BY ANY MEASURE
The Best in the Business
BY ANY MEASURE
The Best in the Business
T h e N at ional C apital Bank of Washington
Highlights 2011 2011
2010
% Change
(Dollars in thousands, except per share data)
Annual Results
$4,133 14.37 6.72
$3,798 13.09 6.72
8.82% 9.78% 0.00%
1.18% 10.69% 3.82% 49.88%
1.20% 10.17% 3.98% 50.80%
-1.67% 5.11% -4.02% -1.81%
$351,260 348,366 263,382 295,180 67,960 227,471 16,506 38,659
$315,262 306,526 243,295 262,381 60,421 201,960 14,733 37,331
11.42% 13.65% 8.26% 12.50% 12.48% 12.63% 12.03% 3.56%
$368,892 360,141 258,749 1,927 311,731 70,904 240,827 16,449 40,029 287,652
$334,438 326,673 258,091 1,500 282,672 64,572 218,100 14,796 36,703 287,652
10.30% 10.25% 0.25% 28.47% 10.28% 9.81% 10.42% 11.17% 9.06% 0.00%
11.01%
11.84%
-7.01%
10.85%
10.97%
-1.09%
Common Stock, Per Share: Book Value Market Price
$139.16 208.32
$127.59 208.32
9.07% 0.00%
* Average Shares Outstanding
287,652
290,062
-0.83%
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 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
NCB •
2011Annual Report
Shareholders
To Our
Management is very pleased to report that 2011 was another excellent year for The National Capital Bank. By any measure our 122nd year of service was the most successful in our entire history and solidifies our reputation as the “best in the business.” Although we operate in one of the most competitive environments for financial institutions in the nation, we continue to increase our market share and thrive. This is undoubtedly due to the unwavering loyalty of our employees, shareholders and customers. This year your Bank managed to achieve record earnings and double digit deposit growth, and that translated to a strong addition to our capital base. Net income of $4,133,000 was 8.82% better than the previous year. In short, controls on expenses as well as increases in average daily loan and deposit volumes permitted the Bank to continue its string of record results. We invite your attention to the section of the report entitled “Management’s Discussion of Operating Results” for a detailed narrative of our financial performance. If you prefer to examine the numbers in summary form, you can turn to the “Highlights” section located in the front.
2
James M. Didden, President & Richard A. Didden, Chairman & CEO
2011 Financial Achievements This year NCB posted an efficiency ratio of 49.88%. The efficiency ratio is used by analysts as a litmus test to determine how many cents of overhead it takes to produce $1 of profit. Ratios below 60% are considered excellent, and those below 50% are deemed outstanding. Our results are a true testament to the expertise of our Board in its quest to strengthen the bottom line by exercising a reasonable approach to necessary expenditures. This year, management was also able to increase the Bank’s Tier 1 capital by 5.90% to help support the future growth and stability of our institution. In addition, loan losses were negligible and fraud losses were well below average. This is especially noteworthy considering the lingering unemployment rate and the fragile economic environment in which we operated. National Capital Bank did not participate in or profit from the excesses that contributed to the meltdown in the financial services industry. Instead, we invest in and give back to our local communities. We provide jobs, economic stability and community service. Our shareholders received dividends of $6.72 per share which represents a 3.23% return using the last quoted share price in 2011. The 12/31/11 market price of $208.32 held relatively constant throughout the year. When compared to the dismal performance of other financial sector stocks, this constitutes a better than average return on your investment.
3
Strength and Stability is
For well over a century now, The National Capital Bank has been a successful, thriving institution. But from the day we opened our doors on Capitol Hill, we’ve been driven to be much more than that. The financial security and service we give our customers... the return on investment we provide to our stockholders... and the contributions we make to our community... all of those and more are measures we look to every day. And we’ve never been satisfied with less than excellence. Our goal is to be “The Best in the Business” by any and every measure. The people who work here share that goal, and their accomplishments are additional measures of our excellence.
from
Bob Lee started to work part-time for Security Bank in 1952. 60 years later he still loves the banking business after rising up through the ranks from teller to Senior Vice President and Comptroller and finally on to NCB. Lin Cotman went to work as a teller for McLachlen Bank and meteorically
4
nk
Ba
Before Lin and Bob became a team back in 1987, they were friends and Comptrollers at competing banks. Between these two seasoned veterans their current banking experience measures more than 100 years in Washington, D.C. community banking.
5 Stars
Bob Lee rose through the ranks to become its President in 1987. Having vacated his role as Comptroller of the bank to assume the presidency, he turned to his old friend Bob Lee from Security Bank to fill the void. And so history begat more history when the team became reunited in 2003 under the National Capital Bank banner.
in an cial
Lin Cotman
rat rF e e.com & Bau
Today these time tested practitioners of bank accounting look after the Bank’s books with an owl’s eye toward ensuring that one of the safest and soundest banks in America remains just that way for generations to come.
Our
5 STAR Rating
and what it means...
Bankrate.com’s 5-Star “Safe & Sound”
rating is their highest award and is
considered a “Superior” rank for financial
strength and stability in the world of finance. In addition, Bauer Financial,
the nation’s most respected bank rating
service, has given us their top rating for 23 consecutive years, placing us in the
top 3% of all banks in the country. Many
banks have struggled during the financial
crisis, but NCB has prospered, and we’re proud to be measured as “the best” for strength and stability.
5
Jim Thompson, Vice President and Cashier.
Jim Thompson
Generations of Commitment From early in the morning until well into the evening you’ll find Jim Thompson, III at his desk. When you factor in an hour and a half commute on either end of the workday, you begin to understand the remarkable measure of his labors. Jim is methodically creeping up on his dad’s legendary 47 year tenure with National Capital now that his own length of service has turned 42. His is the kind of loyal dedication which we are so fortunate to have threading though our Bank’s long history. And like his dad before him, Jim Thompson is our Vice President and Cashier. He is the custodian of the Bank’s general ledger and oversees such diverse operations as wire transfer, lock box, safe deposit, as well as all automated transactions. His profile in the banking industry, as a highly knowledgeable and respected professional, has earned him a seat on the National Automated Clearing House Association Board of the Federal Reserve System. You’ll have to ask him how he finds time to religiously attend weekly Rotary Club breakfasts and where he finds enough residual dedication to be worthy of his recent “Rotarian of the Year” award from the Rotary Club of Capitol Hill.
Named One of the Best in theNation BY SNL FINANCIAL
SNL looked at over 4,800 wellcapitalized community banks across the nation and ranked them based on six distinct measures of financial performance. National Capital Bank placed in the top 100 based upon our outstanding return on assets, quality of our loan portfolio, containment of operating expenses, and robust net interest margin. By adhering to the fundamentals of sound banking we have provided our stakeholders with tangible returns while garnering national recognition as one of the “best in the business.”
One of the
MOST PROFITABLE COMMUNITY BANKS IN THE NATION
6
Making people feel special
O N
MA GAZINE
in Customer Satisfaction
Originally from Portugal, Fatima began her banking career at Security National Bank in 1981. She later became Assistant Manager of McLachlen National Bank’s main office and, in 1994, Branch Manager of McLachlen Bank at the very office where she now serves as Branch Manager for NCB. All banks love to brag about “personalized service,” but few, if any, deliver it at Ms. Fonseca’s level. Ask any of Fatima’s flock of customers.
B O OK
T G IN FROM WASH
1
#
Making people feel special is just one of Fatima Fonseca’s gifts. There is no one in our Bank who receives more compliments and commendation letters. But Fatima’s measure of worth to the Bank goes far beyond her pleasant countenance. She is a seasoned Bank Officer and Manager who brings a total of 31 years of experience to underpin her professional approach to customer care.
CK E CO CH NSU MERS’
Fatima Fonseca & David Glaser
Getting to Know Our Customers Once you meet him, you can just tell that David Glaser loves being a banker. That is why he has been working for community banks in Washington, D.C. for more than 30 years. During those years he has held almost every position in retail banking: Teller, CSR, Assistant Manager, Security Officer, Branch Operations V.P., Branch Administrator and Senior Vice President. He owns the distinction of being the youngest Vice President ever at McLachlen National Bank when he was just 27. Despite the strong background in operations, we think David’s real talent lies in bringing new business to our Bank and that is why he became our Business Development Vice President. He’s a natural from the moment you meet him and when the time comes to test his knowledge and experience as a career banker, you are rewarded with the true measure of the man. Better than anyone, he understands how to communicate the unique selling proposition that is The National Capital Bank and has made great strides in bringing new business our way.
7
Debra Keats, Senior Vice President of Bank Operations
Management by Professionals Debra Keats came to the Bank as our head teller back in 1995. Her considerable management skills were in evidence from the very start and today she has quickly risen to Senior Vice President and is in charge of our Main Office and Branch operations. While doing the work of two, she keeps her finger on the pulse of every aspect of our day-to-day operations. Her knack for anticipating problems usually finds her hovering close-by when they occur with the resolution in hand. She is the prime expert on the Bank’s core computer system and called on several times a day to answer banking questions which somehow elude the rest of us. She is a sentinel at her desk from early morning until late in the evening and can often be found working on the weekends to keep up with her many responsibilities. As if there were any time left in her schedule, she is highly respected in the Capitol Hill community for her work with the Capitol Hill Group Ministry and Barracks Row Main Street organizations.
AMONG THE
STRONGEST BANKS IN THE COUNTRY
8
National Capital Bank
has been serving our customers for over 100 years.
For almost six generations, The National Capital Bank of Washington has been serving residents and businesses in the Washington, D.C. Metropolitan Area. Among our most cherished assets are the long-term relationships that we have nurtured with so many customers and their family members for 122 years. It is our strong belief that this history and tradition of personal service to our customers and their families is what sets us apart from all of the banks in Washington. It is our mission to embed in our culture an environment that celebrates personal relationships based on integrity and trust. We believe that customers who entrust their money and financial transactions to our care are the core of who we are and what we do – and make us the very best.
From left to right followed by years of service: John Gordon (37), Bill Cornelius (42). Seated: Linda Wallace (26), Robin Anderson (32)
Professionals Supported by Professionals Pictured above are four Bank Officers, each of whom has twenty-five or more year’s tenure with NCB. Like those who are profiled earlier in this report, they are first-string career bankers whose experience and education runs both wide and deep... and we could go on to others. By this time we hope you get the picture. We are convinced that we have the finest group of officers and employees anywhere. Measure them by any standards: They are, very simply, the best in the business!
9
Donna Atkins leads a compliance discussion.
Our“A” Rating and what it means...
The National Capital Bank is the only bank in the Washington, DC metropolitan area with an “A” rating for “Excellent Financial Security” from Weiss Ratings. Weiss ratings are assigned based on a complex analysis of hundreds of factors that are synthesized into five indexes: capitalization, asset quality, profitability, liquidity and stability. An “A” rating requires consistency across all indexes.
Our Strength & Security
owe a great deal to Donna Atkins’ vigilance Donna Atkins started her banking career in 1971 as a customer service representative at Columbia First Bank. At the time she knew little about the vast field of compliance. It takes a very special person with special talents to digest and understand the volumes of regulation which have been heaped on the banking industry over the last thirty years. Donna Atkins spends the better part of her week reading reams of regulations to decide how they might affect our Bank. She excels at what she does as is evidenced by her title as Executive Vice President of the Bank. She also runs our real estate loan department, which accounts for eighty-three percent of the Bank’s loan portfolio. As with so many of our career officers, Donna has multi-faceted talents and experience. Forty years in banking has seen her rise through the ranks to a point where she just might be called one of the finest compliance officers in the nation. We often find her in the Chair at many of the Bank’s team meetings where her leadership skills are in ample measure. And to think, she accepted her first job in banking “only to pay the bills.”
10
Weiss Rating System
A B • good • C • fair • D • weak • E • very weak • • excellent •
Management’s Discussion of
Operating Results
Total Assets
2008
$227,535
2007
2009
$256,822
2011
$256,591
2010
$368,892
$334,438
$298,562 2009
Loan totals were flat at year end, but average loans increased by $20.1 million. This was not the result of slackening demand. Rather, it was our reaction to a verbal criticism levied by a Comptroller of the Currency examiner who took issue with our 95% ratio of loans to deposits. Our arguments that our negligible loan loss history and expert loan underwriting personnel and procedures combined with our strong capital position should take precedence over OCC’s reliance on industry number crunching was to no avail. Therefore, we reluctantly decided to restrict loans, even those secured by safe residential real estate, to current customers at mid-year. Consequently, we experienced a runoff of loans in the third and fourth quarters even though we show an 8.26% increase in average loans over 2010.
$191,869
2008
Average deposits increased by a healthy $32.8 million or 12.50% to $295.2 million, and this additional volume was spread among all types of accounts, both interest-bearing and non-interest bearing. This is a good sign in that it signifies strong growth in core deposits with no reliance on high-cost institutional funding.
$194,615
2007
$259,604
$244,539
Total assets grew to $368.8 million from $334.4 million. This 10.30% increase was mainly attributable to the recognition of our reputation as a service-oriented, rock solid institution that operates ethically and supports the communities we serve. We also received an assist from the much publicized “Move Your Money” campaign. It led to positive national exposure from CNN, ABC, American Banker and Independent Banker. In fact, your Bank was recently recognized as a “top performing Bank” in the eastern U.S. in an article by BANK NEWS. While many community banks seem to shine in tough economic times, NCB received unprecedented publicity this year as an example of a business that gets it right even when economic conditions go wrong. However, the “Professional Service of the Year” award we received from the Capitol Hill Association of Merchants and Professionals (CHAMPS) eclipsed the others. Recognition from our neighbors is the highest honor that can be bestowed on a community bank. Your Bank also retained its “A” or “Excellent” rating from Weiss Ratings. Fewer than two percent of the nation’s banks and thrifts meet their criteria for financial strength, making this distinction very meaningful.
2010
2011
Net Loans
11
12
2008
2009
2010
2011
Deposits & Repurchase Agreements
As always, we re-dedicate ourselves to our mission: “To provide excellent banking products and services in an ethical manner and deliver them to our customers in the most personal and convenient way possible, while earning a strong return for our shareholders.” Throughout this report, we are proud to profile some of the individuals who help make our mission a reality. They are wonderful examples of the very best in the business!
2007
2008
2009
2010
Net Earnings
$4,133
$328,180
$297,469
$223,752
2007
$261,777
$210,495
Interest expense decreased by $186,000 (-14%) as deposit rates trended down throughout the year. We added $427,500 to our Allowance for Loan and Lease Losses (ALLL), the maximum we could contribute under the intricate formula imposed by accounting standards. Our negligible loan loss history is a major component of that formula and it precluded us from increasing our contribution to more reasonable levels. At yearend, our ALLL to Gross Loan ratio was .74%. This percentage is less than half of the average maintained by the banking industry.
$3,798
Even though we have not raised service charges for five years, it was decided to hold off increases for one more year to accommodate our financially strapped customer base.
More than ever, we rely upon our expert and dedicated group of Directors, Officers and Staff for our ongoing progress. We are truly grateful for all of their diligence and devotion to both our customers and to each other. A world of thanks is due to our Board of Directors for their valuable insights and wisdom. We particularly commend the members of NCB’s Executive Committee: Bob Comstock, Vince Cleary, and Bob Donohoe, who met with us each week to help guide our daily activities and challenge us constructively in an effort to keep the Bank strong and growing. We especially appreciate Bob Comstock’s efforts in chairing the Committee so efficiently. We simply could not continue to thrive without the dedication and guidance of our Board committees.
$3,214
Non-interest income (including rental income), amounting to $2.73 million, was down slightly from last year as all categories except “Investment Products” showed decreases. Investment product income was $521 thousand, ahead of last year by $375 thousand or 39%. This is attributable to a sharp increase in the asset volume our Wealth Management division experienced. We anticipate that this service will become an increasingly valuable income stream in the future. Management found it advisable to re-locate this division from our lobby to a larger and more private suite in our main office building. We have also joined forces with a local CPA who shares an office in that suite.
$3,389
Our investment portfolio remains conservatively managed with 18% in U.S. Government obligations and the remainder in U.S. Agencies. At yearend, the investment portfolio showed a net unrealized profit of almost $900 thousand. This “paper profit” will be a major factor in our earnings plan going forward.
Salaries & Benefits decreased slightly primarily because we have a few positions which remain vacant as we search for individuals who meet our rigid standards. It will be necessary to increase our Compliance Department just to keep up with the ever burgeoning requirements of our regulators. It is interesting to note that the average bank in the U.S. has 37 employees. The new Dodd-Frank legislation is 4,000 pages of proposed and final rules. Obviously this will place an undeserved burden on the smaller banks that had absolutely nothing to do with the financial crisis. The consequences of complying with these regulations dictate that we expand our payroll in non-income producing areas at the expense of customer service positions and it will eventually necessitate that we pass some of these costs to our customers. Non-interest expenses increased by $284,888 (3.44%), in part because of renovations to our Main Office, the costs associated with the transition to our new, less geographically restrictive logo as well as our advertising campaign recognizing National Capital Bank as “Washington’s oldest bank.”
$3,665
Treasury induced, artificially low interest rates caused net interest margins to slip by 16 basis points on average assets this year. However, loan income still showed an increase of $419,000 or 3.41%, largely due to the loan volume we booked in the first half of the year. The Bank’s securities portfolio generated income of $1,527,000 -- a robust 25.06% over 2010.
2011
LookingForward to 2012
Dividends Paid
Chairman & CEO
James M. Didden President
2007
2009
2010
2011
$150
2011
$208
2010
Richard A. Didden
$215
2009
For the reasons cited above we are not predicting another record year of earnings in 2012, but, barring unforeseen events, we should produce safe and solid returns for our shareholders. Management has identified its near-term challenges and will focus on remaining in the top tier of the nation’s most highly capitalized banks. On behalf of our Directors, Officers and Staff, we thank you for your investment in National Capital Bank and assure you that your best interests will continue to be our highest priority. However you measure soundness and success, you may rely on us to remain “The Best in the Business.”
$1,933,021
2008
$1,946,904
$1,960,788
2007
$1,960,788
$1,867,418
Artificially low interest rates are a subtle form of debt restructuring and also represent a kind of invisible taxation. Currently the 10-year U.S. Treasury Bond is yielding no
The Bank is due to conduct a strategic planning event this year where we will build a blueprint consistent with our mission fundamentals and determine the areas where we can improve. Our team is unified in the principle that time devoted to customer service is not only fulfilling our promise but is the best investment we can make. You can be assured that our business ethics will never be compromised in the process. We will also assess our customers’ needs for additional products and services, and respond accordingly.
$208
Evidence suggests that government-mandated, unrealistically low interest rates caused our economy to slip into what John Maynard Keynes defined as a “Liquidity Trap.” This happens when consumers and businesses are not willing to invest because they expect the economy to remain weak for an extended period. However, when there is no substantial investment, the economy will certainly remain weak. This view creates a self-fulfilling prophecy which needlessly delays a sustained recovery. This syndrome was evident after our Great Depression and also hobbled Japan during its “Lost Decade” of the1990’s. It isn’t an exaggeration to state that the U.S. is squarely in the middle of “Fed’s Zero Decade.” These low yields will have a more severe impact on those banks that maintain large branch networks because the advantages of increasing deposits are now relatively minimal.
more than 2%. Even if inflation over the next three years averages 2%, which is the FRB’s target, investors will find that they will have earned a zero rate of return. If inflation does accelerate, the rate of return will be negative. Unfortunately, post recession history demonstrates that significant inflation will occur in the not too distant future.
$212
Last year we reported that U.S. Government debt was $14 trillion or $45,300 for every person in the country. This year that debt has soared to over $15 trillion or almost $49,000 per individual and future debt burdens promise to grow exponentially. Obviously, no substantial progress has been made, and despite a fragile recovery in the form of reduced unemployment and modest improvements in general business conditions in the last quarter of last year, 2012 will offer a scenario of sharply reduced net interest margins and paltry returns on core banking operations. We feel that the coming two years will be largely transitional with no significant market strength appearing until late in 2014. However, three major wildcards could alter our thinking dramatically: the European sovereign debt crisis, U.S. monetary policies promoting more quantitative easing (QE3), and the effects of the November elections on tax policy.
2008
Adjusted Share Price
13
Executive Committee
Standing: James M. Didden, Robert F. Comstock, Chmn., Robert B. Donohoe Seated: Richard A. Didden, Vincent D. Cleary
2011 Board of Directors Vincent D. Cleary
Chairman of the Board Cantwell-Cleary Company, Inc.
Robert F. Comstock
Attorney at Law Chairman of the Executive Committee
Donald A. Didden
Executive Vice President (Retired)
James M. Didden President
Kathryn H. Didden Investor
Richard A. Didden Chairman and CEO
Robert B. Donohoe
Senior Vice President The Donohoe Companies, Inc.
William J. Durkin Attorney at Law
14
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. LLD
President and Co-Chairman Lockhart Companies Inc.
Independent Auditor’s Report To the Board of Directors The National Capital Bank of Washington Washington, D.C.
We have audited the accompanying balance sheets of The National Capital Bank of Washington as of December 31, 2011 and 2010, and the related statements of income, changes in stockholders’ equity, and cash flows for the years 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 audits. We conducted our audits 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 audits provide 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, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Certified Public Accountants and Consultants
Winchester, Virginia February 15, 2012
15
Fi n ancial Report
The National Capital Bank of Washington Balance Sheets December 31, 2011 and 2010 Assets
2011
Cash and Due From Banks
$
2010
5,931,956
$
3,976,465
17,779,706 23,711,662
9,811,651 13,788,116
Available-for-sale at fair value
83,557,848
58,716,549
Restricted stock at cost Total investment securities
53,950 83,611,798
53,950 58,770,499
256,822,436 2,625,158
256,591,098 2,529,241
2,121,155
2,759,304
Interest-Bearing Deposits Total cash and cash equivalents Investment Securities:
Loans Receivable Net of allowance for loan losses of $1,926,780 (2011) and $1,500,000 (2010) Bank Premises and Equipment – Net Accrued Interest and Other Assets Total Assets
$
368,892,209
$
334,438,258
$
70,903,763 240,827,494
$
64,571,774 218,100,392
Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest-bearing Interest-bearing Total deposits
311,731,257
282,672,166
16,448,800
14,796,253
683,246 328,863,303
266,991 297,735,410
Securities Sold Under Agreements to Repurchase Accrued Interest and Other Liabilities Total Liabilities
-
Commitments and Contingent Liabilities
-
Stockholders’ Equity: Common stock, $1.25 par value per share - 400,000 shares authorized, 287,652 issued and outstanding at December 31, 2011 and 2010
359,565
Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity
16
See Notes to Financial Statements.
$
359,565
1,438,260
1,438,260
37,700,629
35,500,904
530,452
(595,881)
40,028,906
36,702,848
368,892,209
$
334,438,258
Fi n ancial Report
The National Capital Bank of Washington Statements of Income Years Ended December 31, 2011 and 2010 Interest Income: Loans, including fees Investment securities Interest-bearing deposits Total interest income
2011 $
Interest Expense: Deposits Securities sold under agreements to repurchase and short-term borrowings Total interest expense
2010
12,698,926 1,527,430 52,809 14,279,165
$
12,280,248 1,221,399 40,580 13,542,227
1,150,642
1,338,729
16,953 1,167,595
14,710 1,353,439
13,111,570
12,188,788
427,500
437,764
12,684,070
11,751,024
Noninterest Income: Service charges on deposit accounts Other service charges and fees Rental income Asset management fees Net gain (loss) on sale of securities Other income Total noninterest income
396,450 78,513 1,353,999 521,228 (47,903) 432,119 2,734,406
429,822 81,925 1,348,692 375,430 87,880 466,197 2,789,946
Noninterest Expense: Salaries and employee benefits Occupancy expense Equipment expense Professional fees FDIC assessments Insurance Other expense Total noninterest expense
4,620,707 847,761 222,628 456,698 287,770 61,488 2,060,856 8,557,908
4,600,315 869,426 248,282 422,617 319,433 65,947 1,747,000 8,273,020
6,860,568
6,267,950
2,727,822
2,469,636
Net Interest Income Provision for Loan Losses Net Interest Income after Provision for Loan Losses
Income Before Income Taxes Provision for Income Taxes Net Income Basic and Diluted Earnings Per Share of Common Stock Average Shares Outstanding
$
4,132,746
$
3,798,314
$
14.37
$
13.09
287,652
290,062
See Notes to Financial Statements.
17
Fi n ancial Report
The National Capital Bank of Washington Statements of Changes in Stockholders’ Equity Years Ended December 31, 2011 and 2010 Accumulated Additional Common Stock Shares Balances, December 31, 2009
291,784
Amount $
364,730
$
Other
Paid-In
Retained
Comprehensive
Capital
Earnings
Income (Loss)
1,458,920
$
34,623,613
$
84,990
Total $
36,532,253
Comprehensive income: Net income for 2010
3,798,314
3,798,314
Changes in net unrealized losses on securities available for sale, net of income tax effects of ($429,329)
(628,652)
(628,652)
(52,219)
(52,219)
Less: Reclassification adjustment net of tax ($35,661) Total Comprehensive Income Repurchase of common stock
3,117,443 (4,132)
(5,165)
(20,660)
(974,119)
(999,944)
(1,946,904)
(1,946,904)
Cash dividends declared ($6.72 per share) Balances, December 31, 2010
287,652
$
359,565
$
1,438,260
$
35,500,904
$
(595,881)
$
36,702,848
Comprehensive income: Net income for 2011
4,132,746
4,132,746
Changes in net unrealized gains on securities available for sale, net of income tax effects of $749,773
1,097,869
1,097,869
28,464
28,464
Add: Reclassification adjustment net of tax $19,439 Total Comprehensive Income
5,259,079
Cash dividends declared ($6.72 per share) Balances, December 31, 2011 See Notes to Financial Statements.
18
(1,933,021) 287,652
$
359,565
$
1,438,260
$
37,700,629
(1,933,021) $
530,452
$
40,028,906
Fi n ancial Report
The National Capital Bank of Washington Statements of Cash Flows Years Ended December 31, 2011 and 2010 Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for loan losses Accretion and amortization on investments, net Deferred income tax benefit Realized loss on disposal of fixed assets Realized (gain) loss on sales/calls of available-for-sale securities Net change in: Accrued interest and other assets Accrued interest and other liabilities Net cash provided by operating activities
2011 $
2010
4,132,746
$
3,798,314
252,513 427,500 37,076 (166,734) 1,098 47,903
264,106 437,764 36,877 (156,885) -(87,880)
359,053 92,873 5,184,028
(60,349) 71,765 4,303,712
Cash Flows From Investing Activities: Loan originations and principal payments, net Activity in available-for-sale securities: Purchases Sales, maturities, paydowns, and calls Net decrease in restricted stock Purchase of premises and equipment Net cash used in investing activities
(658,838)
(29,493,554)
(78,249,249) 55,218,516 -(349,528) (24,039,099)
(68,264,732) 52,078,582 800 (82,096) (45,761,000)
Cash Flows From Financing Activities: Increase in interest accounts, demand deposits and savings accounts Increase in time deposits Net increase in repurchase agreements Repurchase of common stock Dividends paid Net cash provided by financing activities
23,960,709 5,098,382 1,652,547 -(1,933,021) 28,778,617
27,777,437 3,668,655 4,245,567 (999,944) (1,946,904) 32,744,811
Increase (Decrease) in Cash and Cash Equivalents
9,923,546
(8,712,477)
13,788,116
22,500,593
Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year
$
23,711,662
$
13,788,116
Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest
$
1,169,606
$
1,359,511
$
2,895,000
$
2,585,267
$
1,895,545
$
(1,145,861)
Taxes Unrealized gain (loss) on securities available for sale See Notes to Financial Statements.
19
Fi n ancial 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: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the fair value of financial instruments. Investment Securities: Debt and equity securities are 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, 2011 and 2010, 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-to-maturity 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. Investment securities are impaired when fair value is less than cost. An impairment is considered “other than temporary” if any of the following conditions are met: the Bank intends to sell the security, it is more likely than not that the Bank will be required to sell the security before the recovery of its amortized cost basis, or the Bank does not expect to recover the security’s entire amortized cost basis (even if the Bank does not intend to sell). The Bank does not have any securities impairment that is considered “other than temporary” at December 31, 2011 and 2010. Loans: Loans are reported at their recorded investment, which is the principal amount outstanding, as adjusted for net deferred fees or cost of loan originations. The balance of the allowance for loan losses is netted against the recorded investment in loans on the balance sheet. 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 all classes of 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, 2011 and 2010. Loans are considered past due when the borrower is not current with their payments in accordance with the contractual terms of their loan agreement.
20
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies (Continued) 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 collectibility 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. For real estate loans delinquent after 180 days, the Bank obtains a new valuation. Any outstanding balance greater than the new valuation, less estimated selling costs will be charged off. Commercial, installment, and credit card loans delinquent after 120 days will be charged off unless there is fraudulent activity or bankruptcy proceedings in which loans will be charged off sooner. The allowance consists of specific, general and unallocated components. For loans that are 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. Management has an established internally developed methodology to determine the adequacy of the allowance for loan losses that assesses the risks inherent in the loan portfolio. For purposes of determining the allowance for loan losses, management has segmented certain loans in the portfolio by product type. Loans are grouped into the following segments: Real estate, Commercial, Installment and Credit Cards. As the first step in determining the general component of the allowance for loan losses, management uses the average of the highest two years of net charge-off experience during the last four years for each segment of the portfolio. The historical loss percentage calculated is applied to the quarter end balance of the each portfolio segment. The historical component is further adjusted by management’s evaluation of various conditions per segment including the economy, concentrations of credit risk, trends in portfolio growth, changes in lending practice, changes in experience and depth of lending staff, changes in value and severity of past due loans and adversely classified loans, changes in collateral value of real estate loans and the effects of external factors including competition, legal and regulatory risks. To determine the specific reserve component of the allowance for loan losses, management evaluates all impaired loans to determine the amount of anticipated loss. The Bank evaluates all segments of loans for impairment except for installment loans and credit card loans. Accordingly, the Bank does not separately identify installment loans and credit card loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. 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). There were no changes in the Bank’s allowance for loan loss methodology during 2011. Troubled Debt Restructurings: In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. There were no loans classified as TDRs as of December 31, 2011 and 2010. 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.
21
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies (Continued) 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. As of and during the years ended December 31, 2011 and 2010, 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 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. 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. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income. Advertising Costs: Advertising costs are expensed as incurred. Advertising costs were $167,999 and $158,951 at December 31, 2011 and 2010, respectively. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 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 $5,162,000 and $9,616,000 at December 31, 2011 and 2010, 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. Interest-Bearing Deposits in Banks: Interest-bearing deposits in banks mature within one year and are carried at cost.
22
Fi n ancial 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 availablefor-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: Certain 2010 balances have been reclassified to conform to the 2011 financial statement presentation. Recent Accounting Pronouncements: In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of the new guidance did not have a material impact on the Bank’s financial statements. In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Bank has included the required disclosures in its financial statements. In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for annual periods ending on or after December 15, 2012. Early adoption is permitted. A nonpublic entity that elects early adoption should apply the provisions of this ASU retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Bank has adopted ASU 2011-02 and included the required disclosures in its financial statements. In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for annual periods beginning after December 15, 2011 with prospective application. Nonpublic entities may apply the amendments in this ASU early, but no earlier than for interim periods beginning after December 15, 2011. The Bank is currently assessing the impact that ASU 2011-04 will have on its financial statements.
23
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies (Continued) In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years beginning after December 15, 2012. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Bank is currently assessing the impact that ASU 201105 will have on its financial statements. In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Bank is currently assessing the impact that ASU 2011-11 will have on its financial statements. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this ASU, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Bank is currently assessing the impact that ASU 2011-12 will have on its financial statements.
24
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 2. Investment Securities Investment securities are summarized as follows at December 31: 2011 Amortized
Gross Unrealized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-sale: U.S. Treasury & Agency obligations
$
81,902,085
$
868,713
82,665,131
$
$
53,950
$
763,046
Mortgage-backed securities
Restricted stock at cost
$
$
(38,640)
931,357
$
(38,640)
-
$
62,644
82,732,158
-
-
825,690 $
83,557,848
$
53,950
2010 Amortized
Gross Unrealized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-sale: U.S. Treasury & Agency obligations
$
Mortgage-backed securities
58,353,770
$ 59,719,437 The National Capital Bank of Washington
Notes to Financial Statements
Restricted stock at cost
$
1,365,667
$
53,950
152,354
$
(1,229,569)
74,327
$
57,276,555
-
$
226,681
$
$
-
$
(1,229,569) -
1,439,994 $
58,716,549
$
53,950
Note 2. Investment Securities (Continued) As of December 31, 2011, nine U.S. Treasury & Agency Obligations with a fair value of $22,961,360 had gross unrealized losses of $38,640. These securities have been in a continuous loss position for less than twelve months. All other securities have gross unrealized gains. As of December 31, 2010, U.S. Treasury & Agency Obligations with a fair value of $50,021,660 had gross unrealized losses of $1,229,569. These securities have been in a continuous loss position for less than twelve months. All other securities have gross unrealized gains. As of December 31, 2011 and 2010, the Bank’s unrealized losses in investments securities are related to interest rate fluctuations. Since the Bank does not intend to sell any of the investments before recovery of its amortized cost basis and has the ability and intent to hold these investments to maturity, the Bank does not consider these investments to be other-than-temporarily impaired. The amortized cost and estimated fair value of debt securities at December 31, 2011, 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 Due after one year through five years
$
Due after five years through ten years Due after ten years Mortgage-backed securities $
Amortized
Fair
Cost
Value
3,000,000 45,333,768
$
2,999,790 45,638,919
31,568,317
32,093,449
2,000,000 763,046
2,000,000 825,690
82,665,131
$
83,557,848
Investment securities with an amortized cost of $82,665,131 and $59,719,437 and fair market value of $83,557,848 and $58,716,549, were pledged to secure repurchase agreements and for other purposes as required or permitted by law at December 31, 2011 and 2010, respectively.
25
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 3. Loans Receivable Loans receivable consisted of the following at December 31: 2011 Real estate loans: Residential real estate
$
2010
176,940,101
$
175,669,489
39,321,377
39,296,657
Commercial
36,165,660
36,164,046
Installment
5,219,358
5,884,365
750,160 258,396,656
738,939 257,753,496
Commercial real estate
Credit cards Net deferred loan costs Allowance for loan losses Total
$
352,560
337,602
(1,926,780)
(1,500,000)
256,822,436
$
256,591,098
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: Allowance for Loan Losses: Balance, January 1, 2010
Real Estate $
Loans charged off Recoveries Net loans charged off Provision for loan losses Balance, December 31, 2010
$
869,514
Commercial $
Installment
217,906
$
$
1,140,000
-
(5,443)
(15,146)
(79,362)
-
1,348
250
1,598
(58,773)
-
(4,095)
(14,896)
(77,764)
402,313
4,294
12,010
19,147
437,764
1,213,054
$
222,200
$
36,846
-
-
-
-
-
-
Balance, December 31, 2011
Total
23,649
-
Loans charged off
-
Provision for loan losses
$
(58,773)
Recoveries Net loans charged off
Credit Cards
28,931
-
110,486
$
$
(720)
(12,355)
1,500,000 (720)
-
-
325,566
27,900
-
(720)
(720)
3,803
427,500
$
1,323,540
$
547,766
$
24,491
$
30,983
$
1,926,780
$
200,000
$
-
$
-
$
-
$
200,000
$
1,123,540
$
547,766
$
24,491
$
30,983
$
1,726,780
$ 216,261,478
$
36,165,660
$
5,219,358
$
750,160
$
800,438
$
-
$
-
$
-
$ 215,461,040
$
36,165,660
$
5,219,358
$
750,160
Ending balance: individually evaluated for impaired Ending balance: collectively evaluated for impaired Loans Receivable: Balance, December 31, 2011
$ 258,396,656
Ending balance: individually evaluated for impaired
$
800,438
Ending balance: collectively evaluated for impaired
26
$ 257,596,218
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 3. Loans Receivable (Continued) Management evaluates the credit quality of all loans, except credit cards, based on an internal grading system that estimates the capability of the borrower to repay the contractual terms of their loan agreement as scheduled or at all. The Bank’s internal risk grading is based on experiences with similarly graded loans. Management analyzes risk grades on an ongoing basis. In addition, risk grades are validated by an independent loan review performed on a quarterly basis. The Bank’s internally assigned grades are as follows: • Pass – Loans are supported by adequate financial statements, adequately secured by collateral and borrower demonstrates the ability to repay from normal business operations. • Special Mention – Loans with no immediate problem, but trends exist with the borrower or the borrower’s industry that warrant close watch. This category also includes loans that are currently performing, but have experienced problems in the past. • Substandard – Loans meeting any of the following conditions: (1) Loans where problems have arisen with the current net worth and/or paying capacity of the borrower, or the collateral pledged, if any, to cause the Bank to further protect its position; (2) Loans having a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; (3) Loans having the distinct possibility that the Bank will sustain some loss if the deficiencies are not satisfactorily corrected. • Doubtful – Loans classified doubtful have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and therefore improbable. • Loss – Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though full or partial recovery may be affected in the future. The Bank’s credit card portfolio is evaluated based on payment activity. All credit cards as of December 31, 2011 and December 31, 2010 were current. The following table represents the credit quality of loan by class as December 31, 2011: Pass
Special Mention
Substandard
Doubtful
Loss
Real estate loans: Residential real estate
$ 174,228,072
Commercial real estate Commercial
$
68,528
35,430,446
735,214
5,219,358
Installment Total
$ 253,330,287 Performing
Credit cards
$
2,712,029
38,452,411
750,160
$
3,515,771
$
-
$
800,438 -
$
800,438
-
$
-
-
-
$
-
-
-
$
-
Non-Performing $
-
There were no loans past due in excess of 30 days, nonaccrual loans, or troubled debt restructurings as of December 31, 2011. As of December 31, 2011, there was one commercial real estate loan with a balance of $800,438 that was classified as impaired with a valuation allowance of $200,000. There were no loans past due greater than 90 days and accruing, nonaccrual loans, or troubled debt restructurings as of December 31, 2010. There were two residential real estate loans related to one borrower with a total balance of $2,534,000 that were classified as impaired and internally rated as substandard as of December 31, 2010, which were current. Due to the underlying collateral, there was no valuation allowance required for these loans. As of December 31, 2010, there was one residential loan past due in excess of 30 days, but less than 60 days, totaling $390,000. All other loans were current in accordance with the contractual terms of loan agreements.
27
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 4. Premises and Equipment Premises and equipment are comprised of the following at December 31: 2011 $
Land and buildings
2010
5,164,031
$
5,006,977
Furniture and equipment
1,854,645 7,018,676
6,910,835
Accumulated depreciation
(4,393,518)
(4,381,594)
Premises and equipment, net
1,903,858
$
2,625,158
$
2,529,241
$
252,513
$
264,106
Depreciation on property and equipment charged to expense
Note 5. Deposits Deposits as of December 31, are summarized as follows: 2011
2010
Weighted Average Balance 70,903,763
-
Interest checking
66,354,437
Money market accounts
Non-interest-bearing
$
Weighted Average
Interest Rate %
Balance $
Interest Rate %
64,571,774
-
0.05
57,358,434
0.05
99,238,510
0.29
92,004,087
0.39
12,789,055
0.10
11,390,761
0.10
Less than $100,000
17,567,457
1.13
16,276,546
0.87
$100,000 or more
44,878,035
1.30
41,070,564
0.89
Interest-bearing:
Statement and passbook savings accounts Certificates of deposit:
240,827,494
Total interest-bearing Total deposits
218,100,392
$
311,731,257
$
282,672,166
$
583,582
$
612,037
Interest paid during the year on certificates of deposit of $100,000 or more
At December 31, 2011, the scheduled maturities of certificates of deposit are as follows: 2012
$
2013
10,007,241
2014
1,446,928 $
28
50,991,323
62,445,492
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 6. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase of $16,448,800 and $14,796,253 at December 31, 2011 and 2010 mature within one to ninety days from the transaction date and are secured by U.S. Government securities with a fair value of $68,847,135 and $37,617,053 at December 31, 2011 and 2010, respectively. The weighted average interest rate on these agreements was .05 and .10 percent at December 31, 2011 and December 31, 2010, respectively. 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 2011, 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 2011 and 2010, 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, 2011 or 2010. 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 dollar for dollar matching employer contribution of up to 4% of their annual compensation. Related expenses were $121,715 and $124,402 for the years ended December 31, 2011 and 2010, respectively. Note 9. Stockholders’ Equity 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, 2011, the Bank’s retained earnings available for the payment of dividends was $5,304,817. 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 risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2011, 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.
29
Fi n ancial Report
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: To Be Well Capitalized Under Actual Amount
For Capital
Prompt Corrective
Adequacy Purposes
Active Provisions
Amount
Amount
Ratio
Ratio
As of December 31, 2011: Total Capital [to Risk Weighted Assets]
$
41,426,000
19.91%
39,499,000 39,499,000
$
20,810,000
>10%
>4%
12,486,000
>6%
>3%
18,029,000
>5%
16,648,000
>8%
18.98%
8,324,000
10.95%
10,817,000
$
Tier 1 Capital [to Risk Weighted Assets] Tier 1 Capital [to Average Assets]
To Be Well Capitalized Under Actual Amount
Ratio
For Capital
Prompt Corrective
Adequacy Purposes
Active Provisions
Amount
Ratio
Amount
Ratio
As of December 31, 2010: Total Capital [to Risk Weighted Assets]
$
38,799,000
18.81%
37,299,000 37,299,000
$
20,630,000
>10%
>4%
12,378,000
>6%
>3%
16,948,000
>5%
16,504,000
>8%
18.08%
8,252,000
11.00%
10,169,000
$
Tier 1 Capital [to Risk Weighted Assets] Tier 1 Capital [to Average Assets]
30
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 11. Income Taxes The Bank files income tax returns in the U.S. federal jurisdiction and the District of Columbia. With few exceptions, the Bank is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2008. The provision for income taxes consists of the following for the years ended December 31: 2011
2010
Current income tax expense: Federal income tax
$
2,294,600
Deferred income tax benefit Total income tax expense
$
2,058,873
599,956
567,648
2,894,556
2,626,521
(166,734)
(156,885)
Local income tax Total current income tax expense
$
2,727,822
$
2,469,636
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: 2011 Income before income tax
$
2010
6,860,568
$
6,267,950
34%
Federal tax rate Tax expense at statutory rate
34%
2,332,593
2,131,103
386,616
367,268
Differences resulting from: District of Columbia franchise tax, net of federal tax effect Nondeductible expenditures
5,544
5,015
Other Provision for income taxes
3,069
(33,750)
$
2,727,822
$
2,469,636
39.76%
Effective tax rate
39.40%
The tax effects of items comprising the Bank’s net deferred tax assets (liabilities) at December 31 are as follows: 2011 Accumulated depreciation
$
2010 (86,871)
$
(67,861)
Deferred loan costs
(143,083)
(137,011)
Allowance for loan loss
781,964
608,753
(362,264)
407,007
44,039
25,434
Unrealized loss (gain) on available-for-sale securities Other Net deferred tax asset
$
233,785
$
836,322
31
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 12. Fair Value Measurements The Bank follows authoritative accounting guidance to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The guidance 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. The guidance provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Authoritative accounting guidance 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 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 model-based 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:
The National Capital BankSecurities of Washington Securities available-for-sale: 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 Notes Financial valuation Statements utilizingto independent 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 identical similar securities by using pricing models that consider observable market data (Level 2). Note 12. of Fair Value or 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, 2011 and 2010:
Description Assets: Available for sale securities: U.S treasury & agency obligations Mortgage-backed securities Total available for sale securities
32
Description Assets: Available for sale securities: U.S treasury & agency obligations Mortgage-backed securities Total available for sale securities
Fair Value as of December 31, 2011
Fair Value Measurements at December 31, 2011 Using Quoted Significant Significant Prices in Other Other Active Observable Unobservable Markets Inputs Inputs (Level 1) (Level 2) (Level 3)
$
$
$
82,732,158 825,690 83,557,848
$
-
$ $
82,732,158 825,690 83,557,848
$ $
-
Fair Value as of December 31, 2010
Fair Value Measurements at December 31, 2010 Using Quoted Significant Significant Prices in Other Other Active Observable Unobservable Markets Inputs Inputs (Level 1) (Level 2) (Level 3)
$
$
$
57,276,555 1,439,994 58,716,549
$
-
$ $
57,276,555 1,439,994 58,716,549
$ $
-
Certain financial and nonfinancial 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-
Fair Value Measurements at December 31, 2010 Using Quoted Significant Significant Prices in Other Other Active Observable Unobservable Markets Inputs Inputs (Level 1) (Level 2) (Level 3)
Fi n ancial Report Fair Value as of December 31, 2010
Description Assets: The National Capital Bank of Washington Available for sale securities: treasury & Statements agency obligations $ NotesU.S to Financial Mortgage-backed securities Total for Measurements sale securities (Continued) $ Note 12.available Fair Value
57,276,555 1,439,994 58,716,549
$ $
-
$ $
57,276,555 1,439,994 58,716,549
$ $
-
The following tableand presents the balances assets and value liabilities at fairbasis valueinonaccordance a recurring with basisGAAP. as of Certain financial nonfinancial assets of arefinancial measured at fair on measured a nonrecurring December 31,to2011 andvalue 2010:of these assets usually result from the application of lower-of-cost-or-market accounting or writeAdjustments the fair downs of individual assets. Fair Value Measurements at December 31, 2011 Using The following describes the valuation techniques used by the Bank to measure certain financial and nonfinancial assets recorded Quoted Significant Significant at fair value on a nonrecurring basis in the financial statements: Prices in Other Other Fair Value Active Observable Unobservable Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and of contractual terms Markets Inputs InputsThe events, it is probable that all amounts due according toasthe of the loan agreement will not be collected. measurement of loss associated with impaired loans can be the observable market price or the3)fair Description December 31,based 2011 on either (Level 1) (Level 2) of the loan(Level value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the Assets: form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral Available for sale securities: is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an $ 82,732,158 $ U.S treasury & agency obligations $ 82,732,158 $ appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, 825,690 Mortgage-backed securities 825,690 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 Total available for sale securities $ 83,557,848 $ $ 83,557,848 $ The National Capital Bank of Washington 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 Notes to Financial market data. Likewise,Statements values for inventory and accounts receivables collateral based on financial statement balances Fair Valueare Measurements at December 31, 2010 Usingor aging reports (Level 3). Impaired loans allocated to the allowance for loan Quoted losses are measuredSignificant at fair value on a nonrecurring Significant basis. AnyFair fair Value value adjustments are recorded in the period incurred as provision for loan losses on the statements of income. Note 12. Measurements (Continued) Prices in Other Other Fair Value Active Observable Unobservable Other Real Estate Owned (OREO): OREO is measured at fair value based on an appraisal conducted by an independent, of data (Level 2). Markets Inputs licensed appraiser outside of the Bank using observableas market However, if an appraisal of the real estateInputs property is over two years old, then the fair value is considered (Level31, 3).2010 The Bank had no OREO at December Description December (Level 1) (Level31, 2) 2011 and 2010. (Level 3) Assets: TheAvailable followingfor table the balances of financial and nonfinancial assets measured at fair value on a nonrecurring basis as of salepresents securities: December 2011 &and 2010:obligations U.S 31, treasury agency $ 57,276,555 $ $ 57,276,555 $ Mortgage-backed securities 1,439,994 1,439,994 Fair Value Measurements at December 31, 2011 Using Total available for sale securities $ 58,716,549 $ $ 58,716,549 $ Quoted Significant Significant Prices in Other Certain financial and nonfinancial assets are measured at fair value on a nonrecurring basisOther in accordance with GAAP. Value Activeof lower-of-cost-or-market Observable accounting Unobservable Adjustments to the fair value of these assets usuallyFair result from the application or writedowns of individual assets. as of Markets Inputs Inputs Description December 31, 2011 (Level 1) (Level 2) (Level 3) The following describes the valuation techniques used by the Bank to measure certain financial and nonfinancial assets recorded Assets: at fair value on a nonrecurring basisallowance in the financial Impaired loans, net of valuation $ statements: 600,438 $ $ 600,438 $ 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 Fair Value Measurements at December 2010 measurement of loss associated with impaired loans can be based on either the observable market price of the31,loan or Using the fair value of the collateral. Fair value is measured based on the value of the collateral loans. Collateral may be in the Quoted securing theSignificant Significant form of real estate or business assets including equipment, inventory, and accounts vast majority of theOther collateral Prices inreceivable. TheOther is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an Fair Value Active Observable Unobservable appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, as of Markets Inputs if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over Inputs two years Description December 2010 equipment (Level is 1) based upon (Level 2) appraisal(Level 3) old, then the fair value is considered Level 3. The value of31,business an outside if deemed Assets: or the net book value on the applicable business’ financial statements if not considered significant using observable significant, market data.loans, Likewise, for allowance inventory and$ accounts receivables Impaired net ofvalues valuation $collateral are- based$ 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.
33
Fi n ancial Report
The National Capital Bank of Washington Notes to Financial Statements Note 12. Fair Value Measurements (Continued) Authoritative accounting guidance 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 short-term 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. The carrying value of restricted stock approximates fair value based on the redemption provisions of the respective entity. 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 short-term 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, 2011 and 2010 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2011 and 2010. The fair value estimates presented below are based on pertinent information available as of December 31, 2011 and 2010. 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. 2011
2010
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Assets: Cash and cash equivalents Investment securities Loans – net Accrued interest receivable
$
23,711,662
$
23,711,662
$
13,788,116
$
13,788,116
83,611,798
83,611,798
58,770,499
58,770,499
256,822,436
267,836,486
256,591,098
260,388,254
901,183
901,183
1,010,400
1,010,400
311,731,257
312,256,914
282,672,166
283,109,566
16,448,800
16,448,800
14,796,253
14,796,253
40,885
40,885
42,896
42,896
Liabilities: Deposits Securities sold under agreement to repurchase Accrued interest payable
34
Fi n ancial 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:
2011 Commitments to extend credit – credit cards Commitments to extend credit – other loans Commercial and standby letters of credit
2010
$
3,166,000 59,618,000 1,883,000
$
2,825,000 56,290,000 1,860,000
$
64,667,000
$
60,975,000
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, 2011 and 2010, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
35
Fi n ancial Report
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 collectibility or present other unfavorable features. At December 31, 2011 and 2010, these loans totaled $8,787,000 and $9,599,000, respectively. In addition, the Bank held deposits of $17,653,000 and $18,093,000 from officers and directors at December 31, 2011 and 2010. 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. Note 17. Subsequent Events The Bank evaluated subsequent events that have occurred after the balance sheet date, but before the financial statements are issued. There are two types of subsequent events (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose about that date. Subsequent events have been considered through February 15, 2012, the date financial statements were available to be issued. Based on the evaluation, the Bank did not identify any recognized or nonrecognized subsequent events that would have required adjustment to or disclosure in the audited financial statements.
36
Officers Richard A. Didden, Sr.
Chairman and Chief Executive Officer
James M. Didden President
Donna J. Atkins Executive Vice President
Debra A. Keats Senior Vice President
James H. Thompson, III Vice President and Cashier
John B. Gordon Vice President
William C. Cornelius, Sr. Vice President
Lin C. Cotman, Jr.
Vice President and Controller
R. Andrew Didden, Jr. Vice President, Investments
Bob D. Hall, II
Vice President, HR Director
David M. Glaser Vice President
Linda M. Wallace Assistant Vice President
Margaret R. Burness Assistant Vice President
Juan J. Elias
Assistant Vice President
Elizabeth D. Martinez Assistant Vice President
Additional Banking Officers
Kirk C. Birdsong, Laurie J. Kisner, Mary F. Lockman, Carmella G. Elliott, Robin P. Anderson, Natasha Shulinina and Fatima P. Fonseca.
Comstock and Riley, LLP General Counsel
Main Office
316 Pennsylvania Avenue, S.E. Washington, D.C. 20003 (202) 546-8000
Friendship Heights Office 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.