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 June 30, 2006
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 000-49929
ACCESS NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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Virginia
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82-0545425 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
1800 Robert Fulton Drive, Suite 310, Reston, Virginia 20191
(Address of principal executive office) (Zip Code)
(703) 871-2100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) o Yes þ No
The number of shares outstanding of Access National Corporations common stock, par value $.835, as
of August 7, 2006, was 10,657,214 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 |
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Consolidated Balance Sheets June 30, 2006 (Unaudited) and December 31, 2005
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Page 2 |
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Consolidated Statements of Income (Unaudited) Six Months Ended June 30, 2006 and 2005
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Page 3 |
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Consolidated Statements of Income (Unaudited) Three Months Ended June 30, 2006 and 2005
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Page 4 |
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Consolidated Statements of Changes in Shareholders Equity (Unaudited) Six Months Ended
June 30, 2006 and 2005
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Page 5 |
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Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2006 and 2005
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Page 6 |
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Notes to Consolidated Financial Statements (Unaudited)
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Page 7 |
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Page 18 |
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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Page 30 |
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Item 4.
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Controls and Procedures
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Page 31 |
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PART II
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OTHER INFORMATION |
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Item 1.
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Legal Proceedings
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Page 31 |
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Item 1A.
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Risk Factors
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Page 31 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Page 36 |
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Item 3.
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Defaults Upon Senior Securities
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Page 36 |
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Item 4.
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Submission of Matters to a Vote of Security Holders
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Page 36 |
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Item 5.
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Other Information
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Page 36 |
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Item 6.
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Exhibits
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Page 37 |
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Signatures
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Page 38 |
- 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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June 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
12,264 |
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$ |
9,854 |
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Interest bearing deposits in other banks |
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3,132 |
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13,329 |
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Securities available for sale, at fair value |
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107,004 |
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87,771 |
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Loans held for sale |
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49,353 |
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45,019 |
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Loans, net of allowance for loan losses of $5,393 and $5,215
respectively |
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402,193 |
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364,518 |
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Premises and equipment |
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9,557 |
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9,650 |
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Other assets |
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8,265 |
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6,909 |
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Total assets |
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$ |
591,768 |
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$ |
537,050 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Deposits |
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Non-interest bearing deposits |
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$ |
82,913 |
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$ |
81,034 |
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Savings and interest-bearing deposits |
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128,525 |
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149,094 |
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Time deposits |
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241,938 |
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189,501 |
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Total deposits |
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453,376 |
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419,629 |
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Other liabilities |
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Short-term borrowings |
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69,429 |
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48,196 |
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Long-term borrowings |
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19,679 |
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21,786 |
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Subordinated debentures |
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10,311 |
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10,311 |
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Other liabilities |
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3,907 |
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5,943 |
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Total liabilities |
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556,702 |
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505,865 |
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SHAREHOLDERS EQUITY |
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Common stock, par value, $0.835; authorized, 60,000,000 shares;
issued and outstanding, 8,447,539 shares in 2006 and 7,956,556
shares in 2005 |
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7,054 |
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6,644 |
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Surplus |
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9,891 |
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9,099 |
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Retained earnings |
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19,576 |
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16,227 |
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Accumulated other comprehensive income (loss), net |
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(1,455 |
) |
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(785 |
) |
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Total shareholders equity |
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35,066 |
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31,185 |
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Total liabilities and shareholders equity |
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$ |
591,768 |
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$ |
537,050 |
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See accompanying notes to consolidated financial statements (unaudited).
- 2 -
ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)
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Six Months Ended June 30, |
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2006 |
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2005 |
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Interest and Dividend Income |
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Interest and fees on loans |
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$ |
15,489 |
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$ |
10,765 |
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Interest on deposits in other banks |
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188 |
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119 |
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Interest and dividends on securities |
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2,259 |
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1,103 |
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Total interest and dividend income |
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17,936 |
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11,987 |
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Interest Expense |
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Interest on deposits |
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7,025 |
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3,910 |
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Interest on short-term borrowings |
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2,080 |
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|
508 |
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Interest on long-term borrowings |
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397 |
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|
497 |
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Interest on subordinated debentures |
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417 |
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321 |
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Total interest expense |
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9,919 |
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5,236 |
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Net interest income |
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8,017 |
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6,751 |
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Provision for loan losses |
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173 |
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497 |
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Net interest income after
provision for loan losses |
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7,844 |
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6,254 |
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Noninterest Income |
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Service fees on deposit accounts |
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156 |
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97 |
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Gain on sale of loans |
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8,917 |
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11,394 |
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Mortgage broker fee income |
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2,213 |
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|
2,606 |
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Other income |
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1,916 |
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|
1,203 |
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Total noninterest income |
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13,202 |
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|
15,300 |
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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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|
9,549 |
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|
9,776 |
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Occupancy and equipment |
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|
989 |
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|
1,094 |
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Other operating expenses |
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|
5,271 |
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|
6,785 |
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Total noninterest expense |
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15,809 |
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17,655 |
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Income before income taxes |
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5,237 |
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|
3,899 |
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Income tax expense |
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|
1,808 |
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|
1,360 |
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NET INCOME |
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$ |
3,429 |
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$ |
2,539 |
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Earnings per common share: |
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Basic |
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$ |
0.42 |
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$ |
0.32 |
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Diluted |
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$ |
0.36 |
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$ |
0.27 |
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|
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Average outstanding shares: |
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|
|
|
|
|
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Basic |
|
|
8,119,548 |
|
|
|
7,919,334 |
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Diluted |
|
|
9,597,856 |
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|
9,367,296 |
|
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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Three Months Ended June 30, |
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2006 |
|
|
2005 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
7,994 |
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|
$ |
5,705 |
|
Interest on deposits in other banks |
|
|
89 |
|
|
|
53 |
|
Interest and dividends on securities |
|
|
1,208 |
|
|
|
610 |
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
9,291 |
|
|
|
6,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
3,726 |
|
|
|
2,103 |
|
Interest on short-term borrowings |
|
|
1,234 |
|
|
|
289 |
|
Interest on long-term borrowings |
|
|
195 |
|
|
|
245 |
|
Interest on subordinated debentures |
|
|
216 |
|
|
|
164 |
|
|
|
|
|
|
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|
Total interest expense |
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|
5,371 |
|
|
|
2,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
3,920 |
|
|
|
3,567 |
|
Provision for loan losses |
|
|
49 |
|
|
|
383 |
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
3,871 |
|
|
|
3,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
Service fees on deposit accounts |
|
|
82 |
|
|
|
63 |
|
Gain on sale of loans |
|
|
4,239 |
|
|
|
6,990 |
|
Mortgage broker fee income |
|
|
1,347 |
|
|
|
1,675 |
|
Other income |
|
|
1,431 |
|
|
|
419 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
7,099 |
|
|
|
9,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
4,843 |
|
|
|
5,213 |
|
Occupancy and equipment |
|
|
463 |
|
|
|
558 |
|
Other operating expenses |
|
|
2,887 |
|
|
|
4,229 |
|
|
|
|
|
|
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|
Total noninterest expense |
|
|
8,193 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,777 |
|
|
|
2,331 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
971 |
|
|
|
827 |
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
1,806 |
|
|
$ |
1,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.19 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
8,220,963 |
|
|
|
7,920,668 |
|
Diluted |
|
|
9,537,473 |
|
|
|
9,375,328 |
|
See accompanying notes to consolidated financial statements (unaudited).
- 4 -
ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended June 30, 2006 and 2005
(In Thousands)
(unaudited)
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Income |
|
|
Total |
|
Balance, December 31, 2005 |
|
$ |
6,644 |
|
|
$ |
9,099 |
|
|
$ |
16,227 |
|
|
$ |
(785 |
) |
|
$ |
|
|
|
$ |
31,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
3,429 |
|
|
|
|
|
|
|
3,429 |
|
|
|
3,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss), unrealized holdings
losses arising during the
period, net of tax $345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(670 |
) |
|
|
(670 |
) |
|
|
(670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend |
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for
exercise of warrants,
shares |
|
|
410 |
|
|
|
792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,202 |
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006 |
|
$ |
7,054 |
|
|
$ |
9,891 |
|
|
$ |
19,576 |
|
|
$ |
(1,455 |
) |
|
|
|
|
|
$ |
35,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
6,608 |
|
|
$ |
9,067 |
|
|
$ |
10,330 |
|
|
$ |
(7 |
) |
|
$ |
|
|
|
$ |
25,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
2,539 |
|
|
|
|
|
|
|
2,539 |
|
|
|
2,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss), unrealized holdings
losses arising during the
period, net of tax $94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
(177 |
) |
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for
exercise of warrants, shares |
|
|
13 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005 |
|
$ |
6,621 |
|
|
$ |
9,092 |
|
|
$ |
12,869 |
|
|
$ |
(184 |
) |
|
|
|
|
|
$ |
28,398 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements (unaudited).
- 5 -
ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In Thousands) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,429 |
|
|
$ |
2,539 |
|
Adjustments to reconcile net income to net cash (used in)
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
178 |
|
|
|
497 |
|
Deferred tax (benefit) |
|
|
(83 |
) |
|
|
91 |
|
Stock based compensation |
|
|
36 |
|
|
|
|
|
Provision for hedging |
|
|
(81 |
) |
|
|
|
|
Net amortization (accretion) on securities |
|
|
8 |
|
|
|
1 |
|
Depreciation and amortization |
|
|
416 |
|
|
|
350 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in loans held for sale |
|
|
(4,098 |
) |
|
|
(33,589 |
) |
(Increase) decrease in other assets |
|
|
(895 |
) |
|
|
(2,062 |
) |
Increase (decrease) in other liabilities |
|
|
(2,036 |
) |
|
|
2,271 |
|
|
|
|
|
|
|
|
Net cash (used in) operating activities |
|
$ |
(3,126 |
) |
|
$ |
(29,902 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities
available for sale |
|
$ |
8,180 |
|
|
$ |
9,894 |
|
Purchases of securities available for sale |
|
|
(28436 |
) |
|
|
(28,187 |
) |
Net (increase) in loans |
|
|
(38090 |
) |
|
|
(21,212 |
) |
Purchases of premises and equipment |
|
|
(275 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
$ |
(58,621 |
) |
|
$ |
(39,643 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in demand, interest-bearing
demand and savings deposits |
|
$ |
(18,689 |
) |
|
$ |
56,802 |
|
Net increase (decrease) in time deposits |
|
|
52436 |
|
|
|
(467 |
) |
Net increase (decrease) in securities sold under
agreement to repurchase |
|
|
1082 |
|
|
|
(2,355 |
) |
Net increase (decrease) in short-term borrowings |
|
|
21152 |
|
|
|
(1,202 |
) |
Net increase (decrease) in long term-borrowings |
|
|
(3107 |
) |
|
|
(2,107 |
) |
Proceeds from issuance of common stock |
|
|
1166 |
|
|
|
37 |
|
Dividends paid |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
$ |
53,959 |
|
|
$ |
50,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in cash and cash equivalents |
|
$ |
(7,788 |
) |
|
$ |
(18,837 |
) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
23,183 |
|
|
|
30,532 |
|
|
|
|
|
|
|
|
Ending |
|
$ |
15,396 |
|
|
$ |
11,695 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
9,871 |
|
|
$ |
5,210 |
|
|
|
|
|
|
|
|
Cash payments for income taxes |
|
$ |
2,207 |
|
|
$ |
1,887 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale |
|
$ |
(1,015 |
) |
|
$ |
(268 |
) |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements (unaudited)
- 6 -
NOTE 1 COMMENCEMENT OF OPERATIONS
Access National Corporation (the Corporation) is a bank holding company incorporated under the
laws of the Commonwealth of Virginia. The Corporation has three wholly owned subsidiaries, Access
National Bank (the Bank), which is an independent commercial bank chartered under federal laws as
a national banking association, Access Capital Trust I, and Access Capital Trust II. The
Corporation does not have any significant operations and serves primarily as the parent company for
the Bank. The Corporations income is primarily derived from dividends received from the Bank. The
amount of these dividends is determined by the Banks earnings and capital position.
The Corporation acquired all of the outstanding stock of the Bank in a statutory exchange
transaction on June 15, 2002, pursuant to an Agreement and Plan of Reorganization between the
Corporation and the Bank.
Access National Bank opened for business on December 1, 1999 and has four wholly-owned
subsidiaries: Access National Mortgage Corporation (the Mortgage Corporation) and United First
Mortgage Corporation (UFM), both Virginia corporations engaged in mortgage banking activities,
Access National Leasing Corporation, a Virginia corporation engaged in commercial and industrial
leasing services, and Access Real Estate LLC. The leasing subsidiary presently has no employees
and its affairs are managed as a part of the Banks commercial lending department. Access Real
Estate LLC is a limited liability corporation established in July, 2003 for the purpose of holding
title to the Corporations headquarters building, located at 1800 Robert Fulton Drive, Reston,
Virginia.
The Corporation formed Access Capital Trust I and Access Capital Trust II in 2002 and 2003
respectively for the purpose of issuing redeemable capital securities. On July 30, 2002 Access
Capital Trust I issued $4.1 million of trust preferred securities and on September 30, 2003, Access
Capital Trust II issued $6.2 million of trust preferred securities. Trust preferred securities may
be included in Tier 1 capital in an amount equal to 25% of Tier 1 capital and amounts in excess of
25% are includable as Tier 2 capital. As guarantor, the Corporation unconditionally guarantees
payment of all distributions required to be paid on the Trust Preferred Securities.
In August 2004, Access National Bank acquired all of the common stock of UFM. The acquisition of
UFM gave the company a new location in the Richmond, Virginia market plus entry into the
Fredericksburg and Staunton markets. The new locations became branch offices of the Mortgage
Corporation.
In July 2005 Access Real Estate LLC purchased an unimproved commercial building lot in Spotsylvania
County, Virginia where the Corporation is contemplating the construction of a combined banking and
mortgage center.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with rules and regulations of the Securities and Exchange
Commission. The statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. All adjustments have
been made, which, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented. Such adjustments are all of a normal and recurring
nature. All significant inter-company accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to the current
period presentation. The results of operations for the three and six months ended June 30, 2006
are not necessarily indicative of the results that may be expected for the entire year ending
December 31, 2006. These consolidated financial statements should be read in conjunction with the
Corporations audited financial statements and the notes thereto as of December 31, 2005, included
in the Corporations Annual Report for the fiscal year ended December 31, 2005.
- 7 -
NOTE 3 STOCK BASED COMPENSATION PLANS
Stock-Based
Compensation Plans On January 1, 2006, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which
requires the measurement and recognition of compensation expense for all stock-based awards made to
employees based on estimated fair values. SFAS No. 123(R) supersedes previous accounting under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees for
periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin (SAB)
No. 107, providing supplemental implementation guidance for SFAS 123(R). The Company has applied
the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
SFAS No. 123(R) requires companies to estimate the fair value of stock-based awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods. The Company adopted
SFAS No. 123(R) using the modified prospective application, which requires the application of the
standard starting from January 1, 2006, the first day of the current fiscal year.
The Companys condensed consolidated financial statements for the three and six months ended June
30, 2006 reflect the impact of SFAS No. 123(R). Stock-based compensation expense related to
employee stock options recognized under SFAS No. 123(R) for the three and six months ended June 30,
2006 was $18 thousand and $36 thousand respectively and is included in other operating expenses.
The total income tax benefit recognized for share-based compensation arrangements for the three and
six months ended June 30, 2006 $6 thousand was $12 thousand respectively. As of June 30, 2006,
total unamortized stock-based compensation cost related to non-vested stock options was $72
thousand, net of expected forfeitures, which is expected to be recognized over a weighted-average
period of 0.90 years.
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees
using the intrinsic value method in accordance with APB No. 25, as allowed under SFAS No. 123,
Accounting for Stock-Based Compensation. Under the intrinsic value method, no stock-based
compensation expense for employee stock options had been recognized in the Companys consolidated
statements of operations because the exercise price of the Companys stock options granted to
employees equaled the fair market value of the underlying stock at the date of grant. In accordance
with the modified prospective transition method the Company used in adopting SFAS No. 123(R), the
Companys results of operations prior to fiscal 2006 have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R).
Stock-based compensation expense recognized during a period is based on the value of the portion of
stock-based awards that is ultimately expected to vest during the period. Stock-based compensation
expense recognized in the three and six months ended June 30, 2006 included compensation expense
for stock-based awards granted prior to, but not yet vested as of December 31, 2005, based on the
fair value on the grant date estimated in accordance with the pro forma provisions of SFAS No. 123.
As stock-based compensation expense recognized for the second quarter of fiscal 2006 is based on
awards ultimately expected to vest, it has been reduced for forfeitures.
The following table illustrates the pro forma net income and earnings per share for the three
months and six months ended June 30, 2005 as if compensation expense for stock options issued to
employees had been determined consistent with SFAS No. 123:
- 8 -
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
1,504 |
|
|
$ |
2,539 |
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
determined under fair value based method
for all awards, net of realized tax effects |
|
|
(42 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net income |
|
$ |
1,462 |
|
|
$ |
2,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.19 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.19 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.16 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.16 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
- 9 -
NOTE
4 SECURITIES
Amortized costs and fair values of securities available for sale as of June
30, 2006 and December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
(In Thousands) |
U.S. Treasury Securities |
|
$ |
988 |
|
|
$ |
|
|
|
$ |
(6 |
) |
|
$ |
982 |
|
U.S. Government Agencies |
|
|
96,340 |
|
|
|
|
|
|
|
(1,935 |
) |
|
|
94,405 |
|
Mortgage Backed Securities |
|
|
1,208 |
|
|
|
|
|
|
|
(12 |
) |
|
|
1,196 |
|
Tax Exempt Municipals |
|
|
2,894 |
|
|
|
|
|
|
|
(100 |
) |
|
|
2,794 |
|
Taxable Municipals |
|
|
1,305 |
|
|
|
|
|
|
|
(80 |
) |
|
|
1,225 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(72 |
) |
|
|
1,428 |
|
Restricted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
720 |
|
FHLB Stock |
|
|
4,254 |
|
|
|
|
|
|
|
|
|
|
|
4,254 |
|
|
|
|
Total Securities |
|
$ |
109,209 |
|
|
$ |
|
|
|
$ |
(2,205 |
) |
|
$ |
107,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Gross Unrealized |
|
Unrealized |
|
|
|
|
Cost |
|
Gains |
|
(Losses) |
|
Fair Value |
|
|
( In Thousands) |
U.S. Treasury Notes |
|
$ |
1,606 |
|
|
$ |
|
|
|
$ |
(4 |
) |
|
$ |
1,602 |
|
U.S. Governmental Agencies |
|
|
76,329 |
|
|
|
|
|
|
|
(1,069 |
) |
|
|
75,260 |
|
Mortgage Backed Securities |
|
|
1,392 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
1,393 |
|
Tax Exempt Municipals |
|
|
2,895 |
|
|
|
|
|
|
|
(55 |
) |
|
|
2,840 |
|
Taxable Municipals |
|
|
1,500 |
|
|
|
|
|
|
|
(34 |
) |
|
|
1,466 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
|
|
|
|
(29 |
) |
|
|
1,471 |
|
Restricted
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank Stock |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
300 |
|
FHLB Stock |
|
|
3,439 |
|
|
|
|
|
|
|
|
|
|
|
3,439 |
|
|
|
|
|
|
$ |
88,961 |
|
|
$ |
3 |
|
|
$ |
(1,193 |
) |
|
$ |
87,771 |
|
|
|
|
- 10 -
The amortized cost and fair value of securities available for sale as of June 30, 2006 and
December 31, 2005 by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid without any penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In Thousands) |
|
|
(In Thousands) |
|
US Treasury & Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
17,024 |
|
|
$ |
16,825 |
|
|
$ |
3,606 |
|
|
$ |
3,570 |
|
Due after one through five years |
|
|
78,806 |
|
|
|
77,143 |
|
|
|
72,831 |
|
|
|
71,808 |
|
Due after five through ten years |
|
|
1,498 |
|
|
|
1,419 |
|
|
|
1,498 |
|
|
|
1,484 |
|
Municipals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five through ten years |
|
|
3,920 |
|
|
|
3,749 |
|
|
|
3,880 |
|
|
|
3,796 |
|
Due after ten through fifteen years |
|
|
279 |
|
|
|
270 |
|
|
|
515 |
|
|
|
510 |
|
Mortgage Backed Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one through five years |
|
|
1,208 |
|
|
|
1,196 |
|
|
|
1,392 |
|
|
|
1,393 |
|
Mutual Fund |
|
|
1,500 |
|
|
|
1,428 |
|
|
|
1,500 |
|
|
|
1,471 |
|
Restricted Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank stock |
|
|
720 |
|
|
|
720 |
|
|
|
300 |
|
|
|
300 |
|
FHLB stock |
|
|
4,254 |
|
|
|
4,254 |
|
|
|
3,439 |
|
|
|
3,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,209 |
|
|
$ |
107,004 |
|
|
$ |
88,961 |
|
|
$ |
87,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 11 -
Investment securities available for sale that have an unrealized loss position at June 30, 2006 and
December 31, 2005 are detailed below
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities in a Loss |
|
|
Securities in a Loss |
|
|
|
|
|
|
Position for Less than |
|
|
Position for 12 Months |
|
|
|
|
|
|
12 Months |
|
|
or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In Thousands) |
|
Investment securities available
for sale: June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Security |
|
$ |
982 |
|
|
$ |
(6 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
982 |
|
|
$ |
(6 |
) |
Mortgage Backed Security |
|
|
1,033 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
1,033 |
|
|
|
(12 |
) |
U.S. Government Agencies |
|
|
1,419 |
|
|
|
(79 |
) |
|
|
94,985 |
|
|
|
(1,857 |
) |
|
|
96,405 |
|
|
|
(1,936 |
) |
Municipals-Taxable |
|
|
1,225 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
1,225 |
|
|
|
(80 |
) |
Municipals-Tax Exempt |
|
|
270 |
|
|
|
(9 |
) |
|
|
2,524 |
|
|
|
(91 |
) |
|
|
2,795 |
|
|
|
(100 |
) |
CRA Mutual Fund |
|
|
1,428 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
1,428 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,357 |
|
|
$ |
(258 |
) |
|
$ |
97,509 |
|
|
$ |
(1,948 |
) |
|
$ |
103,868 |
|
|
$ |
(2,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Security |
|
$ |
1,602 |
|
|
$ |
(4 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,602 |
|
|
$ |
(4 |
) |
Mortgage Backed Security |
|
|
485 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
485 |
|
|
|
(2 |
) |
U.S. Government Agencies |
|
|
28,950 |
|
|
|
(377 |
) |
|
|
29,309 |
|
|
|
(691 |
) |
|
|
58,259 |
|
|
|
(1,068 |
) |
Municipals-Taxable |
|
|
1,465 |
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
1,465 |
|
|
|
(35 |
) |
Municipals-Tax Exempt |
|
|
2,840 |
|
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
2,840 |
|
|
|
(55 |
) |
CRA Mutual Fund |
|
|
1,471 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
1,471 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,813 |
|
|
$ |
(502 |
) |
|
$ |
29,309 |
|
|
$ |
(691 |
) |
|
$ |
66,122 |
|
|
$ |
(1,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe that any individual unrealized loss as of June 30, 2006 and
December 31, 2005 represents other than temporary impairment. These unrealized losses are primarily
attributable to changes in interest rates. The Corporation has the ability to hold these securities
for a time necessary to recover the amortized cost or until maturity when full repayment would be
received.
- 12 -
NOTE 5 LOANS
The following table presents the composition of the loan portfolio at June 30, 2006 and December
31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
|
2006 |
|
|
Total |
|
|
2005 |
|
|
Total |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Commercial |
|
$ |
47,308 |
|
|
|
11.61 |
% |
|
$ |
38,516 |
|
|
|
10.42 |
% |
Real estate non-residential |
|
|
154,687 |
|
|
|
37.95 |
|
|
|
137,423 |
|
|
|
37.17 |
|
Real estate construction |
|
|
40,459 |
|
|
|
9.93 |
|
|
|
37,054 |
|
|
|
10.02 |
|
Residential real estate |
|
|
163,451 |
|
|
|
40.10 |
|
|
|
156,185 |
|
|
|
42.24 |
|
Consumer |
|
|
1,681 |
|
|
|
0.41 |
|
|
|
555 |
|
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
407,586 |
|
|
|
100.00 |
% |
|
$ |
369,733 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
5,393 |
|
|
|
|
|
|
|
5,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
402,193 |
|
|
|
|
|
|
$ |
364,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 SEGMENT REPORTING
Access National Corporation has two reportable segments: traditional commercial banking and a
mortgage banking business. Revenues from commercial banking operations consist primarily of
interest earned on loans and investment securities and fees from deposit services. Mortgage banking
operating revenues consist principally of interest earned on mortgage loans held for sale, gains on
sales of loans in the secondary mortgage market and loan origination fee income.
The commercial bank segment provides the mortgage segment with the short term funds needed to
originate mortgage loans through a warehouse line of credit and charges the mortgage banking
segment interest based on the prime rate. These transactions are eliminated in the consolidation
process.
Other includes the operations of Access National Corporation and Access Real Estate LLC. The
primary source of income for the Corporation is derived from dividends from the Bank and its
primary expense relates to interest on subordinated debentures. The primary source of income for
Access Real Estate is derived from rents received from the Bank and Mortgage Corporation.
- 13 -
The following table presents segment information for the three months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
9,638 |
|
|
$ |
595 |
|
|
$ |
17 |
|
|
$ |
(959 |
) |
|
$ |
9,291 |
|
Gain on sale of loans |
|
|
|
|
|
|
3,802 |
|
|
|
|
|
|
|
|
|
|
|
3,802 |
|
Other revenues |
|
|
396 |
|
|
|
3,316 |
|
|
|
25 |
|
|
|
(440 |
) |
|
|
3,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,034 |
|
|
|
7,713 |
|
|
|
42 |
|
|
|
(1,399 |
) |
|
|
16,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
4,998 |
|
|
|
999 |
|
|
|
335 |
|
|
|
(961 |
) |
|
|
5,371 |
|
Salaries and employee benefits |
|
|
1,584 |
|
|
|
3,259 |
|
|
|
|
|
|
|
|
|
|
|
4,843 |
|
Other |
|
|
1,138 |
|
|
|
2,574 |
|
|
|
389 |
|
|
|
(702 |
) |
|
|
3,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,720 |
|
|
|
6,832 |
|
|
|
724 |
|
|
|
(1,663 |
) |
|
|
13,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
2,314 |
|
|
$ |
881 |
|
|
$ |
(682 |
) |
|
$ |
264 |
|
|
$ |
2,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
562,516 |
|
|
$ |
53,318 |
|
|
$ |
37,850 |
|
|
$ |
(61,916 |
) |
|
$ |
591,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
6,358 |
|
|
$ |
706 |
|
|
$ |
28 |
|
|
$ |
(724 |
) |
|
$ |
6,368 |
|
Gain on sale of loans |
|
|
|
|
|
|
6,728 |
|
|
|
|
|
|
|
32 |
|
|
|
6,760 |
|
Other revenues |
|
|
354 |
|
|
|
2,004 |
|
|
|
137 |
|
|
|
(108 |
) |
|
|
2,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
6,712 |
|
|
|
9,438 |
|
|
|
165 |
|
|
|
(800 |
) |
|
|
15,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
2,588 |
|
|
|
653 |
|
|
|
284 |
|
|
|
(724 |
) |
|
|
2,801 |
|
Salaries and employee benefits |
|
|
1,318 |
|
|
|
3,895 |
|
|
|
|
|
|
|
|
|
|
|
5,213 |
|
Other |
|
|
1,150 |
|
|
|
3,916 |
|
|
|
443 |
|
|
|
(339 |
) |
|
|
5,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,056 |
|
|
|
8,464 |
|
|
|
727 |
|
|
|
(1,063 |
) |
|
|
13,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,656 |
|
|
$ |
974 |
|
|
$ |
(562 |
) |
|
$ |
263 |
|
|
$ |
2,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
447,417 |
|
|
$ |
105,480 |
|
|
$ |
35,459 |
|
|
$ |
(112,916 |
) |
|
$ |
475,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 14 -
The following table presents segment information for the six months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Eliminations |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
18,320 |
|
|
$ |
1,229 |
|
|
$ |
30 |
|
|
$ |
(1,643 |
) |
|
$ |
17,936 |
|
Gain on sale of loans |
|
|
|
|
|
|
8,917 |
|
|
|
|
|
|
|
|
|
|
|
8,917 |
|
Other revenues |
|
|
796 |
|
|
|
4,210 |
|
|
|
587 |
|
|
|
(1,308 |
) |
|
|
4,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
19,116 |
|
|
|
14,356 |
|
|
|
617 |
|
|
|
(2,951 |
) |
|
|
31,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
9,231 |
|
|
|
1,680 |
|
|
|
653 |
|
|
|
(1,645 |
) |
|
|
9,919 |
|
Salaries and employee benefits |
|
|
3,115 |
|
|
|
6,434 |
|
|
|
|
|
|
|
|
|
|
|
9,549 |
|
Other |
|
|
2,121 |
|
|
|
4,825 |
|
|
|
806 |
|
|
|
(1,319 |
) |
|
|
6,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
14,467 |
|
|
|
12,939 |
|
|
|
1,459 |
|
|
|
(2,964 |
) |
|
|
25,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
4,649 |
|
|
$ |
1,417 |
|
|
$ |
(842 |
) |
|
$ |
13 |
|
|
$ |
5,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
562,516 |
|
|
$ |
53,318 |
|
|
$ |
37,850 |
|
|
$ |
(61,916 |
) |
|
$ |
591,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Commercial |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
(In Thousands) |
|
Banking |
|
|
Banking |
|
|
Other |
|
|
Elimination |
|
|
Totals |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
11,937 |
|
|
$ |
1,213 |
|
|
$ |
49 |
|
|
$ |
(1,212 |
) |
|
$ |
11,987 |
|
Gain on sale of loans |
|
|
|
|
|
|
11,394 |
|
|
|
|
|
|
|
|
|
|
|
11,394 |
|
Other revenues |
|
|
812 |
|
|
|
3,141 |
|
|
|
596 |
|
|
|
(643 |
) |
|
|
3,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
12,749 |
|
|
|
15,748 |
|
|
|
645 |
|
|
|
(1,855 |
) |
|
|
27,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
4,826 |
|
|
|
1,061 |
|
|
|
561 |
|
|
|
(1,212 |
) |
|
|
5,236 |
|
Salaries and employee
benefits |
|
|
2,712 |
|
|
|
7,064 |
|
|
|
|
|
|
|
|
|
|
|
9,776 |
|
Other |
|
|
1,956 |
|
|
|
6,425 |
|
|
|
700 |
|
|
|
(705 |
) |
|
|
8,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,494 |
|
|
|
14,550 |
|
|
|
1,261 |
|
|
|
(1,917 |
) |
|
|
23,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
3,255 |
|
|
$ |
1,198 |
|
|
$ |
(616 |
) |
|
$ |
62 |
|
|
$ |
3,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
447,417 |
|
|
$ |
105,480 |
|
|
$ |
35,459 |
|
|
$ |
(112,916 |
) |
|
$ |
475,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 15 -
NOTE 7 EARNINGS PER SHARE (EPS):
The following tables show the calculation of both Basic and Diluted earnings per share for the
three and six months ended June 30, 2006 and 2005 respectively. The numerator of both the Basic and
Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in
the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect
of potentially dilutive common stock options and warrants utilizing the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
(In thousands except for share data) |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,806 |
|
|
$ |
1,504 |
|
Weighted average shares outstanding |
|
|
8,220,963 |
|
|
|
7,920,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
|
1,806 |
|
|
$ |
1,504 |
|
Weighted average shares outstanding |
|
|
8,220,963 |
|
|
|
7,920,668 |
|
Stock options and warrants |
|
|
1,316,510 |
|
|
|
1,454,660 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
9,537,473 |
|
|
|
9,375,328 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.19 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
(In thousands except for share data) |
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
3,429 |
|
|
$ |
2,539 |
|
Weighted average shares outstanding |
|
|
8,119,548 |
|
|
|
7,919,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.42 |
|
|
$ |
0.32 |
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Net Income |
|
|
3,429 |
|
|
$ |
2,539 |
|
Weighted average shares outstanding |
|
|
8,119,548 |
|
|
|
7,919,334 |
|
Stock options and warrants |
|
|
1,478,308 |
|
|
|
1,447,962 |
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
9,597,856 |
|
|
|
9,367,296 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.36 |
|
|
$ |
0.27 |
|
NOTE
8 DERIVATIVES
Access National Mortgage Corporation carries all derivative instruments at fair value as either
assets or liabilities in the consolidated balance sheets. Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities as amended (SFAS
133), provides
- 16 -
ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
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 June 30, 2006 and December 31, 2005 the Mortgage Corporation had derivative financial
instruments with a notional value of $110,964,000 and $96,809,000 respectively. The fair value of
these derivative instruments at June 30, 2006 and December 31, 2005 was $110,921,000 and
$96,731,000 respectively.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board the (FASB), issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized under SFAS No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of an uncertain tax position taken or expected to be taken in a tax
return. The evaluation of an uncertain tax position in accordance with FIN 48 is a two-step
process. The first step is recognition, which requires a determination whether it is more likely
than not that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. The second
step is measurement: A tax position that meets the more-likely-than-not recognition threshold is
measured at the largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings
(or other appropriate components of equity or net assets) for that fiscal year. The Corporation is
still evaluating the applicability of FIN 48. Although that evaluation is not complete, the
Corporation anticipates that the adoption of FIN 48 on January 1, 2007 will not have a material
impact on its financial position.
- 17 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to provide an overview of the significant factors
affecting the financial condition and the results of operations of Access National Corporation and
subsidiaries (the Corporation) for the three and six months ended June 30, 2006 and 2005. The
consolidated financial statements and accompanying notes should be read in conjunction with this
discussion and analysis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q may contain
forward-looking statements. For this purpose, any statements contained herein, including documents
incorporated by reference, that are not statements of historical fact may be deemed to be
forward-looking statements. Examples of forward-looking statements include discussions as to our
expectations, beliefs, plans, goals, objectives and future financial or other performance or
assumptions concerning matters discussed in this document. Forward-looking statements often use
words such as believes, expects, plans, may, will, should, projects, contemplates,
anticipates, forecasts, intends or other words of similar meaning. You can also identify
them by the fact that they do not relate strictly to historical or current facts. Forward-looking
statements are subject to numerous assumptions, risks and uncertainties, and actual results could
differ materially from historical results or those anticipated by such statements. Factors that
could have a material adverse effect on the operations and future prospects of the Corporation
include, but are not limited to: changes in the Corporations competitive position, competitive
actions by other financial institutions and the competitive nature of the financial services
industry and the Corporations ability to compete effectively against other financial institutions
in its banking markets; the Corporations potential growth, including its entrance or expansion
into new markets, the opportunities that may be presented to and pursued by it and the need for
sufficient capital to support that growth; the Corporations ability to manage growth; changes in
government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan
products and financial services; the strength of the economy in the Corporations target market
area, as well as general economic, market, or business conditions; changes in the quality or
composition of the Corporations loan or investment portfolios, including adverse developments in
borrower industries, decline in real estate values in the Corporations markets, or in the
repayment ability of individual borrowers or issuers; an insufficient allowance for loan losses as
a result of inaccurate assumptions; the Corporations reliance on dividends from the Bank as a
primary source of funds; the Corporations reliance on secondary sources, such as Federal Home Loan
Bank advances, sales of securities and loans, federal funds lines of credit from correspondent
banks and out-of-market time deposits, to meet the Banks liquidity needs; changes in laws,
regulations and the policies of federal or state regulators and agencies; the Corporations
mortgage loan business and the offering of non-conforming mortgage loans; and other circumstances,
many of which are beyond the Corporations control. These risks and uncertainties should
be considered in evaluating the forward-looking statements contained herein, and readers are
cautioned not to place undue reliance on such statements. Any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which it is made.
CRITICAL ACCOUNTING POLICIES
General
The Corporations financial statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The financial information contained within our
statements is, to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability. Actual losses could differ significantly
from the historical factors that we monitor. Additionally, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our transactions would
be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan
portfolio. The allowance is based on two basic principals of accounting: (i) SFAS 5 Accounting for
Contingencies, which requires that losses be accrued when they are probable of occurring and
estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market and the loan balance.
An allowance for loan losses is established through a provision for loan losses based upon industry
standards, known risk characteristics, managements evaluation of the risk inherent in the loan
portfolio and changes in the nature and volume of loan activity. Such evaluation considers among
other factors, the estimated market value of the underlying collateral, and current economic
conditions. For further
information about our practices with respect to allowance for loan losses, please see the
subsection Allowance for Loan Losses below.
- 18 -
Derivative Financial Instruments Access National Mortgage Corporation carries all
derivative instruments at fair value as either assets or liabilities in the consolidated balance
sheets. SFAS 133 provides specific accounting provisions for derivative instruments that qualify
for hedge accounting. The Mortgage Corporation has not elected to apply hedge accounting to its
derivative instruments as provided in SFAS 133.
Off-Balance Sheet Items
In the ordinary course of business, the Bank issues commitments to extend credit and, at June 30,
2006, these commitments amounted to $41.0 million. These commitments do not necessarily represent
cash requirements, since many commitments are expected to expire without being drawn on.
At June 30 2006, the Bank had approximately $83.4 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 loan portfolio held for
investment, the volume of commitments and unfunded lines of credit are expected to increase
accordingly.
FINANCIAL CONDITION (June 30, 2006 compared to December 31, 2005)
The Corporations assets totaled $591.8 million at June 30, 2006, an increase of $54.7 million from
year end 2005. The Corporation experienced continued growth during the second quarter of 2006.
Loans held for investment, originated by the Bank, increased $37.9 million over year end. The
growth in loans held for investment is due to our commitment to meeting the credit needs of our
existing and new clients. Loans held for sale totaled $49.3 million, up $4.3 million from December
31, 2005. The increase in loans held for sale is due to an increase in loan originations during the
month of June 2006. Management continues to employ a strategy of attracting highly qualified
professional lenders to support future growth in the loans held for investment. The future
balances in the loans held for sale category will continue to experience volatility due to
fluctuations of interest rates. The balances of this short term investment fluctuate daily as
necessary to support loan origination and secondary market sales activities.
Asset growth during the period was supported by a combination of deposit growth and short term
borrowings. Deposits totaled $453.4 million at June 30, 2006 up from $419.6 million at December 31,
2005. Short term borrowings increased by $21.2 million during the second quarter of 2006. Short
term borrowings are used to fund the loans held for sale activities and to compensate for
fluctuations in core deposits. In addition to short term borrowings, management utilizes wholesale
certificates of deposits as an additional funding source. The Bank concentrates on commercial
accounts and due to the nature of these accounts, balances can be subject to wide fluctuations.
Management continues to expanded the business development and marketing staff to support future
deposit growth necessary to fund loan growth.
In August, the Corporation sold 2,000,000 shares of common stock at a price of $9.38 per share in a
public offering in which two selling shareholders also sold 135,000 of their shares of common
stock. The proceeds will be used primarily to support the continued growth in loans and deposits
of the Bank.
Securities
The Corporations securities portfolio is comprised of U.S. Treasury securities, U.S. Government
Agency securities, mortgage backed securities, obligations of States and Political subdivisions,
Federal Reserve and Federal Home Loan Bank stock. At June 30, 2006 the securities portfolio totaled
$107 million, up from $87.8 million on December 31, 2005. All securities were classified as
available for sale. Securities classified as available for sale are accounted for at fair market
value with unrealized gains and losses recorded directly to a separate component of stockholders
equity, net of associated tax effect. The Corporations securities classified as available for sale
had an unrealized loss net of deferred taxes of $1.5 million on June 30, 2006.
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 Access National Bank (the
Bank), Access National Mortgage Corporation (the Mortgage Corporation) and Access National Leasing
Corporation (the Leasing Corporation) are subject to the regulations and supervision of the Office
of the Comptroller of Currency.
At June 30, 2006, loans held for investment increased by $37.9 million from December 31, 2005 and
totaled $407.6 million. The increase is due to a combination of factors, but primarily due to
servicing the credit needs of existing clients and new business
originating from, referrals, community involvement, and increased name recognition and acceptance
of the Banks products and services within the marketplace. Management intends to continue to
increase loan officer staffing and support in order to facilitate continued growth in the
- 19 -
portfolio. The following is a summary of the Loan Portfolio Held for Investment at June 30, 2006.
Commercial Loans: Commercial Loans represent 11.6% of our held for investment portfolio.
These loans are to businesses or individuals within our target market for business purposes.
Typically the loan proceeds are used to support working capital and the acquisition of fixed assets
of an operating business. These loans are underwritten based upon our assessment of the
obligor(s) ability to generate operating cash flow in the future necessary to repay the loan. To
address the risks associated with the uncertainties of future cash flow, these loans are generally
well secured by assets owned by the business or its principal shareholders and the principal
shareholders are typically required to guarantee the loan.
Real Estate Construction Loans: Real Estate Construction Loans, also known as construction
and land development loans, comprise 9.9% of our held for investment loan portfolio. These loans
generally fall into one of three circumstances: first, loans to individuals that are ultimately
used to acquire property and construct an owner occupied residence; second, loans to builders for
the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to
developers for the purpose of acquiring land that is developed into finished lots for the ultimate
construction of residential or commercial buildings. Loans of these types are generally secured by
the subject property within limits established by the Board of Directors based upon an assessment
of market conditions and up-dated from time to time. The loans typically carry recourse to
principal owners. In addition to the repayment risk associated with loans to individuals and
businesses, loans in this category carry construction completion risk. To address this additional
risk, loans of this type are subject to additional administration procedures designed to verify and
ensure progress of the project in accordance with allocated funding, project specifications and
time frames.
Real Estate Non-Residential Loans: Also known as Commercial Mortgages, loans in this
category represent 38.0% of our loan portfolio held for investment. These loans generally fall
into one of three situations in order of magnitude: first, loans supporting an owner occupied
commercial property; second, properties used by non-profit organizations such as churches or
schools where repayment is dependent upon the cash flow of the non-profit organizations; and third,
loans supporting a commercial property leased to third parties for investment. Commercial Real
Estate Loans are secured by the subject property and underwritten to policy standards. Policy
standards approved by the Board of Directors from time to time set forth, among other
considerations, loan to value limits, cash flow coverage ratios, and the general creditworthiness
of the obligors.
Real Estate Residential Loans: This category includes loans secured by first or second
mortgages on one to four family residential properties and represent 40.1% of the portfolio. Of
this amount, the following sub-categories exist as a percentage of the whole Residential Real
Estate Loan portfolio: Home Equity Lines of Credit 17.1%; First Trust Mortgage Loans 75.1%; Loans
Secured by a Junior Trust 4.7%; Multi-family loans and loans secured by Farmland 3.1%.
Home Equity Loans are extended to borrowers in our target market. Real estate equity is the
largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool
allows the borrower to access the equity in their home or investment property and use the proceeds
for virtually any purpose. Home Equity Loans are most frequently secured by a second lien on
residential property. 1-4 Family Residential First Trust Loan, or First Mortgage Loan, proceeds
are used to acquire or refinance the primary financing on owner occupied and residential investment
properties. Junior Trust Loans, or Loans Secured by a Second Trust Loans, are to consumers
wherein the proceeds have been used for a stated consumer purpose. Examples of consumer purposes
are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in
a single disbursement and repaid over a specified period of time.
Loans in the Residential Real Estate portfolio are underwritten to standards within a traditional
consumer framework that is periodically reviewed and up-dated by our management and Board of
Directors: repayment source and capacity, value of the underlying property, credit history, savings
pattern and stability.
Consumer Loans: Consumer Loans make up less than 0.4% of our loan portfolio. Most loans
are well secured with assets other than real estate, such as marketable securities or automobiles.
Very few loans are unsecured. As a matter of operation, management discourages unsecured lending.
Loans in this category are underwritten to standards within a traditional consumer framework that
is periodically reviewed and updated by our management and the Board of Directors: repayment
capacity, collateral value, savings pattern, credit history and stability.
Loans Held for Sale (LHFS)
Loans Held for Sale are originated by the Mortgage Corporation and carried on our books at the
lower of cost or market value. These loans are residential mortgage loans extended to consumers
underwritten in accordance with standards set forth by an institutional investor to whom we expect
to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the
property securing the loan. Loans are sold with the servicing released to the investor.
The LHFS loans are closed in our name and carried on our books until the loan is delivered to and
purchased by an investor. In the six month period ending June 30, 2006 we originated $354.3
million of loans processed in this manner. Repayment risk of this activity is
minimal since the loans are on the books for a short time period. Loans are sold without recourse
and subject to industry standard representations and warranties. The risks associated with this
activity center around borrower fraud and failure of our investors to
- 20 -
purchase the loans. These
risks are addressed by the on-going maintenance of an extensive quality control program, an
internal audit and verification program, and a selective approval process for investors. To date
we have been able to absorb the financial impact of these risks without material impact on our
operating performance. At June 30, 2006 loans held for sale totaled $49.4 million compared to $45.0
million at year end 2005. The increase in loans held for sale at is primarily due to increase in
loan originations during the month of June.
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. We are paid a fee for
procuring and packaging brokered loans. For the first six months of 2006, we originated a total
volume of $79.6 million in residential mortgage loans under this type of delivery method, as
compared to $114.0 million for the same period of 2005. Brokered loans accounted for 18.4% of the
total loan volume for the first six months of 2006.
Allowance for Loan Losses
The allowance for loan losses increased by $178 thousand which includes a $5 thousand recovery on a
previously charged off loan and totaled $5.4 million at June 30, 2006 compared to $5.2 million at
year end 2005. The allowance for loan losses at June 30, 2006 was 1.32% of total loans held for
investment compared to 1.41% at year end 2005. The allowance for Commercial loans as a percent of
the total Commercial loans amounted to 1.7%, compared to 4.0% at year end 2005. The allowance for
Construction Loans was 1.6% at June 30, 2006 and December 31, 2005. The allowance for Commercial
Real Estate loans was 1.6% of total Commercial Real Estate loans as of June 30, 2006 and 1.4% at
year end 2005. The allowance for Residential Real Estate loans remained unchanged and was 0.9% as
a percent of total Residential Real Estate loans at June 30, 2006 and 0.8% at December 31, 2005.
Although actual loan losses have been insignificant, our senior credit management, with over 60
years in collective experience in managing similar portfolios in our marketplace, concluded the
amount of our reserve and the methodology applied to arrive at the amount of the reserve is
justified and appropriate due to the lack of seasoning of the portfolio, the relatively large
dollar amount of a relatively small number of loans, portfolio growth, staffing changes, volume,
changes in individual risk ratings on new loans and trend analysis. Outside of our own analysis,
our reserve adequacy and methodology are reviewed on a regular basis by, internal audit program,
and bank regulators and such reviews have not resulted in any material adjustment to the reserve.
The Bank does not have a meaningful history of charge offs with which to establish trends in loan
losses by loan classifications. As of June 30, 2006 the total net charge offs for the six years of
operation was approximately $14 thousand. The overall allowance for loan losses is equivalent to
approximately 1.34% of total loans held for investment. The methodology as to how the allowance
was derived is a combination of specific allocations and percentages allocation of the unallocated
portion of the allowance for loan losses, as discussed below. The Bank has developed a
comprehensive risk weighting system based on individual loan characteristics that enables the Bank
to allocate the composition of the allowance for loan losses by types of loans.
The loss risk of each loan within a particular classification, however, is not the same. The
methodology for arriving at the allowance is not dictated by loan classification. The methodology
as to how the allowance was derived is detailed below. Unallocated amounts included in the
allowance for loan losses have been applied to the loan classifications on a percentage basis.
Adequacy of the reserve is assessed, and appropriate expense and charge offs are taken, no less
frequently than at the close of each fiscal quarter end. The methodology by which we
systematically determine the amount of our reserve is set forth by the Board of Directors in our
Credit Policy. Under this Policy, our Chief Credit Officer is charged with ensuring that each loan
is individually evaluated and the portfolio characteristics are evaluated to arrive at an
appropriate aggregate reserve. The results of the analysis are documented, reviewed and approved
by the Board of Directors no less than quarterly. The following elements are considered in this
analysis: loss estimates on specific problem credits (the Specific Reserve) , individual loan
risk ratings, lending staff changes, loan review and board oversight, loan policies and procedures,
portfolio trends with respect to volume, delinquency, composition/concentrations of credit, risk
rating migration, levels of classified credit, off-balance sheet credit exposure, any other factors
considered relevant from time to time (the General Reserve) and, finally, an Unallocated
Reserve to cover any unforeseen factors not considered above in the appropriate magnitude. Each
of the reserve components, General, Specific and Unallocated are discussed in further detail below.
With respect to the General Reserve, all loans are graded or Risk Rated individually for loss
potential at the time of origination and as warranted thereafter, but no less frequently than
quarterly. Loss potential factors are applied based upon a blend of the following criteria: our
own direct experience at this bank; our collective management experience in administering similar
loan portfolios in the market for over 60 years; and peer data contained in statistical releases
issued by both the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. Although looking only at peer data and the banks historically low write-offs would
suggest a lower loan loss allowance, our managements experience with similar portfolios in the
same market combined with the fact that our portfolio is relatively unseasoned, justify a
conservative approach in contemplating external statistical resources. Accordingly, managements
collective experience at this bank and other banks is the most heavily weighted criterion, and the
weighting is subjective and varies by
loan type, amount, collateral, structure, and repayment terms. Prevailing economic condition
generally and within each individual borrowers business sector are considered, as well as any
changes in the borrowers own financial position and, in the case of
- 21 -
commercial loans, management
structure and business operations. As of June 30, 2006 our evaluation of these factors supported
approximately 79.9% of the total loss reserve. As our portfolio ages and we gain more direct
experience, the direct experience will weigh more heavily in our evaluation.
When deterioration develops in an individual credit, the loan is placed on a Watch List and the
loan is monitored more closely. All loans on the watch list are evaluated for specific loss
potential based upon either an evaluation of the liquidated value of the collateral or cash flow
deficiencies. If management believes that, with respect to a specific loan, an impaired source of
repayment, collateral impairment or a change in a debtors financial condition presents a
heightened risk of non-performance of a particular loan, a portion of the reserve may be
specifically allocated to that individual loan. The aggregation of this loan by loan analysis
comprises the Specific Reserve and accounted for 0% of the total loss reserve at June 30, 2006.
The Unallocated Reserve is maintained to absorb risk factors outside of the General and Specific
Allocations. Maximum and minimum target limits are established by us on a quarterly basis for the
Unallocated Reserve. As of June 30, 2006 the threshold range for this component was 0.00% to 0.15%
of the total loan portfolio and accounted for approximately 20.0% of the total loss reserve. At
June 30, 2006 the unallocated reserve amounted to $1.1 million and equaled .27% of total loans.
The unallocated balance is above our threshold due to loans that had the risk ratings upgraded.
An analysis of the Corporations allowance for loan losses as of and for the period indicated is
set forth in the following tables:
Allowance for Loan Losses
(In Thousands)
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
5,215 |
|
Charge offs |
|
|
|
|
Recoveries |
|
|
5 |
|
Provision |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
5,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the Allowance for Loan Losses |
|
|
June 30, 2006 |
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
|
Amount |
|
Percentage |
|
Loss |
|
Percentage |
|
Amount |
|
Percentage |
|
Loan Loss |
|
Percentage |
|
|
(Dollars In Thousands) |
Commercial |
|
$ |
47,308 |
|
|
|
11.61 |
% |
|
$ |
814 |
|
|
|
15.09 |
% |
|
|
38,516 |
|
|
|
10.42 |
% |
|
$ |
1,546 |
|
|
|
29.65 |
% |
Real estate non-residential |
|
|
154,687 |
|
|
|
37.95 |
|
|
|
2,411 |
|
|
|
44.70 |
|
|
|
137,423 |
|
|
|
37.17 |
|
|
|
1,896 |
|
|
|
36.36 |
|
Real estate construction |
|
|
40,459 |
|
|
|
9.93 |
|
|
|
641 |
|
|
|
11.89 |
|
|
|
37,054 |
|
|
|
10.02 |
|
|
|
500 |
|
|
|
9.58 |
|
Residential real estate |
|
|
163,451 |
|
|
|
40.10 |
|
|
|
1,510 |
|
|
|
28.00 |
|
|
|
156,185 |
|
|
|
42.24 |
|
|
|
1,267 |
|
|
|
24.30 |
|
Consumer |
|
|
1,681 |
|
|
|
0.41 |
|
|
|
17 |
|
|
|
0.32 |
|
|
|
555 |
|
|
|
0.15 |
|
|
|
6 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
$ |
407,586 |
|
|
|
100.00 |
% |
|
$ |
5,393 |
|
|
|
100.00 |
% |
|
|
369,733 |
|
|
|
100.00 |
% |
|
$ |
5,215 |
|
|
|
100.00 |
% |
|
|
|
|
|
Nonperforming Loans And Past Due
At June 30, 2006 there were no loans in non accrual or past due status.
- 22 -
Deposits
Deposits are the primary source of funding loan growth. At June 30, 2006 deposits totaled $453.4
million compared to $419.6 million on December 31, 2005, an increase of $33.7 million.
Non-Interest Bearing accounts increased $1.9 million, Savings and Money Market accounts declined
$20.6 million and Time Deposits increased $52.4 million. The decline in Savings and Money Market
accounts is partially due to transfers into Time Deposits for higher interest rates. The Banks
core deposit base is comprised primarily of commercial accounts and, due to the inherent nature of
these accounts, balances can be subject to wide fluctuations.
We utilize our professional loan officers to market both loans and deposits. In addition,
management has expanded the business development and marketing areas of the Bank to provide
continued future growth.
Shareholders Equity
Shareholders equity was $35.1 million at June 30, 2006. A strong capital position is vital to the
continued profitability of the Corporation. It also promotes depositor and investor confidence and
provides a solid foundation for the future growth of the organization. Shareholders equity
increased by $3.9 million during the six months ended June 30, 2006. The increase is due to the
retention of $3.4 million in earnings and $1.2 million from the exercise of stock options and
warrants, less a $81 thousand dividend payment. Other comprehensive income (loss) representing
unrealized losses on available for sale securities increased $670 thousand net of taxes.
Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank
are required to maintain. These risk based capital guidelines take into consideration risk
factors, as defined by the banking regulators, associated with various categories of assets, both
on and off the balance sheet. Both the Corporation and Bank are classified as Well Capitalized,
which is the highest rating. The following Risk Based Capital Analysis table outlines the
regulatory components of capital and risk based capital ratios.
- 23 -
Risk Based Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In Thousands) |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
7,054 |
|
|
$ |
6,644 |
|
Capital surplus |
|
|
9,891 |
|
|
|
9,099 |
|
Retained earnings |
|
|
19,576 |
|
|
|
16,227 |
|
Less: Net Unrealized loss on equity Securities |
|
|
(47 |
) |
|
|
(19 |
) |
Subordinated debentures |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
Total tier 1 capital |
|
|
46,474 |
|
|
|
41,951 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
5,530 |
|
|
|
4,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital |
|
$ |
52,004 |
|
|
$ |
46,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
442,354 |
|
|
$ |
388,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets |
|
$ |
562,019 |
|
|
$ |
552,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
Capital Ratios: |
|
|
|
|
|
|
|
|
|
Minimum |
Tier 1 risk based capital ratio |
|
|
10.51 |
% |
|
|
10.80 |
% |
|
|
4.00 |
% |
Total risk based capital ratio |
|
|
11.76 |
% |
|
|
12.05 |
% |
|
|
8.00 |
% |
Leverage ratio |
|
|
8.27 |
% |
|
|
7.60 |
% |
|
|
4.00 |
% |
- 24 -
RESULTS OF OPERATIONS (June 30, 2006)
Summary
Pretax income for the three months and six months ended June 30, 2006 was $2.8 million and $5.2
million respectively compared to $2.3 million and $3.9 million respectively for the corresponding
period of 2005. Net income after taxes for the three months and six months ended June 30, 2006
totaled $1.8 million and $3.4 million respectively compared to $1.5 million and $2.5 million
respectively for the same periods in 2005.
Income before taxes for the three and six months ended June 30, 2006 for the banking segment was
$2.3 million and $4.6 million respectively versus $1.7 million and $3.3 million respectively for
the same period in 2005. Income from the banking segment increased approximately $1.3 million
during the first six months of 2006 compared to the same period last year. This increase in income
is attributable to the growth in the loan portfolio. Earnings in 2006 were impacted by increased
interest expense associated with an increase in short term borrowings and higher interest rates on
deposits. Income before taxes from the mortgage segment was $881 thousand and $1.4 million for the
three months and six months ended June 30, 2006 respectively, compared to $974 thousand and $1.2
million for the corresponding period in 2005 respectively. The increase in income in 2006 is due
in part to a reduction in operating expenses associated with a decrease in loan originations.
For the three and six months ended June 30, 2006 the banking segment accounted for 83.3% and 88.8%
respectively of the pretax consolidated earnings. The banking segment is the predominant
contributor to growth and earnings. Revenue from the mortgage segment is subject to fluctuations
as mortgage interest rates change and to the real estate market cycle.
Basic earnings per common share for the second quarter of 2006 amounted to $0.22 and $0.42 per
share for the three and six months ended June 30, 2006, respectively, up from $0.19 and $0.32 per
share for the same periods in 2005. Diluted earnings per share for the second quarter were $0.19
and $0.36 for the three and six month period in 2006 up from $0.16 and $0.27 per share for the same
periods of 2005.
Interest and fees on loans increased by $4.7 million in the six months ended June 30, 2006 over the
same period of 2005 reflecting the $37.9 million increase in loans held for investment over year
end. Interest on investment securities increased $1.2 million due to a $19.2 million increase in
investment securities over December 31, 2005. Noninterest income totaled $13.2 million for the six
months ended June 30, 2006 compared to $15.3 million for the same period in 2005. This decrease is
primarily due to the decline in gains on mortgage loans held for sale. Interest and fees on loans
totaled approximately $8 million for the three months ended June 30, 2006 compared to $5.7 million
for the same period in 2005, an increase $2.3 million. Income from investment securities was up
$598 thousand for the second quarter compared to the same period in 2005.
Net Interest Income
Net interest income, the principal source of bank earnings, is the amount of income generated by
earning assets (primarily loans and investment securities) less the interest expense incurred on
interest bearing liabilities (primarily deposits) used to fund earning assets. During the first
quarter of 2006 our net interest margin decreased 30 basis points from 3.27% in 2005 to 2.97% in
2006. The decrease in net interest margin is due to the flat yield curve and increased short term
rates.
Net interest income for the six months ended June 30, 2006 increased to $8.0 million compared to
$6.8 million for the same period in 2005. Net interest income for the second quarter totaled $3.9
million compared to $3.2 million for the same period in 2005. Net interest income depends upon the
volume of earning assets and interest bearing liabilities and the associated rates. Average
interest earning assets increased $128.3 million from $412.5 million at June 30, 2005 to $541.0
million in 2006. The increase is attributed to the growth in average loans which increased by
approximately $83.0 million and the growth in average investment securities which increased by
$46.3 million. The yield on earning assets increased from 5.81% in 2005 to 6.64% in 2006
reflecting an increase in yield on all earning asset categories and reflects the rising rate
environment.
Total interest expense for the first six months of 2006 increased $4.7 million over the total of
$5.2 million for the same period in 2005 as a result of increases in interest bearing deposits and
increased interest expense on borrowings. Interest expense for the second quarter of 2006 was up $
2.6 million over the second quarter of 2005. Total interest bearing deposits averaged $344.4
million at period ended June 30, 2006 compared to $252.3 million at June 30, 2005. Borrowed funds
for six months ended June 30, 2006 averaged $119.3 million compared to $73.9 million for the
corresponding period in 2005. The increase in deposits and borrowings funded the growth in earning
assets. The average cost of interest bearing liabilities at June 30, 2006 was 4.28% up 107 basis
points from June 30, 2005.
- 25 -
Volume and Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2006 compared to 2005 |
|
|
Change Due To: |
|
|
Increase / |
|
|
|
|
|
|
(Decrease) |
|
Volume |
|
Rate |
|
|
(In Thousands) |
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
1,179 |
|
|
$ |
998 |
|
|
$ |
181 |
|
Loans |
|
|
4,724 |
|
|
|
2,830 |
|
|
|
1,894 |
|
Interest bearing deposits |
|
|
69 |
|
|
|
(13 |
) |
|
|
82 |
|
|
|
|
Total Increase (Decrease) in
Interest Income |
|
|
5,972 |
|
|
|
3,815 |
|
|
|
2,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
28 |
|
|
|
4 |
|
|
|
24 |
|
Money market deposit accounts |
|
|
627 |
|
|
|
33 |
|
|
|
594 |
|
Savings accounts |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Time deposits |
|
|
2,459 |
|
|
|
1,772 |
|
|
|
687 |
|
|
|
|
Total interest-bearing deposits |
|
|
3,115 |
|
|
|
1,810 |
|
|
|
1,305 |
|
FHLB advances |
|
|
1,365 |
|
|
|
986 |
|
|
|
379 |
|
Securities sold under agreements to repurchase |
|
|
20 |
|
|
|
6 |
|
|
|
14 |
|
Other short-term borrowings |
|
|
187 |
|
|
|
65 |
|
|
|
122 |
|
Long-term borrowings |
|
|
(100 |
) |
|
|
(96 |
) |
|
|
(4 |
) |
Subordinated debentures |
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
|
Total Increase (Decrease) in Interest
Expense |
|
|
4,683 |
|
|
|
2,771 |
|
|
|
1,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Net Interest Income |
|
$ |
1,289 |
|
|
$ |
1,044 |
|
|
$ |
245 |
|
|
|
|
- 26 -
Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Month |
|
|
|
Period Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars In Thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1) |
|
$ |
103,912 |
|
|
$ |
2,282 |
|
|
|
4.39 |
% |
|
$ |
57,619 |
|
|
$ |
1,103 |
|
|
|
3.83 |
% |
Loans(2) |
|
|
428,526 |
|
|
|
15,489 |
|
|
|
7.23 |
% |
|
|
345,571 |
|
|
|
10,765 |
|
|
|
6.23 |
% |
Interest bearing deposits |
|
|
8,374 |
|
|
|
188 |
|
|
|
4.49 |
% |
|
|
9,300 |
|
|
|
119 |
|
|
|
2.56 |
% |
|
|
|
|
|
Total interest earning assets |
|
|
540,812 |
|
|
|
17,959 |
|
|
|
6.64 |
% |
|
|
412,490 |
|
|
|
11,987 |
|
|
|
5.81 |
% |
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
10,385 |
|
|
|
|
|
|
|
|
|
|
|
9,475 |
|
|
|
|
|
|
|
|
|
Premises, land and equipment |
|
|
9,651 |
|
|
|
|
|
|
|
|
|
|
|
8,688 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
6,482 |
|
|
|
|
|
|
|
|
|
|
|
5,921 |
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses |
|
|
(5,312 |
) |
|
|
|
|
|
|
|
|
|
|
(4,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
21,206 |
|
|
|
|
|
|
|
|
|
|
|
19,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
562,018 |
|
|
|
|
|
|
|
|
|
|
$ |
432,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
11,275 |
|
|
$ |
123 |
|
|
|
2.18 |
% |
|
$ |
10,795 |
|
|
$ |
95 |
|
|
|
1.76 |
% |
Money market deposit accounts |
|
|
126,483 |
|
|
|
2,528 |
|
|
|
4.00 |
% |
|
|
124,331 |
|
|
|
1,901 |
|
|
|
3.06 |
% |
Savings accounts |
|
|
607 |
|
|
|
3 |
|
|
|
0.99 |
% |
|
|
418 |
|
|
|
2 |
|
|
|
0.96 |
% |
Time deposits |
|
|
206,051 |
|
|
|
4,371 |
|
|
|
4.24 |
% |
|
|
116,769 |
|
|
|
1,912 |
|
|
|
3.27 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
344,416 |
|
|
|
7,025 |
|
|
|
4.08 |
% |
|
|
252,313 |
|
|
|
3,910 |
|
|
|
3.10 |
% |
FHLB Advances |
|
|
72,309 |
|
|
|
1,771 |
|
|
|
4.90 |
% |
|
|
27,149 |
|
|
|
406 |
|
|
|
2.99 |
% |
Securities sold under agreements to repurchase |
|
|
1,892 |
|
|
|
33 |
|
|
|
3.49 |
% |
|
|
1,378 |
|
|
|
13 |
|
|
|
1.89 |
% |
Other short-term borrowings |
|
|
13,805 |
|
|
|
276 |
|
|
|
4.00 |
% |
|
|
8,964 |
|
|
|
89 |
|
|
|
1.99 |
% |
Long-term borrowings |
|
|
21,005 |
|
|
|
397 |
|
|
|
3.78 |
% |
|
|
26,089 |
|
|
|
497 |
|
|
|
3.81 |
% |
Subordinated debentures |
|
|
10,311 |
|
|
|
417 |
|
|
|
8.09 |
% |
|
|
10,311 |
|
|
|
321 |
|
|
|
6.23 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
463,738 |
|
|
|
9,919 |
|
|
|
4.28 |
% |
|
|
326,204 |
|
|
|
5,236 |
|
|
|
3.21 |
% |
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
61,022 |
|
|
|
|
|
|
|
|
|
|
|
75,130 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,831 |
|
|
|
|
|
|
|
|
|
|
|
3,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
528,591 |
|
|
|
|
|
|
|
|
|
|
|
405,261 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
33,427 |
|
|
|
|
|
|
|
|
|
|
|
27,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity: |
|
$ |
562,018 |
|
|
|
|
|
|
|
|
|
|
$ |
432,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread(3) |
|
|
|
|
|
|
|
|
|
|
2.36 |
% |
|
|
|
|
|
|
|
|
|
|
2.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4) |
|
|
|
|
|
$ |
8,040 |
|
|
|
2.97 |
% |
|
|
|
|
|
$ |
6,751 |
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income and yields are presented on a fully taxable equivalent basis using
34% tax rate. |
|
(2) |
|
Loans placed on nonaccrual status are included in loan balances |
|
(3) |
|
Interest spread is the average yield earned on earning assets, less the average rate
incurred on interest bearing liabilities. |
|
(4) |
|
Net interest margin is net interest income, expressed as a percentage of average
earning assets. |
27
Non Interest Income
Non-interest income consists of revenue generated from a broad range of financial services and
activities. The Mortgage Corporation provides the most significant contributions towards
non-interest income. Total non-interest income was $13.2 million for the six month period ending
June 30, 2006 compared to $15.3 million for the same period in 2005, a decrease of $2.1 million.
Noninterest income for the three month period ending June 30, 2006 totaled approximately $7.1
million down from $9.1 million for the same period of 2005. Gains on the sale of loans originated
by the Mortgage Corporation totaled $4.2 million and $8.9 million for the three and six month
periods ending June 30, 2006, compared to $7.0 million and $11.4 million for the same periods of
2005. Mortgage broker fees amounted to $1.3 million and $2.2 million for the three and six month
periods ended June 30, 2006, respectively, down from $1.7 million and $2.6 million for the same
periods in 2005. Other income totaled $1.9 million, for the first six months of 2006 up from $1.2
million for the same period in 2005. Other income totaled $1.4 million for the second quarter of
2006 up from $419 thousand for the second quarter of 2005.
Non Interest Expense
Non interest expense totaled $8.2 million and $15.8 million for the three and six months ended June
30, 2006 compared to $10 million and $17.7 million for the same periods in 2005. Salaries and
benefits totaled $9.5 million for the first six months of 2006, compared to $9.8 million for the
same period last year. Salaries and benefits totaled $4.8 million and $5.2 million for the second
quarter of 2006 and 2005, respectively. Other operating expenses totaled $5.3 million at June 30,
2006, down from $6.8 million at June 30, 2005. Other operating expenses totaled $2.9 million and
$4.2 million for the second quarter of 2006 and 2005, respectively. As with other non interest
income associated with the Mortgage Corporation non interest expense also fluctuates with loan
origination volumes.
Liquidity Management
Liquidity is the ability of the Corporation to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities. Liquidity management
involves maintaining the Corporations ability to meet the daily cash flow requirements of both
depositors and borrowers.
Asset and liability management functions not only serve to assure adequate liquidity in order to
meet the needs of the Corporations customers, but also to maintain an appropriate balance between
interest sensitive assets and interest sensitive liabilities so that the Corporation can earn an
appropriate return for its shareholders.
The asset portion of the balance sheet provides liquidity primarily through loan principal
repayments and maturities of investment securities. Other short-term investments such as Federal
Funds sold and maturing interest bearing deposits with other banks are additional sources of
liquidity funding. At June 30, 2006, overnight interest bearing balances totaled $3.1 million and
securities available for sale totaled $107.0 million.
The liability portion of the balance sheet provides liquidity through various interest bearing and
non interest bearing deposit accounts, Federal Funds purchased, securities sold under agreement to
repurchase and other short-term borrowings. At June 30, 2006, the Corporation had a line of credit
with the Federal Home Loan Bank of Atlanta totaling $161.0 million and outstanding variable rate
loans of $50.0 million, and an additional $19.7 million in term loans at fixed rates ranging from
2.70% to 4.97% leaving $85.9 million available on the line. In addition to the line of credit at
the Federal Home Loan Bank, the Bank and its mortgage bank subsidiary also issue repurchase
agreements and commercial paper. As of June 30, 2006, outstanding repurchase agreements totaled
$2.1 million and commercial paper issued amounted to $19.6 million. The interest rate on these
instruments is variable and subject to change daily. The Bank also maintains Federal Funds lines
of credit with its correspondent banks and, at June 30, 2006, these lines amounted to $22.6
million. The Corporation also has $10.3 million in subordinated debentures to support the growth
of the organization.
28
Borrowed Funds Distribution
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars In Thousands) |
|
At Period End |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
50,000 |
|
|
$ |
36,000 |
|
FHLB long term borrowings |
|
|
19,679 |
|
|
|
21,786 |
|
Securities sold under agreements to repurchase |
|
|
2,058 |
|
|
|
977 |
|
Other short term borrowings |
|
|
17,371 |
|
|
|
11,219 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
|
|
|
|
|
|
|
Total at period end |
|
$ |
99,419 |
|
|
$ |
80,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
FHLB Advances |
|
$ |
72,309 |
|
|
$ |
43,375 |
|
FHLB long term borrowings |
|
|
21,005 |
|
|
|
24,028 |
|
Securities sold under agreements to repurchase |
|
|
1,892 |
|
|
|
925 |
|
Other short term borrowings |
|
|
13,805 |
|
|
|
8,520 |
|
Subordinated debentures |
|
|
10,311 |
|
|
|
10,311 |
|
|
|
|
|
|
|
|
Total average balance |
|
$ |
119,322 |
|
|
$ |
87,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds |
|
|
4.85 |
% |
|
|
4.02 |
% |
|
|
|
|
|
|
|
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual
obligations disclosed in the Corporations annual report on Form 10-K for the fiscal year ended
December 31, 2005.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporations market risk is composed primarily of interest rate risk. The Funds Management
Committee is responsible for reviewing the interest rate sensitivity position and establishes
policies to monitor and coordinate the Corporations sources, uses and pricing of funds.
Interest Rate Sensitivity Management
The Corporation uses a simulation model to analyze, manage and formulate operating strategies that
address net interest income sensitivity to movements in interest rates. The simulation model
projects net interest income based on various interest rate scenarios over a twelve month period.
The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets
and liabilities. The model incorporates certain assumptions which management believes to be
reasonable regarding the impact of changing interest rates and the prepayment assumption of certain
assets and liabilities as of June 30, 2006. The table below reflects the outcome of these analyses
at June 30, 2006, assuming a flat balance sheet. According to the model run for the period ended
June 30, 2006 over a twelve month period, an immediate 100 basis points increase in interest rates
would result in a decline in net interest income by 0.88%. An immediate 100 basis points decline in
interest rates would result in an increase in net interest income by 1.46%. While management
carefully monitors the exposure to changes in interest rates and takes actions as warranted to
decrease any adverse impact, there can be no assurance about the actual effect of interest rate
changes on net interest income. The following table reflects the Corporations earnings sensitivity
profile as of June 30, 2006.
|
|
|
|
|
Rate Shock Analysis |
June 30, 2006 |
Change in |
|
Hypothetical |
|
Hypothetical Percentage |
Federal Funds |
|
Percentage Change |
|
Change In Economic |
Target Rate |
|
In Earnings |
|
Value of Equity |
3.00%
|
|
-4.16%
|
|
-23.32% |
2.00%
|
|
-2.48%
|
|
-15.07% |
1.00%
|
|
-0.88%
|
|
-7.38% |
-1.00%
|
|
1.46%
|
|
6.18% |
-2.00%
|
|
1.11%
|
|
10.49% |
-3.00%
|
|
0.29%
|
|
16.08% |
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 (locked) by both the Corporation and the borrower for specified
periods of time. When the borrower locks their interest rate, the Corporation effectively extends a
put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement,
but the Corporation must honor the interest rate for the specified time period. The Corporation
is exposed to interest rate risk during the accumulation of interest rate lock commitments and
loans prior to sale. The Corporation utilizes either a best efforts sell forward commitment or a
mandatory sell forward commitments to economically hedge the changes in fair value of the loan due
to changes in market interest rates. Failure to effectively monitor, manage and hedge the interest
rate risk associated with the mandatory commitments subjects the Corporation to potentially
significant market risk.
Throughout the lock period the changes in the market value of interest rate lock commitments, best
efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are
included in the statement of operations in mortgage revenue. The Corporations management has
made complex judgments in the recognition of gains and losses in connection with this activity.
The Corporation utilizes a third party and its proprietary simulation model to assist in
identifying and managing the risk associated with this activity. The Corporation did not have a
material gain or loss representing the amount of hedge ineffectiveness during the reporting periods
contained in this report.
30
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that is designed to ensure
that material information relating to the Corporation and its consolidated subsidiaries is
accumulated and communicated to management, including the Corporations Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As
required, management, with the participation of the Corporations Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of the Corporations
disclosure controls and procedures as of the end of the period covered by this report. Based on
this evaluation, the Corporations Chief Executive Officer and Chief Financial Officer concluded
that the Corporations disclosure controls and procedures were operating effectively to ensure that
information required to be disclosed by the Corporation in reports that it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the SEC.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that the Corporations disclosure controls and procedures will detect or uncover
every situation involving the failure of persons within the Corporation to disclose material
information otherwise required to be set forth in the Corporations periodic and current reports.
Changes in Internal Controls
The Corporations management is also responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. No changes in our internal control over financial
reporting occurred during the last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a party to legal proceedings arising in the ordinary course of business. Management is
of the opinion that these legal proceedings will not have a material adverse effect on the
Corporations financial condition or results of operations. From time to time the Bank may
initiate legal actions against borrowers in connection with collecting defaulted loans. Such
actions are not considered material by management unless otherwise disclosed.
Item 1A. Risk Factors
Our future success will depend on our ability to compete effectively in the highly competitive
financial services industry.
We face substantial competition in all phases of our operations from a variety of different
competitors. In particular, there is very strong competition for financial services in Fairfax
County, Virginia and the entire Washington, D.C. metropolitan area in which we conduct a
substantial portion of our business. We compete with commercial banks, credit unions, savings and
loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms,
insurance companies, money market funds and other mutual funds, as well as other local and
community, super-regional, national and international financial institutions that operate offices
in our primary market areas and elsewhere. Our future growth and success will depend on our ability
to compete effectively in this highly competitive financial services environment.
Many of our competitors are well-established, larger financial institutions and many offer
products and services that we do not. Many have substantially greater resources, name recognition
and market presence that benefit them in attracting business. Some of our competitors are not
subject to the same regulations that are imposed on bank holding companies and federally-insured
national banks, including credit unions that do not pay federal income tax, and, therefore, have
regulatory advantages over us in accessing funding and in providing various services. While we
believe we compete effectively with these other financial institutions in our primary markets, we
may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of
geographic diversification and inability to spread our marketing costs across a broader market. If
we have to raise interest rates paid on deposits or lower interest rates charged on loans to
compete effectively, our net interest margin and income could be negatively affected. Failure to
compete effectively to attract new, or to retain existing, clients may reduce or limit our net
income and our market share and may adversely affect our results of operations, financial condition
and growth.
Our profitability depends on interest rates generally, and we may be adversely affected by changes
in government monetary policy.
31
Our profitability depends in substantial part on our net interest margin, which is the difference
between the rates we receive on loans and investments and the rates we pay for deposits and other
sources of funds. Our net interest margin depends on many factors that are partly or completely
outside of our control, including competition, federal economic, monetary and fiscal policies, and
economic conditions generally. Our net interest income will be adversely affected if market
interest rates change so that the interest we pay on deposits and borrowings increases faster than
the interest we earn on loans and investments.
Changes in interest rates, particularly by the Board of Governors of the Federal Reserve System,
which implements national monetary policy in order to mitigate recessionary and inflationary
pressures, also affect the value of our loans. In setting its policy, the Federal Reserve may
utilize techniques such as: (i) engaging in open market transactions in United States government
securities; (ii) setting the discount rate on member bank borrowings; and (iii) determining reserve
requirements. These techniques may have an adverse effect on our deposit levels, net interest
margin, loan demand or our business and operations. In addition, an increase in
interest rates could adversely affect borrowers ability to pay the principal or interest on
existing loans or reduce their desire to borrow more money. This may lead to an increase in our
nonperforming assets, a decrease in loan originations, or a reduction in the value of and income
from our loans, any of which could have a material and negative effect on our results of
operations. We try to minimize our exposure to interest rate risk, but we are unable to completely
eliminate this risk. Fluctuations in market rates and other market disruptions are neither
predictable nor controllable and may have a material and negative effect on our business, financial
condition and results of operations.
Our profitability depends significantly on local economic conditions.
As a lender, we are exposed to the risk that our loan clients may not repay their loans
according to their terms and any collateral securing payment may be insufficient to fully
compensate us for the outstanding balance of the loan plus the costs we incur disposing of the
collateral. Although we have collateral for most of our loans, that collateral can fluctuate in
value and may not always cover the outstanding balance on the loan. With most of our loans
concentrated in Northern Virginia, a decline in local economic conditions could adversely affect
the values of our real estate collateral. Consequently, a decline in local economic conditions may
have a greater effect on our earnings and capital than on the earnings and capital of larger
financial institutions whose real estate loan portfolios are geographically diverse.
In addition to the financial strength and cash flow characteristics of each of our borrowers,
the bank often secures loans with real estate collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If we are required to liquidate the
collateral securing a loan to satisfy the debt during a period of reduced real estate values, our
earnings and capital could be adversely affected.
Our business strategy includes the continuation of our growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or fail to manage our
growth effectively.
We intend to continue to grow in our existing banking markets (internally and through
additional offices) and to expand into new markets as appropriate opportunities arise. Our
prospects must be considered in light of the risks, expenses and difficulties frequently
encountered by companies that are experiencing growth. We cannot assure you we will be able to
expand our market presence in our existing markets or successfully enter new markets, or that any
expansion will not adversely affect our results of operations. Failure to manage our growth
effectively could have a material adverse effect on our business, future prospects, financial
condition or results of operations, and could adversely affect our ability to successfully
implement our business strategy. Also, if our growth occurs more slowly than anticipated or
declines, our operating results could be materially affected in an adverse way.
Our ability to successfully grow will depend on a variety of factors, including the continued
availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth. While we believe we have the
management resources and internal systems in place to successfully manage our future growth, there
can be no assurance growth opportunities will be available or growth will be successfully managed.
We may face risks with respect to future acquisitions.
As a strategy, we have sought to increase the size of our franchise by pursuing business
development opportunities, and we have grown rapidly since our incorporation. As part of that
strategy, we have acquired three mortgage companies and a small equipment leasing company. We may
acquire other financial institutions and mortgage companies, or parts of those entities, in the
future. Acquisitions and mergers involve a number of risks, including:
32
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the time and costs associated with identifying and evaluating potential acquisitions and merger partners; |
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the estimates and judgments used to evaluate credit, operations,
management and market risks with respect to the target entity may not
be accurate; |
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the time and costs of evaluating new markets, hiring experienced local
management and opening new offices, and the time lags between these
activities and the generation of sufficient assets and deposits to
support the costs of the expansion; |
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our ability to finance an acquisition and possible ownership and
economic dilution to our current shareholders and to investors
purchasing common stock in this offering; |
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the diversion of our managements attention to the negotiation of a
transaction, and the integration of the operations and personnel of
the combining businesses; |
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entry into new markets where we lack experience; |
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the introduction of new products and services into our business; |
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the incurrence and possible impairment of goodwill associated with an
acquisition and possible adverse short-term effects on our results of
operations; and |
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the loss of key employees and clients. |
We may incur substantial costs to expand, and we can give no assurance such expansion will result
in the levels of profits we seek. There can be no assurance that integration efforts for any future
mergers or acquisitions will be successful. Also, we may issue equity securities, including common
stock and securities convertible into shares of our common stock, in connection with future
acquisitions, which could cause ownership and economic dilution to our current shareholders and to
investors purchasing common stock in this offering. There is no assurance that, following any
future merger or acquisition, our integration efforts will be successful or our company, after
giving effect to the acquisition, will achieve profits comparable to or better than our historical
experience.
Our allowance for loan losses could become inadequate and reduce our earnings and capital.
We maintain an allowance for loan losses that we believe is adequate for absorbing any
potential losses in our loan portfolio. Management conducts a periodic review and consideration of
the loan portfolio to determine the amount of the allowance for loan losses based upon general
market conditions, credit quality of the loan portfolio and performance of our clients relative to
their financial obligations with us. The amount of future losses, however, is susceptible to
changes in economic and other market conditions, including changes in interest rates and collateral
values that are beyond our control, and these future losses may exceed our current estimates.
Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan
portfolio, we cannot predict such losses or that our allowance will be adequate in the future.
Excessive loan losses could have a material impact on our financial performance and reduce our
earnings and capital.
As a result of our significant growth in the past two years, a large portion of our loans held for
investment portfolio consists of new loans that are unseasoned.
From the beginning of 2004 until June 30, 2006, our loans held for investment portfolio has
grown by approximately $218.3 million. Industry experience shows that it takes several years for
loan difficulties to become apparent. We can give no assurance that these loans will not become
non-performing or delinquent, which could adversely affect our future performance.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from our bank as our primary source of funds. The primary source of funds
of our bank are client deposits and loan repayments. While scheduled loan repayments are a
relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.
The ability of borrowers to repay loans can be adversely affected by a number of factors, including
changes in economic conditions, adverse trends or events affecting business industry groups,
reductions in real estate values or markets, business closings or lay-offs, inclement weather,
natural disasters and international instability. Additionally, deposit levels may be affected by a
number of factors, including rates paid by competitors, general interest rate levels, regulatory
capital requirements, returns available to clients on alternative investments and general economic
conditions. Accordingly, we may be required from time to time to rely on secondary sources of
liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal
Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from
correspondent banks, as well as out-of-market time deposits. While we believe that these sources
are currently adequate, there can be no assurance they will be sufficient to meet future liquidity
demands, particularly if we
33
continue to grow and experience increasing loan demand. We may be
required to slow or discontinue loan growth, capital expenditures
or other investments or liquidate assets should such sources not be adequate.
We are subject to extensive regulation that could limit or restrict our activities and adversely
affect our earnings.
We operate in a highly regulated industry, and both we and our wholly-owned bank are subject
to extensive regulation and supervision by the Federal Reserve Bank, the Office of the Comptroller
of the Currency and the FDIC. Our compliance with these regulations is costly and restricts certain
of our activities, including payment of dividends, mergers and acquisitions, investments, loans and
interest rates charged, interest rates paid on deposits and locations of offices. We are also
subject to capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth. Many of these regulations are intended to protect
depositors and the FDICs Deposit Insurance Fund rather than our shareholders.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the
Securities and Exchange Commission and Nasdaq that are applicable to us, have increased the scope,
complexity and cost of corporate governance, reporting and disclosure practices, including the cost
of completing our audit and maintaining our internal controls. As a result, we may experience
greater compliance costs.
The laws and regulations that apply to us could change at any time. We cannot predict whether
or what form of proposed statute or regulation will be adopted or the extent to which such adoption
may affect our business. Regulatory changes may increase our costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to offer competing
financial services and products and thus place other entities that are not subject to similar
regulation in stronger, more favorable competitive positions, which could adversely affect our
growth and our ability to operate profitably. Failure to comply with existing or new laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have an adverse effect on our business, financial condition
and results of operations.
Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow
our business at all. In addition, our recent and rapid growth may distort some of our historical
financial ratios and statistics. In the future, we may not have the benefit of several recently
favorable factors, such as a generally stable interest rate environment, a strong real estate
market, or the ability to find suitable expansion opportunities. Various factors, such as economic
conditions, regulatory and legislative considerations and competition, may also impede or prohibit
our ability to expand our market presence. If we experience a significant decrease in our
historical rate of growth, our results of operations and financial condition may be adversely
affected due to a high percentage of our operating costs being fixed expenses.
Our hedging strategies may not be successful in managing our risks associated with interest
rates.
We use various derivative financial instruments to provide a level of protection against
interest rate risks, but no hedging strategy can protect us completely. When rates change, we
expect to record a gain or loss on derivatives that would be offset by an inverse change in the
value of loans held for sale and mortgage-related securities. We cannot assure you, however, that
our hedging strategy and use of derivatives will offset the risks related to changes in interest
rates.
The profitability of our mortgage company will be significantly reduced if we are not able to sell
mortgages.
Currently, we sell all of the mortgage loans originated by our mortgage company. We only
underwrite mortgages that we reasonably expect will have more than one potential purchaser. The
profitability of our mortgage company depends in large part upon our ability to originate or
purchase a high volume of loans and to quickly sell them in the secondary market. Thus, we are
dependent upon (i) the existence of an active secondary market and (ii) our ability to sell loans
into that market.
Our mortgage companys ability to sell mortgage loans readily is dependent upon the
availability of an active secondary market for single-family mortgage loans, which in turn depends
in part upon the continuation of programs currently offered by Fannie Mae and Freddie Mac and other
institutional and non-institutional investors. These entities account for a substantial portion of
the secondary market in residential mortgage loans. Some of the largest participants in the
secondary market, including Fannie Mae and Freddie Mac, are government-sponsored enterprises whose
activities are governed by federal law, and, while we do not actively participate in their
programs, they do have substantial market influence. Any future changes in laws that significantly
affect the activity of these government-sponsored enterprises and other institutional and
non-institutional investors or any impairment of our ability to participate in such programs could,
in turn, adversely affect our operations.
We may be exposed to greater risks from offering non-conforming mortgage loans.
34
We are an acquirer and originator of non-conforming residential mortgage loans for sale into
the secondary market. These are
residential mortgages that do not qualify for purchase by government-sponsored agencies such as
Fannie Mae and Freddie Mac. Our operations may be negatively affected due to our investments in
non-conforming mortgage loans. Credit and liquidity risks associated with non-conforming mortgage
loans may be greater than those for conforming mortgage loans. We, therefore, may assume the risk
of increased delinquency rates and/or credit losses as well as interest rate risk.
Our small- to medium-sized business target market may have fewer financial resources to weather a
downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and
financial services needs of small- and medium-sized businesses. These businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger entities. If
general economic conditions negatively impact this major economic sector in the markets in which we
operate, our results of operations and financial condition may be adversely affected.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and
counterparties, we may rely on information furnished to us by or on behalf of clients and
counterparties, including financial statements and other financial information. We also may rely on
representations of clients and counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to clients, we may assume that a customers audited
financial statements conform with GAAP and present fairly, in all material respects, the financial
condition, results of operations and cash flows of the customer. Our financial condition and
results of operations could be negatively impacted to the extent we rely on financial statements
that do not comply with GAAP or are materially misleading.
Negative public opinion could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public
opinion, is inherent in our business. Negative public opinion can result from our actual or alleged
conduct in any number of activities, including lending practices, corporate governance and
acquisitions, and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely affect our ability to keep and
attract clients and employees and can expose us to litigation and regulatory action. Because
virtually all of our businesses operate under the Access National brand, actual or alleged
conduct by one business can result in negative public opinion about our other businesses. Although
we take steps to minimize reputation risk in dealing with our clients and communities, this risk
will always be present given the nature of our business.
We depend on the services of key personnel, and a loss of any of those personnel would disrupt our
operations and result in reduced revenues.
Our success depends upon the continued service of our senior management team and upon our
ability to attract and retain qualified financial services personnel. Competition for qualified
employees is intense. In our experience, it can take a significant period of time to identify and
hire personnel with the combination of skills and attributes required in carrying out our strategy.
If we lose the services of our key personnel, or are unable to attract additional qualified
personnel, our business, financial condition, results of operations and cash flows could be
materially adversely affected.
Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed or may not be available on favorable terms.
We are required by federal regulatory authorities to maintain adequate levels of capital to
support our operations. Our last common stock offering closed in August 2006. We may at some point
need to again raise additional capital to support our continued growth. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets at that time, which
are outside our control, and on our financial performance. Accordingly, we cannot assure you of our
ability to raise additional capital if needed on terms acceptable to us. If we cannot raise
additional capital when needed, our ability to further expand our operations through internal
growth and acquisitions could be materially impaired.
Our directors and executive officers own a significant portion of our common stock.
Our directors and executive officers, as a group, beneficially owned approximately 28.5% of
our outstanding common stock as of June 30, 2006 (35.7% upon the exercise of outstanding vested
options and warrants). As a result of their ownership, our directors and executive officers will
have the ability, by voting their shares in concert, to significantly influence the outcome of all
matters submitted to our shareholders for approval, including the election of directors.
35
We may need to invest in new technology to compete effectively, and that could have a negative
effect on our operating results and the value of our common stock.
The market for financial services, including banking services, is increasingly affected by
advances in technology, including developments in telecommunications, data processing, computers,
automation and Internet-based banking. We depend on third-party vendors for portions of our data
processing services. In addition to our ability to finance the purchase of those services and
integrate them into our operations, our ability to offer new technology-based services depends on
our vendors abilities to provide and support those services. Future advances in technology may
require us to incur substantial expenses that adversely affect our operating results, and our
limited capital resources may make it impractical or impossible for us to keep pace with
competitors possessing greater capital resources. Our ability to compete successfully in our
banking markets may depend on the extent to which we and our vendors are able to offer new
technology-based services and on our ability to integrate technological advances into our
operations.
Please refer to the Corporations Annual Report on Form 10-K for the year ended December 31, 2005
for disclosures with respect to the Corporations risk factors. There have been no material
changes since year-end 2005 in the specified risk factors disclosed in the Annual Report on Form
10-K.
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
The 2006 Annual Meeting of Shareholders of the Corporation was held on May 23, 2006.
At the 2006 Annual Meeting, the following persons were elected to serve as Class I Directors
of the Corporation, to serve until the 2009 Annual Meeting, having received the following votes:
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Name |
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For |
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Withheld |
Michael W. Clarke |
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6,918,493 |
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79,468 |
James L. Jadlos |
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6,918,493 |
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79,468 |
The following Class II and III Directors whose terms expire in 2007 and 2008 continued in
office: Thomas M. Kody, Robert C. Shoemaker, Jacques Rebibo, John W. (Skip) Edgemond, IV and J.
Randolph Babbitt.
No other matters were voted on during the meeting.
Item 5. Other information
None
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Item 6. Exhibits
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Exhibit No. |
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Description |
3.1
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Amended and Restated Articles of Incorporation of Access
National Corporation (incorporated by reference to Exhibit 3.1
to Form 8-K filed July 18, 2006 (file number 000-49929)) |
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3.2
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Bylaws of Access National Corporation (incorporated by
reference to Exhibit 3.2 to Form 8-K dated August 1, 2005
(file number 000-49929)) |
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10.10
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Underwriting Agreement, dated July 27, 2006, between the
Company and Keefe, Bruyette & Woods, Inc. and Scott &
Stringfellow, Inc. (incorporated by reference to Exhibit 10.12
to Form 8-K filed August 2, 2006 (file number 000-49929)). |
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31.1*
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CEO Certification Pursuant to Rule 13a-14(a) |
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31.2*
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CFO Certification Pursuant to Rule 13a-14(a) |
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32*
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CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. § 1350) |
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* |
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filed herewith |
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+ |
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indicates a management contract or compensatory plan or arrangement |
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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 |
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(Registrant) |
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Date: August 11, 2006
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By:
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/s/ Michael W. Clarke |
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Michael W. Clarke
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President & Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 11, 2006
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By:
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/s/ Charles Wimer |
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Charles Wimer |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial & Accounting Officer) |
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