As filed with the Securities and Exchange Commission on July 19, 2006.

Registration No. 333-134929

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 1
TO
Form S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

Access National Corporation

(Exact name of registrant as specified in its charter)

 

 

1800 Robert Fulton Drive, Suite 300

Reston, Virginia 20191

(703) 871-2100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Michael W. Clarke

President and Chief Executive Officer

Access National Corporation

1800 Robert Fulton Drive, Suite 300

Reston, Virginia 20191

(703) 871-2100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

TABLE OF CONTENTS

 

 

ABOUT THIS PROSPECTUS

 

In making your investment decision, you should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with any other or different information. If anyone provides you with information that is different from, or inconsistent with, the information in this prospectus, you should not rely on it. We believe the information in this prospectus is materially complete and correct as of the date on the front cover. However, we cannot guarantee that the information will remain correct after that date. For that reason, you should assume that the information in this prospectus is accurate only as of the date on the front cover and that it may not still be accurate on a later date. This document may only be used where it is legal to sell these securities. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sales of our shares of common stock.

 

Neither we, the underwriters, nor any of our officers, directors, agents or representatives make any representation to you about the legality of an investment in our common stock. You should not interpret the contents of this prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.

 

This prospectus does not offer to sell, or ask for offers to buy, any shares of our common stock in any state or jurisdiction where it would not be lawful or where the person making the offer is not qualified to do so.

 

No action is being taken in any jurisdictions outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in those jurisdictions. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about, and to observe, any restrictions that apply in those jurisdictions to this offering or the distribution of this prospectus.

In this prospectus, we rely on and refer to information and statistics regarding the banking industry and the Washington, D.C. metropolitan market. We obtained this market data from independent publications or other publicly available information. Although we believe these sources are reliable, we have not independently verified and do not guarantee the accuracy and completeness of this information.

 

PROSPECTUS SUMMARY

	•	increased our total consolidated assets from $132.1 million as of December 31, 2001 to $592.5 million as of March 31, 2006;
	•	increased our total consolidated net loans held for investment from $67.5 million as of December 31, 2001 to $378.3 million as of March 31, 2006;
	•	increased our total consolidated deposits from $104.9 million as of December 31, 2001 to $423.1 million as of March 31, 2006;

	•	increased our diluted earnings per share from $0.14 for the year ended December 31, 2001 to $0.63 for the year ended December 31, 2005; and
	•	achieved a return on average equity of 20.0% for the quarter ended March 31, 2006, and 20.6% for the year ended December 31, 2005.

	•	Emphasize Relationship Banking.  We believe our clients desire a bank that specializes in providing customized financial services in a timely and flexible manner. We compete by relying on the strength of our client service, responsiveness, knowledge of the local community, and our relationship banking approach. Our ability to respond quickly to the professional and personal needs of small- to medium-sized businesses, and the individuals associated with these businesses, helps us build client loyalty and strengthens our relationships with our clients. Our emphasis on relationship banking and providing exceptional client service begins with our talented team of lending professionals. Unlike many of our competitors, loans originated by our loan officers are also managed by the same loan officers, creating a stronger client relationship. Our seven senior loan officers, with titles of senior vice president or higher, have a collective experience in excess of 185 years or over 26 years each on average. Somewhat unique for the transient Washington, D.C. metropolitan area, each one of these individuals has spent virtually his entire banking career in the bank’s market area.
	•	Continue to Invest in Complementary and Integrated Business Model.  As our clients’ businesses become successful, personal goals and wealth objectives of the business owners become increasingly important. Accordingly, we provide private banking services to assist our individual clients in acquiring assets, building wealth and managing their resources. The acquisition of our mortgage companies allowed us to acquire skilled professionals with expertise that is consistent with our supplying effective private banking services to our individual clients. We will consider entering other related fee income businesses that serve our target market as opportunities, market conditions and our capacity dictate. Continued execution of our strategic vision will allow us to further diversify and enhance our fee income-generating product offerings.
	•	Efficient Commercial Banking Platform.  We operate three full service offices in Fairfax County, Virginia. Unlike many other banks in the Washington, D.C. metropolitan area that have pursued an aggressive retail branching strategy, we cater primarily to commercial clients, efficiently using the Internet and couriers as service delivery vehicles. We employ full-time couriers to pick-up client deposits at their places of business, and we are presently deploying remote deposit capture technology to provide our clients with superior convenience compared to traditional branch banking delivery channels. We further empower the delivery convenience of our clients by sending client services

		personnel to our client sites where hands-on assistance is provided to enable and create reliance upon our Internet banking and cash management services. Our service delivery strategy has enabled us to efficiently operate our bank while successfully growing our loans held for investment and deposit balances at a compound annual growth rate of 52.3% and 41.4%, respectively, since 2001. Making banking convenient has enabled us to achieve our demand deposit to total deposit ratio of 20.3% as of March 31, 2006.

	•	Target Attractive Operating Markets.  The economy in the Washington, D.C. metropolitan area provides a solid foundation for a bank and creates a robust banking environment that continues to outperform national averages. The presence of the federal government and related industries helps to drive strong population growth rates and some of the nation’s highest household income levels. As the population density in our current market area increases and growth radiates outward from Washington, D.C., we are evaluating, and will continue to evaluate, markets with similarly favorable market demographics in Virginia and Maryland.
	•	Continued Disciplined Execution.  Disciplined underwriting, credit administration and monitoring are critical to our success. We are conservative commercial credit lenders and mortgage originators. We review our underwriting standards on an ongoing basis, regularly assess the adequacy of our allowance for loan losses, and have an independent third party conduct a loan review three times a year. We sell all of the loans originated by the mortgage company with the servicing released to the buyers. At March 31, 2006, our nonperforming assets as a percentage of total assets were 0.20% and our net charge-offs to average loans were 0.00%. Our reserves to loans held for investment as of March 31, 2006 were 1.39%.

										At or for the
		At or for the								Six Months Ended
		Three Months Ended June 30,								June 30,
		2006				2005				2006				2005
		(Unaudited)
		(Dollars in thousands, except share data)
Income Statement Data:
Net interest income(1)		$	3,931			$	3,567			$	8,040			$	6,751
Provision for loan losses			49				383				173				497
Noninterest income			7,099				9,147				13,202				15,300
Noninterest expense			8,193				10,000				15,809				17,655
Provision for income taxes			971				827				1,808				1,360
Net income			1,806				1,504				3,429				2,539
Per Share Data:
Basic net income(2)		$	0.22			$	0.19			$	0.42			$	0.32
Diluted net income(2)			0.19				0.16				0.36				0.27
Book value at period end			4.15				3.58				4.15				3.58
Balance Sheet Data:
Total assets		$	591,769			$	475,440			$	591,769			$	475,440
Loans held for sale			49,353				69,834				49,353				69,834
Loans held for investment			407,587				313,807				407,587				313,807
Allowance for loan losses			5,394				4,516				5,394				4,516
Investment securities			107,004				69,401				107,004				69,401
Total deposits			453,376				373,728				453,376				373,728
Borrowings			99,420				68,726				99,420				68,726
Shareholder’s equity			35,066				28,398				35,066				28,398
Selected Performance Ratios:
Return on average assets			1.24	%			1.35	%			1.22	%			1.17	%
Return on average shareholders’ equity			21.00				21.52				20.52				18.68
Net interest margin(1)(3)			2.81				3.36				2.97				3.27
Asset Quality Ratios:
Nonperforming loans to period-end loans held for investment			0.00	%			0.48	%			0.00	%			0.48	%
Nonperforming assets to total assets(4)			0.00				0.31				0.00				0.31
Allowance for loan losses to period-end loans held for investment			1.32				1.44				1.32				1.44
Allowance for loan losses to nonperforming loans held for investment			0.00				299.66				0.00				299.66
Net loan charge-offs to average loans outstanding			0.00				0.00				0.00				0.00
Capital Ratios:
Equity-to-assets ratio(5)			5.93	%			5.97	%			5.93	%			5.97	%
Leverage capital ratio(6)			8.27				8.57				8.27				8.57
Tier 1 capital ratio(6)			10.51				10.69				10.51				10.69
Total capital ratio(6)			11.76				12.16				11.76				12.16
Other data:
Mortgage originations			243,974				265,129				437,208				457,462
Gain on sale of loans			4,817				6,980				9,932				11,614

(1)		Net interest income is calculated on a fully taxable equivalent basis using a 34% tax rate.

(2)		Per share amounts are computed based on the weighted-average number of shares outstanding during each period.

(3)		Net interest margin is net interest income divided by average interest-earning assets.

(4)		Nonperforming assets consist of the aggregate amount of any non-accruing loans, loans past due greater than 90 days and still accruing interest, restructured loans and foreclosed assets on each date.

(5)		Equity-to-assets ratios are computed based on total shareholders’ equity and total assets at each period end.

(6)		These ratios are described under the captions “Supervision and Regulation — Governmental Policies and Legislation — Capital Requirements” and “— Federal Deposit Insurance Act and Prompt Corrective Action Requirements.”

Common Stock Offered		An aggregate of 2,135,000 shares: 2,000,000 shares by us and 135,000 shares by the selling shareholders (an aggregate of 2,455,250 shares if the underwriters exercise their over-allotment options in full)

Common Stock Outstanding After This Offering(1)		10,447,538 shares (10,747,538 shares if the underwriters exercise their over-allotment options in full)

Net Proceeds		The net proceeds of this offering will be approximately $           (after deducting underwriting discounts and commissions and offering expenses payable by us) based on the public offering price of $      per share. The amount of net proceeds will be higher if the underwriters exercise their over-allotment options. We will not receive any of the proceeds from the sale of common stock by the selling shareholders. (See “Use of Proceeds.”)
Use of Proceeds		We intend to contribute the net proceeds we receive from this offering primarily to our bank to support continued growth in its loans and deposits. We will use any portion of the net proceeds we retain for general corporate purposes. We will not receive any of the proceeds from the sale of common stock by the selling shareholders. (See “Use of Proceeds.”)
Dividend Policy		We paid our first two cash dividends, each of $0.005 per share of common stock, on February 24, 2006 and May 25, 2006, respectively. We intend to continue paying dividends, but our payment of dividends in the future will depend on a number of factors. We cannot assure you that we will continue to pay dividends or that the amount of dividends we pay will not be reduced in the future. (See “Price Range of Our Common Stock and Dividend Information.”)

Nasdaq Global Market symbol		ANCX

Risk Factors		In addition to general investment risks, purchasing our common stock in this offering will involve other specific investment considerations related to us and our business. Those matters are described in this prospectus under the heading “Risk Factors.” You should carefully review and consider those risks before you purchase any shares.

(1)		The number of shares to be outstanding after the offering is based on the number of shares outstanding as of June 30, 2006 and does not include 981,518 shares of common stock issuable upon exercise of options outstanding as of June 30, 2006 at a weighted average exercise price of $4.34 per share, or 854,677 shares of common stock issuable upon exercise of warrants outstanding as of June 30, 2006 at a weighted average exercise price of $1.67 per share. If exercised, the shares represented by these options and warrants would represent approximately 17.9% of our issued and outstanding common stock. After giving effect to our sale of 2,000,000 shares pursuant to this offering, if exercised, the shares represented by these options and warrants would represent approximately 14.9% of our issued and outstanding common stock (or approximately 14.6% if the underwriters exercise their over-allotment options in full).

		At or for the Three
		Months Ended
		March 31,								At or for the Year Ended December 31,
		2006				2005				2005				2004				2003				2002				2001
		(Unaudited)
		(Dollars in thousands, except share data)
Income statement data:
Net interest income(1)		$	4,109			$	3,184			$	15,289			$	11,694			$	9,138			$	5,848			$	3,115
Provision for loan losses			124				114				1,196				1,462				526				841				720
Noninterest income			6,103				6,153				31,467				25,952				33,765				22,494				11,082
Noninterest expense			7,616				7,655				36,340				31,580				36,432				23,447				12,060
Provision for income taxes			837				533				3,305				1,619				2,129				1,359				530
Net income before extraordinary items			1,623				1,035				5,897				2,985				3,816				2,695				887
Extraordinary income, net of income tax			0				0				0				330				0				0				0
Net income			1,623				1,035				5,897				3,315				3,816				2,695				887
Per share data and shares outstanding:
Basic net income, before extraordinary items(2)		$	0.20			$	0.13			$	0.75			$	0.40			$	0.55			$	0.41			$	0.15
Basic net income(2)			0.20				0.13				0.75				0.44				0.55				0.41				0.15
Diluted net income, before extraordinary items(2)			0.17				0.11				0.63				0.33				0.43				0.36				0.14
Diluted net income(2)			0.17				0.11				0.63				0.36				0.43				0.36				0.14
Book value at period end			4.08				3.36				3.92				3.29				2.84				2.32				1.75
Weighted-average number of common shares outstanding:
Basic			8,018,133				7,917,998				7,867,135				7,509,536				6,986,680				6,594,000				6,000,000
Diluted			9,658,239				9,345,524				9,423,087				9,155,778				8,822,372				7,478,064				6,581,988
Shares outstanding at period end			8,100,724				7,918,648				7,956,556				7,914,148				6,954,720				7,020,000				6,000,000
Balance sheet data:
Total assets		$	592,478			$	447,345			$	537,050			$	420,098			$	257,390			$	240,348			$	132,069
Loans held for sale			70,635				48,817				45,019				36,245				29,756				93,852				38,615
Loans held for investment			383,607				298,463				369,733				292,594				189,320				114,835				68,736
Allowance for loan losses			5,339				4,133				5,215				4,019				2,565				2,048				1,192
Investment securities			110,243				56,706				87,771				51,378				23,178				15,637				10,582
Total deposits			423,112				366,610				419,629				317,393				198,183				178,251				104,876
Borrowings			132,810				51,477				80,293				74,390				36,332				40,385				14,872
Shareholders’ equity			33,045				26,570				31,185				25,998				19,755				16,291				10,465
Selected performance ratios:
Return on average assets			1.19	%			0.98	%			1.29	%			0.97	%			1.45	%			1.64	%			0.98	%
Return on average shareholders’ equity			20.01				15.67				20.63				14.48				20.48				20.17				8.75
Net interest margin(1)(3)			3.14				3.20				3.49				3.64				3.58				3.73				3.54

		At or for the Three
		Months Ended
		March 31,								At or for the Year Ended December 31,
		2006				2005				2005				2004				2003				2002				2001
		(Unaudited)
		(Dollars in thousands, except share data)
Asset quality ratios:
Nonperforming loans to period-end loans held for investment			0.32	%			0.53	%			0.35	%			0.74	%			0.44	%			0.00	%			1.36	%
Nonperforming assets to total assets(4)			0.20				0.35				0.24				0.52				0.32				0.00				0.71
Allowance for loan losses to period-end loans held for investment			1.39				1.38				1.41				1.37				1.35				1.78				1.73
Allowance for loan losses to nonperforming loans held for investment			440.50				262.74				397.78				185.07				310.93				0.00				127.87
Net loan charge-offs to average loans outstanding			0.00				0.00				0.00				0.00				0.00				0.00				0.01
Capital ratios:
Equity-to-assets ratio(5)			5.58	%			5.94	%			5.81	%			6.19	%			7.68	%			6.78	%			7.92	%
Leverage capital ratio(6)			8.08				8.60				7.60				8.83				10.28				8.12				8.91
Tier 1 capital ratio(6)			10.44				10.90				10.80				10.98				12.54				12.09				10.96
Total capital ratio(6)			11.69				12.45				12.05				12.71				15.47				13.33				12.20
Other data:
Mortgage originations		$	193,234			$	192,333			$	990,445			$	780,844			$	1,239,666			$	791,601			$	381,018
Gain on sale of loans			5,115				4,634				24,095				20,015				27,818				19,737				9,813

(1)		Net interest income is calculated on a fully taxable equivalent basis using a 34% tax rate.
(2)		Per share amounts are computed based on the weighted-average number of shares outstanding during each period.
(3)		Net interest margin is net interest income divided by average interest-earning assets.
(4)		Nonperforming assets consist of the aggregate amount of any non-accruing loans, loans past due greater than 90 days and still accruing interest, restructured loans and foreclosed assets on each date.
(5)		Equity-to-assets ratios are computed based on total shareholders’ equity and total assets at each period end.
(6)		These ratios are described under the captions “Supervision and Regulation — Governmental Policies and Legislation — Capital Requirements” and “— Federal Deposit Insurance Act and Prompt Corrective Action Requirements.”

 

An investment in our common stock involves risks. You should carefully consider the risks described below in conjunction with the other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. If any of the following risks or other risks that have not been identified or that we may believe are immaterial or unlikely actually occur, our business, financial condition and results of operations could be harmed. This could cause the price of our stock to decline, and you may lose part or all of your investment. This prospectus contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Past results are not a reliable indicator of future results and historical trends should not be used to anticipate results or trends in future periods. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements.

 

Risks Related to Our Business

 

Our future success will depend on our ability to compete effectively in the highly competitive financial services industry.

 

We face substantial competition in all phases of our operations from a variety of different competitors. In particular, there is very strong competition for financial services in Fairfax County, Virginia and the entire Washington, D.C. metropolitan area in which we conduct a substantial portion of our business. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other local and community, super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. Our future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment.

 

Many of our competitors are well-established, larger financial institutions and many offer products and services that we do not. Many have substantially greater resources, name recognition and market presence that benefit them in attracting business. Some of our competitors are not subject to the same regulations that are imposed on bank holding companies and federally-insured national banks, including credit unions that do not pay federal income tax, and, therefore, have regulatory advantages over us in accessing funding and in providing various services. While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our net income and our market share and may adversely affect our results of operations, financial condition and growth.

 

Our profitability depends on interest rates generally, and we may be adversely affected by changes in
government monetary policy.

 

Our profitability depends in substantial part on our net interest margin, which is the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds. Our net interest margin depends on many factors that are partly or completely outside of our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

 

Changes in interest rates, particularly by the Board of Governors of the Federal Reserve System, which implements national monetary policy in order to mitigate recessionary and inflationary pressures, also affect the value of our loans. In setting its policy, the Federal Reserve may utilize techniques such as: (i) engaging in open market transactions in United States government securities; (ii) setting the discount rate on member bank borrowings; and (iii) determining reserve requirements. These techniques may have an adverse effect on our deposit levels, net interest margin, loan demand or our business and operations. In addition, an increase in

interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money. This may lead to an increase in our nonperforming assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our results of operations. We try to minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

 

Our profitability depends significantly on local economic conditions.

 

As a lender, we are exposed to the risk that our loan clients may not repay their loans according to their terms and any collateral securing payment may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs we incur disposing of the collateral. Although we have collateral for most of our loans, that collateral can fluctuate in value and may not always cover the outstanding balance on the loan. With most of our loans concentrated in Northern Virginia, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

 

In addition to the financial strength and cash flow characteristics of each of our borrowers, the bank often secures loans with real estate collateral. At March 31, 2006, approximately 88.25% of our bank’s loans held for investment have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

 

Our business strategy includes the continuation of our growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

 

We intend to continue to grow in our existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies that are experiencing growth. We cannot assure you we will be able to expand our market presence in our existing markets or successfully enter new markets, or that any expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially affected in an adverse way.

 

Our ability to successfully grow will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed.

 

We may face risks with respect to future acquisitions.

 

As a strategy, we have sought to increase the size of our franchise by pursuing business development opportunities, and we have grown rapidly since our incorporation. As part of that strategy, we have acquired three mortgage companies and a small equipment leasing company. We may acquire other financial institutions and mortgage companies, or parts of those entities, in the future. Acquisitions and mergers involve a number of risks, including:

 

 

 

We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance that integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders and to investors purchasing common stock in this offering. There is no assurance that, following any future merger or acquisition, our integration efforts will be successful or our company, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.

 

Our allowance for loan losses could become inadequate and reduce our earnings and capital.

 

We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of our clients relative to their financial obligations with us. The amount of future losses, however, is susceptible to changes in economic and other market conditions, including changes in interest rates and collateral values that are beyond our control, and these future losses may exceed our current estimates. Our allowance for loan losses at March 31, 2006 was $5.3 million. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or that our allowance will be adequate in the future. Excessive loan losses could have a material impact on our financial performance and reduce our earnings and capital.

 

As a result of our significant growth in the past two years, a large portion of our loans held for investment portfolio consists of new loans that are unseasoned.

 

From the beginning of 2004 until March 31, 2006, our loans held for investment portfolio has grown by approximately $194.3 million. Industry experience shows that it takes several years for loan difficulties to become apparent. We can give no assurance that these loans will not become non-performing or delinquent, which could adversely affect our future performance.

 

Liquidity needs could adversely affect our results of operations and financial condition.

 

We rely on dividends from our bank as our primary source of funds. The primary source of funds of our bank are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse

trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

 

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

 

We operate in a highly regulated industry, and both we and our wholly-owned bank are subject to extensive regulation and supervision by the Federal Reserve Bank, the Office of the Comptroller of the Currency and the FDIC. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth. Many of these regulations are intended to protect depositors and the FDIC’s Deposit Insurance Fund rather than our shareholders.

 

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and Nasdaq that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the cost of completing our audit and maintaining our internal controls. As a result, we may experience greater compliance costs.

 

The laws and regulations that apply to us could change at any time. We cannot predict whether or what form of proposed statute or regulation will be adopted or the extent to which such adoption may affect our business. Regulatory changes may increase our costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products and thus place other entities that are not subject to similar regulation in stronger, more favorable competitive positions, which could adversely affect our growth and our ability to operate profitably. Failure to comply with existing or new laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have an adverse effect on our business, financial condition and results of operations.

 

Our recent results may not be indicative of our future results.

 

We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics. In the future, we may not have the benefit of several recently favorable factors, such as a generally stable interest rate environment, a strong real estate market, or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

 

Our hedging strategies may not be successful in managing our risks associated with interest rates.

 

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When rates change, we expect to record a gain or loss on derivatives that would be offset by an inverse change in the value of loans held for sale and mortgage-related

securities. We cannot assure you, however, that our hedging strategy and use of derivatives will offset the risks related to changes in interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and “— Quantitative and Qualitative Market Risk Disclosure.”

 

The profitability of our mortgage company will be significantly reduced if we are not able to sell mortgages.

 

Currently, we sell all of the mortgage loans originated by our mortgage company. We only underwrite mortgages that we reasonably expect will have more than one potential purchaser. The profitability of our mortgage company depends in large part upon our ability to originate or purchase a high volume of loans and to quickly sell them in the secondary market. Thus, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to sell loans into that market.

 

Our mortgage company’s ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae and Freddie Mac and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are government-sponsored enterprises whose activities are governed by federal law, and, while we do not actively participate in their programs, they do have substantial market influence. Any future changes in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-institutional investors or any impairment of our ability to participate in such programs could, in turn, adversely affect our operations.

 

We may be exposed to greater risks from offering non-conforming mortgage loans.

 

We are an acquirer and originator of non-conforming residential mortgage loans for sale into the secondary market. These are residential mortgages that do not qualify for purchase by government-sponsored agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected due to our investments in non-conforming mortgage loans. Credit and liquidity risks associated with non-conforming mortgage loans may be greater than those for conforming mortgage loans. We, therefore, may assume the risk of increased delinquency rates and/or credit losses as well as interest rate risk.

 

Our small- to medium-sized business target market may have fewer financial resources to weather a downturn in the economy.

 

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small- and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

 

We depend on the accuracy and completeness of information about clients and counterparties.

 

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.

Negative public opinion could damage our reputation and adversely impact our earnings.

 

Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action. Because virtually all of our businesses operate under the “Access National” brand, actual or alleged conduct by one business can result in negative public opinion about our other businesses. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

 

We depend on the services of key personnel, and a loss of any of those personnel would disrupt our
operations and result in reduced revenues.

 

Our success depends upon the continued service of our senior management team and upon our ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. In our experience, it can take a significant period of time to identify and hire personnel with the combination of skills and attributes required in carrying out our strategy. If we lose the services of our key personnel, or are unable to attract additional qualified personnel, our business, financial condition, results of operations and cash flows could be materially adversely affected.

 

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed or may not be available on favorable terms.

 

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our last common stock offering closed in April 2002, and we are undertaking this offering to support our continued growth. We may at some point need to again raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

 

Our directors and executive officers own a significant portion of our common stock.

 

Our directors and executive officers, as a group, beneficially owned approximately 28.5% of our outstanding common stock as of June 30, 2006 (35.7% upon the exercise of outstanding vested options and warrants). As a result of their ownership, our directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

 

We may need to invest in new technology to compete effectively, and that could have a negative effect on our operating results and the value of our common stock.

 

The market for financial services, including banking services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation and Internet-based banking. We depend on third-party vendors for portions of our data processing services. In addition to our ability to finance the purchase of those services and integrate them into our operations, our ability to offer new technology-based services depends on our vendors’ abilities to provide and support those services. Future advances in technology may require us to incur substantial expenses that adversely affect our operating results, and our limited capital resources may make it impractical or impossible for us to keep pace with competitors possessing greater capital resources. Our ability to compete successfully in our banking markets may depend on the extent to which we and our vendors are able to offer new technology-based services and on our ability to integrate technological advances into our operations.

Risks Related to an Investment in Our Common Stock

 

Our future capital needs could result in dilution of your investment.

 

Our board of directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities. These issuances would dilute the ownership interests of purchasers of our common stock in this offering and may dilute the per share book value of our common stock. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, our then current shareholders.

 

The trading volume in our common stock has been low, and the sale of a substantial number of shares in the public market could depress the price of our stock and make it difficult for you to sell your shares.

 

Our common stock has traded on the Nasdaq Global Market since the third quarter of 2004. However, our common stock is thinly traded and has substantially less liquidity than the average trading market for many other publicly traded companies. Thinly traded stock can be more volatile than stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained after this offering. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to operating performance. Therefore, our shareholders may not be able to sell their shares at the volume, prices or times that they desire.

 

We cannot predict what effect, if any, future sales of our common stock in the market, or the availability of shares of our common stock for sale in the market, will have on the market price of our common stock. Therefore, we cannot assure you that sales of substantial amounts of our common stock in the market, or the potential for large amounts of market sales, would not cause the price of our common stock to decline or impair our ability to raise capital. Following this offering, we expect to have approximately 10,328,708 shares of common stock outstanding (or 10,628,708 shares of common stock outstanding if the underwriters exercise their over-allotment options in full).

 

The market price of our common stock may decline after the stock offering.

 

The price per share at which we sell our common stock in this offering may be more or less than the market price of our common stock on the date the offering is completed. If the actual purchase price is less than the market price for the shares of common stock, some purchasers in this offering may be inclined to immediately sell shares of common stock to try to realize a profit. Any such sales, depending on the volume and timing, could cause the market price of our common stock to decline. Also, because stock prices generally fluctuate over time, we cannot assure you that you will be able to sell shares after this offering at a price equal to or greater than the actual purchase price. You should consider these possibilities in deciding whether to purchase shares of common stock in this offering and the timing of any sale of those shares after the offering.

 

We have broad discretion as to how we spend or apply the net proceeds of this offering. Our failure to effectively use these proceeds could adversely affect our ability to earn profits.

 

The net proceeds we receive from this offering will become a part of our general funds, and we intend to contribute substantially all of our net proceeds from this offering to our bank to provide it with capital to support continued growth in loans and deposits. We will likely spend portions of the net proceeds in the future for various general corporate purposes. We will have significant flexibility in applying net proceeds, but our failure to apply these funds effectively could reduce our profitability.

 

Our ability to pay dividends is subject to regulatory restrictions, and we may be unable to pay future dividends.

 

Our ability to pay dividends is subject to regulatory restrictions and the need to maintain sufficient consolidated capital. Also, our only source of funds with which to pay dividends to our shareholders is

dividends we receive from our bank, and the bank’s ability to pay dividends to us is limited by its own obligations to maintain sufficient capital and regulatory restrictions. If these regulatory requirements are not satisfied, we will be unable to pay dividends on our common stock. We paid our first two cash dividends on February 24, 2006 and May 25, 2006, and, as we have only paid dividends twice, we cannot guarantee that dividends will not be reduced or eliminated in future periods.

 

Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.

 

We have supported our continued growth by issuing trust preferred securities through two special purpose trusts and accompanying junior subordinated debentures. At March 31, 2006, we had outstanding trust preferred securities totaling $10.3 million. We unconditionally guaranteed payment of principal and interest on the trust preferred securities. Also, the junior subordinated debentures we issued to the special purpose trust that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before we can pay any dividends on our common stock. In the event of our bankruptcy, dissolution or liquidation, holders of our junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, but during that time we would not be able to pay dividends on our common stock.

 

Certain provisions under our articles of incorporation and applicable law may make it difficult for others to obtain control of our corporation even if such a change in control may be favored by some shareholders.

 

In addition to the amount of common stock controlled by our chairman of the board and other principal shareholder as described in this prospectus under the heading “Selling Shareholders,” certain provisions in our articles of incorporation and applicable Virginia corporate and banking law may have the effect of discouraging a change of control of our company even if such a transaction is favored by some of our shareholders and could result in shareholders receiving a substantial premium over the current market price of our shares. The primary purpose of these provisions is to encourage negotiations with our management by persons interested in acquiring control of our corporation. These provisions may also tend to perpetuate present management and make it difficult for shareholders owning less than a majority of the shares to be able to elect even a single director.

 

Our securities are not FDIC insured.

 

Our common stock is not a savings or deposit account or other obligation of the bank, and is not insured by the FDIC’s Deposit Insurance Fund or any other governmental agency and is subject to investment risk, including the possible loss of principal.

 

Some discussions in this prospectus may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution you to be aware of the speculative nature of “forward-looking statements.” These statements are not guarantees of performance or results. Statements that are not historical in nature, including statements that include the words “may,” “anticipate,” “estimate,” “could,” “should,” “would,” “will,” “plan,” “predict,” “project,” “potential,” “expect,” “believe,” “intend,” “continue,” “assume” and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate, they are not guarantees of future performance. Whether actual results will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this prospectus, including the following:

 

 

 

 

 

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. You should refer to risks detailed under the “Risk Factors” section included in this prospectus and in our periodic and current reports filed with the Securities and Exchange Commission for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.

 

We do not intend to and assume no responsibility for updating or revising any forward-looking statements contained in this prospectus, whether as a result of new information, future events or otherwise.

 

The following table shows the calculation of the estimated net proceeds we will receive from our sale of 2,000,000 shares of common stock in this offering at the public offering price of $      per share.

 

 

If the underwriters’ over-allotment options are exercised in full, we estimate that the net proceeds to us will be approximately $     .

 

The net proceeds of this offering will qualify as Tier 1 capital for regulatory purposes and become part of our general funds.

 

We intend to contribute the net proceeds we receive from this offering primarily to our bank to provide it with capital to support its continued growth in its loans and deposits. To the extent net proceeds are not required to support the bank’s growth in loans and deposits, we will use these amounts for general corporate purposes in the execution of our strategic plan.

 

Before we apply any of the proceeds for any of these uses, we will likely invest them in short-term investment securities. The precise amounts and timing of the application of proceeds will depend upon our funding requirements, the funding and capital requirements of the bank, whether we have funds available from other sources that we can use for any of those purposes, and other factors.

 

We will not receive any proceeds from the sale of the shares by the selling shareholders.

 

The following table reflects, as of June 30, 2006, our capitalization and capital ratios, and our unaudited pro forma adjusted capitalization and capital ratios as if this offering had been completed on that date. The information in the table assumes that:

 

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited financial statements and unaudited interim financial statements, including the related financial statement footnotes, that begin on page F-1 of this prospectus.

 

 

 

 

 

 

Our common stock trades on the Nasdaq Global Market under the symbol “ANCX.” The table below sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the Nasdaq Global Market and the dividends declared per share on our common stock. Where appropriate, prices have been adjusted for the effects of stock splits effected in the form of stock dividends during the periods presented. Our common stock began trading on the Nasdaq Global Market in the third quarter of 2004. Prior to that, the stock prices listed reflect the prices paid in the indicated periods in the actual private trades of which our management is aware. There may have been other transactions of which our management is unaware. Due to the limited volume of trading in our common stock, these transactions do not necessarily reflect the intrinsic or market value of the stock at the time they were completed.

 

Share prices set forth below for all periods prior to December 23, 2005, have been adjusted to give retroactive effect to a two-for-one stock split that occurred on December 23, 2005 and for all periods prior to June 1, 2003, have been adjusted to give retroactive effect to a three-for-one stock split that occurred on June 1, 2003.

 

 

On July 17, 2006, the last reported sale price of our common stock on the Nasdaq Global Market was $9.70 per share. At March 31, 2006, there were 8,100,724 shares of our common stock outstanding, held by approximately 350 holders of record.

 

Under Virginia law, we are authorized to pay dividends as declared by our board of directors subject to certain restrictions discussed below. In connection with our announced intention to commence the payment of regular quarterly cash dividends, we paid our first quarterly cash dividend on our common stock on February 24, 2006, and our second quarterly cash dividend on our common stock on May 25, 2006. However, the amount and frequency of cash dividends, if any, will be determined by our board of directors after consideration of our earnings, capital requirements and our financial condition and will depend on cash dividends paid to us by our bank. As a result, our ability to pay future dividends will depend upon the earnings of the bank, its financial condition and its need for funds.

 

There are a number of federal banking policies and regulations that restrict our bank’s ability to pay dividends. In particular, because our bank is a depository institution and its deposits are insured by the Federal Deposit Insurance Corporation, it may not pay dividends or distribute capital assets if it is in default on any assessment due to the FDIC. Also, the bank is subject to regulations that impose certain minimum capital requirements affecting the amount of cash available for distribution to us. The bank is subject to laws and regulations that limit the amount of dividends that it can pay. Under federal law, a bank may not declare a dividend in excess of undivided profits or if, after making the dividend, the bank would be “undercapitalized,” as defined in the federal banking regulations. Also under federal law, a bank may not declare a dividend unless capital surplus equals or exceeds the capital stock of the bank except (i) in the case of an annual dividend, the bank may declare a dividend if the bank transfers ten percent of its net income for the preceding four quarters to capital surplus, or (ii) in the case of a quarterly or semiannual dividend, or any other special dividend, the bank may declare a dividend if the bank transfers ten percent of its net income for the preceding two quarters to capital surplus. In addition, under federal law, a bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the bank in any calendar year exceeds the total of the bank’s retained net income of that year to date, combined with its retained net income of the preceding two years, unless the dividend is approved by the Office of the Comptroller of the Currency. Lastly, under Federal Reserve policy, we are required to maintain adequate regulatory capital and are expected to serve as a source of financial strength to our bank and to commit resources to support our bank. In addition, federal and state agencies have the authority to prevent us from paying a dividend to our shareholders. These policies and regulations may have the effect of reducing or eliminating the amount of dividends that we can declare and pay to our shareholders in the future.

 

We are organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders. See “Supervision and Regulation — Governmental Policies and Legislation — Dividends” and “Description of our Capital Stock — Dividend Policy.”

 

In the future, our ability to declare and pay cash dividends will be subject to evaluation by our board of directors of our and the bank’s operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and other relevant considerations, and we cannot assure you that we will continue to pay cash dividends on any particular schedule or that we will not reduce the amount of dividends we pay in the future.

 

The following table contains summary historical consolidated financial data from our consolidated financial statements. You should read it in conjunction with our audited year end consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this prospectus. Except for the data under “Selected Performance Ratios,” “Asset Quality Ratios,” and “Capital Ratios,” the information at and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, is derived from our audited year end consolidated financial statements and related notes for those respective periods. The information at and for the three months ended March 31, 2006 and 2005 is unaudited. However, in the opinion of our management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the results of operations for the unaudited periods have been made. The information in this table is adjusted to give retroactive effect to a two-for-one stock split that occurred on December 23, 2005, a three-for-one stock split that occurred on June 1, 2003, and a ten-for-one stock split that occurred on June 15, 2001. The operating data for the three months ended March 31, 2006 are not necessarily indicative of the results that might be expected for the year.

 

 

 

 

This section presents management’s discussion and analysis of our financial condition and results of operations. You should read this discussion in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in these forward-looking statements as a result of various factors, including those discussed under the captions “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” This discussion is intended to assist in understanding our financial condition and results of operations.

 

Overview

 

When we commenced operations in late 1999, the core competencies of the personnel and systems we put in place were designed to support the banking needs of small- to middle-market businesses and the private banking needs of affiliated individuals. An essential element of private banking is mortgage banking. Rather than open a new mortgage banking company at the same time we started a de novo bank, we chose to acquire an existing mortgage banking operation. This was a financial and strategic decision that produced several desirable benefits: (1) the mortgage banking operation we acquired was profitable so it could subsidize operating losses of the bank in the early months; (2) the mortgage banking operation facilitated client and asset flow that enabled the bank to scale earning assets more quickly; (3) it brought a larger consolidated employment and revenue base that enabled us to build business infrastructure more quickly than a de novo bank could otherwise accomplish; (4) it allowed us to be more selective in our credit selection as evidenced by the asset quality figures; (5) it required us to develop and maintain more sophisticated liquidity management strategies than typically resident in community banks; and (6) it allowed us to offer a more comprehensive level of private banking to our clients and prospects.

 

The foundational business strategy combined with general economic conditions facilitated strong earnings contribution from our mortgage banking segment, which we refer to throughout as the “mortgage company.” The mortgage company contributed the majority of our consolidated earnings from 1999 through 2003. Heavy investment in the commercial banking platform during the first four years facilitated deliberate and strong growth in our commercial banking bank segment, which we refer to throughout as the “bank.” The bank has contributed the majority of earnings since 2004, and it is our intent for that segment to contribute 70-80% of earnings going forward as a strategic corporate objective. Under this strategic objective, we expect to manage our business so that the mortgage company, together with other fee income oriented businesses that we may enter, will account for the balance of our non-bank earnings.

 

Since 2002, our mortgage origination volume has fluctuated between $733 million and $1.2 billion. Subject to positive and negative seasonal and cyclical conditions beyond our control, we manage this business to fall within a range of $750 million and $1 billion. In the first quarter of 2006, the volume annualizes within this range.

 

Meanwhile, our commercial bank has experienced significant growth. Since the beginning of 2004, loans held for investment increased from $189.3 million to $383.6 million as of March 31, 2006. Deposits have grown more dramatically during the same period from $198.2 million to $423.1 million.

 

Since 2003, the capital required to support our growth has been provided through retained earnings. The company and bank are well capitalized with respect to levels of capital required by their respective regulatory authorities.

 

Overall, the evolutionary business and financial strategy has translated into a positive trend in earnings growth. In our latest fiscal year ended December 31, 2005, net income increased 89% to $5.9 million from $3.3 million reported for the year ended December 31, 2004. In the latest quarter ended March 31, 2006, net income was $1.6 million, an increase of 56.8% over the $1.0 million net income reported for the quarter ended March 31, 2005. The segment contributions during these periods fall within our stated objectives.

Return on average equity for the three months ended March 31, 2006 was 20.01% compared to 15.67% for the same period of 2005.

 

Critical Accounting Policies

 

Our significant accounting policies are set forth in Note 1 of our notes to consolidated financial statements (audited) included in this prospectus. Of these significant accounting policies, we consider our policy regarding the allowance for loan losses to be our most critical accounting policy, because it requires the most subjective and complex judgments by management. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management.

 

Allowance for Loan Losses

 

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principals of accounting: (i) Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.

 

An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. Such evaluation considers among other factors, the estimated market value of the underlying collateral and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see the subsection “Loans” below.

 

Derivative Financial Instruments

 

The mortgage company carries all derivative instruments at fair value as either assets or liabilities in the consolidated balance sheets. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”), provides specific accounting provisions for derivative instruments that qualify for hedge accounting. The mortgage company has not elected to apply hedge accounting to its derivative instruments as provided in SFAS No. 133 as amended. See Notes 1, 10 and 11 of our notes to consolidated financial statements (audited) included in this prospectus for additional information on derivatives.

 

Comparison of Results of Operations for the Three Months Ended March 31, 2006 and 2005

 

Pretax income for the three months ended March 31, 2006 was $2.5 million compared to $1.6 million for the corresponding period of 2005. Net income after taxes for the three months ended March 31, 2006 totaled $1.6 million compared to $1.0 million for the same period in 2005.

 

First quarter income before taxes in 2006 from the bank was $2.3 million compared to $1.6 million for the same period in 2005. Income from the bank increased approximately $730 thousand over the same period last year and accounted for 70% of the increase in earnings. This increase in income is attributable to a focus on commercial lending, increased name recognition and the addition of experienced professional loan officers, all of which expanded our base of business. Earnings were impacted by increased interest expense associated with an increase in short term borrowings and higher interest rates on deposits. Income from the mortgage company was $536 thousand for the three months ended March 31, 2006, compared to $224 thousand for the corresponding period in 2005. This increase was primarily due to the increase in gain on sale of loans in the first quarter of 2006.

In the three months ended March 31, 2006 the bank accounted for 94.9% of the pretax consolidated earnings. The bank is the predominant contributor to growth and earnings. Revenue from the mortgage company is subject to fluctuations as mortgage interest rates change.

 

Basic earnings per common share for the first quarter of 2006 amounted to $0.20 per share, up from $0.13 per share in 2005. Diluted earnings per share for the first quarter were $0.17, up from $0.11 per share in the first quarter of 2005.

 

Interest and fees on loans increased by $2.4 million in the three months ended March 31, 2006 over the same period of 2005, reflecting the $85.1 million increase in loans held for investment from the first quarter of 2005. Interest on investment securities increased $558 thousand due to a $53.5 million increase in investment securities over March 31, 2005. Noninterest income totaled $6.1 million for the three months ended March 31, 2006 compared to $6.2 million for the same period in 2005.

 

Net Interest Income

 

Net interest income, our principal source of bank earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits) used to fund earning assets. During the first quarter of 2006, our net interest margin decreased 6 basis points from 3.20% in 2005 to 3.14% in 2006. The decrease in net interest margin is due to the flat yield curve and increased rates on deposits.

 

Net interest income for three months ended March 31, 2006 increased to $4.1 million compared to $3.2 million for the same period in 2005. Net interest income depends upon the volume of earning assets and interest-bearing liabilities and the associated rates. Average interest-earning assets increased $125.4 million from $398.3 million at March 31, 2005 to $523.7 million in 2006. The increase is attributed to the growth in average loans which increased by $78.2 million and the growth in average investment securities which increased by $46.6 million. The yield on earning assets increased from 5.64% in 2005 to 6.61% in 2006, reflecting an increase in yield on all earning asset categories and the current rate environment.

 

Total interest expense for the first quarter of 2006 increased $2.1 million over the total of $2.4 million for the same period in 2005 as a result of increases in interest-bearing deposits and increased interest expense on borrowings. Total interest-bearing deposits averaged $339.6 million for the period ended March 31, 2006 compared to $241.6 million for the period ended March 31, 2005. Borrowed funds for three months ended March 31, 2006 averaged $107.3 million compared to $73.9 million for the corresponding period in 2005. The increase in deposits and borrowings funded the growth in earning assets. The average cost of interest-bearing liabilities at March 31, 2006 was 4.07%, up 98 basis points from March 31, 2005.

The following table presents an analysis of average interest-earning assets and interest-bearing liabilities, the interest income or expense applicable to each asset or liability category and the resulting yield or rate paid.

 

Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities