e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2007
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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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) o Yes þ No
The number of shares outstanding of Access National Corporations common stock, par value $.835, as
of May 11, 2007 was 11,997,487 shares.
Table of Contents
ACCESS NATIONAL CORPORATION
FORM 10-Q
INDEX
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PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements (unaudited) |
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Consolidated Balance Sheets March 31, 2007 and December 31, 2006 |
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Page 2 |
Consolidated Statements of Income, Three months ended March 31, 2007 and 2006 |
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Page 3 |
Consolidated Statements of Changes in Shareholders Equity Three Months Ended March 31, 2007 and 2006 |
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Page 4 |
Consolidated Statements of Cash Flows Three Months Ended March 31, 2007 and 2006 |
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Page 5 |
Notes to Consolidated Financial Statements |
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Page 6 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Page 15 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Page 27 |
Item 4. Controls and Procedures |
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Page 28 |
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PART II OTHER INFORMATION |
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Item 1. Legal Proceedings |
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Page 28 |
Item 1A. Risk Factors |
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Page 28 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Page 28 |
Item 3. Defaults Upon Senior Securities |
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Page 28 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Page 28 |
Item 5. Other Information |
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Page 28 |
Item 6. Exhibits |
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Page 29 |
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Signatures |
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Page 30 |
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share Data)
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March 31 |
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December 31, |
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2007 |
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2006 (a) |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
9,511 |
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$ |
11,974 |
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Interest bearing deposits in other banks |
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24,670 |
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15,391 |
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Securities available for sale, at fair value |
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93,593 |
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105,163 |
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Loans held for sale |
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67,429 |
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65,320 |
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Loans, net of allowance for loan losses of $5,746 and $5,452 respectively |
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451,919 |
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428,142 |
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Premises and equipment |
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9,842 |
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9,598 |
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Other assets |
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10,240 |
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9,194 |
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Total assets |
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$ |
667,204 |
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$ |
644,782 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Deposits
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Non-interest bearing deposits |
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$ |
91,537 |
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$ |
79,223 |
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Savings and interest-bearing deposits |
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114,282 |
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120,309 |
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Time deposits |
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254,868 |
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239,400 |
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Total deposits |
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460,687 |
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438,932 |
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Other liabilities
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Short-term borrowings |
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82,909 |
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84,951 |
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Long-term borrowings |
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44,435 |
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42,572 |
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Subordinated debentures |
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10,311 |
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10,311 |
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Other liabilities |
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4,554 |
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5,721 |
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Total liabilities |
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602,896 |
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582,487 |
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SHAREHOLDERS EQUITY |
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Common stock, par value, $0.835; authorized, 60,000,000 shares;
issued and outstanding,12,020,587 shares at March 31, 2007 and 11,816,929 shares at December 31, 2006 |
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10,037 |
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9,867 |
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Surplus |
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29,796 |
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29,316 |
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Retained earnings |
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24,847 |
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23,641 |
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Accumulated other comprehensive income (loss), net |
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(372 |
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(529 |
) |
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Total shareholders equity |
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64,308 |
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62,295 |
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Total liabilities and shareholders equity |
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$ |
667,204 |
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$ |
644,782 |
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(a) |
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The condensed consolidated balance sheet at December 31, 2006 was derived from audited
consolidated financial
statements. |
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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2007 |
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2006 |
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Interest and Dividend Income |
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Interest and fees on loans |
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$ |
9,822 |
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$ |
7,495 |
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Interest on deposits in other banks |
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188 |
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99 |
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Interest and dividends on securities |
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1,163 |
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1,051 |
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Total interest and dividend income |
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11,173 |
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8,645 |
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Interest Expense |
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Interest on deposits |
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4,008 |
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3,299 |
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Interest on short-term borrowings |
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1,399 |
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846 |
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Interest on long-term borrowings |
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481 |
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202 |
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Interest on subordinated debentures |
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229 |
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201 |
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Total interest expense |
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6,117 |
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4,548 |
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Net interest income |
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5,056 |
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4,097 |
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Provision for loan losses |
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291 |
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124 |
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Net interest income after provision for loan losses |
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4,765 |
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3,973 |
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Noninterest Income |
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Service fees on deposit accounts |
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102 |
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74 |
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Gain on sale of loans |
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5,393 |
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4,678 |
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Mortgage broker fee income |
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1,279 |
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866 |
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Other income |
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1,205 |
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476 |
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Total noninterest income |
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7,979 |
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6,094 |
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Noninterest Expense |
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Salaries and employee benefits |
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5,219 |
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4,706 |
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Occupancy and equipment |
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613 |
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518 |
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Other operating expenses |
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4,953 |
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2,383 |
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Total noninterest expense |
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10,785 |
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7,607 |
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Income before income taxes |
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1,959 |
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2,460 |
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Income tax expense |
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633 |
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837 |
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NET INCOME |
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$ |
1,326 |
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$ |
1,623 |
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Earnings per common share: |
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Basic |
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$ |
0.11 |
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$ |
0.20 |
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Diluted |
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$ |
0.11 |
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$ |
0.17 |
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Average outstanding shares: |
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Basic |
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11,954,863 |
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8,018,133 |
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Diluted |
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12,255,330 |
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9,658,239 |
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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, 2007 and 2006
(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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Comprehensive |
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Stock |
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Surplus |
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Earnings |
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Income (Loss) |
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Income |
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Total |
|
Balance, December 31, 2006 |
|
$ |
9,867 |
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|
$ |
29,316 |
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|
$ |
23,641 |
|
|
$ |
(529 |
) |
|
$ |
|
|
|
$ |
62,295 |
|
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|
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|
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|
|
|
|
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Comprehensive income: |
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|
|
|
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Net income |
|
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|
|
|
|
|
|
|
|
1,326 |
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|
|
|
|
|
|
1,326 |
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|
|
1,326 |
|
|
|
|
|
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Other comprehensive income (loss),
unrealized holdings gains arising
during the period, net of tax $81 |
|
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|
|
|
|
|
|
|
|
|
|
|
157 |
|
|
|
157 |
|
|
|
157 |
|
|
|
|
|
|
|
|
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|
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|
Cash Dividend from DRSPP |
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|
|
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(121 |
) |
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|
|
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|
(121 |
) |
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|
|
|
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|
|
|
|
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|
$ |
1,483 |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for exercise of
options and dividend reinvest
|
|
|
170 |
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
$ |
10,037 |
|
|
$ |
29,797 |
|
|
$ |
24,846 |
|
|
$ |
(372 |
) |
|
|
|
|
|
$ |
64,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
Balance, December 31, 2005 |
|
$ |
6,644 |
|
|
$ |
9,099 |
|
|
$ |
16,227 |
|
|
$ |
(785 |
) |
|
$ |
|
|
|
$ |
31,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Comprehensive income: |
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
1,623 |
|
|
|
|
|
|
|
1,623 |
|
|
|
1,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss),
unrealized holdings losses arising
during the period, net of tax $88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171 |
) |
|
|
(171 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends |
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for exercise
of options and dividend reinvest
|
|
|
120 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006 |
|
$ |
6,764 |
|
|
$ |
9,427 |
|
|
$ |
17,810 |
|
|
$ |
(956 |
) |
|
|
|
|
|
$ |
33,045 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements (unaudited).
4
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,326 |
|
|
$ |
1,623 |
|
Adjustments to reconcile net income to net cash (used in)
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
291 |
|
|
|
124 |
|
Deferred tax (benefit) |
|
|
(7 |
) |
|
|
(77 |
) |
Stock based compensation |
|
|
21 |
|
|
|
18 |
|
Provision (benefit) from hedging |
|
|
(1 |
) |
|
|
(28 |
) |
Net amortization (accretion) on securities |
|
|
(6 |
) |
|
|
(1 |
) |
Depreciation and amortization |
|
|
212 |
|
|
|
197 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in loans held for sale |
|
|
(1,579 |
) |
|
|
(25,380 |
) |
(Increase) decrease in other assets |
|
|
(1,638 |
) |
|
|
(232 |
) |
Increase (decrease) in other liabilities |
|
|
(1,167 |
) |
|
|
(2,432 |
) |
|
|
|
|
|
|
|
Net cash (used in) operating activities |
|
|
(2,548 |
) |
|
|
(26,188 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities available for sale |
|
|
15,705 |
|
|
|
1,657 |
|
Purchases of securities available for sale |
|
|
(3,891 |
) |
|
|
(24,387 |
) |
Net (increase) in loans |
|
|
(24,068 |
) |
|
|
(14,110 |
) |
Purchases of premises and equipment |
|
|
(467 |
) |
|
|
(186 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(12,721 |
) |
|
|
(37,026 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in demand, interest-bearing demand and savings |
|
|
6,187 |
|
|
|
(5,439 |
) |
Net increase in time deposits |
|
|
15,568 |
|
|
|
8,922 |
|
Net increase in securities sold under agreement to repurchase |
|
|
62 |
|
|
|
250 |
|
Net increase (decrease) in short-term borrowings |
|
|
(2,104 |
) |
|
|
54,321 |
|
Net increase (decrease) in long term borrowings |
|
|
1,863 |
|
|
|
(2,054 |
) |
Proceeds from issuance of common stock |
|
|
630 |
|
|
|
430 |
|
Dividends paid |
|
|
(121 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
22,085 |
|
|
|
56,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
6,816 |
|
|
|
(6,824 |
) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
27,365 |
|
|
|
23,183 |
|
|
|
|
|
|
|
|
Ending |
|
$ |
34,181 |
|
|
$ |
16,359 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
6,116 |
|
|
$ |
4,530 |
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
2,115 |
|
|
$ |
1,477 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale |
|
$ |
238 |
|
|
$ |
(259 |
) |
See accompanying notes to consolidated financial statements (unaudited).
5
ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 COMMENCEMENT OF OPERATIONS
Access National Corporation (the Corporation) is a bank holding company incorporated under the
laws of the Commonwealth of Virginia. The Corporation has three wholly owned subsidiaries, Access
National Bank (the Bank), which is an independent commercial bank chartered under federal laws as
a national banking association, Access Capital Trust I, and Access Capital Trust II. The
Corporation does not have any significant operations and serves primarily as the parent company for
the Bank. The Corporations income is primarily derived from dividends received from the Bank. The
amount of these dividends is determined by the Banks earnings and capital position.
The Corporation acquired all of the outstanding stock of the Bank in a statutory exchange
transaction on June 15, 2002, pursuant to an Agreement and Plan of Reorganization between the
Corporation and the Bank.
Access National Bank opened for business on December 1, 1999 and has 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.
In August 2006, the corporation concluded a public stock offering of 2.3 million shares of common
stock that provided approximately $20 million in new capital.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with rules and regulations of the Securities and Exchange
Commission. The statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. All adjustments have
been made, which, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented. Such adjustments are all of a normal and recurring
nature. All significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to the current
period presentation. The results of operations for the three months ended March 31, 2007 are not
necessarily indicative of the results that may be expected for the entire year ending December 31,
2007. These consolidated financial statements should be read in conjunction with the Corporations
audited financial statements and the notes thereto as of December 31, 2006, included in the
Corporations Annual Report on Form 10 K for the fiscal year ended December 31, 2006.
6
NOTE 3 STOCK BASED COMPENSATION PLANS
During the first quarter of 2007 the Corporation granted 78,100 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
during the first quarter have a vesting period of two and one half years and expire in three and
one half years after the issue date. There were no options granted during the first quarter of
2006.
Stockbased compensation expense recognized in other operating expense during the first quarter of
2007 was approximately $21 thousand and $18 thousand for the same period in 2006. 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, 2007 is
presented as follows:
|
|
|
|
|
|
|
3 Months ended |
|
|
March 31, 2007 |
Assumptions |
|
|
|
|
Expected life of option |
|
|
3.33 |
|
Risk-free interest rate |
|
|
4.72 |
% |
Expected volatility of stock |
|
|
23 |
% |
Expected dividend yield |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
Number of |
|
Weighted Avg. |
|
Remaining |
|
Aggregate Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Term |
|
Value |
Outstanding at December 31, 2006 |
|
|
815,244 |
|
|
$ |
4.80 |
|
|
|
2.296 |
|
|
$ |
3,885,204 |
|
Granted |
|
|
78,100 |
|
|
$ |
9.58 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(164,820 |
) |
|
$ |
1.67 |
|
|
|
|
|
|
$ |
1,297,787 |
|
Lapsed or Canceled |
|
|
(200 |
) |
|
$ |
14.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
728,324 |
|
|
$ |
6.03 |
|
|
|
2.693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
590,304 |
|
|
|
|
|
|
|
2.607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value per share of Granted Options in 2007 |
|
$ |
2.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Options as of March 31, 2007 |
|
|
138,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Options as of December 31, 2006 |
|
|
88,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7
NOTE 4 SECURITIES
Amortized costs and fair values of securities available for sale as of March 31, 2007 and December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
(In Thousands) |
U.S. Treasury Securities |
|
$ |
991 |
|
|
$ |
6 |
|
|
|
|
|
|
$ |
997 |
|
U.S. Government Agencies |
|
|
80,333 |
|
|
|
21 |
|
|
|
(537 |
) |
|
|
79,817 |
|
Mortgage Backed Securities |
|
|
990 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
992 |
|
Tax Exempt Municipals |
|
|
2,892 |
|
|
|
6 |
|
|
|
(9 |
) |
|
|
2,889 |
|
Taxable Municipals |
|
|
1,305 |
|
|
|
|
|
|
|
(25 |
) |
|
|
1,280 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(29 |
) |
|
|
1,471 |
|
Restricted Securities - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
873 |
|
FHLB Stock |
|
|
5,274 |
|
|
|
|
|
|
|
|
|
|
|
5,274 |
|
|
|
|
Total Securities |
|
$ |
94,158 |
|
|
$ |
36 |
|
|
$ |
(601 |
) |
|
$ |
93,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
(In Thousands) |
U.S. Treasury Notes |
|
$ |
990 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
996 |
|
U.S. Governmental Agencies |
|
|
92,352 |
|
|
|
5 |
|
|
|
(748 |
) |
|
|
91,609 |
|
Mortgage Backed Securities |
|
|
1,037 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
1,040 |
|
Tax Exempt Municipals |
|
|
2,893 |
|
|
|
5 |
|
|
|
(10 |
) |
|
|
2,888 |
|
Taxable Municipals |
|
|
1,305 |
|
|
|
|
|
|
|
(30 |
) |
|
|
1,275 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(32 |
) |
|
|
1,468 |
|
Restricted Stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
873 |
|
FHLB Stock |
|
|
5,014 |
|
|
|
|
|
|
|
|
|
|
|
5,014 |
|
|
|
|
Total Securities |
|
$ |
105,964 |
|
|
$ |
20 |
|
|
$ |
(821 |
) |
|
$ |
105,163 |
|
|
|
|
8
The amortized cost and fair value of securities available for sale as of March 31, 2007 and
December 31, 2006 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, 2007 |
|
|
December 31, 2006 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
US Treasury & Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
33,973 |
|
|
$ |
33,748 |
|
|
$ |
34,994 |
|
|
$ |
34,690 |
|
Due after one through five years |
|
|
45,853 |
|
|
|
45,585 |
|
|
|
56,850 |
|
|
|
56,442 |
|
Due after five through ten years |
|
|
1,498 |
|
|
|
1,481 |
|
|
|
1,498 |
|
|
|
1,473 |
|
Municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five through ten years |
|
|
4,197 |
|
|
|
4,169 |
|
|
|
4,198 |
|
|
|
4,163 |
|
Mortgage Backed Securities
Due in one year or less |
|
|
45 |
|
|
|
45 |
|
|
|
48 |
|
|
|
49 |
|
Due after one through five years |
|
|
945 |
|
|
|
947 |
|
|
|
989 |
|
|
|
991 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
1,471 |
|
|
|
1,500 |
|
|
|
1,468 |
|
Restricted Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank stock |
|
|
873 |
|
|
|
873 |
|
|
|
873 |
|
|
|
873 |
|
FHLB stock |
|
|
5,274 |
|
|
|
5,274 |
|
|
|
5,014 |
|
|
|
5,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
94,158 |
|
|
$ |
93,593 |
|
|
$ |
105,964 |
|
|
$ |
105,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Investment securities available for sale that have an unrealized loss position at March 31, 2007
and December 31, 2006 are detailed below
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a loss |
|
|
Securities in a loss |
|
|
|
|
|
|
Position for less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Security |
|
$ |
|
|
|
$ |
|
|
|
$ |
362 |
|
|
$ |
(1 |
) |
|
$ |
362 |
|
|
$ |
(1 |
) |
U.S. Government Agencies |
|
|
|
|
|
|
|
|
|
|
64,795 |
|
|
|
(537 |
) |
|
|
64,795 |
|
|
|
(537 |
) |
Municipals-Taxable |
|
|
|
|
|
|
|
|
|
|
1,280 |
|
|
|
(25 |
) |
|
|
1,280 |
|
|
|
(25 |
) |
Municipals-Tax Exempt |
|
|
|
|
|
|
|
|
|
|
1,408 |
|
|
|
(9 |
) |
|
|
1,408 |
|
|
|
(9 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,471 |
|
|
|
(29 |
) |
|
|
1,471 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
69,316 |
|
|
$ |
(601 |
) |
|
$ |
69,316 |
|
|
$ |
(601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a loss |
|
|
Securities in a loss |
|
|
|
|
|
|
Position for less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Security |
|
$ |
|
|
|
$ |
|
|
|
$ |
378 |
|
|
$ |
(1 |
) |
|
$ |
378 |
|
|
$ |
(1 |
) |
U.S. Government Agencies |
|
|
24,936 |
|
|
|
(64 |
) |
|
|
56,668 |
|
|
|
(684 |
) |
|
|
81,604 |
|
|
|
(748 |
) |
Municipals-Taxable |
|
|
|
|
|
|
|
|
|
|
1,275 |
|
|
|
(30 |
) |
|
|
1,275 |
|
|
|
(30 |
) |
Municipals-Tax Exempt |
|
|
458 |
|
|
|
(2 |
) |
|
|
1,408 |
|
|
|
(9 |
) |
|
|
1,866 |
|
|
|
(11 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,468 |
|
|
|
(31 |
) |
|
|
1,468 |
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,394 |
|
|
$ |
(66 |
) |
|
$ |
61,197 |
|
|
$ |
(755 |
) |
|
$ |
86,591 |
|
|
$ |
(821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of March 31, 2007 and December
31, 2006 represents other than temporary impairment. These unrealized losses are primarily
attributable to changes in interest rates. The Corporation has the ability to hold these securities
for a time necessary to recover the amortized cost or until maturity when full repayment would be
received.
10
NOTE 5 LOANS
The following table presents the composition of the loan portfolio at March 31, 2007 and December
31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
Percent of |
|
|
Dec 31 |
|
|
Percent of |
|
|
|
2007 |
|
|
Total |
|
|
2006 |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Commercial |
|
$ |
59,101 |
|
|
|
12.91 |
% |
|
$ |
51,825 |
|
|
|
11.95 |
% |
Real estate non-residential |
|
|
178,910 |
|
|
|
39.09 |
|
|
|
159,996 |
|
|
|
36.90 |
|
Real estate construction |
|
|
61,089 |
|
|
|
13.35 |
|
|
|
68,570 |
|
|
|
15.81 |
|
Residential real estate |
|
|
157,815 |
|
|
|
34.48 |
|
|
|
152,648 |
|
|
|
35.21 |
|
Consumer |
|
|
750 |
|
|
|
0.17 |
|
|
|
555 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
457,665 |
|
|
|
100.00 |
% |
|
$ |
433,594 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
5,746 |
|
|
|
|
|
|
|
5,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
451,919 |
|
|
|
|
|
|
$ |
428,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 bank segment provides the mortgage segment with the short-term funds needed to
originate mortgage loans through a warehouse line of credit and charges the mortgage banking
segment interest based on the prime rate. These transactions are eliminated in the consolidation
process.
Other includes the operations of Access National Corporation and Access Real Estate LLC. The
primary source of income for the Corporation is derived from dividends from the Bank and its
primary expense relates to interest on subordinated debentures. The primary source of income for
Access Real Estate LLC is derived from rents received from the Bank and Mortgage Corporation.
11
The following table presents segment information for the three months ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Mortgage |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
11,033 |
|
|
$ |
1,136 |
|
|
$ |
199 |
|
|
$ |
(1,195 |
) |
|
$ |
11,173 |
|
Gain on sale of loans |
|
|
|
|
|
|
5,393 |
|
|
|
|
|
|
|
|
|
|
|
5,393 |
|
Other revenues |
|
|
426 |
|
|
|
2,465 |
|
|
|
263 |
|
|
|
(568 |
) |
|
|
2,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
11,459 |
|
|
|
8,994 |
|
|
|
462 |
|
|
|
(1,763 |
) |
|
|
19,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,696 |
|
|
|
1,273 |
|
|
|
344 |
|
|
|
(1,196 |
) |
|
|
6,117 |
|
Salaries and employee benefits |
|
|
1,668 |
|
|
|
3,551 |
|
|
|
|
|
|
|
|
|
|
|
5,219 |
|
Other |
|
|
1,347 |
|
|
|
4,708 |
|
|
|
369 |
|
|
|
(567 |
) |
|
|
5,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,711 |
|
|
|
9,532 |
|
|
|
713 |
|
|
|
(1,763 |
) |
|
|
17,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
2,748 |
|
|
$ |
(538 |
) |
|
$ |
(251 |
) |
|
$ |
|
|
|
$ |
1,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
609,145 |
|
|
$ |
71,675 |
|
|
$ |
9,891 |
|
|
$ |
(23,507 |
) |
|
$ |
667,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
8,682 |
|
|
$ |
634 |
|
|
$ |
13 |
|
|
$ |
(684 |
) |
|
$ |
8,645 |
|
Gain on sale of loans |
|
|
|
|
|
|
4,678 |
|
|
|
|
|
|
|
|
|
|
|
4,678 |
|
Other revenues |
|
|
400 |
|
|
|
1,330 |
|
|
|
311 |
|
|
|
(625 |
) |
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
9,082 |
|
|
|
6,643 |
|
|
|
575 |
|
|
|
(1,309 |
) |
|
|
14,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
4,233 |
|
|
|
681 |
|
|
|
318 |
|
|
|
(684 |
) |
|
|
4,548 |
|
Salaries and employee benefits |
|
|
1,531 |
|
|
|
3,175 |
|
|
|
|
|
|
|
|
|
|
|
4,706 |
|
Other |
|
|
982 |
|
|
|
2,251 |
|
|
|
417 |
|
|
|
(625 |
) |
|
|
3,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,746 |
|
|
|
6,107 |
|
|
|
735 |
|
|
|
(1,309 |
) |
|
|
12,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
2,336 |
|
|
$ |
536 |
|
|
$ |
(160 |
) |
|
$ |
|
|
|
$ |
2,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
560,877 |
|
|
$ |
72,756 |
|
|
$ |
37,405 |
|
|
$ |
(78,560 |
) |
|
$ |
592,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007 and 2006 respectively. The numerator of both the Basic and
Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in
the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect
of potentially dilutive common stock options and warrants utilizing the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
|
(In thousands, except per share data) |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,326 |
|
|
$ |
1,623 |
|
Weighted average shares outstanding |
|
|
11,954,863 |
|
|
|
8,018,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.11 |
|
|
$ |
0.20 |
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,326 |
|
|
$ |
1,623 |
|
Weighted average shares outstanding |
|
|
11,954,863 |
|
|
|
8,018,133 |
|
Stock options and warrants |
|
|
300,467 |
|
|
|
1,640,106 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
12,255,330 |
|
|
|
9,658,239 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.11 |
|
|
$ |
0.17 |
|
NOTE 8 DERIVATIVES
The Mortgage Corporation carries all derivative instruments at fair value as either assets or
liabilities in the consolidated balance sheets. Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities as amended (SFAS 133),
provides specific accounting provisions for derivative instruments that qualify for hedge accounting. The
Mortgage Corporation has not elected to apply hedge accounting to its derivative instruments as
provided in SFAS 133.
The Mortgage Corporation enters into interest rate lock commitments, which are commitments to
originate loans whereby the interest rate on the loan is determined prior to funding and the
customers have locked into that interest rate. The Mortgage Corporation also has corresponding
forward sales commitments related to these interest rate lock commitments, which are recorded at
fair value with changes in fair value recorded in non-interest income. The market value of rate
lock commitments and best efforts contracts is not readily ascertainable with precision because
rate lock commitments and best efforts contracts are not actively traded in stand-alone markets.
The Mortgage Corporation determines the fair value of rate lock commitments and best efforts
contracts by measuring the change in the value of the underlying asset while taking into
consideration the probability that the rate lock commitments will close.
For derivative instruments not designated as hedging instruments, the derivative is recorded as a
freestanding asset or liability with the change in value being recognized in current earnings
during the period of change.
At March 31, 2007 and December 31, 2006 the Mortgage Corporation had derivative financial
instruments with a notional value of $179.8 million and $195.8 million respectively. The fair
value of these derivative instruments at March 31, 2007 and December 31, 2006 was $179.8 million
and $195.7 million respectively.
13
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and
140. This statement amends SFAS No.
133 and 140 by: permitting fair value remeasurement for any hybrid financial instrument with an
embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips
and principal-only strips are not subject to the requirements of SFAS No. 133; establishing a
requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; clarifying that concentrations of credit risk in the form of
subordination are not embedded derivatives; and amending SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial instrument. The
statement is effective for fiscal years beginning after September 15, 2006. The adoption of this
standard is not anticipated to have a material impact on financial condition, results of operations
or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement 109, which provides guidance on the measurement,
recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The
interpretation also provides guidance on de-recognition, classification, interest and penalties,
and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is
more-likely-than-not that the position will be sustained upon examination by the appropriate taxing
authority. A tax position that meets this threshold is measured as the largest amount of benefit
that is more likely than not (greater than 50 percent) realized upon ultimate settlement. The
cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of
retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of this standard is not anticipated to have a material impact on
financial condition, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157) establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. While SFAS applies under other
accounting pronouncements that require or permit fair value measurements, it does not require any
new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date. In addition, the Statement establishes a fair value
hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. Lastly, SFAS 157 requires additional disclosures for each interim and
annual period separately for each major category of assets and
liabilities. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Management does not expect the adoption of this
statement to have a material impact on the Corporations financial statements.
In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and
Financial Liabilitiesincluding an amendment of FASB Statement No. 115. This Statement permits
entities to choose to measure many financial instruments and certain
other items at fair value. Such election, which may be applied on an
instrument by instrument basis, is typically irrevocable once
elected. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is expected to expand
the use of fair value measurement, which is consistent with the Boards long-term measurement
objectives for accounting for financial instruments. This Statement is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.
The Corporation is evaluating the impact of this new standard but
currently does not believe the adoption of this statement will have a material effect on the
Corporations consolidated financial statements.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to provide an overview of the significant factors
affecting the financial condition and the results of operations of Access National Corporation and
subsidiaries (the Corporation) for the three months ended March 31, 2007 and 2006. The
consolidated financial statements and accompanying notes should be read in conjunction with this
discussion and analysis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q may contain
forward-looking statements. For this purpose, any statements contained herein, including documents
incorporated by reference, that are not statements of historical fact may be deemed to be
forward-looking statements. Examples of forward-looking statements include discussions as to our
expectations, beliefs, plans, goals, objectives and future financial or other performance or
assumptions concerning matters discussed in this document. Forward-looking statements often use
words such as believes, expects, plans, may, will, should, projects, contemplates,
anticipates, forecasts, intends or other words of similar meaning. You can also identify
them by the fact that they do not relate strictly to historical or current facts. Forward-looking
statements are subject to numerous assumptions, risks and uncertainties, and actual results could
differ materially from historical results or those anticipated by such statements. Factors that
could have a material adverse effect on the operations and future prospects of the Corporation
include, but are not limited to: changes in the Corporations competitive position, competitive
actions by other financial institutions and the competitive nature of the financial services
industry and the Corporations ability to compete effectively against other financial institutions
in its banking markets; the Corporations potential growth, including its entrance or expansion
into new markets, the opportunities that may be presented to and pursued by it and the need for
sufficient capital to support that growth; the Corporations ability to manage growth; changes in
government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan
products and financial services; the strength of the economy in the Corporations target market
area, as well as general economic, market, or business conditions; changes in the quality or
composition of the Corporations loan or investment portfolios, including adverse developments in
borrower industries, decline in real estate values in the Corporations markets, or in the
repayment ability of individual borrowers or issuers; an insufficient allowance for loan losses as
a result of inaccurate assumptions; the Corporations reliance on dividends from the Bank as a
primary source of funds; the Corporations reliance on secondary sources, such as Federal Home Loan
Bank advances, sales of securities and loans, federal funds lines of credit from correspondent
banks and out-of-market time deposits, to meet the Banks liquidity needs; changes in laws,
regulations and the policies of federal or state regulators and agencies; the Corporations
mortgage loan business and the offering of non-conforming mortgage loans; and other circumstances,
many of which are beyond the Corporations control. Standard
representations and warranties issued in connection with Loans Held
for Sale may impact earnings due to the potential need to repurchase
loans due to early payment defaults and other reasons. The subsequent
cost of liquidating these loans may adversely impact earnings. These risks and uncertainties should be
considered in evaluating the forward-looking statements contained herein, and readers are cautioned
not to place undue reliance on such statements. Any forward-looking statement speaks only as of
the date on which it is made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which it is made.
CRITICAL ACCOUNTING POLICIES
General
The Corporations financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The financial information contained within our
statements is, to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability. Actual losses could differ significantly
from the historical factors that we monitor. Additionally, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our transactions would
be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan
portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5 Accounting for
Contingencies, which requires that losses be accrued when they are probable of occurring and
estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market and the loan balance.
An allowance for loan losses is established through a provision for loan losses based upon industry
standards, known risk characteristics, managements evaluation of the risk inherent in the loan
portfolio and changes in the nature and volume of loan activity. Such evaluation considers among
other factors, the estimated market value of the underlying collateral, and current economic
conditions. For further information about our practices with respect to allowance for loan losses,
please see the subsection Allowance for Loan Losses below.
15
Derivative Financial Instruments The Mortgage Corporation carries all derivative
instruments at fair value as either assets or liabilities in the consolidated balance sheets. SFAS
133 provides specific accounting provisions for derivative instruments that qualify for hedge
accounting. The Mortgage Corporation has not elected to apply hedge accounting to its derivative
instruments as provided in SFAS 133.
Off-Balance Sheet Items
In the ordinary course of business, the Bank issues commitments to extend credit and, at March 31,
2007, these commitments amounted to $25.3 million. These commitments do not necessarily represent
cash requirements, since many commitments are expected to expire without being drawn on.
At March 31, 2007, the Bank had approximately $108.0 million in unfunded lines of credit and
letters of credit. These lines of credit, if drawn upon, would be funded from routine cash flows
and short term borrowings. As the Corporation continues the planned expansion of the loan
portfolio held for investment, the volume of commitments and unfunded lines of credit are expected
to increase accordingly.
FINANCIAL CONDITION (March 31, 2007 compared to December 31, 2006)
The Corporations assets increased $22.4 million from $644.8 million at December 31, 2006 to $667.2
million at March 31, 2007. The growth in assets occurred in loans held for investment, interest
bearing balances and loans held for sale. Loans held for investment increased $24.1 million over
year end. Investment securities decreased approximately $11.6 million due to maturities that were
not reinvested. Interest bearing deposits increased $9.3 million and loans held for sale increased
by $2.1 million. The growth in loans held for investment is due to our commitment to meeting the
credit needs of our existing clients, and new clients. The volume of loans held for sale is
primarily due to the expansion of the wholesale division. This category of loans is subject to
volatility due to changes in interest rates and the general economic outlook for the housing
market. Management continues to employ a strategy of attracting highly qualified professional
lenders to support future growth in the loans held for investment.
Asset growth during the period was funded by a combination of deposit growth, and an increase in
long-term borrowings. Deposits increased $21.8 million and totaled $460.7 million at March 31,
2007 up from $438.9 million at December 31, 2006. Long term borrowings at March 31, 2007 totaled
$44.4 million, an increase of $1.9 million from December 31, 2006, and investment securities
decreased $11.6 million.
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,
and Federal Reserve and Federal Home Loan Bank stock. At March 31, 2007 the securities portfolio
totaled $93.6 million, down from $105.2 million on December 31, 2006. All securities were
classified as available for sale. Securities classified as available for sale are accounted for at
fair market value with unrealized gains and losses recorded directly to a separate component of
shareholders equity, net of associated tax effect. The Corporations securities classified as
available for sale had an unrealized loss net of deferred taxes of $0.4 million on March 31, 2007.
Investment securities are used to provide liquidity, generate income, and to temporarily supplement
loan growth as needed.
Loans
The loans held for investment portfolio constitutes the largest component of earning assets and is
comprised of commercial loans, real estate loans, construction loans, and consumer loans. These
lending activities provide access to credit to small businesses, professionals and consumers in the
greater Washington, D.C. metropolitan area. All lending activities of the Bank and its subsidiaries
are subject to the regulations and supervision of the Office of the Comptroller of Currency.
At March 31, 2007, loans held for investment increased by $24.1 million from December 31, 2006 and
totaled $457.7 million.
Commercial loans increased $7.3 million, commercial real estate loans increased $18.9 million,
construction loans decreased $7.5 million, and residential real estate loans increased $5.2 million
compared to December 31, 2006. See Note 5 for a table that summarizes the composition of the
Corporations loan portfolio. The increase in loans is attributable to servicing the needs of
existing clients and new business originating from, referrals, community involvement, and increased
name recognition and acceptance of the Banks products and services within the marketplace.
Management intends to increase loan officer staffing and support to facilitate continued growth in
the portfolio. The following is a summary of the Loan Portfolio Held for Investment at March 31,
2007.
Commercial Loans: Commercial Loans represent 12.9% of our held for investment portfolio.
These loans are to businesses or individuals within our target market for business purposes.
Typically the loan proceeds are used to support working capital and the acquisition of fixed assets
of an operating business. We underwrite these loans based upon our assessment of the obligor(s)
ability to generate operating cash flows in the future necessary to repay the loan. To address the
risks associated with the uncertainties of future cash flows, these loans are
16
generally well
secured by assets owned by the business or its principal shareholders and the principal
shareholders are typically required to guarantee the loan.
Real Estate Construction Loans: Real Estate Construction Loans, also known as construction
and land development loans, comprise 13.4% of our held for investment loan portfolio. These loans
generally fall into one of three circumstances: first, loans to individuals that are ultimately
used to acquire property and construct an owner occupied residence; second, loans to builders for
the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to
developers for the purpose of acquiring land that is developed into finished lots for the ultimate
construction of residential or commercial buildings. Loans of these types are generally secured by
the subject property within limits established by the Board of Directors based upon an assessment
of market conditions and up-dated from time to time. The loans typically carry recourse to
principal owners. In addition to the repayment risk associated with loans to individuals and
businesses, loans in this category carry construction completion risk. To address this additional
risk, loans of this type are subject to additional administration procedures designed to verify and
ensure progress of the project in accordance with allocated funding, project specifications and
time frames.
Commercial Real Estate Loans: Also known as Commercial Mortgages, loans in this category
represent 39.1% of our loan portfolio held for investment. These loans generally fall into one of
three situations in order of magnitude: first, loans supporting an owner occupied commercial
property; second, properties used by non-profit organizations such as churches or schools where
repayment is dependent upon the cash flow of the non-profit organizations; and third, loans
supporting a commercial property leased to third parties for investment. Commercial Real Estate
Loans are secured by the subject property and underwritten to policy standards. Policy standards
approved by the Board of Directors from time to time set forth, among other considerations, loan to
value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.
Real Estate Residential Loans: This category includes loans secured by first or second
mortgages on one to four family residential properties and represent 34.5% of the portfolio. Of
this amount, the following sub-categories exist as a percentage of the whole Residential Real
Estate Loan portfolio: Home Equity Lines of Credit 15.7%; First Trust Mortgage Loans 78.0%; Loans
Secured by a Junior Trust 3.8%; Multi-family loans and loans secured by Farmland 2.5%.
Home Equity Loans are extended to borrowers in our target market. Real estate equity is the
largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool
allows the borrower to access the equity in their home or investment property and use the proceeds
for virtually any purpose. Home Equity Loans are most frequently secured by a second lien on
residential property. 1-4 Family Residential First Trust Loan, or First Mortgage Loan, proceeds
are used to acquire or refinance the primary financing on owner occupied and residential investment
properties. Junior Trust Loans, or Loans Secured by a Second Trust Loans, are 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 up-dated by our management and Board of
Directors: repayment source and capacity, value of the underlying property, credit history, savings
pattern and stability.
Consumer Loans: Consumer Loans make up approximately 0.2% of our loan portfolio. Most
loans are well secured with assets other than real estate, such as marketable securities or
automobiles. Very few consumer loans are unsecured. As a matter of operation, management
discourages unsecured lending. Loans in this category are underwritten to standards within a
traditional consumer framework that is periodically reviewed and updated by our management and the
Board of Directors: repayment capacity, collateral value, savings pattern, credit history and
stability.
Loans Held for Sale (LHFS)
Loans Held for Sale are originated by the Mortgage Corporation and carried on our books at the
lower of cost or market value. These loans
are residential mortgage loans extended to consumers and underwritten in accordance with standards
set forth by an institutional investor to whom we expect to sell the loans for a profit. Loan
proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold
with the servicing released to the investor. The LHFS loans are closed in our name and carried on
our books until the loan is delivered to and purchased by an investor. In the first quarter of
2007 we originated $309.8 million of loans processed in this manner. Repayment risk of this
activity is minimal since the loans are on the books for a short time period. Loans are sold
without recourse and subject to industry standard representations and warranties. The risks
associated with this activity center around borrower fraud and failure of our investors to purchase
the loans. These risks are addressed by the on-going maintenance of an extensive quality control
program, an internal audit and verification program, and a selective approval process for
investors. At March 31, 2007 loans held for sale totaled $67.4
million compared to $65.3 million at year end 2006. The increase in loans held for sale that is
primarily due to increase in loan originations during the month of March.
17
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. We are paid a fee for
procuring and packaging brokered loans. For the first three months of 2007, we originated a total
volume of $59.7 million in residential mortgage loans under this type of delivery method, as
compared to $33.7 million for the same period of 2006. Brokered loans accounted for 19.3% of the
total loan volume for the first three months of 2007.
Allowance for Loan Losses
The Banks allowance for loan losses increased by $294 thousand which includes a $3 thousand recovery on a
previously charged off loan and totaled $5.7 million at March 31, 2007 compared to $5.5 million at
year end 2006. The allowance for loan losses at March 31, 2007 and December 31, 2006 was 1.26% of
total loans held for investment. The allowance for Commercial loans as a percent of the total
Commercial loans amounted to 1.7%, compared to 1.5% at year end 2006. The allowance for
Construction Loans was 1.5% of total Construction loans at March 31, 2007 and 1.5% at December 31,
2006. The allowance for Commercial Real Estate loans was 1.4% of total Commercial Real Estate loans
as of March 31, 2007 and 1.4% at year end 2006. The allowance for Residential Real Estate loans
was 0.8% of total Residential Real Estate loans at March 31, 2007 and December 31, 2006. Although
actual loan losses have been insignificant, our senior credit management, with over 60 years in
collective experience in managing similar portfolios in our marketplace, concluded the amount of
our reserve and the methodology applied to arrive at the amount of the reserve is justified and
appropriate due to the lack of seasoning of the portfolio, the relatively large dollar amount of a
relatively small number of loans, portfolio growth, staffing changes, volume, changes in individual
risk ratings on new loans and trend analysis. Outside of our own analysis, our reserve adequacy
and methodology are reviewed on a regular basis by, our internal audit program and bank regulators
and such reviews have not resulted in any material adjustment to the reserve.
The Bank does not have a meaningful history of charge offs with which to establish trends in loan
losses by loan classifications. As of March 31,2007 the total net charge offs for the seven years
of operation was approximately $11 thousand. The overall allowance for loan losses is equivalent
to approximately 1.26% of total loans held for investment. The methodology as to how the
allowance was derived is a combination of specific allocations and percentages allocation of the
unallocated portion of the allowance for loan losses, as discussed below. The Bank has developed a
comprehensive risk weighting system based on individual loan characteristics that enables the Bank
to allocate the composition of the allowance for loan losses by types of loans.
The loss risk of each loan within a particular classification, however, is not the same. The
methodology for arriving at the allowance is not dictated by loan classification. The methodology
as to how the allowance was derived is detailed below. Unallocated amounts included in the
allowance for loan losses have been applied to the loan classifications on a percentage basis.
Adequacy of the reserve is assessed, and appropriate expense and charge offs are taken, no less
frequently than at the close of each fiscal quarter end. The methodology by which we
systematically determine the amount of our reserve is set forth by the Board of Directors in our
Credit Policy. Under this Policy, our Chief Credit Officer is charged with ensuring that each loan
is individually evaluated and the portfolio characteristics are evaluated to arrive at an
appropriate aggregate reserve. The results of the analysis are documented, reviewed and approved
by the Board of Directors no less than quarterly. The following elements are considered in this
analysis: loss estimates on specific problem credits (the Specific Reserve), individual loan
risk ratings, lending staff changes, loan review and board oversight, loan policies and procedures,
portfolio trends with respect to volume, delinquency, composition/concentrations of credit, risk
rating migration, levels of classified credit, off-balance sheet credit exposure, any other factors
considered relevant from time to time (the General Reserve) and, finally, an Unallocated
Reserve to cover any unforeseen factors not considered above in the appropriate magnitude. Each
of the reserve components, General, Specific and Unallocated are discussed in further detail below.
With respect to the General Reserve, all loans are graded or Risk Rated individually for loss
potential at the time of origination and as warranted thereafter, but no less frequently than
quarterly. Loss potential factors are applied based upon a blend of the following criteria: our
own direct experience at this Bank; our collective management experience in administering similar
loan portfolios in the market for over 60 years; and peer data contained in statistical releases
issued by both the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. Although looking only at peer data and the Banks historically low write-offs would
suggest a lower loan loss allowance, our managements experience with similar portfolios in the
same market combined with the fact that our portfolio is relatively unseasoned, justify a
conservative approach in contemplating external statistical resources. Accordingly, managements
collective experience at this Bank and other banks is the most heavily weighted criterion, and the
weighting is subjective and varies by loan type, amount, collateral, structure, and repayment
terms. Prevailing economic condition generally and within each individual borrowers business
sector are considered, as well as any changes in the borrowers own financial position and, in the
case of commercial loans, management structure and business operations. As of March 31, 2007 our
evaluation of these factors supported approximately 90.7% of the total loss reserve. As our
portfolio ages and we gain more direct experience, the direct experience will weigh more heavily in
our evaluation.
18
When deterioration develops in an individual credit, the loan is placed on a Watch List and the
loan is monitored more closely. All loans on the watch list are evaluated for specific loss
potential based upon either an evaluation of the liquidated value of the collateral or cash flow
deficiencies. If management believes that, with respect to a specific loan, an impaired source of
repayment, collateral impairment or a change in a debtors financial condition presents a
heightened risk of non-performance of a particular loan, a portion of the reserve may be
specifically allocated to that individual loan. The aggregation of this loan by loan analysis
comprises the Specific Reserve and accounted for 0% of the total loss reserve at March 31, 2007.
The Unallocated Reserve is maintained to absorb risk factors outside of the General and Specific
Allocations. Maximum and minimum target limits are established by us on a quarterly basis for the
Unallocated Reserve. As of March 31, 2007 the threshold range for this component was 0.00% to
0.15% of the total loan portfolio and accounted for approximately 9.3% of the total loss reserve.
At March 31, 2007 the unallocated reserve amounted to $0.5 million and equaled 0.12% of total
loans.
An analysis of the Corporations allowance for loan losses as of and for the period indicated is
set forth in the following tables:
Allowance for Loan Losses
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Balance as of December 31 |
|
$ |
5,452 |
|
|
$ |
5,215 |
|
|
|
|
|
|
|
|
|
|
Charge offs |
|
|
|
|
|
|
|
|
Recoveries |
|
|
3 |
|
|
|
|
|
Provision |
|
|
291 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31 |
|
$ |
5,746 |
|
|
$ |
5,339 |
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
|
(Dollars In Thousands) |
Commercial |
|
$ |
59,101 |
|
|
|
12.91 |
% |
|
$ |
997 |
|
|
|
17.35 |
% |
|
$ |
51,825 |
|
|
|
11.95 |
% |
|
$ |
802 |
|
|
|
14.71 |
% |
Commercial real estate |
|
|
178,910 |
|
|
|
39.09 |
|
|
|
2,541 |
|
|
|
45.37 |
|
|
|
159,996 |
|
|
|
36.90 |
|
|
|
2,296 |
|
|
|
42.11 |
|
Real estate construction |
|
|
61,089 |
|
|
|
13.35 |
|
|
|
889 |
|
|
|
17.76 |
|
|
|
68,570 |
|
|
|
15.81 |
|
|
|
1,055 |
|
|
|
19.35 |
|
Residential real estate |
|
|
157,815 |
|
|
|
34.48 |
|
|
|
1,313 |
|
|
|
23.68 |
|
|
|
152,648 |
|
|
|
35.21 |
|
|
|
1,293 |
|
|
|
23.72 |
|
Consumer |
|
|
750 |
|
|
|
0.17 |
|
|
|
6 |
|
|
|
0.27 |
|
|
|
555 |
|
|
|
0.13 |
|
|
|
6 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
$ |
457,665 |
|
|
|
100.00 |
% |
|
$ |
5,746 |
|
|
|
100.00 |
% |
|
$ |
433,594 |
|
|
|
100.00 |
% |
|
$ |
5,452 |
|
|
|
100.00 |
% |
|
|
|
|
|
Reserve for Potential Loan Losses Loans Held for Sale (LHFS)
The
Mortgage Corporation maintains a reserve separately from the Bank
specifically for LHFS and is not included in the Banks Allowance for
Loan Losses.
The risks associated with the LHFS activity of the Mortgage Corporation differs from the risks
associated with Loans Held for Investment and is therefore accounted for separately by the Mortgage
Corporation. The risks associated with LHFS center around early payment defaults, borrower fraud
and failure of our investors to purchase loans. Prior to the period ended March 31, 2007 the
reserve for this activity was not material.
LHFS are added to a Reserve Schedule as soon as management is able to ascertain or substantiate
a claim or loss potential
19
related to
a sold loan. In March, the Mortgage corporation expensed
$913 thousand
to other operating expense in response to an evaluation of approximately $6 million in loans
previously sold. The balance in the Reserve for Potential Loan Losses was increased to
approximately $1.2 million at March 31, 2007, up from $233 thousand at December 31, 2006. The amount of the Reserve for
Potential Loan Losses is based on Managements estimate of the financial risks associated with each
loan and the likely disposition action. Disposition may be in the form of collateral liquidation
or resale to a third party at a discount.
Nonperforming Loans And Past Due
At March 31, 2007 the Bank had no loans in non-accrual status. There were three loans totaling $530
thousand in non-accrual status at the Mortgage Corporation There was one Bank loan past due more
than 30 days amounting to $1.2 million.
Deposits
Deposits are the primary source of funding loan growth. At March 31, 2007 deposits totaled $460.7
million compared to $438.9 million on December 31, 2006, an increase of $21.8 million.
Non-Interest Bearing accounts increased $12.3 million, savings and interest-bearing accounts
declined $6.0 million and time deposits increased $15.5 million. The decline in savings and
interest-bearing accounts was offset by the increase in higher
yielding time deposits. The Banks core deposit base is
comprised primarily of commercial accounts and, due to the inherent nature of these accounts;
balances can be subject to wide fluctuations.
In March 2007 the Bank opened a new banking office in Loudoun County and plans to open one in
Prince William County during the third quarter. The new branches are expected to provide an
opportunity to expand our deposit base.
Shareholders Equity
Shareholders equity was $64.3 million at March 31, 2007. A strong capital position is vital to the
continued profitability of the Corporation. It also promotes depositor and investor confidence and
provides a solid foundation for the future growth of the organization. Shareholders equity
increased by $2.0 million during the three months ended March 31, 2007. The increase is due to the
retention of earnings and the exercise of stock options and dividends reinvested. Other
comprehensive (loss), representing unrealized gains and losses on available for sale securities,
decreased $157 thousand net of taxes.
Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank
are required to maintain. These risk based capital guidelines take into consideration risk
factors, as defined by the banking regulators, associated with various categories of assets, both
on and off the balance sheet. Both the Corporation and Bank are classified as Well Capitalized,
which is the highest rating. The following Risk Based Capital Analysis table outlines the
regulatory components of capital and risk based capital ratios.
20
Risk Based Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In Thousands) |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
10,037 |
|
|
$ |
9,867 |
|
Capital surplus |
|
|
29,796 |
|
|
|
29,317 |
|
Retained earnings |
|
|
24,847 |
|
|
|
23,640 |
|
Less: Net unrealized loss on equity securities |
|
|
(19 |
) |
|
|
(21 |
) |
Subordinated debentures |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
|
74,661 |
|
|
|
72,803 |
|
|
|
|
|
|
|
|
|
|
Subordinated debentures not included in Tier 1 |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
5,990 |
|
|
|
5,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital |
|
$ |
80,651 |
|
|
$ |
78,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
509,158 |
|
|
$ |
484,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
647,080 |
|
|
$ |
631,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
Capital Ratios: |
|
|
|
|
|
|
|
|
|
Minimum |
Tier 1 risk based capital ratio |
|
|
14.66 |
% |
|
|
15.01 |
% |
|
|
4.00 |
% |
Total risk based capital ratio |
|
|
15.84 |
% |
|
|
16.18 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
11.54 |
% |
|
|
11.53 |
% |
|
|
4.00 |
% |
21
RESULTS OF OPERATIONS (March 31, 2007)
Summary
Net income for the three months ended March 31, 2007 totaled $1.3 million compared to $1.6 million
for the same period in 2006. Basic earnings per common share amounted to $0.11 per share for the
three months ended March 31, 2007, compared to $0.20 per share for the same period in 2006. Diluted
earnings per share were $0.11 and $0.17 for the three month period ended March 31 in 2007 and 2006
respectively. Earnings were impacted by a $913 thousand charge to other operating expense to
increase the reserve for potential loan losses at the Mortgage Corporation. The increase in the
Mortgage Corporations reserve for potential loan losses was deemed prudent after analyzing the
potential need to repurchase approximately $6.0 million in loans
previously sold. The management of the Mortgage Corporation believes
this repurchase activity is an isolated event based on current market
conditions. Previous repurchase activity has not been material.
Although there can be no assurance, future repurchase activity is not
expected to be material.
Interest and fees on loans increased by $2.3 million in the first quarter ended March 31, 2007 over
the same period of 2006 reflecting the $24.1 million increase in loans held for investment over
year end. Noninterest income totaled $8.0 million for the three months ended March 31, 2007
compared to $6.1 million for the same period in 2006. This increase is primarily due to the gains
on mortgage loans held for sale.
Net Interest Income
Net interest income, the principal source of bank earnings, is the amount of income generated by
earning assets (primarily loans and investment securities) less the interest expense incurred on
interest bearing liabilities (primarily deposits) used to fund earning assets. Our net interest
margin increased 9 basis points during the first three months from 3.14% in 2006 to 3.23% in 2007.
The increase in net interest margin is due to a $104.5 million increase in earning assets over the
first quarter of 2006.
Net interest income for the three months ended March 31, 2007 increased to $5.1 million compared to
$4.1 million for the same period in 2006. Net interest income depends upon the volume of earning
assets and interest bearing liabilities and the associated rates. The yield on earning assets
increased from 6.61% in 2006 to 7.12% in 2007.
Total interest expense for the first three months of 2007 increased $1.6 million from $4.5 million
in 2006 to $6.1 million. Total interest bearing deposits averaged approximately $353.0 million at
period ended March 31, 2007 compared to $339.6 million at March 31, 2006. Borrowed funds for three
months ended March 31, 2007 averaged $161.3 million compared to $107.2 million for the
corresponding period in 2006. The increase in deposits and borrowings funded the growth in earning
assets. The average cost of interest bearing liabilities at March 31, 2007 was 4.76%, up from
4.07% at March 31, 2006.
22
Volume and Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 compared to 2006 |
|
|
|
|
|
|
Change Due To: |
|
|
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
|
(In Thousands) |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
105 |
|
|
$ |
59 |
|
|
$ |
46 |
|
Loans |
|
|
2,328 |
|
|
|
1,782 |
|
|
|
546 |
|
Interest-bearing deposits |
|
|
96 |
|
|
|
66 |
|
|
|
30 |
|
|
|
|
Total Increase (Decrease) in Interest Income |
|
|
2,529 |
|
|
|
1,907 |
|
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(2 |
) |
Money market deposit accounts |
|
|
(140 |
) |
|
|
(213 |
) |
|
|
73 |
|
Savings accounts |
|
|
61 |
|
|
|
40 |
|
|
|
21 |
|
Time deposits |
|
|
797 |
|
|
|
343 |
|
|
|
454 |
|
|
|
|
Total interest-bearing deposits |
|
|
709 |
|
|
|
163 |
|
|
|
546 |
|
FHLB Advances |
|
|
413 |
|
|
|
280 |
|
|
|
133 |
|
Securities sold under agreements to repurchase |
|
|
48 |
|
|
|
45 |
|
|
|
3 |
|
Other short-term borrowings |
|
|
92 |
|
|
|
82 |
|
|
|
10 |
|
Long-term borrowings |
|
|
280 |
|
|
|
220 |
|
|
|
60 |
|
Subordinated debentures |
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
Total Increase (Decrease) in Interest Expense |
|
|
1,570 |
|
|
|
790 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Net Interest Income |
|
$ |
959 |
|
|
$ |
1,117 |
|
|
$ |
(158 |
) |
|
|
|
23
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month |
|
|
|
Period Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars In Thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
104,921 |
|
|
$ |
1,168 |
|
|
|
4.45 |
% |
|
$ |
99,572 |
|
|
$ |
1,063 |
|
|
|
4.27 |
% |
Loans(2) |
|
|
508,378 |
|
|
|
9,822 |
|
|
|
7.73 |
% |
|
|
414,633 |
|
|
|
7,495 |
|
|
|
7.23 |
% |
Interest bearing balances |
|
|
14,922 |
|
|
|
188 |
|
|
|
5.04 |
% |
|
|
9,504 |
|
|
|
99 |
|
|
|
4.17 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
628,221 |
|
|
|
11,178 |
|
|
|
7.12 |
% |
|
|
523,709 |
|
|
|
8,657 |
|
|
|
6.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
6,634 |
|
|
|
|
|
|
|
|
|
|
|
10,284 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
9,723 |
|
|
|
|
|
|
|
|
|
|
|
9,683 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
8,074 |
|
|
|
|
|
|
|
|
|
|
|
5,646 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(5,574 |
) |
|
|
|
|
|
|
|
|
|
|
(5,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
18,857 |
|
|
|
|
|
|
|
|
|
|
|
20,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
647,078 |
|
|
|
|
|
|
|
|
|
|
$ |
544,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
9,770 |
|
|
$ |
52 |
|
|
|
2.13 |
% |
|
$ |
11,073 |
|
|
$ |
61 |
|
|
|
2.20 |
% |
Money market deposit accounts |
|
|
105,991 |
|
|
|
1,081 |
|
|
|
4.08 |
% |
|
|
127,282 |
|
|
|
1,221 |
|
|
|
3.84 |
% |
Savings accounts |
|
|
5,146 |
|
|
|
62 |
|
|
|
4.82 |
% |
|
|
494 |
|
|
|
1 |
|
|
|
0.81 |
% |
Time deposits |
|
|
232,066 |
|
|
|
2,813 |
|
|
|
4.85 |
% |
|
|
200,727 |
|
|
|
2,016 |
|
|
|
4.02 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
352,973 |
|
|
|
4,008 |
|
|
|
4.54 |
% |
|
|
339,576 |
|
|
|
3,299 |
|
|
|
3.89 |
% |
FHLB Advances |
|
|
83,674 |
|
|
|
1,132 |
|
|
|
5.41 |
% |
|
|
61,933 |
|
|
|
719 |
|
|
|
4.64 |
% |
Securities sold under agreements to repurchase |
|
|
6,231 |
|
|
|
61 |
|
|
|
3.92 |
% |
|
|
1,592 |
|
|
|
13 |
|
|
|
3.27 |
% |
Other short-term borrowings |
|
|
19,707 |
|
|
|
206 |
|
|
|
4.18 |
% |
|
|
11,768 |
|
|
|
114 |
|
|
|
3.87 |
% |
FHLB Long-term borrowings |
|
|
41,401 |
|
|
|
481 |
|
|
|
4.65 |
% |
|
|
21,668 |
|
|
|
202 |
|
|
|
3.73 |
% |
Subordinated Debentures |
|
|
10,311 |
|
|
|
229 |
|
|
|
8.88 |
% |
|
|
10,311 |
|
|
|
201 |
|
|
|
7.80 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
514,297 |
|
|
|
6,117 |
|
|
|
4.76 |
% |
|
|
446,848 |
|
|
|
4,548 |
|
|
|
4.07 |
% |
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
63,594 |
|
|
|
|
|
|
|
|
|
|
|
60,302 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
4,480 |
|
|
|
|
|
|
|
|
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
582,371 |
|
|
|
|
|
|
|
|
|
|
|
511,632 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
64,709 |
|
|
|
|
|
|
|
|
|
|
|
32,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
647,080 |
|
|
|
|
|
|
|
|
|
|
$ |
544,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
2.36 |
% |
|
|
|
|
|
|
|
|
|
|
2.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4) |
|
|
|
|
|
$ |
5,061 |
|
|
|
3.22 |
% |
|
|
|
|
|
$ |
4,109 |
|
|
|
3.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
24
Non-Interest Income
Non-interest income consists of revenue generated from other financial services and activities.
The Mortgage Corporation provides the most significant contributions towards non-interest income.
Total non-interest income was $8.0 million for the three month period ending March 31, 2007
compared to $6.1 million for the same period in 2006, an increase of $1.9 million. Gains on the
sale of loans originated by the Mortgage Corporation totaled $5.4 million for the three months
ending March 31, 2007, compared to $4.7 million for the same period in 2006. Mortgage broker fees
amounted to $1.3 million for the three month period ended March 31, 2007, up from $0.9 million for
the same period in 2006. Other income totaled $1.2 million, for the first three months of 2007 up
from $0.4 million for the same period in 2006. The increase in other income is primarily due to a
$400 thousand increase in settlement fees and an increase of approximately $400 thousand in other
loan fees.
Non-Interest Expense
Non-interest expense totaled $10.8 million for the three months ended March 31, 2007 compared to
$7.6 million for the same period in 2006. Salaries and benefits totaled $5.2 million for the first
three months of 2007, compared to $4.7 million for the same period last year due to increases in
staff at both the Bank and Mortgage Corporation. Other operating expenses totaled approximately
$5.0 million at March 31, 2007, up from $2.4 million at March 31, 2006. The increase in other
operating expenses is primarily attributable to a $1.2 million increases in broker fees and the
$913 thousand increase in the provision for potential loan losses relating to loans held for sale.
As with other non-interest income associated with the Mortgage Corporation non-interest expense
also fluctuates with loan origination volumes.
Liquidity Management
Liquidity is the ability of the Corporation to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities. Liquidity management
involves maintaining the Corporations ability to meet the daily cash flow requirements of both
depositors and borrowers.
Asset and liability management functions not only serve to assure adequate liquidity in order to
meet the needs of the Corporations customers, but also to maintain an appropriate balance between
interest sensitive assets and interest sensitive liabilities so that the Corporation can earn an
appropriate return for its shareholders.
The asset portion of the balance sheet provides liquidity primarily through loan principal
repayments and maturities of investment securities. Other short-term investments such as Federal
Funds sold and maturing interest bearing deposits with other banks are additional sources of
liquidity funding. At March 31, 2007, overnight interest bearing balances totaled $24.7 million
and securities available for sale totaled $93.6 million.
The liability portion of the balance sheet provides liquidity through various interest bearing and
non-interest bearing deposit accounts, Federal Funds purchased, securities sold under agreement to
repurchase and other short-term borrowings. At March 31, 2007, the Bank had a line of credit with
the Federal Home Loan Bank of Atlanta totaling $193.1 million and had outstanding variable rate
loans of $45 million, and an additional $44.4 million in term loans at fixed rates ranging from
2.70% to 5.34% leaving $103.7 million available on the line. In addition to the line of credit at
the Federal Home Loan Bank, the Bank and its mortgage bank subsidiary also issue repurchase
agreements and commercial paper. As of March 31, 2007, outstanding repurchase agreements totaled
$14.6 million and commercial paper issued amounted to $23.3 million. The interest rates on these
instruments is variable and subject to change daily. The Bank also maintains Federal Funds lines
of credit with its correspondent banks and, at March 31, 2007 these lines amounted to $22.6
million. The Corporation also has $10.3 million in subordinated debentures to support the growth
of the organization.
25
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
45,000 |
|
|
$ |
45,000 |
|
FHLB long term borrowings |
|
|
44,435 |
|
|
|
42,572 |
|
Securities sold under agreements to repurchase |
|
|
14,603 |
|
|
|
14,541 |
|
Other short term borrowings |
|
|
23,306 |
|
|
|
20,599 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
Fed Funds Purchased |
|
|
|
|
|
|
4,811 |
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
137,655 |
|
|
$ |
137,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
83,674 |
|
|
$ |
61,066 |
|
FHLB long term borrowings |
|
|
41,401 |
|
|
|
23,722 |
|
Securities sold under agreements to repurchase |
|
|
6,231 |
|
|
|
4,644 |
|
Other short term borrowings |
|
|
19,707 |
|
|
|
18,005 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
161,324 |
|
|
$ |
117,748 |
|
|
|
|
|
|
|
|
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, 2006.
26
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, 2007. The table below reflects the outcome of these
analyses at March 31, 2007, assuming a flat balance sheet. According to the model run for the
period ended March 31, 2007 projecting forward over a twelve month period, an immediate 100 basis
points increase in interest rates would result in a decline in net interest income by 0.84%. An
immediate 100 basis points decline in interest rates would result in an increase in net interest
income by 1.55%. While management carefully monitors the exposure to changes in interest rates and
takes actions as warranted to decrease any adverse impact, there can be no assurance about the
actual effect of interest rate changes on net interest income. The following table reflects the
Corporations earnings sensitivity profile as of March 31, 2007.
Rate Shock Analysis
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical |
|
Hypothetical Percentage |
|
|
Change in Federal |
|
Percentage Change In |
|
Change In Economic |
|
|
Funds Target Rate |
|
Earnings |
|
Value of Equity |
|
|
|
3.00 |
% |
|
|
-2.61 |
% |
|
|
-17.52 |
% |
|
|
|
2.00 |
% |
|
|
-1.71 |
% |
|
|
-11.37 |
% |
|
|
|
1.00 |
% |
|
|
-0.84 |
% |
|
|
-5.76 |
% |
|
|
|
-1.00 |
% |
|
|
1.55 |
% |
|
|
5.36 |
% |
|
|
|
-2.00 |
% |
|
|
2.81 |
% |
|
|
10.48 |
% |
|
|
|
-3.00 |
% |
|
|
2.94 |
% |
|
|
16.27 |
% |
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 commitments to economically hedge the changes in fair value
of the loan due to changes in market interest rates. Failure to effectively monitor, manage and
hedge the interest rate risk associated with the mandatory commitments subjects the Corporation to
potentially significant market risk.
Throughout the lock period the changes in the market value of interest rate lock commitments, best
efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are
included in the statement of operations in mortgage revenue. The Corporations management has
made complex judgments in the recognition of gains and losses in connection with this activity.
The Corporation utilizes a third party and its proprietary simulation model to assist in
identifying and managing the risk associated with this activity. The Corporation did not have a
material gain or loss representing the amount of hedge ineffectiveness during the reporting periods
contained in this report.
27
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that is designed to ensure
that material information relating to the Corporation and its consolidated subsidiaries is
accumulated and communicated to management, including the Corporations Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As
required, management, with the participation of the Corporations Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Corporations
disclosure controls and procedures as of the end of the period covered by this report. Based on
this evaluation, the Corporations Chief Executive Officer and Chief Financial Officer concluded
that the Corporations disclosure controls and procedures were operating effectively to ensure that
information required to be disclosed by the Corporation in reports that it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the SEC.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that the Corporations disclosure controls and procedures will detect or uncover
every situation involving the failure of persons within the Corporation to disclose material
information otherwise required to be set forth in the Corporations periodic and current reports.
Changes in Internal Controls
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. No changes in our internal control over financial
reporting occurred during the last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a party to legal proceedings arising in the ordinary course of business. Management is
of the opinion that these legal proceedings will not have a material adverse effect on the
Corporations financial condition or results of operations. From time to time the Bank may
initiate legal actions against borrowers in connection with collecting defaulted loans. Such
actions are not considered material by management unless otherwise disclosed.
Item 1A. Risk Factors
Our future success will depend on our ability to compete effectively in the highly competitive
financial services industry.
We face substantial competition in all phases of our operations from a variety of different
competitors. In particular, there is very strong competition for financial services in Fairfax
County, Virginia and the entire Washington, D.C. metropolitan area in which we conduct a
substantial portion of our business. We compete with commercial banks, credit unions, savings and
loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms,
insurance companies, money market funds and other mutual funds, as well as other local and
community, super-regional, national and international financial institutions that operate offices
in our primary market areas and elsewhere. Our future growth and success will depend on our
ability to compete effectively in this highly competitive financial services environment.
Many of our competitors are well-established, larger financial institutions and many offer products
and services that we do not. Many have substantially greater resources, name recognition and
market presence that benefit them in attracting business. Some of our competitors are not subject
to the same regulation as is imposed on bank holding companies and federally-insured national
banks, including credit unions which do not pay federal income tax, and, therefore, have regulatory
advantages over us in accessing funding and in providing various services. While we believe we
compete effectively with these other financial institutions in our primary markets, we may face a
competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic
diversification and inability to spread our marketing costs across a broader market. If we have to
raise interest rates paid on deposits or lower interest rates charged on loans to compete
effectively, our net interest margin and income could be negatively affected. Failure to compete
effectively to attract new, or to retain existing, clients may reduce or limit our net income and
our market share and may adversely affect our results of operations, financial condition and
growth.
Our profitability depends on interest rates generally, and we may be adversely affected by changes
in government monetary policy.
Our profitability depends in substantial part on our net interest margin, which is the difference
between the rates we receive on loans and investments and the rates we pay for deposits and other
sources of funds. Our net interest margin depends on many factors that are partly or completely
outside of our control, including competition, federal economic, monetary and fiscal policies, and
economic conditions generally. Our net interest income will be adversely affected if market
interest rates change so that the interest we pay on deposits and borrowings increases faster than
the interest we earn on loans and investments.
Changes in interest rates, particularly by the Board of Governors of the Federal Reserve System,
which implements national monetary policy in order to mitigate recessionary and inflationary
pressures, also affect the value of our loans. In setting its policy, the Federal Reserve may
utilize techniques such as: (i) engaging in open market transactions in United States government
securities; (ii) setting the discount rate on member bank borrowings; and (iii) determining reserve
requirements. These techniques may have an adverse effect on our deposit levels, net interest
margin, loan demand or our business and operations. In addition, an increase in interest rates
could adversely affect borrowers ability to pay the principal or interest on existing loans or
reduce their desire to borrow more money. This may lead to an increase in our nonperforming
assets, a decrease in loan originations, or a reduction in the value of and income from our loans,
any of which could have a material and negative effect on our results of operations. We try to
minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk.
Fluctuations in market rates and other market disruptions are neither predictable nor controllable
and may have a material and negative effect on our business, financial condition and results of
operations.
Our profitability depends significantly on local economic conditions.
As a lender, we are exposed to the risk that our loan clients may not repay their loans according
to their terms and any collateral securing payment may be insufficient to fully compensate us for
the outstanding balance of the loan plus the costs we incur disposing of the collateral. Although
we have collateral for most of our loans, that collateral can fluctuate in value and may not always
cover the outstanding balance on the loan. With most of our loans concentrated in Northern
Virginia, a decline in local economic conditions could adversely affect the values of our real
estate collateral. Consequently, a decline in local economic conditions may have a greater effect
on our earnings and capital than on the earnings and capital of larger financial institutions whose
real estate loan portfolios are geographically diverse.
28
In addition to the financial strength and cash flow characteristics of each of our borrowers, the
bank often secures loans with real estate collateral. At March 31, 2007, approximately 86.9% of
our banks loans held for investment have real estate as a primary or secondary component of
collateral. The real estate collateral in each case provides an alternate source of repayment in
the event of default by the borrower and may deteriorate in value during the time the credit is
extended. If we are required to liquidate the collateral securing a loan to satisfy the debt
during a period of reduced real estate values, our earnings and capital could be adversely
affected.
Our business strategy includes the continuation of our growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or fail to manage our
growth effectively.
We intend to continue to grow in our existing banking markets (internally and through additional
offices) and to expand into new markets as appropriate opportunities arise. Our prospects must be
considered in light of the risks, expenses and difficulties frequently encountered by companies
that are experiencing growth. We cannot assure you we will be able to expand our market presence
in our existing markets or successfully enter new markets, or that any expansion will not adversely
affect our results of operations. Failure to manage our growth effectively could have a material
adverse effect on our business, future prospects, financial condition or results of operations, and
could adversely affect our ability to successfully implement our business strategy. Also, if our
growth occurs more slowly than anticipated or declines, our operating results could be materially
affected in an adverse way.
Our ability to successfully grow will depend on a variety of factors, including the continued
availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth. While we believe we have
the management resources and internal systems in place to successfully manage our future growth,
there can be no assurance growth opportunities will be available or growth will be successfully
managed.
We may face risks with respect to future acquisitions.
As a strategy, we have sought to increase the size of our franchise by pursuing business
development opportunities, and we have grown rapidly since our incorporation. As part of that
strategy, we have acquired three mortgage companies and a small equipment leasing company. We may
acquire other financial institutions and mortgage companies, or parts of those entities, in the
future. Acquisitions and mergers involve a number of risks, including:
|
|
|
the time and costs associated with identifying and evaluating potential acquisitions
and merger partners; |
|
|
|
|
the estimates and judgments used to evaluate credit, operations, management and market
risks with respect to the target entity may not be accurate; |
|
|
|
|
the time and costs of evaluating new markets, hiring experienced local management and
opening new offices, and the time lags between these activities and the generation of
sufficient assets and deposits to support the costs of the expansion; |
|
|
|
|
our ability to finance an acquisition and possible ownership and economic dilution to
our current shareholders and to investors purchasing common stock in this offering; |
|
|
|
|
the diversion of our managements attention to the negotiation of a transaction, and
the integration of the operations and personnel of the combining businesses; |
|
|
|
|
entry into new markets where we lack experience; |
|
|
|
|
the introduction of new products and services into our business; |
|
|
|
|
the incurrence and possible impairment of goodwill associated with an acquisition and
possible adverse short-term effects on our results of operations; and |
|
|
|
|
the loss of key employees and clients. |
We may incur substantial costs to expand, and we can give no assurance such expansion will result
in the levels of profits we seek. There can be no assurance that integration efforts for any
future mergers or acquisitions will be successful. Also, we may issue equity securities, including
common stock and securities convertible into shares of our common stock, in connection with future
acquisitions, which could cause ownership and economic dilution to our current shareholders and to
investors purchasing common stock in this offering. There is no assurance that, following
29
any future merger or acquisition, our integration efforts will be successful or our company, after
giving effect to the acquisition, will achieve profits comparable to or better than our historical
experience.
Our allowance for loan losses could become inadequate and reduce our earnings and capital.
We maintain an allowance for loan losses that we believe is adequate for absorbing any potential
losses in our loan portfolio. Management conducts a periodic review and consideration of the loan
portfolio to determine the amount of the allowance for loan losses based upon general market
conditions, credit quality of the loan portfolio and performance of our clients relative to their
financial obligations with us. The amount of future losses, however, is susceptible to changes in
economic and other market conditions, including changes in interest rates and collateral values
that are beyond our control, and these future losses may exceed our current estimates. Our
allowance for loan losses at March 31, 2007 was $5.7 million. Although we believe the allowance
for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such
losses or that our allowance will be adequate in the future. Excessive loan losses could have a
material impact on our financial performance and reduce our earnings and capital.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from our bank as our primary source of funds. The primary source of funds of
our bank are client deposits and loan repayments. While scheduled loan repayments are a relatively
stable source of funds, they are subject to the ability of borrowers to repay the loans. The
ability of borrowers to repay loans can be adversely affected by a number of factors, including
changes in economic conditions, adverse trends or events affecting business industry groups,
reductions in real estate values or markets, business closings or lay-offs, inclement weather,
natural disasters and international instability. Additionally, deposit levels may be affected by a
number of factors, including rates paid by competitors, general interest rate levels, regulatory
capital requirements, returns available to clients on alternative investments and general economic
conditions. Accordingly, we may be required from time to time to rely on secondary sources of
liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal
Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from
correspondent banks, as well as out-of-market time deposits. While we believe that these sources
are currently adequate, there can be no assurance they will be sufficient to meet future liquidity
demands, particularly if we continue to grow and experience increasing loan demand. We may be
required to slow or discontinue loan growth, capital expenditures or other investments or liquidate
assets should such sources not be adequate.
We are subject to extensive regulation that could limit or restrict our activities and adversely
affect our earnings.
We operate in a highly regulated industry, and both we and our wholly-owned bank are subject to
extensive regulation and supervision by the Federal Reserve Bank, the Office of the Comptroller of
the Currency and the FDIC. Our compliance with these regulations is costly and restricts certain
of our activities, including payment of dividends, mergers and acquisitions, investments, loans and
interest rates charged, interest rates paid on deposits and locations of offices. We are also
subject to capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth. Many of these regulations are intended to protect
depositors and the FDICs Deposit Insurance Fund rather than our shareholders.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities
and Exchange Commission and Nasdaq that are applicable to us, have increased the scope, complexity
and cost of corporate governance, reporting and disclosure practices, including the cost of
completing our audit and maintaining our internal controls. As a result, we may experience greater
compliance costs.
The laws and regulations that apply to us could change at any time. We cannot predict whether or
what form of proposed statute or regulation will be adopted or the extent to which such adoption
may affect our business. Regulatory changes may increase our costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to offer competing
financial services and products and thus place other entities that are not subject to similar
regulation in stronger, more favorable competitive positions, which could adversely affect our
growth and our ability to operate profitably. Failure to comply with existing or new laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have an adverse effect on our business, financial condition
and results of operations.
Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow our
business at all. In addition, our recent and rapid growth may distort some of our historical
financial ratios and statistics. In the future, we may not have the benefit of several recently
favorable factors, such as a generally stable interest rate environment, a
30
strong real estate market, or the ability to find suitable expansion opportunities. Various
factors, such as economic conditions, regulatory and legislative considerations and competition,
may also impede or prohibit our ability to expand our market presence. If we experience a
significant decrease in our historical rate of growth, our results of operations and financial
condition may be adversely affected due to a high percentage of our operating costs being fixed
expenses.
Our hedging strategies may not be successful in managing our risks associated with interest rates.
We use various derivative financial instruments to provide a level of protection against interest
rate risks, but no hedging strategy can protect us completely. When rates change, we expect to
record a gain or loss on derivatives that would be offset by an inverse change in the value of
loans held for sale and mortgage-related securities. We cannot assure you, however, that our
hedging strategy and use of derivatives will offset the risks related to changes in interest rates.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Quantitative and Qualitative Market Risk Disclosure.
The profitability of our mortgage company will be significantly reduced if we are not able to sell
mortgages.
Currently, we sell all of the mortgage loans originated by our mortgage company. We only underwrite
mortgages that we reasonably expect will have more than one potential purchaser. The profitability
of our mortgage company depends in large part upon our ability to originate or purchase a high
volume of loans and to quickly sell them in the secondary market. Thus, we are dependent upon (i)
the existence of an active secondary market and (ii) our ability to sell loans into that market.
The mortgage companys ability to sell mortgage loans readily is dependent upon the availability of
an active secondary market for single-family mortgage loans, which in turn depends in part upon the
continuation of programs currently offered by Fannie Mae and Freddie Mac and other institutional
and non-institutional investors. These entities account for a substantial portion of the secondary
market in residential mortgage loans. Some of the largest participants in the secondary market,
including Fannie Mae and Freddie Mac, are government-sponsored enterprises whose activities are
governed by federal law, and while we do not actively participate in their programs, they do have
substantial market influence. Any future changes in laws that significantly affect the activity of
these government-sponsored enterprises and other institutional and non-institutional investors or
any impairment of our ability to participate in such programs could, in turn, adversely affect our
operations.
We may be exposed to greater risks from offering non-conforming mortgage loans.
We are an acquirer and originator of non-conforming residential mortgage loans for sale into the
secondary market. These are residential mortgages that do not qualify for purchase by government
sponsored agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected
due to our investments in non-conforming mortgage loans. Credit, liquidity and repurchase risks
associated with
non-conforming mortgage loans may be greater than those for conforming mortgage loans. We,
therefore, may assume the risk of increased delinquency rates and/or credit losses as well as
interest rate risk.
Our small- to medium-sized business target market may have fewer financial resources to weather a
downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and
financial services needs of small- and medium-sized businesses. These businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger entities. If
general economic conditions negatively impact this major economic sector in the markets in which we
operate, our results of operations and financial condition may be adversely affected.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and
counterparties, we may rely on information furnished to us by or on behalf of clients and
counterparties, including financial statements and other financial information. We also may rely
on representations of clients and counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to clients, we may assume that a customers audited
financial statements conform with GAAP and present fairly, in all material respects, the financial
condition, results of operations and cash flows of the customer. Our financial condition and
results of operations could be negatively impacted to the extent we rely on financial statements
that do not comply with GAAP or are materially misleading.
Negative public opinion could damage our reputation and adversely impact our earnings.
31
Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is
inherent in our business. Negative public opinion can result from our actual or alleged conduct in
any number of activities, including lending practices, corporate governance and acquisitions, and
from actions taken by government regulators and community organizations in response to those
activities. Negative public opinion can adversely affect our ability to keep and attract clients
and employees and can expose us to litigation and regulatory action. Because virtually all of our
businesses operate under the Access National brand, actual or alleged conduct by one business can
result in negative public opinion about our other businesses. Although we take steps to minimize
reputation risk in dealing with our clients and communities, this risk will always be present given
the nature of our business.
We depend on the services of key personnel, and a loss of any of those personnel would disrupt our
operations and result in reduced revenues.
Our success depends upon the continued service of our senior management team and upon our ability
to attract and retain qualified financial services personnel. Competition for qualified employees
is intense. In our experience, it can take a significant period of time to identify and hire
personnel with the combination of skills and attributes required in carrying out our strategy. If
we lose the services of our key personnel, or are unable to attract additional qualified personnel,
our business, financial condition, results of operations and cash flows could be materially
adversely affected.
Our ability to pay dividends is subject to regulatory restrictions, and we may be unable to
pay future dividends.
Our ability to pay dividends is subject to regulatory restrictions and the need to maintain
sufficient consolidated capital. Also, our only source of funds with which to pay dividends to our
shareholders is dividends we receive from our bank, and the banks ability to pay dividends to us
is limited by its own obligations to maintain sufficient capital and regulatory restrictions. If
these regulatory requirements are not satisfied, we will be unable to pay dividends on our common
stock. We paid our first cash dividends on February 24, 2006. We cannot guarantee that dividends
will not be reduced or eliminated in future periods.
Holders of our junior subordinated debentures have rights that are senior to those of our common
stockholders.
We have supported our continued growth by issuing trust preferred securities through two special
purpose trusts and accompanying
junior subordinated debentures. At March 31, 2007, we had outstanding trust preferred securities
totaling $10.3 million. We unconditionally guaranteed payment of principal and interest on the
trust preferred securities. Also, the junior subordinated debentures we issued to the special
purpose trust that relate to those trust preferred securities are senior to our common stock. As a
result, we must make payments on the junior subordinated debentures before we can pay any dividends
on our common stock. In the event of our bankruptcy, dissolution or liquidation, holders of our
junior subordinated debentures must be satisfied before any distributions can be made on our common
stock. We do
32
have the right to defer distributions on our junior subordinated debentures (and the related trust
preferred securities) for up to five years, but during that time we would not be able to pay
dividends on our common stock.
Certain provisions under our articles of incorporation and applicable law may make it difficult for
others to obtain control of our corporation even if such a change in control may be favored by some
shareholders.
In addition to the amount of common stock controlled by our chairman of the board and other
principal shareholder as described below under Selling Shareholders, certain provisions in our
articles of incorporation and applicable Virginia corporate and banking law may have the effect of
discouraging a change of control of our company even if such a transaction is favored by some of
our shareholders and could result in shareholders receiving a substantial premium over the current
market price of our shares. The primary purpose of these provisions is to encourage negotiations
with our management by persons interested in acquiring control of our corporation. These
provisions may also tend to perpetuate present management and make it difficult for shareholders
owning less than a majority of the shares to be able to elect even a single director.
Our securities are not FDIC insured.
Our common stock is not a savings or deposit account or other obligation of the bank, and is not
insured by the FDICs Deposit Insurance Fund or any other governmental agency and is subject to
investment risk, including the possible loss of principal.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
33
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
|
|
Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K dated August 1, 2005 (file number 000-49929)) |
|
|
|
10.2+*
|
|
Employment Agreement between Dean F. Hackemer and Access National Mortgage Corp.
dated May 11, 2007 |
|
|
|
31.1*
|
|
CEO Certification Pursuant to Rule 13a-14(a) |
|
|
|
31.2*
|
|
CFO Certification Pursuant to Rule 13a-14(a) |
|
|
|
32*
|
|
CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) |
|
|
|
* |
|
filed herewith |
|
+ |
|
indicates a management contract or compensatory plan or arrangement |
34
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, 2007 |
By: |
/s/ Michael W. Clarke
|
|
|
|
Michael W. Clarke |
|
|
|
President & Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: May 14, 2007 |
By: |
/s/ Charles Wimer
|
|
|
|
Charles Wimer |
|
|
|
Executive Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer) |
|
35