e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
For the quarterly period ended September 30, 2008
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
For the transition period from to
Commission File Number: 000-49929
ACCESS NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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Virginia
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82-0545425 |
(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,
a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
The number of shares outstanding of Access National Corporations common stock, par value $0.835,
as of November 4, 2008 was 10,218,373 shares.
ACCESS NATIONAL CORPORATION
FORM 10-Q
INDEX
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PART I
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FINANCIAL INFORMATION |
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Item 1.
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Financial Statements (unaudited) |
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Consolidated Balance Sheets, September 30, 2008 and December 31, 2007 (audited)
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Page 2 |
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Consolidated Statements of Income, three months ended September 30, 2008 and 2007
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Page 3 |
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Consolidated Statements of Income, nine months ended September 30, 2008 and 2007
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Page 4 |
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Consolidated Statements of Changes in Shareholders Equity, nine months ended September 30, 2008 and 2007
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Page 5 |
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Consolidated Statements of Cash Flows, nine months ended September 30, 2008 and 2007
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Page 6 |
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Notes to Consolidated Financial Statements
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Page 7 |
Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Page 20 |
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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Page 32 |
Item 4.
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Controls and Procedures
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Page 33 |
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PART II
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OTHER INFORMATION |
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Item 1.
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Legal Proceedings
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Page 34 |
Item 1A.
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Risk Factors
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Page 34 |
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Page 34 |
Item 3.
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Defaults Upon Senior Securities
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Page 36 |
Item 4.
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Submission of Matters to a Vote of Security Holders
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Page 36 |
Item 5.
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Other Information
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Page 36 |
Item 6.
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Exhibits
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Page 36 |
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Signatures
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Page 37 |
-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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September 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
8,352 |
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$ |
6,238 |
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Interest-bearing deposits in other banks and federal funds sold |
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24,333 |
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13,266 |
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Securities available for sale, at fair value |
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59,614 |
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73,558 |
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Loans held for sale- Carried at fair value in 2008 |
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46,644 |
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39,144 |
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Loans |
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498,190 |
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477,598 |
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Allowance for loan losses |
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(7,665 |
) |
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(7,462 |
) |
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Net loans |
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490,525 |
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470,136 |
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Premises and equipment |
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9,323 |
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9,712 |
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Other assets |
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17,670 |
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10,322 |
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Total assets |
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$ |
656,461 |
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$ |
622,376 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Non-interest-bearing deposits |
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$ |
84,552 |
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$ |
59,415 |
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Savings and interest-bearing deposits |
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116,085 |
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|
142,820 |
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Time deposits |
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287,575 |
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271,183 |
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Total deposits |
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488,212 |
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473,418 |
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Short-term borrowings |
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42,832 |
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|
41,676 |
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Long-term borrowings |
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52,673 |
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|
39,524 |
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Subordinated debentures |
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6,186 |
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|
6,186 |
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Other liabilities and accrued expenses |
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10,688 |
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|
3,611 |
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Total liabilities |
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600,591 |
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564,415 |
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SHAREHOLDERS EQUITY |
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Common stock, par value, $0.835; authorized, 60,000,000 shares;
issued and
outstanding, 10,212,169 shares at September 30, 2008 and
10,840,730 shares at
December 31, 2007 |
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|
8,527 |
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|
9,052 |
|
Surplus |
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|
17,278 |
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|
21,833 |
|
Retained earnings |
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|
30,037 |
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|
26,846 |
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Accumulated other comprehensive income, net |
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28 |
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|
230 |
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Total shareholders equity |
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55,870 |
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57,961 |
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Total liabilities and shareholders equity |
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$ |
656,461 |
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$ |
622,376 |
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See accompanying notes to consolidated financial statements (Unaudited).
-2-
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
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Three Months Ended |
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September 30, |
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2008 |
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2007 |
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Interest and Dividend Income |
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Interest and fees on loans |
|
$ |
8,849 |
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$ |
10,449 |
|
Interest on federal funds sold and deposits in
other banks |
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|
82 |
|
|
|
159 |
|
Interest and dividends on securities |
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|
796 |
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|
1,091 |
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|
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Total interest and dividend
income |
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9,727 |
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11,699 |
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Interest Expense |
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Interest on deposits |
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3,243 |
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|
5,019 |
|
Interest on short-term borrowings |
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|
280 |
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|
866 |
|
Interest on long-term borrowings |
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|
558 |
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|
520 |
|
Interest on subordinated debentures |
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91 |
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228 |
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Total interest expense |
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4,172 |
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|
6,633 |
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Net interest income |
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5,555 |
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|
5,066 |
|
Provision for loan losses |
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1,855 |
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|
942 |
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Net interest income
after
provision for loan
losses |
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3,700 |
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|
4,124 |
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Noninterest Income |
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|
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Service fees on deposit accounts |
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|
106 |
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|
93 |
|
Gain on sale of loans |
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4,828 |
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|
4,719 |
|
Mortgage broker fee income |
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|
305 |
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|
836 |
|
Other income |
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|
401 |
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|
469 |
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Total noninterest income |
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5,640 |
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|
6,117 |
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|
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Noninterest Expense |
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|
|
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Salaries and employee benefits |
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|
4,490 |
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|
|
5,053 |
|
Occupancy and equipment |
|
|
677 |
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|
615 |
|
Other operating expenses |
|
|
2,980 |
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|
4,352 |
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Total noninterest expense |
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|
8,147 |
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|
10,020 |
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|
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|
|
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Income before
income taxes |
|
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1,193 |
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|
221 |
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|
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Income tax expense (benefit) |
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|
424 |
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|
(23 |
) |
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NET INCOME |
|
$ |
769 |
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|
$ |
244 |
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Earnings per common share: |
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Basic |
|
$ |
0.08 |
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|
$ |
0.02 |
|
|
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|
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Diluted |
|
$ |
0.07 |
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|
$ |
0.02 |
|
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|
|
|
|
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|
|
|
|
|
|
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Average outstanding shares: |
|
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|
|
|
|
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|
Basic |
|
|
10,179,177 |
|
|
|
11,533,795 |
|
Diluted |
|
|
10,278,763 |
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|
11,769,998 |
|
See accompanying notes to consolidated financial statements (Unaudited).
-3-
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
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|
Nine Months Ended |
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September 30, |
|
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|
2008 |
|
|
2007 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
26,378 |
|
|
$ |
30,568 |
|
Interest on deposits in other banks |
|
|
443 |
|
|
|
536 |
|
Interest and dividends on securities |
|
|
2,436 |
|
|
|
3,285 |
|
|
|
|
|
|
|
|
Total interest and dividend
income |
|
|
29,257 |
|
|
|
34,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
10,812 |
|
|
|
13,465 |
|
Interest on short-term borrowings |
|
|
819 |
|
|
|
3,682 |
|
Interest on long-term borrowings |
|
|
1,747 |
|
|
|
1,510 |
|
Interest on subordinated debentures |
|
|
293 |
|
|
|
680 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
13,671 |
|
|
|
19,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,586 |
|
|
|
15,052 |
|
Provision for loan losses |
|
|
3,662 |
|
|
|
1,698 |
|
|
|
|
|
|
|
|
Net interest income
after provision for
loan losses |
|
|
11,924 |
|
|
|
13,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
Service fees on deposit accounts |
|
|
322 |
|
|
|
278 |
|
Gain on sale of loans |
|
|
17,921 |
|
|
|
15,283 |
|
Mortgage broker fee income |
|
|
1,391 |
|
|
|
3,134 |
|
Other income |
|
|
2,470 |
|
|
|
3,503 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
22,104 |
|
|
|
22,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
15,928 |
|
|
|
15,572 |
|
Occupancy and equipment |
|
|
1,881 |
|
|
|
1,844 |
|
Other operating expenses |
|
|
10,734 |
|
|
|
13,667 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
28,543 |
|
|
|
31,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes |
|
|
5,485 |
|
|
|
4,469 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
1,963 |
|
|
|
1,392 |
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
3,522 |
|
|
$ |
3,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
10,323,060 |
|
|
|
11,830,506 |
|
Diluted |
|
|
10,463,230 |
|
|
|
12,104,525 |
|
See accompanying notes to consolidated financial statements (Unaudited).
-4-
ACCESS NATIONAL CORPORATION
Statements of Changes in Shareholders Equity
For the Nine Months Ended September 30, 2008 and 2007
(In Thousands)
(Unaudited)
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
Balance, December 31, 2007 |
|
$ |
9,052 |
|
|
$ |
21,833 |
|
|
$ |
26,846 |
|
|
$ |
230 |
|
|
$ |
57,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
3,522 |
|
|
|
|
|
|
|
3,522 |
|
Other comprehensive income,
unrealized holdings losses
arising during the period
(net of tax, $104) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,320 |
|
Stock option exercises (119,632
shares) |
|
|
100 |
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
339 |
|
Dividend reinvestment plan
(60,218 shares) |
|
|
50 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
329 |
|
Repurchased under share
repurchase program
(808,411 shares) |
|
|
(675 |
) |
|
|
(5,169 |
) |
|
|
|
|
|
|
|
|
|
|
(5,844 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(331 |
) |
|
|
|
|
|
|
(331 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense recognized in
earnings |
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
8,527 |
|
|
$ |
17,278 |
|
|
$ |
30,037 |
|
|
$ |
28 |
|
|
$ |
55,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
9,867 |
|
|
$ |
29,316 |
|
|
$ |
23,641 |
|
|
$ |
(529 |
) |
|
$ |
62,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
3,077 |
|
|
|
|
|
|
|
3,077 |
|
Other comprehensive income,
unrealized holdings gains
arising during the period
(net of tax, $254) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492 |
|
|
|
492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,569 |
|
Stock option exercises (164,820
shares) |
|
|
138 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
275 |
|
Dividend reinvestment plan
(91,105 shares) |
|
|
76 |
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
805 |
|
Repurchased under share
repurchase program
(1,000,000 shares) |
|
|
(835 |
) |
|
|
(7,211 |
) |
|
|
|
|
|
|
|
|
|
|
(8,046 |
) |
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(378 |
) |
|
|
|
|
|
|
(378 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense recognized in
earnings |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
Balance, September 30, 2007 |
|
$ |
9,246 |
|
|
$ |
23,033 |
|
|
$ |
26,340 |
|
|
$ |
(37 |
) |
|
$ |
58,582 |
|
|
|
|
See accompanying notes to consolidated financial statements (Unaudited).
-5-
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,522 |
|
|
$ |
3,077 |
|
Adjustments to reconcile net income to net cash
provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
3,662 |
|
|
|
1,698 |
|
Deferred tax (benefit) |
|
|
(569 |
) |
|
|
(21 |
) |
Stock Based Compensation |
|
|
96 |
|
|
|
62 |
|
Unrealized gains on derivatives |
|
|
(340 |
) |
|
|
(40 |
) |
Net amortization (accretion) on securities |
|
|
2 |
|
|
|
(17 |
) |
Depreciation and amortization |
|
|
570 |
|
|
|
642 |
|
Loss on Disposal of assets |
|
|
5 |
|
|
|
1 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in loans held for
sale |
|
|
(7,500 |
) |
|
|
38,956 |
|
Increase in other assets |
|
|
(7,171 |
) |
|
|
(3,460 |
) |
Increase (decrease) in other liabilities |
|
|
7,078 |
|
|
|
(1,305 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities |
|
|
(645 |
) |
|
|
39,593 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds
from maturities and calls of securities available for sale |
|
|
50,711 |
|
|
|
33,332 |
|
Proceeds from sale of securities |
|
|
2,927 |
|
|
|
|
|
Purchases of securities available for sale |
|
|
(40,003 |
) |
|
|
(22,027 |
) |
Net increase in loans |
|
|
(24,052 |
) |
|
|
(55,399 |
) |
Decrease in federal funds sold |
|
|
2 |
|
|
|
|
|
Proceeds from sale of equipment |
|
|
35 |
|
|
|
|
|
Proceeds from sale of other real estate owned |
|
|
781 |
|
|
|
|
|
Purchases of premises and equipment |
|
|
(164 |
) |
|
|
(620 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,763 |
) |
|
|
(44,714 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net decrease in demand, interest-bearing demand
and savings deposits |
|
|
(1,699 |
) |
|
|
(2,758 |
) |
Net increase in time deposits |
|
|
16,492 |
|
|
|
18,395 |
|
Net decrease in securities sold under agreement to
repurchase |
|
|
(107 |
) |
|
|
(1,034 |
) |
Net increase (decrease) in short-term borrowings |
|
|
1,264 |
|
|
|
(7,418 |
) |
Net increase (decrease) in long-term borrowings |
|
|
13,149 |
|
|
|
(4,286 |
) |
Proceeds from issuance of common stock |
|
|
667 |
|
|
|
1,080 |
|
Purchase of common stock |
|
|
(5,844 |
) |
|
|
(8,046 |
) |
Dividends Paid |
|
|
(331 |
) |
|
|
(378 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
23,591 |
|
|
|
(4,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents |
|
|
13,183 |
|
|
|
(9,566 |
) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
19,502 |
|
|
|
27,365 |
|
|
|
|
|
|
|
|
Ending |
|
$ |
32,685 |
|
|
$ |
17,799 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
13,685 |
|
|
$ |
19,333 |
|
Cash payments for income taxes |
|
$ |
3,300 |
|
|
$ |
4,015 |
|
Supplemental Disclosures of Noncash Investing
Activities |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for
sale |
|
$ |
(306 |
) |
|
$ |
746 |
|
See accompanying notes to consolidated financial statements (Unaudited).
-6-
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 COMMENCEMENT OF OPERATIONS
Access National Corporation (the Corporation) is a bank holding company incorporated under the
laws of the Commonwealth of Virginia. The Corporation has three wholly-owned subsidiaries, Access
National Bank (the Bank), which is an independent commercial bank chartered under federal laws as
a national banking association, Access Capital Trust I, and Access Capital Trust II. The
Corporation does not have any significant operations and serves primarily as the parent company for
the Bank. The Corporations income is primarily derived from dividends received from the Bank. The
amount of these dividends is determined by the Banks earnings and capital position.
The Corporation acquired all of the outstanding stock of the Bank in a statutory exchange
transaction on June 15, 2002, pursuant to an Agreement and Plan of Reorganization between the
Corporation and the Bank.
The Bank opened for business on December 1, 1999 and has two active wholly-owned subsidiaries:
Access National Mortgage Corporation (the Mortgage Corporation), a Virginia corporation engaged
in mortgage banking activities, and Access Real Estate LLC. Access Real Estate LLC is a limited
liability company established in July, 2003 for the purpose of holding title to the Corporations
headquarters building, located at 1800 Robert Fulton Drive, Reston, Virginia.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with rules and regulations of the Securities and Exchange
Commission. 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 nine months ended September 30, 2008 are
not necessarily indicative of the results that may be expected for the entire year ending December
31, 2008. These consolidated financial statements should be read in conjunction with the
Corporations audited financial statements and the notes thereto as of December 31, 2007, included
in the Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
7
NOTE 3 STOCK-BASED COMPENSATION PLANS
During the first nine months of 2008, the Corporation granted 93,375 stock options to officers,
directors, and employees under the 1999 Stock Option Plan (the Plan). Options granted under the
Plan have an exercise price equal to the fair market value as of the grant date. Options granted
have a vesting period of two and one half years and expire three and one half years after the issue
date. Stockbased compensation expense recognized in other operating expense during the first
nine months of 2008 was approximately $96 thousand and $62 thousand for the same period in 2007.
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 nine months ended September 30, 2008 is
presented as follows:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2008 |
|
|
|
|
|
Expected life of options granted |
|
|
2.84 |
|
Risk-free interest rate |
|
|
3.10 |
% |
Expected volatility of stock |
|
|
35 |
% |
Annual expected dividend yield |
|
|
1 |
% |
|
Fair Value of Granted Options |
|
$ |
166,120 |
|
Non-Vested Options |
|
|
159,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
Aggregate |
|
|
Number of |
|
Weighted Avg. |
|
Remaining |
|
Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Term |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
|
|
713,624 |
|
|
$ |
6.07 |
|
|
|
1.99 |
|
|
$ |
979,866 |
|
Granted |
|
|
93,375 |
|
|
$ |
6.32 |
|
|
|
2.84 |
|
|
$ |
|
|
Exercised |
|
|
119,632 |
|
|
$ |
2.82 |
|
|
|
0.49 |
|
|
$ |
|
|
Lapsed or Canceled |
|
|
15,550 |
|
|
$ |
8.13 |
|
|
|
2.15 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
671,817 |
|
|
$ |
6.64 |
|
|
|
1.61 |
|
|
$ |
493,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
511,842 |
|
|
$ |
6.28 |
|
|
|
1.38 |
|
|
$ |
493,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NOTE 4 SECURITIES
Amortized costs and fair values of securities available for sale as of September 30, 2008 and December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In Thousands) |
|
U.S. Treasury
Securities |
|
$ |
998 |
|
|
$ |
14 |
|
|
$ |
|
|
|
$ |
1,012 |
|
U.S. Government
Agencies |
|
|
49,933 |
|
|
|
304 |
|
|
|
(221 |
) |
|
|
50,016 |
|
Mortgage Backed
Securities |
|
|
1,522 |
|
|
|
7 |
|
|
|
(10 |
) |
|
|
1,519 |
|
Municipals tax
exempt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals taxable |
|
|
905 |
|
|
|
|
|
|
|
(2 |
) |
|
|
903 |
|
CRA Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(50 |
) |
|
|
1,450 |
|
Restricted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank
Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
3,820 |
|
|
|
|
|
|
|
|
|
|
|
3,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities |
|
$ |
59,572 |
|
|
$ |
325 |
|
|
$ |
(283 |
) |
|
$ |
59,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
U.S. Treasury Notes |
|
$ |
995 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
1,013 |
|
U.S. Governmental
Agencies |
|
|
61,365 |
|
|
|
417 |
|
|
|
(62 |
) |
|
|
61,720 |
|
Mortgage Backed
Securities |
|
|
793 |
|
|
|
6 |
|
|
|
|
|
|
|
799 |
|
Municipals tax
exempt |
|
|
2,890 |
|
|
|
6 |
|
|
|
(5 |
) |
|
|
2,891 |
|
Municipals taxable |
|
|
1,110 |
|
|
|
|
|
|
|
(11 |
) |
|
|
1,099 |
|
CRA Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(21 |
) |
|
|
1,479 |
|
Restricted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve
Bank Stock |
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
894 |
|
FHLB Stock |
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities |
|
$ |
73,210 |
|
|
$ |
447 |
|
|
$ |
(99 |
) |
|
$ |
73,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 4 SECURITIES (continued)
The amortized cost and fair value of securities available for sale as of September 30, 2008 and
December 31, 2007 by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid without any penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
U.S. Treasury and
Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or
less |
|
$ |
5,998 |
|
|
$ |
6,022 |
|
|
$ |
38,867 |
|
|
$ |
38,879 |
|
Due after one
through five years |
|
|
10,000 |
|
|
|
10,056 |
|
|
|
1,995 |
|
|
|
2,011 |
|
Due after five
through ten years |
|
|
34,933 |
|
|
|
34,950 |
|
|
|
21,498 |
|
|
|
21,844 |
|
Municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one
through five years |
|
|
905 |
|
|
|
903 |
|
|
|
1,110 |
|
|
|
1,099 |
|
Due after five
through ten years |
|
|
|
|
|
|
|
|
|
|
2,890 |
|
|
|
2,891 |
|
Mortgage Backed
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or
less |
|
|
385 |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
Due after one
through five years |
|
|
200 |
|
|
|
202 |
|
|
|
793 |
|
|
|
799 |
|
Due after ten years |
|
|
937 |
|
|
|
927 |
|
|
|
|
|
|
|
|
|
CRA Mutual Fund |
|
|
1,500 |
|
|
|
1,450 |
|
|
|
1,500 |
|
|
|
1,479 |
|
Restricted Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank
stock |
|
|
894 |
|
|
|
894 |
|
|
|
894 |
|
|
|
894 |
|
FHLB stock |
|
|
3,820 |
|
|
|
3,820 |
|
|
|
3,663 |
|
|
|
3,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,572 |
|
|
$ |
59,614 |
|
|
$ |
73,210 |
|
|
$ |
73,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTE 4 SECURITIES (continued)
Investment securities available for sale that have an unrealized loss position at September 30,
2008 and December 31, 2007 are as follows:
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
927 |
|
|
$ |
(10 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
927 |
|
|
$ |
(10 |
) |
U.S. Government Agencies |
|
|
19,712 |
|
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
19,712 |
|
|
|
(221 |
) |
Municipals-Taxable |
|
|
903 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
903 |
|
|
|
(2 |
) |
Municipals-Tax Exempt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,450 |
|
|
|
(50 |
) |
|
|
1,450 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,542 |
|
|
$ |
(233 |
) |
|
$ |
1,450 |
|
|
$ |
(50 |
) |
|
|
22,992 |
|
|
$ |
(283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
19,812 |
|
|
$ |
(62 |
) |
|
$ |
19,812 |
|
|
$ |
(62 |
) |
Municipals-Taxable |
|
|
|
|
|
|
|
|
|
|
1,100 |
|
|
|
(11 |
) |
|
|
1,100 |
|
|
|
(11 |
) |
Municipals-Tax Exempt |
|
|
457 |
|
|
|
(2 |
) |
|
|
915 |
|
|
|
(3 |
) |
|
|
1,372 |
|
|
|
(5 |
) |
CRA Mutual Fund |
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
(21 |
) |
|
|
1,479 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
457 |
|
|
$ |
(2 |
) |
|
$ |
23,306 |
|
|
$ |
(97 |
) |
|
|
23,763 |
|
|
$ |
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of September 30, 2008 and
December 31, 2007 is other than a temporary impairment. These unrealized losses are primarily
attributable to changes in interest rates. The Corporation has the ability to hold these
securities for a time necessary to recover the amortized cost or until maturity when full repayment
would be received.
11
NOTE 5 LOANS
The following table presents the composition of the loan portfolio at September 30, 2008 and
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
|
2008 |
|
|
Total |
|
|
2007 |
|
|
Total |
|
|
|
(In Thousands) |
|
Commercial |
|
$ |
72,661 |
|
|
|
14.58 |
% |
|
$ |
64,860 |
|
|
|
13.58 |
% |
Commercial real estate |
|
|
223,255 |
|
|
|
44.81 |
|
|
|
199,894 |
|
|
|
41.85 |
|
Real estate construction |
|
|
45,460 |
|
|
|
9.13 |
|
|
|
55,074 |
|
|
|
11.53 |
|
Residential real estate |
|
|
155,183 |
|
|
|
31.15 |
|
|
|
156,731 |
|
|
|
32.82 |
|
Consumer |
|
|
1,631 |
|
|
|
0.33 |
|
|
|
1,039 |
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
498,190 |
|
|
|
100.00 |
% |
|
$ |
477,598 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
7,665 |
|
|
|
|
|
|
|
7,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
490,525 |
|
|
|
|
|
|
$ |
470,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 SEGMENT REPORTING
The Corporation has two reportable segments: traditional commercial banking and a mortgage banking
business. Revenues from commercial banking operations consist primarily of interest earned on loans
and investment securities and fees from deposit services. Mortgage banking operating revenues
consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in
the secondary mortgage market and loan origination fee income.
The commercial banking segment provides the mortgage segment with the short-term funds needed to
originate mortgage loans through a warehouse line of credit and charges the mortgage banking
segment interest based on the prime rate. These transactions are eliminated in the consolidation
process.
Other includes the operations of the Corporation and Access Real Estate LLC. The primary source of
income for the Corporation is derived from dividends from the Bank and its primary expense relates
to interest on subordinated debentures. The primary source of income for Access Real Estate LLC is
derived from rents received from the Bank and Mortgage Corporation.
12
NOTE 6 SEGMENT REPORTING (continued)
The following table presents segment information for the three months ended September 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,555 |
|
|
$ |
309 |
|
|
$ |
13 |
|
|
$ |
(150 |
) |
|
$ |
9,727 |
|
Gain on sale of loans |
|
|
|
|
|
|
4,828 |
|
|
|
|
|
|
|
|
|
|
|
4,828 |
|
Other revenues |
|
|
488 |
|
|
|
547 |
|
|
|
325 |
|
|
|
(548 |
) |
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,043 |
|
|
|
5,684 |
|
|
|
338 |
|
|
|
(698 |
) |
|
|
15,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,997 |
|
|
|
120 |
|
|
|
206 |
|
|
|
(151 |
) |
|
|
4,172 |
|
Salaries and employee benefits |
|
|
1,924 |
|
|
|
2,566 |
|
|
|
|
|
|
|
|
|
|
|
4,490 |
|
Other |
|
|
3,275 |
|
|
|
2,354 |
|
|
|
430 |
|
|
|
(547 |
) |
|
|
5,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,196 |
|
|
|
5,040 |
|
|
|
636 |
|
|
|
(698 |
) |
|
|
14,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
847 |
|
|
$ |
644 |
|
|
$ |
(298 |
) |
|
|
|
|
|
$ |
1,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
620,008 |
|
|
$ |
48,721 |
|
|
$ |
44,738 |
|
|
$ |
(57,006 |
) |
|
$ |
656,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
11,605 |
|
|
$ |
902 |
|
|
$ |
185 |
|
|
$ |
(993 |
) |
|
$ |
11,699 |
|
Gain on sale of loans |
|
|
|
|
|
|
4,719 |
|
|
|
|
|
|
|
|
|
|
|
4,719 |
|
Other revenues |
|
|
368 |
|
|
|
1,358 |
|
|
|
260 |
|
|
|
(588 |
) |
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
11,973 |
|
|
|
6,979 |
|
|
|
445 |
|
|
|
(1,581 |
) |
|
|
17,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
6,281 |
|
|
|
1,002 |
|
|
|
344 |
|
|
|
(993 |
) |
|
|
6,634 |
|
Salaries and employee benefits |
|
|
1,867 |
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
5,053 |
|
Other |
|
|
1,456 |
|
|
|
4,588 |
|
|
|
452 |
|
|
|
(588 |
) |
|
|
5,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,604 |
|
|
|
8,776 |
|
|
|
796 |
|
|
|
(1,581 |
) |
|
|
17,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
2,369 |
|
|
$ |
(1,797 |
) |
|
$ |
(351 |
) |
|
|
|
|
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
613,336 |
|
|
$ |
35,064 |
|
|
$ |
50,600 |
|
|
$ |
(56,336 |
) |
|
$ |
642,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table presents segment information for the nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
28,638 |
|
|
$ |
1,349 |
|
|
$ |
59 |
|
|
$ |
(789 |
) |
|
$ |
29,257 |
|
Gain on sale of loans |
|
|
|
|
|
|
17,925 |
|
|
|
|
|
|
|
(4 |
) |
|
|
17,921 |
|
Other revenues |
|
|
1,404 |
|
|
|
3,589 |
|
|
|
861 |
|
|
|
(1,671 |
) |
|
|
4,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
30,042 |
|
|
|
22,863 |
|
|
|
920 |
|
|
|
(2,464 |
) |
|
|
51,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
13,094 |
|
|
|
733 |
|
|
|
635 |
|
|
|
(791 |
) |
|
|
13,671 |
|
Salaries and employee benefits |
|
|
5,862 |
|
|
|
10,066 |
|
|
|
|
|
|
|
|
|
|
|
15,928 |
|
Other |
|
|
7,565 |
|
|
|
9,079 |
|
|
|
1,306 |
|
|
|
(1,673 |
) |
|
|
16,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
26,521 |
|
|
|
19,878 |
|
|
|
1,941 |
|
|
|
(2,464 |
) |
|
|
45,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
3,521 |
|
|
$ |
2,985 |
|
|
$ |
(1,021 |
) |
|
$ |
|
|
|
$ |
5,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
620,008 |
|
|
$ |
48,721 |
|
|
$ |
44,738 |
|
|
$ |
(57,006 |
) |
|
$ |
656,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
34,255 |
|
|
$ |
3,108 |
|
|
$ |
588 |
|
|
$ |
(3,562 |
) |
|
$ |
34,389 |
|
Gain on sale of loans |
|
|
|
|
|
|
15,286 |
|
|
|
|
|
|
|
(3 |
) |
|
|
15,283 |
|
Other revenues |
|
|
1,110 |
|
|
|
6,767 |
|
|
|
791 |
|
|
|
(1,753 |
) |
|
|
6,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
35,365 |
|
|
|
25,161 |
|
|
|
1,379 |
|
|
|
(5,318 |
) |
|
|
56,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
18,151 |
|
|
|
3,724 |
|
|
|
1,027 |
|
|
|
(3,565 |
) |
|
|
19,337 |
|
Salaries and employee benefits |
|
|
5,354 |
|
|
|
10,218 |
|
|
|
|
|
|
|
|
|
|
|
15,572 |
|
Other |
|
|
4,508 |
|
|
|
13,225 |
|
|
|
1,229 |
|
|
|
(1,753 |
) |
|
|
17,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28,013 |
|
|
|
27,167 |
|
|
|
2,256 |
|
|
|
(5,318 |
) |
|
|
52,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,352 |
|
|
$ |
(2,006 |
) |
|
$ |
(877 |
) |
|
$ |
|
|
|
$ |
4,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
613,336 |
|
|
$ |
35,064 |
|
|
$ |
50,600 |
|
|
$ |
(56,336 |
) |
|
$ |
642,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
NOTE 7 EARNINGS PER SHARE (EPS)
The following tables show the calculation of both basic and diluted earnings per share (EPS) for
the three and nine months ended September 30, 2008 and 2007, respectively. The numerator of both
the basic and diluted EPS is equivalent to net income. The weighted average number of shares
outstanding used as the denominator for diluted EPS is increased over the denominator used for
basic EPS by the effect of potentially dilutive common stock options and warrants utilizing the
treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
|
|
(In thousands, except for share data) |
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
769 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
10,179,177 |
|
|
|
11,533,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
769 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
10,179,177 |
|
|
|
11,533,795 |
|
Stock options and warrants |
|
|
99,586 |
|
|
|
236,203 |
|
|
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
10,278,763 |
|
|
|
11,769,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
|
|
(In thousands, except for share data) |
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
3,522 |
|
|
$ |
3,077 |
|
|
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
10,323,060 |
|
|
|
11,830,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.34 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
3,522 |
|
|
$ |
3,077 |
|
|
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
10,323,060 |
|
|
|
11,830,506 |
|
Stock options and warrants |
|
|
140,170 |
|
|
|
274,019 |
|
|
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
10,463,230 |
|
|
|
12,104,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
15
NOTE 8 DERIVATIVES
The Mortgage Corporation carries all derivative instruments at fair value as either assets or
liabilities in the consolidated balance sheets. SFAS 133, Accounting for Derivative Instruments and Hedging Activities 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 September 30, 2008 and December 31, 2007, the Mortgage Corporation had derivative financial
instruments with a notional value of $103.6 million and $33.7 million respectively. The fair
value of these derivative instruments at September 30, 2008 and December 31, 2007 was $103.8
million and $33.5 million respectively.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (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 the Statement applies under
other accounting pronouncements that require or permit fair value measurements, it does not require
any new fair value measurements. SFAS 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 became
effective for the Corporation on January 1, 2008. See Note 10 of the accompanying notes to the
consolidated financial statements for additional information.
In February 2008, the FASB issued FASB Staff Position No. 157-2. The staff position delays the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a recurring basis.
The delay is intended to allow additional time to consider the effect of various implementation
issues with regard to the application of SFAS 157. The new staff position defers the effective date
of SFAS 157 to January 1, 2009 for items within the scope of the staff position. The Corporation is
currently evaluating the impact of FASB Staff Position 157-2 on the consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115. This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The 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 became effective for the Corporation on
January 1, 2008. The Corporation has elected the fair value option for new residential mortgage
loans originated and held for sale. See Note 10 of the accompanying notes to the consolidated
financial statements for additional information.
In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 109, Written Loan Commitments Recorded at Fair Value Through
Earnings (SAB 109). SAB 109 expresses the current view of the SEC staff that the expected net future cash
flows related to the associated servicing of the loan should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. SEC registrants
are expected to apply this guidance on a prospective basis to derivative loan commitments issued or
modified in the first quarter of 2008 and thereafter. The adoption of this standard did not have a
material impact on the Corporations consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) replaces SFAS 141. SFAS 141(R)
establishes principles and requirements for how an acquirer in a business combination recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest; recognizes and measures goodwill acquired in the business combination
or a gain from a bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature
and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the
Corporation taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a
calendar year-end company is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009. The Corporation will
assess the impact of SFAS 141(R) if and when a future acquisition occurs.
16
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting non-controlling interests
(minority interest). As a result, diversity in practice exists. In some cases minority interest is
reported as a liability and in others it is reported in the mezzanine section between liabilities
and equity. Specifically, SFAS 160 requires the recognition of a non-controlling interest (minority
interest) as equity in the consolidated financials statements and separate from the parents
equity. The amount of net income attributable to the non-controlling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a
parents ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated.
Such gain or loss will be measured using the fair value of the non-controlling equity investment on
the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interests. SFAS 160 is effective for the
Corporation on January 1, 2009. Earlier adoption is prohibited. The Corporation is currently
evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging - an amendment of FASB statement No. 133. SFAS 161 requires enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and related items are
accounted for under SFAS 133 and how derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash flows. The new standard is effective
for the Corporation on January 1, 2009. The Corporation is currently evaluating the impact of
adopting SFAS 161 on the consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierachy of Generally Accepted Accounting Principles. SFAS 162 clarifies the sources of accounting principles
used in the preparation of financial statements in the United States. This new guidance is
expected to become effective in 2008 and is not expected to have a material effect on Corporations
consolidated financial statements upon implementation.
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value Asset When the Market for That Asset Is Not Active. FSP 157-3 clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective immediately upon issuance, and did not have
a material impact on the Corporations
consolidated financial statements.
NOTE 10 FAIR VALUE
Effective January 1, 2008, the Corporation adopted SFAS 157 and SFAS 159. SFAS 157 defines fair
value as the exchange price that would be received for an asset or paid to transfer a liability
(exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a companys own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods to determine the fair value of each type of financial
instrument:
Investment securities: The fair values for investment securities are determined by quoted
market prices (Level 1).
Residential loans held for sale: The fair value of loans held for sale is determined using
quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: Derivative instruments are used to hedge residential
mortgage loans held for sale and the related interest-rate lock commitments and include forward
commitments to sell mortgage loans and mortgage backed securities. The fair values of derivative
financial instruments are based on derivative market data inputs as of the valuation date and the
underlying value of mortgage loans for rate lock commitments (Level 3).
17
NOTE 10 FAIR VALUE (continued)
Impaired loans: The fair values of impaired loans are measured for impairment using the
fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral
may be in the form of real estate or business assets including equipment, inventory and accounts
receivable. The use of discounted cash flow models and managements best judgment are significant
inputs in arriving at the fair value measure of the underlying collateral and are therefore
classified within (Level 3).
Other real estate owned: The fair value of other real estate owned, which is included in
other assets on the balance sheet, consists of real estate that has been foreclosed. Foreclosed
real estate is recorded at the lower of fair value less selling expenses or the book balance prior
to foreclosure. Write downs are provided for subsequent declines in value and are recorded in
other non-interest expense (Level 2).
Assets and liabilities measured at fair value under SFAS 157 on a recurring and non-recurring
basis, including financial assets and liabilities for which the Corporation has elected the fair
value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement |
(In Thousands) |
|
|
|
|
|
at September 30, 2008 Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
|
|
|
|
|
|
|
|
Identical |
|
Other |
|
Significant |
|
|
|
|
|
|
Assets (Level |
|
Observable |
|
Unobservable |
Description |
|
Carrying Value |
|
1) |
|
Inputs (Level 2) |
|
Inputs (Level 3) |
Financial Assets-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
investment securities (1) |
|
$ |
54,900 |
|
|
$ |
54,900 |
|
|
$ |
|
|
|
$ |
|
|
Residential loans held for
sale |
|
|
46,644 |
|
|
|
|
|
|
|
46,644 |
|
|
|
|
|
Derivative assets |
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
238 |
|
Financial
Liabilities-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets-Non-Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (2) |
|
|
7,045 |
|
|
|
|
|
|
|
|
|
|
|
7,045 |
|
Other real estate owned (3) |
|
|
653 |
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
|
(1) |
|
Excludes restricted stock. |
|
(2) |
|
Represents the carrying value of loans for which adjustments are based on the appraised
value of the collateral. |
|
(3) |
|
Represents appraised value and realtor comparables less estimated selling expenses. |
18
The changes in Level 3 assets and liabilities measured at fair value on a
recurring basis are
summarized as follows for three month period
ended September 30, 2008.
|
|
|
|
|
(In Thousands) |
|
Net Derivatives |
|
Balance June 30, 2008 |
|
$ |
39 |
|
Realized and unrealized
gains (losses) included in
earnings |
|
|
161 |
|
Unrealized gains (losses)
included in other
comprehensive income |
|
|
|
|
Purchases, Settlements,
paydowns, and maturities |
|
|
|
|
Transfer into Level 3 |
|
|
|
|
|
|
|
|
Balance September 30, 2008 |
|
$ |
200 |
|
|
|
|
|
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are
summarized as follows for the nine
month period ended September 30,
2008.
|
|
|
|
|
(In Thousands) |
|
Net Derivatives |
|
Balance January 1,
2008 |
|
$ |
(140 |
) |
Realized and
unrealized gains
included in
earnings |
|
|
340 |
|
Unrealized gains
(losses) included
in other
comprehensive
income |
|
|
|
|
Purchases,
settlements,
paydowns, and
maturities |
|
|
|
|
Transfer into Level
3 |
|
|
|
|
|
|
|
|
Balance September
30, 2008 |
|
$ |
200 |
|
|
|
|
|
Financial instruments recorded using SFAS 159
Under SFAS 159, the Corporation may elect to report most financial instruments and certain other
items at fair value on an instrument-by-instrument basis with changes in fair value reported in
net income. After the initial adoption, the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified
reconsideration events occur. The fair value election may not be revoked once an election is
made. Additionally, the transaction provisions of SFAS 159 permit a one-time election for
existing positions at the adoption date with a cumulative-effect adjustment included in
beginning retained earnings and future changes in fair value reported in net income. The
Corporation did not elect the fair value option for any existing positions at January 1, 2008
and there was no impact to equity.
The following table reflects the differences between the fair value carrying amount of
residential mortgage loans held for sale at September 30, 2008, measured at fair value under
SFAS 159 and the aggregate unpaid principal amount the Corporation is contractually entitled to
receive at maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
(In Thousands) |
|
Aggregate Fair Value |
|
Difference |
|
Principal |
Residential
mortgage loans held
for sale |
|
$ |
46,644 |
|
|
$ |
1,023 |
|
|
$ |
45,621 |
|
The Corporation elected to account for residential loans held for sale to eliminate the mismatch in
recording changes in market value on derivative instruments used to hedge loans held for sale while
carrying the loans at the lower of cost or market. The change to fair value accounting for loans
held for sale resulted in a pre-tax increase in income of $612 thousand after considering loan
origination fees and costs that were previously deferred in accordance with SFAS No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases-an amendment of FASB Statements No. 13, 60, and 65 and a rescission
of FASB Statement No. 17.
19
NOTE 11 SUBSEQUENT EVENT
On October 14, 2008, the United States Treasury Department (the Treasury ) announced a voluntary
Capital Purchase Program whereby the Treasury will purchase senior preferred shares from qualifying
United States controlled banks, savings associations, and certain bank and savings and loan holding
companies. Each participating institution may sell an amount of senior preferred shares ranging
from 1.0% to 3.0% of its total risk-weighted assets. The preferred shares are generally nonvoting,
pay a cumulative dividend rate of 5.0% per year for the first five years and will reset to a rate
of 9.0% per year after year five, and are callable at par after three years or sooner with the
proceeds of a qualifying offering of Tier 1 common or preferred stock. The Treasury will receive
warrants from each participating institution to purchase common stock with an aggregate market
price equal to 15.0% of the senior preferred investment and an exercise price equal to the market
price of the institutions common stock at the time of issuance. Participating institutions must
agree to certain limitations on executive compensation, share repurchases and dividend payments.
The deadline for submitting an application to participate in the Capital Purchase Program is
November 14, 2008. We are analyzing the benefits and costs of the Capital Purchase Program and have
not yet determined whether we will participate.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Corporations consolidated
financial statements, and notes thereto, for the year ended December 31, 2007 included in the
Corporations Annual Report on Form 10-K. Operating results for the nine months ended September
30, 2008 are not necessarily indicative of the results for the year ending December 31, 2008 or any
future period.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q may contain
forward-looking statements. For this purpose, any statements contained herein, including documents
incorporated by reference, that are not statements of historical fact may be deemed to be
forward-looking statements. Examples of forward-looking statements include discussions as the
Corporations 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 of Atlanta (FHLB) 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 for
other reasons. The subsequent cost of liquidating these loans may have a negative impact on
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 the
Corporation undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which it is made.
RECENT DEVELOPMENTS
There have been historical disruptions in the financial system during the past year and many
lenders and financial institutions have reduced or ceased to provide funding to borrowers,
including other lending institutions. The availability of credit, confidence in the entire
financial sector, and volatility in financial markets has been adversely affected. These
disruptions are likely to have some impact on all institutions in the U.S. banking and financial
industries, including the Corporation. The Federal Reserve Bank has been providing liquidity into
the banking system to compensate for weaknesses in short-term borrowing markets and other capital
markets. A reduction in the Federal Reserves activities or capacity could reduce liquidity in the
markets, thereby increasing funding costs to the Bank or reducing the
availability of funds to the Bank to finance its existing operations. In response to the financial
crises affecting the overall banking system and financial markets, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (EESA) was enacted. Under the EESA, the Treasury
will have authority, among other things, to purchase mortgages, mortgage backed securities and
certain other financial instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.
20
On October 3, 2008, the Troubled Asset Relief Program (TARP) was signed into law. TARP gave the
Treasury authority to deploy up to $750 billion into the financial system with an objective of
improving liquidity in capital markets. On October 24, 2008, Treasury announced plans to direct
$250 billion of this authority into preferred stock investments in banks. The general terms of this
preferred stock program are as follows for a participating bank: pay 5% dividends on the Treasurys
preferred stock for the first five years and 9% dividends thereafter; cannot increase common stock
dividends for three years while Treasury is an investor; cannot redeem the Treasury preferred stock
for three years unless the participating bank raises high-quality private capital; must receive
Treasurys consent to buy back their own stock; Treasury receives warrants entitling Treasury to
buy participating banks common stock equal to 15% of Treasurys total investment in the
participating bank; and participating bank executives must agree to certain compensation
restrictions, and restrictions on the amount of executive compensation which is tax deductible. The
term of this Treasury preferred stock program could reduce investment returns to participating
banks shareholders by restricting dividends to common shareholders, diluting existing
shareholders interests, and restricting capital management practices.
Federal and state governments could pass additional legislation responsive to current credit
conditions. As an example, the Corporation could experience higher credit losses because of federal
or state legislation or regulatory action that reduces the amount the Banks borrowers are
otherwise contractually required to pay under existing loan contracts. Also, the Corporation could
experience higher credit losses because of federal or state legislation or regulatory action that
limits the Banks ability to foreclose on property or other collateral or makes foreclosure less
economically feasible.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC insured financial
institutions up to certain limits. The FDIC charges insured financial institutions premiums to
maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for
bank failures, in which case the FDIC would take control of failed banks and ensure payment of
deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the
FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund,
including requiring riskier institutions to pay a larger share of the premiums. An increase in
premium assessments would increase the Banks expenses. The EESA included a provision for an
increase in the amount of deposits insured by FDIC to $250,000 until December 2009. On October 14,
2008, the FDIC announced a new program the Temporary Liquidity Guarantee Program that provides
unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not
otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions
will be covered under the program for the first 30 days without incurring any costs. After the
initial period, participating institutions will be assessed a 10 basis point surcharge on the
additional insured deposits. The behavior of depositors in regard to the level of FDIC insurance
could cause the Banks existing customers to reduce the amount of deposits held at the Bank, and or
could cause new customers to open deposit accounts at the Bank. The level and composition of the
Banks deposit portfolio directly impacts the Banks funding cost and net interest margin.
The actions described above, together with additional actions announced by the Treasury and other
regulatory agencies, continue to develop. It is not clear at this time what impact, EESA, TARP,
other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that
have been previously announced, and any additional programs that may be initiated in the future
will have on the financial markets and the financial services industry. The extreme levels of
volatility and limited credit availability currently being experienced could continue to effect the
U.S. banking industry and the broader U.S. and global economies, which will have an affect on all
financial institutions, including the Corporation.
CRITICAL ACCOUNTING POLICIES
General
The Corporations financial statements are prepared in accordance with GAAP. The financial
information contained within the 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 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.
21
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in the Banks loan
portfolio. The allowance is based on
two basic principles of accounting: (i) SFAS No. 5 Accounting for Contingencies, which requires
that losses be accrued when they are
probable of occurring and estimatable, and (ii) SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, which requires that losses be accrued based on the differences between the
value of collateral, present value of future cash flows or values that are observable in the
secondary market and the loan balance.
An allowance for loan losses is established through a provision for loan losses based upon industry
standards, known risk characteristics,
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.
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 September
30, 2008, these commitments amounted to $11.8 million. These commitments do not necessarily
represent cash requirements, since many commitments are expected to expire without being drawn on.
At September 30, 2008, the Bank had approximately $106.4 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 loans held
for investment portfolio , the volume of commitments and unfunded lines of credit are expected to
increase accordingly.
The Bank maintains a reserve for potential off-balance sheet credit losses that is included in
other liabilities on the balance sheet. At September 30, 2008 and December 31, 2007 the balance in
this account totaled $277 thousand. The Mortgage Corporation maintains a similar reserve for
standard representations and warranties issued in connection with loans sold that totaled $784
thousand at September 30, 2008 and $119.0 million at December 31, 2007.
FINANCIAL CONDITION (September 30, 2008 compared to December 31, 2007)
At September 30, 2008, the Corporations assets totaled $656.5 million compared to $622.4 million
at December 31, 2007, an increase of $34.1 million. Loans held for investment totaled $498.2
million up from $477.6 million at year end 2007, an increase of $20.6 million. Loans held for sale
totaled $46.6 million, up from $39.1 million at December 31, 2007, an increase of $7.5 million.
Total deposits increased $14.8 million to $488.2 million, compared to $473.4 million at December
31, 2007.
Securities
The Corporations securities portfolio is comprised of U.S. Treasury securities, U.S. government
agency securities, mortgage backed securities, obligations of states and political subdivisions, a
Community Reinvestment Act mutual fund and Federal Reserve Bank and FHLB stock. At September 30,
2008 the securities portfolio totaled $59.6 million, down from $73.6 million on December 31, 2007,
as a result of maturities and called securities that were not reinvested. All securities were
classified as available for sale. Securities classified as available for sale are accounted for at
fair market value with unrealized gains and losses recorded directly to a separate component of
shareholders equity, net of associated tax effect. Investment securities are used to provide
liquidity, to generate income, and to temporarily supplement loan growth as needed.
Loans
The loans held for investment portfolio constitutes the largest component of earning assets and is
comprised of commercial loans, real estate loans, construction loans, and consumer loans. These
lending activities provide access to credit to small businesses, professionals and consumers in the
greater Washington, D.C. metropolitan area. All lending activities of the Bank and its subsidiaries
are subject to the regulations and supervision of the Office of the Comptroller of Currency. At
September 30, 2008, loans held for investment totaled $498.2 million, up $20.6 million from $477.6
million at December 31, 2007. The increase in loans is due to our commitment to provide credit
services to our existing and new clients. The growth occurred primarily in commercial loans and
commercial real estate loans. See Note 5 of the accompanying notes to the consolidated financial
statements for a table that summarizes the composition of the Corporations loan portfolio. The
following is a summary of the loans held for investment portfolio at September 30, 2008.
22
Commercial Loans: Commercial loans represent 14.6% of the loans held for investment
portfolio as of September 30, 2008. These loans are made to businesses or individuals within our
target market for business purposes. Typically the loan proceeds are used to support working
capital and the acquisition of fixed assets of an operating business. We underwrite these loans
based upon our assessment of the obligor(s) ability to generate operating cash flows in the future
necessary to repay the loan. To address the risks associated with the uncertainties of future cash
flows, these loans are generally well secured by assets owned by the business or its principal
shareholders and
the principal shareholders are typically required to guarantee the loan.
Commercial Real Estate Loans: Also known as commercial mortgages, loans in this category
represent 44.8% of the loans held for investment portfolio as of September 30, 2008. 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 Construction Loans: Real estate construction loans, also known as construction
and land development loans, comprise 9.1% of the loans held for investment portfolio as of
September 30, 2008. These loans generally fall into one of three categories: first, loans to
individuals that are ultimately used to acquire property and construct an owner occupied residence;
second, loans to builders for the purpose of acquiring property and constructing homes for sale to
consumers; and third, loans to developers for the purpose of acquiring land that is developed into
finished lots for the ultimate construction of residential or commercial buildings. Loans of these
types are generally secured by the subject property within limits established by the Board of
Directors based upon an assessment of market conditions and updated from time to time. The loans
typically carry recourse to principal owners. In addition to the repayment risk associated with
loans to individuals and businesses, loans in this category carry construction completion risk. To
address this additional risk, loans of this type are subject to additional administration
procedures designed to verify and ensure progress of the project in accordance with allocated
funding, project specifications and time frames.
Residential Real Estate Loans: This category includes loans secured by first or second
mortgages on one to four family residential properties and represents 31.2% of the loans held for
investment portfolio as of September 30, 2008. Of this amount, the following sub-categories exist
as a percentage of the whole residential real estate loan portfolio: home equity lines of credit
12.9%; first trust mortgage loans 77.2%; loans secured by a junior trust 6.3%; multi-family loans
and loans secured by farmland 3.6%.
Home equity lines of credit are extended to borrowers in our target market. Real estate equity is
the largest component of consumer wealth in our marketplace. Once approved, this consumer finance
tool allows the borrowers to access the equity in their home or investment property and use the
proceeds for virtually any purpose. Home Equity Lines of Credit are most frequently secured by a
second lien on residential property. The proceeds of First Trust Mortgage Loans are used to acquire
or refinance the primary financing on owner occupied and residential investment properties. Junior
Trust Loans are loans to consumers wherein the proceeds have been used for a stated consumer
purpose. Examples of consumer purposes are education, refinancing debt, or purchasing consumer
goods. The loans are generally extended in a single disbursement and repaid over a specified
period of time.
Loans in the residential real estate portfolio are underwritten to standards within a traditional
consumer framework that is periodically reviewed and updated by management and Board of Directors:
repayment source and capacity, value of the underlying property, credit history, savings pattern
and stability.
Consumer Loans: Consumer loans make up approximately 0.3% of the loans held for investment
portfolio. Most loans are well secured with assets other than real estate, such as marketable
securities or automobiles. Very few consumer loans are unsecured. As a matter of
operation, management discourages unsecured lending. Loans in this category are underwritten to
standards within a traditional consumer
framework that is periodically reviewed and updated by management and the Board of Directors and
takes into consideration, repayment capacity, collateral value, savings pattern, credit history and
stability.
Loans Held for Sale (LHFS)
LHFS are originated by the Mortgage Corporation. Effective January 1, 2008 LHFS are carried on the
books at fair 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 by the Mortgage Corporation and carried on its
books until the loan is delivered to and purchased by an investor. In the nine months ended
September 30, 2008 we originated $613.2 million of loans processed in this manner. Loans are
sold without recourse and subject to industry standard representations and warranties that may
require the repurchase, by the Mortgage Corporation, of loans previously sold. The repurchase
risks associated with this activity center around early payment defaults and borrower fraud. There
is also a risk that loans originated may not be purchased by our investors. The Mortgage
Corporation attempts to manage these risks by the on-going maintenance of an extensive quality
control program, an internal
audit and verification program, and a selective approval process for investors and programs
offered. At September 30, 2008, LHFS at fair value totaled $46.6 million compared to $39.1 million
at December 31, 2007.
23
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. The Mortgage Corporation is
paid a fee for procuring and packaging
brokered loans. For the first nine months of 2008, $96.7 million in residential mortgage loans were
originated under this type of delivery
method, as compared to $108.4 million for the same period of 2007. Brokered loans accounted for
15.8% of the total loan volume for the first nine months of 2008 compared to 16.7% for the same
period of 2007. We typically broker loans that do not conform to the products offered by the
Mortgage Corporation and for this reason brokered loans are subject to wide fluctuations.
Allowance for Loan Losses
The allowance for loan losses totaled $7.7 million at September 30, 2008 compared to $7.5 million
at year end 2007. The allowance for loan losses is equivalent to approximately 1.5% of total
consolidated loans held for investment at September 30, 2008. The allowance for loan losses
exclusive of specific reserves is approximately 1.2% of loans held for investment. The methodology
to derive the allowance for loan losses 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, risk ratings and systemic risk factors.
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 the reserve is set forth by the Board of Directors in our
Credit Policy. Under the Credit Policy, the 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, is 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. Prevailing economic conditions, generally and within each individual borrowers
business sector, are considered, as well as any changes in the borrowers own financial position
and, in the case of commercial loans, management structure and business operations. As of
September 30, 2008, our evaluation of these factors supported approximately 96.0% of the total loss
reserve.
When deterioration develops in an individual credit, the loan is placed on a watch list and 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
21.9% of the total loss reserve at September 30, 2008.
The Unallocated Reserve is maintained to absorb risk factors outside of the General and Specific
Reserves. Maximum and minimum target limits are established by us on a quarterly basis for the
Unallocated Reserve. As of September 30, 2008, the threshold range for this component was 0.00% to
0.15% of the total loan portfolio and accounted for approximately 4 % of the total allowance for
loan losses. At September 30, 2008, the unallocated reserve amounted to $312 thousand and equaled
0.06% of total loans held for investment. Outside of the Corporations 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
schedule below apportions the allowance for loan losses by loan types.
24
An analysis of the Banks allowance for loan losses as of and for the periods indicated is set
forth in the following tables:
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
Nine months ended |
|
(In Thousands) |
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
Balance at beginning of
period |
|
$ |
7,462 |
|
|
$ |
5,452 |
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(3,593 |
) |
|
|
|
|
Recoveries |
|
|
133 |
|
|
|
2 |
|
Provision |
|
|
3,663 |
|
|
|
1,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September
30, 2008 and 2007 |
|
$ |
7,665 |
|
|
$ |
7,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses |
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan |
|
|
|
|
|
|
Amount |
|
|
Percentage |
|
|
Loss |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
|
Loss |
|
|
Percentage |
|
|
|
(Dollars In Thousands) |
|
Commercial |
|
$ |
72,661 |
|
|
|
14.58 |
% |
|
$ |
1,840 |
|
|
|
24.00 |
% |
|
$ |
64,860 |
|
|
|
13.58 |
% |
|
$ |
1,341 |
|
|
|
17.97 |
% |
Commercial real
estate |
|
|
223,255 |
|
|
|
44.81 |
|
|
|
3,298 |
|
|
|
43.03 |
|
|
|
199,894 |
|
|
|
41.85 |
|
|
|
3,487 |
|
|
|
46.73 |
|
Real estate
construction |
|
|
45,460 |
|
|
|
9.13 |
|
|
|
840 |
|
|
|
10.96 |
|
|
|
55,074 |
|
|
|
11.53 |
|
|
|
929 |
|
|
|
12.45 |
|
Residential real
estate |
|
|
155,183 |
|
|
|
31.15 |
|
|
|
1,668 |
|
|
|
21.76 |
|
|
|
156,731 |
|
|
|
32.82 |
|
|
|
1,695 |
|
|
|
22.72 |
|
Consumer |
|
|
1,631 |
|
|
|
0.33 |
|
|
|
19 |
|
|
|
0.25 |
|
|
|
1,039 |
|
|
|
0.22 |
|
|
|
10 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
$ |
498,190 |
|
|
|
100.00 |
% |
|
$ |
7,665 |
|
|
|
100.00 |
% |
|
$ |
477,598 |
|
|
|
100.00 |
% |
|
$ |
7,462 |
|
|
|
100.00 |
% |
|
|
|
|
|
Non-performing Assets and Impaired Loans
At September 30, 2008, the Bank had non-performing assets totaling $7.7 million consisting of a
commercial loan in the amount of $2.4 million, a commercial real estate loan in the amount of $3.4
million, a residential construction loan in the amount of $1.2 million, a $46 thousand equity loan
and a single family residential property in the amount of $653 thousand in other real estate owned
Subsequent to September 30, 2008, the $653 thousand property in other real estate owned was sold
for $658 thousand.
Deposits
Deposits are one of the primary sources of funding loan growth. At September 30, 2008, deposits
totaled $488.2 million compared to $473.4 million on December 31, 2007, an increase of $14.8
million. Savings and interest-bearing deposits decreased $26.7 million from December 31, 2007, due
in part to a shift into higher yielding time deposits. Time deposits increased $16.4 million from
December 31, 2007 levels. Non-interest-bearing deposits increased $25.1 million from $59.4 million
at December 31, 2007 to $84.6 million at September 30, 2008. The increase in non-interest-bearing
deposits is due to new commercial accounts and increased balances of existing accounts.
Shareholders Equity
Shareholders equity was $55.9 million at September 30, 2008 compared to approximately $58.0
million at December 31, 2007. Shareholders equity decreased by $2.1 million during the nine month
period ended September 30, 2008. The decrease in shareholders equity is primarily due to the
repurchase of 808,411 shares in 2008 under our share repurchase program at a weighted average price
of $7.23 per share, partially offset by an increase in retained earnings of $3.2 million.
On October 22, 2008 the Corporation declared a $0.01 per share cash dividend payable on November
25, 2008 to shareholders of record as of November 5, 2008.
Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank
are required to maintain. These risk based capital guidelines take into consideration risk
factors, as defined by the banking regulators, associated with various categories of
assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well
capitalized, which is the highest rating.
25
The following table outlines the regulatory components of capital and risk based capital ratios.
Risk Based Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Dollars In Thousands) |
|
|
|
|
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
8,527 |
|
|
$ |
9,052 |
|
|
|
|
|
Capital surplus |
|
|
17,278 |
|
|
|
21,833 |
|
|
|
|
|
Retained earnings |
|
|
30,037 |
|
|
|
26,846 |
|
|
|
|
|
Less: Net unrealized loss on
equity securities |
|
|
(33 |
) |
|
|
(14 |
) |
|
|
|
|
Subordinated debentures |
|
|
6,000 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
|
61,809 |
|
|
|
63,717 |
|
|
|
|
|
Qualifying allowance for loan
losses |
|
|
6,757 |
|
|
|
6,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital |
|
$ |
68,566 |
|
|
$ |
70,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
539,403 |
|
|
$ |
525,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
618,006 |
|
|
$ |
632,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
Capital Ratios: |
|
|
|
|
|
|
|
|
|
Minimum |
Tier 1 risk based capital ratio |
|
|
11.46 |
% |
|
|
12.12 |
% |
|
|
4.00 |
% |
Total risk based capital ratio |
|
|
12.71 |
% |
|
|
13.37 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
10.00 |
% |
|
|
10.07 |
% |
|
|
4.00 |
% |
RESULTS OF OPERATIONS
Summary
Net income for the three months ended September 30, 2008 totaled $769 thousand, compared to $244
thousand for the same period in 2007. Diluted earnings per share were $0.07 for the three month
period ended September 30, 2008 compared to $0.02 for the same period in 2007. During the third
quarter approximately $1.9 million was added to the allowance for loan losses as a result of write
downs and charge-offs of non performing loans. Year to date net income totaled $3.5 million for
the nine month period ended September 30, 2008 compared to $3.1 million for the same period in
2007. Diluted earnings per share were $0.34 for the nine month period ended September 30, 2008
compared to $0.25 for the same period in 2007. Average diluted shares outstanding in 2008 totaled
10,463,230 compared to 12,104,525 in 2007.
26
Net Interest Income
Net interest income, the principal source of earnings, is the amount of income generated by earning
assets (primarily loans and investment securities) less the interest expense incurred on
interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income
increased $489 thousand for the three months ended September 30, 2008 over the same period in 2007.
Net interest margin increased 53 basis points during the quarter from 3.17% in 2007 to 3.70% in
2008. The increase in net interest margin is primarily due to a decrease in interest expense
during the period. Year to date net interest income totaled $15.6 million for the nine months
ended September 30, 2008, compared to $15.1 million at the same period in 2007. Average earning
assets for the nine month period ending September 30, 2007 totaled $639.8 million compared to
$597.3 million for the same period in 2008, a decrease of $42.5 million. The decrease in earning
assets is due to a $32.7 million decrease in investment securities and a $33.5 decrease in loans
held for sale, partially offset by a $10.0 million increase in interest-bearing balances due from
other banks and a $13.7 million increase in loans held for investment.
Total interest expense for the three months ended September 30, 2008 decreased approximately $2.5
million from $6.6 million in 2007 to $4.2 million. Total interest-bearing deposits averaged
approximately $378.8 million for the three month period ended September 30, 2008 compared to $406.4
million for the same three month period in 2007. Borrowed funds for the quarter ended September
30, 2008 averaged $114.0 million compared to $123.6 million for the corresponding period in 2007.
The average cost of interest-bearing deposits and liabilities during the three months ended
September 30, 2008 was 3.39%, down from 5.01% during the three months ended September 30, 2007.
Interest expense for the nine month period ending September 30, 2008 totaled $13.7 million, down
from $19.3 million in 2007. The decrease in interest expense is partially due to lower interest
rates and replacing rate sensitive time deposits with lower cost borrowings.
27
The following table presents volume and rate analysis for the nine months ended September 30, 2008
and 2007:
Volume and Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2008 compared to 2007 |
|
|
Change Due To: |
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
|
(In Thousands) |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
(881 |
) |
|
$ |
(1,211 |
) |
|
$ |
330 |
|
Loans |
|
|
(4,191 |
) |
|
|
(1,113 |
) |
|
|
(3,078 |
) |
Interest-bearing deposits |
|
|
(84 |
) |
|
|
264 |
|
|
|
(348 |
) |
|
|
|
Total Decrease in Interest Income |
|
|
(5,156 |
) |
|
|
(2,060 |
) |
|
|
(3,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
(82 |
) |
|
|
(17 |
) |
|
|
(65 |
) |
Money market deposit accounts |
|
|
(1,273 |
) |
|
|
427 |
|
|
|
(1,700 |
) |
Savings accounts |
|
|
(122 |
) |
|
|
(87 |
) |
|
|
(35 |
) |
Time deposits |
|
|
(1,176 |
) |
|
|
(192 |
) |
|
|
(984 |
) |
|
|
|
Total interest-bearing deposits |
|
|
(2,653 |
) |
|
|
131 |
|
|
|
(2,784 |
) |
FHLB Advances |
|
|
(2,449 |
) |
|
|
(1,653 |
) |
|
|
(796 |
) |
Securities sold under agreements to repurchase |
|
|
(142 |
) |
|
|
80 |
|
|
|
(222 |
) |
Other short-term borrowings |
|
|
(272 |
) |
|
|
61 |
|
|
|
(333 |
) |
Long-term borrowings |
|
|
237 |
|
|
|
470 |
|
|
|
(233 |
) |
Subordinated debentures |
|
|
(387 |
) |
|
|
(225 |
) |
|
|
(162 |
) |
|
|
|
Total Decrease in Interest Expense |
|
|
(5,666 |
) |
|
|
(1,136 |
) |
|
|
(4,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Net Interest Income |
|
$ |
510 |
|
|
$ |
(924 |
) |
|
$ |
1,434 |
|
|
|
|
|
|
|
(1) |
|
Interest income is presented on a fully
taxable equivalent basis using 34% tax rate. |
28
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended September 30, |
|
|
2008 |
|
2007 |
|
|
Average |
|
Income / |
|
Yield / |
|
Average |
|
Income / |
|
Yield / |
|
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
|
(Dollars In Thousands) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
63,809 |
|
|
$ |
796 |
|
|
|
4.99 |
% |
|
$ |
95,124 |
|
|
$ |
1,103 |
|
|
|
4.64 |
% |
Loans(2) |
|
|
519,344 |
|
|
|
8,848 |
|
|
|
6.81 |
% |
|
|
529,902 |
|
|
|
10,449 |
|
|
|
7.89 |
% |
Interest-bearing deposits & federal funds sold |
|
|
17,796 |
|
|
|
82 |
|
|
|
1.84 |
% |
|
|
13,827 |
|
|
|
159 |
|
|
|
4.60 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
600,949 |
|
|
|
9,726 |
|
|
|
6.47 |
% |
|
|
638,853 |
|
|
|
11,711 |
|
|
|
7.33 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
6,808 |
|
|
|
|
|
|
|
|
|
|
|
6,887 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
10,237 |
|
|
|
|
|
|
|
|
|
|
|
9,677 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
9,724 |
|
|
|
|
|
|
|
|
|
|
|
8,797 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(9,712 |
) |
|
|
|
|
|
|
|
|
|
|
(6,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
17,057 |
|
|
|
|
|
|
|
|
|
|
|
19,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
618,006 |
|
|
|
|
|
|
|
|
|
|
$ |
657,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
8,832 |
|
|
$ |
25 |
|
|
|
1.13 |
% |
|
$ |
9,257 |
|
|
$ |
49 |
|
|
|
2.12 |
% |
Money market deposit accounts |
|
|
124,065 |
|
|
|
724 |
|
|
|
2.33 |
% |
|
|
117,926 |
|
|
|
1,441 |
|
|
|
4.89 |
% |
Savings accounts |
|
|
2,602 |
|
|
|
22 |
|
|
|
3.38 |
% |
|
|
5,333 |
|
|
|
63 |
|
|
|
4.73 |
% |
Time deposits |
|
|
243,310 |
|
|
|
2,472 |
|
|
|
4.06 |
% |
|
|
273,845 |
|
|
|
3,466 |
|
|
|
5.06 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
378,809 |
|
|
|
3,243 |
|
|
|
3.42 |
% |
|
|
406,361 |
|
|
|
5,019 |
|
|
|
4.94 |
% |
FHLB Advances |
|
|
19,185 |
|
|
|
136 |
|
|
|
2.84 |
% |
|
|
44,339 |
|
|
|
581 |
|
|
|
5.24 |
% |
Securities sold under agreements to repurchase |
|
|
13,930 |
|
|
|
58 |
|
|
|
1.67 |
% |
|
|
12,566 |
|
|
|
135 |
|
|
|
4.30 |
% |
Other short-term borrowings |
|
|
19,064 |
|
|
|
86 |
|
|
|
1.80 |
% |
|
|
14,070 |
|
|
|
151 |
|
|
|
4.29 |
% |
Long-term borrowings |
|
|
55,674 |
|
|
|
558 |
|
|
|
4.01 |
% |
|
|
42,479 |
|
|
|
519 |
|
|
|
4.89 |
% |
Subordinated Debentures |
|
|
6,186 |
|
|
|
91 |
|
|
|
5.88 |
% |
|
|
10,176 |
|
|
|
228 |
|
|
|
8.96 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
492,848 |
|
|
|
4,172 |
|
|
|
3.39 |
% |
|
|
529,991 |
|
|
|
6,633 |
|
|
|
5.01 |
% |
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
65,719 |
|
|
|
|
|
|
|
|
|
|
|
60,961 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
2,581 |
|
|
|
|
|
|
|
|
|
|
|
3,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
561,148 |
|
|
|
|
|
|
|
|
|
|
|
594,308 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
56,858 |
|
|
|
|
|
|
|
|
|
|
|
63,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
618,006 |
|
|
|
|
|
|
|
|
|
|
$ |
657,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
|
|
2.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4) |
|
|
|
|
|
$ |
5,554 |
|
|
|
3.70 |
% |
|
|
|
|
|
$ |
5,078 |
|
|
|
3.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income and yields are presented on a fully taxable
equivalent basis using 34% tax rate. |
|
(2) |
|
Loans placed on nonaccrual status are included in loan balances. |
|
(3) |
|
Interest spread is the average yield earned on earning assets,
less the average rate incurred on interest-bearing liabilities. |
|
(4) |
|
Net interest margin is net interest income, expressed as a
percentage of average earning assets. |
29
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month |
|
|
Period Ended September 30, |
|
|
2008 |
|
2007 |
|
|
Average |
|
Income / |
|
Yield / |
|
Average |
|
Income / |
|
Yield / |
|
|
Balance |
|
Expense |
|
Rate |
|
Balance |
|
Expense |
|
Rate |
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands) |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
64,502 |
|
|
$ |
2,448 |
|
|
|
5.06 |
% |
|
$ |
97,188 |
|
|
$ |
3,329 |
|
|
|
4.57 |
% |
Loans(2) |
|
|
508,696 |
|
|
|
26,377 |
|
|
|
6.91 |
% |
|
|
528,482 |
|
|
|
30,568 |
|
|
|
7.71 |
% |
Interest-bearing balances |
|
|
24,140 |
|
|
|
443 |
|
|
|
2.45 |
% |
|
|
14,098 |
|
|
|
527 |
|
|
|
4.98 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
597,338 |
|
|
|
29,268 |
|
|
|
6.53 |
% |
|
|
639,768 |
|
|
|
34,424 |
|
|
|
7.17 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
6,648 |
|
|
|
|
|
|
|
|
|
|
|
6,782 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
9,539 |
|
|
|
|
|
|
|
|
|
|
|
9,742 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
8,767 |
|
|
|
|
|
|
|
|
|
|
|
5,655 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(8,406 |
) |
|
|
|
|
|
|
|
|
|
|
(5,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
16,548 |
|
|
|
|
|
|
|
|
|
|
|
16,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
613,886 |
|
|
|
|
|
|
|
|
|
|
$ |
656,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
8,692 |
|
|
$ |
78 |
|
|
|
1.20 |
% |
|
$ |
9,823 |
|
|
$ |
160 |
|
|
|
2.17 |
% |
Money market deposit accounts |
|
|
120,986 |
|
|
|
2,302 |
|
|
|
2.54 |
% |
|
|
106,772 |
|
|
|
3,575 |
|
|
|
4.46 |
% |
Savings accounts |
|
|
2,662 |
|
|
|
76 |
|
|
|
3.81 |
% |
|
|
5,478 |
|
|
|
198 |
|
|
|
4.82 |
% |
Time deposits |
|
|
250,434 |
|
|
|
8,356 |
|
|
|
4.45 |
% |
|
|
255,674 |
|
|
|
9,532 |
|
|
|
4.97 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
382,774 |
|
|
|
10,812 |
|
|
|
3.77 |
% |
|
|
377,747 |
|
|
|
13,465 |
|
|
|
4.75 |
% |
FHLB Advances |
|
|
13,247 |
|
|
|
327 |
|
|
|
3.29 |
% |
|
|
68,737 |
|
|
|
2,776 |
|
|
|
5.38 |
% |
Securities sold under agreements to repurchase |
|
|
13,705 |
|
|
|
196 |
|
|
|
1.91 |
% |
|
|
10,610 |
|
|
|
338 |
|
|
|
4.25 |
% |
Other short-term borrowings |
|
|
19,863 |
|
|
|
296 |
|
|
|
1.99 |
% |
|
|
17,736 |
|
|
|
568 |
|
|
|
4.27 |
% |
FHLB long-term borrowings |
|
|
56,841 |
|
|
|
1,747 |
|
|
|
4.10 |
% |
|
|
42,245 |
|
|
|
1,510 |
|
|
|
4.77 |
% |
Subordinated Debentures |
|
|
6,186 |
|
|
|
293 |
|
|
|
6.32 |
% |
|
|
10,266 |
|
|
|
680 |
|
|
|
8.83 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
492,616 |
|
|
|
13,671 |
|
|
|
3.70 |
% |
|
|
527,341 |
|
|
|
19,337 |
|
|
|
4.89 |
% |
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
62,087 |
|
|
|
|
|
|
|
|
|
|
|
62,616 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,804 |
|
|
|
|
|
|
|
|
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
556,507 |
|
|
|
|
|
|
|
|
|
|
|
591,556 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
57,379 |
|
|
|
|
|
|
|
|
|
|
|
64,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
613,886 |
|
|
|
|
|
|
|
|
|
|
$ |
656,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
|
|
|
|
|
|
|
|
|
|
2.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4) |
|
|
|
|
|
$ |
15,597 |
|
|
|
3.48 |
% |
|
|
|
|
|
$ |
15,087 |
|
|
|
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. |
30
Non-interest Income
Non-interest income consists of revenue generated from financial services and activities other than
lending and investing. The Mortgage Corporation provides the most significant contributions to
non-interest income. Total non-interest income was $5.6 million for the three month period ended
September 30, 2008 compared to $6.1 million for the same period in 2007; the decrease is primarily
due to a decrease in broker fee income. Gains on the sale of loans originated by the Mortgage
Corporation totaled $4.8 million for the three month period ending September 30, 2008, up slightly
from $4.7 million for the same period of 2007.
Non-interest income for the nine months ended September 30, 2008 totaled $22.1 million compared to
$22.2 million for the same period of 2007.
Non-interest Expense
Non-interest expense totaled $8.1 million for the third quarter of 2008, compared to $10.0 million
for the same period in 2007. Salaries and benefits totaled $4.5 million for the three month period
ended September 30, 2008, compared to $5.1 million for the same period last year primarily due to a
decrease in commissions as a result of the decline in mortgage loan originations. Other operating
expenses totaled approximately $3.0 million for the quarter, down from $4.4 million for the same
period in 2007, a decrease of $1.4 million. The decrease in other operating expenses is primarily
attributable to a decrease of $858 thousand in broker premiums and a $745 thousand decrease in the
provision for losses on loans held for sale.
Non-interest expense totaled $28.5 million for the nine month period ended September 30, 2008
compared to $31.1 million in 2007, a decrease of $2.6 million. The decrease in non-interest
expense was due to a $2.9 million decrease in other operating expenses attributed to a decrease in
broker premiums and partially offset by small increases in other components of other operating expense.
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
interest-bearing deposits with other banks provide an additional source of liquidity funding. At
September 30, 2008, overnight interest-bearing balances totaled $24.3 million compared to $13.3 at
December 31, 2007.
The liability portion of the balance sheet provides liquidity through various interest-bearing and
non-interest-bearing deposit accounts, Federal Funds purchased, securities sold under agreement to
repurchase and other short-term borrowings. At September 30, 2008, the Bank had a line of credit
with the FHLB totaling $123.6 million and had outstanding in short-term loans of $6.5 million, and
an additional $52.7 million in term loans at fixed rates ranging from 2.55% to 5.21% leaving $64.4
million available on the line. In addition to the line of credit at the FHLB, the Bank and its
mortgage bank subsidiary also issue repurchase agreements and commercial paper. As of September
30, 2008, outstanding repurchase agreements totaled approximately $14.7 million and commercial
paper issued and short-term borrowings amounted to $21.6 million. The interest rates on these
instruments are variable and subject to change daily. The Bank also maintains Federal Funds lines
of credit with its correspondent banks and, at September 30, 2008, these lines amounted to $22.6
million. The Corporation also has $6.2 million in subordinated debentures, to support the growth
of the organization.
31
The following table presents the composition of borrowings at September 30, 2008 and December 31,
2007.
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
6,500 |
|
|
$ |
15,500 |
|
FHLB long term borrowings |
|
|
52,673 |
|
|
|
39,524 |
|
Securities sold under
agreements to repurchase |
|
|
14,707 |
|
|
|
14,814 |
|
Other short term borrowings |
|
|
21,625 |
|
|
|
11,362 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
6,186 |
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
101,691 |
|
|
$ |
87,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
13,247 |
|
|
$ |
60,224 |
|
FHLB long term borrowings |
|
|
56,841 |
|
|
|
41,932 |
|
Securities sold under
agreements to repurchase |
|
|
13,705 |
|
|
|
11,695 |
|
Other short term borrowings |
|
|
19,863 |
|
|
|
16,629 |
|
Subordinated debentures |
|
|
6,186 |
|
|
|
9,237 |
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
109,842 |
|
|
$ |
139,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all
borrowed funds |
|
|
3.47 |
% |
|
|
5.14 |
% |
|
|
|
|
|
|
|
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, 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporations market risk is composed primarily of interest rate risk. The Funds Management
Committee is responsible for reviewing the interest rate sensitivity position and establishes
policies to monitor and coordinate the Corporations sources, uses and pricing of funds.
Interest Rate Sensitivity Management
The Corporation uses a simulation model to analyze, manage and formulate operating strategies that
address net interest income sensitivity to movements in interest rates. The simulation model
projects net interest income based on various interest rate scenarios over a twelve month period.
The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets
and liabilities. The model incorporates certain assumptions which management believes to be
reasonable regarding the impact of changing interest rates and the prepayment assumption of certain
assets and liabilities as of September 30, 2008. The table below reflects the outcome of these
analyses at September 30, 2008, assuming budgeted growth in the balance sheet. According to the
model run for the period ended September 30, 2008, and projecting forward over a twelve month
period, an immediate 100 basis point increase in interest rates would result in an increase in net
interest income of 4.11%. An immediate 100 basis point decline in interest rates would result in a
decrease in net interest income of 3.28%. While management carefully monitors the exposure to
changes in interest rates and takes actions as warranted to mitigate any adverse impact, there can
be no assurance about the actual effect of interest rate changes on net interest income.
32
The following table reflects the Corporations earnings sensitivity profile as of September 30,
2008.
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical |
|
|
|
|
Hypothetical |
|
Percentage Change in |
Change in Federal |
|
Percentage Change in |
|
Economic Value of |
Funds Target Rate |
|
Earnings |
|
Equity |
|
3.00 |
% |
|
|
12.71 |
% |
|
|
-9.29 |
% |
|
2.00 |
% |
|
|
8.54 |
% |
|
|
-6.23 |
% |
|
1.00 |
% |
|
|
4.11 |
% |
|
|
-3.17 |
% |
|
-1.00 |
% |
|
|
-3.28 |
% |
|
|
3.35 |
% |
|
-2.00 |
% |
|
|
-4.71 |
% |
|
|
5.61 |
% |
|
-3.00 |
% |
|
|
-6.99 |
% |
|
|
8.78 |
% |
The Corporations net interest income and the fair value of its financial instruments are
influenced by changes in the level of interest rates. The Corporation manages its exposure to
fluctuations in interest rates through policies established by its Funds Management Committee. The
Funds Management Committee meets periodically and has responsibility for formulating and
implementing strategies to improve balance sheet positioning and earnings and reviewing interest
rate sensitivity.
The Mortgage Corporation is party to mortgage rate lock commitments to fund mortgage loans at
interest rates previously agreed to, as locked by both the Corporation and the borrower for
specified periods of time. When the borrower locks its interest rate, the Corporation effectively
extends a put option to the borrower, whereby the borrower is not obligated to enter into the loan
agreement, but the Corporation must honor the interest rate for the specified time period. The
Corporation is exposed to interest rate risk during the accumulation of interest rate lock
commitments and loans prior to sale. The Corporation utilizes either a best efforts sell forward
commitment or a mandatory sell forward commitment to economically hedge the changes in fair value
of the loan due to changes in market interest rates. Failure to effectively monitor, manage and
hedge the interest rate risk associated with the mandatory commitments subjects the Corporation to
potentially significant market risk.
Throughout the lock period, the changes in the market value of interest rate lock commitments, best
efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are
included in the statement of operations in 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporations management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Corporations disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls
and procedures are effective as of the end of the period covered by this report to ensure that
information required to be disclosed in the reports that the Corporation files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms, and that such information is accumulated and communicated to the
Corporations management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
the Corporations disclosure controls and procedures will detect or uncover every situation
involving the failure of persons within the Corporation to disclose material information required
to be set forth in the Corporations periodic and current reports.
Changes in Internal Control
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act). No changes in our internal control over
financial reporting occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
33
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a party to legal proceedings arising in the ordinary course of business. Management is
of the opinion that these legal proceedings will not have a material adverse effect on the
Corporations financial condition or results of operations. From time to time the Bank may
initiate legal actions against borrowers in connection with collecting defaulted loans. Such
actions are not considered material by management unless otherwise disclosed.
Item 1A. Risk Factors
The following are additional risk factors for the Company,
to be read in conjunction the risk factors as previously disclosed in the Corporations Annual Report on Form 10-K for
the fiscal year ended December 31, 2007.
There can be no assurance that recent government
actions will help stabilize the U.S. financial system.
In response to the financial crises affecting the banking
system and financial markets and going concern threats to investment banks and other financial institutions, various
branches and agencies of the U.S. government have put in place laws, regulations, and programs to address capital and
liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that such laws,
regulations, and programs will have on the financial markets, including the extreme levels of volatility, liquidity
and confidence issues, and limited credit availability currently being experienced. The failure of such laws,
regulations, and programs to help stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect our business, financial condition, results
of operations, access to credit or the trading price of our common stock.
Current levels of market volatility are unprecedented.
Although many markets have been experiencing volatility
and disruption for months, in the past few weeks, the volatility and disruption of financial and credit markets has
reached unprecedented levels for recent times. In some cases, the markets have produced downward pressure on stock
prices and credit availability for certain issuers without regard to those issuers underlying financial strength.
If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will
not experience an adverse effect, which may be material, on our ability to access capital and on our business,
financial condition, and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could
be adversely affected by the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure
to many different counterparties, and we routinely execute transactions with counterparties in the financial services
industry, including brokers, dealers, commercial banks, investment banks, and government sponsored enterprises. Many
of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit
risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient
to recover the full amount of the loan or other obligation due us. There is no assurance that any such losses would
not materially and adversely affect our results of operations or earnings.
Current market developments may adversely
affect our industry, business, and results of operations.
Dramatic declines in the housing market during the prior year,
with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities and major commercial and investment banks.
These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and
the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide
funding to borrowers, including other financial institutions. The resulting lack of available credit, lack of confidence in
the financial sector, increased volatility in the financial markets, and reduced business activity could materially and
adversely, directly or indirectly, affect our business, financial condition and results of operations.
Item 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
Item 6. Exhibits
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Exhibit No. |
|
Description |
3.1
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Amended and Restated Articles of Incorporation of Access
National Corporation (incorporated by reference to Exhibit 3.1
to Form 8-K filed July 18, 2006 (file number 000-49929)) |
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3.2
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Amended and Restated Bylaws of Access National Corporation
(incorporated by reference to Exhibit 3.2 to Form 8-K filed
October 24, 2007 (file number 000-49929)) |
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31.1*
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CEO Certification Pursuant to Rule 13a-14(a) |
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31.2*
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CFO Certification Pursuant to Rule 13a-14(a) |
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32*
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CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. § 1350) |
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.
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Access National Corporation
(Registrant)
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Date: November 7, 2008 |
By: |
/s/ Michael W. Clarke
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Michael W. Clarke |
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President & Chief Executive Officer
(Principal Executive Officer) |
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Date: November 7, 2008 |
By: |
/s/ Charles Wimer
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Charles Wimer |
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Executive Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer) |
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35