UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number: 000-49976
ALLIANCE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
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VIRGINIA
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46-0488111
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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14200 Park Meadow Drive, Suite 200 South, Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)
(703) 814-7200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $4.00 par value per share
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The NASDAQ Stock Market LLC
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Title of each class
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Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit and post such
files).
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Yes
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No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
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The aggregate market value of Alliance Bankshares Corporation common stock held by non-affiliates as of June 30, 2011 was $23,855,189 based on the closing sale price of $4.90 per common share.
The number of shares of common stock outstanding as of April 10, 2012 was 5,109,969.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report will be included in an amendment to this annual report on Form 10-K filed on or before April 30, 2012.
TABLE OF CONTENTS
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PART I.
Item 1.
Business
GENERAL
Alliance Bankshares Corporation (Bankshares or the Company) is a Virginia bank holding company that conducts substantially all its
operations through its subsidiaries. Alliance Bank Corporation (the Bank) is state-chartered in Virginia and a member of the Federal Reserve System. The Bank places special emphasis on serving the needs of individuals, small and medium size
businesses and professional concerns in the greater Washington, D.C. Metropolitan area, primarily in the Northern Virginia submarket.
On November 15, 2005, the Bank formed Alliance Insurance Agency (AIA) through the acquisition of Danaher Insurance Agency. AIA was a wholly-owned subsidiary of the Bank and sold a wide array of
insurance and financial products. In 2006 and 2007, AIA acquired two additional insurance agencies. The combined AIA operations offered insurance products in the Alliance trade area. On December 29, 2009, the Bank sold AIA and no longer offers
insurance products.
On June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a
subsidiary of Bankshares, was formed for the purpose of issuing Bankshares trust preferred debt.
EMPLOYEES
As of December 31, 2011, Bankshares and its subsidiaries had a total of 58 full-time employees. Bankshares considers relations with
its employees to be reasonable and effective. None of our employees are covered by any collective bargaining agreements.
COMPETITION
Bankshares faces significant competition for loans and deposits, including title and escrow deposits. Competition comes
from other commercial banks, savings and loan associations, savings banks, mortgage bankers, broker/dealers, investment advisors and other institutions. We emphasize specialized customer service and advanced technology, establishing long-term
customer relationships and building customer loyalty by providing products and services designed to address the specific needs of our customers.
The severe economic downturn experienced over the past few years and current economic conditions have increased the competition to attract valuable clients. In addition, the changing complexion of local
community banks and migration of bankers within the region is creating greater competitive pressure on the Bank. Our customer service team, relationship managers and senior bankers remain focused on delivering high quality service along with
competitive products to meet or exceed the needs of our clients within our targeted market niches.
It is possible that
current and future governmental regulatory and economic initiatives could further impact the competitive landscape in the Banks markets. Because federal regulation of financial institutions changes regularly and is the subject of constant
legislative debate, we cannot foresee how federal regulation of financial institutions may change in the future.
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LENDING ACTIVITIES
Credit Risk Management.
Our credit management vision is based on the belief that a sound shared credit culture within the Bank, the application of well-designed policies and procedures, and
a long term view are the ingredients that will result in superior asset quality and consistent and acceptable growth. Our business model contains key assumptions that superior asset quality and consistent, acceptable profitability are significant
drivers to maximizing shareholder value. We will not sacrifice asset quality to meet growth objectives, nor permit opportunities to lead to concentrations of risk that are inappropriate or contain excessive risk. The economic slowdown that developed
into a deep recession with ongoing adverse economic effects has had a negative impact on our performance. As positive economic and business factors emerge, we still remain true to our core business values and maintain a diligent focus on asset
quality. We employ a number of business processes to manage risk in our loan portfolio. These include the loan underwriting and approval process, our exposure management process, loan management and the independent loan review. While no set of
processes or procedures can eliminate the possibility of loss, we believe that each of these processes contributes to the quality of our risk management activities.
Loan Underwriting and Approval Process.
Loan requests are developed by our relationship managers who work directly with our customers. Relationship managers are responsible for understanding
the request and will make an evaluation to ensure that the request is consistent with our underwriting standards and risk tolerance. Depending on the complexity of the transaction, additional support is provided by a credit analyst who provides an
independent analysis of the financial strength of the borrower and the underlying credit-worthiness of the transaction.
We
utilize both a signature system and a committee system for approving loans. Relationship managers are given credit authority commensurate with their experience and demonstrated knowledge and ability. The maximum individual authority of any
relationship manager is $250,000. Loans from $250,000 to $1.0 million require an approval or a second signature of the Chief Lending Officer, Chief Credit Officer, or President.
Loans in excess of $1.0 million are considered by our Management Loan Committee, which consists of the senior relationship managers,
Credit Administration Manager, the President and the Chief Lending Officer. Relationships with total requirements of $2.5 million or greater require approval by our Directors Loan Committee of the Board of Directors. In determining the actual level
of required approval, all direct and indirect extensions of credit to the borrower are considered.
Exposure Management
Process.
We utilize a 10-point rating system for our commercial and real estate credit exposures. The vast majority of our loans falls into the middle range of risk ratings and carry what we consider to be ordinary and manageable business
risk. A risk rating is assigned during the underwriting process and is confirmed through the approval process. Further, the risk rating of a loan in the portfolio is reviewed throughout the life of the loan based on its performance and risk profile
as determined via periodic review. This risk rating influences our decision about the overall acceptability of the loan given our overall portfolio risk and also may influence our decision regarding the sale of a participation in the loan. As part
of the systematic evaluation of our loan portfolio, when a loan risk rating increases to a 7 or above (special mention, substandard, doubtful or loss) it is considered for impairment analysis. As part of this process, our credit management team also
prepares an analysis of all loans determined to be impaired. The watch list, impaired loans, non-accrual loans and Other Real Estate Owned (OREO) inventory is presented to our Directors at our monthly Board meetings.
Portfolio diversification and business strategy are key components of our process. On a monthly basis, our Board reviews the total
portfolio by lending type. Exposure ranges are established at least annually and are reviewed monthly as a percentage of risk-based capital for each lending type. Business
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strategies are considered and adjusted based on current portfolio amounts and our perceptions of the market. A number of factors are considered which result in strategies to expand, attract,
maintain, shrink or disengage categories within our portfolio. At the present time, our business plan continues to call for shrinking our exposure to certain construction categories and land loans. In addition, we continue to evaluate the risk
profile of certain of our residential real estate categories, in particular Home Equity or HELOC products, to determine if more restrictive underwriting standards remain appropriate.
The Board-approved exposure ranges developed by us reflect our desire to build an appropriately diversified loan portfolio. We consider
market opportunities, the overall risk in our existing loans, and our expectations for future economic conditions and how they together may impact our portfolio. We then establish guidelines for what we believe are appropriate amounts in each
category of loans. The guidelines are reviewed frequently for changing market conditions and the desire to adjust the Banks risk profile.
The Board of Governors of the Federal Reserve System (the Federal Reserve) has published commercial real estate guidelines for all institutions that are a function of regulatory capital. The guidelines
are commonly referred to as the 100% / 300% guidelines. These guidelines call for enhanced management and risk controls for real estate lending when exposures are in excess of the suggested regulatory guidelines. Our current exposure ranges have
been established with reference to these guidelines relating to commercial real estate lending, as well as our view of real estate related lending in the current economic environment. The Banks current exposures within these specified
categories are within the Federal Reserves recommended guidelines relative to regulatory capital
Participations are
also a part of our risk exposure management process. We seek participants even for loans that we find acceptable and within our policy guidelines in order to spread the risk and maintain the capacity to handle future requests from the same borrower.
From time to time, we may also purchase participations from institutions we believe share our commitment to strong underwriting standards. In general, management will operate the Bank as a net seller of loan participations.
Loan Management.
Commercial and real estate loans require a high degree of attention to monitor changes in cash flows and
collateral values. The primary responsibility for ensuring that loans are being handled in accordance with their terms and conditions rests with the relationship manager, supported by a credit analysis department and a loan operations group. We
obtain and review regular financial reports from our borrowers to evaluate operating performance and identify early warning signs of increasing risk. Our culture encourages the early reporting of problems so that they can be addressed in a timely
and manageable manner. Identification of increased risk results in an increased risk rating, more frequent management review and possible remediation to include requiring additional collateral or identification of alternate sources of repayment.
When feasible, we also seek to increase the interest rates to reflect the higher risk and provide an incentive for borrowers to explore all alternative financing sources. Adversely rated credits are reviewed monthly with the Banks Board of
Directors.
Management of construction loans includes regular on-site inspections by Bank-engaged inspectors to ensure that
advances are supported by work completed. Regular title updates are obtained to protect against intervening liens. A periodic evaluation is done to ensure that there is sufficient loan availability remaining to complete a project. Information
regarding current sales and/or leasing is documented by relationship managers.
Commercial real estate loans are generally
managed on a monthly basis based on receipt of regular principal and interest payments. Operating statements and updated leasing information are collected regularly, but at least annually. This information is analyzed to determine the ongoing
soundness of the credit. Our general practice is to perform a site visit at least annually to visually inspect our collateral.
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Smaller consumer and business loans, most of which require monthly payments of principal and
interest, are managed primarily based on their payment record. As long as monthly payments are made in a timely manner, we spend only a nominal amount of time to oversee the portfolio. Past due reports are reviewed on a weekly basis and appropriate
action is determined based on the level of delinquency and the collateral supporting the credits.
Starting in late 2007, we
undertook a variety of real estate lending studies. These studies focused on products and loan types that appear to have caused risk within our lending portfolio as well as certain loan types that we view as having higher degrees of risk in the
current economic environment. The results of the studies have led to elimination of certain loan products such as higher loan-to-value (or LTV) HELOC loans, tighter lending standards and a change in our credit risk appetite for certain lending
products.
We regularly monitor portfolio asset quality trends as well as trends within specific loan categories to anticipate
changes in risk profiles (by loan type) as well as shifts in risk concentration (amongst the loan type categories). To the extent we determine that shifts in risk and/or concentration either have occurred or are anticipated, additional studies may
be undertaken which could lead us to modify our strategic and tactical approaches. We believe market conditions related to certain real estate lending segments remain challenging and we believe our current lending standards for new loan originations
reflect current market conditions.
Independent Loan Review.
At least annually, we employ the services of an
independent company to assess our lending operations. The outside review firm evaluates our underwriting processes to ensure that we are performing an appropriate level of due diligence by independently selecting a sample of loans for review. Each
loan that is chosen as part of the sample has the Bank-assigned risk rating evaluated. The quality of individual loans is evaluated to ensure that we have fairly described the risks inherent in the specific transaction. The review team is directed
to evaluate whether we are administering loans in accordance with our policies and procedures. An evaluation is performed on our remediation plan used to identify problem loans. The reviewer evaluates the adequacy of specific reserve allocations on
impaired credits and the appropriateness of the process and documentation of our overall allowance for loan losses.
We report
the results of the independent loan review activities to the Audit Committee of the Board of Directors and to the Banks Board of Directors. We consider any process improvement recommendations from the independent loan review team and address
each recommendation with a suggested action plan. We are not aware of any material differences in the evaluation of individual loans between management, the Banks Board of Directors and the independent company regarding specific loans, loan
policies or credit administration.
Lending Limit.
At December 31, 2011, our legal lending limit for loans
to one borrower was $6.48 million. As part of our risk management strategy, we maintain internal house limits below our legal lending limit. Our current house limit is 80% of our legal lending limit, or $5.18 million. However, to
minimize client concentration risk and transactional risk, we prefer not to extend credit beyond the $2.0 million to $3.0 million dollar range. When we receive customer requests in excess of our house or legal lending limit, we evaluate the credit
risk under our normal guidelines. Incremental loan amounts exceeding house policy or legal lending limits of approved transactions are sold as participations and funded by other banks. This practice allows us to serve our clients business
needs as they arise, reduce our risk exposure, and operate within regulatory requirements.
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COMMERCIAL BANKING LINE OF BUSINESS
We categorize our loans into five general classifications: Commercial Real Estate, Real Estate Construction, Residential Real Estate,
Commercial Business and Consumer.
Loan Portfolio.
As part of our normal business activities, we are engaged in
making loans to a broad range of customers, including small businesses and middle market companies, professionals, home builders, commercial real estate developers, commercial real estate investors, consumers and others in our market area. We
generally define our market area as Northern Virginia and the surrounding jurisdictions in the Washington, D.C. metropolitan area. The loan portfolio decreased 7.7% during 2011 as management continued to reduce construction and land related lending,
adversely risk rated credits and our residential subordinate lending exposures (both HELOC and closed-end second trust loans) as circumstances allowed. Our loan portfolio balance at December 31, 2011 was $306.9 compared to $332.3 million at
December 31, 2010.
Commercial Real Estate Lending.
As of December 31, 2011, commercial real estate
loans were $137.6 million or 44.8% of the loan portfolio, compared to $146.2 million or 44.0% of the portfolio as of December 31, 2010. The decreased loan volume reflects the effect of the current economic environment evidenced by the lack of
customer demand in the commercial real estate market in the greater Washington, D.C. metropolitan area. In addition, substantially all loans require regular monthly amortization of principal, resulting in a natural reduction in the portfolio. These
loans are typically secured by first trusts on office, retail, warehouse, commercial condominiums or industrial space. These loans are generally divided into two categories: loans to commercial entities that will occupy most or all of the property
(described as owner-occupied) and loans for income producing properties held by investors.
In the case of
owner-occupied loans, the Bank is usually the primary provider of financial services for the company and/or the principals. This allows us to further monitor the quality of the ongoing cash flow available to service the loans. While these loans are
real estate secured, we believe that, as a portfolio, these loans are less subject to the normal real estate cycles because the underlying businesses are owned by the borrowers who will not seek alternative rental space in times of market
over-supply.
Commercial real estate loans made on income producing properties are made on generally the same terms and
conditions as owner-occupied loans. Underwriting guidelines generally require borrowers to contribute cash equity that results in an 80% or less loan-to-value ratio on owner-occupied properties and a 75% or less loan-to-value ratio on investment
properties. Exceptions to these guidelines are infrequent and are justified based on other credit factors.
Loans in this
category (owner occupied and investment properties) are generally amortizing over 15-25 year periods and carry adjustable rates which reset every 1 to 5 years, indexed against like-maturity treasury instruments.
Real Estate Construction Lending.
The real estate construction portfolio was $39.2 million or 12.8% of the portfolio as of
December 31, 2011, down from the $43.0 million, or 12.9%, as of December 31, 2010. This category consists of three distinct product offerings: loans for the acquisition, development and construction of commercial properties; loans for the
acquisition, development and construction of residential properties; and construction loans to individuals for their own primary residences or second homes.
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Our commercial construction segment generally contains projects where we expect to make a
long term commercial mortgage loan upon successful completion of the project. We also have customers who build commercial condominium units which will be sold to smaller end users. These end loans are also attractive to us as they can lead to full
service relationships with small business owners. Demand for the financing of new projects has been extremely limited over the past two years as developers have delayed or cancelled projects due to market uncertainties. Our underwriting requirements
in the current market include substantial pre-leasing or pre-sales, higher levels of equity and more substantial borrower liquidity levels.
Following substantial decreases in 2008 and 2009, we have continued to experience a decrease in our residential construction portfolio in both 2010 and 2011. Residential home builders who are delivering 1
to 10 single family units per year have been one of our primary customer segments. We advance money for the purchase of lots and also provide funds for construction. When practical, we limit the number of speculative units that a builder can finance
at any particular time. Our construction loan monitoring process includes a complete appraisal, periodic site inspections by a third party, regular interaction by the relationship managers and administrative oversight of the funds utilized in
construction to ensure that construction is progressing as planned and that there are always sufficient funds available in the loan to complete the project. In addition to evaluating the financial capacity of the borrower, we also require equity in
each transaction that puts us in a range of 70-75% loan-to-value on an as completed basis. Substantially all the loans in this category carry a floating rate of interest tied to the Wall Street Journal (WSJ) prime rate with appropriate
minimum contractual rates.
The smallest segment of residential construction loans are to borrowers who have engaged a
contractor to build their primary residence. These loans are underwritten against stringent lending standards, requiring meaningful cash equity, strong income resulting in conservative debt-to income ratios, and impeccable credit standing. We
further require that the borrower engage a qualified contractor to complete the project. While we expect that repayment will likely come from subsequent financing obtained in the traditional mortgage markets, we underwrite these loans assuming we
will convert the loan into a portfolio mortgage. We manage the loan during the construction period essentially the same as if the borrower was a builder.
Residential Real Estate Lending.
The residential real estate portfolio was $101.2 million or 33.0% of the portfolio as of December 31, 2011, down from $110.9 million or 33.4% of the
portfolio as of December 31, 2010. This category consists of five distinct product offerings: open end home equity loans, which are loans secured by secondary financing on residential real estate (HELOCs); closed end amortizing second
mortgages; bridge loans to commercial entities who acquire and remodel properties; first mortgage loans secured by 1-4 family properties held as income or investment properties; and portfolio first mortgage loans on primary or secondary 1-4 family
residences.
Since its inception and up through 2008, the Bank has been an active HELOC lender. This historically attractive
portfolio has experienced some challenges since 2008 as a result of a combination of factors: loss of value in the property securing the loans, a lack of marketability of residential properties, and the impact of loss of income/employment of
individuals in our market. We have continued to adjust and tighten the underwriting standards on new credits to limit loan-to-value ratios to 75% or less and to require higher credit scores and more appropriate debt service ratios. Substantially all
of these loans are priced at or above the WSJ prime rate and float on a daily basis. Originations subsequent to January 2008 often carry interest rate floors. While our loans generally have a revolving period of 15 years followed by a 15 year
amortization (30 years total), our experience is that, similar to first mortgages, the actual expected maturity of an individual loan is much shorter.
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The HELOC portfolio was a source of losses over the past few years. We had, and continue to
have, a number of customers whose personal incomes were directly impacted by the significant downturn in the economy and residential real estate market. We cannot predict when this cycle will change. However, we believe our active risk management
analysis and early intervention will minimize our future losses.
Our closed-end second trust portfolio results primarily from
the conversion of existing HELOCs. This generally involves eliminating any unused availability, fixing the interest rate at current market rates for similar credits, and amortizing the unpaid balance over 15 to 30 years based on the borrowers
capacity to service the debt. We believe our current underwriting standards are conservative and reflect the realities of todays current real estate market.
We have a group of customers who are active in the acquisition and remodeling of existing 1-4 family residential properties. These bridge loans, secured by first deeds of trust, are generally
made under annually reviewed lines of credit which outline the terms and conditions of each individual advance. Each advance generally has a maturity of less than 1 year and carries a floating rate of interest tied to the WSJ prime rate with
contractual minimum rates and transaction fees. Advance rates are based on the lower of cost or as is market value and are generally limited to 80% or less of the appraised value. Our customers buy these properties in the ordinary course
of their business either directly from owners or as part of a foreclosure process. They then invest their own money to restore the property to a fully marketable condition. These loans in many respects are similar to regular residential construction
loans but without some of the related risks.
We also have clients who invest in 1-4 family properties for rental income
purposes. Loans that support these investment activities are underwritten based on appropriate loan-to-value ratios, identified cash flows and assignment of rents, as well as the financial capacity of the borrowers. Loans in this category generally
carry rates which re-set every 3 to 5 years and require monthly amortization.
The final group in this category is loans
secured by first trusts on 1-4 family primary residences. While we do not actively market this product, there are times when business circumstances justify making such a loan for our regular portfolio. These situations include loans to individuals
who for one reason or another do not find mortgage products in the market to fit their needs and who maintain substantial non-lending relationships with us that make these loans attractive to us. The maximum loan-to-value ratio in these loans is
generally 80%, with most at lower advance rates. These loans either have an expected maturity of 5 years or less or carry interest rates that adjust with Treasury rates. Loans in this category are generally amortized over 30 years or less.
Commercial Business Lending.
Our commercial business lending category consists of general business credit in
the form of lines of credit, revolving credit facilities, term loans, equipment loans, stand-by letters of credit and other credit needs experienced by small and medium sized businesses. These loans are written for any sound business purpose
including the financing of business equipment, meeting general working capital needs, or supporting business expansion. Commercial loans generally are secured by business assets, carry the personal guarantees of the principals and have either
floating rates tied to the WSJ prime rate or are fixed for 3 to 7 year periods. Our customers come from a wide variety of businesses, including government contractors, professional services, building trades and retail. Commercial business loans
represented 8.7% of the loan portfolio or $26.8 million at December 31, 2011, a slight decrease from $27.5 million at December 31, 2010, which was 8.3% of the portfolio. The major factor in the decline is the recently ended economic
recession and the relatively stagnant recovery that
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continues to impact the local economy. We experienced lower borrowings by commercial customers who were also affected by the economic conditions leading to a general contraction in their needs
for credit. In the long-term, we expect growth in this loan category as the economy improves.
Consumer Lending.
This category constitutes the smallest part of our loan portfolio. These loans are small personal lines of credit and term loans. Loans are both secured (deposit accounts, brokerage accounts, automobiles, etc.) and unsecured and carry either fixed
or floating rates. Our marketing of these products is generally reactive in nature, responding to requests that come to us primarily from the principals and/or employees of our commercial customers. The balance as of December 31, 2011 was
$2.0million compared to $4.7 million as of December 31, 2010.
Traditional Mortgage Banking.
In December
2006, we made the strategic decision to exit our stand alone mortgage banking operation Alliance Home Funding, LLC (AHF). In 2009 and 2008, we offered mortgage banking products through a small team of Bank employees that formed the Alliance Bank
Mortgage Division (ABMD). In early 2010, we made the decision to eliminate ABMD mortgage staffing. In 2010, we had a minor level of income which was related to selling the remaining loans that had been originated by ABMD. ABMD remains inactive as of
December 31, 2011.
Commercial Deposit Activities and Other Services.
Deposits and repurchase agreements
are the key sources of our funding. We offer a broad array of deposit products that include demand, NOW, money market, savings accounts and certificates of deposit. In addition to deposit products, we offer customer repurchase agreements (repos). We
typically see repos used by commercial business customers as part of active cash management programs. We pay competitive interest rates on the interest-bearing deposits to garner our share of the market. As a relationship-oriented bank, we also seek
to obtain deposit relationships with our loan clients.
Our strategic plan is to continue our focus on specialized customer
services executed via the Title and Settlement Group. This department serves entrepreneurs, professionals and small business owners that include title and mortgage loan closing companies, which represent a substantial percentage of our non-interest
bearing deposits. Through the use of proprietary software, enhanced customer service, and a package of electronic banking tools, we are able to deliver an array of services that are very attractive and affordable for title insurance agencies, many
of which maintain significant account balances with us. Our business strategy includes expanding the number of customers in this market segment by continuing to provide the highest quality customer service and the latest technology devoted to this
industry. This remains a highly competitive sector of the market.
We have traditionally offered investment and wealth
management products to our clients. In mid-2010, we assessed our product offerings, delivery channel and market penetration. The review indicated certain resources should be reallocated more effectively within the Company. Consequently, in late
third quarter of 2010, we transitioned these investment and wealth management clients to another unaffiliated wealth management company.
WHOLESALE FUNDING
As
our overall asset liability management process dictates, we may become more or less competitive in our deposit terms and interest rate structure. Consequently, we may use brokered deposits to augment the Banks funding position. The wholesale
nature of brokered deposits makes gathering specific quantities or duration of deposits an efficient process. In 2008, as the real estate economy declined and we experienced outflows of non-interest bearing deposits, we used wholesale or brokered
deposits to supplement our overall funding position. We continue to utilize brokered deposits to extend the duration of liabilities as part of our asset liability management strategies. We are a member of the Federal Home Loan Bank of Atlanta (FHLB)
and we utilize the short-term and long-term advances as part of our funding strategy.
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RETAIL BANKING LINE OF BUSINESS
We offer traditional retail loan and deposit products for our clients via our six bank business center locations: Fair Lakes, Annandale,
the city of Manassas Park, Reston, Ballston and Tysons Corner. The locations have the characteristics of a traditional retail branch, (e.g. tellers, ATM, customer service representative and a branch manager), and we view the retail operation
as a tool to execute our core commercial and business strategies. In 2010, we relocated our commercial and real estate relationship managers to our branches. This action was designed to fully support the market trade areas and our tactical approach
to business development.
We recognize the cost to develop and implement a large retail presence; therefore, our business
strategy calls for a limited number of strategically placed business centers in the greater Washington, D.C. Metropolitan area.
FDIC
Insurance of Deposit Accounts
The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the FDIC)
up to the limits set forth under applicable law. For additional information regarding federal deposit insurance, please see our discussion in Part I, Item 1 of this Annual Report on Form 10-K under the heading Supervision and
RegulationInsurance of Accounts, Assessments and Regulation by the FDIC.
SUPERVISION AND REGULATION
General
Bank holding
companies and banks are extensively regulated under both federal and state law. The following summary briefly describes the more significant provisions of currently applicable federal and state laws and certain regulations and the potential impact
of such provisions on Banksharesand the Bank. This summary is not complete, and we refer you to the particular statutory or regulatory provisions or proposals for more information. Because federal regulation of financial institutions changes
regularly and is the subject of constant legislative and regulatory debate, we cannot forecast how federal regulation of financial institutions may change in the future and affect Bankshares and the Banks operations and regulation,
supervision and examination by the Federal Reserve.
Regulation of Bankshares
Bankshares must file annual, quarterly and other reports with the Securities and Exchange Commission (SEC). Bankshares is directly
affected by the corporate responsibility and accounting reform legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the SOX Act), and the related rules and regulations. The SOX Act includes provisions that,
among other things, require that periodic reports containing financial statements that are filed with the SEC be accompanied by chief executive officer and chief financial officer certifications as to the accuracy and compliance with law; additional
disclosure requirements and corporate governance and other related rules.
When enacted in 2002, Section 404(a) of the
SOX Act required public companies to include in their annual reports on Form 10-K an assessment from management of the effectiveness of the companys internal control over financial reporting, and Section 404(b) of the SOX Act required the
companys auditor to attest to and report on managements assessment. From 2002 through 2010, the SEC had
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delayed implementation of Section 404(b) of the SOX Act for public companies with a public float below $75 million (i.e. companies that are smaller reporting companies or non-accelerated
filers). In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) permanently exempted smaller reporting companies and non-accelerated filers from Section 404(b) of the SOX Act, and the SEC made
conforming amendments to certain of its rules and forms in September 2010.
Our managements report on internal control
over financial reporting is contained in Item 9A herein. Bankshares has expended considerable time and money in complying with the SOX Act and expects to continue to incur additional expenses in the future.
Bank Holding Company Act
As a bank holding company, Bankshares is subject to regulation under the Bank Holding Company Act of 1956, as amended (the BHCA), and the
examination and reporting requirements of the Federal Reserve. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the
Federal Reserve has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company. As a state-chartered
commercial bank, the Bank and its subsidiaries are also subject to regulation, supervision and examination by the Virginia Bureau of Financial Institutions (Bureau).
The BHCAgenerally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is closely related to banking or to
managing or controlling banks. Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state
imposed concentration limits. The Federal Reserve has jurisdiction to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The Dodd-Frank Act amended provisions of the BHCA (and corresponding
provisions of the Federal Deposit Insurance Act (FDIA)) to require that a bank holding company be well capitalized and well managed before the Federal Reserve will approve an interstate bank acquisition or merger. Also as a result of the Dodd-Frank
Act, banks also are able to branch across state lines, provided that the law of the state in which the branch is to be located would permit establishment of the branch if the bank were a state bank chartered by such state. Similarly, approval of the
Bureau is required for certain acquisitions of other banks and bank holding companies.
The Federal Reserve requires a bank
holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries. Bankshares may be compelled by the Federal Reserve to invest additional capital in the event the Bank experiences
significant loan losses, earnings shortfalls or rapid balance sheet growth.
Federal law and regulatory policy impose a number
of obligations and restrictions on bank holding companies and their depository institution subsidiaries to reduce potential loss exposure to the depositors and to the FDIC insurance funds. For example, a bank holding company must commit resources to
support its subsidiary depository institutions. In addition, insured depository institutions under common control must reimburse the FDIC for any loss suffered or reasonably anticipated by the Deposit Insurance Fund (DIF) as a result of the default
of a commonly controlled insured depository institution. The FDIC may decline to enforce the provisions if it determines that a waiver is in the best interest of the DIF. An FDIC claim for damage is superior to claims of shareholders of an insured
depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt, other than affiliates, of the commonly controlled insured depository institution.
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The FDIA provides that amounts received from the liquidation or other resolution of any
insured depository institution must be distributed, after payment of secured claims, to pay the deposit liabilities of the institution before payment of any other general creditor or shareholder. This provision would give depositors a preference
over general and subordinated creditors and shareholders if a receiver is appointed to distribute the assets of the Bank.
Restrictions on
Extensions of Credit and Investment in the Stock of Bankshares or its Subsidiaries
Subsidiary banks of a bank holding
company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities thereof, and on the taking of such
stock or securities as collateral for loans to any borrower. Further, a holding company and any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing, on the condition that: (a) the customer obtain or provide some additional credit, property or services from or to such bank
other than a loan, discount, deposit or trust service; (b) the customer obtain or provide some additional credit, property or service from or to a holding company or any other subsidiary of a holding company; or (c) the customer not obtain
some other credit, property or service from competitors, except for reasonable requirements to assure the soundness of credit extended.
Capital Requirements
The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking
organizations they supervise. Under the risk-based capital requirements of these federal bank regulatory agencies, Bankshares and the Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8% and a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 4.0%. At least half of the total capital must be Tier 1 capital, which includes common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles and other
adjustments. The remainder may consist of Tier 2 capital, such as a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments), other qualifying preferred stock and a limited amount of the general loan
loss allowance. As long as Bankshares has total consolidated assets of less than $15 billion, Bankshares may include in Tier 1 and total capital Bankshares trust preferred securities that were issued before May 19, 2010.
At December 31, 2011, the total capital to risk-weighted asset ratio of Bankshares was 13.8% and the ratio of the Bank was 13.7%. At
December 31, 2011, the Tier 1 capital to risk-weighted asset ratio was 12.5% for Bankshares and 12.5% for the Bank.
In
addition, each of the federal regulatory agencies has established leverage capital ratio guidelines for banking organizations. These guidelines provide for a minimum Tier l leverage ratio of 4.0% for banks and bank holding companies. At
December 31, 2011, the Tier l leverage ratio was 7.5% for Bankshares and 7.6% for the Bank. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions must maintain capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible assets.
In December 2010, the Basel
Committee on Banking Supervision (the Basel Committee) released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as Basel III. Basel III, when
implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Implementation is presently scheduled to
be phased in between 2014 and 2019, although it is possible that implementation may be delayed as a result of multiple factors including the current condition of the banking industry within the U.S. and abroad.
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The Basel III final capital framework, among other things, (i) introduces as a new
capital measure Common Equity Tier 1 (CET1), (ii) specifies that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring
that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly adopted international standard, a
minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted
assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in
a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0%
total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the
ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup
of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with
a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity
repurchases and compensation based on the amount of the shortfall.
The implementation of the Basel III final framework will
commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:
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3.5% CET1 to risk-weighted assets.
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4.5% Tier 1 capital to risk-weighted assets.
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8.0% Total capital to risk-weighted assets.
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The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets
dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will
be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent
January 1, until it reaches 2.5% on January 1, 2019).
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The U.S. banking agencies have indicated informally that they expect to propose regulations
implementing Basel III in mid-2012. In addition to Basel III, the Dodd-Frank Act requires or permits the federal banking agencies to adopt regulations affecting banking institutions capital requirements in a number of respects, including
potentially more stringent capital requirements for systemically important financial institutions.
Accordingly, the
regulations ultimately applicable to Bankshares may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could
adversely impact the Bankshares net income and return on equity.
Payment of Dividends
As a bank holding company, Bankshares is a separate legal entity from the Bank. Virtually all of Bankshares income results from
dividends paid to it by the Bank. Both Bankshares and the Bank are subject to laws and regulations that limit the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated
that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued or due by the bank and (2) if the prospective rate of
earnings retention appears consistent with the organizations capital needs, asset quality and overall financial position. In addition, the FDIA prohibits insured depository institutions such as the Bank from making capital distributions,
including the payment of dividends, if, after making such distribution, the institution would become undercapitalized as defined in the statute. As of the date of filing of this Annual Report on Form 10-K, Bankshares and the Bank are prohibited from
declaring and paying dividends without prior regulatory approval.
The Dodd-Frank Act
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial
regulatory landscape, including changes that will affect all bank holding companies and banks, including Bankshares and the Bank, including the following provisions affecting the business of Bankshares and the Bank:
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Insurance of Deposit Accounts.
The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits
to consolidated assets less tangible capital, eliminated the ceiling on the size of the DIF and increased the floor applicable to the size of the DIF. The Dodd-Frank Act also made permanent the $250,000 limit for federal deposit insurance and
increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all
insured depository institutions.
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Payment of Interest on Demand Deposits.
The Dodd-Frank Act repealed the federal prohibitions on the payment of interest and demand deposits,
thereby permitting depository institutions to pay interest on business transaction and other accounts.
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Creation of the Consumer Financial Protection Bureau.
The Dodd-Frank Act centralized significant aspects of consumer financial protection by
creating a new agency, the Consumer
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Financial Protection Bureau (the CFPB), responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets
and, to a lesser extent, smaller institutions. As a smaller institution, most consumer protection aspects of the Dodd-Frank Act will continue to be applied to Bankshares by the Federal Reserve and to the Bank by the FDIC.
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Debit Card Interchange Fees.
The Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) to, among other things, require that debit card
interchange fees must be reasonable and proportional to the actual cost incurred by the issuer with respect to the transaction. In June 2011, the Federal Reserve Board adopted regulations setting the maximum permissible interchange fee as the sum of
21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the issuer implements additional fraud-prevention standards. Although issuers that have assets
of less than $10 billion are exempt from the Federal Reserves regulations that set maximum interchange fees, these regulations are expected to significantly impact the interchange fees that financial institutions with less than $10 billion in
assets are able to collect.
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In addition, the Dodd-Frank Act implements other far-reaching
changes to the financial regulatory landscape, including provisions that:
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Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such
preemption.
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Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.
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Require bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state.
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Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit
insured depository institutions from conducting certain derivatives businesses in the institution itself.
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Require large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management.
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Require loan originators to retain 5 percent of any loan sold or securitized, unless it is a qualified residential mortgage, which must
still be defined by the regulators. FHA, VA and Rural Housing Service loans are specifically exempted from the risk retention requirements.
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Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders that apply to all public
companies, not just financial institutions.
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Many aspects of the Dodd-Frank Act remain subject to rulemaking
and will take effect over several years, making it difficult to anticipate the overall financial impact onBankshares, its subsidiaries, its customers or the financial industry more generally. Provisions in the legislation that require revisions to
the capital requirements of Bankshares and the Bank could require Bankshares and the Bank to seek other sources of capital in the future. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Acts
mandates are discussed further below.
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Incentive Compensation
In June 2010, the Federal Reserve, the Office of the Comptroller of the Currency (the OCC) and the FDIC issued a comprehensive final guidance on incentive compensation intended to ensure that the
incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the
risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organizations incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking
beyond the organizations ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective
oversight by the organizations board of directors.
The Federal Reserve will review, as part of the regular,
risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Bankshares, that are not large, complex banking organizations. These reviews will be tailored to each organization based on the
scope and complexity of the organizations activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the
organizations supervisory ratings, which can affect the organizations ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or
related risk-management control or governance processes, pose a risk to the organizations safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
The Dodd-Frank Act requires the SEC and the federal bank regulatory agencies to establish joint regulations or guidelines that require
financial institutions with assets of at least $1 billion to disclose the structure of their incentive compensation practices and prohibit such institutions from maintaining compensation arrangements that encourage inappropriate risk-taking by
providing excessive compensation or that could lead to material financial loss to the financial institution. The SEC and the federal bank regulatory agencies proposed such regulations in March 2011, which may become effective before the end of 2012.
If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which Bankshares may structure compensation for its executives only if Bankshares total consolidated assets exceed $1 billion. These
proposed regulations incorporate the three principles discussed in the June 2010 comprehensive final guidance on incentive compensation that was issued by the Federal Reserve, the OCC and the FDIC in June 2010.
Restrictions on Proprietary Trading
The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain
unregistered investment companies (defined as hedge funds and private equity funds), with implementation starting as early as July 2012. This provision of the Dodd-Frank Act is commonly called the Volcker Rule. In October 2011, federal
financial regulators proposed rules to implement the Volcker Rule that included an extensive request for comments on the proposed rules. The proposed rules are highly complex and many aspects of their application remain uncertain. Based on the
proposed rules, Bankshares does not currently anticipate that the Volcker Rule will have a material effect on the operations of Bankshares or the Bank, as Bankshares and the Bank do not engage in the businesses prohibited by the Volcker Rule. Until
final rules are adopted, the precise financial impact of these rules on Bankshares and the financial industry cannot be determined.
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Prompt Corrective Action
The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon
whether the institution in question is
well capitalized
, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized under the risk-based
and leverage capital guidelines discussed above. These terms are defined under uniform regulations issued by each of the federal banking agencies regulating these institutions. An insured depository institution which is less than adequately
capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. As of December 31, 2011, Bankshares was considered
well capitalized
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Gramm Leach Bliley Act of 1999
The Gramm Leach Bliley Act (the GLB Act) allows a bank holding company or other company to declare and certify its status as a financial
holding company, which will allow it to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in
nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. It also authorizes the Federal
Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.
In
order for a bank holding company to qualify as a financial holding company, all of its depository subsidiaries must be
well capitalized
and well managed, and must meet their Community Reinvestment Act of 1977 (CRA) obligations.
The bank holding company also must declare its intention to become a financial holding company to the Federal Reserve and certify that it meets the requirements.Although Bankshares could qualify to be a financial holding company, Bankshares does not
currently contemplate seeking to become a financial holding company until it identifies significant specific benefits from doing so.
The GLB Act also imposes customer privacy requirements on financial institutions. Financial institutions generally are prohibited from disclosing customer information to non-affiliated third parties,
unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions must disclose their specific privacy policies to their customers annually. Upon making such disclosure, there is no specific
restriction on financial institutions disclosing customer information to affiliated parties. Financial institutions must comply with state law, however, if it protects customer privacy more fully than federal law.
The cumulative effect of the GLB Act and other recent bank legislation has caused us to strengthen our staff to handle the procedures
required by this additional regulation. The increased staff and operational costs have impacted the Bank andBankshares profitability.
Regulation of Alliance Bank
The Bank is a Virginia chartered commercial bank and a member of the Federal Reserve System. Its deposit accounts are insured by the Deposit Insurance Fund (DIF) of the FDIC up to the maximum legal limits
of the FDIC and it is subject to regulation, supervision and regular examination by the Bureau and the Federal Reserve. The regulations of these various agencies govern most aspects of the Banks business, including required reserves against
deposits, loans, investments, mergers and acquisitions, borrowings, dividends, location and number of branch offices. The laws and regulations governing the Bank generally have been promulgated to protect depositors and the deposit insurance funds,
and not for the purpose of protecting shareholders.
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Insurance of Accounts, Assessments and Regulation by the FDIC
The Banks deposits are insured up to applicable limits by the DIF of the FDIC. In July 2010, the Dodd-Frank Act permanently raised
the basic limit on federal deposit insurance coverage to $250,000 per depositor, but did not change FDIC deposit insurance coverage for retirement accounts, which remains $250,000 per depositor. In November 2010, the FDIC issued a final rule to
implement provisions of the Dodd-Frank Act that provide for temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts. For purposes of this extension, the definition of noninterest-bearing transaction accounts
includes traditional checking accounts or demand deposit accounts on which no interest is paid and Interest on Lawyer Trust Accounts (IOLTAs), and excludes negotiable order of withdraw consumer checking accounts (NOW accounts) and money-market
deposit accounts. The extended program is not optional and will no longer be funded by separate premiums. This temporary unlimited deposit insurance coverage became effective on December 31, 2010 and terminates on December, 31, 2012.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review
processes.
In February 2011, the FDIC approved a final rule that changes the assessment base from domestic deposits to
average consolidated total assets minus average tangible equity (defined as Tier 1 capital); adopts a new large-bank pricing assessment scheme; and sets a target size for the DIF. The changes went into effect beginning with the second quarter of
2011 and were payable at the end of September 2011. The rule, as mandated by the Dodd-Frank Act, finalizes a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15%
and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2% and 2.5%.
Under the
FDICs deposit insurance assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institutions assessment rate depends
upon the category to which it is assigned. Unlike the other categories, as applied to small institutions Risk Category I, which contains the least risky depository institutions, contains further risk differentiation based on the FDICs analysis
of financial ratios, examination component ratings (CAMELS components) and other information. Assessment rates are determined by the FDIC and, beginning April 1, 2011, initial base assessment rates ranged from 2.5 to 45 basis points. The FDIC
may make the following further adjustments to an institutions initial base assessment rates: decreases for long-term unsecured debt, including most senior unsecured debt and subordinated debt; increases for holding long-term unsecured debt or
subordinated debt issued by other insured depository institutions; and increases for broker deposits in excess of 10 percent of domestic deposits for insurances not well rated and well capitalized.
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or
the designated reserve ratio. Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the
designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion of increasing of raising the designated reserve ratio from
1.15 percent to 1.35 percent. The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis.
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In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve
ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act. The restoration plan requires the FDIC to update its loss and income projections for the DIF at least semiannually, and if needed the FDIC may increase or
decrease assessment rates following a notice-and-comment rulemaking.
In May 2009, the FDIC adopted a
final rule imposing a five basis point special assessment on each insured depository institutions assets minus Tier 1 capital as of June 30, 2009. The assessment was part of the FDICs efforts to rebuild the DIF and help maintain
public confidence in the banking system. Bankshares was assessed $299,000, all of which was expensed in 2009. In November 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012, on December 31, 2009, along with each institutions risk-based deposit insurance assessment for the third quarter of 2009. The prepayment was based
on an institutions assessment rate and assessment base for the third quarter of 2009, assuming a five percent annual growth in deposits each year. On December 30, 2009, Bankshares prepaid $5.4 million of FDIC assessments.
Monetary and Fiscal Policy Effects on Interest Rates
Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by the Bank on its deposits and its other borrowings and the interest received by it
on loans extended to its customers and securities held in its trading or investment portfolios, constitute the major portion of the Banks earnings. Thus, our earnings and growth are subjected to the influence of economic conditions both
domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve, which regulates the supply of money through various means including open market dealings in United States
government securities. The nature and timing of changes in such policies, and their potential impact on the Bank and Bankshares, cannot be predicted.
Interstate Banking and Branching
The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act) or by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997, that applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch
acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.
All banks located in Virginia are authorized to branch statewide. Accordingly, a bank located anywhere in Virginia has the ability, subject to regulatory approval, to establish branch facilities near any
of our facilities and within the Banks market area. Applicable Virginia statutes permit regulatory authorities to approve de novo branching in Virginia by institutions located in states that would permit Virginia institutions to branch on a de
novo basis into those states. Prior to the enactment of the Dodd-Frank Act, national and state-chartered banks were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states
laws. However, interstate branching is now permitted for all national and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to
establish a branch, thus effectively giving out of state banks parity with in state banks with respect to de novo branching.
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Regulatory Enforcement Authority
Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Transactions with Affiliates
Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under
common control with such bank. Generally, Section 23A(a) limits the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate to an amount equal to 10% of such institutions
capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus, and (b) requires that all such transactions be on terms substantially the same, or
at least as favorable, to the bank as those provided to a non-affiliate. The term covered transaction includes the making of loans, purchase of assets, issuance of a guarantee, asset repurchase agreements and similar other types of
transactions. Section 23B applies to covered transactions as well as sales of assets and payments of money to an affiliate. These transactions must also be conducted on terms substantially the same, or at least as favorable, to the
bank as those provided to non-affiliates.
Community Reinvestment Act (CRA)
The CRA encourages each insured depository institution covered by the act to help meet the credit needs of the communities in which it
operates. The CRA requires that each federal financial supervisory agency assess the record of each covered depository institution helping to meet the credit needs of its entire community, including low-and-moderate income neighborhoods, consistent
with safe and sound operations; an agency will take that record into account when deciding whether to approve an institutions application for a deposit facility.
The Bank received a satisfactory CRA rating from the Federal Reserve Bank of Richmond following the Banks last CRA compliance review. An institution classified in this group has a satisfactory
record of ascertaining and helping to meet the credit needs of its entire delineated community, including low- and moderate-income neighborhoods, in a manner consistent with its resources and capabilities.
Loans to Insiders
The
Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, any loan to a director, an executive officer
or to a principal shareholder of a bank, or to entities controlled by any of the foregoing, may not exceed, together with all outstanding loans to such persons or entities controlled by such person, the banks loan to one borrower limit. For
purposes of Section 22 of the Federal Reserve Act, the Dodd-Frank Act has included in the concept of loans to an insider other extensions of credit including repurchase agreements, derivative transactions, and securities lending or
borrowing transactions. Loans in the aggregate to insiders of the related interest as a class may not exceed two times the banks unimpaired capital and unimpaired surplus until the banks total assets equal or exceed $100 million, at
which time the aggregate is limited to the banks unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate
22
federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company, and to entities controlled by such persons, unless such loans are approved
in advance by a majority of the board of directors of the bank with any interested director not participating in the voting. The loan amount, which includes all other outstanding loans to such person, as to which such prior board of
director approval is required, is the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and with underwriting
standards that are substantially the same as those offered in comparable transactions to other persons. Further, section 402 of the Sarbanes-Oxley Act of 2002, with certain exceptions, prohibits loans to directors and executive officers.
Other Regulations
Bankshares maintains a compliance department to ensure it is in compliance with consumer protection laws and regulations.
Bank Secrecy Act (BSA).
Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect
certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the Treasury. In addition, financial institutions are required to file
suspicious activity reports for transactions that involve more than $5,000 and /or which the financial institution knows, suspects or has reason to suspect, involves illegal funds, is designed to evade the requirements of the BSA or has no lawful
purpose.
USA Patriot Act.
The USA Patriot Act, which became effective on October 26, 2001, amends the Bank
Secrecy Act and is intended to facilitate information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial
institutions, upon providing notice to the Treasury, to share information with one another in order to better identify and report to the federal government activities that may involve money laundering or terrorists activities. The USA Patriot
Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Certain provisions of the USA Patriot Act impose the obligation to establish anti-money laundering programs, including the
development of a customer identification program, and the screening of all customers against any government lists of known or suspected terrorists. Although it does create a reporting obligation and there is a cost of compliance, the USA Patriot Act
does not materially affect the Banks products, services or other business activities.
Reporting Terrorist
Activities.
The Federal Bureau of Investigation (FBI) has sent, and will send, banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank has been requested, and will be requested, to
search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report with the Treasury and contact the FBI.
The Office of Foreign Assets Control (OFAC), which is a division of the Treasury, is responsible for helping to insure that United States
entities do not engage in transactions with enemies of the United States, as defined by various Executive Orders and Acts of Congress. OFAC sends banking regulatory agencies lists of names of persons and organizations suspected of
aiding, harboring or engaging in terrorist acts, and publicly releases information on designations of persons and organizations suspected of engaging in these activities. If the Bank finds a name on any transaction, account or wire transfer that is
on an OFAC list, it must freeze such account, file a suspicious activity report with the Treasury and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any
23
notifications. The Bank actively checks high-risk areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software that is updated each time a
modification is made to the lists of Specially Designated Nationals and Blocked Persons provided by OFAC and other agencies.
Interagency Appraisal and Evaluation Guidelines
.
In December 2010, the Federal Reserve Board, the Office of the
Comptroller of the Currency and the FDIC, jointly with other federal regulatory agencies, issued the Interagency Appraisal and Evaluation Guidelines. This guidance, which updates guidance originally issued in 1994, sets forth the minimum regulatory
standards for appraisals. The guidance incorporates previous regulatory issuances affecting appraisals, addresses advances in information technology used in collateral evaluation, and clarifies standards for use of analytical methods and
technological tools in developing evaluations. The guidance also requires institutions to use strong internal controls to ensure reliable appraisals and evaluations and to monitor and periodically update valuations of collateral for existing real
estate loans and transactions.
Future Regulatory Uncertainty
Legislative Initiatives
.
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such initiatives may change banking statutes
and the operating environment for Bankshares and the Bank in substantial and unpredictable ways. It is difficult to determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would
have, upon the financial condition or results of our operations or the operations of Bankshares or the Bank. A change in statute, regulations or regulatory policies applicable to us or the Bank could have a material effect on the financial
condition, results of operations or business of Bankshares and the Bank.
INTERNET ACCESS TO CORPORATE DOCUMENTS
Information about Bankshares can be found on the Banks website at www.alliancebankva.com. Under Documents / SEC Filings
in the Investor Relations section of the website, Bankshares posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those reports as soon as reasonably practicable after they are electronically
filed with or furnished to the SEC. All such filings are available free of charge.
The information available on the
Banks website is not part of this Annual Report on Form 10-K or any other report filed by Bankshares with the SEC.
System failures, interruptions or breaches of security could adversely impact our business operations and financial
condition.
Communications and information systems are essential to the conduct of Bankshares businesses, as such systems are used to manage customer relationships, general ledger, deposits and loans. While Bankshares has established
policies and procedures to prevent or limit the impact of systems failures, interruptions and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any
compromise of the security systems could deter customers from using the Banks website and online banking service, both of which involve the transmission of confidential information. Although
24
Bankshares and the Bank rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may
not protect the systems from compromises or breaches of security, which would adversely affect Bankshares results of operations and financial condition.
In addition, Bankshares outsources certain of its data processing to certain third-party providers. If the third-party providers encounter difficulties, or if Bankshares has difficulty in communicating
with them, Bankshares ability to adequately process and account for customer transactions could be affected, and Bankshares business operations could be adversely impacted. Threats to information security also exist in the processing of
customer information through various other vendors and their personnel.
The occurrence of any systems failure, interruption
or breach of security could damage Bankshares reputation and result in a loss of customers and business, could subject it to additional regulatory scrutiny or could expose it to civil litigation and possible financial liability. Any of these
occurrences could have a material adverse effect on Bankshares financial condition and results of operations.
Our
credit risk management approach or processes can impact our results.
We have a disciplined approach to credit allocation. In the event our risk processes indicate a business strategy towards or away from a certain loan type, we may create a
concentration of credit which could be positively or negatively impacted by economic factors. Our credit risk management approach is dependent on our personnel accurately and adequately identifying current and inherent risks in loan transactions and
loan products. Although we believe our credit risk management approach is appropriate, the failure to accurately identify risks in loan transactions could negatively affect our financial condition and performance.
Our focus on commercial and real estate loans may increase the risk of credit losses, which would negatively affect our financial
results.
We offer a variety of loans including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial)
in the greater Washington, D.C. metropolitan area. A continued downturn in this real estate market, such as further deterioration in the value of this collateral, or in the local or national economy and job markets, could adversely affect our
customers ability to pay these loans, which in turn could adversely affect us. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit
carefully. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.
If our
allowance for loan losses becomes inadequate, our results of operations may be adversely affected.
We maintain an allowance for loan losses that we believe is adequate to absorb any potential losses in our loan portfolio. Through a periodic
review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio and performance of our customers relative to their
financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these future losses may exceed our current
estimates. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or provide assurance that our allowance will be adequate in the future. Excessive loan losses
could have a material adverse impact on our financial performance.
25
Federal and state regulators, as an integral part of their supervisory function,
periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase
in the allowance for loan losses required by these regulatory agencies could have a negative effect on our financial condition and results of operations.
If the value of real estate in our market areas was to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect
on our asset quality, capital structure and profitability.
As of December 31, 2011, a significant portion of our loan portfolio is comprised of loans secured by either commercial real estate or 1-4 family residential properties. In the
majority of these loans, real estate was the primary collateral component. In some cases, and out of an abundance of caution, we take real estate as security for a loan even when it is not the primary component of collateral. The real estate
collateral that provides the primary or an alternate source of repayment in the event of default may deteriorate in value during the term of the loan as a result of changes in economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in tax and other laws and acts of nature. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, which we have seen and continue to
experience, our earnings and capital could be adversely affected. We are subject to increased lending risks in the form of loan defaults as a result of the high concentration of real estate lending in our loan portfolio should the real estate market
in Virginia and our market area maintain its downward turn. Continued weakness of the real estate market in our primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing the loans and the value of real estate owned by us. If real estate values decline further, it is also more likely that we would be required to increase our allowance for loan losses, which could
adversely affect our financial condition and results of operations.
If we need additional capital in the future to
achieve or maintain our targeted regulatory capital levels, we may not be able to obtain it on terms that are favorable. This could negatively affect our performance and the value of our common stock.
Our business strategy calls for balance
sheet repositioning and loan growth while maintaining an adequate capital buffer above the
well capitalized
status. If our balance sheet composition and risk profile changes, we may need to expand the acceptable range of the
capital buffer above our current targeted levels. Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to
obtain additional capital in the amounts needed or on terms satisfactory to us or to our shareholders.
The Basel III
capital requirements may require us to maintain higher levels of capital, which could reduce our profitability.
The adoption of Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as
the key source of regulatory capital. Although the new capital requirements are phased in over the next decade and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory
agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support
our business risk profile prior to final implementation of the Basel III standards. If Bankshares and the Bank are required to maintain higher levels of capital, Bankshares and the Bank may have fewer opportunities to invest capital into
interest-earning assets, which could limit the profitable business operations available to Bankshares and the Bank and adversely impact our financial condition and results of operations.
26
We have been effective in a specific market niche, which creates an industry
concentration.
We have made a special effort to obtain deposits from title and mortgage loan closing companies. These are monies held for short periods of time by title and mortgage loan closing companies pending the disbursement of funds in
mortgage loan or mortgage loan refinancing transactions. The balances on deposit with us from these depositors tend to fluctuate greatly during any given month, depending on transaction scheduling and overall market conditions. These balances
represent a substantial portion of our non-interest bearing deposits, which creates a real estate industry concentration. These deposits are subject to seasonal and cyclical market fluctuations and are particularly sensitive to slower real estate
markets. In order to meet the withdrawal needs of these customers, we monitor our liquidity, investment securities and lines of credit on a constant basis. The attractive nature of this deposit base or market niche has generated substantial banking
competition for this type of client. Because of this industry concentration in our deposits, we are exposed to liquidity and concentration risks attendant to changes in real estate markets, which could adversely impact our overall performance.
We depend on the services of key personnel, and a loss of any of those personnel could disrupt our operations and
result in reduced earnings.
We are a customer focused and relationship driven organization. Our growth and success has been in large part driven by the personal customer relationships maintained by our executives. Although we have entered
into employment contracts with our executive officers, we cannot offer any assurance that they and other key employees will remain employed by us. The loss of services of key employees or client relationship managers could reduce the number of
quality accounts maintained at the Bank, whichcould have a material adverse effect on our operations and possibly result in reduced revenues and earnings.
The success of our future recruiting and employee retention efforts will impact our ability to execute our business strategy.
Our business strategy will require us to continue to attract,
hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit
their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult in a competitive labor market. In light of the presently competitive labor market, we cannot assure
you that we will be successful in attracting, hiring, motivating or retaining qualified and high-performing, experienced banking professionals. In addition, we are deploying resources to attract additional staff personnel, but cannot guarantee that
this investment of money and management time will be successful. The success of our recruiting efforts may impact our ability to execute our business strategy and our future profitability.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash
flows
. Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital and other general corporate purposes. An inability to raise
funds through deposits, borrowing, and securities sold under repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be
fully sufficient to meet our funding needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances, securities sold under agreements to repurchase and other wholesale funding sources to obtain the
funds necessary to implement our growth strategy.
27
Our access to funding sources in amounts adequate to finance our activities or on terms
which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in
which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. To the extent we are not successful in obtaining such funding, we will be unable to
implement our strategy as planned which could have a material adverse effect on our financial condition, result of operations and cash flows.
Difficult market conditions have adversely affected our industry
.
Dramatic declines in the housing market over the past few years, with falling home prices and increasing
foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressures on consumers and lack
of confidence in the financial markets have adversely affected our business and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies
and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions
industry.
Our future success is dependent on our ability to compete effectively in the highly competitive banking
industry.
The Northern Virginia and the greater Washington, D.C. metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint, and is therefore a highly competitive banking market. Our
future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment. We compete for loans, deposits, and investment dollars with numerous large, regional and national banks and other
community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, and private lenders. Many competitors offer products and services
we do not offer and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, some competitors may be able to price loans and deposits more aggressively than we do. Some of
the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured state-chartered banks, national banks and federal savings institutions. As a
result, these nonbank competitors have certain advantages over us in accessing funding and in providing various services. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn
on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.
The Dodd-Frank Act could increase our regulatory compliance burden and associated costs, place restrictions on certain products and services, and limit our future capital raising
strategies.
A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Act, was signed into law on July 21, 2010. The Dodd-Frank Act
represents a sweeping overhaul of the financial services industry within the United States and mandates significant changes in the financial regulatory landscape that will impact all
28
financial institutions, including the Company. The Dodd-Frank Act will likely increase our regulatory compliance burden and may have a material adverse effect on us, by increasing the costs
associated with our regulatory examinations and compliance measures. The federal regulatory agencies, and particularly bank regulatory agencies, are given significant discretion in drafting the Dodd-Frank Acts implementing rules and
regulations and, consequently, many of the details and much of the impact of the Dodd-Frank Act will depend on the final implementing rules and regulations. Accordingly, it remains too early to fully assess the impact of the Dodd-Frank Act and
subsequent regulatory rulemaking processes on our business, financial condition or results of operations.
Among the
Dodd-Frank Acts significant regulatory changes, the Dodd-Frank Act creates a new financial consumer protection agency that could impose new regulations on us and include its examiners in our routine regulatory examinations conducted by the
FDIC, which could increase our regulatory compliance burden and costs and restrict the financial products and services we can offer to our customers. This agency, named the Consumer Financial Protection Bureau, may reshape the consumer financial
laws through rulemaking and enforcement of the Dodd-Frank Acts prohibitions against unfair, deceptive and abusive business practices, which may directly impact the business operations of financial institutions offering consumer financial
products or services, including the Company. This agencys broad rulemaking authority includes identifying practices or acts that are unfair, deceptive or abusive in connection with any consumer financial transaction or consumer financial
product or service. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to the Company or its subsidiaries by virtue
of the adoption of such policies and best practices by the Federal Reserve and FDIC. The costs and limitations related to this additional regulatory agency and the limitations and restrictions that will be placed upon the Company with respect to its
consumer product and service offerings have yet to be determined. However, these costs, limitations and restrictions may produce significant, material effects on our business, financial condition and results of operations
The Dodd-Frank Act also increases regulatory supervision and examination of bank holding companies and their banking and non-banking
subsidiaries, which could increase our regulatory compliance burden and costs and restrict our ability to generate revenues from non-banking operations. The Dodd-Frank Act imposes more stringent capital requirements on bank holding companies, which
could limit our future capital strategies. The Dodd-Frank Act also increases regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate hedging transactions.
Trading in our common stock is not consistent and can be very low at time. As a result, shareholders may not be able to
quickly and easily sell their common stock, particularly in large quantities.
Although our common stock is listed on the NASDAQ Capital Market and a number of broker- dealers offer to make a market in our common stock on a regular basis, the
trading volume of our common stock to date has been limited, averaging approximately 10,980 shares per trading day during the year ended December 31, 2011. There can be no assurance that a continuously active and liquid market for our common
stock will develop or, even if such a market did develop, could be maintained. As result, shareholders may find it difficult to sell a significant number of shares at the prevailing market price, which would make it difficult for our shareholders to
liquidate their investment in our common stock.
Our deposit insurance premiums could be substantially higher in the
future, which could have an adverse impact on our financial condition or results of operations.
Market conditions have affected the DIF of the FDIC and reduced the ratio of the insurance reserve to insured deposits. As a result, insured
depository institutions may be required to pay significantly higher premiums or additional special assessments. If we are required to pay significantly higher deposit insurance premiums or special assessments, our results of operations and financial
condition could be materially adversely impacted.
29
Under current FDIC regulations, each insured depository institution is subject to a
risk-based assessment system and, depending on its assigned risk category, is assessed insurance premiums based on the amount of deposits held. On February 7, 2011, the FDIC adopted final rules that went into effect April 1, 2011 to
implement changes to the deposit insurance assessment rules that were required by the Dodd-Frank Act. In particular, the definition of an institutions deposit insurance assessment base will change from total deposits to total assets less
tangible equity, and the new initial base assessment rates range from 5 to 35 basis points depending on risk category. As under the current FDIC regulations, following the effectiveness of the FDICs new deposit insurance assessment rules, a
depository institution with a higher assigned risk category will be assessed insurance premiums based on a higher base assessment rate, and thus will pay higher deposit insurance premiums, than the rates applicable to and premiums paid by a
similarly situated depository institution with a lower assigned risk category. If the risk category of the Bank ever declines, the Banks base deposit insurance assessment rate could increase. If the Banks base deposit insurance
assessment rate increases, the Company could be required to pay increased FDIC deposit insurance premiums that could have an adverse impact on our financial condition or results of operations.
Deterioration in the soundness of other financial institutions could adversely affect us.
Our ability to engage in routine
funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we
routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial
services institutions, or the financial services industry generally, could exacerbate the market-wide liquidity crisis and could lead to losses or defaults by us or by other institutions. There is no assurance that any such losses would not
materially adversely affect our results of operations.
Declines in asset values may result in impairment charges and
adversely affect the value of our investments, financial performance, and capital.
We maintain an investment portfolio that includes, but is not limited to, government sponsored entity securities, mortgage-backed securities and municipal
securities. The market value may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate, and a lack of liquidity for resales
of certain investment securities. We periodically, but not less than quarterly, evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value
that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion on the other-than-temporary impairment, which could have a material
adverse effect on our results of operations in the periods in which the write-offs occur.
Our adoption of Fair Value
Option (FVO) accounting could result in income statement volatility.
In 2007, we adopted the provisions of ASC 820-10 and account for certain assets and liabilities on a fair value basis. Our objective in adopting the accounting standard was
to provide the reader of the financial statements a more realistic view of our balance sheet and the market values of investments and wholesale liabilities. If our matching of assets and liabilities is not precisely achieved for business or economic
reasons, more income statement volatility may occur.
30
Our business is subject to interest rate risk and variations in interest rates may
negatively affect our financial performance.
The majority of our assets and liabilities are monetary in nature and subject us to significant risk from changes in interest rates. Fluctuations in interest rates are not
predictable or controllable. Like most financial institutions, changes in interest rates can impact our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and
interest paid on interest-bearing liabilities, such as deposits and borrowings, as well as the valuation of our assets and liabilities. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets
and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets or vice versa. In either event, if market interest rates should move contrary to our
position, this gap will negatively impact our earnings. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and
instability in domestic and foreign markets.
An increase in interest rates may, among other things, reduce the
demand for loans and our ability to originate loans. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition
for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan and mortgage-backed securities portfolios, and our overall results. Although our asset liability
management strategy is designed to control our risk from changes in market interest rates, it may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.
Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to
report our financial results on a timely basis with the desired degree of accuracy.
The requirements of Section 404 of the SOX Act and SEC rules and regulations require an annual management report on our internal controls over financial
reporting, including, among other matters, managements assessment of the effectiveness of our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be
able to report our financial results with the desired degree of accuracy or to prevent fraud.
Item 1B.
Unresolved Staff Comments
Bankshares has no unresolved comments from the SEC staff.
31
Item 2.
Properties
We typically lease our branch and office locations. Our business model seeks to minimize the level of investment in buildings and
facilities; thus we have not purchased any branch, production office or business office locations. In securing space, we are generally responsible for build out costs, furniture and fixtures, computers, telephones and bank-specific equipment such as
vaults, alarms and ATMs. In the next three years, four of our branch leases will expire. As part of our routine facilities management process we review the performance of these specific locations and the surrounding branch trade area. The evaluation
could lead to relocation of certain branch sites prior to the lease expiration or at the expiration of the lease.
The
following table highlights our facilities:
|
|
|
|
|
Address
|
|
Type of Facility
|
|
Current Base Lease Expiration
(1)
|
|
|
|
14200 Park Meadow Drive
Chantilly, Virginia
|
|
Corporate Headquarters
|
|
July 2016
|
|
|
|
12735 Shoppes Lane
Fairfax,
Virginia
|
|
Main banking office,
Full
service branch, ATM
|
|
August 2013
|
|
|
|
11730 Plaza America Drive
Reston, Virginia
|
|
Full service branch, ATM
|
|
August 2012
|
|
|
|
4501 North Fairfax Drive
Arlington, Virginia
|
|
Full service branch, ATM
|
|
June 2013
|
|
|
|
8221 Old Courthouse Road
Vienna, Virginia
|
|
Full service branch, ATM
|
|
October 2013
|
|
|
|
7023 Little River Turnpike
Annandale, Virginia
|
|
Full service branch, ATM
|
|
April 2018
|
|
|
|
9113 Manassas Drive
Manassas
Park, Virginia
|
|
Full service branch, ATM
|
|
April 2019
|
|
|
|
Cosners Corner
(2)
Fredericksburg, Virginia
|
|
Undeveloped leased space
Subleasing activities underway
|
|
January 2019
|
(1)
|
Office leases have one or more renewal options that may be exercised at our discretion subject to
terms and conditions outlined in each specific lease. Note 16 of the Notes to Consolidated Financial Statements details the future minimum rental commitments.
|
(2)
|
Bankshares has determined that the Fredericksburg branch location does not fit within our current
strategic plan. We are attempting to sublease the Cosners Corner location.
|
We believe that
all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.
32
Item 3.
Legal Proceedings
From time to time, Bankshares may be involved in litigation relating to claims arising in the normal course of its business. In the
opinion of management final disposition of any pending or threatened legal matters will not have a material adverse effect on Bankshares financial condition or results of operations.
On August 12, 2011, a lawsuit styled
Crispin, Derivatively on behalf of Nominal Defendant Alliance Bankshares
Corporation vs. Drohan, et al.
, Case No. 2011 11825 (the Crispin Lawsuit) was filed in the Circuit Court of Fairfax County (the Court) of the Commonwealth of Virginia against Bankshares, the Bank, Eagle Bancorp, Inc. (Eagle), each of
the current directors of Bankshares and Douglas W. McMinn, a former director of Bankshares. The Crispin Lawsuit purported to be brought on behalf of the shareholders of Bankshares, and alleged that the individual defendants breached and/or
aided and abetted breaches, and that the Bank and Eagle aided and abetted breaches, of fiduciary duties owed to Bankshares in connection with entry into a merger agreement among Bankshares, the Bank and Eagle. The plaintiffs in the Crispin Lawsuit
sought to enjoin the consummation of the merger of Bankshares with and into Eagle or the award of damages and further relief as the Court deemed just and proper.
On November 28, 2011, Bankshares and Alliance mutually agreed to terminate their agreement to merge. An Order of Nonsuit, dated December 5, 2011, was entered by the Court, which order dismissed
without prejudice the Crispin Lawsuit in its entirety. Bankshares does not expect the lawsuit to be re-filed given the termination of the merger agreement among it, the Bank, and Eagle.
Item 4.
Mine Safety Disclosures
Not
applicable.
PART II.
Item 5.
Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed for quotation on the NASDAQ Capital Market (formerly called the NASDAQ SmallCap Market) on the NASDAQ Stock Market System under the symbol
ABVA.
As of April 10,
2012, we had 5,109,969 shares of common stock issued and outstanding, held by approximately 318 registered shareholders of record and the closing price of our common stock was $4.20.
The high and low sales prices per share for our common stock for each quarter for the two years ended December 31, 2011, as reported
by the NASDAQ Stock Market, are shown in the table below. During these periods, we did not issue any cash dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
|
|
$
|
5.87
|
|
|
$
|
4.00
|
|
|
$
|
3.27
|
|
|
$
|
2.36
|
|
Second
|
|
|
7.00
|
|
|
|
4.56
|
|
|
|
3.38
|
|
|
|
2.30
|
|
Third
|
|
|
5.72
|
|
|
|
4.35
|
|
|
|
3.42
|
|
|
|
2.46
|
|
Fourth
|
|
|
5.60
|
|
|
|
3.31
|
|
|
|
4.17
|
|
|
|
2.65
|
|
33
Dividend Policy
Payment of dividends is at the discretion of Bankshares Board of Directors and is subject to various federal and state regulatory limitations. As a business strategy, we have elected to retain all
earnings to support current and future growth.
Issuer Purchases of Equity Securities
No repurchases of equity securities occurred in 2011 or 2010.
Item 6.
Selected Financial Data
34
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Information
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
21,706
|
|
|
$
|
26,838
|
|
|
$
|
28,541
|
|
|
$
|
29,077
|
|
|
$
|
38,352
|
|
Interest expense
|
|
|
5,633
|
|
|
|
7,918
|
|
|
|
12,609
|
|
|
|
16,721
|
|
|
|
20,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,073
|
|
|
|
18,920
|
|
|
|
15,932
|
|
|
|
12,356
|
|
|
|
17,472
|
|
Provision for loan losses
|
|
|
1,549
|
|
|
|
1,753
|
|
|
|
2,995
|
|
|
|
4,724
|
|
|
|
5,824
|
|
Non-interest income (loss)
|
|
|
690
|
|
|
|
2,159
|
|
|
|
2,243
|
|
|
|
(1,818
|
)
|
|
|
(1,089
|
)
|
Non-interest expense
|
|
|
16,208
|
|
|
|
18,277
|
|
|
|
20,870
|
|
|
|
20,359
|
|
|
|
16,130
|
|
Income taxes (benefit)
|
|
|
4,964
|
|
|
|
344
|
|
|
|
(1,965
|
)
|
|
|
(5,084
|
)
|
|
|
(2,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(5,958
|
)
|
|
|
705
|
|
|
|
(3,725
|
)
|
|
|
(9,461
|
)
|
|
|
(3,543
|
)
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(671
|
)
|
|
|
441
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
|
$
|
(4,396
|
)
|
|
$
|
(9,020
|
)
|
|
$
|
(2,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data and Shares Outstanding Data:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss)
|
|
$
|
(1.17
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.86
|
)
|
|
$
|
(1.77
|
)
|
|
$
|
(0.53
|
)
|
Fully diluted net income (loss)
|
|
|
(1.17
|
)
|
|
|
0.14
|
|
|
|
(0.86
|
)
|
|
|
(1.77
|
)
|
|
|
(0.53
|
)
|
Income (loss) continuing operations per common shares, basic
|
|
|
(1.17
|
)
|
|
|
0.14
|
|
|
|
(0.73
|
)
|
|
|
(1.85
|
)
|
|
|
(0.69
|
)
|
Income (loss) continuing operations per common shares, diluted
|
|
|
(1.17
|
)
|
|
|
0.14
|
|
|
|
(0.73
|
)
|
|
|
(1.85
|
)
|
|
|
(0.69
|
)
|
Book value at period end
|
|
|
5.50
|
|
|
|
6.60
|
|
|
|
6.49
|
|
|
|
7.28
|
|
|
|
8.96
|
|
Tangible book value at period end
|
|
|
5.50
|
|
|
|
6.60
|
|
|
|
6.49
|
|
|
|
6.12
|
|
|
|
7.71
|
|
Shares outstanding, period end
|
|
|
5,109,969
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
Average shares outstanding, basic
|
|
|
5,108,757
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
|
|
5,356,187
|
|
Average shares outstanding, diluted
|
|
|
5,108,757
|
|
|
|
5,107,800
|
|
|
|
5,106,819
|
|
|
|
5,106,819
|
|
|
|
5,356,187
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
506,483
|
|
|
$
|
538,511
|
|
|
$
|
576,335
|
|
|
$
|
572,849
|
|
|
$
|
541,262
|
|
Total loans, net of unearned discount
|
|
|
306,876
|
|
|
|
332,310
|
|
|
|
359,380
|
|
|
|
367,371
|
|
|
|
398,224
|
|
Allowance for loan loss
|
|
|
5,393
|
|
|
|
5,281
|
|
|
|
5,619
|
|
|
|
5,751
|
|
|
|
6,411
|
|
Total investment securities
|
|
|
123,463
|
|
|
|
135,852
|
|
|
|
145,031
|
|
|
|
67,998
|
|
|
|
20,338
|
|
Total trading securities
|
|
|
596
|
|
|
|
2,075
|
|
|
|
7,460
|
|
|
|
82,584
|
|
|
|
84,950
|
|
Other real estate owned
|
|
|
3,748
|
|
|
|
4,627
|
|
|
|
7,875
|
|
|
|
11,749
|
|
|
|
4,277
|
|
Total non-performing assets
|
|
|
17,969
|
|
|
|
8,930
|
|
|
|
13,495
|
|
|
|
16,644
|
|
|
|
24,287
|
|
Total deposits
|
|
|
380,443
|
|
|
|
406,943
|
|
|
|
431,908
|
|
|
|
428,724
|
|
|
|
365,264
|
|
Shareholders equity
|
|
|
28,122
|
|
|
|
33,685
|
|
|
|
33,134
|
|
|
|
37,167
|
|
|
|
45,733
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average assets
|
|
|
-1.20
|
%
|
|
|
0.13
|
%
|
|
|
nm
|
|
|
|
nm
|
|
|
|
nm
|
|
Return (loss) on average equity
|
|
|
-17.13
|
%
|
|
|
1.89
|
%
|
|
|
nm
|
|
|
|
nm
|
|
|
|
nm
|
|
Net interest margin
(1)
|
|
|
3.55
|
%
|
|
|
3.79
|
%
|
|
|
2.89
|
%
|
|
|
2.52
|
%
|
|
|
3.22
|
%
|
|
|
|
|
|
|
Asset Quality Ratios:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to period-end loans
|
|
|
1.76
|
%
|
|
|
1.59
|
%
|
|
|
1.56
|
%
|
|
|
1.57
|
%
|
|
|
1.61
|
%
|
Allowance to non-performing assets
|
|
|
.30
|
X
|
|
|
0.59
|
X
|
|
|
0.42
|
X
|
|
|
0.34
|
X
|
|
|
0.26
|
X
|
Non-performing assets to total assets
|
|
|
3.51
|
%
|
|
|
1.75
|
%
|
|
|
2.34
|
%
|
|
|
2.91
|
%
|
|
|
4.48
|
%
|
Net charge-offs to average loans
|
|
|
0.45
|
%
|
|
|
0.61
|
%
|
|
|
0.87
|
%
|
|
|
1.43
|
%
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital
|
|
|
12.5
|
%
|
|
|
11.6
|
%
|
|
|
10.4
|
%
|
|
|
9.6
|
%
|
|
|
11.7
|
%
|
Total risk-based capital
|
|
|
13.8
|
%
|
|
|
12.9
|
%
|
|
|
11.6
|
%
|
|
|
10.9
|
%
|
|
|
12.9
|
%
|
Leverage capital ratio
|
|
|
7.5
|
%
|
|
|
7.5
|
%
|
|
|
7.1
|
%
|
|
|
7.6
|
%
|
|
|
9.0
|
%
|
Total equity to total assets
|
|
|
5.6
|
%
|
|
|
6.3
|
%
|
|
|
5.8
|
%
|
|
|
6.5
|
%
|
|
|
8.5
|
%
|
(1)
|
Net interest income divided by total average earning assets.
|
(2)
|
Non-performing assets consist of nonaccrual loans, other impaired loans, TDRs, loans
greater than 90 days and accruing and foreclosed properties.
|
35
Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding and evaluating the
financial condition and results of operations of Alliance Bankshares Corporation (Bankshares), Alliance Bank Corporation (Bank), and Alliance Bank Mortgage Division (ABMD) on a consolidated basis. This discussion and analysis should be read in
conjunction with Bankshares consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Some of the matters discussed below and
elsewhere in this report include forward-looking statements. Forward-looking statements often use words such as believe, expect, plan, may, will, should, project,
contemplate, anticipate, forecast, intend or other words of similar meaning. Forward-looking statements in this report may include, but are not limited to, profitability, liquidity, Bankshares
loan portfolio, adequacy of the allowance for loan losses and provisions for loan losses, trends regarding net charge-offs, trends regarding levels of non-performing assets, interest rates and yields, interest rate sensitivity, market risk,
regulatory developments, capital requirements, business strategy, the effects of Bankshares efforts to reposition its business and other goals or objectives.
You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. The forward-looking statements Bankshares makes in this report are subject to
significant risks, assumptions and uncertainties, including among other things, the following important factors that could affect the actual outcome of future events:
|
|
|
Changes in the strength of the national economy in general and the local economies in Bankshares market areas that adversely affect
Bankshares customers and their ability to transact profitable business with us, including the ability of Bankshares borrowers to repay their loans according to their terms or a change in the value of the related collateral;
|
|
|
|
Retention of existing employees;
|
|
|
|
Maintaining and developing well established and valuable client relationships and referral source relationships;
|
|
|
|
Changing trends in customer profiles and behavior;
|
|
|
|
Direct and substantive competition from other financial services companies targeting certain key business lines;
|
|
|
|
Other competitive factors within the financial services industry;
|
|
|
|
Changes in the availability of funds resulting in increased costs or reduced liquidity;
|
|
|
|
Changes in accounting policies, rules and practices;
|
|
|
|
Changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and
credit markets, and soundness of other financial institutions Bankshares does business with;
|
|
|
|
The timing of and value realized upon the sale of Other Real Estate Owned (OREO) property;
|
|
|
|
Changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates;
|
|
|
|
Fiscal and governmental policies of the United States federal government;
|
36
|
|
|
Reactions in financial markets related to potential or actual downgrades in the sovereign credit rating of the United States and the budget deficit or
national debt of the United States government;
|
|
|
|
The impact of the Dodd-Frank Act, related regulatory rulemaking processes and other legislative and regulatory initiatives on the regulation and
supervision of financial institutions, specifically depository institutions;
|
|
|
|
The impact of changes to capital requirements that apply to financial institutions and depository institutions, including changes related to the
proposed Basel III capital standards;
|
|
|
|
Changes in the way the FDIC insurance premiums are assessed;
|
|
|
|
Changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
|
|
|
|
Timing and implementation of certain balance sheet strategies;
|
|
|
|
Impairment concerns and risks related to Bankshares investment portfolio, and the impact of fair value accounting, including income statement
volatility;
|
|
|
|
Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;
|
|
|
|
Changes in tax laws and regulations;
|
|
|
|
Bankshares ability to recognize future tax benefits;
|
|
|
|
Impacts of implementing various accounting standards; and
|
|
|
|
Other factors described from time to time in our SEC filings.
|
In addition, Bankshares business and financial performance could be impacted as the financial industry restructures in the current
environment, both by changes in the creditworthiness and performance of Bankshares counterparties and by changes in the regulatory and competitive landscape. Additionally, other risks that could cause actual results to differ from predicted
results are set forth in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2011.
Because
of these and other uncertainties, Bankshares actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, Bankshares past results of operations are not necessarily
indicative of future performance.
Bankshares cautions you that the above list of important factors is not exclusive. These
forward-looking statements are made as of the date of this report, and Bankshares may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking
statements are made.
2011 Performance Highlights
|
|
|
Total assets were $506.5 million at December 31, 2011, a decrease of $32.0 million from December 31, 2010 total assets of $538.5 million. The
decrease in total assets is directly related to the payoff of a number of loan relationships, scheduled principal repayments, reductions in Bankshares investment securities portfolio and the valuation allowance on net deferred tax assets
offset by an increase in cash and due from banks. The increase in cash and due from banks relates to the cyclical nature of Bankshares title and escrow clients.
|
|
|
|
Total loans were $306.9 million at December 31, 2011, a decrease of $25.4 million, or 7.7%, from the December 31, 2010 balance of $332.3
million. The decrease results from the payoffs of a number of loan relationships as well as scheduled principal repayments. While new loan
|
37
|
activity has increased in 2011, the volume of originations has not kept pace with repayments. Each loan segment as a percentage of total loans at December 31, 2011 is nearly unchanged from
the percentages at December 31, 2010.
|
|
|
|
Deposits were $380.4 million at December 31, 2011, a decrease of $26.5 million from the December 31, 2010 balance of $406.9 million. This
decrease is due to the maturity of time deposits that have closed due to interest rate competition.
|
|
|
|
Demand deposits were $112.5 million at December 31, 2011, or 29.6% of total deposits. This compares to the December 31, 2010 level of $124.6
million or 30.6% of total deposits.
|
|
|
|
Bankshares ratio of non-performing assets to total assets was 3.53% as of December 31, 2011 compared to 1.75% as of December 31, 2010,
an increase of 178 basis points. As of December 31, 2011, the composition of non-performing assets was $13.3 million of non-accrual loans, $3.7 million of OREO, and $956 thousand of troubled debt restructured loans for a total of $18.0 million,
compared to total non-performing assets as of December 31, 2010, of $9.4 million. The non-accrual balance increased by $11.4 million at December 31, 2011 compared to December 31, 2010.
|
|
|
|
The investment securities portfolio totaled $123.5 million at December 31, 2011. This compares to $135.9 million of investments as of
December 31, 2010, a decrease of $12.4 million, or 9.1%. Targeted efforts by management to strategically restructure the balance sheet as well as opportunistic gains-taking led to the reduction in the investment securities portfolio.
|
|
|
|
Net loss for the year ended December 31, 2011 was $6.0 million compared to net income of $705 thousand for the same period in 2010, a decline of
$6.7 million. Earnings per common share, basic and diluted, amounted to $(0.13) for the year ended December 31, 2011, compared to $(1.17) for the year ended December 31, 2010. Earnings were negatively affected by the terminated merger
related expenses of $1.2 million, a decreased net margin, OREO write-downs, the fair value adjustment on the FHLB advance of $3.1 million, settlement of a legal action relating to the previous sale of a Bank-owned residential property and deferred
tax valuation allowance of $5.3 million. The negative adjustment of $3.1 million on the FHLB advance was due to lower market rates and management electing to use a more advanced model in valuing the advance. These negative events were partially
offset by gains on sale of available-for-sale securities in the amount of $3.4 million, as compared to $2.2 million for the same period in 2010.
|
|
|
|
Non-interest expense for 2011 amounted to $16.2 million compared to $18.3 million for the same period in 2010, a decrease of $2.1 million. The key
components of the decrease in non-interest expense are salary and benefits expense and other real estate owned expense, offset by the inclusion of $1.2 million in merger expenses.
|
Executive Overview
Bankshares primary long-term goals continue to be maximizing earnings and deploying capital in profit driven initiatives that will
enhance shareholder value in a sustainable fashion. In pursuit of these goals, Bankshares current emphasis is on optimizing profitability in the near term and strengthening the financial performance of the Company, while also transitioning its
operations to focus more closely on traditional banking activities and to reposition Bankshares for the future. Bankshares transitional strategies include, among others, continuing the following initiatives:
|
|
|
Diversifying the loan portfolio by increasing Bankshares focus on commercial loans and loans secured by owner occupied commercial real estate,
while continuing to be an active lender in attractive segments of the residential and commercial real estate markets.
|
|
|
|
Reducing the investment securities portfolio and eliminating the trading assets portfolio.
|
38
|
|
|
Continuing to attentively manage the level of non-performing assets by addressing problem loans on a timely basis.
|
|
|
|
Increasing low cost deposits by local commercial and retail customers, while working to reduce Bankshares brokered deposit portfolio.
|
|
|
|
Reducing Bankshares operating and funding costs.
|
Balance Sheet
December 31, 2011 compared to December 31,
2010.
Total assets were $506.5 million as of December 31, 2011, a decrease of $32.0 million from the December 31, 2010 level of $538.5 million. As of year-end 2011, total loans were $306.9 million, trading securities were $596
thousand and investment securities were $123.5 million. The remaining balance of the earning assets were overnight federal funds sold of $16.6 million and restricted stocks of $4.8 million. These earning assets amounted to $452.3 million or 89.3% of
total assets at year end 2011, as compared to $494.4 million or 91.8% of total assets as of year-end 2010.
The allowance for
loan losses was $5.4 million or 1.76% of loans outstanding as of December 31, 2011. This compares to $5.3 million or 1.59% of loans outstanding as of December 31, 2010. Non-performing assets totaled $18.0 million as of
December 31, 2011, compared to non-performing assets of $9.4 million as of December 31, 2010. Impaired loans and non-accruals amounted to $13.3 million as of December 31, 2011, and, in addition, the specific allocation of the
allowance for loan losses related to these loans was $2.3 million as of December 31, 2011. Impaired and non-accrual loans as of December 31, 2010 were $4.3 million and a specific allocation of $873 thousand of the allowance for loan losses
was provided by Bankshares on these loans.
Total deposits amounted to $380.4 million as of December 31, 2011, a decrease
of $26.5 million from the December 31, 2010 level of $406.9 million. Total demand deposits were $112.5 million as of December 31, 2011 compared to $124.6 million as of year end 2010. Demand deposits represent 29.6% of total deposits
as of December 31, 2010, compared to 30.6% as of December 31, 2010.
We use customer repurchase agreements (repos)
and wholesale funding from the Federal Home Loan Bank of Atlanta (FHLB) to support the asset growth of the organization. As of December 31, 2011, there were $40.4 million of customer repos outstanding, which is $2.7 million less than were
outstanding at the end of 2010. As of December 31, 2011, the organization had $44.4 million in FHLB long term advances outstanding, compared to $41.2 million as of December 31, 2010. The longer term FHLB advances are used as part of our
overall balance sheet management strategy.
In June 2003, we issued $10.0 million in Trust Preferred Capital Notes through a
statutory business trust. As of December 31, 2011 and December 31, 2010, the full $10.0 million was considered Tier 1 regulatory capital. The Trust Preferred Capital Notes accrue interest at a rate of 3 month LIBOR plus 315 basis points.
Bankshares elected to defer the cash payments due on various quarterly installments due dates throughout 2011 and 2010 in accordance with the terms of the indenture governing the Trust Preferred Capital Notes
Total shareholders equity was $28.1 million as of December 31, 2011, compared to $33.7 million as of
December 31, 2010. The change from the 2010 level is primarily related to the net loss of $6.0 million. Book value per share decreased to $5.50 as of December 31, 2011 from $6.60 as of December 31, 2010.
39
December 31, 2010 compared to December 31, 2009.
Total assets were
$538.5 million as of December 31, 2010, a decrease of $37.8 million from the December 31, 2009 level of $576.3 million. As of year-end 2010, total loans were $332.3 million, trading securities were $2.1 million and investment securities
were $135.9 million. The remaining balance of the earning assets were overnight federal funds sold of $17.9 million and restricted stocks of $6.4 million. These earning assets amounted to $494.5 million or 91.8% of total assets at year end 2010, as
compared to $523.1 million or 90.8% of total assets as of year-end 2009.
The allowance for loan losses was $5.3 million or
1.59% of loans outstanding as of December 31, 2010. This compares to $5.6 million or 1.56% of loans outstanding as of December 31, 2009. (The ratios exclude loans held for sale.) Non-performing assets totaled $9.4 million as of
December 31, 2010, compared to non-performing assets of $13.5 million as of December 31, 2009. Impaired loans and non-accruals amounted to $4.3 million as of December 31, 2010; in addition the specific allocation of the allowance for
loan losses related to these loans was $873 thousand as of December 31, 2010. Impaired and non-accrual loans as of December 31, 2009 were $5.6 million; we provided a specific allocation of $1.5 million of the allowance for loan losses on
these loans.
Total deposits amounted to $406.9 million as of December 31, 2010, a decrease of $25.0 million from the
December 31, 2009 level of $431.9 million. Total demand deposits were $124.6 million as of December 31, 2010 compared to $92.8 million as of year end 2009. Demand deposits represent 30.6% of total deposits as of December 31,
2010, compared to 21.5% as of December 31, 2009.
We use customer repurchase agreements (repos) and wholesale
funding from the FHLB to support the asset growth of the organization. As of December 31, 2010, there were $43.1 million of customer repos outstanding or $5.4 million more than were outstanding at the end of 2009. As of December 31, 2010,
the organization had $41.2 million in FHLB long term advances outstanding, compared to $50.8 million as of December 31, 2009. The longer term FHLB advances are used as part of our overall balance sheet management strategy.
In June 2003, we issued $10.0 million in Trust Preferred Capital Notes through a statutory business trust. As of December 31, 2010
and December 31, 2009, the full $10.0 million was considered Tier 1 regulatory capital. The Trust Preferred Capital Notes accrue interest at a rate of 3 month LIBOR plus 315 basis points. Bankshares elected to defer the cash payments due on
various quarterly installments due dates throughout 2010 and 2009 in accordance with the terms of the indenture governing the Trust Preferred Capital Notes.
Total shareholders equity was $33.7 million as of December 31, 2010 and $33.1 million as of December 31, 2009. The change from the 2009 level is primarily related to the net income of $705
thousand. Book value per share increased to $6.60 as of December 31, 2010 from $6.49 as of December 31, 2009.
Critical
Accounting Policies
Bankshares financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Bankshares uses historical loss factors as one factor in determining the inherent loss that may be present
in its loan portfolio. Actual losses could differ significantly from the historical factors that Bankshares uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics
of our transactions would be the same, the timing of events that would impact our financial statements could change.
40
Allowance for Loan Losses.
The allowance for loan losses is an estimate of the
losses that may be sustained in Bankshares loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05, Contingencies which requires that losses be accrued when they are probable of occurring and
estimable, and (2) ASC 310-10-35, Receivables 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. The allowance for loan losses has two basic components: the general allowance and the specific allowance.
The
general allowance is developed following the accounting principles contained in ASC 450-10-05, Contingencies and represents the largest component of the total allowance. It is determined by aggregating unclassified loans and unimpaired loans by loan
type based on common purpose, collateral, repayment source or other credit characteristics and then applying factors which in the judgment of management represent the expected losses inherent in the portfolio. In determining these factors,
Bankshares considers the following: (1) delinquencies and overall risk ratings, (2) loss history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the experience and depth of the
borrowers management, (6) national and local economic trends, (7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g.,
competition and regulatory requirements).
ASC 310-10-35, Receivables is the basis upon which Bankshares determines specific
reserves on individual loans which comprise the specific allowance. Specific loans to be evaluated for impairment are identified based on the borrowers loan size and the loans risk rating, collateral position and payment history. If it
is determined that it is likely that the Bank will not receive full payment in a timely manner, the loan is determined to be impaired. Each such identified loan is then evaluated to determine the amount of reserve that is appropriate based on ASC
310-10-35. This standard also requires that losses be accrued based on the differences between the value of collateral, present value of expected future cash flows or values that are observable in the secondary market and the loan balance.
Share-Based Compensation
. ASC 718-10, Stock Compensation, requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, such as stock options and non-vested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the Black-Scholes model to estimate
fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Deferred Tax Asset.
Bankshares, using a third party agent routinely evaluates the likelihood of the recognition of deferred
tax assets. The analysis is used to determine if a valuation allowance for deferred tax assets is necessary. Bankshares reviews and analyzes various forms of positive and negative evidence in determining whether a valuation allowance is necessary
and if so to what degree a valuation allowance is warranted.
Bankshares considered positive evidence such as recent financial
performance, previous earnings patterns, the recent history of loan charge-offs, non-performing assets, OREO expenses, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within a reasonable time
horizon. Bankshares considered negative evidence such as operating losses in prior fiscal periods and trends in market values of its real estate collateral. Bankshares also considered several different economic scenarios in evaluating whether the
projected income in future periods was sufficient to recover the NOL over a reasonable time horizon. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. The projected performance
metrics over the period of NOL recognition indicates that, as of December 31, 2011, it is more likely than not that Bankshares will not have sufficient taxable income in the future to recognize all of the deferred tax assets, and a valuation
allowance was recognized.
41
Results of Operations
2011 compared to 2010.
For the year ended December 31, 2011, the net loss amounted to $6.0 million thousand compared to net income of $705 thousand for 2010. Basic and diluted net
income (loss) per common share was $(1.17) in 2011 and $0.14 in 2010. Return on average equity was -17.13% in 2011 compared to 1.89% in 2010. The net interest margin was 3.55% in 2011 compared to 3.79% in 2010. The key drivers of our net loss were
the terminated merger expenses of $1.2 million, a decreased net interest margin, OREO write-downs, the settlement of a legal action relating to the previous sale of a Bank-owned residential property, recognition of a $5.3 million valuation allowance
for deferred tax assets, and the fair value adjustment on the FHLB advance of $3.1 million.
2010 compared to
2009
. For the year ended December 31, 2010, net income amounted to $705 thousand, compared to net loss of ($4.4) million for 2009. Basic and diluted net income (loss) per common share was $0.14 in 2010 and ($0.86) in 2009. Earnings
(loss) per share from continuing operations was $0.14 at December 31, 2010 compared to ($0.73) at December 31, 2009. Return on average equity was 1.89% in 2010 compared to (12.23%) in 2009. Return on average assets was 0.13% in 2010
compared to (0.74%) in 2009. The net interest margin was 3.79% in 2010 which compares to 2.89% in 2009. The key drivers of our improved net income in 2010 were an improved net interest margin, reduced credit and OREO related costs, reduced operating
expenses, and gains on sale of investment securities.
Interest Income and Expense
Net interest income (on a fully tax equivalent basis) for the year ended December 31, 2011 was $16.2 million compared to $19.4
million for the same period in 2010. Interest income on earning assets was $5.3 million lower for the year ended December 31, 2011, compared to 2010. Of the $5.3 million decrease in interest income, $1.2 million is attributable to the $24.7
million lower average balance in loans. The decrease in yield from 5.94% to 5.65% in the loan portfolio also contributed $1.1 million to the decrease in interest income. The reduction in the average balance in the investment securities portfolio was
$22.9 million and contributed $914 thousand to the reduction in interest income. The decrease in yield from 4.49% to 2.92% in the investment securities portfolio also contributed $2.0 million to the decrease in interest income. This was offset by
the decrease in interest expense of $2.3 million. The average balance of interest-bearing deposits decreased by $41.6 million and contributed $839 thousand to the reduction in interest expense. The average rate paid on deposits improved to 1.48%
from 1.96%, which reduced interest expense by $1.3 million. A lower average balance of borrowed funds offset a higher rate paid on borrowed funds.
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities,
shareholders equity and related income, expense and corresponding weighted average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.
42
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances, Interest Income and Expense and Average Yield and Rates
(1)
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Average
Balance
|
|
|
Income /
Expense
|
|
|
Yield /
Rate
|
|
|
Average
Balance
|
|
|
Income /
Expense
|
|
|
Yield /
Rate
|
|
|
Average
Balance
|
|
|
Income /
Expense
|
|
|
Yield /
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(2)
|
|
$
|
320,005
|
|
|
$
|
18,073
|
|
|
|
5.65
|
%
|
|
$
|
344,684
|
|
|
$
|
20,476
|
|
|
|
5.94
|
%
|
|
$
|
360,993
|
|
|
$
|
21,106
|
|
|
|
5.85
|
%
|
Trading securities
|
|
|
948
|
|
|
|
67
|
|
|
|
7.07
|
%
|
|
|
3,296
|
|
|
|
214
|
|
|
|
6.49
|
%
|
|
|
39,375
|
|
|
|
1,485
|
|
|
|
3.77
|
%
|
Investment securities
|
|
|
123,764
|
|
|
|
3,617
|
|
|
|
2.92
|
%
|
|
|
146,639
|
|
|
|
6,580
|
|
|
|
4.49
|
%
|
|
|
125,039
|
|
|
|
5,894
|
|
|
|
4.71
|
%
|
Federal funds sold
|
|
|
10,956
|
|
|
|
53
|
|
|
|
0.48
|
%
|
|
|
17,450
|
|
|
|
64
|
|
|
|
0.37
|
%
|
|
|
25,164
|
|
|
|
56
|
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
455,673
|
|
|
|
21,810
|
|
|
|
4.79
|
%
|
|
|
512,069
|
|
|
|
27,334
|
|
|
|
5.34
|
%
|
|
|
550,571
|
|
|
|
28,541
|
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
25,934
|
|
|
|
|
|
|
|
|
|
|
|
23,986
|
|
|
|
|
|
|
|
|
|
|
|
18,902
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
Other Real Estate Owned (OREO)
|
|
|
4,295
|
|
|
|
|
|
|
|
|
|
|
|
6,732
|
|
|
|
|
|
|
|
|
|
|
|
10,234
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
15,925
|
|
|
|
|
|
|
|
|
|
|
|
19,735
|
|
|
|
|
|
|
|
|
|
|
|
20,474
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(5,450
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,420
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
42,280
|
|
|
|
|
|
|
|
|
|
|
|
46,876
|
|
|
|
|
|
|
|
|
|
|
|
46,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
497,953
|
|
|
|
|
|
|
|
|
|
|
$
|
558,945
|
|
|
|
|
|
|
|
|
|
|
$
|
596,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
42,566
|
|
|
$
|
118
|
|
|
|
0.28
|
%
|
|
$
|
47,600
|
|
|
$
|
207
|
|
|
|
0.43
|
%
|
|
$
|
46,476
|
|
|
$
|
440
|
|
|
|
0.95
|
%
|
Money market deposit accounts
|
|
|
24,318
|
|
|
|
178
|
|
|
|
0.73
|
%
|
|
|
24,648
|
|
|
|
270
|
|
|
|
1.10
|
%
|
|
|
18,780
|
|
|
|
274
|
|
|
|
1.46
|
%
|
Savings accounts
|
|
|
4,176
|
|
|
|
6
|
|
|
|
0.14
|
%
|
|
|
3,875
|
|
|
|
9
|
|
|
|
0.23
|
%
|
|
|
3,791
|
|
|
|
14
|
|
|
|
0.37
|
%
|
Time deposits
(3)
|
|
|
196,638
|
|
|
|
3,671
|
|
|
|
1.87
|
%
|
|
|
233,201
|
|
|
|
5,577
|
|
|
|
2.39
|
%
|
|
|
286,262
|
|
|
|
9,713
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
267,698
|
|
|
|
3,973
|
|
|
|
1.48
|
%
|
|
|
309,324
|
|
|
|
6,063
|
|
|
|
1.96
|
%
|
|
|
355,309
|
|
|
|
10,441
|
|
|
|
2.94
|
%
|
FHLB advances
(4)
|
|
|
41,922
|
|
|
|
1,042
|
|
|
|
2.49
|
%
|
|
|
54,301
|
|
|
|
1,134
|
|
|
|
2.09
|
%
|
|
|
51,054
|
|
|
|
1,158
|
|
|
|
2.27
|
%
|
Other borrowings
|
|
|
58,749
|
|
|
|
618
|
|
|
|
1.05
|
%
|
|
|
55,202
|
|
|
|
721
|
|
|
|
1.31
|
%
|
|
|
55,446
|
|
|
|
1,010
|
|
|
|
1.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
368,369
|
|
|
|
5,633
|
|
|
|
1.53
|
%
|
|
|
418,827
|
|
|
|
7,918
|
|
|
|
1.89
|
%
|
|
|
461,809
|
|
|
|
12,609
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
92,300
|
|
|
|
|
|
|
|
|
|
|
|
100,365
|
|
|
|
|
|
|
|
|
|
|
|
96,326
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
2,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
463,175
|
|
|
|
|
|
|
|
|
|
|
|
521,550
|
|
|
|
|
|
|
|
|
|
|
|
560,886
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
34,778
|
|
|
|
|
|
|
|
|
|
|
|
37,395
|
|
|
|
|
|
|
|
|
|
|
|
35,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
$
|
497,953
|
|
|
|
|
|
|
|
|
|
|
$
|
558,945
|
|
|
|
|
|
|
|
|
|
|
$
|
596,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(5)
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
2.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(6)
|
|
|
|
|
|
$
|
16,177
|
|
|
|
3.55
|
%
|
|
|
|
|
|
$
|
19,416
|
|
|
|
3.79
|
%
|
|
|
|
|
|
$
|
15,932
|
|
|
|
2.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.
|
(2)
|
The Bank had average non-accruing loans of $11.5 million, $3.6 million, and $5.2 million in 2011, 2010, and 2009 respectively.
|
|
The 2011, 2010 and 2009 interest income excluded from the loans above was $801 thousand, $222 thousands and $256 thousand respectively.
|
(3)
|
Average fair value of time deposits as of 2011, 2010, and 2009 was $0, $0 and $11.9 million
respectively.
|
(4)
|
Average fair value of FHLB advances as of 2011, 2010 and 2009 was $26.9, $26.2 million, and $25.8
million respectively.
|
(5)
|
Interest spread is the average yield earned on earning assets, less the average rate incurred on
interest-bearing liabilities.
|
(6)
|
Net interest margin is net interest income, expressed as a percentage of average earning assets.
|
43
Our net interest margin was 3.55% for the year ended December 31, 2011, compared to
3.79% for 2010. The net interest income earned, on a fully taxable equivalent basis, was $16.2 million in 2011 compared to $19.4 million in 2010, a decrease of 16.6%. The decrease in net interest margin was due to a substantial increase in loans on
non-accrual and the restructuring of the investment portfolio.
Average loan balances were $320.0 million for the year ended
December 31, 2011, compared to $344.7 million for 2010. This is a decrease of $24.7 million, or 7.2%. The related interest income from loans was $18.1 million in 2011, a decrease of $2.4 million from the 2010 level of $20.5 million. The average
yield on loans decreased to 5.65% in 2011, a decrease of 29 basis points from 5.94% for the same period in 2010.
Trading
securities averaged $948 thousand for the year ended December 31, 2011 compared to $3.3 million for the year ended December 31, 2010. As part of our strategic management of the balance sheet, we took proactive steps to reduce the size of
the trading portfolio. In 2010, we continued our strategy to liquidate our trading assets when economically feasible or when market conditions improved. As of December 31, 2011, we held only one trading asset position amounting to $596
thousand. Interest income on trading securities for the year ended December 31, 2011 was $67 thousand compared to $214 thousand for the same period in 2010. The average yield on trading securities increased to 7.07% in 2011 an increase of 58
basis points from 6.49% for the same period in 2010.
Investment securities averaged $123.8 million for the year ended
December 31, 2011 compared to $146.6 million for the year ended December 31, 2010. Investment securities income was $3.6 million on a fully taxable equivalent basis for the year ended December 31, 2011 and $6.6 million for the year
ended December 31, 2010. The average tax equivalent yields on investment securities for the year ended December 31, 2011 and 2010 were 2.92% and 4.49% respectively.
A certain portion of the Banks excess liquidity is invested in federal funds sold. For the year ended December 31, 2011, federal funds sold contributed $53 thousand of interest income, compared
to $64 thousand for the same period in 2010.
Average interest-bearing liabilities (deposits and purchased funds) were $368.4
million in 2011, which was $50.5 million less than the 2010 level of $418.8 million. Interest expense for all interest-bearing liabilities amounted to $5.6 million for the year ended December 31, 2011, a $2.3 million decrease from the 2010
level of $7.9 million. The average cost of interest-bearing liabilities for the year ended December 31, 2011 was 1.53% or 36 basis points lower than the 2010 level of 1.89%. The declining and low interest environment allowed for market
competitive repricing of certain core deposit products in 2011. Additionally, the brokered certificate of deposit portfolio benefited from the lower interest rate environment as well.
Average time deposits for 2011 were $196.6 million, a decrease of $36.6 million over the 2010 level of $233.2 million. Average FHLB
advances were $41.9 million in 2011, which is $12.4 million lower than the 2010 average of $54.3 million. Average other borrowings were $58.7 million as of December 31, 2011, an increase of $3.5 million from the 2010 level of $55.2 million.
Other borrowings are principally comprised of customer repurchase agreements and federal funds purchased.
Non-interest-bearing demand deposit balances averaged $92.3 million as of the year ended December 31, 2011, or $8.1 million less
than the year ended December 31, 2010 balance of $100.4 million. These balances are subject to seasonal changes.
The
following table describes the impact on our tax equivalent interest income and expense resulting from changes in average balances and average rates for the periods indicated. The change in interest income due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume and Rate Analysis
|
|
|
|
|
|
|
Years Ended December 31,
2011
compared to 2010
|
|
|
Years Ended December 31,
2010
compared to 2009
|
|
|
|
Change Due To:
|
|
|
Change Due To:
|
|
|
|
Increase /
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Increase /
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
(2,963
|
)
|
|
$
|
(914
|
)
|
|
$
|
(2,049
|
)
|
|
$
|
686
|
|
|
$
|
940
|
|
|
$
|
(254
|
)
|
Trading securities
|
|
|
(147
|
)
|
|
|
(168
|
)
|
|
|
21
|
|
|
|
(1,271
|
)
|
|
|
(5,978
|
)
|
|
|
4,707
|
|
Loans
|
|
|
(2,160
|
)
|
|
|
(1,170
|
)
|
|
|
(1,083
|
)
|
|
|
(630
|
)
|
|
|
(955
|
)
|
|
|
325
|
|
Federal funds sold
|
|
|
(11
|
)
|
|
|
(55
|
)
|
|
|
44
|
|
|
|
8
|
|
|
|
(7
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(5,281
|
)
|
|
|
(2,307
|
)
|
|
|
(3,067
|
)
|
|
|
(1,207
|
)
|
|
|
(6,000
|
)
|
|
|
4,793
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
(2,090
|
)
|
|
|
(839
|
)
|
|
|
(1,251
|
)
|
|
|
(4,378
|
)
|
|
|
(1,490
|
)
|
|
|
(2,888
|
)
|
Borrowed funds
|
|
|
(195
|
)
|
|
|
(524
|
)
|
|
|
329
|
|
|
|
(313
|
)
|
|
|
93
|
|
|
|
(406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
(2,285
|
)
|
|
|
(1,363
|
)
|
|
|
(922
|
)
|
|
|
(4,691
|
)
|
|
|
(1,397
|
)
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
(2,996
|
)
|
|
$
|
(944
|
)
|
|
$
|
(2,145
|
)
|
|
$
|
3,484
|
|
|
$
|
(4,603
|
)
|
|
$
|
8,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio
In its lending activities, Bankshares seeks to develop substantial relationships with clients whose business and individual banking needs will grow with the Bank. Bankshares has made significant efforts
to be responsive to the lending needs in the markets served, while maintaining sound asset quality and credit practices. Bankshares grants credit to commercial business, commercial real estate, real estate construction, residential real estate and
consumer borrowers in the normal course of business. The loan portfolio net of discounts and fees was $306.9 million as of December 31, 2011 or $25.4 million lower than the December 31, 2010 level of $332.3 million. The decline in the loan
portfolio is attributable to the pay down of loans that more than offset the production of new loans during the year. Loan reductions during 2011 resulted from scheduled loan amortizations of approximately $10 million; scheduled maturities and pay
offs of approximately $12 million; strategic reductions in exposure of approximately $10 million (generally due to credit or concentration risk). In addition, approximately $10 million of loans were repaid from borrower asset sales or re-financings.
45
The following tables summarize the composition of the loan portfolio by dollar amount and
each segment as a percentage of the total loan portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate
|
|
$
|
101,248
|
|
|
$
|
110,862
|
|
|
$
|
110,449
|
|
|
$
|
92,764
|
|
|
$
|
78,462
|
|
Commercial real estate
|
|
|
137,610
|
|
|
|
146,222
|
|
|
|
153,314
|
|
|
|
154,929
|
|
|
|
151,017
|
|
Construction/land
|
|
|
39,176
|
|
|
|
43,017
|
|
|
|
50,140
|
|
|
|
71,771
|
|
|
|
114,305
|
|
Commercial and industrial
|
|
|
26,820
|
|
|
|
27,517
|
|
|
|
40,585
|
|
|
|
44,409
|
|
|
|
50,736
|
|
Consumer - non real estate
|
|
|
2,022
|
|
|
|
4,692
|
|
|
|
4,413
|
|
|
|
3,028
|
|
|
|
3,704
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
479
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
306,876
|
|
|
$
|
332,310
|
|
|
$
|
359,380
|
|
|
$
|
367,371
|
|
|
$
|
398,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Loans to Total Year-end Loans by Portfolio Segment
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Residential Real Estate
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
25
|
%
|
|
|
20
|
%
|
Commercial Real Estate
|
|
|
45
|
%
|
|
|
44
|
%
|
|
|
43
|
%
|
|
|
42
|
%
|
|
|
38
|
%
|
Construction/land
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
29
|
%
|
Commercial and industrial
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
Consumer - non real estate
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all loans are initially underwritten based on identifiable cash flows and supported by
appropriate advance rates on collateral which is independently valued. Commercial loans are generally secured by accounts receivable, equipment and business assets. Commercial real estate is secured by owner-occupied or income producing commercial
properties of all types. Real estate construction loans are supported by projects which generally require an appropriate level of pre-sales or pre-leasing. Generally, all commercial and real estate loans have full recourse to the owners and/or
sponsors. Residential real estate is secured by first or second trusts on both owner-occupied and investor-owned residential properties.
As noted in the table above, loans secured by various types of real estate constitute a significant portion of total loans. Commercial real estate loans represent the largest dollar
exposure. Substantially all of these loans are secured by properties in the Metropolitan Washington, D.C. area with the heaviest concentration in Northern Virginia and Fairfax County in particular. Risk is managed through diversification by
sub-market, property type, and loan size. Risk is further managed by seeking investment property loans with multiple tenants and by emphasizing owner-occupied loans. The average loan size in this portfolio is $634 thousand as of
December 31, 2011.
The current levels of construction/land loans are a product of managements efforts to
de-emphasize this type of lending in recent years. New originations in this segment are being underwritten in the context of current market conditions and are particularly focused in sub-markets which appear to be the strongest in the
region. Legacy loans, particularly in the land portion of this portfolio, have been largely converted to amortizing loans with regular principal and interest payments. We expect to see further reductions in our land exposure offset by
potential increases in certain residential construction activities as market conditions improve.
The bulk of the reduction in
the loan portfolio from 2010 to 2011 is concentrated in residential and commercial real estate loan portfolios. While modest growth occurred across the various loan categories
46
in the form of new borrowing clients and new loans to existing borrowers, the impact of that growth was overshadowed by loan balance reductions from planned reduction in exposure to higher risk
clients, pay offs from clients following asset sales or other borrower liquidity events, and lower borrowings under commercial revolving credit facilities.
The following table presents the maturities or repricing periods of selected loans outstanding at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Maturity Distribution
As of
December 31, 2011
|
|
|
|
One Year
or Less
|
|
|
After One Year
Through
Five Years
|
|
|
After
Five Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
14,889
|
|
|
$
|
10,131
|
|
|
$
|
1,800
|
|
|
$
|
26,820
|
|
Construction/land
|
|
|
27,465
|
|
|
|
8,784
|
|
|
|
2,927
|
|
|
|
39,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,354
|
|
|
$
|
18,915
|
|
|
$
|
4,727
|
|
|
$
|
65,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
$
|
64,716
|
|
|
$
|
75,067
|
|
|
$
|
68,990
|
|
|
$
|
208,773
|
|
Variable rates
|
|
|
42,496
|
|
|
|
51,403
|
|
|
|
4,204
|
|
|
|
98,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,212
|
|
|
$
|
126,470
|
|
|
$
|
73,194
|
|
|
$
|
306,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality
Bankshares segregates loans meeting the criteria for special mention, substandard, doubtful and loss from non-classified, or pass rated, loans. Bankshares reviews the characteristics of each rating at
least annually, generally during the first quarter of each year. The characteristics of these ratings are as follows:
Pass
and watch rated loans (risk ratings 1 to 6) are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loans, and an appropriate leverage ratio. The
borrower has paid all obligations as agreed and it is expected that the borrower will maintain this type of payment history. Routinely, acceptable personal guarantors support these loans.
Special mention loans (risk rating 7) have a specific defined weakness in the borrowers operations and/or the borrowers
ability to generate positive cash flow on a sustained basis. The borrowers recent payment history is characterized by late payments. Bankshares risk exposure to special mention loans is mitigated by collateral supporting the loan. The
collateral is considered to be well-managed, well maintained, accessible and readily marketable.
Substandard loans (risk
rating 8) are considered to have specific and well-defined weaknesses that jeopardize the viability of Bankshares credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source
may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantors to pay the loan may not adequately protect Bankshares. There is a distinct possibility that Bankshares
will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet Bankshares definition of an impaired loan unless the loan is significantly past due and the
borrowers performance and financial condition provide evidence that it is probable Bankshares will be unable to collect all amounts due.
Substandard non-accrual loans have the same characteristics as substandard loans. However these loans have a non-accrual classification generally because the borrowers principal or interest payments
are 90 days or more past due.
47
Doubtful rated loans (risk rating 9) have all the weakness inherent in a loan that is
classified as substandard but 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 improbable. The possibility of loss
related to doubtful rated loans is extremely high.
Loss (risk rating 10) rated loans are not considered collectible under
normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
The table below represents Bankshares loan portfolio by risk rating, classification, and loan portfolio segment as of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Asset By Class
As of
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
Internal Risk Rating Grades
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
Loans
|
|
Risk Rating Number
1
|
|
1 to 5
|
|
|
6
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
10
|
|
|
|
|
Commercial & industrial
|
|
$
|
23,901
|
|
|
$
|
927
|
|
|
$
|
224
|
|
|
$
|
1,768
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,820
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
63,192
|
|
|
|
625
|
|
|
|
1,742
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
68,169
|
|
Non-owner occupied
|
|
|
60,069
|
|
|
|
1,231
|
|
|
|
8,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,441
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
9,356
|
|
|
|
175
|
|
|
|
599
|
|
|
|
3,753
|
|
|
|
876
|
|
|
|
|
|
|
|
14,759
|
|
Commercial
|
|
|
16,018
|
|
|
|
|
|
|
|
1,662
|
|
|
|
5,837
|
|
|
|
900
|
|
|
|
|
|
|
|
24,417
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
27,311
|
|
|
|
430
|
|
|
|
718
|
|
|
|
95
|
|
|
|
552
|
|
|
|
|
|
|
|
29,106
|
|
Single family
|
|
|
56,134
|
|
|
|
4,876
|
|
|
|
|
|
|
|
5,347
|
|
|
|
|
|
|
|
|
|
|
|
66,357
|
|
Multifamily
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,785
|
|
Consumer - non real estate
|
|
|
1,836
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
263,602
|
|
|
$
|
8,264
|
|
|
$
|
13,272
|
|
|
$
|
19,410
|
|
|
$
|
2,328
|
|
|
$
|
|
|
|
$
|
306,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to
be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets.
|
As part of our normal credit risk management practices, we regularly monitor the payment
performance of our borrowers. Substantially all loans require some form of payment on a monthly basis, with a high percentage requiring regular amortization of principal. However, certain HELOCs, commercial and industrial lines of credit, and
construction loans generally require only monthly interest payments.
When payments are 90 days or more in arrears or when
Bankshares determines that it is no longer prudent to recognize current interest income on a loan, Bankshares may classify the loan as non-accrual. Three lending relationships are major contributors to the increase in non-accrual levels during 2011.
The first relationship, with an aggregate exposure of $4.6 million, continues to make note payments but payments are inconsistent and its ability to sustain payments remains in question. The second relationship, with an aggregate exposure of $2.3
million, was to be curtailed in the fall of 2011 from the sale of collateral property. The proposed sale did not occur as anticipated due to a utility easement issue with the collateral property. The third relationship has an exposure of $2.3
million. The collateral appears adequate at this time while Bankshares works with the client to sell underlying property.
From time to time, a loan may be past due 90 days or more but is in the process of collection and thus warrants remaining on accrual
status. Bankshares had no such loans at December 31, 2011.
48
The following table sets forth the aging and non-accrual loans by class as of
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging and Non-accrual Loans By Class
As
of December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
90 Days or
More Past
Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
90-days
Past Due
and Still
Accruing
|
|
|
Non-
accrual
Loans
|
|
Commercial & industrial
|
|
$
|
1,228
|
|
|
$
|
367
|
|
|
$
|
|
|
|
$
|
1,595
|
|
|
$
|
25,225
|
|
|
$
|
|
|
|
$
|
977
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
121
|
|
|
|
|
|
|
|
2,610
|
|
|
|
2,731
|
|
|
|
65,438
|
|
|
|
|
|
|
|
2,610
|
|
Non-owner occupied
|
|
|
|
|
|
|
992
|
|
|
|
|
|
|
|
992
|
|
|
|
68,449
|
|
|
|
|
|
|
|
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
540
|
|
|
|
540
|
|
|
|
14,219
|
|
|
|
|
|
|
|
540
|
|
Other construction & land
|
|
|
|
|
|
|
1,225
|
|
|
|
5,988
|
|
|
|
7,213
|
|
|
|
17,204
|
|
|
|
|
|
|
|
7,139
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
304
|
|
|
|
33
|
|
|
|
184
|
|
|
|
521
|
|
|
|
28,585
|
|
|
|
|
|
|
|
236
|
|
Single Family
|
|
|
74
|
|
|
|
29
|
|
|
|
1,733
|
|
|
|
1,836
|
|
|
|
64,521
|
|
|
|
|
|
|
|
1,762
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
Consumer-non real estate
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,913
|
|
|
$
|
2,646
|
|
|
$
|
11,055
|
|
|
$
|
15,614
|
|
|
$
|
291,262
|
|
|
$
|
|
|
|
$
|
13,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
The allowance for loan losses is an estimate of losses that may be sustained in Bankshares loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05,
Contingencies which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310-10-35, Receivables 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.
The allowance for
loan losses was $5.4 million at December 31, 2011, or 1.76% of loans outstanding, compared to $5.3 million or 1.59% of loans outstanding, at December 31, 2010. Bankshares has allocated $2.3 million of the allowance at December 31,
2011 compared to $873 thousand at December 31, 2010 for specific non-performing loans. For the year ended December 31, 2011, Bankshares had net charge-offs of $1.4 million compared to net charge-offs of $2.1 million in the same period of
2010.
As part of its routine credit administration process, Bankshares engages an outside consulting firm to review our loan
portfolio periodically. The information from these reviews is used to monitor individual loans as well as to evaluate the overall adequacy of the allowance for loan losses.
In reviewing the adequacy of the allowance for loan losses at each period, management takes into consideration the historical loan losses experienced by Bankshares, current economic conditions affecting
the borrowers ability to repay, the volume of loans, trends in delinquent, non-accruing, and potential problem loans, and the quality of collateral securing loans. Loan losses are charged against the allowance
49
when Bankshares believes that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. After charging
off all known losses incurred in the loan portfolio, management considers on a quarterly basis whether the allowance for loan losses remains adequate to cover its estimate of probable future losses, and establishes a provision for loan losses as
appropriate. Because the allowance for loan losses is an estimate, as the loan portfolio and allowance for loan losses review process continues to evolve, there may be changes to this estimate and elements of the methodology used that may have an
effect on the overall level of allowance maintained.
The following table represents an analysis of the allowance for loan
losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of the Allowance for Loan Losses
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
5,281
|
|
|
$
|
5,619
|
|
|
$
|
5,751
|
|
|
$
|
6,411
|
|
|
$
|
4,377
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,549
|
|
|
|
1,753
|
|
|
|
2,995
|
|
|
|
4,724
|
|
|
|
5,824
|
|
|
|
|
|
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical and industrial
|
|
|
10
|
|
|
|
477
|
|
|
|
390
|
|
|
|
1,124
|
|
|
|
1,054
|
|
Construction/land
|
|
|
404
|
|
|
|
173
|
|
|
|
843
|
|
|
|
2,247
|
|
|
|
1,675
|
|
Residential real estate
|
|
|
1,044
|
|
|
|
1,450
|
|
|
|
1,619
|
|
|
|
2,372
|
|
|
|
988
|
|
Commercial real estate
|
|
|
173
|
|
|
|
69
|
|
|
|
321
|
|
|
|
209
|
|
|
|
84
|
|
Consumer - non real estate
|
|
|
71
|
|
|
|
70
|
|
|
|
121
|
|
|
|
62
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total chargeoffs
|
|
|
1,702
|
|
|
|
2,239
|
|
|
|
3,294
|
|
|
|
6,014
|
|
|
|
3,847
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical and industrial
|
|
|
116
|
|
|
|
10
|
|
|
|
35
|
|
|
|
219
|
|
|
|
4
|
|
Construction/land
|
|
|
|
|
|
|
18
|
|
|
|
28
|
|
|
|
354
|
|
|
|
|
|
Residential real estate
|
|
|
134
|
|
|
|
66
|
|
|
|
39
|
|
|
|
48
|
|
|
|
48
|
|
Commercial real estate
|
|
|
9
|
|
|
|
35
|
|
|
|
16
|
|
|
|
2
|
|
|
|
|
|
Consumer - non real estate
|
|
|
6
|
|
|
|
19
|
|
|
|
49
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
265
|
|
|
|
148
|
|
|
|
167
|
|
|
|
630
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net chargeoffs
|
|
|
1,437
|
|
|
|
2,091
|
|
|
|
3,127
|
|
|
|
5,384
|
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
5,393
|
|
|
$
|
5,281
|
|
|
$
|
5,619
|
|
|
$
|
5,751
|
|
|
$
|
6,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
1.76
|
%
|
|
|
1.59
|
%
|
|
|
1.56
|
%
|
|
|
1.57
|
%
|
|
|
1.61
|
%
|
Allowance for loan losses to non-accrual loans
|
|
|
0.41X
|
|
|
|
2.8X
|
|
|
|
1.3X
|
|
|
|
1.7X
|
|
|
|
0.4X
|
|
Non-performing assets to allowance for loan losses
|
|
|
333.19
|
%
|
|
|
177.96
|
%
|
|
|
240.17
|
%
|
|
|
289.41
|
%
|
|
|
378.43
|
%
|
Non-performing assets to total assets
|
|
|
3.51
|
%
|
|
|
1.75
|
%
|
|
|
2.34
|
%
|
|
|
2.91
|
%
|
|
|
4.48
|
%
|
Net chargeoffs to average loans
|
|
|
0.45
|
%
|
|
|
0.61
|
%
|
|
|
0.87
|
%
|
|
|
1.43
|
%
|
|
|
0.97
|
%
|
50
The following table provides a breakdown of the allocation of the allowance for loan losses
by loan type. However, management does not believe that the allowance for loan losses can be fragmented by category with any precision that would be useful to investors. As such, the entire allowance is available for losses in any particular
category, notwithstanding this allocation. The breakdown of the allowance for loan losses is based primarily upon those factors discussed above in computing the allowance for loan losses as a whole. Because all of these factors are subject to
change, the allocation and actual results are not necessarily indicative of the exact category of potential loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
As of
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
Land
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning Balance:
|
|
$
|
463
|
|
|
$
|
1,420
|
|
|
$
|
700
|
|
|
$
|
2,613
|
|
|
$
|
85
|
|
|
$
|
5,281
|
|
Charge-offs
|
|
|
(10
|
)
|
|
|
(173
|
)
|
|
|
(404
|
)
|
|
|
(1,044
|
)
|
|
|
(71
|
)
|
|
|
(1,702
|
)
|
Recoveries
|
|
|
116
|
|
|
|
9
|
|
|
|
|
|
|
|
134
|
|
|
|
6
|
|
|
|
265
|
|
Provision
|
|
|
(359
|
)
|
|
|
252
|
|
|
|
1,512
|
|
|
|
123
|
|
|
|
21
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
210
|
|
|
$
|
1,508
|
|
|
$
|
1,808
|
|
|
$
|
1,826
|
|
|
$
|
41
|
|
|
$
|
5,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
135
|
|
|
$
|
1,376
|
|
|
$
|
760
|
|
|
$
|
|
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
210
|
|
|
$
|
1,373
|
|
|
$
|
432
|
|
|
$
|
1,066
|
|
|
$
|
41
|
|
|
$
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
26,820
|
|
|
$
|
137,610
|
|
|
$
|
39,176
|
|
|
$
|
101,248
|
|
|
$
|
2,022
|
|
|
$
|
306,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
977
|
|
|
$
|
2,610
|
|
|
$
|
7,678
|
|
|
$
|
1,999
|
|
|
$
|
|
|
|
$
|
13,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
25,843
|
|
|
$
|
135,000
|
|
|
$
|
31,498
|
|
|
$
|
99,249
|
|
|
$
|
2,022
|
|
|
$
|
293,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
Impaired Loans (Loans with a Specific Allowance Allocation).
As of December 31, 2011, there were no loans with impairment allocations that were not also in non-accrual status. At
December 31, 2010, a $2.4 million loan was carried as impaired which was subsequently placed on non-accrual status in the first quarter of 2011.
Non-accrual Loans
. A loan may be placed on non-accrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. Bankshares
closely monitors individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner with minimum exposure to Bankshares. Bankshares maintains a policy of adding an appropriate
amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition, specific credit extended by the Bank, general economic conditions and other factors and external circumstances identified during the process of
estimating probable losses in the Companys loan portfolio.
On December 31, 2011, there were $13.3 million in loans
on non-accrual status compared to $1.9 at December 31, 2010. The $13.3 million non-accrual loan balance consists mostly of loans secured by residential and commercial real estate in the Northern Virginia area. The specific allowance for
impaired loans as of December 31, 2011 was $2.3 million.
51
Total Non-Performing Assets.
As of December 31, 2011, we had $18.0
million of non-performing assets on the balance sheet compared to $9.4 million as of December 31, 2010, an increase of $8.6 million. This increase is due to the addition of several non-accrual lending relationships and troubled debt
restructurings during 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Credit Quality Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
2,400
|
|
|
$
|
1,227
|
|
|
$
|
1,428
|
|
|
$
|
2,928
|
|
Non-accrual loans
|
|
|
13,264
|
|
|
|
1,903
|
|
|
|
4,394
|
|
|
|
3,467
|
|
|
|
17,082
|
|
Total loans past due 90 days and still accruing
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings (not on non-accrual)
|
|
|
956
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
|
3,748
|
|
|
|
4,627
|
|
|
|
7,875
|
|
|
|
11,749
|
|
|
|
4,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
17,968
|
|
|
$
|
9,398
|
|
|
$
|
13,496
|
|
|
$
|
16,644
|
|
|
$
|
24,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific reserves associated with impaired loans
|
|
$
|
2,271
|
|
|
$
|
873
|
|
|
$
|
1,495
|
|
|
$
|
1,148
|
|
|
$
|
2,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets
|
|
|
3.51
|
%
|
|
|
1.75
|
%
|
|
|
2.34
|
%
|
|
|
2.91
|
%
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Reserves.
As of December 31, 2011, we had $2.3 million in specific reserves
for non-performing loans, as compared to $873 thousand at December 31, 2010.
Other Real Estate Owned
(OREO).
As of December 31, 2011, we had $3.7 million classified as OREO on the balance sheet, compared to $4.6 million as of December 31, 2010. The OREO balance includes $1.3 million which relates to residential acreage in the
Winchester, Virginia area, $879 thousand which relates to residential building lots in Woodstock, Virginia, and $720 thousand which relates to residential/ farm property in Charles Town, West Virginia. The remainder is made up of five additional
properties totaling $900 thousand at December 31, 2011.
In March 2012, two related non-accrual loans were converted to
OREO via purchase of the collateral property at foreclosure. As a result, the second trust note in the amount of $348 thousand (previously fully impaired and reserved for in the Allowance for Loan Loss Reserve) was charged off in the first quarter
of 2012 and the improved property (residential property in Fairfax County, Virginia) was purchased into OREO for $970 thousand.
52
The table below reflects the OREO activity in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Beginning balance on January 1
|
|
$
|
4,627
|
|
|
$
|
7,875
|
|
|
$
|
11,749
|
|
Properties acquired at foreclosure
|
|
|
434
|
|
|
|
1,973
|
|
|
|
3,602
|
|
Capital improvements on foreclosed properties
|
|
|
|
|
|
|
55
|
|
|
|
55
|
|
Sales on foreclosed properties
|
|
|
(959
|
)
|
|
|
(4,918
|
)
|
|
|
(5,873
|
)
|
Valuation adjustments
|
|
|
(354
|
)
|
|
|
(358
|
)
|
|
|
(1,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year December 31
|
|
$
|
3,748
|
|
|
$
|
4,627
|
|
|
$
|
7,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale.
As of December 31, 2011 and 2010, there were no loans held for
sale. The Bank is not actively marketing mortgage loans for sale at this time or conducting mortgage lending operations through ABMD.
Trading Assets
The
trading portfolio amounted to $596 thousand as of December 31, 2011 compared to $2.1 million as of December 31, 2010. Management does not intend on adding securities to the trading asset portfolio. As of December 31, 2011, the
portfolio contains one PCMO security with a fair value of $596 thousand. The security was rated AAA by at least one rating service at the time the security was acquired. As of December 31, 2011, the security was rated below investment grade.
The security is performing consistent with expectations. If market conditions warrant, the Bank will consider selling this security prior to receiving final principal payment from the routine monthly cashflow. The current effective portfolio yield
is 5.44%.
The following table reflects our trading assets and effective yield on the instruments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Assets
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
U.S. government agency securities
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
3,536
|
|
|
|
5.08
|
%
|
PCMOs
(1)
|
|
|
596
|
|
|
|
5.44
|
%
|
|
|
2,075
|
|
|
|
5.32
|
%
|
|
|
3,924
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trading Assets
|
|
$
|
596
|
|
|
|
5.44
|
%
|
|
$
|
2,075
|
|
|
|
5.32
|
%
|
|
$
|
7,460
|
|
|
|
5.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of December 31, 2011, trading assets consisted of one PCMO instrument. This PCMO was
rated AAA by at least one ratings agency on the purchase date. Curently the security has a rating below investment grade. This instrument is currently performing as expected.
|
Beginning in 2009, the size of the trading asset portfolio was significantly reduced as part of an
overall strategic direction to minimize the trading asset portfolio. The Company continued to execute the strategy to minimize the trading asset portfolio during 2011 and 2010, eliminating its U.S. government agency trading assets and further
reducing its PCMO trading securities.
53
Investment Securities Available for Sale
We actively manage our portfolio duration and composition with changing conditions and changes in balance sheet risk management needs.
Additionally, securities are pledged as collateral for certain borrowing transactions and repurchase agreements. During 2011, we modified our investment portfolio strategy with the objectives of shortening portfolio duration, reducing price
volatility, and being positioned to opportunistically take gains. Declines in longer term interest rates during the second quarter resulted in attractive gains on selected securities sales. During the third quarter, additional gains were realized as
we took advantage of unprecedented declines in interest rates coincident with repositioning the investment portfolio in anticipation of the pending merger. These gains also served to offset the negative impact of the increase in the $25 million FHLB
Advance which is subject to quarterly valuation under fair value option accounting.
On December 31, 2011, our investment
portfolio contained U.S. treasury notes, callable and non-callable U.S. government agency securities, U.S. government agency collateralized mortgage obligations (CMOs), U.S. government agency mortgage backed securities (MBS), PCMOs, and municipal
securities. U. S. treasury notes were 57.6% or $71.1 million as of December 31, 2011. U.S. government agency securities were $9.8 million or 7.9% of the December 31, 2011 investment portfolio. As of December 31, 2011, PCMOs, CMOs
and MBS made up 32.1% of the portfolio or $39.6 million. Municipal securities were 2.4% of the portfolio or $3.0 million as of December 31, 2011. We actively manage our portfolio duration and composition with changing market conditions and
changes in balance sheet risk management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions and repurchase agreements. The total amount of the investment securities accounted for under available-for-sale
accounting was $123.5 million on December 31, 2011 compared to $135.9 million at December 31, 2010. Targeted efforts to strategically restructure our balance sheet led to shifts in our investment portfolio mix along with periods
where the investment portfolio was smaller than the December 31, 2009 level of $145.0 million. The investment securities tax-equivalent yield was 1.02% as of December 31, 2011 compared to the December 31, 2010 yield of 4.28%,
due to fluctuations in market rates and changes in the portfolio duration and mix.
The total amount of the investment
securities accounted for under available-for-sale accounting was $145.0 million on December 31, 2009. Our investment securities portfolio at December 31, 2009 contained callable U.S. government agency securities, U.S. government agency
CMOs, U.S. government agency MBS, PCMOs and state and municipal bonds. U.S. government agency securities were $49.8 million, PCMOs, CMOs and MBS made up $78.2 million of the portfolio, and municipal securities were $17.1 million.
54
The following table sets forth a summary of the investment securities portfolio as of the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
$
|
71,115
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government corporations and agencies
|
|
|
9,751
|
|
|
|
51,763
|
|
|
|
49,786
|
|
U.S. government agency CMOs
|
|
|
31,038
|
|
|
|
22,576
|
|
|
|
45,617
|
|
U.S. government agency MBS
|
|
|
7,698
|
|
|
|
14,805
|
|
|
|
10,462
|
|
PCMOs
|
|
|
950
|
|
|
|
17,621
|
|
|
|
22,076
|
|
Municipal securities
|
|
|
2,911
|
|
|
|
29,087
|
|
|
|
17,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Securities
|
|
$
|
123,463
|
|
|
$
|
135,852
|
|
|
$
|
145,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the contractual maturity of the investment securities on an amortized cost
basis and their weighted average yield as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturities of Investment Securities
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Within
One Year
|
|
|
After One
Year but Within
Five Years
|
|
|
After Five
Year but Within
Ten Years
|
|
|
After Ten Years
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Total
(4)
|
|
|
Yield
|
|
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
$
|
71,119
|
|
|
|
0.01
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
71,119
|
|
|
|
0.01
|
%
|
U.S. government agency securities
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
9,737
|
|
|
|
2.63
|
%
|
|
|
9,737
|
|
|
|
2.63
|
%
|
U.S. government agency CMOs
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
30,893
|
|
|
|
2.16
|
%
|
|
|
30,893
|
|
|
|
2.16
|
%
|
U.S. government agency MBS
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
7,672
|
|
|
|
2.01
|
%
|
|
|
7,672
|
|
|
|
2.01
|
%
|
PCMOs
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
1,005
|
|
|
|
2.82
|
%
|
|
|
1,005
|
|
|
|
2.82
|
%
|
Municipal securities
(2)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
2,982
|
|
|
|
5.06
|
%
|
|
|
2,982
|
|
|
|
5.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Securities
(3)
|
|
$
|
71,119
|
|
|
|
0.01
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
52,289
|
|
|
|
2.40
|
%
|
|
$
|
123,408
|
|
|
|
1.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Contractual maturities of CMOs, PCMOs and MBS are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any
time.
|
(2)
|
Municipal securities yield is on a fully tax equivalent basis assuming a 34% federal tax rate.
|
(3)
|
We do not hold any held-to-maturity securities as of December 31, 2011.
|
(4)
|
Total above is amortized cost and does not include unrealized gain of $55 thousand.
|
(5)
|
Total available for sale securities amounted to $123.5 million.
|
55
Restricted Securities
Bankshares security portfolio contains restricted securities that are required to be held as part of the Companys banking operations. These include stock of the Federal Reserve Bank, the FHLB
and others. The following table summarizes the balances of restricted stock at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Federal Reserve Bank stock
|
|
$
|
1,201
|
|
|
$
|
1,201
|
|
|
$
|
1,201
|
|
FHLB stock
|
|
|
3,365
|
|
|
|
4,948
|
|
|
|
4,911
|
|
Bankers Bank stock
|
|
|
206
|
|
|
|
206
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restricted Stock
|
|
$
|
4,772
|
|
|
$
|
6,355
|
|
|
$
|
6,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income
The following table highlights the major components of non-interest income for the periods referenced:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Deposit account service charges
|
|
$
|
151
|
|
|
$
|
220
|
|
|
$
|
296
|
|
|
$
|
272
|
|
|
$
|
275
|
|
Gain on loan sales
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
152
|
|
|
|
1,059
|
|
Net gain (loss) on sale of securities
|
|
|
3,372
|
|
|
|
2,237
|
|
|
|
1,508
|
|
|
|
(46
|
)
|
|
|
50
|
|
Trading activity and fair value adjustments
|
|
|
(3,132
|
)
|
|
|
(511
|
)
|
|
|
171
|
|
|
|
(2,328
|
)
|
|
|
(2,672
|
)
|
Other
|
|
|
299
|
|
|
|
213
|
|
|
|
143
|
|
|
|
132
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
690
|
|
|
$
|
2,159
|
|
|
$
|
2,243
|
|
|
$
|
(1,818
|
)
|
|
$
|
(1,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit account service charges consist of routine banking fees such as account maintenance, insufficient
funds, online banking, stop payment, and wire transfer fees and amounted to $151 thousand, $220 thousand and $296 thousand, for each of the years ended December 31, 2011, 2010 and 2009, respectively.
The ABMD division did not generate any gains on loan sales in 2011 and 2010; however, there were $125 thousand in gains in 2009.
In the year ended December 31, 2011, we had a net gain of $3.4 million on the sale of investment securities. This
represents an increase of $1.1 million from the 2010 net gain of $2.2 million. The net gain on the sale of investment securities for 2009 was $1.5 million. Bankshares views the available for sale investment portfolio as a tool in managing the
overall balance sheet and liquidity positions of the organization. From time to time, Bankshares will sell investment securities to achieve certain business objectives. These sales may result in gains or losses depending on the timing and book value
of instruments sold.
Fair value adjustments recorded for the year ended December 31, 2011 resulted in a net loss of $3.1
million, compared to a net loss of $511 thousand for the same period in 2010, an increase of $2.6 million. The net loss was primarily driven by the negative adjustment of $3.1 million on the FHLB advance. The negative adjustment of $3.1 million was
due to lower market rates and management electing to use a more advanced model in valuing the FHLB advance. The movement of interest spreads had an adverse effect on the FHLB advances value. At contractual maturity the FHLB advance will become
due at par and any previously recorded loss will be accreted to income as maturity approaches. At December 31, 2011,
56
trading activity and fair value adjustments associated with the trading assets generated a net gain of $10 thousand. Trading security and fair value adjustments for the year ended
December 31, 2010 was $64 thousand in net loss.
Our other non-interest income is predominately from ATM fees and
investment management fees which amounted to $130 thousand, $213 thousand and $143 thousand, for each of the years ended December 31, 2011, 2010 and 2009, respectively. Bankshares did not generate any non-interest income from investment
management fees due to the Companys decision to phase out investment management operations during the third quarter of 2010.
Non-Interest Expense
During 2011, Bankshares made important progress toward its strategic goal of by decreasing our non-interest expenses.
Non-interest expense for the year ended December 31, 2011, amounted to $16.2 million compared to $18.3 million for the same period
in 2010, a decrease of $2.1 million. A key component of non-interest expense is salary and benefits expense. This expense for the year ended December 31, 2011 was $5.4 million, compared to the 2010 level of $6.9 million, a decrease of $1.5
million. Occupancy and equipment expenses were $2.9 million compared to the 2010 level of $3.4 million, a decrease of $494 thousand.
OREO expense was $454 thousand for the year ended December 31, 2011 compared to $841 thousand for the same period in 2010. The OREO balance consists of mostly undeveloped land with little maintenance
cost and valuation write-downs. Non-interest expense for the year ended December 31, 2011 also included $1.2 million in terminated merger related expenses and $414 thousand for settlement-related expenses in connection with a legal action
relating to the previous sale of a Bank-owned residential property, each with no similar charge in 2010.
Non-interest expense
for 2010 amounted to $18.3 million, compared to the 2009 level of $20.9 million. Salary and benefits costs in 2010 and 2009 were $6.9 million and $7.0 million, respectively. Other operating expenses amounted to $11.4 million in 2010 and $13.9
million in 2009. OREO expenses in 2010 were 841 thousand as compared to $2.4 million in 2009.
57
The components of other operating expenses for the periods referenced were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expense
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Business development
|
|
$
|
216
|
|
|
$
|
361
|
|
|
$
|
557
|
|
|
$
|
621
|
|
|
$
|
704
|
|
Office expense
|
|
|
303
|
|
|
|
549
|
|
|
|
624
|
|
|
|
772
|
|
|
|
882
|
|
Bank operations expense
|
|
|
589
|
|
|
|
296
|
|
|
|
339
|
|
|
|
309
|
|
|
|
358
|
|
Data processing
|
|
|
1,651
|
|
|
|
1,023
|
|
|
|
828
|
|
|
|
796
|
|
|
|
723
|
|
Professional fees
|
|
|
1,598
|
|
|
|
2,192
|
|
|
|
1,775
|
|
|
|
1,832
|
|
|
|
1,748
|
|
FDIC insurance
|
|
|
850
|
|
|
|
1,369
|
|
|
|
2,239
|
|
|
|
605
|
|
|
|
168
|
|
Merger expenses
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,093
|
|
|
|
1,305
|
|
|
|
2,514
|
|
|
|
1,459
|
|
|
|
1,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,458
|
|
|
$
|
7,095
|
|
|
$
|
8,876
|
|
|
$
|
6,394
|
|
|
$
|
6,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data processing expenses increased to $1.7 million at December 31, 2011 compared to $1.0 million at
December 31, 2010, an increase of $700 thousand. This increase is due to the conversion of our core operating system in the first quarter of 2011. Professional fees reduced to $1.6 million at December 31, 2011 compared to $2.2 million at
December 31, 2010. This reduction is attributable to lesser consulting fees associated with the data processing conversion in 2011 than were paid in 2010. FDIC insurance expense reduced to $850 thousand at December 31, 2011 compared to
$1.4 million at December 31, 2010. This decrease is directly related to the FDIC changing the method of calculating the assessment in early 2011.
Fredericksburg Business Initiative.
In 2010, the Bank was successful in terminating the leases of two of the Fredericksburg locations. As of December 31, 2011, the Bank is continuing to
market the space for a potential branch site in the Cosners Corner area in Fredericksburg. Bankshares has recorded a liability of $205 thousand as of December 31, 2011 for the estimated present value of the potential differential between
the contractual rental obligations and potential subleasing income.
Income Taxes
We recorded income tax expense of $5.0 million in 2011 compared to income tax expense of $344 thousand in 2010.
Bankshares routinely evaluates the likelihood of the recognition of deferred tax assets. The analysis is used to determine if a valuation
allowance for deferred tax assets is necessary. Our analysis reviews various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted.
Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Our analysis reviewed
various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative
evidence when determining if a valuation allowance is necessary. We considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss, (NOL) carry forwards within the
prescribed time periods. In addition, we considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it is not considered more likely
than not that Bankshares will be able to realize all its deferred tax assets. A valuation allowance of $5.3 million related to the deferred tax assets has been recorded at December 31, 2011.
58
Deposits
Bankshares seeks deposits within its market area by offering high-quality customer service, using technology to deliver deposit services effectively and paying competitive interest rates. A significant
portion of its client base and deposits are directly related to home sales and refinancing activity, including from title and escrow agency customers.
At December 31, 2011, the deposit portfolio was $380.4 million, a decrease of $26.5 million compared to the December 31, 2010 level of $406.9 million. The interest-bearing deposits on average
cost the Bank 1.48% for the year ended December 31, 2011 or 48 basis points less than 2010 average cost of 1.96%. As key interest rates declined over the past year, Bankshares repriced deposits at lower levels.
At December 31, 2011, Bankshares non-interest bearing demand deposits were $112.5 million compared to $124.6 million at
December 31, 2010, a $12.2 million, or 9.8% decrease. Average non-interest bearing demand deposits were $92.3 million for the year ended December 31, 2011 compared to average demand deposits of $100.4 million at December 31, 2010, a
decrease of $8.1 million, or 8.0%. The disparity between the December 31, 2011 balance of non-interest bearing deposits of $112.5 million and the average balance for the year 2011 of non-interest bearing deposits of $92.3 million is directly
related to seasonal and cyclical changes in the business activities of our title and escrow agency client base. Frequently, our title and escrow agency clients experience strong deposit growth around the end of a month or quarter.
Bankshares currently uses wholesale brokered deposits. Bankshares believes these types of funds offer a reliable stable source of funds
for the Bank. Frequently the interest rates associated with wholesale brokered deposits are significantly lower than general customer rates in our markets. As market conditions warrant and balance sheet needs dictate, Bankshares may continue to
participate in the wholesale brokered certificate of deposit market. As with any deposit product, Bankshares has potential risk for non-renewal by the customer and/or broker.
As of December 31, 2011, Bankshares had $122.4 million of wholesale brokered certificates of deposit which is $22.4 million higher than the December 31, 2010 level of $100.0 million. This
increase is due to management utilizing these instruments to lengthen the duration of the liabilities on the balance sheet.
59
The following table shows the maturity distribution and coupon rate of wholesale brokered
certificate of deposits at December 31, 2011:
|
|
|
|
|
|
|
|
|
Maturity Distribution of Brokered Deposits by Year
|
|
Maturity Year
|
|
Amount
|
|
|
Average
Coupon
Rate
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
$
|
52,454
|
|
|
|
1.23
|
%
|
2013
|
|
|
37,562
|
|
|
|
1.53
|
%
|
2014
|
|
|
22,423
|
|
|
|
1.58
|
%
|
2015
|
|
|
10,000
|
|
|
|
1.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,439
|
|
|
|
1.44
|
%
|
|
|
|
|
|
|
|
|
|
The following table details the average amount of, and the average rate paid on, the following primary
deposit categories for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits and Average Rates Paid
Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Income/
Expense
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
42,566
|
|
|
$
|
118
|
|
|
|
0.28
|
%
|
|
$
|
47,600
|
|
|
$
|
207
|
|
|
|
0.43
|
%
|
|
$
|
46,476
|
|
|
$
|
440
|
|
|
|
0.95
|
%
|
Money market deposit accounts
|
|
|
24,318
|
|
|
|
178
|
|
|
|
0.73
|
%
|
|
|
24,648
|
|
|
|
270
|
|
|
|
1.10
|
%
|
|
|
18,780
|
|
|
|
274
|
|
|
|
1.46
|
%
|
Savings accounts
|
|
|
4,176
|
|
|
|
6
|
|
|
|
0.14
|
%
|
|
|
3,875
|
|
|
|
9
|
|
|
|
0.23
|
%
|
|
|
3,791
|
|
|
|
14
|
|
|
|
0.37
|
%
|
Time deposits
|
|
|
196,638
|
|
|
|
3,671
|
|
|
|
1.87
|
%
|
|
|
233,201
|
|
|
|
5,577
|
|
|
|
2.39
|
%
|
|
|
286,262
|
|
|
|
9,713
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
267,698
|
|
|
$
|
3,973
|
|
|
|
1.48
|
%
|
|
|
309,324
|
|
|
$
|
6,063
|
|
|
|
1.96
|
%
|
|
|
355,309
|
|
|
$
|
10,441
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
92,300
|
|
|
|
|
|
|
|
|
|
|
|
100,365
|
|
|
|
|
|
|
|
|
|
|
|
96,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
359,998
|
|
|
|
|
|
|
|
|
|
|
$
|
409,689
|
|
|
|
|
|
|
|
|
|
|
$
|
451,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The following is a summary of the maturity distribution of certificates of deposit as of
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit Maturity Distribution
December 31, 2011
|
|
|
|
Three
Months
or Less
|
|
|
Three
Months to
Six Months
|
|
|
Six Months
to Twelve
Months
|
|
|
Over
Twelve
Months
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than $100,000
|
|
$
|
33,055
|
|
|
$
|
19,800
|
|
|
$
|
21,208
|
|
|
$
|
80,521
|
|
|
$
|
154,584
|
|
Greater than or equal to $100,000
|
|
|
3,755
|
|
|
|
4,938
|
|
|
|
14,237
|
|
|
|
15,634
|
|
|
|
38,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,810
|
|
|
$
|
24,738
|
|
|
$
|
35,445
|
|
|
$
|
96,155
|
|
|
$
|
193,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Both Bankshares and the Bank are considered well capitalized under the risk-based capital guidelines adopted by the federal banking regulatory agencies. Capital adequacy is an important
measure of financial stability. Maintaining a well capitalized regulatory position is paramount for each organization. Both Bankshares and the Bank monitor the capital positions to ensure appropriate capital for the respective risk
profile of each organization, as well as sufficient levels to promote depositor and investor confidence in the respective organizations.
Total shareholders equity was $28.1 million as of December 31, 2011 compared to the December 31, 2010 level of $33.7 million. The change in equity is primarily attributable to
Bankshares net loss for 2011 of $6.0 million. Book value per common share was $5.50 as of December 31, 2011, compared to $6.60 as of December 31, 2010. The net unrealized gain on available-for-sale securities amounted to $36
thousand, net of tax, as of December 31, 2011, compared to a net unrealized loss on available-for-sale securities of $288 thousand, net of tax, as of December 31, 2010.
The following table reflects the components of shareholders equity on a book value per share basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Book Value Per Share, beginning of the period
|
|
$
|
6.60
|
|
|
$
|
6.49
|
|
|
$
|
7.28
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
(1.17
|
)
|
|
|
0.14
|
|
|
|
(0.86
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
0.09
|
|
Effects of Changes in Other Comprehensive Income
1
|
|
|
0.07
|
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Share, end of the period
|
|
$
|
5.50
|
|
|
$
|
6.60
|
|
|
$
|
6.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Other Comprehensive Income represents the unrealized gains or losses associated with
available-for-sale securities and the related reclassification adjustments.
|
61
Payment of dividends is at the discretion of Bankshares Board of Directors and is
subject to various federal and state regulatory limitations. It is Bankshares current policy to retain earnings to support its banking operations and its business risk profile.
On June 30, 2003, the Trust privately issued $10.0 million face amount of the trusts floating rate trust preferred
capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The Trust issued $310 thousand in common equity to Bankshares. Simultaneously, the Trust used the proceeds of the sale to purchase $10.3
million principal amount of Bankshares floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated
Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust
Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption Trust Preferred Capital Notes. Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense
in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred
Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through December 31, 2011, Bankshares elected to defer the
interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of December 31, 2011 the total amount of deferred and compounded interest owed under the
indenture is $890 thousand. The base interest rate as of December 31, 2011 was 3.70% and as of December 31, 2010 was 3.45%.
All or a portion of Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to 25% of
shareholders equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At December 31, 2011 and December 31, 2010, the entire amount was considered Tier 1 capital. Management does
not expect the restrictions on Tier 1 capital treatment of trust preferred securities that were enacted by the Dodd-Frank Act to impact the Tier 1 capital status of the Trust Preferred Capital Notes, as the Dodd-Frank Acts restrictions
generally do not apply to trust preferred securities issued prior to enactment by institutions with fewer than $15 billion in assets.
62
Bankshares is considered
well capitalized
as of December 31, 2011,
2010 and 2009. The following table shows our capital categories, capital ratios and the minimum capital ratios currently required by bank regulators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Based Capital Analysis
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
20,440
|
|
|
$
|
20,427
|
|
|
$
|
20,427
|
|
Capital surplus
|
|
|
25,915
|
|
|
|
25,857
|
|
|
|
25,835
|
|
Retained earnings (deficit)
|
|
|
(18,269
|
)
|
|
|
(12,311
|
)
|
|
|
(12,897
|
)
|
Less: disallowed assets
|
|
|
|
|
|
|
(2,990
|
)
|
|
|
(1,211
|
)
|
Add: Qualifying Trust Preferred Securities
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
38,086
|
|
|
|
40,983
|
|
|
|
42,154
|
|
|
|
|
|
Tier 2 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying allowance for loan losses
|
|
|
3,828
|
|
|
|
4,400
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital
|
|
|
3,828
|
|
|
|
4,400
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital
|
|
$
|
41,914
|
|
|
$
|
45,383
|
|
|
$
|
47,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets
|
|
$
|
304,676
|
|
|
$
|
352,277
|
|
|
$
|
405,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets
|
|
$
|
506,050
|
|
|
$
|
547,008
|
|
|
$
|
596,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Regulatory
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Minimum
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk based capital ratio
|
|
|
12.5
|
%
|
|
|
11.6
|
%
|
|
|
10.4
|
%
|
|
|
4.0
|
%
|
Total risk based capital ratio
|
|
|
13.8
|
%
|
|
|
12.9
|
%
|
|
|
11.6
|
%
|
|
|
8.0
|
%
|
Leverage ratio
|
|
|
7.5
|
%
|
|
|
7.5
|
%
|
|
|
7.1
|
%
|
|
|
4.0
|
%
|
Equity to assets ratio
|
|
|
5.6
|
%
|
|
|
6.3
|
%
|
|
|
5.7
|
%
|
|
|
N/A
|
|
The regulatory risk based capital guidelines establish
minimum
capital levels for the Bank to be
deemed
well capitalized.
The guidelines for
well capitalized
call for a leverage ratio of 5.0%, tier 1 risk based capital ratio of 6.0% and total risk based capital ratio of 10.0%. As of December 31, 2011,
the Company had capital ratios in excess of the regulatory minimums to be
well capitalized.
The Bank and Bankshares continuously monitor the capital levels and the risk profile of the entities to determine if capital levels are
sufficient for the risk profiles of the organization.
Purchased Funds and Other Borrowings
Purchased funds and other borrowings include repurchase agreements (repos), which Bankshares offers to commercial customers and affluent
individuals, federal funds purchased and treasury, tax and loan balances. The bulk of purchased funds are made up of the following four categories: customer repos, outstanding federal funds purchased, the Trust Preferred Capital Notes and FHLB
advances. Customer repos amounted to $40.4 million at December 31, 2011, compared to $43.1 million at December 31, 2010 and $37.7 million at December 31, 2009. FHLB advances amounted to $44.4 million at December 31, 2011,
compared to $41.2 million at December 31, 2010 and $50.8 million at December 31, 2009. Other borrowings were $0, $5 thousand and $9.6 million at December 31, 2011, December 31, 2010 and December 31, 2009 respectively. The
Trust Preferred Capital Notes were $10.3 million for all periods presented.
63
An analysis of the purchased funds distribution is presented below for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Funds Distribution
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
At Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB long-term advances, at fair value
|
|
$
|
29,350
|
|
|
$
|
26,208
|
|
|
$
|
25,761
|
|
FHLB long-term advances
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
25,000
|
|
Customer repos
|
|
|
40,420
|
|
|
|
43,148
|
|
|
|
37,716
|
|
Purchased funds and other borrowings
|
|
|
|
|
|
|
5
|
|
|
|
9,574
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at period end
|
|
$
|
95,080
|
|
|
$
|
94,671
|
|
|
$
|
108,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB long-term advances, at fair value
|
|
$
|
26,922
|
|
|
$
|
26,196
|
|
|
$
|
26,054
|
|
FHLB long-term advances
|
|
|
15,000
|
|
|
|
28,105
|
|
|
|
25,000
|
|
Customer repos
|
|
|
36,666
|
|
|
|
35,759
|
|
|
|
33,017
|
|
Purchased funds and other borrowings
|
|
|
11,773
|
|
|
|
9,133
|
|
|
|
12,119
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average balance
|
|
$
|
100,671
|
|
|
$
|
109,503
|
|
|
$
|
106,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds, end of period
|
|
|
2.00
|
%
|
|
|
1.77
|
%
|
|
|
1.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds, during the period
|
|
|
1.65
|
%
|
|
|
1.69
|
%
|
|
|
2.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding during period
|
|
$
|
108,431
|
|
|
$
|
126,156
|
|
|
$
|
117,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer repurchase agreements are standard commercial banking transactions that involve a Bank customer
instead of a wholesale bank or broker. Bankshares offers this product as an accommodation to larger retail and commercial customers and affluent individuals that request safety for their funds beyond the FDIC deposit insurance limits. Bankshares
believes this product offers it a stable source of financing at a reasonable market rate of interest. Bankshares does not use or have any open repurchase agreements with any broker-dealers.
The FHLB is a key source of funding for the Bank. During the periods presented, Bankshares has used overnight advances (daily rate
credit) to support its short-term liquidity needs. On a longer term basis, Bankshares augments its funding portfolio with its two FHLB advances, one of which is accounted for on a fair value basis, and one of which is accounted for on a cost basis.
At December 31, 2011 and December 31, 2010, the FHLB long-term advance accounted for on a fair value basis had a
value of $29.4 million and $26.2 million respectively, and matures in 2021. The increase in fair value of this advance at December 31, 2011 compared to December 31, 2010 is due to lower market interest rates and management electing to use
a more advanced model in valuing the FHLB advance. The weighted average interest rate on the long-term FHLB advance accounted for on a fair value basis was 3.985% for all periods presented. The par value of the FHLB advance accounted for on a fair
value basis was $25.0 million at December 31, 2011, and December 31, 2010.
At December 31, 2011, there
was one FHLB advance accounted for on a cost basis. Bankshares entered into this floating rate advance in the first quarter of 2010 for $15.0 million. The advance matures in 2012 and the interest rate at December 31, 2011 was 0.379%. The
weighted average interest rate for both FHLB advances at December 31, 2011 is 3.07%.
64
Fair Value Liability Classified as Level 3
.
Beginning in the third
quarter of 2008 and continuing through the present time, portions of the investment and debt markets have experienced a period of significant distress and dysfunction, and market values for certain financial instruments may not be readily available.
Although certain portions of the investment and debt markets have improved, the fair value of an instrument is not the same as a liquidation value. In evaluating the fair value of funding instruments, Bankshares determined that the typical valuation
techniques did not take into account the distressed investment and debt markets. As such, Bankshares considered other factors such as typical spreads for the instruments, conversion swaptions, swap curves, discounted cash flow models, previously
observable non-distressed valuations and bond issuance rates and spreads for investment and non-investment grade instruments. As of December 31, 2011 and December 31, 2010, the fair value of the long-term FHLB advance accounted for on a
fair value basis was $29.4 million and $26.2 million respectively.
Liquidity
Bankshares specifically focuses on liquidity management to meet the demand for funds from its depositors and lending clients as well as
expenses that it incurs in the operation of its business. Bankshares has a formal liquidity management policy and a contingency funding policy used to assist management in executing the liquidity strategies necessary for the Bank. Similar to other
banking organizations, the Bank monitors the need for funds to support depositor activities and funding of loans. Bankshares client base includes a significant number of title and escrow businesses which have more deposit inflows and outflows
than a traditional commercial business relationship. The Bank maintains additional liquidity sources to support the needs of this client base. As noted in the risk factors section of this Form 10-K, loss of relationship officers or clients could
have a material impact on Bankshares liquidity position through a reduction in average deposits.
Bankshares Chief
Financial Officer and Controller monitor its overall liquidity position daily. Bankshares can and will draw upon federal funds lines with correspondent banks, draw upon reverse repurchase agreement lines with correspondent banks and use FHLB
advances as needed. Bankshares deposit customers frequently have lower deposit balances in the middle of the month, and balances generally rise toward the end of each month. As such, Bankshares uses wholesale funding techniques to support its
balance sheet and asset portfolios, although its longer term plan is to increase deposits from its local retail and commercial deposits and maintain available wholesale funding sources as additional liquidity.
As of December 31, 2011, Bankshares had $45.8 million in cash and due from banks to support the business activities and deposit
flows of its clients. The Bank maintains credit lines at the FHLB and other correspondent banks. At December 31, 2011, the Bank had a total credit line of $106.9 million with the FHLB with an unused portion of $66.9 million. Borrowings with the
FHLB have certain collateral requirements and are subject to disbursement approval by the FHLB. At December 31, 2011, the Bank had $30.0 million in secured borrowing capacity and $4.0 million in unsecured borrowing capacity (both reverse
repurchase agreements and federal funds purchased) from correspondent banks. As of December 31, 2011, the Bank did not have any outstanding borrowings from its correspondent banks. All borrowings from correspondent banks are subject to
disbursement approval. The Bank is also eligible to borrow from the Federal Reserve Discount Window subject to the collateral requirements and other terms and conditions that may exist. In addition to the borrowing capacity described above,
Bankshares and the Bank may sell investment securities, loans and other assets to generate additional liquidity. Bankshares anticipates maintaining sufficient liquidity to protect depositors, provide for business growth and comply with regulatory
requirements.
65
Return on Average Assets and Average Equity
The ratio of net income to average assets and average equity and certain other ratios are as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Average total assets
|
|
$
|
497,953
|
|
|
$
|
558,945
|
|
|
$
|
596,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity
|
|
$
|
34,778
|
|
|
$
|
37,395
|
|
|
$
|
35,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
|
$
|
(4,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
-1.20
|
%
|
|
|
0.13
|
%
|
|
|
-0.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average stockholders equity
|
|
|
-17.13
|
%
|
|
|
1.89
|
%
|
|
|
-12.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity to average total assets
|
|
|
6.98
|
%
|
|
|
6.69
|
%
|
|
|
6.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Activities
Bankshares and the Bank enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of customers. These off-balance sheet arrangements include
commitments to extend credit, standby letters of credit and financial guarantees which would impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. See Note 19 of the Notes to Consolidated Financial Statements for further discussion of the nature, business purpose and elements of risk
involved with these off-balance sheet arrangements. With the exception of these off-balance sheet arrangements, we have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements and their effect on us, see Recent Accounting Pronouncements in Note 2 of the Notes to Consolidated Financial Statements contained
herein.
66
Quarterly Financial Results
The following tables list quarterly financial results for the years ended December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Data
2011
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Interest income
|
|
$
|
4,653
|
|
|
$
|
5,398
|
|
|
$
|
5,746
|
|
|
$
|
5,909
|
|
Interest expense
|
|
|
1,313
|
|
|
|
1,356
|
|
|
|
1,447
|
|
|
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
3,340
|
|
|
|
4,042
|
|
|
|
4,299
|
|
|
|
4,392
|
|
Provision for loan losses
|
|
|
344
|
|
|
|
130
|
|
|
|
769
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
2,996
|
|
|
|
3,912
|
|
|
|
3,530
|
|
|
|
4,086
|
|
Non interest income
|
|
|
339
|
|
|
|
(651
|
)
|
|
|
818
|
|
|
|
184
|
|
Non interest expense
|
|
|
4,654
|
|
|
|
4,067
|
|
|
|
3,764
|
|
|
|
3,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(1,319
|
)
|
|
|
(806
|
)
|
|
|
584
|
|
|
|
547
|
|
Provision (benefit) for income taxes
|
|
|
4,894
|
|
|
|
(303
|
)
|
|
|
191
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(6,213
|
)
|
|
$
|
(503
|
)
|
|
$
|
393
|
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
(1.22
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
(1.22
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Interest income
|
|
$
|
6,441
|
|
|
$
|
6,491
|
|
|
$
|
6,925
|
|
|
$
|
6,981
|
|
Interest expense
|
|
|
1,676
|
|
|
|
1,866
|
|
|
|
2,070
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,765
|
|
|
|
4,625
|
|
|
|
4,855
|
|
|
|
4,675
|
|
Provision for loan losses
|
|
|
425
|
|
|
|
378
|
|
|
|
675
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
4,340
|
|
|
|
4,247
|
|
|
|
4,180
|
|
|
|
4,400
|
|
Non interest income
|
|
|
1,134
|
|
|
|
351
|
|
|
|
413
|
|
|
|
261
|
|
Non interest expense
|
|
|
4,983
|
|
|
|
4,336
|
|
|
|
4,411
|
|
|
|
4,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
491
|
|
|
|
262
|
|
|
|
182
|
|
|
|
114
|
|
Provision (benefit) for income taxes
|
|
|
333
|
|
|
|
20
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
158
|
|
|
$
|
242
|
|
|
$
|
191
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
Asset Liability Management (ALM) Risk Management.
Bankshares engages a consulting firm to model its
short-term and long-term interest rate risk profile. The model includes basic business assumptions, interest rates, repricing information and other relevant market data necessary to project our interest rate risk. The Board of Directors has
established interest rate risk limits for both short-term and long-term interest rate exposure. On a periodic basis, management reports to the Board of Directors on Bankshares base interest rate risk profile and expectations of changes in the
profiles based on certain interest rate shocks.
Net Interest Income (NII) Sensitivity (Short-term Interest Rate Risk).
Bankshares ALM process evaluates the effect of upward and downward changes in market interest rates on future net interest income. This analysis involves shocking the interest rates used in determining net interest income over the next
twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of Bankshares shorter-term interest rate risk. This analysis is accomplished by assuming a static balance sheet over a period of
time with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under various rate scenarios. These assumptions include
prepayments, the sensitivity of non-maturity deposit rates, and other factors deemed significant by Bankshares.
Since
Bankshares actual balance sheet movement is not static (maturing and repayment dollars being rolled back into like instruments for new terms at current market rates), these changes in net interest income are indicative only of the magnitude of
interest rate risk in the balance sheet and not necessarily reflective of the income Bankshares would actually receive.
The
ALM model results for December 31, 2011 are shown in the table below. Assuming an immediate upward shift in market interest rates of 100 basis points and a static balance sheet, the results indicate Bankshares would expect net interest income
to increase over the next twelve months by 1.2%. Assuming a shift downward of 100 basis points, Bankshares would expect net interest income to decrease over the next twelve months by 0.9%.
Economic Value of Equity (Long-term Interest Rate Risk).
The economic value of equity process models the cashflows of
financial instruments to maturity. The model incorporates growth and pricing assumptions to develop a baseline Economic Value of Equity (EVE). The interest rates used in the model are then shocked for an immediate increase or decrease in interest
rates. The results of the shocked model are compared to the baseline results to determine the percentage change in EVE under the various scenarios. The resulting percentage change in EVE is an indication of the longer term repricing risk and options
embedded in the balance sheet.
The table below shows, as of December 31, 2011 and 2010, ALM model results under various
interest rate shocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Interest Rate Shocks
|
|
NII
|
|
|
EVE
|
|
|
NII
|
|
|
EVE
|
|
-200 bp
|
|
|
-3.6
|
%
|
|
|
-6.5
|
%
|
|
|
-6.9
|
%
|
|
|
9.4
|
%
|
-100 bp
|
|
|
-0.9
|
%
|
|
|
-3.1
|
%
|
|
|
-2.1
|
%
|
|
|
5.3
|
%
|
+100 bp
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
2.3
|
%
|
|
|
-6.6
|
%
|
+200 bp
|
|
|
2.9
|
%
|
|
|
3.2
|
%
|
|
|
4.7
|
%
|
|
|
-11.8
|
%
|
All results above are within Bankshares current interest rate risk policy guidelines.
68
Interest Rate Gap
.
In addition to the NII and EVE models, management
reviews our static gap position. The cumulative gap position within one year was -$2.3 million, or -0.5% of total assets, at December 31, 2011. While this measurement technique is common in the financial services industry, it has
limitations and is not Bankshares sole tool for measuring interest rate sensitivity. Bankshares does not believe this model accurately reflects its true short-term and long-term interest rate exposure. As an example, $22.1 million of the
investment and trading securities at December 31, 2011 are classified as greater than five years due to the contractual maturity of the instruments. Investment and trading securities are easily marketed and can be liquidated in a short period
of time. As a result, it is reasonable to consider a portion of, or perhaps all of, the $22.1 million of investment and trading securities as the within three month category, which further suggests a more balanced short-term interest
rate position for Bankshares.
The following table reflects our December 31, 2011 static interest rate gap
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Maturing or Repricing
|
|
|
|
Within
3 Months
|
|
|
4 - 12
Months
|
|
|
1 -5
Years
|
|
|
Over
5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
80,866
|
|
|
$
|
|
|
|
$
|
21,140
|
|
|
$
|
21,457
|
|
|
$
|
123,463
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596
|
|
|
|
596
|
|
Loans
|
|
|
45,693
|
|
|
|
48,254
|
|
|
|
126,469
|
|
|
|
73,196
|
|
|
|
293,612
|
|
Interest-bearing deposits
|
|
|
43,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,874
|
|
Federal funds sold
|
|
|
16,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
187,000
|
|
|
|
48,254
|
|
|
|
147,609
|
|
|
|
95,249
|
|
|
|
478,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
48,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,649
|
|
Money market deposit accounts
|
|
|
23,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,370
|
|
Savings accounts & IRAs
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826
|
|
Time deposits
|
|
|
36,810
|
|
|
|
60,183
|
|
|
|
81,746
|
|
|
|
14,409
|
|
|
|
193,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
111,655
|
|
|
|
60,183
|
|
|
|
81,746
|
|
|
|
14,409
|
|
|
|
267,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB long term advances, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,350
|
|
|
|
29,350
|
|
FHLB long term advances
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Customer repurchase agreements
|
|
|
40,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,420
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
177,385
|
|
|
|
60,183
|
|
|
|
81,746
|
|
|
|
43,759
|
|
|
|
363,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Gap
|
|
$
|
9,615
|
|
|
$
|
(11,929
|
)
|
|
$
|
65,863
|
|
|
$
|
51,490
|
|
|
$
|
115,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap
|
|
$
|
9,615
|
|
|
$
|
(2,314
|
)
|
|
$
|
63,549
|
|
|
$
|
115,039
|
|
|
$
|
115,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap / Total Assets
|
|
|
1.9
|
%
|
|
|
-0.5
|
%
|
|
|
12.4
|
%
|
|
|
22.5
|
%
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the next twelve months $97.0 million of time deposits are due to reprice or mature. Of the $97.0
million, $52.5 is brokered deposits. Current pricing of the brokered deposits reflected an interest rate savings on deposits maturing in the next twelve months. The impact of future repricing on interest expense will depend upon the interest rate
environment at that time.
69
Interest Rate Risk Management Summary.
As part of its interest rate
risk management, Bankshares typically uses the trading and investment portfolio and its wholesale funding instruments to balance its interest rate exposure. There is no guarantee that the risk management techniques and balance sheet management
strategies Bankshares employs will be effective in periods of rapid rate movements or extremely volatile periods. Bankshares believes its strategies are prudent and within its policy guidelines in the base case of its modeling efforts as of
December 31, 2011.
70
Item 8.
Financial Statements and Supplementary Data
Alliance Bankshares Corporation
Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
With Report of Independent Registered Public Accounting Firm
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Alliance Bankshares Corporation
Chantilly,
Virginia
We have audited the accompanying consolidated balance sheets of Alliance Bankshares Corporation and subsidiaries as of
December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders equity, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Alliance Bankshares Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with
U.S. generally accepted accounting principles.
We were not engaged to examine managements assessment of the effectiveness of Alliance
Bankshares Corporation and subsidiaries internal control over financial reporting as of December 31, 2011, included in the accompanying
Managements Report on Internal Control over Financial Reporting
and, accordingly, we do
not express an opinion thereon.
/s/ Yount Hyde & Barbour, P.C.
Winchester, Virginia
April 17, 2012
72
Alliance Bankshares Corporation
Consolidated Balance Sheets
December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
45,837
|
|
|
$
|
24,078
|
|
Federal funds sold
|
|
|
16,567
|
|
|
|
17,870
|
|
Trading securites, at fair value
|
|
|
596
|
|
|
|
2,075
|
|
Investment securites available-for-sale, at fair value
|
|
|
123,463
|
|
|
|
135,852
|
|
Restricted stock, at cost
|
|
|
4,772
|
|
|
|
6,355
|
|
Loans, net of allowance for loan losses of $5,393 and $5,281
|
|
|
301,483
|
|
|
|
327,029
|
|
Premises and equipment, net
|
|
|
1,415
|
|
|
|
1,584
|
|
Other real estate owned
|
|
|
3,748
|
|
|
|
4,627
|
|
Accrued interest and other assets
|
|
|
8,602
|
|
|
|
19,041
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
506,483
|
|
|
$
|
538,511
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$
|
112,450
|
|
|
$
|
124,639
|
|
Savings and NOW deposits
|
|
|
51,475
|
|
|
|
56,569
|
|
Money market deposits
|
|
|
23,370
|
|
|
|
25,524
|
|
Time deposits
|
|
|
193,148
|
|
|
|
200,211
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
380,443
|
|
|
|
406,943
|
|
Repurchase agreements
|
|
|
40,420
|
|
|
|
43,153
|
|
Federal Home Loan Bank advances ($29,350 and $26,208 at fair value)
|
|
|
44,350
|
|
|
|
41,208
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
Other liabilities
|
|
|
2,838
|
|
|
|
3,212
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
478,361
|
|
|
|
504,826
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 and 5,106,819 shares issued and outstanding at
December 31, 2011 and 2010
|
|
|
20,440
|
|
|
|
20,427
|
|
Capital surplus
|
|
|
25,915
|
|
|
|
25,857
|
|
Retained (deficit)
|
|
|
(18,269
|
)
|
|
|
(12,311
|
)
|
Accumulated other comprehensive income (loss), net
|
|
|
36
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
28,122
|
|
|
|
33,685
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
506,483
|
|
|
$
|
538,511
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
73
Alliance Bankshares Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
18,073
|
|
|
$
|
20,476
|
|
Investment securities
|
|
|
3,513
|
|
|
|
6,084
|
|
Trading securities
|
|
|
67
|
|
|
|
214
|
|
Federal funds sold
|
|
|
53
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
21,706
|
|
|
|
26,838
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
Savings and NOW deposits
|
|
|
124
|
|
|
|
216
|
|
Time deposits
|
|
|
3,671
|
|
|
|
5,577
|
|
Money market deposits
|
|
|
178
|
|
|
|
270
|
|
Repurchase agreements
|
|
|
238
|
|
|
|
354
|
|
FHLB advances
|
|
|
1,042
|
|
|
|
1,134
|
|
Trust preferred capital notes
|
|
|
380
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
5,633
|
|
|
|
7,918
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,073
|
|
|
|
18,920
|
|
Provision for loan losses
|
|
|
1,549
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
14,524
|
|
|
|
17,167
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME:
|
|
|
|
|
|
|
|
|
Deposit account service charges
|
|
|
151
|
|
|
|
220
|
|
Net gain on sale of available-for-sale securities
|
|
|
3,372
|
|
|
|
2,237
|
|
Fair value adjustments
|
|
|
(3,132
|
)
|
|
|
(511
|
)
|
Other operating income
|
|
|
299
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
690
|
|
|
|
2,159
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
5,355
|
|
|
|
6,906
|
|
Occupancy expense
|
|
|
2,309
|
|
|
|
2,663
|
|
Equipment expense
|
|
|
632
|
|
|
|
772
|
|
Other Real Estate Owned expense
|
|
|
454
|
|
|
|
841
|
|
Merger Expenses
|
|
|
1,158
|
|
|
|
|
|
Operating expenses
|
|
|
6,300
|
|
|
|
7,095
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
16,208
|
|
|
|
18,277
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(994
|
)
|
|
|
1,049
|
|
Income tax expense
|
|
|
4,964
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
(1.17
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted
|
|
$
|
(1.17
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
74
Alliance Bankshares Corporation
Consolidated Statements of Changes in Shareholders Equity
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Capital
Surplus
|
|
|
Retained
(Deficit)
|
|
|
Acccumulated
Other
Comprehensive
Income (Loss)
|
|
|
Comprehensive
Income
(Loss)
|
|
|
Total
Share-
holders
Equity
|
|
BALANCE, DECEMBER 31, 2009
|
|
$
|
20,427
|
|
|
$
|
25,835
|
|
|
$
|
(13,016
|
)
|
|
$
|
(112
|
)
|
|
|
|
|
|
$
|
33,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
705
|
|
|
|
|
|
|
$
|
705
|
|
|
|
705
|
|
Other comprehensive (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available-for-sale, net of tax of $670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
Less: reclassification adjustment, net income taxes of ($761)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
|
$
|
(176
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2010
|
|
$
|
20,427
|
|
|
$
|
25,857
|
|
|
$
|
(12,311
|
)
|
|
$
|
(288
|
)
|
|
|
|
|
|
$
|
33,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(5,958
|
)
|
|
|
|
|
|
$
|
(5,958
|
)
|
|
|
(5,958
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available-for-sale, net of tax of $1,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,550
|
|
|
|
|
|
Less: reclassification adjustment, net income taxes of ($1,146)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income , net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
$
|
324
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2011
|
|
$
|
20,440
|
|
|
$
|
25,915
|
|
|
$
|
(18,269
|
)
|
|
$
|
36
|
|
|
|
|
|
|
$
|
28,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
75
Alliance Bankshares Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
1,530
|
|
|
|
1,074
|
|
Gain (loss) on disposal of fixed assets
|
|
|
(20
|
)
|
|
|
9
|
|
Provision for loan losses
|
|
|
1,549
|
|
|
|
1,753
|
|
Losses and valuation adjustments on Other Real Estate Owned
|
|
|
354
|
|
|
|
358
|
|
Proceeds from sale of loans held for sale
|
|
|
|
|
|
|
1,983
|
|
Stock-based compensation expense
|
|
|
63
|
|
|
|
22
|
|
Net (gain) on sale of securities available-for-sale
|
|
|
(3,372
|
)
|
|
|
(2,237
|
)
|
Fair value adjustments
|
|
|
3,132
|
|
|
|
511
|
|
Deferred tax expense
|
|
|
4,964
|
|
|
|
344
|
|
Changes in assets and liabilities affecting operations:
|
|
|
|
|
|
|
|
|
Accrued interest and other assets
|
|
|
4,783
|
|
|
|
2,934
|
|
Other liabilities
|
|
|
(374
|
)
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,651
|
|
|
|
7,736
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net change in federal funds sold
|
|
|
1,303
|
|
|
|
(14,900
|
)
|
Purchase of securities available-for-sale
|
|
|
(162,134
|
)
|
|
|
(99,880
|
)
|
Proceeds from sale of securities available-for-sale
|
|
|
166,591
|
|
|
|
92,953
|
|
Paydowns on securities available-for-sale
|
|
|
10,881
|
|
|
|
17,675
|
|
Net change in trading securities
|
|
|
2,012
|
|
|
|
5,324
|
|
Net change in restricted stock
|
|
|
1,583
|
|
|
|
(37
|
)
|
Net change in loan portfolio
|
|
|
23,563
|
|
|
|
23,006
|
|
Proceeds from sale of fixed assets
|
|
|
36
|
|
|
|
|
|
Proceeds from sale of Other Real Estate Owned
|
|
|
959
|
|
|
|
4,918
|
|
Capital improvements on Other Real Estate Owned
|
|
|
|
|
|
|
(55
|
)
|
Purchase of premises and equipment
|
|
|
(461
|
)
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
44,333
|
|
|
|
28,773
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net change in cash (expended on):
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
(12,189
|
)
|
|
|
31,793
|
|
Savings and NOW deposits
|
|
|
(5,094
|
)
|
|
|
2,952
|
|
Money market deposits
|
|
|
(2,154
|
)
|
|
|
3,062
|
|
Time deposits
|
|
|
(7,063
|
)
|
|
|
(62,772
|
)
|
Repurchase agreements
|
|
|
(2,733
|
)
|
|
|
(4,137
|
)
|
Proceeds from exercise of stock options
|
|
|
8
|
|
|
|
|
|
FHLB advances
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(29,225
|
)
|
|
|
(39,102
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
21,759
|
|
|
|
(2,593
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
24,078
|
|
|
|
26,671
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
45,837
|
|
|
$
|
24,078
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
76
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Alliance Bankshares Corporation (Bankshares or Company) is a bank holding company that conducts substantially all its
operations through its subsidiaries. Alliance Bank Corporation (the Bank) is state-chartered and a member of the Federal Reserve System. The Bank places special emphasis on serving the needs of individuals, small and medium size businesses and
professional concerns in the greater Washington D.C. Metropolitan region, primarily in the Northern Virginia submarket.
On
November 15, 2005, the Bank formed Alliance Insurance Agency (AIA) through the acquisition of Danaher Insurance Agency. AIA was a wholly-owned subsidiary of the Bank and sold a wide array of insurance and financial products. In 2006 and 2007,
AIA acquired two additional insurance agencies. The combined AIA operations offered insurance products in the Alliance trade area. On December 29, 2009, the Bank sold AIA and no longer offers insurance products.
On June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a subsidiary of Alliance Bankshares
Corporation, was formed for the purpose of issuing Bankshares trust preferred debt.
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of presentation and consolidation
The consolidated financial statements include the accounts of
Alliance Bankshares Corporation, Alliance Virginia Capital Trust I and Alliance Bank Corporation. In consolidation all significant inter-company accounts and transactions have been eliminated. The subordinated debt of the trust is reflected as a
liability of Bankshares.
Business
The Bank is a state-chartered commercial bank. Our main business line is
commercial banking. We provide services and products to clients located in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia area.
Use of estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make
estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, fair value of financial assets and liabilities, other-than-temporary impairment of securities, valuation of deferred income taxes and proper valuation of other real estate owned.
Cash and cash equivalents
For the purposes of the consolidated Statements of Cash Flows, Bankshares has defined
cash and cash equivalents as those amounts included in the balance sheet caption Cash and due from banks.
Trading activities
Bankshares previously engaged in trading activities. Securities that are held principally for resale in
the near term are recorded in the trading securities account at fair value with changes in fair value recorded in earnings. Interest and dividends are included in net interest income.
Securities
Investments in debt and equity securities with readily determinable fair values are classified as either held to
maturity, available for sale, or trading, based on managements intent. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other
comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of
the securities.
77
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Impairment of securities occurs when the fair value of a security is less than its
amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (a) the Company intends to sell the security or (b) it is more-likely-than-not that the Company will
be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that it will be required to sell the security before recovery, it must
determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss,
there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive
income. For equity securities, impairment is considered to be other-than-temporary based on the Companys ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in
a write-down that must be included in net income.
The Company regularly reviews each investment security for
other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value
of cash flows expected to be collected from debt securities, the Companys intention with regard to holding the security to maturity and the likelihood that it would be required to sell the security before recovery.
Fair Value Accounting
Fair values of financial instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
Accounting Standards Codification (ASC)
820-10-20, Fair Value Accounting, states that valuation techniques consistent with the market approach, income approach and/or cost approach should be used to measure fair value. Unobservable inputs should reflect the reporting
entitys own assumptions about the assumptions that market participants would use in pricing the asset or the liability. As of December 31, 2011, Bankshares utilized a more advanced model to estimate the fair value of the FHLB advance
accounted for under fair value accounting. For the year ended December 31, 2011, there was a negative $3.1 million adjustment to the fair value of the FHLB advance, driven by the decrease in interest rates during the period, and the change in
accounting estimate.
Loans
The Bank grants mortgage, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is represented by loans throughout the Washington, D.C. metropolitan area. The ability of the Banks debtors to honor their contracts is dependent upon the real estate and general economic conditions of the lending
area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
generally is reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the life of the loan or currently upon the sale or repayment of a loan.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Consumer loans are typically charged off after 90 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
78
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
All interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. Loan losses are charged against the allowance when management believes the inability to collect the loan has been confirmed. All classes
of loans are typically charged-off no later than 180 days past due unless they are well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest
is considered doubtful.
Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular
basis, not less than quarterly, by management. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
The allowance represents an estimate that, in managements judgment, will be adequate to absorb any losses on existing loans that may
become uncollectible. Managements judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the
nature and volume of the loan portfolio, current economic conditions that may affect a borrowers ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently
subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan segment:
Real estate residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the
borrower and changes in the value of the collateral.
Real estate construction loans carry risks that the project will not be
finished according to schedule, the project will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general
contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
Commercial business and commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership
of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate
over time and cannot be appraised with as much precision.
Consumer loans carry risks associated with the continued
credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss,
divorce, illness or personal bankruptcy.
79
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Our allowance for loan losses has two basic components: the specific allowance for
impaired credits and the general allowance based on relevant risk factors. Each of these components is determined based upon estimates that can and do change when the actual events occur.
The specific allowance is used to individually allocate an allowance for loans identified as impaired. Impairment testing includes
consideration of the borrowers overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of the collateral. For collateral dependent loans, an updated appraisal will be
ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market
conditions when appropriate. These factors are combined to estimate the probability and severity of inherent losses. When impairment is identified, a specific reserve is established based on Bankshares calculation of the loss embedded in the
individual loan. Bankshares does not separately identify individual consumer and residential loans for impairment testing unless loans become 60 days or more past due.
The general component is the largest component of the total allowance and is determined by aggregating un-criticized loans by loan type based on common purpose, collateral, repayment source or other
credit characteristics. We then apply allowance factors, which in the judgment of management represent the expected losses over the life of the loans. In determining those factors, we consider the following: (1) delinquencies and overall risk
ratings, (2) loss history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the experience and depth of the borrowers management, (6) national and local economic trends,
(7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g., regulatory requirements).
The characteristics of the loan ratings are as follows:
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loans, and an appropriate
leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
Special mention loans have a specific defined weakness in the borrowers operations and the borrowers ability to generate
positive cash flow on a sustained basis. The borrowers recent payment history is characterized by late payments. Bankshares risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-managed, well
maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses
that jeopardize the viability of Bankshares credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of
the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect Bankshares. There is a distinct possibility that Bankshares will sustain some loss if the deficiencies associated with the loan are not
corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrowers performance and financial condition provide evidence that it is probable that
Bankshares will be unable to collect all amounts due. Substandard non-accrual loans have the same characteristics as substandard loans; however they have a non-accrual classification.
80
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Doubtful rated loans have all the weakness inherent in a loan that is classified as
substandard but 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 improbable. The possibility of loss is extremely
high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any
future payment on the loan. Loss rated loans are fully charged off.
A loan is considered impaired when, based on current
information and events, it is probable that Bankshares will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management reviews commercial, construction and real
estate loans on the internal watch list as well as loans greater than $250,000 for impairment at least quarterly. Consumer and residential real estate loans are not individually reviewed for impairment unless they are 60 days or more past due on
principal and/or interest payments. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled payments when due. Management determines the significance of payment
delays and payment shortfalls taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrowers prior payment history, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan level basis by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market
price, or the fair value of the collateral if the loan is collateral dependent. These factors are combined to estimate the probability and severity of inherent loss. When impairment is identified, a specific reserve may be established based on
Bankshares calculation of the loss embedded in the individual loan. If an impaired loan is 90 days or more past due or if the collection of interest or principal is doubtful, the loan will be placed on nonaccrual status. Any payments received
from the borrower will be accounted for on a cash basis.
Troubled Debt Restructurings
In situations where, for
economic or legal reasons related to a borrowers 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. As of December 31, 2011, there were $1.2 million of loans classified as TDRs of which $257 thousand were classified as non-accrual. There was $212
thousand in loans classified as TDRs as of December 31, 2010.
Premises and equipment
Furniture and
equipment are stated at cost less accumulated depreciation and amortization and are depreciated over their estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the lives of the respective leases or the
estimated useful life of the leasehold improvement, whichever is less. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate.
81
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Foreclosed assets or Other Real Estate Owned (OREO)
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 underlying valuation are included in Other Real Estate Owned Expense in the Consolidated
Statements of Operations
Income taxes
Bankshares uses the liability (or balance sheet) approach in financial
accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in
the future. 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 plus or minus 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 Consolidated Balance Sheets 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 Consolidated Statements of Operations.
Repurchase agreements
The Bank routinely enters into repurchase agreements with customers. As part of the repurchase
agreements, the Bank uses marketable investment securities from its investment portfolio as collateral for the customer agreements. The repurchase agreements bear interest at a current market rate.
Stock-based compensation
ASC 718-10, Stock Compensation, requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, such as stock options and non-vested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the fair value of an award on the
grant date and is recognized over the service period, which is usually the vesting period.
Included within salaries and
employee benefits expense for the years ended December 31, 2011 and 2010, is $63 thousand and $22 thousand of stock-based compensation, respectively. As of December 31, 2011 and December 31, 2010, there was $82 thousand and $179
thousand, respectively, of total unrecognized compensation expense, related to stock options, which will be recognized over the remaining requisite service period ending December 31, 2014. For the year ended December 31, 2011, the
weighted-average remaining contractual life is 4.8 years.
Stock option compensation expense is the estimated fair value of
options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model. There
were no grants of stock options in 2011.
82
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Earnings (loss) per share
Basic earnings (loss) per share represents
income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Bankshares relate solely to outstanding stock options and are determined using the treasury
method.
Off-balance-sheet instruments
In the ordinary course of business, Bankshares, through its banking
subsidiary, has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and rate lock commitments. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or received.
Advertising and marketing expense
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs for the years ended December 31, 2011 and 2010 were $76 and, $77 thousand, respectively.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership,
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Reclassifications
there were no reclassifications in the current year.
Recent Accounting Pronouncements
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. The new disclosure guidance significantly expands the existing requirements and has led to greater transparency into an entitys exposure to credit losses from lending arrangements. The extensive new
disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance
of the ASU, such as the allowance roll forward and modification disclosures has been required for periods beginning on or after December 15, 2010. Bankshares has included the required disclosures in its consolidated financial statements.
The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements
In
December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance requires pro forma disclosure for business combinations that
occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the
pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a
material impact on Bankshares consolidated financial statements.
83
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002,
Interactive Data to Improve Financial Reporting. The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers
and foreign large accelerated filers using U.S. generally accepted accounting principles (GAAP) were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010.
All remaining filers were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. Bankshares has submitted financial statements in extensible business
reporting language (XBRL) format with their SEC filings in accordance with the phased-in schedule.
In March 2011, the SEC
issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance
consistent with current authoritative accounting guidance issued as a part of the FASBs Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of
referencing through the SAB Series. The effective date for SAB 114 was March 28, 2011. The adoption of the new guidance did not have a material impact on the Bankshares consolidated financial statements.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings. The amendments in this ASU temporarily delayed the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay was intended to allow the FASB 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 was effective for interim and annual periods ending after June 15, 2011. Bankshares has adopted ASU 2011-01 and included the required disclosures in its consolidated financial statements
.
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditors evaluation
of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Retrospective application to the beginning of the annual period of
adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of
measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Bankshares has adopted ASU 2011-02 and included the required disclosures
in its consolidated financial statements
.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing
(Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or
redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are
84
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing
transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to
measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary
wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application was not
permitted. Bankshares is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income. The
objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other
comprehensive income as part of the statement of changes in shareholders equity. The amendments require that all non-owner changes in shareholders equity be presented either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a
total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income,
a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income
either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods
within those years beginning after December 15, 2011. Early adoption was permitted because compliance with the amendments was already permitted. The amendments do not require transition disclosures. The adoption of the new guidance did not have
a material impact on Bankshares consolidated financial statements.
In August 2011, the SEC issued Final Rule No. 33-9250,
Technical Amendments to Commission Rules and Forms related to the FASBs Accounting Standards Codification. The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in
Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the new
guidance did not have a material impact on Bankshares consolidated financial statements.
85
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210)
Disclosures about Offsetting Assets and Liabilities. This ASU requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the balance sheet and instruments and transactions
subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should
provide the disclosures required by those amendments retrospectively for all comparative periods presented. Bankshares is currently assessing the impact that ASU 2011-11 will have on its consolidated financial statements
.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments
to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the
face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational
concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of
accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either
in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements
.
On December 29, 2009, the Bank entered into and closed on a Stock Purchase Agreement (Agreement) between the Bank
as the seller and a group of former AIA executives. The Agreement provides for the purchase of all of the issued and outstanding shares (Shares) of AIA, a wholly-owned insurance agency subsidiary of the Bank. Pursuant to the Agreement, AIA sold the
Shares for a total purchase price of $5,025,000. At closing, the Bank received $3,750,000 in cash and closing credits, with the remainder of the purchase price payable pursuant to promissory notes that do not bear interest (Notes), as follows:
(1) $650,000 pursuant to the terms of one promissory note that was due and payable in full on February 15, 2011, and (2) $625,000 pursuant to the terms of five promissory notes in the original principal amount of $125,000 each, which
are due and payable on February 15, 2011, 2012, 2013, 2014 and 2015, respectively. The Notes contain usual and customary conditions and are secured by a pledge of 9,800 of the 10,000 shares sold at closing.
The $650,000 promissory note due and payable on February 15, 2011 was refinanced as a commercial loan in the normal course of
business. This note was paid in full. We received a payment of $90,000 and $83,000 in full satisfaction for the promissory notes due on February 15, 2011 and 2012 respectively. The payment of $90,000 was based on certain performance
metrics realized in the ordinary course of business. We established an allowance of $140,000 in 2010 against the remaining promissory notes due through February 2015.
86
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The results of the operations and the loss on the sale were reported as discontinued
operations in the 2009 and 2010 financial statements.
4.
|
|
FAIR VALUE MEASUREMENTS
|
Bankshares uses fair value measurements to record fair value adjustments to certain assets and liabilities and to
determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (FASB), ASC 820-10, the fair value of a financial instrument is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for
Bankshares various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is,
not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in
valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the
facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, Bankshares groups its financial assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value.
|
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
|
|
|
|
Level 2 Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for
identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
|
|
|
|
Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect Bankshares own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
A financial instruments categorization within the valuation hierarchy is based upon the lowest level
of input that is significant to the fair value measurement.
87
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following describes the valuation techniques used by Bankshares to measure certain
financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Trading and
Available-for-Sale Securities
Trading and available-for-sale securities 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 consider observable market data (Level 2). Financial assets and liabilities that are traded infrequently have values based
on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements own view about the assumptions that market participants would use in
pricing the asset or liability (Level 3). As a result, some of Bankshares securities are hand priced using customary spreads over similar maturity treasury instruments.
FHLB Advances
Under the fair value accounting standards, certain liabilities can be carried at fair value. The designated instruments are recorded on a fair value basis at the time of
issuance. As of December 31, 2011, Bankshares had one wholesale liability as a fair value instrument: a long-term Federal Home Loan Bank (FHLB) advance. Wholesale instruments are designated as either Level 2 or Level 3 under the ASC 820-10 fair
value hierarchy. Level 2 liabilities are based on quoted market prices using independent valuation techniques for similar instruments with like characteristics. This information is deemed to be observable market data. Level 3 liabilities are
financial instruments that are difficult to value due to dysfunctional, distressed markets or lack of actual trading volume. Management gathers certain data to value the instrument, including swap curves, conversion swaptions and discounted cash
flows. These data points are modeled to reflect the estimate of the fair value of the liability.
88
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables present the balances of financial assets and liabilities measured
at fair value on a recurring basis as of December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2011
|
|
Descriptions
|
|
Fair Value
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
Total
Changes in
Fair Value
Included
in YTD
Results
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - PCMOs
|
|
$
|
596
|
|
|
$
|
|
|
|
$
|
596
|
|
|
$
|
|
|
|
$
|
10
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
|
71,115
|
|
|
|
71,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
|
9,751
|
|
|
|
|
|
|
|
9,751
|
|
|
|
|
|
|
|
|
|
U.S. government CMOs
|
|
|
31,038
|
|
|
|
|
|
|
|
31,038
|
|
|
|
|
|
|
|
|
|
U.S. government agency MBS
|
|
|
7,698
|
|
|
|
|
|
|
|
7,698
|
|
|
|
|
|
|
|
|
|
PCMOs
|
|
|
950
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
2,911
|
|
|
|
|
|
|
|
2,911
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advance
|
|
|
29,350
|
|
|
|
|
|
|
|
|
|
|
|
29,350
|
|
|
|
(3,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
Descriptions
|
|
Fair Value
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
Total
Changes in
Fair Value
Included
in YTD
Results
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities - PCMOs
|
|
$
|
2,075
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,075
|
|
|
$
|
(87
|
)
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government treasuries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
|
51,763
|
|
|
|
|
|
|
|
25,773
|
|
|
|
25,990
|
|
|
|
|
|
U.S. government CMOs
|
|
|
22,576
|
|
|
|
|
|
|
|
22,576
|
|
|
|
|
|
|
|
|
|
U.S. government agency MBS
|
|
|
14,805
|
|
|
|
|
|
|
|
14,805
|
|
|
|
|
|
|
|
|
|
PCMOs
|
|
|
17,621
|
|
|
|
|
|
|
|
|
|
|
|
17,621
|
|
|
|
|
|
Municipal securities
|
|
|
29,087
|
|
|
|
|
|
|
|
29,087
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
FHLB advance
|
|
|
26,208
|
|
|
|
|
|
|
|
|
|
|
|
26,208
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables present the activity in Level 3 fair value measurements for the
years ended December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
(Dollars in thousands)
|
|
|
|
Trading
Securities
|
|
|
FHLB Advances
|
|
|
AFS Securities
|
|
Beginning balance, January 1, 2011
|
|
$
|
2,075
|
|
|
$
|
26,208
|
|
|
$
|
43,611
|
|
Transfers into (out of) Level 3
|
|
|
(596
|
)
|
|
|
|
|
|
|
(26,940
|
)
|
Sales, maturities or calls
|
|
|
(1,489
|
)
|
|
|
|
|
|
|
(16,286
|
)
|
Realized gains (losses) on assets
|
|
|
10
|
|
|
|
|
|
|
|
170
|
|
Realized (gains) losses on liabilities
|
|
|
|
|
|
|
3,142
|
|
|
|
|
|
Unrealized gains (losses) on assets
|
|
|
|
|
|
|
|
|
|
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2011
|
|
$
|
|
|
|
$
|
29,350
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
(Dollars in thousands)
|
|
|
|
Trading
Securities
|
|
|
FHLB Advances
|
|
|
AFS Securities
|
|
Beginning balance, January 1, 2010
|
|
$
|
7,460
|
|
|
$
|
25,761
|
|
|
$
|
71,862
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, maturities or calls
|
|
|
(5,298
|
)
|
|
|
|
|
|
|
(58,942
|
)
|
Realized gains (losses) on assets
|
|
|
(87
|
)
|
|
|
|
|
|
|
1,103
|
|
Realized (gains) losses on liabilities
|
|
|
|
|
|
|
447
|
|
|
|
|
|
Unrealized gains (losses) on assets
|
|
|
|
|
|
|
|
|
|
|
263
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
29,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2010
|
|
$
|
2,075
|
|
|
$
|
26,208
|
|
|
$
|
43,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the assets and liabilities selected for fair value accounting where available, management obtained
pricing on each instrument from independent third parties who relied upon pricing models using widely available and industry standard yield curves. At December 31, 2011, the securities previously carried at level three were moved to level two
due to the fact that the pricing was identical to the normal market price. Management will continue to monitor these instruments. Changes in fair values associated with fluctuations in market values reported above are reported as fair value
adjustments on the Consolidated Statements of Operations.
90
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
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 Bankshares 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 underlying collateral, if any. 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 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 to be 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 Consolidated Statements of Operations.
Other Real Estate Owned (OREO)
OREO is measured at fair value using an income or market valuation approach based on an
appraisal conducted by an independent, licensed appraiser 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 to be Level 3. Any fair value adjustments
are recorded in the period recognized as Other Real Estate Owned expense in the Consolidated Statements of Operations.
91
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables summarize Bankshares assets that were measured at fair value
on a non-recurring basis during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at December 31, 2011
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net of valuation allowance
|
|
$
|
6,760
|
|
|
$
|
|
|
|
$
|
6,760
|
|
|
$
|
|
|
OREO
|
|
$
|
3,748
|
|
|
$
|
|
|
|
$
|
2,275
|
|
|
$
|
1,473
|
|
|
|
|
|
Carrying Value at December 31, 2010
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net of valuation allowance
|
|
$
|
3,124
|
|
|
$
|
|
|
|
$
|
3,124
|
|
|
$
|
|
|
OREO
|
|
$
|
4,627
|
|
|
$
|
|
|
|
$
|
4,627
|
|
|
$
|
|
|
The following describes the valuation techniques used by Bankshares to measure certain financial assets
and liabilities not previously described in this note that are not recorded at fair value on a recurring basis in the financial statements:
Cash, Due from Banks and Federal Funds Sold
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where
applicable.
92
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Restricted Stock
Restricted investments in correspondent banks are carried
at cost based on the underlying redemption provisions of the instruments and therefore are not included in the fair value disclosures.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, statement savings, and certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements,
and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on Bankshares current incremental borrowing rates for
similar types of borrowing arrangements.
Trust Preferred Capital Notes
The fair value of Bankshares Trust
Preferred Capital Notes, which are discussed in Note 12, is estimated using discounted cash flow analyses based on Bankshares current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. Fair value of off-balance sheet financial commitments are considered immaterial and are therefore not included in the table below.
93
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following table reflects the fair value of financial instruments for the years ended
December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
45,837
|
|
|
$
|
45,837
|
|
|
$
|
24,078
|
|
|
$
|
24,078
|
|
Federal funds sold
|
|
|
16,567
|
|
|
|
16,567
|
|
|
|
17,870
|
|
|
|
17,870
|
|
Trading securities
|
|
|
596
|
|
|
|
596
|
|
|
|
2,075
|
|
|
|
2,075
|
|
Available-for-sale securities
|
|
|
123,463
|
|
|
|
123,463
|
|
|
|
135,852
|
|
|
|
135,852
|
|
Loans, net
|
|
|
301,483
|
|
|
|
297,163
|
|
|
|
327,029
|
|
|
|
324,164
|
|
Accrued interest receivable
|
|
|
1,815
|
|
|
|
1,815
|
|
|
|
2,758
|
|
|
|
2,758
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
112,450
|
|
|
$
|
112,450
|
|
|
$
|
124,639
|
|
|
$
|
124,639
|
|
Interest-bearing deposits
|
|
|
267,993
|
|
|
|
268,691
|
|
|
|
282,304
|
|
|
|
264,176
|
|
Short-term borrowings
|
|
|
40,420
|
|
|
|
40,420
|
|
|
|
43,153
|
|
|
|
43,148
|
|
FHLB advances
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
FHLB advances, at fair value
|
|
|
29,350
|
|
|
|
29,350
|
|
|
|
26,208
|
|
|
|
26,208
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
Accrued interest payable
|
|
|
1,155
|
|
|
|
1,155
|
|
|
|
976
|
|
|
|
976
|
|
The following table reflects the remaining trading securities accounted for on a fair value basis and the effective
yield of the instruments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value
|
|
|
Yield
|
|
|
Fair Value
|
|
|
Yield
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCMOs
|
|
|
596
|
|
|
|
5.44
|
%
|
|
|
2,075
|
|
|
|
5.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
596
|
|
|
|
5.44
|
%
|
|
$
|
2,075
|
|
|
|
5.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011 and 2010, none of the trading securities were pledged. Proceeds from sales and
calls of trading securities were $1.2 million and $5.3 million for the years ended December 31, 2011 and 2010, respectively.
94
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The amortized cost, unrealized holding gains and losses, and the fair value of investment securities at
December 31, 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
|
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
$
|
71,119
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
71,115
|
|
U.S. government corporations and agencies
|
|
|
9,737
|
|
|
|
35
|
|
|
|
(21
|
)
|
|
|
9,751
|
|
U.S. government agency CMOs
|
|
|
30,893
|
|
|
|
195
|
|
|
|
(50
|
)
|
|
|
31,038
|
|
U.S. government agency MBS
|
|
|
7,672
|
|
|
|
26
|
|
|
|
|
|
|
|
7,698
|
|
PCMOs
|
|
|
1,005
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
950
|
|
Municipal securities
|
|
|
2,982
|
|
|
|
70
|
|
|
|
(141
|
)
|
|
|
2,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
123,408
|
|
|
$
|
326
|
|
|
$
|
(271
|
)
|
|
$
|
123,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost, unrealized holding gains and losses, and the fair value of investment securities at
December 31, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
|
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
$
|
51,684
|
|
|
$
|
657
|
|
|
$
|
(578
|
)
|
|
$
|
51,763
|
|
U.S. government CMOs
|
|
|
22,185
|
|
|
|
596
|
|
|
|
(205
|
)
|
|
|
22,576
|
|
U.S. government agency MBS
|
|
|
14,587
|
|
|
|
218
|
|
|
|
|
|
|
|
14,805
|
|
PCMOs
|
|
|
17,180
|
|
|
|
468
|
|
|
|
(27
|
)
|
|
|
17,621
|
|
Municipal securities
|
|
|
30,653
|
|
|
|
201
|
|
|
|
(1,767
|
)
|
|
|
29,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
136,289
|
|
|
$
|
2,140
|
|
|
$
|
(2,577
|
)
|
|
$
|
135,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no held-to-maturity investments as of December 31, 2011 or 2010.
The amortized cost and fair value of available-for-sale securities as of December 31, 2011, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.
95
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Due within one year
|
|
$
|
71,119
|
|
|
$
|
71,115
|
|
Due after ten years
|
|
|
52,289
|
|
|
|
52,348
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123,408
|
|
|
$
|
123,463
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and calls of securities available for sale were $166.6 million and $93.0 million for
the years ended December 31, 2011 and 2010, respectively. Gross gains of $4.2 million and $2.3 million and gross losses of $784 thousand and $45 thousand were realized on these sales during 2011 and 2010, respectively. The tax provision
applicable to the net realized gain amounted to $1.1 million and $761 thousand, respectively.
At December 31, 2011 and
2010, available-for-sale securities with a carrying value of $111.1 million and $119.8 million, respectively, were pledged to secure repurchase agreements, Federal Home Loan Bank advances, and public deposits and for other purposes required or
permitted by law.
The following tables present the aggregate amount of unrealized loss in investment securities as of
December 31, 2011 and 2010. The aggregate is determined by summation of all the related securities that have a continuous loss at year end, and the length of time that the loss has been unrealized is shown by terms of less than 12
months and 12 months or more. The fair value is the approximate market value as of year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
12
months or more
|
|
|
|
|
|
|
Less than 12 months
|
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
$
|
71,115
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
71,115
|
|
|
$
|
(4
|
)
|
U.S. government corporations and agencies
|
|
|
3,327
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
3,327
|
|
|
|
(21
|
)
|
U.S. government agency CMOs
|
|
|
7,401
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
7,401
|
|
|
|
(50
|
)
|
PCMOs
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
(55
|
)
|
|
|
950
|
|
|
|
(55
|
)
|
Municipal securities
|
|
|
526
|
|
|
|
(4
|
)
|
|
|
525
|
|
|
|
(137
|
)
|
|
|
1,051
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investment securities:
|
|
$
|
82,369
|
|
|
$
|
(79
|
)
|
|
$
|
1,475
|
|
|
$
|
(192
|
)
|
|
$
|
83,844
|
|
|
$
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
12 months or more
|
|
|
|
|
|
|
Less than 12 months
|
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
$
|
25,195
|
|
|
$
|
(578
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,195
|
|
|
$
|
(578
|
)
|
U.S. government agency CMOs
|
|
|
7,252
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
7,252
|
|
|
|
(205
|
)
|
PCMOs
|
|
|
4,103
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
4,103
|
|
|
|
(27
|
)
|
Municipal securities
|
|
|
19,862
|
|
|
|
(1,112
|
)
|
|
|
1,966
|
|
|
|
(655
|
)
|
|
|
21,828
|
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investment securities:
|
|
$
|
56,412
|
|
|
$
|
(1,922
|
)
|
|
$
|
1,966
|
|
|
$
|
(655
|
)
|
|
$
|
58,378
|
|
|
$
|
(2,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankshares investment security portfolio is primarily comprised of U.S. Treasury Notes and fixed
rate bonds, whose prices move inversely with interest rates. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Unrealized losses within Bankshares portfolio typically occur as market interest rates
rise. Such unrealized losses are considered temporary in nature. Under ASC 320-10-35, Debt and Equity Securities Recognition and Presentation of Other-Than-Temporary Impairments, an impairment is considered other than temporary if any of
the following conditions are met: Bankshares intends to sell the security, it is more likely than not that Bankshares will be required to sell the security before recovery of its amortized cost basis, or Bankshares does not expect to recover the
securitys entire amortized cost basis (even if Bankshares does not intend to sell). In the event that a security would suffer impairment for a reason that was other than temporary, Bankshares would be expected to write down the
securitys value to its new fair value, and the amount of the write-down would be included in earnings as a realized loss. As of December 31, 2011 and 2010, management does not consider any of the unrealized losses to be
other-than-temporarily impaired and no impairment charges have been recorded.
There are a total of 27 investment securities
totaling $83.8 million that have an unrealized loss and are considered temporarily impaired as of December 31, 2011. Management believes the unrealized losses noted in the table above are a result of current market conditions and interest
rates, and do not reflect on the ability of the issuers to repay the obligations. Approximately $81.8 million or 97.6% of the investment securities with an unrealized loss are backed by U.S. Government Agencies or Corporations and other forms of
underlying collateral.
Bankshares investment in FHLB stock totaled $3.4 million at December 31, 2011. FHLB stock is
generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment,
its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Bankshares does not consider this investment to be other than temporarily impaired as of December 31, 2011 and no impairment
has been recognized. FHLB stock is included in restricted stock on the Consolidated Balance Sheets.
97
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following table summarizes the composition of the loan portfolio by dollar amount and percentage as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
101,248
|
|
|
|
33.0
|
%
|
|
$
|
110,862
|
|
|
|
33.4
|
%
|
Commercial real estate
|
|
|
137,610
|
|
|
|
44.8
|
%
|
|
|
146,222
|
|
|
|
44.0
|
%
|
Construction/land
|
|
|
39,176
|
|
|
|
12.8
|
%
|
|
|
43,017
|
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
278,034
|
|
|
|
90.6
|
%
|
|
|
300,101
|
|
|
|
90.3
|
%
|
Commercial and industrial
|
|
|
26,820
|
|
|
|
8.7
|
%
|
|
|
27,517
|
|
|
|
8.3
|
%
|
Consumer
|
|
|
2,022
|
|
|
|
0.7
|
%
|
|
|
4,692
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
306,876
|
|
|
|
100.0
|
%
|
|
|
332,310
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(5,393
|
)
|
|
|
|
|
|
|
(5,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
301,483
|
|
|
|
|
|
|
$
|
327,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011 and 2010, there were $25 thousand and $894 thousand respectively in checking
account overdrafts that were reclassified on the Consolidated Balance Sheets as loans.
98
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables represent the credit quality of assets by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Asset By Class
As Of
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
INTERNAL RISK RATING GRADES
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total Loans
|
|
Risk Rating Number
1
|
|
|
1 to 5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
23,901
|
|
|
$
|
927
|
|
|
$
|
224
|
|
|
$
|
1,768
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,820
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
63,192
|
|
|
|
625
|
|
|
|
1,742
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
68,169
|
|
Non-owner occupied
|
|
|
60,069
|
|
|
|
1,231
|
|
|
|
8,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,441
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
9,356
|
|
|
|
175
|
|
|
|
599
|
|
|
|
3,753
|
|
|
|
876
|
|
|
|
|
|
|
|
14,759
|
|
Other construction & land
|
|
|
16,018
|
|
|
|
|
|
|
|
1,662
|
|
|
|
5,837
|
|
|
|
900
|
|
|
|
|
|
|
|
24,417
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
27,311
|
|
|
|
430
|
|
|
|
718
|
|
|
|
95
|
|
|
|
552
|
|
|
|
|
|
|
|
29,106
|
|
Single family
|
|
|
56,134
|
|
|
|
4,876
|
|
|
|
|
|
|
|
5,347
|
|
|
|
|
|
|
|
|
|
|
|
66,357
|
|
Multifamily
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,785
|
|
Consumernon real estate
|
|
|
1,836
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
263,602
|
|
|
$
|
8,264
|
|
|
$
|
13,272
|
|
|
$
|
19,410
|
|
|
$
|
2,328
|
|
|
$
|
|
|
|
$
|
306,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Asset By Class
As Of
December 31, 2010
(Dollars in thousands)
|
|
INTERNAL RISK RATING GRADES
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total Loans
|
|
Risk Rating Number
1
|
|
|
1 to 5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
24,539
|
|
|
$
|
437
|
|
|
$
|
734
|
|
|
$
|
1,807
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,517
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
73,834
|
|
|
|
634
|
|
|
|
2,074
|
|
|
|
3,273
|
|
|
|
|
|
|
|
|
|
|
|
79,815
|
|
Non-owner occupied
|
|
|
59,757
|
|
|
|
2,732
|
|
|
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,407
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
17,483
|
|
|
|
1,553
|
|
|
|
|
|
|
|
3,300
|
|
|
|
872
|
|
|
|
|
|
|
|
23,208
|
|
Commercial
|
|
|
7,723
|
|
|
|
1,633
|
|
|
|
1,492
|
|
|
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
19,809
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
43,266
|
|
|
|
958
|
|
|
|
348
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
44,969
|
|
Single family
|
|
|
45,520
|
|
|
|
6,627
|
|
|
|
3,312
|
|
|
|
5,846
|
|
|
|
|
|
|
|
|
|
|
|
61,305
|
|
Multifamily
|
|
|
4,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,588
|
|
Consumernon real estate
|
|
|
4,501
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
281,211
|
|
|
$
|
14,574
|
|
|
$
|
11,878
|
|
|
$
|
23,775
|
|
|
$
|
872
|
|
|
$
|
|
|
|
$
|
332,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to
be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets.
|
99
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following table sets forth the aging and non-accrual loans by class for
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging and Non-accrual Loans By Class
As
of December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or More
Past
Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
90-days
Past Due
and Still
Accruing
|
|
|
Non-accrual
Loans
|
|
Commercial and industrial
|
|
$
|
1,228
|
|
|
$
|
367
|
|
|
$
|
|
|
|
$
|
1,595
|
|
|
$
|
25,225
|
|
|
$
|
|
|
|
$
|
977
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
121
|
|
|
|
|
|
|
|
2,610
|
|
|
|
2,731
|
|
|
|
65,438
|
|
|
|
|
|
|
|
2,610
|
|
Non-owner occupied
|
|
|
|
|
|
|
992
|
|
|
|
|
|
|
|
992
|
|
|
|
68,449
|
|
|
|
|
|
|
|
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
540
|
|
|
|
540
|
|
|
|
14,219
|
|
|
|
|
|
|
|
540
|
|
Other construction & land
|
|
|
|
|
|
|
1,225
|
|
|
|
5,988
|
|
|
|
7,213
|
|
|
|
17,204
|
|
|
|
|
|
|
|
7,139
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
304
|
|
|
|
33
|
|
|
|
184
|
|
|
|
521
|
|
|
|
28,585
|
|
|
|
|
|
|
|
236
|
|
Single Family
|
|
|
74
|
|
|
|
29
|
|
|
|
1,733
|
|
|
|
1,836
|
|
|
|
64,521
|
|
|
|
|
|
|
|
1,762
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
Consumer -non real estate
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,913
|
|
|
$
|
2,646
|
|
|
$
|
11,055
|
|
|
$
|
15,614
|
|
|
$
|
291,262
|
|
|
$
|
|
|
|
$
|
13,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging and Non-accrual Loans By Class
As
of December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or More
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
90-days
Past Due
and Still
Accruing
|
|
|
Non-accrual
Loans
|
|
Commerical and industrial
|
|
$
|
718
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
718
|
|
|
$
|
26,799
|
|
|
$
|
|
|
|
$
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1,992
|
|
|
|
|
|
|
|
291
|
|
|
|
2,283
|
|
|
|
77,532
|
|
|
|
|
|
|
|
291
|
|
Non-owner occupied
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
|
|
66,079
|
|
|
|
|
|
|
|
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,585
|
|
|
|
|
|
|
|
1,128
|
|
|
|
3,713
|
|
|
|
19,495
|
|
|
|
256
|
|
|
|
872
|
|
Commercial
|
|
|
1,859
|
|
|
|
1,917
|
|
|
|
|
|
|
|
3,776
|
|
|
|
16,033
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Lines
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
427
|
|
|
|
44,541
|
|
|
|
|
|
|
|
|
|
Single Family
|
|
|
5,608
|
|
|
|
|
|
|
|
478
|
|
|
|
6,086
|
|
|
|
55,220
|
|
|
|
|
|
|
|
740
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,588
|
|
|
|
|
|
|
|
|
|
Consumer -non real estate
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
91
|
|
|
|
4,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
13,517
|
|
|
$
|
2,008
|
|
|
$
|
1,897
|
|
|
$
|
17,422
|
|
|
$
|
314,888
|
|
|
$
|
256
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
8.
|
|
ALLOWANCE FOR LOAN LOSSES
|
The following table summarizes activity in the allowance for loan losses for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of year
|
|
$
|
5,281
|
|
|
$
|
5,619
|
|
Provision for loan losses
|
|
|
1,549
|
|
|
|
1,753
|
|
Loans charged off
|
|
|
(1,702
|
)
|
|
|
(2,239
|
)
|
Recoveries of loans charged off
|
|
|
265
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,437
|
)
|
|
|
(2,091
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5,393
|
|
|
$
|
5,281
|
|
|
|
|
|
|
|
|
|
|
The following table represents the allocation of allowance for loan losses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
As of
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
Land
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning Balance:
|
|
$
|
463
|
|
|
$
|
1,420
|
|
|
$
|
700
|
|
|
$
|
2,613
|
|
|
$
|
85
|
|
|
$
|
5,281
|
|
Charge-offs
|
|
|
(10
|
)
|
|
|
(173
|
)
|
|
|
(404
|
)
|
|
|
(1,044
|
)
|
|
|
(71
|
)
|
|
|
(1,702
|
)
|
Recoveries
|
|
|
116
|
|
|
|
9
|
|
|
|
|
|
|
|
134
|
|
|
|
6
|
|
|
|
265
|
|
Provision
|
|
|
(359
|
)
|
|
|
252
|
|
|
|
1,512
|
|
|
|
123
|
|
|
|
21
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
210
|
|
|
$
|
1,508
|
|
|
$
|
1,808
|
|
|
$
|
1,826
|
|
|
$
|
41
|
|
|
$
|
5,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
135
|
|
|
$
|
1,376
|
|
|
$
|
760
|
|
|
$
|
|
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
210
|
|
|
$
|
1,373
|
|
|
$
|
432
|
|
|
$
|
1,066
|
|
|
$
|
41
|
|
|
$
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
26,820
|
|
|
$
|
137,610
|
|
|
$
|
39,176
|
|
|
$
|
101,248
|
|
|
$
|
2,022
|
|
|
$
|
306,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
977
|
|
|
$
|
2,610
|
|
|
$
|
7,678
|
|
|
$
|
1,999
|
|
|
$
|
|
|
|
$
|
13,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
25,843
|
|
|
$
|
135,000
|
|
|
$
|
31,498
|
|
|
$
|
99,249
|
|
|
$
|
2,022
|
|
|
$
|
293,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
As of
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
Commercial &
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
Land
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Ending Balance:
|
|
$
|
463
|
|
|
$
|
1,420
|
|
|
$
|
700
|
|
|
$
|
2,613
|
|
|
$
|
85
|
|
|
$
|
5,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
77
|
|
|
$
|
696
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
463
|
|
|
$
|
1,343
|
|
|
$
|
4
|
|
|
$
|
2,513
|
|
|
$
|
85
|
|
|
$
|
4,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
27,517
|
|
|
$
|
146,222
|
|
|
$
|
43,017
|
|
|
$
|
110,862
|
|
|
$
|
4,692
|
|
|
$
|
332,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
|
|
|
$
|
291
|
|
|
$
|
3,272
|
|
|
$
|
740
|
|
|
$
|
|
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
27,517
|
|
|
$
|
145,931
|
|
|
$
|
39,745
|
|
|
$
|
110,122
|
|
|
$
|
4,692
|
|
|
$
|
328,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables represent specific allocation for impaired loans by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Allocation for Impaired Loans by Class
As of December 31, 2011
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
(Dollars in thousands)
|
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
$
|
977
|
|
|
$
|
1,033
|
|
|
$
|
|
|
|
$
|
1,037
|
|
|
$
|
15
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction & land
|
|
|
2,293
|
|
|
|
2,293
|
|
|
|
|
|
|
|
2,199
|
|
|
|
87
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
963
|
|
|
|
963
|
|
|
|
|
|
|
|
968
|
|
|
|
37
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
2,610
|
|
|
|
2,669
|
|
|
|
135
|
|
|
|
2,311
|
|
|
|
20
|
|
Non-owner occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
540
|
|
|
|
546
|
|
|
|
259
|
|
|
|
546
|
|
|
|
|
|
Other construction & land
|
|
|
4,845
|
|
|
|
5,049
|
|
|
|
1,118
|
|
|
|
5,436
|
|
|
|
53
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
1,036
|
|
|
|
1,039
|
|
|
|
759
|
|
|
|
1,041
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
13,264
|
|
|
$
|
13,592
|
|
|
$
|
2,271
|
|
|
$
|
13,538
|
|
|
$
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Allocation for Impaired Loans by Class
As of December 31, 2010
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
(Dollars in thousands)
|
|
With no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Family
|
|
$
|
306
|
|
|
$
|
322
|
|
|
$
|
|
|
|
$
|
320
|
|
|
$
|
9
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
291
|
|
|
|
291
|
|
|
|
77
|
|
|
|
293
|
|
|
|
20
|
|
Non-owner occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,272
|
|
|
|
3,428
|
|
|
|
696
|
|
|
|
3,353
|
|
|
|
197
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
|
|
434
|
|
|
|
457
|
|
|
|
100
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
4,303
|
|
|
$
|
4,498
|
|
|
$
|
873
|
|
|
$
|
4,400
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no non-accrual loans excluded from impaired loan disclosures as of December 31, 2011 and
2010. No additional funds are committed to be advanced in connection with impaired loans. At December 31, 2011, there were $1.2 million of loans classified as troubled debt restructured loans of which $257 thousand was classified as
non-accrual. There were $212 thousand at December 31, 2010. Of the $1.2 million in troubled debt restructured at December 31, 2011, loans totaling $1.2 thousand are in compliance with the terms of the notes and a loan totaling $257
thousand is in nonaccrual status. The following table reflects loan modifications classified as TDRs for the year ended of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
|
|
|
|
For the Year Ended December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded Investment
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate-Single family
|
|
|
6
|
|
|
$
|
1,213
|
|
|
$
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
TDR payment defaults during the year ended December 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2011
|
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
|
(Dollars in thousands)
|
|
Troubled debt restructurings that subsequently defaulted
|
|
|
|
|
|
|
|
|
Residential Real Estate- Single family
|
|
|
1
|
|
|
$
|
257
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
|
|
$
|
257
|
|
|
|
|
|
|
|
|
|
|
For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR
modification, either the TDR is placed in nonaccrual status or a charge-off has occurred.
9.
|
|
OTHER REAL ESTATE OWNED
|
The table below reflects changes in Other Real Estate Owned (OREO) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of year
|
|
$
|
4,627
|
|
|
$
|
7,875
|
|
Properties acquired at foreclosure
|
|
|
434
|
|
|
|
1,973
|
|
Capital improvements on foreclosed properties
|
|
|
|
|
|
|
55
|
|
Sales on foreclosed properties
|
|
|
(959
|
)
|
|
|
(4,918
|
)
|
Valuation adjustments
|
|
|
(354
|
)
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
3,748
|
|
|
$
|
4,627
|
|
|
|
|
|
|
|
|
|
|
The table below reflects expenses applicable to OREO for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Net loss on sales of OREO
|
|
$
|
12
|
|
|
$
|
303
|
|
Valuation adjustments
|
|
|
354
|
|
|
|
358
|
|
Operating expenses
|
|
|
88
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Total OREO related expenses
|
|
$
|
454
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
105
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
10.
|
|
PREMISES AND EQUIPMENT
|
Premises and equipment are summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Leasehold improvements
|
|
$
|
1,783
|
|
|
$
|
1,742
|
|
Furniture, fixtures and equipment
|
|
|
6,003
|
|
|
|
5,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,786
|
|
|
|
7,409
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,371
|
)
|
|
|
(5,825
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
1,415
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization charged to operations in 2011 and 2010 totaled $614 thousand and $695
thousand, respectively.
11.
|
|
FEDERAL HOME LOAN BANK ADVANCES
|
Bankshares has two advances from the FHLB: one fixed rate advance and one floating rate advance. At December 31,
2011 and December 31, 2010, the FHLB advance accounted for on a fair value basis had a value of $29.4 and $26.2 million, respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB advance accounted for on a fair
value basis was 3.985% at December 31, 2011 and December 31, 2010. The par value of the FHLB advance accounted for on a fair value basis was $25.0 million at December 31, 2011 and December 31, 2010. The negative adjustment of
$3.1 million in 2011, was due to lower market rates and management electing to use a more advanced model in valuing the FHLB advance starting in the third quarter of 2011.
At December 31, 2011 and December 31, 2010, there was one FHLB advance accounted for on a cost basis. Bankshares entered into this floating rate advance in the first quarter of 2010 for $15.0
million. The advance matures in 2012 and the interest rate at December 31, 2011 and December 31, 2010 was 0.379% and 0.184%, respectively. The weighted average interest rate for both FHLB advances outstanding is 3.07%.
12.
|
|
TRUST PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST
|
On June 30, 2003, Bankshares wholly-owned Delaware statutory business trust privately issued
$10.0 million face amount of the Trusts floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to
Bankshares. Simultaneously, the trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital
Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred
Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption Trust preferred capital notes. Bankshares records
distributions payable on the Trust Preferred Capital Notes as an interest
106
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate
adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through
December 31, 2011, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of December 31, 2011, the total
amount of deferred and compounded interest owed under the indenture is $953 thousand. The base interest rate as of December 31, 2011 was 3.70% and as of December 31, 2010 was 3.45%.
All or a portion of the Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1
capital. Under the current guidelines, Tier 1 capital may include up to 25% of shareholders equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At December 31, 2011 and
December 31, 2010, the entire amount was considered Tier 1 capital.
Allocation of federal and state income taxes between current and deferred portions is as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
Deferred tax
|
|
|
4,964
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
4,964
|
|
|
$
|
344
|
|
|
|
|
|
|
|
|
|
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rate
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Computed at the expected statutory rate
|
|
$
|
(338
|
)
|
|
$
|
357
|
|
Tax exempt income, net
|
|
|
(56
|
)
|
|
|
(109
|
)
|
Other
|
|
|
67
|
|
|
|
96
|
|
Change in valuation allowance
|
|
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
4,964
|
|
|
$
|
344
|
|
|
|
|
|
|
|
|
|
|
107
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Deferred Taxes.
Bankshares has recorded a deferred tax asset (DTA) as of
December 31, 2011 and 2010. In accordance with ASC 740-10,
Income Taxes
(formerly SFAS No. 109,
Accounting for Income Taxes
), deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of the tax benefit generated by net operating losses depends upon the existence of sufficient taxable income within the
applicable carryback and carry forward periods. Bankshares periodically assesses the need to establish, increase, or decrease a valuation allowance for deferred tax assets.
Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Our analysis reviewed various forms of positive and negative evidence in determining whether a
valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. We considered
positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss, (NOL) carry forwards within the prescribed time periods. In addition, we considered tax planning strategies
that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it is not considered more likely than not that Bankshares will be able to realize all its deferred tax assets. A
valuation allowance of $5.3 million related to the deferred tax assets has been recorded at December 31, 2011.
Bankshares
evaluated the DTA related to the fair value adjustment of an FHLB advance separately from other DTAs. As the future taxable income implicit in the recovery of the book basis of the fair value adjustment offsets any potential future deductions
underlying the DTA, Bankshares determined that no valuation allowance was necessary for this DTA. Bankshares has the ability and intent to retain the FHLB advance until such time as it recovers in value, which could be maturity.
The components of the net deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
$
|
1,833
|
|
|
$
|
1,795
|
|
Deferred rent
|
|
|
17
|
|
|
|
21
|
|
Deferred data processing costs
|
|
|
130
|
|
|
|
77
|
|
Unrealized loss on available-for-sales securities
|
|
|
|
|
|
|
149
|
|
Other real estate owned
|
|
|
1,164
|
|
|
|
1,088
|
|
Net operating loss carryforward
|
|
|
1,905
|
|
|
|
2,690
|
|
Other
|
|
|
447
|
|
|
|
72
|
|
Fair value adjustment
|
|
|
1,553
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,049
|
|
|
|
6,581
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
|
19
|
|
|
|
|
|
Deferred loan costs, net
|
|
|
96
|
|
|
|
107
|
|
Depreciation and amortization
|
|
|
66
|
|
|
|
18
|
|
Other
|
|
|
24
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
6,844
|
|
|
$
|
6,422
|
|
Valuation allowance
|
|
|
(5,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
1,553
|
|
|
$
|
6,422
|
|
|
|
|
|
|
|
|
|
|
On November 6, 2009, a new law was enacted that changes the rules and regulations for NOL carrybacks
for large corporations (as defined by the Internal Revenue Service (IRS)). The new rules allow for a carryback period of five years. Bankshares filed the appropriate tax forms seeking a refund of $3.9 million.
108
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In early 2010, Bankshares received approximately $3.4 million of the refund. The remaining amounts due are related to alternative minimum taxes and we anticipate a full refund of the alternative
minimum taxes paid.
Bankshares files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few
exceptions, Bankshares is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2008.
The components of other operating expenses for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Business development
|
|
$
|
216
|
|
|
$
|
361
|
|
Office expense
|
|
|
303
|
|
|
|
549
|
|
Bank operations expense
|
|
|
589
|
|
|
|
296
|
|
Data processing
|
|
|
1,651
|
|
|
|
1,023
|
|
Professional fees
|
|
|
1,598
|
|
|
|
2,192
|
|
FDIC insurance
|
|
|
850
|
|
|
|
1,369
|
|
Merger Expenses
|
|
|
1,158
|
|
|
|
|
|
Other
|
|
|
1,093
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,458
|
|
|
$
|
7,095
|
|
|
|
|
|
|
|
|
|
|
15.
|
|
RELATED PARTY TRANSACTIONS AND LETTERS OF CREDIT
|
Bankshares grants loans and letters of credit to its executive officers, directors and their affiliated entities. These
loans are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion
of management, do not involve more than normal risk or present other unfavorable features. The aggregate amount of such loans outstanding at December 31, 2011 and 2010 was approximately $1.5 million and $2.3 million, respectively. During 2011,
new loans and line of credit advances to such related parties amounted to $19 thousand in the aggregate and payments amounted to $807 thousand in the aggregate.
Bankshares also maintains deposit accounts with some of its executive officers, directors and their affiliated entities. The aggregate amount of these deposit accounts at December 31, 2011 and 2010
amounted to $5.5 million and $1.1 million, respectively.
16.
|
|
COMMITMENTS AND CONTINGENCIES
|
As a member of the Federal Reserve System, Bankshares is required to maintain certain average reserve balances. For the
final weekly reporting period in the years ended December 31, 2011 and 2010, the aggregate amounts of daily average required balances were $7.9 million and $10.2 million, respectively.
109
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the
accompanying consolidated financial statements. Bankshares does not anticipate losses as a result of these transactions. See Note 19 with respect to financial instruments with off-balance-sheet risk. Bankshares is obligated under several operating
leases, with initial terms of three to ten years, for its office locations and branch sites.
Total rental expense for the
occupancy leases for the years ended December 31, 2011 and 2010 was $1.9 million and $2.3 million, respectively. Bankshares also leases office equipment and vehicles pursuant to operating leases with various expiration dates. Total rental
expense for office equipment for the years ended December 31, 2011 and 2010 was $52 thousand and $130 thousand, respectively.
Bankshares leases office space for six of its branch locations, corporate headquarters location, and space in Fredericksburg. These non-cancelable agreements, which expire through March 2019, in some
instances require payment of certain operating charges. At December 31, 2011, minimum annual rental commitments under these leases are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
(Dollars in thousands)
|
|
2012
|
|
$
|
1,791
|
|
2013
|
|
|
1,543
|
|
2014
|
|
|
1,239
|
|
2015
|
|
|
1,274
|
|
2016
|
|
|
1,163
|
|
Thereafter
|
|
|
760
|
|
|
|
|
|
|
Total
|
|
$
|
7,770
|
|
|
|
|
|
|
Bankshares made a decision to exit the Fredericksburg, Virginia market place and is actively attempting to
sublease a single facility under lease agreement in the Fredericksburg, Virginia market. Bankshares has recorded a liability of $205 thousand as of December 31, 2011 for the estimated present value of the potential differential between the
contractual rental obligations and potential subleasing income.
110
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
17.
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Supplemental disclosures of cash flow information for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid during the year
|
|
$
|
5,454
|
|
|
$
|
8,714
|
|
Income taxes paid during the year
|
|
$
|
|
|
|
$
|
|
|
Supplemental Disclosures of Noncash Activities:
|
|
|
|
|
|
|
|
|
Fair value adjustment for securities
|
|
$
|
492
|
|
|
$
|
(267
|
)
|
Transfer of loans to foreclosed assets
|
|
$
|
434
|
|
|
$
|
1,973
|
|
The aggregate amount of time deposits in denominations of $100 thousand or more at December 31, 2011 and 2010 was
$38.6 million and $48.8 million, respectively. Brokered deposits totaled $122.4 million and $100.0 million at December 31, 2011 and 2010, respectively.
At December 31, 2011, the scheduled maturities of time deposits are as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
(Dollars in thousands)
|
|
2012
|
|
$
|
96,993
|
|
2013
|
|
|
53,444
|
|
2014
|
|
|
28,302
|
|
2015
|
|
|
12,976
|
|
2016
|
|
|
1,433
|
|
|
|
|
|
|
Total
|
|
$
|
193,148
|
|
|
|
|
|
|
Bankshares has made a special effort to obtain deposits from title and mortgage loan closing companies.
These balances represent a substantial portion of our non-interest bearing deposits, which creates a real estate industry concentration.
111
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
19.
|
|
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|
Bankshares, through its banking subsidiary, is party to credit-related financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated balance sheets.
Bankshares exposure to credit
loss is represented by the contractual amount of these commitments. Bankshares follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2011 and 2010, the following financial instruments were outstanding whose contract amounts represent credit risk (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Financial instruments whose contract amounts represent credit risk
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
49,424
|
|
|
$
|
34,773
|
|
Standby letters of credit
|
|
|
2,139
|
|
|
|
2,274
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation 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. Bankshares evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bankshares, is based on
managements credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to
the total extent to which Bankshares is committed.
Standby letters of credit are conditional commitments issued by Bankshares
to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Bankshares generally holds collateral supporting those commitments if deemed necessary.
From time to time Bankshares will enter into forward purchase agreements for investment securities. These purchases generally will settle within 90 days of the end of the reporting period. As of
December 31, 2011 Bankshares had no forward purchase commitments.
Bankshares maintains cash accounts and federal funds
sold in other commercial banks. The amount on deposit with correspondent institutions, including federal funds sold at December 31, 2011, exceeded the insurance limits of the Federal Deposit Insurance Corporation by $14.4 million.
112
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
20.
|
|
SIGNIFICANT CONCENTRATIONS
|
Substantially all of Bankshares loans, commitments and standby letters of credit have been granted to customers
located in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia area. Bankshares overall business includes a significant focus on real estate activities, including real estate lending, title companies and real
estate settlement businesses. Commercial real estate loans are 44.8% of the total gross loan portfolio as of December 31, 2011 and total real estate loans are 90.6% of the total gross loan portfolio as of December 31, 2011. The impact of
this concentration can create more volatility in our funding mix, especially during periods of declines in the real estate market, which can have an impact on organizational profitability.
Bankshares has a 401(k) defined contribution plan covering substantially all full-time employees and provides that an
employee becomes eligible to participate immediately on employment provided they are age 21 or older. Under the plan, a participant may contribute up to 15% of his or her covered compensation for the year, subject to certain limitations. In the
first quarter of 2010, Bankshares elected to discontinue the 401(k) matching contributions Matching contributions totaled $3 thousand for the year ended December 31, 2010. Bankshares may also make, but is not required to make, a discretionary
contribution for each participant. The amount of contribution, if any, is determined on an annual basis by the Board of Directors. No discretionary contributions were made by Bankshares during the years ended December 31, 2011 and 2010
Federal and state banking regulations place certain restrictions on cash dividends paid and loans or advances made by
the Bank to Bankshares. The total amount of dividends which may be paid at any date is generally limited to a portion of retained earnings as defined. As of December 31, 2011, no funds were available to be transferred from the banking
subsidiary to the Parent Company, without prior regulatory approval. As of December 31, 2011 and 2010, no cash dividends were declared.
As a member of the Federal Reserve Bank system, the Bank is required to subscribe to shares of $100 par value Federal Reserve Bank stock equal to 6% of the Banks capital and surplus. The Bank is
only required to pay for one-half of the subscription. The remaining amount is subject to call when deemed necessary by the Board of Governors of the Federal Reserve.
Bankshares (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bankshares financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt correction action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require Bankshares and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31,
2011 and 2010, that Bankshares and the Bank met all capital adequacy requirements to which they are subject.
113
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
As of December 31, 2011, the most recent notification from the Federal Reserve Bank
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks category. Bankshares and the Banks actual capital amounts and ratios as of December 31,
2011 and 2010 are also presented in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Capital
Requirement
|
|
|
Minimum
To Be
Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
41,914
|
|
|
|
13.8
|
%
|
|
$
|
24,374
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
41,670
|
|
|
|
13.7
|
%
|
|
$
|
24,292
|
|
|
|
8.0
|
%
|
|
$
|
30,158
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
38,086
|
|
|
|
12.5
|
%
|
|
$
|
12,187
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
37,855
|
|
|
|
12.5
|
%
|
|
$
|
12,146
|
|
|
|
4.0
|
%
|
|
$
|
18,095
|
|
|
|
6.0
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
38,086
|
|
|
|
7.5
|
%
|
|
$
|
20,242
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
37,855
|
|
|
|
7.6
|
%
|
|
$
|
19,843
|
|
|
|
4.0
|
%
|
|
$
|
24,804
|
|
|
|
5.0
|
%
|
As of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
45,383
|
|
|
|
12.9
|
%
|
|
$
|
28,182
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
44,910
|
|
|
|
12.8
|
%
|
|
$
|
28,089
|
|
|
|
8.0
|
%
|
|
$
|
35,111
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
40,983
|
|
|
|
11.6
|
%
|
|
$
|
14,091
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
40,510
|
|
|
|
11.5
|
%
|
|
$
|
14,044
|
|
|
|
4.0
|
%
|
|
$
|
21,067
|
|
|
|
6.0
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
40,983
|
|
|
|
7.5
|
%
|
|
$
|
21,880
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Alliance Bank Corporation
|
|
$
|
40,510
|
|
|
|
7.4
|
%
|
|
$
|
21,838
|
|
|
|
4.0
|
%
|
|
$
|
27,298
|
|
|
|
5.0
|
%
|
114
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Effective June 30, 1999, as amended on May 28, 2003 and June 22, 2005, Bankshares established an
incentive and non-qualified stock option plan called Alliance Bankshares Corporation 1999 Stock Option Plan (1999 Plan). The 1999 Plan is administered by the Board of Directors of Bankshares acting upon recommendations made by the Compensation
Committee appointed by the Board. The 1999 Plan is currently authorized to grant a maximum of 1,143,675 shares to directors, key employees and consultants. The options are granted at the fair market value of Bankshares common stock at the date of
grant. The term of the options shall not exceed ten years from the date of grant. The options vest on a schedule determined by the Compensation Committee based on financial performance criteria.
Effective June 13, 2007, Bankshares established a new incentive stock option plan called Alliance Bankshares Corporation 2007
Incentive Stock Plan (2007 Plan). The 2007 Plan is administered by the Compensation Committee appointed by the Board. The maximum number of shares authorized is 200,000 common shares. The 2007 Plan permits the grant of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and stock awards to employees, non-employee directors and non-employee service providers. The options are granted at the fair market value of Bankshares
common stock at the date of grant. The term of the options shall not exceed ten years from the date of grant. The options vest on a schedule determined by the Compensation Committee based on financial performance criteria.
The 1999 Plan and the 2007 Plan are summarized in the following tables:
The fair value of each grant is estimated at the grant date using the Black-Scholes Option-Pricing Model with the following weighted
average assumptions (no grants were made in 2011):
|
|
|
|
|
December
31,
2010
|
|
|
Dividend yield
|
|
0.00%
|
Expected life
|
|
7 years
|
Expected volatility
|
|
71.37%
|
Risk-free interest rate
|
|
2.29%
|
The expected volatility is based on historical volatility. The risk-free interest rates for the periods
within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on Bankshares history
and expectation of dividend payouts.
115
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
A summary of the status of Bankshares stock option plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
2010
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
(Dollars in thousands)
|
|
Outstanding at January 1
|
|
|
500,210
|
|
|
$
|
10.26
|
|
|
|
|
|
684,005
|
|
|
$
|
11.27
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
2.89
|
|
Forfeited
|
|
|
(228,864
|
)
|
|
|
12.19
|
|
|
|
|
|
(243,795
|
)
|
|
|
11.27
|
|
Exercised
|
|
|
(3,150
|
)
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(10,350
|
)
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
257,846
|
|
|
$
|
8.88
|
|
|
|
|
|
500,210
|
|
|
$
|
10.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
198,096
|
|
|
$
|
10.73
|
|
|
|
|
|
373,985
|
|
|
$
|
11.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per option of options granted during the year
|
|
$
|
|
|
|
|
|
|
|
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The status of the options outstanding at December 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Year of
Expiration
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
2012
|
|
|
18,803
|
|
|
|
1 year
|
|
|
$
|
4.72
|
|
|
|
18,803
|
|
|
$
|
4.72
|
|
2013
|
|
|
39,243
|
|
|
|
2 years
|
|
|
$
|
9.41
|
|
|
|
39,243
|
|
|
$
|
9.41
|
|
2014
|
|
|
28,175
|
|
|
|
3 years
|
|
|
$
|
16.44
|
|
|
|
28,175
|
|
|
$
|
16.44
|
|
2015
|
|
|
32,775
|
|
|
|
4 years
|
|
|
$
|
14.01
|
|
|
|
32,775
|
|
|
$
|
14.01
|
|
2017
|
|
|
66,250
|
|
|
|
6 years
|
|
|
$
|
10.72
|
|
|
|
66,250
|
|
|
$
|
10.72
|
|
2018
|
|
|
1,600
|
|
|
|
7 years
|
|
|
$
|
2.32
|
|
|
|
|
|
|
$
|
|
|
2019
|
|
|
11,000
|
|
|
|
8 years
|
|
|
$
|
2.08
|
|
|
|
3,850
|
|
|
$
|
2.08
|
|
2020
|
|
|
60,000
|
|
|
|
9 years
|
|
|
$
|
2.89
|
|
|
|
9,000
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,846
|
|
|
|
4.8 years
|
|
|
$
|
8.88
|
|
|
|
198,096
|
|
|
$
|
10.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
24.
|
|
NET INCOME (LOSS) PER SHARE
|
The following table shows the weighted average number of shares used in computing net income (loss) per common share
and the effect on weighted average number of shares of potential dilutive common stock. Potential dilutive common stock had no effect on income (loss) available to common shareholders for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
|
|
(Dollars in thousands)
|
|
Basic net income per share
|
|
|
5,108,757
|
|
|
$
|
(1.17
|
)
|
|
|
5,106,819
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities, stock options
|
|
|
|
|
|
|
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
|
5,108,757
|
|
|
$
|
(1.17
|
)
|
|
|
5,107,800
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) utilized in the earnings per share calculations above
|
|
$
|
(5,958
|
)
|
|
|
|
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average potential common shares of 167,306 and 478,210 have been excluded from the earnings (loss) per
share calculation for 2011 and 2010, because their effects were anti-dilutive.
117
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
25.
|
|
PARENT ONLY FINANCIAL INFORMATION
|
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 2011 and 2010
( Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
192
|
|
|
$
|
299
|
|
Investment in subsidiaries
|
|
|
37,994
|
|
|
|
43,364
|
|
Other assets
|
|
|
1,209
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
39,395
|
|
|
$
|
44,568
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Trust preferred capital notes
|
|
$
|
10,310
|
|
|
$
|
10,310
|
|
Other liabilities
|
|
|
963
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
11,273
|
|
|
$
|
10,883
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
20,440
|
|
|
$
|
20,427
|
|
Capital surplus
|
|
|
25,915
|
|
|
|
25,857
|
|
Retained (deficit)
|
|
|
(18,269
|
)
|
|
|
(12,311
|
)
|
Accumulated other comprehensive income (loss), net
|
|
|
36
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
28,122
|
|
|
$
|
33,685
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
39,395
|
|
|
$
|
44,568
|
|
|
|
|
|
|
|
|
|
|
118
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Statements of Operations
For the Years Ended December 31, 2011 and
2010
( Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Other income
|
|
$
|
110
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
380
|
|
|
$
|
367
|
|
Professional fees
|
|
|
5
|
|
|
|
15
|
|
Other expense
|
|
|
207
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
592
|
|
|
$
|
465
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax (benefit) and undistributed income (loss) of subsidiaries
|
|
$
|
(482
|
)
|
|
$
|
(471
|
)
|
Income tax (benefit)
|
|
|
(194
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
Loss before undistributed income (loss) of subsidiaries
|
|
$
|
(288
|
)
|
|
$
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
Undistributed income (loss) of subsidiaries
|
|
|
(5,670
|
)
|
|
|
1,016
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
119
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,958
|
)
|
|
$
|
705
|
|
Adjustments to reconcile net income (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Undistributed (income) loss of subsidiaries
|
|
|
5,670
|
|
|
|
(1,016
|
)
|
Stock-based compensation expense
|
|
|
63
|
|
|
|
22
|
|
Increase (decrease) in other assets
|
|
|
(271
|
)
|
|
|
115
|
|
Increase in accrued expenses
|
|
|
381
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(115
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock options
|
|
$
|
8
|
|
|
$
|
|
|
Common stock repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
Net (decrease) in Cash and Cash Equivalents
|
|
|
(107
|
)
|
|
|
(125
|
)
|
Beginning of Year
|
|
|
299
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
End of Year
|
|
$
|
192
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
120
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
On July 27, 2011, Eagle Bancorp, Inc. (Eagle), Bankshares and the Bank entered into an Agreement of Merger (Merger
Agreement), pursuant to which Bankshares was to merge with and into Eagle, with Eagle being the surviving corporation.
On
November 28, 2011, Eagle, Bankshares and the Bank mutually agreed to terminate the Merger Agreement.
In connection with
the termination of the Merger Agreement, Bankshares, the Bank and Eagle entered into a Merger Termination Agreement, dated November 28, 2011 (the Termination Agreement). The Termination Agreement provided, among other things, that neither party
would incur any termination fee or penalty in connection with termination of the Merger Agreement, including in connection with any solicitation or consummation by Bankshares of a transaction with any third party. In addition, the Termination
Agreement provided for mutual releases by the parties from any claims of liability to one another relating to the Merger Agreement or the transactions contemplated thereby and that each party shall be solely responsible for its own expenses and
costs incurred in connection with the Merger Agreement and the transactions contemplated thereby.
Bankshares total transaction
expenses related to the Merger and its subsequent termination totaled approximately $1.2 million.
Bankshares evaluated subsequent events that occurred after the balance sheet date, but before the financial statements
are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial
statements, and (2) non-recognized, or those that provided evidence about conditions that did not exist at the date of the balance sheet but arose after that date. As of the report date there were no subsequent events that would cause
adjustments to or disclosures in the financial statements.
121
Item 9.
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures.
Bankshares has disclosure controls and procedures to ensure that the information
required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and
regulations, and that such information is accumulated and communicated to management, including Bankshares Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Bankshares management evaluated, with the participation of Bankshares Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, Bankshares Chief Executive Officer and Chief Financial Officer concluded that Bankshares disclosure controls and procedures were not
effective as of December 31, 2011 because Bankshares was unable to file this Annual Report on Form 10-K by the original filing deadline as a result of needing additional time to complete certain testing of its internal control over financial
reporting and certain audit procedures.
Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within Bankshares to disclose material information required to be set forth in our periodic reports.
Managements Report on Internal Control over Financial Reporting.
Bankshares management is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).
Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the
effectiveness of Bankshares internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework. Based on our assessment, management believes that, as of December 31, 2011, Bankshares internal control over financial reporting was ineffective based on those criteria.
Specifically, management concluded that Bankshares internal control over financial reporting was ineffective as of December 31, 2011 due to a material weakness related to electronic access to certain systems applications, including the
general ledger. During the conversion of Bankshares data processing systems from one software platform to another, certain personnel were granted system access to a number of applications, including the general ledger, for conversion purposes.
The conversion was completed in February 2011. On February 23, 2012, we discovered these access rights were not removed and a number of employees had access beyond their normal job function and responsibility. Bankshares promptly modified the
authorizations to properly limit access to the applications according to the employees job function and responsibility level. Bankshares also promptly reviewed the various applications for the period in question and found no unauthorized
access. Given these actions, Bankshares believes this material weakness in its internal control over financial reporting to have been remediated fully as of February 28, 2012.
In addition, management concluded that there was a material weakness relating to certain financial reporting issues at December 31,
2011. Three adjustments were recommended by the independent auditor to the year-end financial statement. These adjustments relate to the FDIC prepaid assessments, stock based compensation and income taxes. Bankshares is in the process of instituting
controls to remediate this weakness.
122
This annual report does not include an attestation report of Bankshares registered
public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by Bankshares registered public accounting firm pursuant to rules of the SEC that permit Bankshares to provide
only managements report in this annual report.
Changes in Internal Controls
. There were no changes in our
internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item will be included in an amendment to this annual report on Form 10-K filed on or before April 30, 2012.
Item 11.
Executive Compensation
The information required by this item will be included in an amendment to this annual report on Form 10-K filed on or before
April 30, 2012.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item will be included in an amendment to this annual
report on Form 10-K filed on or before April 30, 2012.
Item 13.
Certain Relationships and Related
Transactions, and Director Independence
The information required by this item will be included in an amendment to
this annual report on Form 10-K filed on or before April 30, 2012.
Item 14.
Principal Accountant
Fees and Services
The information required by this item will be included in an amendment to this annual report on
Form 10-K filed on or before April 30, 2012.
123
PART IV.
Item 15.
Exhibits, Financial Statement Schedules
|
|
|
|
|
(a)
|
|
Exhibits
|
|
|
|
|
|
|
|
2.1
|
|
Agreement and Plan of Reorganization between Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of May 22, 2002 (incorporated by reference to Exhibit 2.0
to Form 8-K12g-3 filed August 21, 2002).
|
|
|
|
|
|
2.4
|
|
Stock Purchase Agreement between Alliance Bank Corporation, as the seller, and Thomas P. Danaher and Oswald H. Skewes, as the purchasers, dated as of December 29, 2009
(incorporated by reference to Exhibit 2.4 to Form 10-K filed May 28, 2010).
|
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Alliance Bankshares Corporation (as amended July 6, 2006) (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 14,
2006).
|
|
|
|
|
|
3.2
|
|
Bylaws of Alliance Bankshares Corporation (amended and restated as of December 19, 2007) (incorporated by reference to Exhibit 3.2 to Form 8-K filed December 27,
2007).
|
|
|
|
|
Certain instruments relating to trust preferred capital securities not being registered have been omitted in accordance with Item
601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
|
|
|
|
|
|
10.1*
|
|
Alliance Bankshares Corporation Stock Option Plan, as restated effective March 25, 2003, and further amended April 27, 2005 (incorporated by reference to Appendix A to the
definitive proxy statement filed May 2, 2005).
|
|
|
|
|
|
10.1.1*
|
|
Form of Stock Option Agreement for Alliance Bankshares Corporation Stock Option Plan (incorporated by reference to Exhibit 10.1.1 to Form 10-K filed March 31,
2006).
|
|
|
|
|
|
10.3*
|
|
Amended and Restated Employment Agreement between Alliance Bank and Paul M. Harbolick, Jr. dated
March 1, 2007 (incorporated by reference to Exhibit 10.3 to
Form 10-Q filed May 10, 2007).
|
|
|
|
|
|
10.3.1*
|
|
Amendment to the Employment Agreement between Alliance Bank and Paul M. Harbolick, Jr. dated as of December 30, 2008 (incorporated by reference to Exhibit 10.3.1 to Form 10-K filed
April 15, 2009).
|
|
|
|
|
|
10.4*
|
|
Amended and Restated Employment Agreement between Alliance Bank and Craig W. Sacknoff dated March 1, 2007 (incorporated by reference to Exhibit 10.4 to Form 10-Q filed
May 10, 2007).
|
|
|
|
|
|
10.4.1*
|
|
Amendment to the Employment Agreement between Alliance Bank and Craig W. Sacknoff, dated as of December 30, 2008 (incorporated by reference to Exhibit 10.4.1 to Form 10-K filed
April 15, 2009).
|
|
|
|
|
|
10.7*
|
|
Base Salaries of Named Executive Officers.
|
|
|
|
|
|
10.8*
|
|
Non-Employee Director Compensation.
|
124
|
|
|
|
|
|
|
10.11*
|
|
Alliance Bankshares Corporation 2007 Incentive Stock Plan, effective as of June 13, 2007 (incorporated by reference to Appendix A to definitive proxy statement filed
April 30, 2007).
|
|
|
|
|
|
10.12*
|
|
Form of Stock Option Agreement for Alliance Bankshares Corporation 2007 Incentive Stock Plan (incorporated by reference to Exhibit 10.12 to Form 8-K filed November 9,
2007).
|
|
|
|
|
|
10.13*
|
|
Employment Agreement between Alliance Bankshares Corporation, Alliance Bank Corporation, and William E. Doyle, Jr., dated as of May 4, 2010 (incorporated by reference to
Exhibit 10.13 to Form 10-Q filed August 16, 2010).
|
|
|
|
|
|
10.14*
|
|
Employment Agreement between Alliance Bank Corporation and George F. Cave, dated as of October 22, 2010 (incorporated by reference to Exhibit 10.14 to Form 10-Q filed November
15, 2010).
|
|
|
|
|
|
10.15*
|
|
Employennt Agreement between Alliance Bank Corporation and Jean S. Houpert, dated as of March 23, 2012 (incorporated by reference to Exhibit 10.15 to Form 8-K filed March 29,
2012)
|
|
|
|
|
|
21
|
|
Subsidiaries of the Registrant.
|
|
|
|
|
|
23.1
|
|
Consent of Yount, Hyde & Barbour, P.C.
|
|
|
|
|
|
31.1
|
|
Certification of CEO pursuant to Rule 13a-14(a).
|
|
|
|
|
|
31.2
|
|
Certification of CFO pursuant to Rule 13a-14(a).
|
|
|
|
|
|
32
|
|
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.
|
|
|
|
|
|
101
|
|
The following materials from Alliance Bankshares Corporations Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting
Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Shareholders Equity, (iv) Consolidated Statements of Cash Flows, and
(v) Notes to Consolidated Financial Statements.
|
125
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLIANCE BANKSHARES CORPORATION
(
Registrant)
|
|
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ William E. Doyle, Jr.
|
Date
|
|
|
|
|
|
William E. Doyle, Jr.
|
|
|
|
|
|
|
Director, President & Chief Executive Officer
|
|
|
|
|
|
|
(principal executive officer)
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Jean S. Houpert
|
Date
|
|
|
|
|
|
Jean S. Houpert
|
|
|
|
|
|
|
Executive Vice President &
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
(principal financial and accounting officer)
|
126
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ William M. Drohan
|
Date
|
|
|
|
|
|
William M. Drohan
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Donald W. Fisher, PhD
|
Date
|
|
|
|
|
|
Donald W. Fisher
|
|
|
|
|
|
|
Chairman of the Board of Directors
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Lawrence N. Grant
|
Date
|
|
|
|
|
|
Lawrence N. Grant
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Robert C. Kovarik, Jr.
|
Date
|
|
|
|
|
|
Robert C. Kovarik, Jr.
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ D. Mark Lowers
|
Date
|
|
|
|
|
|
D. Mark Lowers
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Serina Moy
|
Date
|
|
|
|
|
|
Serina Moy
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ J. Eric Wagoner
|
Date
|
|
|
|
|
|
J. Eric Wagoner
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Robert G. Weyers
|
Date
|
|
|
|
|
|
Robert G. Weyers
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Oliver T. Carr, III
|
Date
|
|
|
|
|
|
Oliver T. Carr, III
|
|
|
|
|
|
|
Director
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ William E. Doyle, Jr.
|
Date
|
|
|
|
|
|
William E. Doyle, Jr.
|
|
|
|
|
|
|
Director, President & Chief Executive Officer
|
|
|
|
|
|
|
(principal executive officer)
|
|
|
|
|
April 17, 2012
|
|
|
|
|
|
/s/ Jean S. Houpert
|
Date
|
|
|
|
|
|
Jean S. Houpert
|
|
|
|
|
|
|
Executive Vice President &
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
(principal financial and accounting officer)
|
127
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