Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion is intended to assist readers in understanding and evaluating the
financial condition and results of operations of Bankshares and the Bank on a consolidated basis. This discussion and analysis should be read in conjunction with Bankshares Annual Report on Form 10-K for the year ended December 31, 2011,
and the unaudited consolidated financial statements and accompanying notes included elsewhere in this report.
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 Securities and Exchange Commission (SEC). All such filings are available free of charge.
The information available on the Banks website is not part of the Quarterly Report on Form 10-Q or any other report filed by Bankshares with the SEC.
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, statements regarding the proposed merger (the Merger) of Bankshares and WashingtonFirst Bankshares, Inc., estimated capital requirements under the MOU to be compliant with applicable capital adequacy
rules, 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:
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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;
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Retention of existing employees;
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Maintaining and developing well established and valuable client relationships and referral source relationships;
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39
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Changing trends in customer profiles and behavior;
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Direct and substantive competition from other financial services companies targeting certain key business lines;
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Other competitive factors within the financial services industry;
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Changes in the availability of funds resulting in increased costs or reduced liquidity;
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Changes in accounting policies, rules and practices;
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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;
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The timing of and value realized upon the sale of Other Real Estate Owned (OREO) property;
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Changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates;
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Fiscal and governmental policies of the United States federal government;
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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;
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The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, related regulatory rulemaking processes and other legislative and
regulatory initiatives on the regulation and supervision of financial institutions, specifically depository institutions;
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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;
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Changes in Bankshares and the Banks risk profile that cause the amount of new capital necessary for compliance with applicable capital
adequacy rules to be materially different from Bankshares estimate;
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Changes in the way the FDIC insurance premiums are assessed;
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Changes in interest rates and market prices, which could reduce Bankshares net interest margins, asset valuations and expense expectations;
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Timing and implementation of certain balance sheet strategies;
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Impairment concerns and risks related to Bankshares investment portfolio, and the impact of fair value accounting, including income statement
volatility;
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Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;
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Changes in tax laws and regulations;
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Bankshares ability to recognize future tax benefits;
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Impacts of implementing various accounting standards;
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Deposit attrition, operating costs, customer losses and business disruption in connection with the Merger, including adverse effects on relationships
with employees, may be greater than expected;
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The ability to complete the Merger as expected and within the expected timeframe;
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The possibility that required regulatory and shareholder approvals of the Merger may not be obtained, or one or more of the other conditions to the
completion of the Merger may not be satisfied;
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The expected growth opportunities or cost savings from the Merger may not be fully realized or may take longer to realize than expected; and
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Other factors described from time to time in our SEC filings.
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40
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 Bankshares 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.
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 Bankshares 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
Bankshares transactions would be the same, the timing of events that would impact its financial statements could change.
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)
41
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 nonvested 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 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.
At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary.
Its 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. Bankshares 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, Bankshares 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
was considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. As of September 30, 2012, the net deferred tax asset was $1.6 million, compared to $1.5 million as of December 31, 2011.
Overview
On
May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving
corporation. Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally
42
refrain from specific actions without the consent of WFBI. Completion of the Merger is subject to approval by the shareholders of each of Bankshares and WFBI, applicable regulatory approval and
customary closing conditions.
On May 31, 2012, in contemplation of the pending Merger and after consulting with
Washington First Bank, Bankshares exercised its early termination clause in the lease agreement with Carr Properties on the Corporate Headquarters location in Chantilly, Virginia. This event triggered a payment of $675 thousand which is
recorded in the financial statements as other assets according to the guidance outlined in ASC 805 and 420.
Notwithstanding
the Merger Agreement, 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 its financial performance, 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:
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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 aspects of the residential and commercial real estate markets.
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Reducing the investment securities portfolio and eliminating the trading assets portfolio.
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Continuing to attentively manage the level of non-performing assets by addressing problem loans on a timely basis.
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Increasing low cost deposits by local commercial and retail customers, while working to reduce Bankshares brokered deposit and repurchase
agreement portfolios.
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Reducing Bankshares operating and funding costs.
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Additionally, Bankshares and the Bank are parties to a Memorandum of Understanding (the MOU) with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions, which is a
regulatory means of seeking correction through informal administrative action from institutions considered to be of supervisory concern, but which have not deteriorated to the point where they warrant formal administrative action. Among the specific
concerns cited in the MOU were asset quality, earnings, liquidity, and capital. The MOU imposes restrictions and/or requirements on Bankshares and the Bank, including (i) the requirement to be examined twice yearly by its regulators, (ii) the
requirement to provide regular quarterly progress reports to the relevant regulators and (iii) the requirement that Bankshares and the Bank receive regulatory approval to pay dividends, repurchase common stock, and make interest or principal
payments on subordinated debt and trust preferred securities. Bankshares has implemented significant improvements in credit policies, loan administration, and liquidity management in its efforts to comply with the terms of the MOU. The MOU also
requires Bankshares to maintain a written plan for compliance with the capital adequacy rules applicable to all state member banks under Federal Reserve Board Regulation H (12 CFR Part 208). These rules require all state member banks, including the
Bank, to maintain adequate capital consistent with their risk profiles, which takes into account the volume of adversely classified loans, the adequacy of the loan loss reserve, any planned asset growth and the nature and level of asset
concentrations, among other things. Given this, it is the policy of federal banking regulators not to specify or confirm that a given capital level will be adequate at a future point in time. As a result, federal banking regulators have
not, and Bankshares cannot, identify a specific dollar amount of capital required under the MOU. However, Bankshares estimates that it would need $7.5 million to $10 million in new capital to be compliant with applicable capital adequacy rules.
Performance Highlights
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The net loss for the quarter ended September 30, 2012 was $170 thousand compared to a net loss of $503 thousand for the same period in 2011, an
improvement of $333 thousand. The net loss was $1.5 million for the nine months ended September 30, 2012 compared to net income of $256 thousand for the nine months ended September 30, 2011, a decrease of $1.8 million. Loss per common
share, basic and diluted, amounted to $0.30 for the nine months ended September 30, 2012, compared to earnings per share of $0.05 for the nine months ended September 30, 2011. Earnings for the nine months ended September 30, 2012,
were negatively affected by merger related expenses of $666 thousand, the negative fair value adjustment on the FHLB advance of $668 thousand and a reduction in interest income of $3.9 million, from $17.1 million for the nine months ended
September 30, 2011 to $13.2 million for the nine months ended September 30, 2012. Due to the improvement in the overall risk profile of the loan portfolio and the lower level of total loans, Alliance released $223 thousand of reserves into
income and also did not recognized a provision expense during the quarter, this has positively affected net income for the period. The reduction in interest income is comprised of a $1.4 million decrease in the loan interest income and a $2.5
million decrease in the interest income from investment securities.
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43
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Total assets were $521.9 million at September 30, 2012, an increase of $15.4 million from total assets of $506.5 million at December 31,
2011. The increase in total assets is directly related to a $69.7 million increase in cash and due from banks, with such increase being offset by $18.9 million decrease in the loan portfolio related to the payoff of a number of loan relationships as
well as a $44.1 million reduction in Bankshares investment portfolio. The increase in cash relates to the cyclical nature of the business of Bankshares title and escrow clients.
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Total loans were $288.0 million at September 30, 2012, a decrease of $18.9 million, or 6.2% from the December 31, 2011 balance of $306.9
million. The decrease in total loans results from a combination of strategic repositioning of lending activities, normal amortization and payoffs, the total of which offset new loan production during the period. Each loan segment as a percentage of
total loans at September 30, 2012 is nearly unchanged from the percentages at December 31, 2011.
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Demand deposits were $145.3 million at September 30, 2012, or 35.1% of total deposits. This compares to the December 31, 2011 level of $112.5
million, or 29.6% of total deposits.
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The composition of non-performing assets as of September 30, 2012 was primarily comprised of $10.9 million of non-accrual loans, $3.6 million of
OREO, $897 thousand of troubled debt restructured loans, compared to the composition of non-performing assets as of December 31, 2011, which 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. The non-performing assets balance decreased by $2.0 million at September 30, 2012 compared to December 31, 2011. The change resulted from the following: the charge off of six loans
secured by residential real estate, totaling $838 thousand; the foreclosure and purchase into OREO of a residential property valued at $963 thousand; the full repayment of a commercial loan secured by land with a prior balance of $899 thousand; the
movement back to accrual status of two loans secured by land totaling $325 thousand; and , the receipt of ongoing payments from a borrower with three outstanding loans secured by land and construction equipment totaling $4.4 million that are carried
in non-accrual status; such payments reduced Bankshares carrying balance by $85 thousand during 2012. Since December 31, 2011, six loans totaling $1.1 million have been added to the non-accrual and impaired loan list. Of these six loans,
95% are secured by residential real estate.
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The investment securities portfolio totaled $79.4 million at September 30, 2012. This compares to $123.5 million of investments as of
December 31, 2011, a decrease of $44.1 million. This decrease is attributable to managements strategy to reduce the investment portfolio by taking some opportunistic gains to mitigate some of the losses realized in the CMO portfolio and
to improve the overall yield. In addition, the investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. When prepayments on these instruments occur at a faster rate than anticipated, principal is
paid down earlier than expected. During the nine months ended September 30, 2012, the Bank experienced greater than expected prepayments on a variety of investment securities.
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The net interest margin for the quarter ended September 30, 2012 was 3.02% compared to 3.61% for the same 2011 period, a decrease of 59 basis
points. For the nine months ended September 30, 2012, the net interest margin of 3.10% was 64 basis points lower than the net interest margin of 3.74% for the nine months ended September 30, 2011.
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For the nine months ended September 30, 2012, Bankshares experienced early prepayments on a number of CMOs and PCMOs securities. When prepayments on these instruments occur at a
faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield, the Bank experiences greater than expected prepayments on a variety of investment securities.
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Deposits were $414.2 million at September 30, 2012, an increase of $33.8 million from the December 31, 2011 balance of $380.4 million. Strong
growth in the title agency-related deposit coupled with a strategic shift of funding from repurchase agreements into deposits, contributed to the increase in overall deposit balance. Savings and NOW accounts increased by $32.6 million from $51.5
million at December 31, 2011 to $84.1 million at September 30, 2012 and non-interest bearing deposits increased by $32.8 million, from $112.5 million at December 31, 2011 to $145.3 million at September 30, 2012. These increases
were offset by decreases in money market deposits of $5.3 million, from $23.4 million at December 31, 2011 to $18.1 million at September 30, 2012, and time deposits of $26.4 million, from $193.1 million at December 31, 2011 to $166.7
million at September 30, 2012.
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Non-interest expense for the three months ended September 30, 2012 amounted to $3.5 million compared to $4.1 million for the same period in 2011 a
reduction of $601 thousand. For the nine months ended September 30, 2012, non-interest expense amounted to $10.8 million compared to $11.6 million in 2011, a reduction of $800 thousand. The non-interest expense for the nine months ended
September 30, 2012, include merger related expenses of $666 thousand, consultant expenses related to contract employees of $445 thousand and OREO expenses including valuation adjustments of $340 thousand.
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Financial Performance Measures
. Bankshares net loss for the three month
period ended September 30, 2012 was $170 thousand, an improvement of $333 thousand over the third quarter of 2011 net loss of $503 thousand. The net loss of $170 thousand for the quarter ended September 30, 2012 includes net interest
income of $3.1 million compared to $4.0 million for the same period last year, a decrease of $900 thousand. Results during the quarter ended September 30, 2012 were primarily impacted by reduced interest income, merger-related expenses, OREO
expenses and valuation write-downs, and a negative adjustment to the $25 million FHLB advance recorded at fair value, the total of which offset gains on the sale of investment securities and favorable reductions in non-interest expenses and interest
expenses. Due to the improvement in the overall risk profile of the loan portfolio and a lower level of total loans, In addition, Alliance released reserves into income and also did not recognize a provision expense during the quarter. For the three
months ended September 30, 2012, total interest expense was $1.1 million compared to $1.4 million for the three months ended September 30, 2011. These factors led to $0.03 basic and diluted loss per share for the quarter ended
September 30, 2012, compared to $0.10 basic and diluted loss per share for the quarter ended September 30, 2011. Weighted average basic shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for
the three months ended September 30, 2011. Weighted average diluted shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for the three months ended September 30, 2011.
For the nine month period ended September 30, 2012, Bankshares had a net loss of $1.5 million compared to net income of $256
thousand for the same period in the prior year, a decline of $1.8 million. The net loss of $1.5 million for the nine months ended September 30, 2012 includes net interest income of $9.6 million compared to $12.7 million for the same period last
year, a decrease of $3.1 million. The decrease is due primarily to a decrease in interest income in the amount of $3.9 million, from $17.1 million for the nine months ended September 30, 2011, to $13.2 million for the same period in 2012, and
the lower average yield on the investment portfolio and the lower average balances on the loan portfolio. The decrease was partially offset by a reduction of $787 thousand in the cost of funds. For the nine months ended September 30, 2012,
total interest expense was $3.5 million compared to $4.3 million for the nine months ended September 30, 2011. These factors led to a $0.30 basic and diluted loss per share for the nine months ended September 30, 2012. The basic and
diluted earnings per share for the nine months ended September 30, 2011 was $0.05. Weighted average basic shares outstanding were 5,109,969 for the nine months ended September 30, 2012 and 5,108,616 for the nine months ended
September 30, 2011. Weighted average diluted shares outstanding were 5,109,969 and 5,129,311 for the nine months ended September 30, 2012 and September 30, 2011, respectively.
The net interest margin decreased to 3.02% for the three months ended September 30, 2012 compared to 3.61% for the three months
ended September 30, 2011, a decrease of 59 basis points. The net interest margin was 3.10% for the nine months ended September 30, 2012
46
compared to 3.74% for the nine months ended September 30, 2011, a decrease of 64 basis points. For the first nine months of 2012 the net interest margin continues to be negatively affected
by the decrease in the yield on interest earning assets. Targeted efforts to strategically restructure Bankshares balance sheet in anticipation of the merger with Eagle during 2011 led to shifts in Bankshares investment portfolio mix and
the overall reduced balance and yield on the portfolio, and the unexpected prepayments on the CMO instruments in the portfolio. Yield on the investment portfolio for the nine months ended September 31, 2012 was 1.09% compared to 3.57% for the
same period in 2011. Total interest income reversal relating to non-accrual loans for the nine months ended September 30, 2012 was $355 thousand compared to $461 thousand for the nine months ended September 30, 2011.
Results of Operations
Net Interest Income
.
Net interest income (on a fully tax equivalent basis) for the three months ended
September 30, 2012 was $3.1 million compared to $4.0 million for the same period in 2011. Interest income on earning assets was $1.2 million lower for the three months ended September 30, 2012, compared to the third quarter of 2011, while
interest expense decreased $257 thousand during the same time period.
Net interest income for the nine months ended
September 30, 2012 was $9.6 million compared to $12.8 million for the same period in 2011. Interest income on earning assets was $3.9 million lower for the nine months ended September 30, 2012, compared to the first nine months of 2011. Of
the $3.9 million decrease in interest income, $1.1 million is attributable to the $27.5 million lower average balance in loans. The reduction in the average balance in the investment securities portfolio was $17.3 million and contributed $2.5
million to the reduction in interest income. This was offset by the decrease in interest expense of $787 thousand. The average balance of interest bearing deposits decreased by $18.0 million and contributed $818 thousand to the reduction in interest
expense.
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The following table illustrates average balances of total interest-earning and non-interest
earning assets as well as total interest-bearing and non-interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders equity and related income, expense and corresponding
weighted average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.
Average Balances, Interest Income and Expense and Average Yield and
Rates
(1)
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Three Months Ended September 30,
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2012
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2011
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Average
Balance
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Income /
Expense
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Yield /
Rate
1
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Average
Balance
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Income /
Expense
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Yield /
Rate
1
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(Dollars in thousands)
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Assets
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Interest-earning assets:
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Loans
(2)
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$
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288,421
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$
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3,973
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5.48
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%
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$
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320,004
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$
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4,574
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5.67
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%
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Trading securities
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276
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9
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12.97
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%
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639
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12
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7.45
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%
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Investment securities
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98,950
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182
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0.73
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%
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117,771
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823
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2.77
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%
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Federal funds sold
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19,876
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33
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0.66
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%
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7,674
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10
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0.52
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%
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Total interest earning assets
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407,523
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4,197
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4.10
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%
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446,088
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5,419
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4.82
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%
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|
|
|
|
|
|
|
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
61,100
|
|
|
|
|
|
|
|
|
|
|
|
24,594
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO)
|
|
|
3,821
|
|
|
|
|
|
|
|
|
|
|
|
4,150
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
8,446
|
|
|
|
|
|
|
|
|
|
|
|
14,596
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(5,162
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
69,384
|
|
|
|
|
|
|
|
|
|
|
|
39,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
476,907
|
|
|
|
|
|
|
|
|
|
|
$
|
485,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
60,271
|
|
|
$
|
29
|
|
|
|
0.19
|
%
|
|
$
|
40,475
|
|
|
$
|
25
|
|
|
|
0.25
|
%
|
Money market deposit accounts
|
|
|
17,649
|
|
|
|
34
|
|
|
|
0.77
|
%
|
|
|
24,612
|
|
|
|
45
|
|
|
|
0.73
|
%
|
Savings accounts
|
|
|
4,703
|
|
|
|
1
|
|
|
|
0.08
|
%
|
|
|
3,152
|
|
|
|
1
|
|
|
|
0.13
|
%
|
Time deposits
|
|
|
168,722
|
|
|
|
629
|
|
|
|
1.48
|
%
|
|
|
197,008
|
|
|
|
877
|
|
|
|
1.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
251,345
|
|
|
|
693
|
|
|
|
1.10
|
%
|
|
|
265,247
|
|
|
|
948
|
|
|
|
1.42
|
%
|
FHLB advances
(3)
|
|
|
44,564
|
|
|
|
267
|
|
|
|
2.38
|
%
|
|
|
41,311
|
|
|
|
261
|
|
|
|
2.51
|
%
|
Other borrowings
|
|
|
37,210
|
|
|
|
139
|
|
|
|
1.49
|
%
|
|
|
50,871
|
|
|
|
147
|
|
|
|
1.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
333,119
|
|
|
|
1,099
|
|
|
|
1.31
|
%
|
|
|
357,429
|
|
|
|
1,356
|
|
|
|
1.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
113,770
|
|
|
|
|
|
|
|
|
|
|
|
89,101
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,775
|
|
|
|
|
|
|
|
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
449,664
|
|
|
|
|
|
|
|
|
|
|
|
449,101
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
27,243
|
|
|
|
|
|
|
|
|
|
|
|
36,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
476,907
|
|
|
|
|
|
|
|
|
|
|
$
|
485,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(4)
|
|
|
|
|
|
|
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(5)
|
|
|
|
|
|
$
|
3,098
|
|
|
|
3.02
|
%
|
|
|
|
|
|
$
|
4,063
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.
|
(2)
|
The Bank had average non-accrual loans of $11.4 million and $10.8 million in the third quarter of 2012 and 2011. The 2012
and 2011 interest income on non-accrual loans excluded from the loans above was $171 thousand and $150 thousand,
respectively.
|
(3)
|
The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate
advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for on a fair value basis. The average fair value of the fixed rate FHLB advance for the second quarter of 2012 and 2011 was $30.0 million and $29.3
million, respectively. As of September 30, 2012, the fair value of the fixed rate FHLB advance was $30.0 million.
|
(4)
|
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.
|
(5)
|
Net interest margin is net interest income expressed as a percentage of average earning assets.
|
48
Average loan balances were $288.4 million for the three months ended September 30, 2012
compared to $320.0 million for the same period in 2011. The $31.6 million decline is average loan balances is concentrated in a $10 million decline in C&I loan balances centered in the loss of two large lines of credit; $9.5 million reduction in
Owner-occupied Commercial Mortgages where borrowers refinanced with other lenders and a $9 million decline in Residential Investment Mortgage Loans, primarily due to reduced activity with our larger Residential Flippers who buy and sell properties
within a 12 month time frame.
Bankshares longer-term strategy is to grow small business commercial loans and owner occupied commercial
real estate, and focus on Bankshares geographical area. The related interest income from loans was $4.0 million in the three months ended September 30, 2012 compared to $4.6 million in the same period in 2011. The average yield on loans
of 5.48% during the three months ended September 30, 2012 was 19 basis points lower than the yield of 5.67% in the third quarter of 2011. Interest rates are established for classes of loans that include variable rates based on Wall Street
Journal Prime or other identifiable bases while others carry fixed rates with terms out to 15 years. Most new variable rate originations include minimum start rates and/or floors.
For the three months ended September 30, 2012, Bankshares held one security in its trading portfolio with an average balance of $276
thousand, compared to $639 thousand for the three months ended September 30, 2011. The trading security interest income for the three months ended September 30, 2012 was $9 thousand compared to $12 thousand for the three months ended
September 30, 2011. At September 30, 2012, the carrying value of the security was $293 thousand.
Investment
securities averaged $99.0 million for the quarter ended September 30, 2012 compared to $117.8 million for the same quarter in 2011. Investment securities income (on a fully tax equivalent basis) was $182 thousand for the three months ended
September 30, 2012 compared to $823 thousand for the three months ended September 30, 2011. The tax equivalent average yield on investment securities for the three months ended September 30, 2012, was 0.73% compared to 2.77% for the
three months ended September 30, 2011. The reduction in the average balance of the investment securities portfolio reflects managements targeted efforts to strategically restructure Bankshares balance sheet in anticipation of the
merger during 2011 that led to shifts in Bankshares investment portfolio mix, the reduction in the portfolio and the reduction in the overall yield. During the second quarter and continuing into the third quarter of 2012, the Bank experienced
greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than anticipated, premium amortization increases and adversely impact the portfolio yield.
Short-term investments in federal funds sold contributed $33 thousand to interest income in the three month period ended
September 30, 2012, compared to $10 thousand for the same period in 2011. The average balance for the three months ended September 30, 2012 was $19.9 million, a $12.2 million increase from the prior year average balance of $7.7 million.
The increase in federal funds sold is due to the increase in the Title and Escrow businesses accounts during the quarter.
49
The average balance of cash and due from banks was $61.1 million and $24.6 million for the
three months ended September 30, 2012 and 2011, respectively.
Total average interest earning assets yielded 4.10% for
the three months ended September 30, 2012 compared to the yield of 4.82% for the same period in 2011. Total interest income was $4.2 million for the three months ended September 30, 2012 compared to $5.4 million for the three months ended
September 30, 2011. As discussed above, interest income decreased in the third quarter of 2012 compared to the third quarter of 2011 due to the smaller average loans and securities balances, which are a product of Bankshares strategies to
reposition its balance sheet, and lower yields generated by Bankshares interest-earning assets in the low interest rate environment, coupled with the unexpected prepayments on the CMO instruments in the investment portfolio.
Total average interest-bearing liabilities were $333.1 million in the third quarter of 2012, or $24.3 million lower than the third
quarter of 2011 level of $357.4 million. A key driver of the decline was the decrease in average time deposits. The average balance of time deposits for the third quarter of 2012 was $168.7 million compared to the third quarter of 2011 average
balance of $197.0 million, a decrease of $28.3 million. Interest expense for all interest-bearing liabilities amounted to $1.1 million for the three months ended September 30, 2012 compared to $1.4 million for the three months ended
September 30, 2011, or a decrease of $257 thousand. The average cost of interest-bearing liabilities for the third quarter of 2012 was 1.31% or 20 basis points lower than the third quarter of 2011 level of 1.51%. The lower interest rate
environment allowed for competitive repricing of interest bearing demand accounts, money market accounts, savings accounts and title client based time deposits. The benefits of the repricing are seen in the lower time deposit cost of 1.48% during
the third quarter of 2012 compared to 1.77% during the same period of 2011.
For the three months ended September 30,
2012, the brokered certificate of deposit portfolio carried an average coupon rate of 1.24% compared to an average coupon rate of 1.71% at September 30, 2011. When maturing wholesale deposits mature and are replaced, Bankshares is able to
secure new brokered deposits at lower rates.
Non-interest bearing demand deposits averaged $113.8 million for the third
quarter of 2012, $24.7 million more than the third quarter of 2011 level of $89.1 million. This increase is due to the cyclical fluctuation in the title and escrow customer business and the growth in the title agency-related deposits, coupled with a
strategic shift of funding from repurchase agreements into deposits.
50
Average Balances, Interest Income and Expense and Average Yield and
Rates
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Income /
Expense
|
|
|
Yield /
Rate
1
|
|
|
Average
Balance
|
|
|
Income /
Expense
|
|
|
Yield /
Rate
1
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(2)
|
|
$
|
294,498
|
|
|
$
|
12,245
|
|
|
|
5.55
|
%
|
|
$
|
321,981
|
|
|
$
|
13,674
|
|
|
|
5.68
|
%
|
Trading securities
|
|
|
424
|
|
|
|
27
|
|
|
|
8.51
|
%
|
|
|
1,066
|
|
|
|
57
|
|
|
|
7.15
|
%
|
Investment securities
|
|
|
108,597
|
|
|
|
888
|
|
|
|
1.09
|
%
|
|
|
125,859
|
|
|
|
3,365
|
|
|
|
3.57
|
%
|
Federal funds sold
|
|
|
13,751
|
|
|
|
72
|
|
|
|
0.70
|
%
|
|
|
8,641
|
|
|
|
32
|
|
|
|
0.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
417,270
|
|
|
|
13,232
|
|
|
|
4.24
|
%
|
|
|
457,547
|
|
|
|
17,128
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
43,409
|
|
|
|
|
|
|
|
|
|
|
|
21,343
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
1,276
|
|
|
|
|
|
|
|
|
|
|
|
1,599
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO)
|
|
|
3,995
|
|
|
|
|
|
|
|
|
|
|
|
4,367
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
9,576
|
|
|
|
|
|
|
|
|
|
|
|
16,548
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
53,124
|
|
|
|
|
|
|
|
|
|
|
|
38,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
470,394
|
|
|
|
|
|
|
|
|
|
|
$
|
495,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
49,278
|
|
|
$
|
86
|
|
|
|
0.23
|
%
|
|
$
|
41,646
|
|
|
$
|
83
|
|
|
|
0.27
|
%
|
Money market deposit accounts
|
|
|
16,690
|
|
|
|
95
|
|
|
|
0.76
|
%
|
|
|
24,769
|
|
|
|
139
|
|
|
|
0.75
|
%
|
Savings accounts
|
|
|
4,376
|
|
|
|
3
|
|
|
|
0.09
|
%
|
|
|
4,238
|
|
|
|
5
|
|
|
|
0.16
|
%
|
Time deposits
|
|
|
180,343
|
|
|
|
2,070
|
|
|
|
1.53
|
%
|
|
|
197,999
|
|
|
|
2,845
|
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
250,687
|
|
|
|
2,254
|
|
|
|
1.20
|
%
|
|
|
268,652
|
|
|
|
3,072
|
|
|
|
1.53
|
%
|
FHLB advances
(3)
|
|
|
44,999
|
|
|
|
803
|
|
|
|
2.38
|
%
|
|
|
41,192
|
|
|
|
776
|
|
|
|
2.52
|
%
|
Other borrowings
|
|
|
44,584
|
|
|
|
476
|
|
|
|
1.43
|
%
|
|
|
59,292
|
|
|
|
472
|
|
|
|
1.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
340,270
|
|
|
|
3,533
|
|
|
|
1.39
|
%
|
|
|
369,136
|
|
|
|
4,320
|
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
98,038
|
|
|
|
|
|
|
|
|
|
|
|
89,369
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,540
|
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
440,848
|
|
|
|
|
|
|
|
|
|
|
|
461,058
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
29,546
|
|
|
|
|
|
|
|
|
|
|
|
34,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
470,394
|
|
|
|
|
|
|
|
|
|
|
$
|
495,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Spread
(4)
|
|
|
|
|
|
|
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(5)
|
|
|
|
|
|
$
|
9,699
|
|
|
|
3.10
|
%
|
|
|
|
|
|
$
|
12,808
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.
|
(2)
|
The Bank had average non-accrual loans of $11.4 million and $11.0 million for the first nine months of 2012 and 2011, respectively. The 2012 and 2011 interest income on non-accrual loans excluded from the
loans above was $355 thousand and $311 thousand, respectively.
|
(3)
|
The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for a fair value
basis. The average fair value of the fixed rate FHLB advance for the first nine months of 2012 and 2011 was $ 29.3 million and $26.2 million, respectively. As of September 30, 2012, the fair value of the fixed rate FHLB advance was $30.0
million.
|
(4)
|
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.
|
(5)
|
Net interest margin is net interest income expressed as a percentage of average earning assets.
|
51
For the nine months ended September 30, 2012, average loan balances were $294.5 million
compared to $322.0 million for the same period in 2011, a decrease of $27.5 million. Interest income from loans was $12.2 million in the first nine months of 2012 compared to $13.7 million in the same period of 2011, with the average yield
decreasing to 5.55% from 5.68%. The lower average balance contributed $1.1 thousand and lower rates contributed $302 thousand to the $1.4 million decrease in interest income on loans.
For the nine months ended September 30, 2012, Bankshares held one security in its trading portfolio with an average balance of $424
thousand, compared to $1.1 million for the nine months ended September 30, 2011. The trading security interest income for the nine months ended September 30, 2012 was $27 thousand compared to $57 thousand for the nine months ended
September 30, 2011. The reduction in average trading securities reflects managements business strategy to eliminate the trading securities portfolio as Bankshares repositions the balance sheet and led to the reduction in associated
interest income. At September 30, 2012, the carrying value of the security was $293 thousand.
Investment securities
averaged $108.6 million for the nine months ended September 30, 2012 compared to $125.9 million for the same period in 2011. Investment securities income was $888 thousand for the nine months ended September 30, 2012 compared to $3.4
million for the nine months ended September 30, 2011. The average tax equivalent yields on investment securities for the nine months ended September 30, 2012 and 2011 were 1.09% and 3.57% respectively. The reduction in average investment
securities reflects managements targeted efforts to strategically restructure our balance sheet in anticipation of the merger during 2011 which led to shifts in the portfolio mix and reduction the investment portfolios balance. During
the second quarter and continuing into the third quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than
anticipated, premium amortization increases which adversely impacts the portfolio yield.
Short-term investments in federal
funds sold contributed $72 thousand to interest income in the nine month period ended September 30, 2012 compared to $32 thousand in the nine month period ended September 30, 2011.
The average balance of cash and due from banks was $43.4 million and $21.3 million for the nine months ended September 30, 2012 and
2011 respectively.
Total average earning assets yielded 4.24% for the nine months ended September 30, 2012 or 76 basis
points lower than the yield of 5.00% for the same period in 2011. Total interest income (on a fully tax equivalent basis) was $13.2 million for the nine months ended September 30, 2012 compared to $17.1 million for the nine months ended
September 30, 2011.
Total average interest-bearing liabilities were $340.3 million in the first nine months of 2012 or
$28.8 million less than the first nine months of 2011 level of $369.1 million. The average balance of time deposits was $17.7 million lower than the same period last year. For the nine months ended September 30, 2012, interest expense was $3.5
million compared to $4.3 million for the nine months ended September 30, 2011. The average cost of interest-bearing
52
liabilities for the first nine months of 2012 was 1.39% or 17 basis points lower than the 2011 level of 1.56%. Many of the larger wholesale deposits have matured and new brokered deposits were
issued at lower interest rates.
For the nine months ended, September 30, 2012, the brokered certificate of deposit
portfolio carried an average coupon rate of 1.48% compared to an average coupon rate of 1.85% at September 30, 2011.
Non-interest bearing demand deposits averaged $98.0 million for the first nine months of 2012, or $8.6 thousand more than the first nine
months of 2011 level of $89.4 million. These balances are subject to seasonal changes.
The following table describes the
impact on Bankshares 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume and Rate Analysis
Nine Months
Ended September 30,
2012 compared to 2011
|
|
|
|
Change Due To:
|
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,429
|
)
|
|
$
|
(1,127
|
)
|
|
$
|
(302
|
)
|
Trading securities
|
|
|
(30
|
)
|
|
|
(44
|
)
|
|
|
14
|
|
Investment securities
|
|
|
(2,477
|
)
|
|
|
(396
|
)
|
|
|
(2,081
|
)
|
Federal funds sold
|
|
|
40
|
|
|
|
24
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) in interest income
|
|
|
(3,896
|
)
|
|
|
(1,543
|
)
|
|
|
(2,353
|
)
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
(818
|
)
|
|
|
(266
|
)
|
|
|
(552
|
)
|
Borrowed funds
|
|
|
31
|
|
|
|
58
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) in interest expense
|
|
|
(787
|
)
|
|
|
(208
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in net interest income
|
|
$
|
(3,109
|
)
|
|
$
|
(1,335
|
)
|
|
$
|
(1,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended, September 30, 2012, due to improvement in the overall risk profile of the
loan portfolio and a lower level of total loans, the Company released reserves into income of $223 thousand, and did not recognize a provision expense for the period.
Non-interest Income (Other Income).
Non-interest income amounted to a loss of
$
153 thousand during the three months ended September 30, 2012, an increase of $498 thousand
from a loss of $651 thousand of non-interest income for the same period of 2011.
Fair value adjustments on the FHLB advance
and the trading security recorded for the three months ended September 30, 2012 resulted in a net loss of $401 thousand, compared to a net loss of $2.8 million for the same period in 2011, a decrease of $2.4 million. The net loss of $170
thousand for the three months ended September 30, 2012 is primarily driven by a negative fair value adjustment of $459 thousand on the FHLB advance, and gains of $171 thousand on the sale of investment securities
53
Non-interest Expense.
Non-interest expense for the three months ended
September 30, 2012, amounted to $3.5 million compared to $4.1 million for the same period in 2011, a decrease of $600 thousand. The key components of non-interest expenses are salary and employee benefits, merger related expenses, occupancy
expenses and professional fees. Salary and employee benefits expenses for the quarter ended September 30, 2012 were $956 million, compared to the third quarter of 2011 level of $1.2 million, a decrease of $241 thousand. Professional fees for
the quarter ended September 30, 2012 were $465 thousand, compared to the third quarter of 2011 level of $398 thousand, an increase of $67 thousand, which is due to the use of contract employees in the Human Resources, Information Technology and
Accounting departments. Merger expenses were $248 thousand for the three months ended September 30, 2012, compared to $619 thousand for the same period in 2011. Occupancy expenses and equipment expenses collectively totaled $702 thousand for
the quarter ended September 30, 2012 compared to the 2011 level of $741 thousand, a decrease of $39 thousand.
For the
nine months ended September 30, 2012, non-interest expense was $10.8 million compared to $11.6 million for the 2011 period, a decrease of $800 thousand. Salaries and employee benefits expenses decreased by $716 thousand, occupancy and equipment
expenses decreased by $94 thousand, merger related expenses increased by $47 thousand, and professional fees increased by $319 thousand. This increase in professional fees is due to the use of contract employees to fill open positions in the Human
Resources, Information Technology, and Accounting departments. OREO expenses for the nine months ended excluding valuation allowance was $109 thousand and $77 thousand for the nine months ended September 30, 2012 and 2011 respectively. FDIC
assessments decreased by $227 thousand, and there was a decrease of $382 thousand in other operating expenses. There were also merger related expenses of $666 thousand.
Income Taxes.
Bankshares recorded an income tax benefit of $156 thousand and $227 thousand related to the FHLB fair value adjustment for the three and nine months ended
September 30, 2012 and 2011 respectively. This income tax benefit was an increase of $297 thousand over the nine months ended, September 30, 2011 and a decrease of $333 thousand for three months ended September 30, 2011.
At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary.
Its 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. Bankshares 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, Bankshares 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
was considered more likely than not, that Bankshares will not be able to realize all of its deferred tax assets. As of September 30, 2012, the net deferred tax asset was $1.6 million, compared to $1.5 million as of December 31, 2011. The
change in the net asset is due to fair value changes relating to the FHLB advance.
54
Analysis of Financial Condition
Trading Security.
At September 30, 2012 and December 31, 2011, the trading portfolio consisted of one PCMO
security with a fair value of $293 thousand and $596 thousand respectively. The current effective portfolio yield is 5.43%.
The following table reflects Bankshares trading assets and effective yield on the instruments as of the dates indicated:
ALLIANCE BANKSHARES CORPORATION
Consolidated Statistical Information
Trading Asset Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Security
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
PCMO
(1)
|
|
$
|
293
|
|
|
|
5.43
|
%
|
|
$
|
596
|
|
|
|
5.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
293
|
|
|
|
5.43
|
%
|
|
$
|
596
|
|
|
|
5.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of September 30, 2012, trading security portfolio consisted of one PCMO instrument. This
PCMO was rated AAA by at least one ratings agency on the purchase date. Currently the security has a rating below investment grade.
|
The instrument is paying as agreed.
Investment Securities -
Available-for-Sale.
Bankshares actively manages its 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 $79.4 million September 30, 2012 compared to $123.5 million at December 31, 2011. Targeted efforts to strategically restructure the balance sheet in 2011 led to shifts in the investment portfolio
mix and reduced the investment securities portfolio balance at September 30, 2012.
On September 30, 2012, the
investment portfolio contained callable and non-callable U.S. government corporations and agencies securities, U.S. government collateralized mortgage obligations (CMOs), U.S. government mortgage backed securities (MBS), PCMOs, and municipal
securities.
55
On September 30, 2012, U.S. corporations and agencies were $18.6 million or 23.4%
of the portfolio, PCMOs, CMOs and MBS were $51.9 million, or 65.4% of the portfolio, and municipal securities were $8.9 million, or 11.2% of the portfolio.
The yield on the investment securities portfolio as of September 30, 2012 was 2.53%. During the third quarter of 2012, the Bank earned $182 thousand on the investment securities portfolio or an
effective tax equivalent yield of 0.73%. The investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. Bankshares is experiencing lower yields on the portfolio in 2012 on a number of instruments.
When prepayments on these instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield. During the second quarter and continuing into the third quarter of 2012, the Bank experienced
greater than expected prepayments on a variety of investment securities. The U. S. treasuries matured during the first nine months of 2012 and were re-invested in higher yielding securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities- Available-for-Sale
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
% of
Total
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
% of
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,115
|
|
|
|
0.01
|
%
|
|
|
57.6
|
%
|
U.S. government corporations and agencies
|
|
|
18,569
|
|
|
|
2.37
|
%
|
|
|
23.4
|
%
|
|
|
9,751
|
|
|
|
2.63
|
%
|
|
|
7.9
|
%
|
U.S. government agency CMOs
|
|
|
41,229
|
|
|
|
2.26
|
%
|
|
|
51.9
|
%
|
|
|
31,038
|
|
|
|
2.16
|
%
|
|
|
25.1
|
%
|
U.S. government agency MBS
|
|
|
9,768
|
|
|
|
2.14
|
%
|
|
|
12.3
|
%
|
|
|
7,698
|
|
|
|
2.01
|
%
|
|
|
6.2
|
%
|
PCMOs
|
|
|
932
|
|
|
|
2.87
|
%
|
|
|
1.2
|
%
|
|
|
950
|
|
|
|
2.82
|
%
|
|
|
0.8
|
%
|
Municipal securities
|
|
|
8,913
|
|
|
|
4.47
|
%
|
|
|
11.2
|
%
|
|
|
2,911
|
|
|
|
5.06
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities Available-for-Sale
|
|
$
|
79,411
|
|
|
|
2.53
|
%
|
|
|
100.0
|
%
|
|
$
|
123,463
|
|
|
|
1.02
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following table summarizes the contractual maturity of the investment securities on an amortized cost
basis and their weighted average yield as of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturities of Investment Securities
September 30, 2012
|
|
|
|
(Dollars in thousands)
|
|
|
|
Within
One Year
|
|
|
After One
Year but Within
Five
Years
|
|
|
After Five
Years but Within
Ten
Years
|
|
|
After Ten Years
|
|
|
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Total
(4,5)
|
|
Available-For-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government corporations and agencies
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
18,262
|
|
|
|
2.36
|
%
|
|
|
18,262
|
|
U.S. government agency CMOs
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
2,744
|
|
|
|
1.95
|
%
|
|
|
38,507
|
|
|
|
2.26
|
%
|
|
|
41,251
|
|
U.S. government agency MBS
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
9,535
|
|
|
|
2.15
|
%
|
|
|
9,535
|
|
PCMOs
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
902
|
|
|
|
2.87
|
%
|
|
|
902
|
|
Municipal securities
(2)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
3,771
|
|
|
|
3.30
|
%
|
|
|
4,961
|
|
|
|
4.79
|
%
|
|
|
8,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
6,515
|
|
|
|
2.73
|
%
|
|
$
|
72,167
|
|
|
|
2.45
|
%
|
|
$
|
78,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Available-For-Sale Securities
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
Bankshares did not have any held-to-maturity securities as of September 30, 2012.
|
(4)
|
Total above is amortized cost and does not include unrealized gains of $729 thousand.
|
(5)
|
The fair value of the contractual maturities listed in the total above amounts to $79.4 million.
|
Restricted Securities.
Bankshares securities 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 Community Bankers Bank (CBB). The following table summarizes the balances of restricted stock at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Federal Reserve Bank Stock
|
|
$
|
1,201
|
|
|
$
|
1,201
|
|
FHLB stock
|
|
|
2,565
|
|
|
|
3,365
|
|
CBB stock
|
|
|
206
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Total Restricted Stock
|
|
$
|
3,972
|
|
|
$
|
4,772
|
|
|
|
|
|
|
|
|
|
|
57
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 $288.0 million as of September 30, 2012, or $18.9 million lower than the
December 31, 2011 level of $306.9 million.
The following table summarizes 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
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
92,443
|
|
|
|
32.1
|
%
|
|
$
|
101,248
|
|
|
|
33.0
|
%
|
Commercial real estate
|
|
|
125,602
|
|
|
|
43.6
|
%
|
|
|
137,610
|
|
|
|
44.8
|
%
|
Construction/land
|
|
|
41,478
|
|
|
|
14.4
|
%
|
|
|
39,176
|
|
|
|
12.8
|
%
|
Commercial and industrial
|
|
|
27,076
|
|
|
|
9.5
|
%
|
|
|
26,820
|
|
|
|
8.7
|
%
|
Consumer - non real estate
|
|
|
1,382
|
|
|
|
0.5
|
%
|
|
|
2,022
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
287,981
|
|
|
|
100
|
%
|
|
$
|
306,876
|
|
|
|
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 non-owner occupied
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 $582 thousand as of
September 30, 2012.
The table also shows a modest increase in the construction/land portion of the portfolio, which
represented 14.4% of the portfolio at September 30, 2012 and 12.8% of the portfolio at December 31, 2011. The current levels of construction/land loans are a product of managements efforts to moderate this type of lending in recent
years. New originations in this
58
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. Bankshares expects to see further reductions in its land exposure offset by potential increases in
certain residential construction activities as market conditions improve.
Loans secured by residential real estate have
declined 8.7% since December 31, 2011, with reductions across most relevant loan classes to include both owner-occupied and investment residential categories. All loans in these categories represent loans underwritten by Bankshares,
(Bankshares does not purchase loans in this portfolio) to customers with whom it has had direct contact in the local communities it serves. Bankshares believes that its underwriting criteria reflect current market conditions. The portfolio
of first mortgage loans had an average size per housing unit of $331 thousand as of September 30, 2012. Bankshares subordinate trust loans averaged $99 thousand per property as of September 30, 2012. While
Bankshares recognizes that the Metropolitan Washington, D.C. residential real estate market continues to be a nascent recovery, Bankshares believes that its current underwriting standards, its emphasis on serving the sub-markets it knows, the
granularity of its portfolio, and the continued reduction of its subordinate trust portfolio represent the appropriate risk management strategies for this portfolio.
The following table presents the maturities or repricing periods of selected loans outstanding at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012
|
|
|
|
One Year
or Less
|
|
|
After One Year
Through Five Years
|
|
|
After
Five Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
18,483
|
|
|
$
|
7,795
|
|
|
$
|
799
|
|
|
$
|
27,076
|
|
Construction/land
|
|
|
23,138
|
|
|
|
14,562
|
|
|
|
3,778
|
|
|
|
41,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,620
|
|
|
$
|
22,357
|
|
|
$
|
4,577
|
|
|
$
|
68,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
$
|
62,448
|
|
|
$
|
77,093
|
|
|
$
|
70,515
|
|
|
$
|
210,056
|
|
Variable rates
|
|
|
31,814
|
|
|
|
41,665
|
|
|
|
4,446
|
|
|
|
77,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,262
|
|
|
$
|
118,758
|
|
|
$
|
74,961
|
|
|
$
|
287,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
59
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.
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 highly questionable and improbable based upon current existing facts,
conditions, and values. 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.
60
The table below represents Bankshares loan portfolio by risk rating, classification,
and loan portfolio segment as of September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
24,083
|
|
|
$
|
787
|
|
|
$
|
205
|
|
|
$
|
2,001
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,076
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
54,391
|
|
|
|
871
|
|
|
|
1,982
|
|
|
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
61,045
|
|
Non-owner occupied
|
|
|
56,289
|
|
|
|
4,736
|
|
|
|
1,731
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
64,557
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
16,037
|
|
|
|
792
|
|
|
|
|
|
|
|
|
|
|
|
559
|
|
|
|
|
|
|
|
17,388
|
|
Other construction & land
|
|
|
14,823
|
|
|
|
524
|
|
|
|
165
|
|
|
|
8,242
|
|
|
|
336
|
|
|
|
|
|
|
|
24,090
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity lines
|
|
|
27,031
|
|
|
|
321
|
|
|
|
99
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
27,601
|
|
Single family
|
|
|
51,801
|
|
|
|
2,729
|
|
|
|
2,684
|
|
|
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
59,449
|
|
Multifamily
|
|
|
5,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,393
|
|
Consumer - non real estate
|
|
|
1,181
|
|
|
|
8
|
|
|
|
181
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
251,029
|
|
|
$
|
10,768
|
|
|
$
|
7,047
|
|
|
$
|
18,242
|
|
|
$
|
895
|
|
|
$
|
|
|
|
$
|
287,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Bankshares normal credit risk management practices, it regularly monitors the
payment performance of its 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 classifies the loan as non-accrual. The decrease in non-accrual loans from $13.3 million at December 2011 to $10.9 million at
September 30, 2012 is attributed to the following factors: Six non-accrual/impaired loans totaling $838 thousand secured by residential real estate were charged off during the period, one loan for $963 thousand was secured by a residential
property in Fairfax County, Virginia which was foreclosed into Bankshares OREO; and a commercial loan totaling $899 thousand secured by land in Fairfax County, Virginia was paid in full. Four other non-accrual loans continue to receive
ongoing payments which are applied to reduce Bankshares carrying value for these loans.
61
The following table sets forth the aging and non-accrual loans by class, as of
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging and Non-accrual Loans By Class
As
of September 30, 2012
|
|
|
|
(Dollars in thousands)
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or
More Past
Due
|
|
|
Total Past
Due
|
|
|
Current
1
|
|
|
90-days
Past Due
and Still
Accruing
|
|
|
Nonaccrual
Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,518
|
|
|
$
|
28
|
|
|
$
|
269
|
|
|
$
|
1,815
|
|
|
$
|
25,261
|
|
|
$
|
792
|
|
|
$
|
1,547
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
355
|
|
|
|
99
|
|
|
|
2,475
|
|
|
|
2,929
|
|
|
|
58,116
|
|
|
|
|
|
|
|
2,475
|
|
Non-owner occupied
|
|
|
|
|
|
|
1,801
|
|
|
|
|
|
|
|
1,801
|
|
|
|
62,756
|
|
|
|
|
|
|
|
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
|
|
|
|
|
|
|
|
1,351
|
|
|
|
1,351
|
|
|
|
16,037
|
|
|
|
|
|
|
|
559
|
|
Other construction & land
|
|
|
165
|
|
|
|
983
|
|
|
|
4,866
|
|
|
|
6,014
|
|
|
|
18,076
|
|
|
|
|
|
|
|
5,849
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity lines
|
|
|
285
|
|
|
|
292
|
|
|
|
150
|
|
|
|
727
|
|
|
|
26,874
|
|
|
|
|
|
|
|
150
|
|
Single family
|
|
|
623
|
|
|
|
1,315
|
|
|
|
261
|
|
|
|
2,199
|
|
|
|
57,250
|
|
|
|
|
|
|
|
261
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,393
|
|
|
|
|
|
|
|
|
|
Consumer -non real estate
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
|
|
1,370
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,946
|
|
|
$
|
4,518
|
|
|
$
|
9,384
|
|
|
$
|
16,848
|
|
|
$
|
271,133
|
|
|
$
|
792
|
|
|
$
|
10,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
For the purposes of this table only, loans 1-29 days past due are included in the balance of
current loans.
|
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 $4.9 million at September 30, 2012, or 1.69 % of loans outstanding, compared to $5.4 million or 1.76% of loans outstanding, at December 31, 2011.
Bankshares has allocated $1.7 million at September 30, 2012 compared to $2.3 million at December 31, 2011 for specific non-performing loans. For the first nine months of 2012, Bankshares had net charge-offs of $755 thousand compared to net
charge-offs of $1.3 million in the same period of 2011.
As part of its routine credit administration process, Bankshares
engages an outside consulting firm to review its 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.
62
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 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 used in the
methodology that may have an effect on the overall level of allowance maintained.
Over the past several quarters, we have
experienced a reduction in our loan portfolio and in the losses we have previously experienced. Net loans outstanding decreased $5.5 million from June 30, 2012 to September 30, 2012, due to the payoffs from several large commercial
borrowers, coupled with a reduction in activities from our residential real estate investors. Due to these events coupled with the improvement in our risk profile of the loan portfolio reflected in the ASC450-10-05 portion of the Allowance for Loan
Losses model, and lower level of loans, Alliance released $222 thousand of previous recorded reserves into income and did not recognized a provision expense during the quarter ended September 30, 2012.
63
The following table represents an analysis of the allowance for loan losses for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2012
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Nine
Months
Ended September 30,
2011
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
5,393
|
|
|
$
|
5,281
|
|
|
$
|
5,281
|
|
|
|
|
|
Provision for loan losses
|
|
|
228
|
|
|
|
1,549
|
|
|
|
1,205
|
|
|
|
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Construction/land
|
|
|
|
|
|
|
(404
|
)
|
|
|
(404
|
)
|
Residential real estate
|
|
|
(894
|
)
|
|
|
(1,044
|
)
|
|
|
(898
|
)
|
Commercial real estate
|
|
|
|
|
|
|
(173
|
)
|
|
|
(173
|
)
|
Consumer - non real estate
|
|
|
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total chargeoffs
|
|
|
(894
|
)
|
|
|
(1,702
|
)
|
|
|
(1,556
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
116
|
|
|
|
116
|
|
Construction/land
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
139
|
|
|
|
134
|
|
|
|
118
|
|
Commercial real estate
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
Consumer - non real estate
|
|
|
|
|
|
|
6
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
139
|
|
|
|
265
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (chargeoffs)
|
|
|
(755
|
)
|
|
|
(1,437
|
)
|
|
|
(1,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
4,866
|
|
|
$
|
5,393
|
|
|
$
|
5,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
1.69
|
%
|
|
|
1.76
|
%
|
|
|
1.62
|
%
|
Allowance for loan losses to nonaccrual loans
|
|
|
.45X
|
|
|
|
0.41X
|
|
|
|
0.49X
|
|
Allowance for loan losses to non-performing assets
|
|
|
30.63
|
%
|
|
|
29.58
|
%
|
|
|
0.34X
|
|
Non-performing assets to total assets
|
|
|
3.04
|
%
|
|
|
3.55
|
%
|
|
|
2.85X
|
|
Net chargeoffs to average loans
|
|
|
0.26
|
%
|
|
|
0.45
|
%
|
|
|
0.54
|
%
|
64
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 September 30, 2012
|
|
|
|
(Dollars in thousands)
|
|
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Construction
Land
|
|
|
Residential
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
210
|
|
|
$
|
1,508
|
|
|
$
|
1,808
|
|
|
$
|
1,826
|
|
|
$
|
41
|
|
|
$
|
5,393
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(894
|
)
|
|
|
|
|
|
$
|
(894
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
$
|
139
|
|
Provision
|
|
|
(56
|
)
|
|
|
(53
|
)
|
|
|
68
|
|
|
|
282
|
|
|
|
(13
|
)
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
154
|
|
|
$
|
1,455
|
|
|
$
|
1,876
|
|
|
$
|
1,353
|
|
|
$
|
28
|
|
|
$
|
4,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
109
|
|
|
$
|
|
|
|
$
|
1,520
|
|
|
$
|
78
|
|
|
|
4
|
|
|
$
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
45
|
|
|
$
|
1,455
|
|
|
$
|
356
|
|
|
$
|
1,275
|
|
|
$
|
24
|
|
|
$
|
3,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance:
|
|
$
|
27,076
|
|
|
$
|
125,602
|
|
|
$
|
41,478
|
|
|
$
|
92,443
|
|
|
$
|
1,382
|
|
|
$
|
287,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,546
|
|
|
$
|
2,475
|
|
|
$
|
6,409
|
|
|
$
|
971
|
|
|
|
12
|
|
|
$
|
11,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
25,530
|
|
|
$
|
123,127
|
|
|
$
|
35,069
|
|
|
$
|
91,472
|
|
|
$
|
1,370
|
|
|
$
|
276,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing Assets
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 September 30, 2012, there was $10.9 million in loans
on non-accrual status compared to $13.3 million at December 31, 2011. The $10.9 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 September 30, 2012 is $1.7 million.
65
Non-accruals for the nine months ended September 30, 2012 were $10.9 million, compared
to $10.7 for the same period in 2011. Non-accrual loans continue to represent transactions originated in 2006 and prior.
Total Non-performing Assets.
As of September 30, 2012, Bankshares had $15.9 million of non-performing assets on the
balance sheet compared to $18.0 million as of December 31, 2011, a decrease of $2.1 million. This decrease is primarily comprised of the charge off of six loans, secured by residential real estate, totaling $838 thousand; the foreclosure and
purchase into OREO of a residential property valued at $963 thousand; the full repayment of a commercial loan secured by land with a prior balance of $899 thousand; the movement back to accrual status of two loans secured by land totaling $325
thousand. Since December 31, 2011, six loans totaling $1.1 million have been added to the non-accrual and impaired loan list. Of these six loans, 95% are secured by residential real estate. The ratio of non-performing assets to total assets
decreased to 3.04% as of September 30, 2012 from 3.55% as of December 31, 2011, a 51 basis points decrease.
The
following table provides information regarding credit quality at the dates presented:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Credit Quality Information
|
|
(Dollars in thousands)
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
|
Non-accrual loans
|
|
|
10,853
|
|
|
|
13,264
|
|
OREO
|
|
|
3,575
|
|
|
|
3,748
|
|
Other impaired loans
|
|
|
560
|
|
|
|
|
|
Troubled debt restructurings
|
|
|
897
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
15,885
|
|
|
$
|
17,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific reserves associated with impaired loans
|
|
$
|
1,711
|
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets
|
|
|
3.04
|
%
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
Specific Reserves.
As of September 30, 2012, Bankshares had $1.7 million in specific
reserves for non-performing loans, compared to $2.3 million at December 31, 2011.
Other Real Estate Owned
(OREO).
As of September 30, 2012, Bankshares had $3.6 million classified as OREO on the balance sheet, compared to $3.7 million as of December 31, 2011. The OREO balance includes $951 thousand which relates to residential acreage
in the Stephens City, Virginia, $790 thousand which relates to acreage in Woodstock, Virginia, and $720 thousand which relates to a farm property in Charles Town, West Virginia, and $851 thousand which relates to residential property in Northern
Virginia. The remainder is made up of five additional properties totaling $263 thousand at September 30, 2012.
66
The table below reflects the OREO activity in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended September 30,
2012
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
3,748
|
|
|
$
|
4,627
|
|
|
|
|
Properties acquired at foreclosure
|
|
|
963
|
|
|
|
434
|
|
Sales of foreclosed properties
|
|
|
(905
|
)
|
|
|
(959
|
)
|
Valuation adjustments
|
|
|
(231
|
)
|
|
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
3,575
|
|
|
$
|
3,748
|
|
|
|
|
|
|
|
|
|
|
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 those from
title and escrow agency customers.
At September 30, 2012, the deposit portfolio was $414.2 million, an increase of $33.8
million compared to the December 31, 2011 level of $380.4 million. The average cost of interest-bearing deposits was 1.20% for the nine months ended September 30, 2012, or 33 basis points less than the nine months ended September 30,
2011 average cost of 1.53%. As key interest rates declined over the past year, Bankshares repriced deposits at lower levels.
At September 30, 2012, Bankshares savings and NOW deposits were $84.1 million compared to $51.5 million at December 31,
2011, a $32.6 million increase. Average non-interest bearing demand deposits were $98.0 million for the nine months ended September 30, 2012 compared to average non-interest bearing demand deposits of $89.4 million for the nine months ended
September 30, 2011, an increase of $8.6 million. The disparity between the September 30, 2012 balance of non-interest bearing deposits of $145.3 million and the average balance for the first nine months of 2012 of non-interest bearing
deposits of $98.0 million is directly related to seasonal and cyclical changes in the business activities of Bankshares title and escrow agency client base. Frequently, Bankshares 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 its 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 September 30, 2012, Bankshares had $100.5 million of wholesale brokered certificates of deposit which is $21.9 million lower
than the December 31, 2011 level of $122.4 million. This decrease is due to managements decision not to renew a certificate of deposit that matured during the first nine months of 2012.
67
The following table shows the maturity distribution and coupon rate of wholesale brokered
certificate of deposits at September 30, 2012:
|
|
|
|
|
|
|
|
|
Maturity Distribution of Brokered Deposits by Year
|
|
Maturity Year
|
|
Amount
|
|
|
Average Coupon
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
2013
|
|
|
68,044
|
|
|
|
1.03
|
%
|
2014
|
|
|
22,423
|
|
|
|
1.58
|
%
|
2015
|
|
|
10,000
|
|
|
|
1.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,467
|
|
|
|
1.24
|
%
|
|
|
|
|
|
|
|
|
|
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 $22.6 million at September 30, 2012, compared to $40.4 million at December 31, 2011, a decrease of 17.8 million.
The decrease in the Customer repurchase portfolio resulted from managements decision to reduce the balance in repositioning the balance sheet and the investment portfolio. The Trust Preferred Capital Notes were $10.3 million for all periods
presented.
68
|
|
|
|
|
|
|
|
|
|
|
Purchased Funds Distribution
|
|
|
|
Nine Months
September 30,
2012
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
At Period End
|
|
|
|
|
|
|
|
|
FHLB long-term advances, at fair value
|
|
$
|
30,018
|
|
|
$
|
29,350
|
|
FHLB advances
|
|
|
15,000
|
|
|
|
15,000
|
|
Customer repos
|
|
|
22,558
|
|
|
|
40,420
|
|
Purchased funds and other borrowings
|
|
|
|
|
|
|
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
Total at period end
|
|
$
|
77,886
|
|
|
$
|
95,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
FHLB long-term advances, at fair value
|
|
$
|
29,269
|
|
|
$
|
26,922
|
|
FHLB long-term advances
|
|
|
15,730
|
|
|
|
15,000
|
|
Customer repos
|
|
|
33,099
|
|
|
|
36,666
|
|
Purchased funds and other borrowings
|
|
|
1,175
|
|
|
|
11,773
|
|
Trust Preferred Capital Notes
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
Total average balance
|
|
$
|
89,583
|
|
|
$
|
100,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds, end of period
|
|
|
1.95
|
%
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate paid on all borrowed funds, during the period
|
|
|
1.91
|
%
|
|
|
1.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding during period
|
|
$
|
99,328
|
|
|
$
|
108,431
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2012 and December 31, 2011, the FHLB long-term advance accounted for on a fair value basis had a
value of $30.0 million and $29.4 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 3.99% for all periods presented. The par value of the FHLB advance
was $25.0 million at September 30, 2012 and December 31 2011.
At September 30, 2012, there was one FHLB
advance accounted for on a cost basis. Bankshares entered into this floating rate advance in the first quarter of 2012 for $15.0 million. The advance matures in 2013 and the interest rate at September 30, 2012 was 0.32%. The weighted average
interest rate for both FHLB advances at September 30, 2012 is 2.61%.
69
Fair Value of 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 September 30, 2012 and December 31, 2011, the fair value of the long-term FHLB advance
accounted for on a fair value basis was $30.0 million and $29.4 million respectively.
The following table reflects the fair
value of liabilities accounted for under ASC 820-10 as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Par
Value
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
Par
Value
|
|
|
Fair
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
FHLB long-term advance
|
|
$
|
25,000
|
|
|
$
|
30,018
|
|
|
|
3.99
|
%
|
|
$
|
25,000
|
|
|
$
|
29,350
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Bankshares Annual Report on Form 10-K for the year ended December 31, 2011 and the forward-looking statement section of this Quarterly Report on Form 10-Q, 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
monitors 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.
70
As of September 30, 2012, Bankshares had $115.5 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 September 30, 2012, the Bank had a total credit line of $101.4 million with the FHLB with an unused
portion of $61.4 million. Borrowings with the FHLB have certain collateral requirements and are subject to disbursement approval by the FHLB. At September 30, 2012, 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 other correspondent banks. As of September 30, 2012, the Bank did not have any outstanding borrowings from its other 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.
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 $27.1 million as of September 30, 2012 compared to the December 31, 2011 level of $28.1
million. The change in equity is primarily attributable to Bankshares net loss for the first nine months of 2012 of $1.5 million and unrealized gains on securities of $442 thousand. Book value per common share was $5.30 as of
September 30, 2012, compared to $5.50 as of December 31, 2011. The net unrealized gain on available-for-sale securities amounted to $478 thousand, net of tax, as of September 30, 2012, compared to a net unrealized gain on
available-for-sale securities of $36 thousand, net of tax, as of December 31, 2011.
71
The following table reflects the components of shareholders equity on a book value per share
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended September 30,
2012
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Nine
Months
Ended September 30,
2011
|
|
|
|
(Dollars in thousands)
|
|
Book value per share, beginning of the period
|
|
$
|
5.50
|
|
|
$
|
6.60
|
|
|
$
|
6.60
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
(0.30
|
)
|
|
|
(1.17
|
)
|
|
|
0.05
|
|
Effects of other changes in other comprehensive income
1
|
|
|
0.10
|
|
|
|
0.07
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share, end of the period
|
|
$
|
5.30
|
|
|
$
|
5.50
|
|
|
$
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Other comprehensive income represents the unrealized gains or losses associated with
available-for-sale securities and related reclassification adjustments.
|
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. In
addition, the terms of the Merger Agreement restrict Bankshares from declaring, setting aside or paying any dividends or other distributions on any class of its capital stock without the consent of WFBI while the Merger is pending.
On September 30, 2003, Bankshares wholly-owned Delaware statutory business trust (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 September 30, 2012, 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 September 30,
2012, the total amount of deferred and compounded interest owed under the indenture is $1.3 million. The base interest rate as of September 30, 2012 was 3.54% and as of December 31, 2011 was 3.70%.
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 September 30, 2012 and
72
December 31, 2011, $8.9 and $9.4 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.
73
Bankshares is considered
well capitalized
as of September 30, 2012
and December 31, 2011, based on regulatory risk based capital guidelines. The following table shows Bankshares capital categories, capital ratios and the minimum capital ratios currently required by bank regulators:
|
|
|
|
|
|
|
|
|
|
|
Risk Based Capital Analysis
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
20,440
|
|
|
$
|
20,440
|
|
Capital surplus
|
|
|
25,942
|
|
|
|
25,915
|
|
Retained (deficit)
|
|
|
(19,791
|
)
|
|
|
(18,269
|
)
|
Less: disallowed assets
|
|
|
|
|
|
|
|
|
Add: Qualifying Trust Preferred Securities
|
|
|
8,864
|
|
|
|
9,353
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
|
35,455
|
|
|
|
37,439
|
|
|
|
|
Tier 2 Capital:
|
|
|
|
|
|
|
|
|
Qualifying allowance for loan losses
|
|
|
3,541
|
|
|
|
3,828
|
|
Qualifying Trust Preferred Securities
|
|
|
1,136
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital
|
|
|
4,677
|
|
|
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Capital
|
|
$
|
40,131
|
|
|
$
|
41,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk weighted assets
|
|
$
|
292,381
|
|
|
$
|
304,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average assets
|
|
$
|
476,908
|
|
|
$
|
506,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30.
2012
|
|
|
December 31,
2011
|
|
|
Regulatory
Minimum
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk based capital ratio
|
|
|
12.1
|
%
|
|
|
12.3
|
%
|
|
|
4.0
|
%
|
Total risk based capital ratio
|
|
|
13.7
|
%
|
|
|
13.8
|
%
|
|
|
8.0
|
%
|
Leverage ratio
|
|
|
7.4
|
%
|
|
|
7.4
|
%
|
|
|
4.0
|
%
|
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 September 30, 2012,
the Company had capital ratios of 7.4%, 12.1% and 13.7%, respectively, all 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. The MOU also requires Bankshares to maintain a written plan for compliance with the capital adequacy rules applicable to all state member banks under
Federal Reserve Board Regulation H (12 CFR Part 208). These rules require all state member banks, including the Bank, to maintain adequate capital consistent with their risk profiles, which takes into account the volume of adversely classified
loans, the adequacy of the loan loss reserve, any planned asset growth and the nature and level of asset concentrations, among other things. Given this, it is the policy of federal banking regulators not to specify or confirm that a given capital
level will be adequate at a future point in time. As a result, federal banking regulators have not, and Bankshares cannot, identify a specific dollar amount of capital required under the MOU. However, Bankshares estimates that it would
need $7.5 million to $10 million in new capital to be compliant with applicable capital adequacy rules.
74
The ratio of net income to average assets and average equity and certain other ratios are as
follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September 30,
2012
|
|
|
Nine
Months Ended
September 30,
2012
|
|
|
Twelve
Months
Ended
December 31,
2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Average total assets
|
|
$
|
476,907
|
|
|
$
|
470,394
|
|
|
$
|
497,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shareholders equity
|
|
$
|
27,243
|
|
|
$
|
29,546
|
|
|
$
|
34,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(170
|
)
|
|
$
|
(1,522
|
)
|
|
$
|
(5,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (annualized)
|
|
|
0.14
|
%
|
|
|
0.43
|
%
|
|
|
1.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders equity (annualized)
|
|
|
2.48
|
%
|
|
|
6.88
|
%
|
|
|
17.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shareholders equity to average total assets
|
|
|
5.71
|
%
|
|
|
6.28
|
%
|
|
|
6.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As of September 30, 2012, commercial real estate loans were 43.6% and residential real estate loans were 32.1% of the total gross loan portfolio. In addition,
a substantial portion of our non-interest bearing deposits is generated by our title and escrow company clients. As of September 30, 2012, the non-interest bearing deposits were 35.1% of total deposits. The impact of the title and escrow
company 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.
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. 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.
As of
September 30, 2012, there are no material changes to the off-balance sheet arrangements disclosed in Bankshares Annual Report on Form 10-K for the year ended December 31, 2011.
75
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02, Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment. The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to
make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing
guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the assets fair value when testing an indefinite-lived intangible asset for impairment. The
amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of the new guidance did not have a material impact on Bankshares
consolidated financial statements.
In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805):
Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The amendments in this ASU clarify the applicable guidance for subsequently
measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of
indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new
indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The adoption of the new guidance will not have a
material impact on Bankshares consolidated financial statements
In January 2011, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2011-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2011-06 amends Subtopic 820-10 to clarify existing disclosures,
require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2011-06 is effective for interim and annual periods beginning after December 15, 2009, except
for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures became effective for fiscal years beginning after December 15, 2011 and for interim periods
within those fiscal years. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
In July 2011, the FASB issued ASU 2011-20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new
disclosure guidance significantly expands the existing requirements and will lead to greater transparency into 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, 2011. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward
and modification disclosures were required for periods beginning on or after December 15,
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2011. Bankshares has included the required disclosures in its consolidated financial statements and the disclosures did not have a material impact on Bankshares consolidated financial
statements.
In December 2011, the FASB issued ASU 2011-28, Intangible Goodwill and Other (Topic 350) When
to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.
For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU became effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
In December 2011, the FASB issued ASU 2011-29, 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 2011-29 became 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, 2011. Early adoption was permitted. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
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