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| ANCX > SEC Filings for ANCX > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-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 principles of
accounting: (i) SFAS No. 5 "Accounting for Contingencies", which requires that
losses be accrued when they are probable of occurring and estimatable, and
(ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which
requires that losses be accrued based on the differences between the value of
collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance. An allowance for loan losses is
established through a provision for loan losses based upon industry standards,
known risk characteristics, 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 June 30, 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 June 30, 2009, these commitments amounted to $28.7 million. These
commitments do not necessarily represent cash requirements, since many
commitments are expected to expire without being drawn on.
At June 30, 2009, the Bank had approximately $73.0 million in unfunded lines of
credit and letters of credit. These lines of credit, if drawn upon, would be
funded from routine cash flows and short-term borrowings. As the Corporation
continues
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 June 30, 2009 and
December 31, 2008 the balance in this account totaled $297 thousand. The
Mortgage Corporation maintains a similar reserve for standard representations
and warranties issued in connection with loans sold that totaled $3.5 million at
June 30, 2009 and $1.4 million at December 31, 2008.
Subsequent Events
On June 30, 2009, the Corporation adopted FASB Statement No. 165, "Subsequent
Events". SFAS 165 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. Specifically, SFAS 165
defines: (1) the period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Management has reviewed events occurring
through August 13, 2009, the date the second quarter financial statements were
filed on Form 10Q and no subsequent events have occurred requiring accrual or
disclosure.
FINANCIAL CONDITION (June 30, 2009 compared to December 31, 2008)
At June 30, 2009, the Corporation's assets totaled $740.6 million compared to
$702.3 million at December 31, 2008, an increase of $38.3 million. Loans held
for investment totaled $505.7 million up from $485.9 million at year end 2008
primarily due to increases in construction, commercial and industrial and
commercial real estate loans. Loans held for sale totaled $107.8 million, up
from $84.3 million at December 31, 2008, an increase of $23.5 million, primarily
due to lower interest rates. Total deposits increased $59.5 million to
$544.9 million, compared to $485.4 million at December 31, 2008.
Securities
The Corporation's securities portfolio is comprised of U.S. government agency
securities, mortgage backed securities, taxable municipal securities, a CRA
mutual fund and Federal Reserve Bank and Federal Home Loan Bank stock. At
June 30, 2009 the securities portfolio totaled $68.7 million, down from
$91.0 million on December 31, 2008. The decrease is due in part to the sale of
$5 million in taxable municipal securities during the second quarter with a
pre-tax gain of approximately $649 thousand. The remaining decrease is due to
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 and industrial loans, real estate
loans, construction and land development loans, and consumer loans. All lending
activities of the Bank and its subsidiaries are subject to the regulations and
supervision of the Comptroller. During the six months ended June 30, 2009, we
were able to increase loans held for investment while applying stricter credit
standards and conservative loan-to-value requirements. Loans held for investment
totaled $505.7 million, an increase of $19.8 million from $485.9 million at
December 31, 2008. The increase in loans demonstrates the Bank's commitment to
providing credit to small businesses, professionals and consumers in the greater
Washington, D.C. metropolitan area. Commercial loans increased $8.7 million and
residential real estate loans decreased $3.1 million. Commercial real estate
loans increased $5.2 million and construction and land development loans
increased $9.0 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 June 30, 2009.
Commercial Loans: Commercial Loans represent 15.5% of the loans held for
investment portfolio as of June 30, 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 44.2% of the loans held for investment portfolio as of
June 30, 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 10.2% of the loans held for
investment portfolio as of June 30, 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
29.8% of the loans held for investment portfolio as of June 30, 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, 15.3%;
first trust mortgage loans, 70.1%; junior trust loans, 12.0%; and multi-family
loans and loans secured by farmland 2.6%.
Home equity lines of credit are extended to borrowers in our target market. Real
estate equity is the largest component of consumer wealth in our marketplace.
Once approved, this consumer finance tool allows the borrowers to access the
equity in their home or investment property and use the proceeds for virtually
any purpose. Home equity lines of credit are most frequently secured by a second
lien on residential property. The proceeds of first trust mortgage loans are
used to acquire or refinance the primary financing on owner occupied and
residential investment properties. Junior trust loans are loans to consumers
wherein the proceeds have been used for a stated consumer purpose. Examples of
consumer purposes are education, refinancing debt, or purchasing consumer goods.
The loans are generally extended in a single disbursement and repaid over a
specified period of time.
Loans in the residential real estate portfolio are underwritten to standards
within a traditional consumer framework that is periodically reviewed and
updated by management and Board of Directors and takes into consideration
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 as of June 30, 2009. 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 six months ended June 30,
2009 we originated $953.4 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 June 30, 2009,
LHFS at fair value totaled $107.8 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 six months of 2009, $16.9 million in residential mortgage loans were
originated under this type of delivery method, as compared to $51.6 million for
the same period of 2008. Brokered loans accounted for 1.8% of the total loan
volume for the first six months of 2009 compared to 11.4% 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 approximately $8.1 million at June 30,
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 June 30, 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 management has 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 table 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 for loan losses 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,
Allowance for Loan Losses (continued)
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 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 the dates and for the
periods indicated is set forth in the following tables:
Six months ended
Allowance for Loan Losses June 30,
(In Thousands) 2009 2008
Balance at beginning of period $ 7,462 $ 7,462
Charge offs (3,062 ) (87 )
Recoveries 248 128
Provision 3,429 1,807
Balance at the end of period $ 8,077 $ 9,310
Allocation of the Allowance for Loan Losses
(Dollars In Thousands)
June 30, 2009 December 31, 2008
Allowance
for Loan Allowance for
Amount Percentage Loss Percentage Amount Percentage Loan Loss Percentage
Commercial and industrial $ 78,261 15.48 % $ 1,806 22.36 % $ 69,537 14.31 % $ 1,816 24.34 %
Commercial real estate 223,691 44.24 3,277 40.57 218,539 44.97 2,948 39.51
Real estate construction 51,616 10.21 936 11.59 42,600 8.77 805 10.79
Residential real estate 150,607 29.78 2,045 25.32 153,740 31.64 1,880 25.19
Consumer 1,486 0.29 13 0.16 1,513 0.31 13 0.17
$ 505,661 100.00 % $ 8,077 100.00 % $ 485,929 100.00 % $ 7,462 100.00 %
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