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| ANCX > SEC Filings for ANCX > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principals of
accounting: (i) Statement of Financial Accounting Standards ("SFAS") No. 5
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and estimatable and (ii) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance. An allowance for loan losses is established through a provision for
loan losses based upon industry standards, known risk characteristics, and
management's evaluation of the risk inherent in the loan portfolio and changes
in the nature and volume of loan activity. Such evaluation considers among other
factors, the estimated market value of the underlying collateral, and current
economic conditions. For further information about our practices with respect to
allowance for loan losses, please see the subsection "Allowance for Loan Losses"
below.
Other Than Temporary Impairment of Investment Securities
The Bank's investment portfolio is classified as available-for-sale. The
estimated fair value of the portfolio fluctuates due to changes in market
interest rates and other factors. Changes in estimated fair value are recorded
in stockholders' equity as a component of comprehensive income. Securities are
monitored to determine whether a decline in their value is other-than-temporary.
Management evaluates the investment portfolio on a quarterly basis to determine
the collectability of amounts due per the contractual terms of the investment
security. Once a decline in value is determined to be other than temporary, the
value of the security is reduced and a corresponding charge to earnings is
recognized. At March 31, 2009 there were no securities with other than temporary
impairment.
Income Taxes
The Corporation uses the liability method of accounting for income taxes. This
method results in the recognition of deferred tax assets and liabilities that
are reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The deferred
provision for income taxes is the result of the net change in the deferred tax
asset and deferred tax liability balances during the year. This amount combined
with the current taxes payable or refundable results in the income tax expense
for the current year.
Fair Value
Fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on and
off balance sheet financial instruments do not include the value of anticipated
future business or the values of assets and liabilities not considered financial
instruments. For additional information about our financial assets carried at
fair value, refer to Note 10 of the accompanying notes to the consolidated
financial statements.
Off-Balance Sheet Items
In the ordinary course of business, the Bank issues commitments to extend credit
and, at March 31, 2009, these commitments amounted to $33.3 million. These
commitments do not necessarily represent cash requirements, since many
commitments are expected to expire without being drawn on.
At March 31, 2009, the Bank had approximately $160.5 million in unfunded lines
of credit and letters of credit. These lines of credit, if drawn upon, would be
funded from routine cash flows and short-term borrowings. As the Corporation
continues
Off-Balance Sheet Items (continued)
the planned expansion of the loans held for investment portfolio, the volume of
commitments and unfunded lines of credit are expected to increase accordingly.
The Bank maintains a reserve for potential off-balance sheet credit losses that
is included in other liabilities on the balance sheet. At March 31, 2009 and
December 31, 2008 the balance in this account totaled $277 thousand. The
Mortgage Corporation maintains a similar reserve for standard representations
and warranties issued in connection with loans sold that totaled $2.0 million at
March 31, 2009 and $1.4 million at December 31, 2008.
FINANCIAL CONDITION (March 31, 2009 compared to December 31, 2008)
At March 31, 2009, the Corporation's assets totaled $755.2 million compared to
$702.3 million at December 31, 2008, an increase of $52.9 million. Loans held
for investment totaled $485.6 million down slightly from $485.9 million at year
end 2008 primarily due to a decrease in loan demand. Loans held for sale totaled
$93.8 million, up from $84.3 million at December 31, 2008, an increase of
$9.5 million, due to lower interest rates and increased refinancing activity.
Total deposits increased $61.2 million to $546.6 million, compared to
$485.4 million at December 31, 2008.
Securities
The Corporation's securities portfolio is comprised of U.S. Treasury securities,
U.S. government agency securities, mortgage backed securities, obligations of
states and political subdivisions, a Community Reinvestment Act mutual fund and
Federal Reserve Bank and FHLB stock. At March 31, 2009 the securities portfolio
totaled $83.8 million, down from $91.0 million on December 31, 2008, as a result
of maturities and called securities that were not reinvested. All securities
were classified as available for sale. Securities classified as available for
sale are accounted for at fair market value with unrealized gains and losses
recorded directly to a separate component of shareholders' equity, net of
associated tax effect. Investment securities are used to provide liquidity, to
generate income, and to temporarily supplement loan growth as needed.
Loans
The loans held for investment portfolio constitutes the largest component of
earning assets and is comprised of commercial loans, real estate loans,
construction loans, and consumer loans. These lending activities provide access
to credit to small businesses, professionals and consumers in the greater
Washington, D.C. metropolitan area. All lending activities of the Bank and its
subsidiaries are subject to the regulations and supervision of the Comptroller.
At March 31, 2009, loans held for investment totaled $485.6 million, down
$0.3 million from $485.9 million at December 31, 2008. Commercial loans
decreased $4.8 million and residential real estate loans decreased $3.1 million.
Commercial real estate loans increased $4.6 million and construction loans
increased $3.2 million. See Note 5 of the accompanying notes to the consolidated
financial statements for a table that summarizes the composition of the
Corporation's loan portfolio. The following is a summary of the loans held for
investment portfolio at March 31, 2009.
Commercial Loans: Commercial Loans represent 13.3% of the loans held for
investment portfolio as of March 31, 2009. These loans are made to businesses or
individuals within our target market for business purposes. Typically the loan
proceeds are used to support working capital and the acquisition of fixed assets
of an operating business. We underwrite these loans based upon our assessment of
the obligor(s)' ability to generate operating cash flows in the future necessary
to repay the loan. To address the risks associated with the uncertainties of
future cash flows, these loans are generally well secured by assets owned by the
business or its principal shareholders and the principal shareholders are
typically required to guarantee the loan.
Commercial Real Estate Loans: Also known as commercial mortgages, loans in this
category represent 45.9% of the loans held for investment portfolio as of
March 31, 2009. These loans generally fall into one of three situations in order
of magnitude: first, loans supporting an owner occupied commercial property;
second, properties used by non-profit organizations such as churches or schools
where repayment is dependent upon the cash flow of the non-profit organizations;
and third, loans supporting a commercial property leased to third parties for
investment. Commercial real estate loans are
secured by the subject property and underwritten to policy standards. Policy
standards approved by the Board of Directors from time to time set forth, among
other considerations, loan to value limits, cash flow coverage ratios, and the
general creditworthiness of the obligors.
Real Estate Construction Loans: Real estate construction loans, also known as
construction and land development loans, comprise 9.4% of the loans held for
investment portfolio as of March 31, 2009. These loans generally fall into one
of three categories: first, loans to individuals that are ultimately used to
acquire property and construct an owner occupied residence; second, loans to
builders for the purpose of acquiring property and constructing homes for sale
to consumers; and third, loans to developers for the purpose of acquiring land
that is developed into finished lots for the ultimate construction of
residential or commercial buildings. Loans of these types are generally secured
by the subject property within limits established by the Board of Directors
based upon an assessment of market conditions and updated from time to time. The
loans typically carry recourse to principal owners. In addition to the repayment
risk associated with loans to individuals and businesses, loans in this category
carry construction completion risk. To address this additional risk, loans of
this type are subject to additional administration procedures designed to verify
and ensure progress of the project in accordance with allocated funding, project
specifications and time frames.
Residential Real Estate Loans: This category includes loans secured by first or
second mortgages on one to four family residential properties and represents
31.0% of the loans held for investment portfolio as of March 31, 2009. Of this
amount, the following sub-categories exist as a percentage of the whole
residential real estate loan portfolio: home equity lines of credit, 16.9%;
first trust mortgage loans, 70.5%; junior trust loans, 10.4%; and multi-family
loans and loans secured by farmland 2.2%.
Home equity lines of credit are extended to borrowers in our target market. Real
estate equity is the largest component of consumer wealth in our marketplace.
Once approved, this consumer finance tool allows the borrowers to access the
equity in their home or investment property and use the proceeds for virtually
any purpose. Home equity lines of credit are most frequently secured by a second
lien on residential property. The proceeds of first trust mortgage loans are
used to acquire or refinance the primary financing on owner occupied and
residential investment properties. Junior trust loans are loans to consumers
wherein the proceeds have been used for a stated consumer purpose. Examples of
consumer purposes are education, refinancing debt, or purchasing consumer goods.
The loans are generally extended in a single disbursement and repaid over a
specified period of time.
Loans in the residential real estate portfolio are underwritten to standards
within a traditional consumer framework that is periodically reviewed and
updated by management and Board of Directors: repayment source and capacity,
value of the underlying property, credit history, savings pattern and stability.
Consumer Loans: Consumer Loans make up approximately 0.3% of the loans held for
investment portfolio. Most loans are well secured with assets other than real
estate, such as marketable securities or automobiles. Very few consumer loans
are unsecured. As a matter of operation, management discourages unsecured
lending. Loans in this category are underwritten to standards within a
traditional consumer framework that is periodically reviewed and updated by
management and the Board of Directors and takes into consideration, repayment
capacity, collateral value, savings pattern, credit history and stability.
Loans Held for Sale ("LHFS")
LHFS are residential mortgage loans originated by the Mortgage Corporation to
consumers and underwritten in accordance with standards set forth by an
institutional investor to whom we expect to sell the loans for a profit. Loan
proceeds are used for the purchase or refinance of the property securing the
loan. Loans are sold with the servicing released to the investor. The LHFS loans
are closed by the Mortgage Corporation and carried on its books until the loan
is delivered to and purchased by an investor. In the three months ended
March 31, 2009 we originated $439.1 million of loans processed in this manner.
Loans are sold without recourse and subject to industry standard representations
and warranties that may require the repurchase, by the Mortgage Corporation, of
loans previously sold. The repurchase risks associated with this activity center
around early payment defaults and borrower fraud. There is also a risk that
loans originated may not be purchased by our investors. The Mortgage Corporation
attempts to manage these risks by the on-going maintenance of an extensive
quality control program, an internal audit and verification program, and a
selective approval process for investors and programs offered. At March 31,
2009, LHFS at fair value totaled $93.8 million compared to $84.3 million at
December 31, 2008.
Brokered Loans
Brokered loans are underwritten and closed by a third party lender. The Mortgage
Corporation is paid a fee for procuring and packaging brokered loans. For the
first three months of 2009, $8.4 million in residential mortgage loans were
originated under this type of delivery method, as compared to $27.9 million for
the same period of 2008. Brokered loans accounted for 1.9% of the total loan
volume for the first three months of 2009 compared to 12.8% for the same period
of 2008. We typically broker loans that do not conform to the products offered
by the Mortgage Corporation and for this reason the level of brokered loans is
subject to wide fluctuations.
Allowance for Loan Losses
The allowance for loan losses totaled $7.6 million at March 31, 2009 compared to
$7.5 million at year end 2008. The allowance for loan losses is equivalent to
approximately 1.6% of total consolidated loans held for investment at March 31,
2009. The level of the allowance for loan losses is determined by management
through an ongoing detailed analysis of risk and loss potential within the
portfolio as a whole and they have concluded the amount of our reserve and the
methodology applied to arrive at the amount of the reserve is justified and
appropriate. Outside of our own analysis, our reserve adequacy and methodology
are reviewed on a regular basis by an internal audit program, and bank
regulators and such reviews have not resulted in any material adjustment to the
reserve. The schedule below, Allocation of the Allowance for Loan Losses,
reflects the allocation by the different loan types. The methodology as to how
the allowance was derived is a combination of specific allocations and
percentage allocations of the allowance for loan losses, as discussed below.
The Bank has developed a comprehensive risk weighting system based on individual
loan characteristics that enables the Bank to allocate the composition of the
allowance for loan losses by types of loans. The methodology as to how the
allowance was derived is detailed below. Adequacy of the allowance is assessed
monthly and increased by provisions charged to expense. Charge-offs are taken,
no less frequently than at the close of each fiscal quarter. The methodology by
which we systematically determine the amount of our allowance is set forth by
the Board of Directors in our Credit Policy, pursuant to which our Chief Credit
Officer is charged with ensuring that each loan is individually evaluated and
the portfolio characteristics are evaluated to arrive at an appropriate
aggregate reserve. The results of the analysis are documented, reviewed and
approved by the Board of Directors no less than quarterly. The following
elements are considered in this analysis: loss estimates on specific problem
credits, individual loan risk ratings, lending staff changes, loan review and
board oversight, loan policies and procedures, portfolio trends with respect to
volume, delinquency, composition/concentrations of credit, risk rating
migration, levels of classified credit, off-balance sheet credit exposure, any
other factors considered relevant from time to time. All loans are graded or
"Risk Rated" individually for loss potential at the time of origination and as
warranted thereafter, but no less frequently than quarterly. Loss potential
factors are applied based upon a blend of the following criteria: our own direct
experience at this Bank; our collective management experience in administering
similar loan portfolios in the market; and peer data contained in statistical
releases issued by both the Comptroller and the Federal Deposit Insurance
Corporation ("FDIC").Management's collective experience at this Bank and other
banks is the most heavily weighted criterion, and the weighting is subjective
and varies by loan type, amount, collateral, structure, and repayment terms.
Prevailing economic conditions generally and within each individual borrower's
business sector are considered, as well as any changes in the borrower's own
financial position and, in the case of commercial loans, management structure
and business operations. When deterioration develops in an individual credit,
the loan is placed on a "Watch List" and the loan is monitored more closely. All
loans on the watch list are evaluated for specific loss potential based upon
either an evaluation of the liquidated value of the collateral or cash flow
deficiencies. If management believes that, with respect to a specific loan, an
impaired source of repayment, collateral impairment or a change in a debtor's
financial condition presents a heightened risk of loss, the loan is classified
as impaired and the book balance of the loan is reduced to the expected
liquidation value by charging the allowance for loan losses.
An analysis of the Bank's allowance for loan losses as of and for the periods indicated is set forth in the following tables:
Allowance for Loan Losses
Three months ended
March 31,
(In Thousands) 2009 2008
Balance at beginning of period $ 7,462 $ 7,462
Charge offs (1,195 ) (87 )
Recoveries 5 123
Provision 1,369 408
Balance as of March 31, 2009 and 2008 $ 7,641 $ 7,906
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Allocation of the Allowance for Loan Losses
March 31, 2009 December 31, 2008
Allowance Allowance
for Loan for Loan
Amount Percentage Loss Percentage Amount Percentage Loss Percentage
(Dollars In Thousands)
Commercial $ 64,714 13.33 % $ 1,696 22.20 % $ 69,537 14.31 % $ 1,816 24.34 %
Commercial real estate 223,090 45.94 3,172 41.51 218,539 44.97 2,948 39.51
Real estate construction 45,755 9.42 874 11.44 42,600 8.77 805 10.79
Residential real estate 150,684 31.03 1,888 24.71 153,740 31.64 1,880 25.19
Consumer 1,380 0.28 11 0.14 1,513 0.31 13 0.17
$ 485,623 100.00 % $ 7,641 100.00 % $ 485,929 100.00 % $ 7,462 100.00 %
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Non-performing Assets
At March 31, 2009, the Bank had non-performing assets totaling $10.0 million
consisting of non-accrual loans and other real estate owned. Non-accrual loans
totaled approximately $5.5 million and are composed of a commercial loan in the
amount of $478 thousand, a commercial real estate loan in the amount of
$2.0 million, two residential construction loans totaling $2.6 million, and a
real estate residential first trust loan in the amount of $457 thousand. Other
real estate owned consists of two commercial properties totaling $4.5 million.
Subsequent to March 31, 2009 a payoff was received on one construction loan in
the amount of $.6 million.
Deposits
Deposits are one of the primary sources of funding loan growth. At March 31,
2009, deposits totaled $546.6 million compared to $485.4 million on December 31,
2008, an increase of $61.2 million. Savings and interest-bearing deposits
decreased $4.3 million from December 31, 2008. Time deposits increased
$26.2 million from $314.7 million at December 31, 2008 to $340.9 million at
March 31, 2009. Non-interest-bearing deposits increased $39.3 million from
$75.0 million at December 31, 2008 to $114.3 million at March 31, 2009. The
increase in non-interest-bearing deposits is largely due to fluctuations in
balances of commercial accounts.
Shareholders' Equity
Shareholders' equity was $60.9 million at March 31, 2009 compared to
approximately $57.9 million at December 31, 2008. Shareholders' equity increased
by $3.0 million during the three month period ended March 31, 2009. The increase
. . .
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