Highlights 2008 T h e N at i on a l C a p i ta l Ba n k of Wa s h i n g t on (Dollars in thousands, except per share data) 2008
2007
% CHANGE
$3,389 11.61 6.72
$3,665 12.56 6.40
-8% -8% 5%
1.31% 9.73% 4.20% 51.73%
1.54% 11.13% 4.85% 48.53%
-15% -13% -13% 7%
$259,485 251,545 193,735 209,898 60,864 149,034 14,059 34,827
$238,178 224,441 189,648 186,778 58,092 128,686 17,741 32,937
9% 12% 2% 12% 5% 16% -21% 6%
$259,604 226,761 192,876 1,007 212,574 54,760 157,814 11,178 35,421 291,784
$244,539 232,026 195,591 976 196,488 67,709 128,779 14,007 33,782 291,784
6% -2% -1% 3% 8% -19% 23% -20% 5% 0%
13.42%
13.83%
-3%
13.64%
13.81%
-1%
Common Stock, Per Share: Book Value Market Price
$121.39 150.00
$115.78 215.00
5% -30%
* Average Shares Outstanding
291,784
291,784
0%
ANNUAL RESULTS
Net Income Earnings Per Share * Cash Dividends Paid Per Common Share
PERFORMANCE RATIOS BASED ON NET INCOME
Return on Average Assets Return on Average Shareholders’ Equity Net Interest Margin ----Average Assets Cost Efficiency Ratio (As reported to The Comptroller of Currency)
SELECTED AVERAGE BALANCES Total Assets Total Earning Assets Total Gross Loans Total Deposits Non Interest Interest Total Repurchase Agreements Total Stockholders Equity
SELECTED YEAR-END BALANCES Total Assets Total Earning Assets Total Gross Loans Allowance for Loan Losses Total Deposits Non Interest Interest Total Repurchase Agreements Total Shareholders’ Equity Total Shares of Common Stock
CAPITAL RATIOS
Average Shareholders’ Equity to Average Assets at Year-end Shareholders’ Equity to Assets at Year-end
Safety, Stability, Service TO OUR SHAREHOLDERS:
Allow us to assure you that The National Capital Bank remains safe, stable and, most importantly, very profitable. We feel fortunate to be largely unaffected by circumstances surrounding the nation’s current financial crisis, although, like most of you, we are somewhat confused about what to expect in the future. Regardless of what the future may bring, we promise never to compromise the Bank’s integrity by following untested slick new trends or by introducing products designed to take unfair advantage of our customers. It is thanks to our steady, time-tested and consumer-first approach to financial services that we remain at the peak of our craft! Throughout this report we have illustrated just a few of the many honors and accolades that were recently awarded to us by independent experts in our profession. Management is both proud and pleased to report that this year was the third best earnings year in our 119 year history.
100-YEAR OLD SMALL BUSINESS OF THE YEAR WASHINGTON DC ECONOMIC PARTNERSHIP
4
RATED “A+” FOR BEING
THE SAFEST BANK IN THE DISTRICT OF COLUMBIA WEISS RATINGS, INC.
AWARDED. “FIRST PLACE” FROM ABA MARKETING NETWORK FOR THE 2006 ANNUAL REPORT
2008 was in many respects analogous to a scene from the movie A Night at the Opera in which a character played by Groucho Marx, the host, is handed an inflated dinner bill by his waiter. “This is an outrage!” the character says. He proceeds to slide the bill to a woman at his table and warns “If I were you, I wouldn’t pay it!” Well, to a large extent, Wall Street has feasted on the American consumer, and our Federal Government is mandating that Main Street foot an excessively disproportionate share of the bill. We have always maintained that a major part of a bank’s responsibility to its customers is to prevent them from undertaking financial burdens that put them at excessive risk. This fundamental responsibility seemed to have been cast aside by some of our competition in the boom years solely for the purpose of profiteering, and the resulting risk of this reckless behavior has landed squarely on the shoulders of present and future taxpayers. Another major element of this injustice will be in the form of astronomical increases in FDIC assessment fees that will be forced upon safe and sound community banks, like ours, even though they had nothing whatsoever to do with the present financial turmoil. We will also be required to comply with massive new regulations as a consequence of the losses suffered by banks that severely mismanaged risk in the marketplace. Interest rates were cut ten times during the year in an effort to help bail out a substantial portion of the financial sector where companies were poorly managed, shortsighted and operated by Boards with lax or non-existent lending and investing policies. Our government responded with an initial $700 billion, taxpayer-financed bailout in an attempt to shore up the balance sheets of those institutions considered “too big to fail”, hoping to restore public confidence in them. Does anyone realistically believe that $700 billion is anywhere near enough to ease our economic woes? Why are smaller, adequately capitalized institutions allowed to “belly up to the bailout bar?” Should our children and our children’s children be subject to this fiscal liability?
5
Safety, Stability, Service THE ONLY DC BANK CURRENTLY RATED
“FIVE STARS” OR WITH A
CAEL RATING OF “1” IN BANKRATE.COM’S “SAFE & SOUND RATINGS”
RATED
“ONE OF THE TOP BANKS & THRIFTS” BY THE WASHINGTON BUSINESS JOURNAL
Is anyone convinced that the institutions which helped cause this debacle are willing to abandon their “get rich quick” philosophies? Can the government make better-informed loan decisions than private enterprise? Will the institutions receiving funds under the Troubled Asset Relief Program (TARP) be able to repay the loans, with interest, in a timely manner -- or even at all? These are just some of the questions that will need to be dealt with sooner rather than later if we expect to lay the groundwork for an orderly and meaningful recovery. In reality, the bulk of the recovery strategies promulgated by this unholy alliance of megabanks and Congress seem like very short term solutions to a much longer term problem and have done nothing to restore the public confidence in the markets. We sincerely hope that this experiment in nationalizing the U.S. banking sector, and quite possibly the auto and insurance industries, is limited and short-lived. It is not difficult to envision the Federal government as the major banking competition for National Capital in the near future. This will hardly be the level playing field that promotes healthy competition and its countless benefits to customers! Since World II, our nation has experienced approximately ten cycles of recession, including the current one. Historically, rate reductions have eventually played a major role in restoring those anemic economies. However, we are now faced with a massive
6
THE ONLY DC BANK OR THRIFT WITH A CURRENT RATING OF
“A+” FOR “EXCELLENT FINANCIAL SECURITY” FROM THESTREET.COM
RATED
“BEST BANK IN DC FOR SMALL BUSINESS LOANS” BY ENTREPRENEUR MAGAZINE
GREATER DC
FAMILY BUSINESS OF THE YEAR global crisis that has become more severe and protracted, and the Fed has left no room to cut rates further. This current recession will undoubtedly become the longest since the “mother of all recessions” that ended in 1933. It’s true that all recessions have unique causes and consequences, but they also have many basic fundamentals in common, namely: declining asset values; slow or negative job growth; declining wages and rising unemployment. These have often been a consequence of unwise and greedy business decisions made by a significant portion of the corporate sector as it preyed on misinformed and/or naive consumers. Members of Congress who emphasized re-election strategies to the detriment of the long-term common good of the people have also added substantially to our current deepening economic woes.
7
Safety, Stability, Service We find this predicament especially distressing because so many of these
mistakes are the result of ignoring the cyclical history of economic downturns and could have been prevented. For example, thirty three years ago, in our 1975 Annual Report, George A. Didden, Jr. wrote the following words of wisdom:
“Both bankers and their regulatory agencies forgot the lesson of the 1930’s and managed to delude themselves that there never again would be more than a short-lived halt in the upward spiral of prosperity. Chief among the misconceptions was an abiding faith that real estate values must always climb higher and higher. Capital adequacy for banks became an outmoded theory and was replaced by the modern device known as leverage. In such changes were the roots of the troubles in which numerous banks find themselves today… It is our unshakable belief that one who is licensed and entrusted with the care and custody of money belonging to the general public should be charged with a high degree of honesty and prudence… Bankers should not be permitted to speculate, gamble or take excessive risks with their depositors’ money.”
More recently, in the 1991 Annual Report, Mr. Didden, Jr. added:
“I am often asked how the National Capital Bank escapes the heavy losses caused by bad loans… I have always strongly believed that when debt exceeds worth there is considerable risk in the loan. Some credit officers believe there is no limit to the size of debt if it is secured by liens on real estate… Large debts frequently become unmanageable…When our borrowers get in this position and we can’t work it out, we gladly give them to less prudent lenders.”
8
AWARDED A FIVE STAR RATING FOR
EXCEPTIONAL PERFORMANCE FOR 79 CONSECUTIVE QUARTERS BY BAUERFINANCIAL, INC.
RATED “TOP COMMERCIAL LENDER” BY THE WASHINGTON BUSINESS JOURNAL
The philosopher, George Santayana, coined the phrase, “Those who do not learn from history are doomed to repeat it.” It’s difficult to imagine a more critical mantra for our times, one that should have guided the banking industry before this current financial morass developed. Unfortunately, it may be too late for the many institutions that ignored sound practices and, despite clear warning signs, continued to follow a shallow lending paradigm consisting of paper-thin or non-existent equity ratios. We are extremely proud to be the present custodians of the history lessons passed from generation to generation. As a result, National Capital Bank had solid success in 2008! Compared with many other banks, our achievements could be considered remarkable. Needless to say, the National Capital Bank chose not to participate in the government’s Debt Guaranty Program-- not only because our capital base is exceptionally strong and stable, but also because we hold ourselves to a high ethical standard that does not include extorting public funds from generations of taxpayers. Management did, however, agree to contribute increased FDIC assessment fees in return for the FDIC’s guarantee to insure all balances held in non-interest-bearing checking accounts and certain other low-interest transaction accounts to an unlimited amount at least until year-end 2009. Our conservative philosophy has served us well – in good times and bad – and we have no intention of ever abandoning these principles which have made our Bank one of the very strongest in the nation. In times such as these, capital is king and your Bank maintains enviable ratios. For example, NCB’s Risk Weighted Ratio at yearend was 22.47% -- almost 3 times what is required by the Comptroller of the Currency. Our tier 1 ratio is 21.85% -- over 5 times the requirement -- and Tier 1 Capital to Average Assets ratio stood at 13.46% -- over 4.5 times the requirement.
9
Operating Results MANAGEMENT’S DISCUSSION OF
anagement is pleased to report that the
core balances on which we pay no interest decreased
accompanying financial statements
substantially, our Bank still maintains one of the highest
for the year ending December 31, 2008 audited by Yount,
ratios of demand deposits to total deposits in the country.
Hyde & Barbour, P.C. illustrate that, despite generally weak results posted by our industry, your Bank more
Total gross loans ended the year at $192,876,000, slightly
than held its own this year. Total Assets grew 6.16% from
down from the previous year’s $195,591,000 figure, a
$244,538,000 in 2007 to $259,604,000 at year-end 2008.
decrease of 1.39%. I am gratified that we increased our real
Total Deposits also rose to a new record of $212,574,000,
estate loan portfolio by $5,316,000 or 3.54%. These are
an 8.19% improvement over last year’s $196,488,000.
largely safe residential credits where we do not lend more
Most of this increase occurred in interest-bearing money
than 80% of the selling price or appraised value, whichever
market and certificate of deposit accounts. Non-interest
is lower. Most importantly, net loan losses amounted to
bearing demand deposits, however, showed a decrease of
only $80,100 for the entire year, representing less than
$12,948,000 or 19.12%. Average daily deposit growth was
0.04% of gross loans outstanding at year end. This quality
strong standing at $209,898,000 on December 31st of
of loans ratio makes us the envy of our peers year after
2008 vs. last year’s $186,778,000. This is an improvement of
year and attests to the strength of our lending policies and
$23,122,000 or 12.38%, as businesses and consumers fled
staff. We have, however, chosen to be even more vigilant
from financial institutions they considered risky to more
when underwriting loans as a consequence of the distressed
highly capitalized and better managed ones. Although
economic climate pervading our service area. Our Board
2006
2007
$194,615
2005
$186,528
2004
$177,153
2008
$161,853
$244,473
$218,841 10
2007
$259,604
2006
$244,539
2005
$271,676
2004
NET LOANS 2008
$191,869
TOTAL ASSETS
of Directors, acting with an abundance of caution, decided
remains a top priority for Management to help reduce our
to add an additional $15,400 to the $96,000 we had
reliance on net interest margin. The Bank’s Investment
already accrued in the Allowance for Loan and Lease
Department and Payment Processing Department have
Losses account this year because of the deterioration of
achieved substantial earnings growth in the last few years,
real estate values and the general economic downturn in
and our ATM network fees are also contributing positively
the Metropolitan area we serve. The balance of the ALLL
to the bottom line.
account was $1,007,000 at year-end.
We expend a great deal of effort in an attempt to control
Year 2008 Net Income amounted to $3,389,000,
non-interest expenses. In 2008, they grew at a relatively
representing the third best earning year in our 119 year
modest 6.30%. The largest increase was in ‘Outside
history. Unfortunately, this figure was down $276,000 or
Services’ because we thought it was prudent to outsource
7.54% when compared to last year -- NCB’s best year ever.
our legal counsel. This legal expense was necessitated by the
By far, the primary reason for this slippage is net interest
death of George A. Didden, III who performed that duty
margin compression. It stood at 4.85% last year as opposed
in addition to those of Chairman and CEO since 1995.
to 4.20% this year. That equates to a very substantial 65
Our staff growth, coupled with the increasing complexity
basis point drop (13%) and will be a source of considerable
of labor laws, dictated that we hire a full-time Human
worry for the foreseeable future as loan and investment
Resources Director. We are pleased to have Mr. Bob Hall,
rates continue their freefall. Improving non-interest income
II, SPHR, capably filling that position. We also recruited
2007
2008
$3,389
2006
$3,638
2005
$3,298
2004
$2,770
2008
$223,752
2007
$210,495
$190,163
2006
$212,345
2005
$241,508
2004
NET EARNINGS
$3,665
DEPOSITS & REPURCHASE AGREEMENTS
11
Operating Results MANAGEMENT’S DISCUSSION OF
an Assistant Compliance Officer in response to the ever
and an unsurpassed level of customer service. Our Board
increasing demands placed on that area. Despite these
of Directors deserves much credit for its wisdom and
needed additions, salary and benefit expense was down over
guidance throughout the year. We are sad to report that
$218,000 compared to last year.
Mrs. Zelda Heller decided not to stand for re-election in order to devote more time to her profession. Mrs. Heller
Management
believes
our
Shareholders
received
chaired the Executive Committee during the Bank’s two
substantially better than average returns than those of our
most profitable years, and we will miss her work ethic as
peers in 2008. Dividends rose 32 cents or 5% to $6.72 per
well as her results oriented approach to business. However,
share even though the bid price of our very thinly traded
the shareholders did elect four new Directors: Kathryn H.
stock was $150.00 at year-end compared to $215.00 in
Didden, Dorothee D. Riederer, George Pedas and William
2007. Earnings per share ended 2008 at $11.61, down 95
Pedas. These individuals possess a wonderful wealth of
cents or 7.56%.
diverse knowledge and skills and we are confident that the Bank will remain in very capable hands going forward.
We continue to be blessed with a very professional and
We extend our very special thanks to the members of
highly dedicated staff, each of whom toils daily to help
the Executive Committee: Robert Comstock, Chairman;
maintain one of the very best community banks in the
Vincent Cleary; and Robert Donohoe. Their collective
nation. We could not achieve these admirable results
contribution to the Bank’s safety, stability, and bottom line
without their constant dedication to professional excellence
was nothing short of extraordinary in these turbulent times.
12
2007
2008
$150
2006
$215
2005
$200
2004
$175
2008
$205
2007
$1,867,418
2006
$1,823,650
2005
$1,706,936
$1,546,455
2004
ADJUSTED SHARE PRICE
$1,960,788
DIVIDENDS PAID
2009
LOOKING TOWARDS
e usually find ourselves issuing cautionary predictions in this section of the report. This year is no different. 2009 will most assuredly present the greatest challenges of any year in our memory. Net interest margins will continue to be squeezed significantly. Remember that lower interest rates translate into lower profits for your Bank. Risks in the loan portfolio will be scrupulously monitored as never before, and we will continue to resist the temptation to chase higher yields by purchasing securities with long maturities just to increase short term profits. Rest assured that Management will continue to be vigilant in protecting shareholder value, and we are committed to the principles of further developing our rich 119 year history by exercising conservative management, searching for additional sources of income, closely monitoring our controllable expenses and continuing National Capital Bank’s tradition of unequaled customer service.
Richard A. Didden
James M. Didden
Chairman & CEO
President
13
Board of Directors 2008
Back row, from left to right: Wesley S. Williams, Jr., George T. Pedas, James Pedas, James M. Didden, Heman M. Ward, William J. Durkin, Jr., Robert B. Donohoe, Richard A. Didden, Donald A. Didden, William T. Pedas Front row, from left to right: Dorothee D. Riederer, Vincent D. Cleary, Kathryn H. Didden, Robert F. Comstock Not pictured: James A. Monk
VINCENT D. CLEARY
Chairman and Chief Executive Officer Cantwell-Cleary Company, Inc.
ROBERT F. COMSTOCK
Comstock and Riley, LLP Counsel Chairman of the Executive Committee
DONALD A. DIDDEN
RICHARD A. DIDDEN
JAMES M. DIDDEN
ROBERT B. DONOHOE
Executive Vice President
President
KATHRYN H. DIDDEN Investor
14
Chairman and CEO
Senior Vice President The Donohoe Companies, Inc.
Special congratulations to long-time NCB Director, and former Washington Redskins player, James “Art” Monk, for his induction into the Pro Football Hall of Fame this past year.
WILLIAM J. DURKIN, JR. Attorney at Law
JAMES A. MONK
Chairman and President Good Samaritan Foundation
GEORGE T. PEDAS Attorney at Law
JAMES PEDAS
Co-Owner Circle Management
WILLIAM T. PEDAS Vice President Circle Management
DOROTHEE D. RIEDERER Investor
HEMAN M. WARD Real Estate Development
REV. WESLEY S. WILLIAMS, JR., LL.D. President and Co-Chairman Lockhart Companies Inc.
15
Auditors
LETTER FROM THE
INDEPENDENT AUDITOR’S REPORT To the Board of Directors
The National Capital Bank of Washington Washington, D.C.
e have audited the accompanying balance sheet of The National Capital Bank of Washington as of
December 31, 2008, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion
on these financial statements based on our audit. The financial statements of The National Capital Bank of Washington for the year ended December 31, 2007, were audited by other auditors whose report, dated March 5, 2008, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
The National Capital Bank of Washington as of December 31, 2008, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Winchester, Virginia February 18, 2009
16
Financials Statements BALANCE SHEETS
16
STATEMENTS OF INCOME
17
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
18
STATEMENTS OF CASH FLOWS
19
NOTES TO FINANCIAL STATEMENTS
20 – 35
17
Financial Report The National Capital Bank of Washington Balance Sheets
December 31, 2008 and 2007 Assets
2007
2008
Cash and Cash Equivalents: Cash and due from banks
$
Federal funds sold
30,055,813
$
Total cash and cash equivalents
9,247,301 12,850,000
30,055,813
22,097,301
33,830,402
23,553,110
Investment Securities: Available-for-sale at fair value Restricted stock at cost
54,750
54,750
33,885,152
23,607,860
191,868,603
194,614,990
Bank Premises and Equipment – Net
2,438,843
2,670,835
Accrued Interest and Other Assets
1,355,639
1,547,771
Total investment securities Loans Receivable Net of allowance for loan losses of $1,007,000 (2008) and $975,738 (2007)
Total Assets
$
259,604,050
$
54,760,340
$
244,538,757
Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing
$
Interest-bearing Total deposits
67,708,740
157,813,642
128,779,122
212,573,982
196,487,862
11,178,432
14,007,470
Securities Sold Under Agreements to Repurchase Accrued Interest and Other Liabilities Total Liabilities Commitments and Contingent Liabilities
430,937
260,970
224,183,351
210,756,302 -
-
Stockholders’ Equity: Common stock, $1.25 par value per share 400,000 shares authorized, 291,784 issued and outstanding as of December 31, 2008 and 2007 Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity See Notes to Financial Statements.
18
$
364,730
364,730
1,458,920
1,458,920
33,369,931
31,941,650
227,118
17,155
35,420,699
33,782,455
259,604,050
$
244,538,757
The National Capital Bank of Washington Statements of Income Years Ended December 31, 2008 and 2007 2007
2008 Interest Income: Loans, including fees
$
11,290,351
$
12,354,608
Investment securities
921,224
1,205,732
Federal funds sold
527,577
407,751
12,739,152
13,968,091
1,991,170
2,452,564
174,521
621,360
2,165,691
3,073,924
10,573,461
10,894,167
111,390
96,000
10,462,071
10,798,167
432,808
411,091
80,289
79,684
Total interest income Interest Expense: Deposits Securities sold under agreements to repurchase and short-term borrowings Total interest expense Net Interest Income Provision for Loan Losses Net Interest Income after Provision for Loan Losses Noninterest Income: Service charges on deposit accounts Other service charges and fees Rental income
1,287,056
1,180,333
Asset management fees
226,735
190,051
Other income
581,225
505,116
2,608,113
2,366,275
Total noninterest income Noninterest Expense:
4,084,386
4,302,988
Occupancy expense
Salaries and employee benefits
839,632
737,706
Equipment expense
326,997
368,738
Professional fees
345,246
187,473
Insurance
47,497
50,799
1,843,510
1,395,695
Total noninterest expense
7,487,268
7,043,399
Income Before Income Taxes
5,582,916
6,121,043
2,193,847
2,455,775
Other expense
Provision for Income Taxes Net Income Basic and Diluted Earnings Per Share of Common Stock Average Shares Outstanding
$
3,389,069
$
3,665,268
$
11.61
$
12.56
291,784
291,784
See Notes to Financial Statements.
19
Financial Report
The National Capital Bank of Washington
Statements of Changes in Stockholders’ Equity Years Ended December 31, 2008 and 2007
Accumulated
Additional Common Stock Shares Balances, December 31, 2006
Amount
291,784
$
364,730
$
Other
Paid-In
Retained
Comprehensive
Capital
Earnings
Income (Loss)
1,458,920
$
30,143,799
$
(150,779)
Total $
31,816,670
Comprehensive income: Net income for 2007
-
-
-
3,665,268
-
3,665,268
tax effects of ($114,704)
-
-
-
-
167,934
167,934
Total Comprehensive Income
-
-
-
-
-
3,833,202
-
-
-
(1,867,417)
-
(1,867,417)
291,784
364,730
1,458,920
Changes in net unrealized gains on securities available for sale, net of income
Cash dividends declared ($6.40 per share) Balances, December 31, 2007
31,941,650
17,155
33,782,455
Comprehensive income: Net income for 2008
3,389,069
3,389,069
Changes in net unrealized gains on securities available for sale, net of income tax effects of ($143,391) Total Comprehensive Income
209,963
209,963
--
--
--
--
--
3,599,032
--
--
--
(1,960,788)
--
(1,960,788)
Cash dividends declared ($6.72 per share) Balances, December 31, 2008 See Notes to Financial Statements.
20
291,784
$
364,730
$
1,458,920
$
33,369,931
$
227,118
$
35,420,699
The National Capital Bank of Washington Statements of Cash Flows Years Ended December 31, 2008 and 2007 2007
2008 Cash Flows From Operating Activities: Net income
$
3,389,069
$
3,665,268
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation
313,889
304,232
111,390 (181,386)
96,000 (391,673)
Deferred income tax benefit
(46,469)
(12,657)
Decrease in accrued interest and other assets Increase (decrease) in accrued interest and
250,318
91,134
14,860
(50,611)
Provision for loan losses Accretion and amortization on investments, net
other liabilities Net cash provided by operating activities Cash Flows From Investing Activities: Loan originations and principal payments, net
3,851,671
3,701,693
2,634,996
(8,183,014)
(39,155,965)
(15,931,587)
Purchase of: Securities available for sale Proceeds from the maturity of: Securities held to maturity
1,000,000
-
Securities available for sale Purchase of premises and equipment Net cash used in investing activities
29,413,413 (81,897)
21,537,578 (264,067)
(7,189,453)
(1,841,090)
Cash Flows From Financing Activities: Increase (decrease) in interest accounts, demand deposits and savings accounts
7,559,480
Increase in time deposits
8,526,640
Net (decrease) in repurchase agreements Dividends paid Net cash provided by (used in) financing activities Increase (decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year
(8,359,196) 10,087,268
(2,829,038) (1,960,788)
(3,577,536) (1,867,417)
11,296,294
(3,716,881)
7,958,512
(1,856,278) 23,953,579
22,097,301 $
30,055,813
$
22,097,301
Interest
$
2,231,284
$
3,076,128
Taxes
$
2,189,739
$
2,503,492
$
353,354
$
282,638
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Unrealized gain on securities available for sale See Notes to Financial Statements.
21
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies
Nature of Operations: The National Capital Bank of Washington (the Bank) operates under a national bank charter and provides full banking services principally to customers in the Washington, D.C. metropolitan area. As a national bank, the Bank is subject to regulations of the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. Management uses available information to recognize losses on loans currently, while future additions to the allowance may be necessary based on changes in economic conditions. In addition, there are inherent risks and uncertainties related to the operation of a financial institution, such as interest rate risk. The possibility exists that because of changing economic conditions, unforeseen changes could occur and have an adverse effect on the financial position of the Bank. Investment Securities: Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires debt and equity securities to be segregated into the following three categories: trading, held-to-maturity, and available-for-sale. Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Unrealized gains and losses on trading securities are included in earnings. As of December 31, 2008 and 2007, the Bank did not hold any trading securities. Securities classified as held-to-maturity are accounted for at amortized cost, and require the Bank to have both the positive intent and ability to hold these securities to maturity. Securities not classified as either trading or held-tomaturity are considered to be available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported, net of taxes, in accumulated other comprehensive income until realized. Realized gains or losses on the sale of securities are reported in earnings and are determined using the adjusted cost of the specific security sold. Interest income is accrued on the investment’s face value. Purchase premium and discounts are recognized in interest income using the interest method over the term of the securities. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Loans: Loans are reported at the principal amount outstanding, as adjusted for net deferred fees or cost of loan originations and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the yield on the related loans using the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal in accordance with the loan’s contractual terms, or when a loan becomes contractually past due by ninety days or more with respect to principal or interest. All interest accrued but not collected for loans placed on non-accrual or charged off is reversed against interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Accruals are resumed on loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loan is estimated to be fully collectible as to both principal and interest. The Bank had no nonaccrual loans as of December 31, 2008 and 2007. Allowance For Loan Losses: An allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks that are probable within the loan portfolio. The allowance is based upon management’s continuing assessment of various factors affecting the collectability of loans, including current economic conditions, past credit experience, the value of the underlying collateral, and such other factors as in management’s judgment deserve current recognition in estimating probable credit losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Loans deemed uncollectible are charged off and deducted from the allowance, while subsequent recoveries are credited to the allowance.
22
The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, a specific allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. In accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended, a loan is considered impaired when management determines that it is probable that the Bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impaired loans are carried at the estimated present value of total expected future cash flows, discounted at the loan’s effective rate, or the fair value of the collateral, if the loan is collateral-dependent, or if less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount). During and as of the years ended 2008 and 2007, the Bank did not have any impaired loans. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. Premises and Equipment: Land is carried at cost. Property and equipment are stated at cost, less accumulated depreciation, which is computed on the straight-line method over the estimated useful lives of the assets, which range between 3 and 31 years. Maintenance and repairs of property and equipment are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of premises and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in noninterest income and noninterest expenses, respectively. Foreclosed Assets: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. During and as of the years ended 2008 and 2007, the Bank did not have any foreclosed assets. Earnings Per Share Of Common Stock: The Bank has a simple capital structure, with no potential common stock outstanding, such as through stock options or warrants. Earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the year after giving retroactive effect to stock splits. Income Taxes: The Bank accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the currently enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities. Advertising Costs: Advertising costs are expensed as incurred. Cash and Cash Equivalents: For purposes of the statement of cash flows, cash equivalents are highly liquid investments with original maturities of three months or less and include cash and due from banks and federal funds sold. Included in cash and due from banks on the balance sheets were restricted funds on required deposit with the Federal Reserve Bank totaling $6,554,000 and $11,515,000 at December 31, 2008 and 2007, respectively. In addition, the Bank maintains cash balances in other correspondent banks that may exceed federally insured limits. The Bank has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk.
23
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Reclassifications: presentation.
Certain 2007 balances have been reclassified to conform to the 2008 financial statement
Recent Accounting Pronouncements: In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109. The Interpretation prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return that are not certain to be realized. FIN 48 is effective for fiscal years beginning after December 15, 2006. On December 30, 2008, the FASB issued a staff position, FIN 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises”, which defers the effective date for the Bank to fiscal years beginning after December 15, 2008. The Bank does not expect an immaterial impact on the financial statements as a result of implementing this interpretation. In September 2006, the FASB reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benefit postretirement. The Bank adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Bank adopted SFAS 157 effective January 1, 2008. The Bank decided not to report any existing financial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the financial statements. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Bank adopted SFAS 159 effective January 1, 2008. The adoption of SFAS 159 was not material to the financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Bank does not expect the implementation of SFAS 141(R) to have a material impact on its financial statements, at this time.
24
The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS 160). The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008, with early adoption prohibited. The Bank does not expect the implementation of SFAS 160 to have a material impact on its financial statements, at this time. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Bank on January 1, 2009. In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Bank on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on the Bank’s financial statements. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the financial statements. In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Bank on December 31, 2008 and is not expected to have a material impact on the financial statements. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Bank’s financial statements. In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the financial statements.
25
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 2. Investment Securities
Investment securities are summarized as follows at December 31:
There were no sales of any securities in 2008 or 2007.
26
The National Capital Bank of Washington Notes to Financial Statements Note 2.
Investment Securities (Continued)
As of December 31, 2008, all securities have gross unrealized gains. Information pertaining to securities with gross unrealized losses and their fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows at December 31:
2007 Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Description of Securities U.S. Treasury & Agency Obligations
$ 6,952,940
$ (33,117)
-
-
2,139,734
(40,354)
2,139,734
(40,354)
$ 6,952,940
$ (33,117)
$ 3,139,114
$ (40,974)
$ 10,092,054
$ (74,091)
Mortgage-backed securities
$
999,380
$
(620)
$
7,952,320
$ (33,737)
The amortized cost and estimated fair value of debt securities at December 31, 2008, by contractual maturity are shown in the table that follows. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
Available-for-Sale
Due in one year or less
$
Amortized
Fair
Cost
Value
24,601,334
$
24,805,967
Due after one year through five years
6,833,281
6,972,974
Mortgage-backed securities
2,013,563
2,051,461
$
33,448,178
$
33,830,402
Investment securities with an amortized cost of $33,298,178 and $22,374,240 and fair market value of $33,680,402 and $22,377,175, were pledged to secure repurchase agreements and for other purposes as required or permitted by law at December 31, 2008 and 2007, respectively.
27
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 3. Loans Receivable
Loans receivable consisted of the following at December 31: 2007
2008 Residential real estate
$
Commercial real estate
122,306,066
$
116,989,111 33,050,057
33,048,497
Installment
5,644,166
7,461,785
Commercial
31,580,005
37,804,943
192,578,734
195,305,896
Net deferred loan costs Total
284,832
296,869
Allowance for loan losses
(975,738)
(1,007,000) $
191,868,603
$
194,614,990
The Bank is principally engaged in banking in the Washington, D.C. metropolitan area. The Bank primarily grants commercial and residential loans, the majority of which are secured by real estate. Although the Bank has a diversified portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the economy of the Washington, D.C. metropolitan area. A summary of transactions in the allowance for loan losses is as follows for the years ended December 31:
2007
2008 Balance, January 1
$
975,738
Loans charged off Recoveries
929,859 (50,121) -
5,432
Net loans charged off
(50,121)
(80,128)
Provision for loan losses Balance, December 31
$
(85,560)
96,000
111,390 $
1,007,000
$
975,738
There were no loans past due and still accruing, nonaccrual loans, or impaired loans as of December 31, 2008 and 2007. Note 4.
Premises and Equipment
Premises and equipment are comprised of the following at December 31:
Land and buildings
$
Furniture and equipment
4,696,328
$
4,662,639 2,138,294
2,146,502
Accumulated depreciation Premises and equipment, net
2007
2008
6,842,830
6,800,933
(4,403,987)
(4,130,098)
$
2,438,843
$
2,670,835
$
313,889
$
304,232
Depreciation on property and equipment charged to expense
28
The National Capital Bank of Washington Notes to Financial Statements Note 5.
Deposits
Deposits as of December 31, are summarized as follows:
2007 Weighted Average
2008 Weighted Average
Interest Rate %
Interest Rate % Non-interest-bearing
$
67,708,740
-
0.10 0.88
45,937,495 44,260,867
0.38 2.33
0.19
10,635,953
0.45
54,760,340
-
49,328,829 61,894,264 10,119,102
$
Interest-bearing: Interest checking Money market accounts Statement and passbook savings accounts Certificates of deposit: Less than $100,000
14,072,720
2.77
9,002,486
4.12
$100,000 or more
22,398,727
2.65
18,942,321
4.59
Total interest-bearing
157,813,642
Total deposits
128,779,122
$ 212,573,982
$
196,487,862
$
$
658,432
Interest paid during the year on certificates of deposit on $100,000 or more
573,260
At December 31, 2008, the scheduled maturities of certificates of deposit are as follows:
2009 2010
$
2011 Thereafter
430,762 $
Note 6.
31,616,326 4,424,359
36,471,447
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase of $11,178,432 at December 31, 2008 mature within one to ninety days from the transaction date and are secured by U.S. Government securities with a fair value of $33,422,355. The weighted average interest rate on these agreements was .50 percent at December 31, 2008. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Note 7.
Line of Credit
During 2008, the Bank renewed a $9,000,000 line of credit agreement with another financial institution. The interest rate on this agreement is equal to the prevailing Federal Funds rate. During 2008, the Bank’s outstanding balances did not exceed $9,000,000 for any period of the borrowing and no balances were outstanding as of December 31, 2008 or 2007.
29
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 8.
Defined Contribution Plan
The Bank has a defined contribution plan that covers substantially all of the Bank’s full-time employees. Participants can contribute up to 15%, or the maximum amount allowable by law, of their annual compensation and receive a 50% matching employer contribution of up to 4% of their annual compensation. Related expenses were $51,381 and $71,924 for the years ended December 31, 2008 and 2007, respectively. Note 9.
Stockholders’ Equity
Pursuant to a stock repurchase plan, the Bank repurchased no shares during 2008 and 2007. On April 2, 2007, the Board of Directors authorized a 2-for-1 stock split, thereby increasing the number of issued and outstanding shares to 291,784, and decreasing the par value of each share to $1.25. All references in the accompanying financial statements to the number of common shares and per-share amounts have been restated to reflect the stock split. Restriction on dividends: The amount of dividends that the Bank can pay without approval from the Office of the Comptroller of the Currency is limited to its retained net income for the current year plus its retained net income for the preceding two years. At December 31, 2008, the Bank’s retained earnings available for the payment of dividends was $5,040,744. In addition, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. Note 10.
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 Capital (as defined in the regulations) to riskweighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008 and 2007, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2008, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table that follows. There are no conditions or events since that notification that management believes have changed the Bank’s category.
30
The National Capital Bank of Washington Notes to Financial Statements The National Capital Bank of Washington Notes to Financial Statements Note 10.
Regulatory Matters (Continued)
The Bank’s required and actual capital amounts and ratios are set forth in the following table: Note 10. Regulatory Matters (Continued) The Bank’s required and actual capital amounts and ratios are set forth in the following table:
31
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 11.
Income Taxes
The provision for income taxes consists of the following for the years ended December 31:
2007
2008 Current income tax expense: Federal income tax
$
Local income tax Total current income tax expense Deferred income tax benefit Total income tax expense
1,740,294
$
1,931,622
500,022
536,810
2,240,316
2,468,432 (12,657)
(46,469) $
2,193,847
$
2,455,775
A reconciliation of the statutory income tax to the income tax expense included in the financial statements is as follows for the years ended December 31: 2007
2008 Income before income tax
$
Federal tax rate
5,582,916
$
6,121,043 34%
34%
Tax expense at statutory rate
1,898,191
2,081,155
317,597
354,385
Differences resulting from: District of Columbia franchise tax, net of federal tax effect Nondeductible expenditures Other Provision for income taxes
$
Effective tax rate
2,487
2,487
(24,428)
17,748
2,193,847
$
2,455,775 40.12%
39.30%
The tax effects of items comprising the Bank’s net deferred tax assets (liabilities) at December 31 are as follows: 2007 2008 Accumulated depreciation
$
Deferred loan costs Allowance for loan loss
(114,238)
$
(166,034)
(120,480)
(114,252)
408,676
411,570
Unrealized (gain) losses on available-for-sale securities
1,517
5,312 Net deferred tax asset
32
(11,716)
(155,106)
Other $
24,164
$
121,085
The National Capital Bank of Washington Notes to Financial Statements Note 12.
Fair Value Measurements
The Bank adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Thus, the Bank has only partially applied SFAS 157. In October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows: Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 – Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and modelbased valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).
33
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 12.
Fair Value Measurements (Continued)
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:
Assets: Available for sale securities
Fair Value $33,830,402
Fair Value Measurements at December 31, 2008 Using Quoted Significant Significant Prices in Other Other Active Observable Unobservable Markets Inputs Inputs (Level 1) (Level 2) (Level 3) $5,036,800
$28,793,602
$
-
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Bank to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements: Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income. The Bank had no impaired loans as of December 31, 2008.
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The National Capital Bank of Washington Notes to Financial Statements Note 12.
Fair Value Measurements (Continued)
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures of the estimated fair values of financial instruments, which is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The assumptions used by management are more fully detailed below. It should be noted that different assumptions could significantly affect these estimates and the net realizable values could be materially different from the estimates presented below. The Bank had determined the fair value of its financial instruments using the following assumptions: Cash and Cash Equivalents and Accrued Interest Receivable and Payable – The fair value of cash and cash equivalents and accrued interest receivable and payable was estimated to equal the carrying value due to the shortterm nature of these financial instruments. Investment Securities – The fair value of securities was estimated based on quoted market prices, dealer quotes, and prices obtained from independent pricing services. Loans – The fair value of loans receivable was estimated by discounting estimated future cash flows using current rates on loans with similar credit risks and terms. Deposits – The fair value of demand and savings deposits was estimated to equal the carrying value due to the shortterm nature of the financial instruments. The fair value of time deposits was estimated by discounting estimated future cash flows using current rates on time deposits with similar maturities. Short-Term Borrowings – The carrying amounts of borrowing under repurchase agreements, and other short-term borrowings maturing within ninety days, approximate their fair values. Off-Balance-Sheet-Instruments – The estimated fair value of fee income on letters of credit at December 31, 2008 and 2007 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2008 and 2007. The fair value estimates presented below are based on pertinent information available as of December 31, 2008 and 2007. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Bank could realize in a current market transaction. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
2007
2008 Carrying
Fair
Carrying
Value
Value
Value
Fair Value
Assets: Cash and cash equivalents Investment securities Loans – net
$
30,055,813
$
30,055,813
$
22,097,301
$
22,097,301
33,885,152
33,885,152
23,607,860
23,607,860
191,868,603
195,438,489
194,614,990
196,078,728
767,841
767,841
727,706
727,706
212,573,982
212,643,059
196,487,862
196,551,955
11,178,432
11,178,432
14,007,470
14,007,470
51,903
51,903
117,505
117,505
Accrued interest Receivable Liabilities: Deposits Securities sold under agreement to repurchase Accrued interest payable
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Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 13.
Financial Instruments With Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, commitments under credit card arrangements, and commercial and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and commercial and standby letters of credit is represented by the contractual amount of those obligations. The Bank uses the same policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The contract amounts of these financial instruments at December 31 are as follows: 2008 Commitments to extend credit – credit cards
$
Commitments to extend credit – other loans
2,592,343
2007 $
Commercial and standby letters of credit
596,000
1,525,059 $
49,568,596
2,536,000 43,106,000
45,451,194 $
46,238,000
Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include inventory, real estate, equipment, securities, cash, and income-producing commercial properties. Credit card commitments are unsecured. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting these commitments. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. At December 31, 2008 and 2007, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
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The National Capital Bank of Washington Notes to Financial Statements Note 14.
Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial condition of the Bank. Note 15.
Related Party Transactions
In the normal course of banking business, loans are made to executive officers and directors. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and did not involve more than normal risks of collectability or present other unfavorable features. At December 31, 2008 and 2007, these loans totaled $7,445,000 and $8,534,000, respectively. In addition, the Bank held deposits of $11,431,000 from officers and directors at December 31, 2008. Note 16.
Concentrations of Credit
All of the Bank’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank’s market area. The concentrations of credit by type of loan are set forth in Note 3. Commercial and standby letters of credit were granted primarily to commercial borrowers.
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Officers RICHARD A. DIDDEN
R. ANDREW DIDDEN, JR.
Chairman and Chief Executive Officer
Vice President, Investments
JAMES M. DIDDEN
BOB HALL, II
President
Vice President, HR Director
DONALD A. DIDDEN
HELEN WHITAKER-THOMPSON
Executive Vice President
Vice President
DONNA J. ATKINS
LINDA M. WALLACE
Senior Vice President
Assistant Vice President
JAMES H. THOMPSON, III
MARGARET R. BURNESS
Vice President and Cashier
Assistant Vice President
JOHN B. GORDON
JUAN J. ELIAS
Vice President
Banking Officer
WILLIAM C. CORNELIUS, SR.
ELIZABETH D. RICKER
Vice President
Banking Officer
LIN C. COTMAN, JR.
ARLENE B. ULRICH
Vice President and Controller
Banking Officer
DEBRA A. KEATS
KIRK C. BIRDSONG
Vice President
Banking Officer
MAIN OFFICE:
FRIENDSHIP HEIGHTS OFFICE:
316 PENNSYLVANIA AVENUE, S.E. WASHINGTON, D.C. 20003 (202) 546-8000
5228 44TH STREET, N.W. WASHINGTON, D.C. 20015 (202) 966-2688
WWW.NATIONALCAPITALBANK.COM 1-888-NCB-WASH Member: Federal Reserve System and Federal Deposit Insurance Corporation
This statement has not been reviewed, or confirmed for accuracy or relevance by the Office of the Comptroller of the Currency.
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