Highlights 2010 T h e N at i on a l C a p i ta l Ba n k of Wa s h i n g t on
(Dollars in thousands, except per share data)
Net Income Earnings Per Share * Cash Dividends Paid Per Common Share
$3,798 13.09 6.72
$3,214 11.02 6.72
18.17% 18.78% 0.00%
1.20% 10.17% 3.98% 50.80%
1.18% 8.90% 4.05% 54.67%
1.69% 14.27% -1.73% -7.08%
$315,262 306,526 243,295 262,381 60,421 201,960 14,733 37,331
$272,839 265,068 210,031 222,952 55,572 167,379 13,037 36,137
15.55% 15.64% 15.84% 17.68% 8.73% 20.66% 13.01% 3.30%
$334,438 326,673 258,091 1,500 282,672 64,572 218,100 14,796 36,703 287,652
$298,562 288,787 228,675 1,140 251,226 57,406 193,820 10,551 36,532 291,784
12.02% 13.12% 12.86% 31.58% 12.52% 12.48% 12.53% 40.23% 0.47% -1.42%
Common Stock, Per Share: Book Value Market Price
* Average Shares Outstanding
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
Average Shareholders’ Equity to Average Assets at Year-end Shareholders’ Equity to Assets at Year-end
Management is very pleased to report that 2010 was an excellent year for The National Capital Bank. Our 121st year of service was in many respects the most successful in our entire history. Your Bank managed to achieve record earnings combined with doubledigit growth in loans, deposits and total assets. Yet our success this year should not come as a surprise. When facing external adversity, the companies with the best fundamentals usually outperform the competition, and our steadfast reliance on this principle has resulted in a stellar performance. Overall growth was close to the maximum we could absorb while maintaining the excellent capital ratios which have become our hallmark. We welcomed new customers in record numbers thanks to the publicâ€™s realization that our singular reputation for financial stability made us the best choice during these uncertain times -- over one thousand accounts were opened. More people every day are realizing that community banks such as ours offer a safer and friendlier alternative to the Mega Banks. In our case, they also feel good about NCBâ€™s contributions to neighborhood initiatives and non-profits. Â In fact, of all the distinctions we received this year, the awards from the Capitol Hill Chamber of Commerce (CHAMPS) for community service and the civic leadership award from the Capitol Hill Group Ministry were most gratifying. National Capital Bank has always been generous in support of our communities by volunteer efforts as well as donations to organizations such as the Capitol Hill Community Foundation, Barracks Row Main Street, Rotary Clubs, S.O.M.E., Ready, Willing & Working, Capitol Hill Village, the George Didden, III Memorial Shakespeare at School Project and St. Francis Xavier Seniors Program, just to name a few. We rely on their demonstrated expertise to distribute the funds where they are most needed. In 2010, we donated over a quarter of a million dollars to over fifty non-profits. It was indeed an honor to be associated with and be recognized by these community partners. We have also committed significantly to the foundation and development of the Hill Center located at 9th Street and Pennsylvania Avenue, S.E. Formerly the Old Naval Hospital, authorized by President Lincoln in 1864 to treat sailors and marines during the
Civil War, the structure had fallen into severe disrepair. When the painstaking renovation is complete sometime in mid 2011, the Hill Center promises to be a centerpiece for education and community life on the “Hill.” Our discernment in recognizing such future promise and committing ourselves to it comports with our success as your community bank. With the publication of this annual report, we rededicate ourselves to a strong future, both yours and ours, as we continue to expand our winning partnership. Management is steadfast in our mission to make the future a better place for all of us in the areas we serve.
Richard A. Didden, Chairman & CEO James M. Didden, President
We invite you to review “Management’s Discussion of Operating Results” on pages 11-13 for a detailed narrative of financial performance, or if you prefer to examine the numbers in summary form, please see our “Highlights” section in the front.
Melvin Chase & Deacon Ira Chase Melvin Chase has been banking with The National Capital Bank for as long as he can remember. Mr. Chase’s mother, Wilhelmina McMillan, opened savings accounts at NCB for her two sons around 1945, after their father died in WWII. Growing up, National Capital Bank was the only bank Mr. Chase and his brother knew, and he can still recall taking trips with his mother and brother to make deposits at the Bank, which was only a few blocks away from their Capitol Hill home. “People always ask me, ‘Are you still banking with that little bank?’ and I tell them, ‘Yes.’ The National Capital Bank and its employees have always been professional, friendly and helpful in all of my banking needs. I refer friends and family to the Bank all the time.”
“I refer friends and family to the Bank all the time.”
Central bankers have the prerogative to raise interest rates sharply to halt rising prices, but they can only cut interest rates to zero. When a zero interest rate target isn’t enough to stimulate a faltering economy, they have to become creative in order to put more money into circulation. When he was a Fed governor, Bernanke said “…The U.S. government has a technology, called a printing press…that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” This is, of course, the strategy underlying the new round of “Quantitative Easing” (QE2) -- to drive up the prices of longer term bonds which, in turn, will push down long term interest rates. Politicians refer to this practice as “monetizing debt.” We who have been in this business a long time know that the pernicious consequences of free money are severe. In fact, we need look no farther back than 1990 when Japan adopted similar policies which led to their “Lost Decade” of economic stagnation. Albert Einstein said, “We cannot solve problems with the same thinking we used when we created them.” Yet
Congress continues to emphasize stop gap measures which avoid dealing with a debt that promises to bankrupt future generations. U.S. Government debt is now $14 trillion -- $45,300 for every person in the country. According to a recent IMF report, this debt will be larger than the entire U.S. economy by the end of 2012. Fifteen million homeowners are estimated to owe about $770 billion more on their homes than they are presently worth. Many municipalities have no means to repay their monetary obligations. The average American taxpayer hasn’t been taught to comprehend the severity of the problem. We are convinced that significant tax reform together with painful and unpopular cuts in entitlements, phased in as the unemployment picture slowly brightens, offer a partial solution to our crises. However, these measures will neither be enough to significantly reduce our nation’s accumulation of massive debt nor spur job creation. The authors of the Dodd-Frank Act (DFA) are guilty of promoting a potpourri of unsavory compromises that will do little to fix the problem of bank bailouts and absolutely nothing to remedy the “too big to fail” pitfall. Enactment of this 2,400
Nicky and Steve Cymrot, Shareholders Nicky and Steve Cymrot have been shareholders of National Capital Bank for many years, and they first started doing business with the bank in the 1980s. “One of the reasons that we enjoy banking here is that you know your banker. And in the case of National Capital Bank, you know everyone.” The National Capital Bank’s record of safety and stability is important to the Cymrots. “We have complete confidence in National Capital Bank and we look forward to continuing our relationship for many years to come.”
“We have complete confidence in National Capital Bank.”
The Phillips Family When Noah Phillips and his wife moved to Capitol Hill in 2010, they were interested in banking close to their new home. “We were looking for a small, local bank that was sensitive to the needs of customers.” Many of the banks around the Phillips’ home were branches of large, national chains, which did not appeal to them. “I am still getting used to the fact that I can call the bank and have a real person pick up the phone; it’s a new experience in banking for me,” said Mr. Phillips. “My wife and I have found the bank that is right for us, right here near our home. They have a way of doing things that just works better.”
“My wife and I have found the bank that is right for us, right here near our home.”
page legislation will impose massive new regulatory burdens on banks such as ours and will be impossible to fairly enforce. Its most glaring error was one of omission when it failed to address the fate of Fannie Mae and Freddie Mac. These Government-Sponsored Enterprises (GSEs) own or guarantee approximately $5 trillion in U.S. home loans outstanding. U.S. taxpayer liability from their collateralization of risky and fraudulent mortgages is enormous, but by conveniently overlooking it, the debt caused by its slipshod practices ($134 billion to date and climbing) does not even appear as a liability on the Fed’s books. Closer to home, our local economy remains relatively resilient to most downtrends, although promised cuts in local government spending will certainly have a negative impact. However, by adhering to the fundamentals of the past, healthy earnings and moderate growth for National Capital Bank during the coming year is a strong possibility. We intend to expand our relationships and seek new ones based on our reputation for service excellence rather than discount pricing. Our faith in the communities we serve is crucial, and we will continue to take community outreach responsibilities seriously as well.
2011 would normally represent a strategic planning year where we thoughtfully engineer our best plans for the next three to five years. However, we have decided to postpone this event until 2012 because the lack of guidance in the Dodd-Frank legislation promises to handcuff prudent planning. Be assured that we will continue to set financial as well as growth goals in the meantime and align them to the needs of our existing and future customers. More importantly, you may be certain that a major principle in all of our planning will be to continue and where necessary, improve upon policies that support and celebrate the communities we serve. We at The National Capital Bank will always proudly think of ourselves as your community partner.
Richard A. Didden Chairman & CEO
James M. Didden President
William “Bill” Canter William Canter was shopping around for a new bank when he stumbled upon National Capital Bank’s Friendship Heights branch. Mr. Canter sat down with Fatima Fonseca at the branch and took time to interview her about the Bank. “The fact that they only had two locations was a plus, not a minus for me. It was also so impressive that the people at the branch had been working there for years; we’ve gotten to know them each by name.” That was almost ten years ago, and the Canters have been banking with The National Capital Bank ever since. “If I ever had to change banks in the future, I know I would greatly miss the sense of security and personal ties that I have with NCB,” said Mr. Canter.
“Speaking personally with the Bank’s president really reinforced the Bank’s customer relations philosophy and shows that they understand their customers.”
Main Office Management
Friendship Heights Office
Personally Yours At National Capital Bank, our customers tell us that what sets us apart from the competition is truly personal service from trusted banking professionals.
For 121 years, weâ€™ve been serving community needs through our knowledgeable and trusted
staff. The Management and Teller teams at our main office are known for their ability to provide practical solutions and sound advice. In addition, the Friendship Heights branch has earned a reputation in the community for offering exemplary service as well as being a good neighbor.
Nine of the Bankâ€™s employees have worked here for more than 30 years - you canâ€™t keep personnel
for that long without a culture that truly supports its staff as well as its customers. The management of The National Capital Bank is truly grateful for all of the members of our banking family.
NCB was awarded the 2010 Hilly Award for community service.
NCB in the
Community Founded in 1889 by local business leaders
who recognized a need for a neighborhood bank, NCB now tends to the needs of
the communities we’ve served for over a century. The Bank supports local schools and charitable organizations and has Several of National Capital Bank’s team members volunteered on September 25 at the annual Barracks Row Fall Festival.
been instrumental in the founding of the Barracks Row revitalization and the creation of the Capitol Hill Business Improvement District. NCB is not only a supporter of the Capitol Hill Association of Merchants and Professionals (CHAMPS) but also a founding member of the association. In 2010, National Capital Bank supported approximately 50 organizations with over $250,000 in contributions. The images on this page
NCB made a significant donation to our friends, Trees for Capitol Hill. The donation was presented on November 6 at Trees for Capitol Hill’s annual tree planting ceremony.
represent some of our involvement.
Managementâ€™s Discussion of Operating Results
Total Assets increased to $334.4 million from $298.6 million at the end of last year. This 12.02% increase reflected solid performance across the board and will enhance shareholder value in the future.
Operating in an environment of historically low rates was quite a challenge, but with the expert assistance of our Board of Directors, we were able to balance the opposing forces of risk and return to produce a safe, strong and profitable year for our shareholders. Management responded to the mission with a professional enthusiasm and esprit de corps, convincing us once again that our staff remains the best in the industry.
Your Board was again very pleased with the results of the examination conducted by our regulator, the Office of the Comptroller of the Currency. However, in response to well-publicized banking woes, examiners have tended to micromanage even historically successful banks such as ours. We do our best to understand their bureaucratic concerns, and we will continue to cooperate with their suggestions, even though we are convinced that their demands are often unrealistic and result in unnecessary labor expense and overly complex policies. Penalizing well-managed banks such as ours because of the loose underwriting standards and lack of compliance prevalent in relatively few financial institutions is, in our opinion, a short-sighted overreaction. Instead of punishing all banks for the sins of a few, the regulators should expend more of their resources on the troubled sector and leave the thumbscrews behind when conducting exams of healthy banks.
Management is pleased to state that the accompanying report audited by Yount, Hyde & Barbour, P.C., for the year ending December 31, 2010, shows continued strong progress in most areas of your Bank. Close attention to expenses combined with significant increases in both loan and deposit volumes contributed to record results. The increase in loan volume was primarily in owneroccupied real estate loans and lines of credit for our commercial borrowers. Weâ€™re pleased to assure you that every loan on our books is performing well despite the soured economy. In fact, net charge-offs for the last 12 months (excluding credit card write-offs) amounted to only $59,000 on a total loan portfolio of $258 million.
Managementâ€™s Discussion of Operating Results
Deposits & Repurchase Agreements
Total non-interest income exceeded 2009 by $106,749 (+3.98%), primarily because of a 43.37% increase in Investment Department income. Non-interest expenses were up a modest 4.32% ($342,684). Salaries and benefits accounted for the largest increase at $263,451 (6.07%).
Total deposits, including repurchase agreements, increased 13.63% or $35.7 million over last year. We are heartened that our marketing efforts make us an attractive alternative to the customers fleeing the impersonal, fee-gouging and ethically-challenged institutions. Our experience shows that an overwhelming majority of
Interest on loans was higher by $1,343,396, or 12.28%, reflecting higher volume even though rates were at historic lows. On the other hand, interest expense was only up by $42,556 or 3.25% despite a significant rise in deposit account balances. Management was required to pay special attention to a Net Interest Margin (NIM) that slipped from 4.05% in 2009 to 3.98% this year. However, this reduction in NIM remained well below the national average. As a result, an increase of net interest income of $1,464,732 or 13.66% was generated. After a robust contribution to our loan loss reserve, which amounted to a 188% increase over last year, net interest income after the provision for loan losses was $1,178,743, or 11.15% higher than last year.
The Bankâ€™s securities portfolio remains very conservatively managed with U.S. Treasury and U.S. Agency obligations. No serious impairments exist in the portfolio, however; at year-end it showed an unrealized loss of approximately $1 million, primarily because the ten year Treasury Note yield spiked in late December. Those paper losses have since abated somewhat.
prospective customers, when given a chance to compare our charges to those of other banks, realize that they will save significant money and receive much better service at National Capital. Our principles and policies are a major factor in attracting a host of new non-profit organizations and commercial accounts as well.
Gross loans evidenced a strong 12.86% growth of $29.4 million from the end of 2009 to $258 million this year. Increases were seen in each of our loan categories with commercial, real estate, installment and home equity loans showing the largest. Due to this robust growth and the uncertain state of the economy, Management and the Board added $437,764 to fortify the reserve for loan loss. Our loan loss reserve account stood at $1,500,000 at year-end, a modest 0.58% of loans outstanding but commensurate with our historical loan loss record. The total loan portfolio shows a mix of 54% fixed rate and 46% in variable and adjustable rate assets.
The Board’s goal, that NCB remain one of the very strongest financial institutions in the nation, is reflected in our ratios. We trust that our shareholders recognize that our Capital to Assets leverage ratio, standing at 11.84% on December 31, 2010, assures that your Bank remains in an elite top tier for capital strength. Building on this, management is eager to improve long-term shareholder value, and all major decisions in the future will take that into consideration. For example, we recently installed Remote Branch Capture technology
We cannot over-emphasize the contributions of the Executive Committee members who assist us in operating the Bank on a weekly basis. Chairman Bob Donohoe, with the expert assistance of Vince Cleary and Bob Comstock, draw on their collective tenure of over 65 years at NCB to make sure that we remain efficiently on course without sacrificing shareholder value. The entire Board of Directors deserves our thanks for another year of thoughtful, pragmatic policies that we will continue to utilize to keep National Capital Bank safe, sound and growing. We recognize that the burgeoning regulations demand a greater sacrifice of our Directors’ valuable time, yet these men and women continue to deliver quality advice and recommendations without complaint.
Net income after taxes amounted to $3,798,314, the highest in our history, and a remarkable 18.17% ahead of last year. The Board was able to maintain our dividend at $6.72 per share because of this solid performance. Dividend payments represented a generous 51.26% of net income. Even though our capital accounts took a $1 million hit due to a planned stock repurchase in July, which retired 4,132 common shares, we were able to augment undivided profits by $877,291 or 2.53%. Total capital accounts amounted to $36,702,848 at year-end.
that removes a heretofore major impediment to our expansion plans. We also now offer electronic statements that not only offer a great convenience to our customers but allow us to achieve significant cost reductions in postage, hardware, printing and personnel. The Board’s Business Development Committee, chaired by Art Monk, performed admirably in successfully rolling out and promoting “eStatements.” So far, the penetration results are far beyond our projections.
The cost of benefits, especially health insurance, continues to burden our institution, as it does all employers. Total benefit expenses increased by $51,317 or 9.01% over last year, despite our best efforts to contain costs. Main Office rental and parking incomes showed a modest increase.
Adjusted Share Price
2010 Board of Directors EXECUTIVE COMMITTEE
Seated: Richard A. Didden, Vincent D. Cleary Standing: James M. Didden, Robert F. Comstock, Robert B. Donohoe, Chmn.
VINCENT D. CLEARY Chairman of the Board Cantwell-Cleary Company, Inc. ROBERT F. COMSTOCK Attorney at Law 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. Chairman of the Executive Committee WILLIAM J. DURKIN Attorney at Law JAMES A. MONK Chairman and President Good Samaritan Foundation GEORGE T. PEDAS Attorney at Law JAMES PEDAS Co-Owner Circle Management
WILLIAM T. PEDAS Vice President Circle Management DOROTHEE D. RIEDERER Investor HEMAN M. WARD Real Estate Development REV. WESLEY S. WILLIAMS, JR. LLD President and Co-Chairman Lockhart Companies Inc.
INDEPENDENT AUDITORâ€™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, 2010 and 2009, and the related statements of income, changes in stockholdersâ€™ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Bankâ€™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, 2010 and 2009, 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.
Winchester, Virginia February 16, 2011
Less: Reclassification adjustment net of tax ($24,716)
($6.72 per share)
($6.72 per share)
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies
Nature of Operations: The National Capital Bank of Washington (the Bank) operates under a national bank charter and provides full banking services principally to customers in the Washington, D.C. metropolitan area. As a national bank, the Bank is subject to regulations of the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. Management uses available information to recognize losses on loans currently, while future additions to the allowance may be necessary based on changes in economic conditions. In addition, there are inherent risks and uncertainties related to the operation of a financial institution, such as interest rate risk. The possibility exists that because of changing economic conditions, unforeseen changes could occur and have an adverse effect on the financial position of the Bank. Investment Securities: Debt and equity securities are segregated into the following three categories: trading, held-tomaturity, 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, 2010 and 2009, the Bank did not hold any trading securities. Securities classified as held-to-maturity are accounted for at amortized cost and require the Bank to have both the positive intent and ability to hold these securities to maturity. Securities not classified as either trading or held-tomaturity are considered to be available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported, net of taxes, in accumulated other comprehensive income until realized. Realized gains or losses on the sale of securities are reported in earnings and are determined using the adjusted cost of the specific security sold. Interest income is accrued on the investment’s face value. Purchase premium and discounts are recognized in interest income using the interest method over the term of the securities. 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 entity 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 entity does not intend to sell). The Bank does not have any securities impairment that is considered “other than temporary” at December 31, 2010 and 2009. 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, 2010 and 2009. Loans are considered past due when the borrower is not current with their payments in accordance with the contractual terms of their loan agreement.
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 also classified as impaired, a specific allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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 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). As of and during the year ended December 31, 2010, the Bank had one residential loan that was considered impaired; however, due to the abundance of collateral no specific reserve in the allowance was necessary. As of December 31, 2009, the Bank did not have any impaired loans. There were no changes in the Bank’s allowance for loan loss methodology during 2010. Credit Quality Information: 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 independently by an independent loan review performed on a quarterly basis.
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
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, 2010 and December 31, 2009 were current. As of December 31, 2010, the Bank had only one residential loan that was rated as substandard. The remainder of the portfolio was rated pass. All loans in the Bank’s portfolio were rated pass as of December 31, 2009. 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, 2010 and 2009. Premises and Equipment: Land is carried at cost. Property and equipment are stated at cost, less accumulated depreciation, which is computed on the straight-line method over the estimated useful lives of the assets, which range between 3 and 31 years. Maintenance and repairs of property and equipment are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of premises and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in noninterest income and noninterest expenses, respectively. Foreclosed Assets: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. As of and during the years ended December 31, 2010 and 2009, 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.
The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
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 $158,951 and $177,731 at December 31, 2010 and 2009, 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 â€“ 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 $9,616,000 and $3,983,000 at December 31, 2010 and 2009, 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. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Reclassifications: presentation.
Certain 2009 balances have been reclassified to conform to the 2010 financial statement
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 1.
Nature of Banking Activities and Significant Accounting Policies (Continued)
Recent Accounting Pronouncements: In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (ASU) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 was effective for transfers on or after January 1, 2010. The adoption of the new guidance did not have a material impact on the Bank’s financial statements. In January 2010, the FASB issued 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, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand 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 will become 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 rollforward and modification disclosures, will be required for annual periods beginning on or after December 15, 2010. The adoption of the new guidance did not have a material impact on the Bank’s financial statements. In January 2011, the FASB issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities, as defined by the FASB. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for annual periods ending after June 15, 2011.
The National Capital Bank of Washington Notes to Financial Statements Note 2.
Investment securities are summarized as follows at December 31:
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 2.
Investment Securities (Continued)
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. As of December 31, 2009, U.S. Treasury & Agency Obligations with a fair value of $18,836,620 had gross unrealized losses of $169,234. These securities had been in a continuous loss position for less than twelve months. All other securities have gross unrealized gains. As of December 31, 2010 and 2009, the Bankâ€™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, which may be 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, 2010, 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.
Investment securities with an amortized cost of $59,719,437 and $43,482,225 and fair market value of $58,716,549 and $43,625,258, were pledged to secure repurchase agreements and for other purposes as required or permitted by law at December 31, 2010 and 2009, respectively.
The National Capital Bank of Washington Notes to Financial Statements Note 3.
Loans receivable consisted of the following at December 31:
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 debtorsâ€™ 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:
There were no loans past due over 90 days and still accruing interest, nonaccrual loans, or troubled debt restructurings as of December 31, 2010 and 2009. At December 31, 2010, there were two residential real estate loans related to one borrower with a total balance of $2,634,000 that were classified as impaired and internally rated as substandard. These loans were current as of December 31, 2010. Due to the value of the underlying collateral, there is 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. There were no nonaccrual loans, impaired loans, adversely classified loans, or loans past due in excess of 30 days as of December 31, 2009.
Financial Report The National Capital Bank of Washington Notes to Financial Statements
Premises and Equipment
Premises and equipment are comprised of the following at December 31:
Deposits as of December 31, are summarized as follows:
At December 31, 2010, the scheduled maturities of certificates of deposit are as follows:
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 $14,796,253 and $10,550,686 at December 31, 2010 and 2009 mature within one to ninety days from the transaction date and are secured by U.S. Government securities with a fair value of $37,617,053 and $43,625,258 at December 31, 2010 and 2009, respectively. The weighted average interest rate on these agreements was .10 percent at December 31, 2010 and December 31, 2009. 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 2010, 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 2010 and 2009, 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, 2010 or 2009. 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 $124,402 and $103,987 for the years ended December 31, 2010 and 2009, respectively. Note 9.
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, 2010, the Bank’s retained earnings available for the payment of dividends was $4,533,373. 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.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 Capital (as defined in the regulations) to riskweighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2010 and 2009, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2010, 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.
Financial Report The National Capital Bank of Washington Notes to Financial Statements Note 10.
Regulatory Matters (Continued)
The Bankâ€™s required and actual capital amounts and ratios are set forth in the following table:
The National Capital Bank of Washington Notes to Financial Statements Note 11.
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 2007. The provision for income taxes consists of the following for the years ended December 31:
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:
The tax effects of items comprising the Bankâ€™s net deferred tax assets (liabilities) at December 31 are as follows:
Financial 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 modelbased valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).
The National Capital Bank of Washington Notes to Financial Statements Note 12.
Fair Value Measurements (Continued)
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:
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-downs of individual assets. The following describes the valuation techniques used by the Bank to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements: Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable businessâ€™ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income. The Bank had no impaired loans with a valuation allowance as of December 31, 2010 and 2009. Other Real Estate Owned (OREO): OREO is measured at fair value based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if an appraisal of the real estate property is over two years old, then the fair value is considered (Level 3). The Bank had no OREO as of December 31, 2010 and 2009.
Financial 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, 2010 and 2009 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2010 and 2009. The fair value estimates presented below are based on pertinent information available as of December 31, 2010 and 2009. 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.
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 onbalance-sheet instruments. The contract amounts of these financial instruments at December 31 are as follows:
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. 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, 2010 and 2009, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
Financial 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, 2010 and 2009, these loans totaled $9,599,000 and $8,929,000, respectively. In addition, the Bank held deposits of $18,093,000 and $11,954,000 from officers and directors at December 31, 2010 and 2009. Note 16.
Concentrations of Credit
All of the Bankâ€™s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bankâ€™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.
The Bank evaluated subsequent events that have occurred after the balance sheet date, but before the consolidated 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 16, 2011, 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 unaudited consolidated financial statements.