearing deposits |
|
|
(233 |
) |
|
|
151 |
|
|
|
(384 |
) |
|
|
|
Total Increase (Decrease) in Interest Income |
|
|
(352 |
) |
|
|
1,235 |
|
|
|
(1,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
(6 |
) |
|
|
9 |
|
|
|
(15 |
) |
Money market deposit accounts |
|
|
(670 |
) |
|
|
(280 |
) |
|
|
(390 |
) |
Savings accounts |
|
|
(26 |
) |
|
|
19 |
|
|
|
(45 |
) |
Time deposits |
|
|
(485 |
) |
|
|
928 |
|
|
|
(1,413 |
) |
|
|
|
Total interest-bearing deposits |
|
|
(1,187 |
) |
|
|
676 |
|
|
|
(1,863 |
) |
FHLB Advances |
|
|
95 |
|
|
|
126 |
|
|
|
(31 |
) |
Securities sold under agreements to
repurchase |
|
|
(43 |
) |
|
|
47 |
|
|
|
(90 |
) |
Other short-term borrowings |
|
|
(42 |
) |
|
|
33 |
|
|
|
(75 |
) |
Long-term borrowings |
|
|
(74 |
) |
|
|
12 |
|
|
|
(86 |
) |
Subordinated debentures |
|
|
(50 |
) |
|
|
|
|
|
|
(50 |
) |
|
|
|
Total Increase (Decrease) in Interest
Expense |
|
|
(1,301 |
) |
|
|
894 |
|
|
|
(2,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Net Interest Income |
|
$ |
949 |
|
|
$ |
341 |
|
|
$ |
608 |
|
|
|
|
28
Yields on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month |
|
|
Period Ended March 31, |
|
|
2009 |
|
2008 |
|
|
Average |
|
Income / |
|
Yield / |
|
Average |
|
Income / |
|
Yield / |
|
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
|
(Dollars In Thousands) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
78,135 |
|
|
$ |
980 |
|
|
|
5.02 |
% |
|
$ |
71,106 |
|
|
$ |
863 |
|
|
|
4.85 |
% |
Loans(2) |
|
|
553,531 |
|
|
|
8,667 |
|
|
|
6.26 |
% |
|
|
494,504 |
|
|
|
8,903 |
|
|
|
7.20 |
% |
Interest-bearing balances |
|
|
76,785 |
|
|
|
32 |
|
|
|
0.17 |
% |
|
|
34,668 |
|
|
|
265 |
|
|
|
3.06 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
708,451 |
|
|
|
9,679 |
|
|
|
5.46 |
% |
|
|
600,278 |
|
|
|
10,031 |
|
|
|
6.68 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
5,470 |
|
|
|
|
|
|
|
|
|
|
|
6,850 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
13,620 |
|
|
|
|
|
|
|
|
|
|
|
9,668 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
13,912 |
|
|
|
|
|
|
|
|
|
|
|
7,941 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(7,695 |
) |
|
|
|
|
|
|
|
|
|
|
(7,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
25,307 |
|
|
|
|
|
|
|
|
|
|
|
17,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
733,758 |
|
|
|
|
|
|
|
|
|
|
$ |
617,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
11,743 |
|
|
$ |
27 |
|
|
|
0.92 |
% |
|
$ |
8,847 |
|
|
$ |
33 |
|
|
|
1.49 |
% |
Money market deposit accounts |
|
|
71,197 |
|
|
|
240 |
|
|
|
1.35 |
% |
|
|
118,841 |
|
|
|
910 |
|
|
|
3.06 |
% |
Savings accounts |
|
|
4,663 |
|
|
|
17 |
|
|
|
1.46 |
% |
|
|
2,754 |
|
|
|
43 |
|
|
|
6.25 |
% |
Time deposits |
|
|
366,079 |
|
|
|
2,797 |
|
|
|
3.06 |
% |
|
|
272,489 |
|
|
|
3,282 |
|
|
|
4.82 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
453,682 |
|
|
|
3,081 |
|
|
|
2.72 |
% |
|
|
402,931 |
|
|
|
4,268 |
|
|
|
4.24 |
% |
FHLB advances |
|
|
23,859 |
|
|
|
221 |
|
|
|
3.71 |
% |
|
|
10,750 |
|
|
|
126 |
|
|
|
4.69 |
% |
Securities sold under agreements to repurchase and fed fund purchased |
|
|
26,695 |
|
|
|
38 |
|
|
|
0.57 |
% |
|
|
13,080 |
|
|
|
81 |
|
|
|
2.48 |
% |
Other short-term borrowings |
|
|
24,038 |
|
|
|
57 |
|
|
|
0.95 |
% |
|
|
16,646 |
|
|
|
99 |
|
|
|
2.38 |
% |
FHLB Long-term borrowings |
|
|
34,623 |
|
|
|
305 |
|
|
|
3.52 |
% |
|
|
49,831 |
|
|
|
550 |
|
|
|
4.41 |
% |
Senior unsecured term note |
|
|
16,331 |
|
|
|
171 |
|
|
|
4.19 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
Subordinated Debentures |
|
|
6,186 |
|
|
|
63 |
|
|
|
4.07 |
% |
|
|
6,186 |
|
|
|
113 |
|
|
|
7.31 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
585,414 |
|
|
|
3,936 |
|
|
|
2.69 |
% |
|
|
499,424 |
|
|
|
5,237 |
|
|
|
4.19 |
% |
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
79,705 |
|
|
|
|
|
|
|
|
|
|
|
55,348 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
8,346 |
|
|
|
|
|
|
|
|
|
|
|
3,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
673,465 |
|
|
|
|
|
|
|
|
|
|
|
558,553 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
60,293 |
|
|
|
|
|
|
|
|
|
|
|
58,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
733,758 |
|
|
|
|
|
|
|
|
|
|
$ |
617,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
2.78 |
% |
|
|
|
|
|
|
|
|
|
|
2.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4)* |
|
|
|
|
|
$ |
5,743 |
|
|
|
3.24 |
% |
|
|
|
|
|
$ |
4,794 |
|
|
|
3.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
29
Non-interest Income
Non-interest income consists of revenue generated from financial services and activities other than
lending and investing. The Mortgage Corporation provides the most significant contributions to
non-interest income. Total non-interest income was $15.2 million for the three month period ended
March 31, 2009 compared to $8.4 million for the same period in 2008; the increase is primarily due
to an increase in gains on sale of loans. Gains on the sale of loans originated by the Mortgage
Corporation totaled $13.8 million for the three month period ended March 31, 2009, up from $6.9
million for the same period of 2008 as a result of an increase of $249.7 million in loans
originated during the first quarter of 2009.
Non-interest Expense
Non-interest expense totaled $14.9 million for the first quarter of 2009, compared to $10.2 million
for the same period in 2008. Salaries and employee benefits totaled $7.5 million for the three
month period ended March 31, 2009, compared to $5.9 million for the same period last year,
primarily due to a increase in commissions as a result of the increase in mortgage loan
originations. Other operating expenses totaled approximately $6.7 million for the first quarter of
2009, up from $3.6 million for the same period in 2008, an increase of $3.1 million. The increase
is primarily attributable to an increase in management fees associated with the operation of
certain offices of the Mortgage Corporation and the increase in loan production. Advertising
expenses relating to the Mortgage Corporation also contributed to the increase in other operating
expense.
The table below provides the composition of other operating expenses.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
Advertising and promotional expense |
|
$ |
1,304 |
|
|
$ |
857 |
|
Investor fees |
|
|
430 |
|
|
|
255 |
|
Management fees |
|
|
2,078 |
|
|
|
466 |
|
Provision for losses on loans sold |
|
|
966 |
|
|
|
460 |
|
Buy down expense |
|
|
240 |
|
|
|
150 |
|
Business and franchise tax |
|
|
112 |
|
|
|
87 |
|
Accounting and auditing service |
|
|
153 |
|
|
|
123 |
|
Consulting fees |
|
|
74 |
|
|
|
77 |
|
OREO expense |
|
|
173 |
|
|
|
|
|
Credit report expense |
|
|
102 |
|
|
|
65 |
|
Data processing |
|
|
134 |
|
|
|
130 |
|
FDIC insurance expense |
|
|
167 |
|
|
|
86 |
|
Other |
|
|
810 |
|
|
|
859 |
|
|
|
|
|
|
|
|
|
|
$ |
6,743 |
|
|
$ |
3,615 |
|
|
|
|
|
|
|
|
Liquidity Management
Liquidity is the ability of the Corporation to meet current and future cash flow requirements. The
liquidity of a financial institution reflects its ability to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining the Corporations ability to meet the daily cash flow
requirements of both depositors and borrowers.
30
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 interest-bearing deposits with other banks provide an additional source of liquidity
funding. At March 31, 2009, overnight interest-bearing balances totaled $66.9 million compared to
$13.7 at December 31, 2008.
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 March 31, 2009, the Bank had $118.7 million
available under a line of credit with the FHLB and had outstanding in short-term loans of $27.5
million, and an additional $24.2 million in term loans at fixed rates ranging from 2.55% to 5.07%
leaving $67.0 million available on the line. In addition to the line of credit at the FHLB, the
Bank and its mortgage bank subsidiary also issue repurchase agreements and commercial paper. As of
March 31, 2009, outstanding repurchase agreements totaled approximately $26.4 million and
commercial paper issued and short-term borrowings amounted to $23.1 million. The interest rates on
these instruments are variable and subject to change daily. The Bank also maintains federal funds
lines of credit with its correspondent banks and, at March 31, 2009, these lines amounted to $22.6
million. The Corporation also has $6.2 million in subordinated debentures to support the growth of
the organization.
On February 11, 2009 the Bank issued $30.0 million in term debt under the FDICs Temporary
Liquidity Guarantee Program that is backed by the full faith and credit of the United States. The
note bears interest at 2.74% plus a 1% guarantee fee and matures February 15, 2012. The proceeds
were used to supplement traditional sources of liquidity and to provide funding for loans.
31
The following table presents the composition of borrowings at March 31, 2009 and December 31, 2008.
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
27,464 |
|
|
$ |
44,333 |
|
FHLB long-term borrowings |
|
|
24,244 |
|
|
|
41,107 |
|
Securities sold under agreements to
repurchase and federal funds purchased |
|
|
26,426 |
|
|
|
31,388 |
|
Other short-term borrowings |
|
|
23,109 |
|
|
|
27,854 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,186 |
|
Senior unsecured term note |
|
|
29,996 |
|
|
|
|
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
137,425 |
|
|
$ |
150,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars In Thousands) |
|
Average Balances |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
23,859 |
|
|
$ |
13,524 |
|
FHLB long-term borrowings |
|
|
34,623 |
|
|
|
54,173 |
|
Securities sold under agreements to
repurchase and federal funds purchased |
|
|
26,695 |
|
|
|
16,433 |
|
Other short-term borrowings |
|
|
24,038 |
|
|
|
20,697 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,186 |
|
Senior unsecured term note |
|
|
16,331 |
|
|
|
|
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
131,732 |
|
|
$ |
111,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds |
|
|
2.59 |
% |
|
|
3.32 |
% |
|
|
|
|
|
|
|
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, 2008.
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 March 31, 2009. The table below reflects the outcome of these
analyses at March 31, 2009, assuming budgeted growth in the balance sheet. According to the model
run for the period ended March 31, 2009, and projecting forward over a twelve month period, an
immediate 100 basis point increase in interest rates would result in an increase in net interest
income of 1.75%. Modeling for an immediate 100 basis point decrease in interest rates has been
suspended due to the current rate environment. While management carefully monitors the exposure to
changes in interest rates and takes actions as warranted to mitigate any adverse impact, there can
be no assurance about the actual effect of interest rate changes on net interest income.
32
The following table reflects the Corporations earnings sensitivity profile as of March 31, 2009.
March 31, 2009
|
|
|
|
|
|
|
|
|
Hypothetical Percentage |
Change in Federal |
|
Hypothetical Percentage |
|
Change in Economic |
Funds Target Rate |
|
Change in Earnings |
|
Value of Equity |
3.00%
|
|
6.45%
|
|
-5.59% |
2.00%
|
|
3.98%
|
|
-4.19% |
1.00%
|
|
1.75%
|
|
-2.58% |
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 its 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 commitment to economically hedge the changes in fair value
of the loan due to changes in market interest rates. Failure to effectively monitor, manage and
hedge the interest rate risk associated with the mandatory commitments subjects the Corporation to
potentially significant market risk.
Throughout the lock period, the changes in the market value of interest rate lock commitments, best
efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are
included in the statement of operations in other income. 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporations management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Corporations disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls
and procedures are effective as of the end of the period covered by this report to ensure that
information required to be disclosed in the reports that the Corporation files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms, and that such information is accumulated and communicated to the
Corporations management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
the Corporations disclosure controls and procedures will detect or uncover every situation
involving the failure of persons within the Corporation to disclose material information required
to be set forth in the Corporations periodic and current reports.
Changes in Internal Control
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in our internal control over
financial reporting occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
33
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 our risk factors from those disclosed in the Corporations
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases the Corporation made of its
common shares during the first quarter of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
|
(d) Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
of Shares that may |
|
|
|
(a) Total Number of |
|
|
(b) Average Price |
|
|
Part of Publicly |
|
|
yet be Purchased |
|
Period |
|
Shares Purchased |
|
|
Paid Per Share |
|
|
Announced Plan |
|
|
Under the Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 January 31, 2009 |
|
|
2,086 |
|
|
|
4.79 |
|
|
|
2,086 |
|
|
|
427,454 |
|
February 1 February 28,
2009 |
|
|
8,219 |
|
|
|
4.43 |
|
|
|
8,219 |
|
|
|
419,235 |
|
March 1 March 31, 2009 |
|
|
10,237 |
|
|
|
4.42 |
|
|
|
10,237 |
|
|
|
408,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,542 |
|
|
$ |
4.47 |
|
|
|
20,542 |
|
|
|
425,423 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
34
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of Access
National Corporation (incorporated by reference to Exhibit 3.1
to Form 8-K filed July 18, 2006 (file number 000-49929)) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Access National Corporation
(incorporated by reference to Exhibit 3.2 to Form 8-K filed
October 24, 2007 (file number 000-49929)) |
|
|
|
4.0
|
|
Certain instruments relating to long-term debt as to which the
total amount of securities authorized thereunder does not
exceed 10% of Access National Corporations total assets have
been omitted in accordance with Item 601(b)(4)(iii) of
Regulation S-K. The registrant will furnish a copy of any
such instrument to the Securities and Exchange Commission upon
its request. |
|
|
|
31.1*
|
|
CEO Certification Pursuant to Rule 13a-14(a) |
|
|
|
31.2*
|
|
CFO Certification Pursuant to Rule 13a-14(a) |
|
|
|
32*
|
|
CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. § 1350) |
35
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.
|
|
|
|
|
|
Access National Corporation
(Registrant)
|
|
Date: May 14, 2009 |
By: |
/s/ Michael W. Clarke
|
|
|
|
Michael W. Clarke |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 14, 2009 |
By: |
/s/ Charles Wimer
|
|
|
|
Charles Wimer |
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer) |
|
|
36