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EX-32 - EX-32 - ALLIANCE BANKSHARES CORP | w82860exv32.htm |
EX-31.2 - EX-31.2 - ALLIANCE BANKSHARES CORP | w82860exv31w2.htm |
EX-31.1 - EX-31.1 - ALLIANCE BANKSHARES CORP | w82860exv31w1.htm |
EX-10.15 - EX-10.15 - ALLIANCE BANKSHARES CORP | w82860exv10w15.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-49976
ALLIANCE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA | 46-0488111 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
14200 Park Meadow Drive, Suite 200 South, Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(703) 814-7200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 12, 2011 the number of outstanding shares of registrants common stock, par value $4.00
per share was: 5,108,969.
ALLIANCE BANKSHARES CORPORATION
INDEX
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Alliance Bankshares Corporation
Consolidated Balance Sheets
March 31, 2011, December 31, 2010 and March 31, 2010
(Dollars in thousands except per share amounts)
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 49,635 | $ | 24,078 | $ | 49,855 | ||||||
Federal funds sold |
8,272 | 17,870 | 15,358 | |||||||||
Trading securities, at fair value |
605 | 2,075 | 3,430 | |||||||||
Investment securities available-for-sale, at fair value |
125,469 | 135,852 | 147,842 | |||||||||
Restricted stock, at cost |
6,374 | 6,355 | 6,712 | |||||||||
Loans, net of allowance for loan losses of $5,611, $5,281 and $5,737 |
313,996 | 327,029 | 341,629 | |||||||||
Premises and equipment, net |
1,579 | 1,584 | 1,932 | |||||||||
Other real estate owned |
4,533 | 4,627 | 8,370 | |||||||||
Accrued interest and other assets |
17,836 | 19,041 | 18,528 | |||||||||
TOTAL ASSETS |
$ | 528,299 | $ | 538,511 | $ | 593,656 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
LIABILITIES: |
||||||||||||
Non-interest bearing deposits |
$ | 120,687 | $ | 124,639 | $ | 120,317 | ||||||
Savings and NOW deposits |
53,233 | 56,569 | 56,216 | |||||||||
Money market deposits |
24,671 | 25,524 | 24,650 | |||||||||
Time deposits |
207,539 | 200,211 | 252,556 | |||||||||
Total deposits |
406,130 | 406,943 | 453,739 | |||||||||
Repurchase agreements, federal funds purchased and other borrowings |
33,992 | 43,153 | 27,293 | |||||||||
Federal Home Loan Bank advances ($26,057, $26,208 and $25,883 at fair value) |
41,057 | 41,208 | 65,883 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Other liabilities |
3,052 | 3,212 | 2,997 | |||||||||
Commitments and contingent liabilities |
| | | |||||||||
Total liabilities |
494,541 | 504,826 | 560,222 | |||||||||
STOCKHOLDERS EQUITY: |
||||||||||||
Common stock, $4 par value; 15,000,000 shares authorized;
5,108,219 shares issued and outstanding at March 31, 2011and
5,106,819 shares at December 31, 2010 and March 31, 2010, respectively |
20,433 | 20,427 | 20,427 | |||||||||
Capital surplus |
25,855 | 25,857 | 25,822 | |||||||||
Retained (deficit) |
(11,946 | ) | (12,311 | ) | (12,902 | ) | ||||||
Accumulated other comprehensive income (loss), net |
(584 | ) | (288 | ) | 87 | |||||||
Total stockholders equity |
33,758 | 33,685 | 33,434 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 528,299 | $ | 538,511 | $ | 593,656 | ||||||
See Notes to Consolidated Financial Statements.
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands, except for per share data)
2011 | 2010 | |||||||
INTEREST INCOME: |
||||||||
Loans |
$ | 4,545 | $ | 5,140 | ||||
Investment securities |
1,321 | 1,742 | ||||||
Trading securities |
33 | 88 | ||||||
Federal funds sold |
10 | 11 | ||||||
Total interest income |
5,909 | 6,981 | ||||||
INTEREST EXPENSE: |
||||||||
Savings and NOW deposits |
32 | 72 | ||||||
Time deposits |
997 | 1,666 | ||||||
Money market deposits |
49 | 79 | ||||||
Repurchase agreements, federal funds purchased and other borrowings |
88 | 124 | ||||||
FHLB advances |
259 | 280 | ||||||
Trust preferred capital notes |
92 | 85 | ||||||
Total interest expense |
1,517 | 2,306 | ||||||
Net interest income |
4,392 | 4,675 | ||||||
Provision for loan losses |
306 | 275 | ||||||
Net interest income after provision for loan losses |
4,086 | 4,400 | ||||||
OTHER INCOME: |
||||||||
Deposit account service charges |
37 | 78 | ||||||
Net gain on sale of available-for-sale securities |
79 | 256 | ||||||
Trading activity and fair value adjustments |
24 | (190 | ) | |||||
Other operating income |
44 | 117 | ||||||
Total other income |
184 | 261 | ||||||
OTHER EXPENSES: |
||||||||
Salaries and employee benefits |
1,392 | 2,003 | ||||||
Occupancy expense |
561 | 628 | ||||||
Equipment expense |
168 | 194 | ||||||
Other real estate owned expense |
35 | 43 | ||||||
FDIC assessments |
350 | 363 | ||||||
Operating expenses |
1,217 | 1,316 | ||||||
Total other expenses |
3,723 | 4,547 | ||||||
Income before income taxes |
547 | 114 | ||||||
Income tax expense |
182 | | ||||||
NET INCOME |
$ | 365 | $ | 114 | ||||
Net income per common share, basic |
$ | 0.07 | $ | 0.02 | ||||
Net income per common share, diluted |
$ | 0.07 | $ | 0.02 | ||||
Weighted average number of shares, basic |
5,108,048 | 5,106,819 | ||||||
Weighted average number of shares, diluted |
5,123,029 | 5,108,085 | ||||||
See Notes to Consolidated Financial Statements.
2
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
Accumulated | Total | |||||||||||||||||||||||
Other | Stock- | |||||||||||||||||||||||
Common | Capital | Retained | Comprehensive | Comprehensive | holders | |||||||||||||||||||
Stock | Surplus | (Deficit) | Income (Loss) | Income (Loss) | Equity | |||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
$ | 20,427 | $ | 25,835 | $ | (13,016 | ) | $ | (112 | ) | $ | 33,134 | ||||||||||||
COMPREHENSIVE INCOME: |
||||||||||||||||||||||||
Net income |
| | 114 | | $ | 114 | 114 | |||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains on securities
available-for-sale, net of tax of $190 |
| | | | 368 | | ||||||||||||||||||
Less: reclassification adjustment, net of
income taxes of $(87) |
| | | | (169 | ) | | |||||||||||||||||
Other
comprehensive income, net of tax |
| | | 199 | 199 | 199 | ||||||||||||||||||
Total comprehensive income |
| | | | $ | 313 | | |||||||||||||||||
Stock-based compensation expense |
| (13 | ) | | | (13 | ) | |||||||||||||||||
BALANCE, March 31, 2010 |
$ | 20,427 | $ | 25,822 | $ | (12,902 | ) | $ | 87 | $ | 33,434 | |||||||||||||
BALANCE, DECEMBER 31, 2010 |
$ | 20,427 | $ | 25,857 | $ | (12,311 | ) | $ | (288 | ) | $ | 33,685 | ||||||||||||
COMPREHENSIVE INCOME: |
||||||||||||||||||||||||
Net income |
| | 365 | | $ | 365 | 365 | |||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding losses on securities
available-for-sale, net of tax of $(125) |
| | | | (244 | ) | | |||||||||||||||||
Less: reclassification adjustment, net of
income taxes of $(27) |
| | | | (52 | ) | | |||||||||||||||||
Other
comprehensive loss, net of tax |
| | | (296 | ) | (296 | ) | (296 | ) | |||||||||||||||
Total comprehensive income |
| | | | $ | 69 | | |||||||||||||||||
Exercise of stock options |
6 | (2 | ) | | | 4 | ||||||||||||||||||
BALANCE, March 31, 2011 |
$ | 20,433 | $ | 25,855 | $ | (11,946 | ) | $ | (584 | ) | $ | 33,758 | ||||||||||||
See Notes to Consolidated Financial Statements.
3
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 365 | $ | 114 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation, amortization and accretion |
371 | 256 | ||||||
Disposal of fixed assets |
15 | | ||||||
Provision for loan losses |
306 | 275 | ||||||
Losses and valuation adjustments on other real estate owned |
12 | | ||||||
Proceeds from sale of loans held for sale |
| 1,983 | ||||||
Stock-based compensation expense |
| (13 | ) | |||||
Net (gain) on sale of securities available-for-sale |
(79 | ) | (256 | ) | ||||
Trading activity and fair value adjustments |
(24 | ) | 190 | |||||
Changes in assets and liabilities affecting operations: |
||||||||
Accrued interest and other assets |
833 | 3,644 | ||||||
Other liabilities |
(160 | ) | 66 | |||||
Net cash provided by operating activities |
1,639 | 6,259 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Net change in federal funds sold |
9,598 | (12,388 | ) | |||||
Purchase of securities available-for-sale |
(9,756 | ) | (21,054 | ) | ||||
Proceeds from sale/calls of securities available-for-sale |
15,264 | 14,490 | ||||||
Paydowns on securities available-for-sale |
4,293 | 4,219 | ||||||
Net change in trading securities |
1,867 | 3,920 | ||||||
Net change in restricted stock |
(19 | ) | (394 | ) | ||||
Net change in loan portfolio |
12,517 | 11,247 | ||||||
Proceeds from sale of other real estate owned |
292 | 115 | ||||||
Purchase of premises and equipment |
(168 | ) | (64 | ) | ||||
Net cash provided by investing activities |
33,888 | 91 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net change in cash realized from (expended on): |
||||||||
Non-interest bearing deposits |
(3,952 | ) | 27,471 | |||||
Savings and NOW deposits |
(3,336 | ) | 2,599 | |||||
Money market deposits |
(853 | ) | 2,188 | |||||
Time deposits |
7,328 | (10,427 | ) | |||||
Repurchase agreements, federal funds purchased and other borrowings |
(9,161 | ) | (19,997 | ) | ||||
FHLB long term advances issued |
| 15,000 | ||||||
Proceeds from exercise of stock options |
4 | | ||||||
Net cash provided by (used in) financing activities |
(9,970 | ) | 16,834 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
25,557 | 23,184 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
24,078 | 26,671 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 49,635 | $ | 49,855 | ||||
See Notes to Consolidated Financial Statements.
4
Table of Contents
Notes to Consolidated Financial Statements
1. General
Alliance Bankshares Corporation (Bankshares or Company) is a bank holding company that conducts
substantially all its operations through its subsidiaries. Alliance Bank Corporation (the Bank) is
state-chartered and a member of the Federal Reserve System. The Bank places special emphasis on
serving the needs of individuals, small and medium size businesses and professional concerns in the
greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia submarket.
In March 2001, the Bank formed Alliance Home Funding, LLC (AHF). AHF is a wholly-owned mortgage
banking subsidiary of the Bank and originated residential mortgages for subsequent sale. AHF did
not maintain the servicing rights on mortgages sold. On December 27, 2006, Bankshares announced it
would no longer offer mortgage banking operations via AHF. The company is now inactive. Alliance
Bank Mortgage Division (ABMD) was created in 2007 as a division within the Bank. From time to
time, ABMD may offer mortgage banking products and services to Bank clients and some additional
third party clients. In 2010 and 2011, ABMD had minimal operational activity. As of March 31,
2011, this division within the Bank is inactive.
On June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a
subsidiary of Bankshares was formed for the purpose of issuing Bankshares trust preferred debt.
The accompanying unaudited consolidated financial statements reflect the financial condition and
results of operations of Bankshares on a consolidated basis and have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) for interim
financial reporting. All significant intercompany balances and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain
all adjustments and reclassifications of a normal and recurring nature considered necessary to
present fairly Bankshares financial position as of March 31, 2011, December 31, 2010 and March 31,
2010, the results of operations for the three month period ended March 31, 2011 and 2010, and cash
flows and changes in stockholders equity for the three month period ended March 31, 2011 and 2010.
The notes included herein should be read in conjunction with the financial statements and
accompanying notes included in Bankshares Annual Report on Form 10-K for the year ended December
31, 2010 filed with the Securities and Exchange Commission (the SEC).
Operating results for the three month periods ended March 31, 2011 and 2010 are not necessarily
indicative of full year financial results.
Accounting Standards Codification (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 fair
5
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value of an award on the grant date and
is recognized over the service period, which is usually the vesting period.
As of March 31, 2011, there was $126 thousand of total unrecognized compensation expense related to
stock options, which will be recognized over the remaining requisite service period which is
estimated to be five years or less.
Stock option compensation expense is the estimated fair value of options granted amortized on a
straight-line basis over the requisite service period for each separately vesting portion of the
award. The fair value of each grant is estimated at the grant date using the Black-Scholes
option-pricing model. There were no grants of stock options for the first three months of 2011.
Stock option activity for the three months ended March 31, 2011 is summarized below:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value | |||||||||||||
Shares | Price | Life (in years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2011 |
500,210 | $ | 10.26 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(1,400 | ) | 2.32 | |||||||||||||
Forfeited |
(70,625 | ) | 12.18 | |||||||||||||
Expired |
(10,350 | ) | 4.25 | |||||||||||||
Outstanding at March 31, 2011 |
420,635 | $ | 10.11 | 5.0 | $ | | ||||||||||
Exercisable at March 31, 2011 |
308,835 | $ | 11.92 | 5.0 | $ | | ||||||||||
2. Fair Value Measurements
Bankshares uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. In accordance with the Fair Value
Measurements and Disclosures topic of Financial Accounting Standards Board (FASB), ASC 820-10, the
fair value of a financial instrument is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Fair value is best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for Bankshares various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the assumptions used,
6
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including the discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price
in an orderly transaction (that is, not a forced liquidation or distressed sale) between market
participants at the measurement date under current market conditions. If there has been a
significant decrease in the volume and level of activity for the asset or liability, a change in
valuation technique or the use of multiple valuation techniques may be appropriate. In such
instances, determining the price at which willing market participants would transact at the
measurement date under current market conditions depends on the facts and circumstances and
requires the use of significant judgment. The fair value is a reasonable point within the range
that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, Bankshares groups its financial assets and liabilities generally
measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value.
| Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. |
| Level 2 Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. |
| Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
A financial instruments categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
The following describes the valuation techniques used by Bankshares to measure certain financial
assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Trading and Available-for-Sale Securities Trading and available-for-sale securities are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when
available (Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party
vendors compile prices from various sources and may determine the fair value of identical or
similar securities by using pricing models
7
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that consider observable market data (Level 2).
Financial assets and liabilities that are traded infrequently have values based on prices or
valuation techniques that require inputs that are both unobservable and significant to the overall
fair value measurement. These inputs reflect managements own view about the assumptions that
market participants would use in pricing the asset or liability (Level 3). As a result, some of our
securities are hand priced using customary spreads over similar maturity treasury instruments.
FHLB Advances and Time Deposits Under the fair value accounting standards, certain liabilities
can be carried at fair value. The designated instruments are recorded on a fair value
basis at the time of issuance. As of March 31, 2011, Bankshares had one wholesale liability as a
fair value instrument: a long-term Federal Home Loan Bank (FHLB) advance.
Wholesale instruments are designated as either Level 2 or Level 3 under the ASC 820-10 fair value
hierarchy. Level 2 liabilities are based on quoted market prices using independent valuation
techniques for similar instruments with like characteristics. This information is deemed to be
observable market data. Level 3 liabilities are financial instruments that are difficult to value
due to dysfunctional, distressed markets or lack of actual trading volume. Management gathers
certain data to value the instrument. Data include swap curves, option adjusted spreads and
discounted cash flows. These data points are modeled to reflect the fair value of the liability.
The following table presents the balances of financial assets and liabilities measured at fair
value on a recurring basis as of March 31, 2011 and December 31, 2010:
Fair Value Measurements at March 31, 2011 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Quoted | Significant | Significant | Changes in | |||||||||||||||||
Prices in | Other | Other | Fair Value | |||||||||||||||||
Active | Observable | Unobservable | Included in | |||||||||||||||||
Fair | Markets | Inputs | Inputs | Current | ||||||||||||||||
Description | Value | (Level 1) | (Level 2) | (Level 3) | Quarter | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Trading securities PCMOs |
$ | 605 | $ | | $ | | $ | 605 | $ | (127 | ) | |||||||||
Available-for-sale securities: |
||||||||||||||||||||
U.S. government corporations and agencies |
42,972 | | 42,972 | | | |||||||||||||||
U.S. government CMOs |
20,098 | | 20,098 | | | |||||||||||||||
U.S. government agency MBS |
19,601 | | 19,601 | | | |||||||||||||||
PCMOs |
13,715 | | | 13,715 | | |||||||||||||||
Municipal securities |
29,083 | | 29,083 | | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
FHLB advances |
26,057 | | | 26,057 | 151 | |||||||||||||||
$ | 24 | |||||||||||||||||||
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Fair Value Measurements at December 31, 2010 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Quoted | Significant | Significant | Changes in | |||||||||||||||||
Prices in | Other | Other | Fair Value | |||||||||||||||||
Active | Observable | Unobservable | Included in | |||||||||||||||||
Fair | Markets | Inputs | Inputs | 2010 | ||||||||||||||||
Description | Value | (Level 1) | (Level 2) | (Level 3) | Results | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Trading securities PCMOs |
$ | 2,075 | $ | | $ | | $ | 2,075 | $ | (87 | ) | |||||||||
Available-for-sale securities: |
||||||||||||||||||||
U.S. government corporations and
agencies |
51,763 | | 25,773 | 25,990 | | |||||||||||||||
U.S. government CMOs |
22,576 | | 22,576 | | | |||||||||||||||
U.S. government agency MBS |
14,805 | | 14,805 | | | |||||||||||||||
PCMOs |
17,621 | | | 17,621 | | |||||||||||||||
Municipal securities |
29,087 | | 29,087 | | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Brokered certificate of deposit |
| | | | 23 | |||||||||||||||
FHLB advances |
26,208 | | | 26,208 | (447 | ) | ||||||||||||||
$ | (511 | ) | ||||||||||||||||||
The following table presents the activity in Level 3 fair value measurements for the three
months ended March 31, 2011:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Significant Unobservable Inputs
(Level 3)
(dollars in thousands) | ||||||||||||
Available for | ||||||||||||
Trading | FHLB | Sale | ||||||||||
Securities | Advances | Securities | ||||||||||
Beginning balance, January 1, 2011 |
$ | 2,075 | $ | 26,208 | $ | 43,611 | ||||||
Transfers into (out of) Level 3 |
| | (25,990 | ) | ||||||||
Sales, maturities or calls |
(1,343 | ) | | (3,750 | ) | |||||||
Realized gains (losses) on assets |
(127 | ) | | 59 | ||||||||
Realized (gains) losses on liabilities |
| (151 | ) | | ||||||||
Unrealized gains (losses) on assets |
| | (215 | ) | ||||||||
Ending balance, March 31, 2011 |
$ | 605 | $ | 26,057 | $ | 13,715 | ||||||
For the assets and liabilities selected for fair value accounting, management obtained pricing
on each instrument from independent third parties who relied upon pricing
9
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models using widely
available and industry standard yield curves. Although there are positive signs in the economy,
the market is continuing to act in an unusual manner; therefore, management is continuing to
monitor certain instruments using additional inputs as well as implementing its strategy to reduce
the fair value portfolio. Changes in fair values associated with fluctuations in market values
reported above are reported as trading activity and fair value adjustments on the Consolidated
Statements of Income.
Certain financial and nonfinancial assets are measured at fair value on a nonrecurring basis in
accordance with GAAP. Adjustments to the fair value of these assets usually result from the
application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by Bankshares to measure certain financial
and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans. Loans are designated as impaired when, in the judgment of management based on
current information and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The measurement of loss associated with impaired
loans can be based on either the observable market price of the loan or the fair value of the
underlying collateral, if any. Collateral may be in the form of real estate or business assets
including equipment, inventory, and accounts receivable. The vast majority of the collateral is
real estate. The value of real estate collateral is determined utilizing an income or market
valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of
Bankshares using observable market data (Level 2). However, if the collateral is a house or
building in the process of construction or if an appraisal of the real estate property is over two
years old, then the fair value is considered to be Level 3. Impaired loans allocated to the
allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value
adjustments are recorded in the period incurred as provision for loan losses on the Consolidated
Statements of Income.
Other Real Estate Owned (OREO). OREO is measured at fair value using an income or market valuation
approach based on an appraisal conducted by an independent, licensed appraiser outside of
Bankshares using observable market data (Level 2). However, if an appraisal of the real estate
property is over two years old, then the fair value is considered to be Level 3.
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The following table summarizes Bankshares assets that were measured at fair value on a
nonrecurring basis during the period.
Carrying Value at March 31, 2011 | ||||||||||||||||
Quoted | Significant | Significant | ||||||||||||||
Prices | Other | Other | ||||||||||||||
In Active | Observable | Unobservable | ||||||||||||||
Carrying | Markets | Inputs | Inputs | |||||||||||||
Description | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans, net of valuation allowance |
$ | 7,306 | $ | | $ | 7,306 | $ | | ||||||||
OREO |
$ | 4,533 | $ | | $ | 4,533 | $ | |
Carrying Value at December 31, 2010 | ||||||||||||||||
Quoted | Significant | Significant | ||||||||||||||
Prices | Other | Other | ||||||||||||||
In Active | Observable | Unobservable | ||||||||||||||
Carrying | Markets | Inputs | Inputs | |||||||||||||
Description | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans, net of valuation allowance |
$ | 3,124 | $ | | $ | 3,124 | $ | | ||||||||
OREO |
$ | 4,627 | $ | | $ | 4,627 | $ | |
The following describes the valuation techniques used by Bankshares to measure certain
financial assets and liabilities not previously described in this note that are not recorded at
fair value on a recurring basis in the financial statements:
Cash, Due from Banks, and Federal Funds Sold
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four
family residential), credit card loans, and other consumer loans are based on quoted market prices
of similar loans sold in conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values for other loans
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(e.g., commercial real estate and investment
property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable.
Restricted Stock
Restricted investments in correspondent banks are carried at cost based on the underlying
redemption provisions of the instruments and therefore are not included in the fair value
disclosures.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, statement
savings, and certain types of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other
short-term borrowings maturing within ninety days approximate their fair values. Fair values of
other short-term borrowings are estimated using discounted cash flow analyses based on Bankshares
current incremental borrowing rates for similar types of borrowing arrangements.
Trust Preferred Capital Notes
The fair value of Bankshares Trust Preferred Capital Notes, which is discussed in Note 9, is
estimated using discounted cash flow analyses based on Bankshares current incremental borrowing
rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the committed rates. The
fair value of standby letters of credit is based on fees
12
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currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. Fair value of off- balance
sheet financial Commitments are considered immaterial, and are
therefore not included in the table below.
Fair Value of Financial Instruments
The following table reflects the fair value of financial instruments:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 49,635 | $ | 49,635 | $ | 24,078 | $ | 24,078 | ||||||||
Federal funds sold |
8,272 | 8,272 | 17,870 | 17,870 | ||||||||||||
Trading securities |
605 | 605 | 2,075 | 2,075 | ||||||||||||
Available-for-sale securities |
125,469 | 125,469 | 135,852 | 135,852 | ||||||||||||
Loans, net |
313,996 | 311,512 | 327,029 | 324,164 | ||||||||||||
Accrued interest receivable |
2,366 | 2,366 | 2,758 | 2,758 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Noninterest-bearing deposits |
$ | 120,687 | $ | 120,687 | $ | 124,639 | $ | 124,639 | ||||||||
Interest-bearing deposits |
285,443 | 264,850 | 282,304 | 264,176 | ||||||||||||
Short-term borrowings |
33,992 | 33,992 | 43,153 | 43,148 | ||||||||||||
FHLB advances |
15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
FHLB advances, at fair value |
26,057 | 26,057 | 26,208 | 26,208 | ||||||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | 10,310 | ||||||||||||
Accrued interest payable |
1,058 | 1,058 | 976 | 976 |
3. Trading Securities
The following table reflects trading securities accounted for on a fair value basis and the
effective yield of the instruments as of the dates indicated:
March 31, | December 31, | March 31, | ||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||
Fair | Fair | Fair | ||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
PCMOs |
605 | 5.43 | % | 2,075 | 5.32 | % | 3,430 | 5.36 | % | |||||||||||||||
Total trading securities |
$ | 605 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 3,430 | 5.26 | % | ||||||||||||
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4. Investment Securities
The amortized cost, unrealized holding gains and losses, and the fair value of investment
securities at March 31, 2011 are summarized as follows:
March 31, 2011 | ||||||||||||||||
Amortized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. government corporations
and agencies |
$ | 43,032 | $ | 524 | $ | (584 | ) | $ | 42,972 | |||||||
U.S. government agency CMOs |
19,703 | 555 | (160 | ) | 20,098 | |||||||||||
U.S. government agency MBS |
19,463 | 159 | (21 | ) | 19,601 | |||||||||||
PCMOs |
13,489 | 265 | (39 | ) | 13,715 | |||||||||||
Municipal securities |
30,667 | 233 | (1,817 | ) | 29,083 | |||||||||||
Total available-for-sale securities |
$ | 126,354 | $ | 1,736 | $ | (2,621 | ) | $ | 125,469 | |||||||
The amortized cost, unrealized holding gains and losses, and the fair value of investment
securities at December 31, 2010 are summarized as follows:
December 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. government corporations
and agencies |
$ | 51,684 | $ | 657 | $ | (578 | ) | $ | 51,763 | |||||||
U.S. government agency CMOs |
22,185 | 596 | (205 | ) | 22,576 | |||||||||||
U.S. government agency MBS |
14,587 | 218 | | 14,805 | ||||||||||||
PCMOs |
17,180 | 468 | (27 | ) | 17,621 | |||||||||||
Municipal securities |
30,653 | 201 | (1,767 | ) | 29,087 | |||||||||||
Total available-for-sale securities |
$ | 136,289 | $ | 2,140 | $ | (2,577 | ) | $ | 135,852 | |||||||
There were no held-to-maturity investments at March 31, 2011 or December 31, 2010.
The following tables present the aggregate amount of unrealized loss in investment securities as of
March 31, 2011 and December 31, 2010. The aggregate amount is determined by summation of all the
related securities that have a continuous loss at period end, and the length of time that the loss
has been unrealized is shown by terms of less than 12 months and 12 months or more. The fair
value is the approximate market value as of the period end.
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March 31, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. government corporations
and agencies |
$ | 27,229 | $ | (584 | ) | $ | | $ | | 27,229 | $ | (584 | ) | |||||||||||
U.S. government agency CMOs |
7,282 | (160 | ) | | | 7,282 | (160 | ) | ||||||||||||||||
U.S. government agency MBS |
5,595 | (21 | ) | | | 5,595 | (21 | ) | ||||||||||||||||
PCMOs |
2,629 | (39 | ) | | | 2,629 | (39 | ) | ||||||||||||||||
Municipal securities |
19,877 | (1,092 | ) | 1,917 | (725 | ) | 21,794 | (1,817 | ) | |||||||||||||||
Total temporarily impaired
investment securities |
$ | 62,612 | $ | (1,896 | ) | $ | 1,917 | $ | (725 | ) | $ | 64,529 | $ | (2,621 | ) | |||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. government corporations
and agencies |
$ | 25,195 | $ | (578 | ) | $ | | $ | | $ | 25,195 | $ | (578 | ) | ||||||||||
U.S. government agency CMOs |
7,252 | (205 | ) | | | 7,252 | (205 | ) | ||||||||||||||||
PCMOs |
4,103 | (27 | ) | | | 4,103 | (27 | ) | ||||||||||||||||
Municipal securities |
19,862 | (1,112 | ) | 1,966 | (655 | ) | 21,828 | (1,767 | ) | |||||||||||||||
Total temporarily impaired
investment securities |
$ | 56,412 | $ | (1,922 | ) | $ | 1,966 | $ | (655 | ) | $ | 58,378 | $ | (2,577 | ) | |||||||||
Bankshares investment security portfolio is primarily comprised of fixed rate bonds, whose
prices move inversely with interest rates. At the end of any accounting period, the portfolio may
have both unrealized gains and losses. Unrealized losses within Bankshares portfolio typically
occur as market interest rates rise. Such unrealized losses are considered temporary in nature.
Under ASC 320-10-35, Debt and Equity Securities Recognition and Presentation of
Other-Than-Temporary Impairments, an impairment is considered other than temporary if any of the
following conditions are met: Bankshares intends to sell the security, it is more likely than not
that Bankshares will be required to sell the security before recovery of its amortized cost basis,
or Bankshares does not expect to recover the securitys entire amortized cost basis (even if
Bankshares does not intend to sell). In the event that a security would suffer impairment for a
reason that was
15
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other than temporary, Bankshares would be expected to write down the securitys
value to its new fair value, and the amount of the write-down would be included in earnings as a
realized loss. As of March 31, 2011 and December 31, 2010, management does not consider any of the
unrealized losses to be other-than-temporarily impaired and no impairment charges have been
recorded.
There are a total of 56 investment securities totaling $64.5 million that have an unrealized loss
and are considered temporarily impaired as of March 31, 2011. Management believes the unrealized
losses noted in the table above are a result of current market conditions, interest rates, and do
not reflect on the ability of the issuers to repay the obligations. Approximately $27.2 million or
42.2% of the investment securities with an unrealized loss are backed by U.S. Government Agencies
or Corporations and other forms of underlying collateral. The PCMOs amounting to $2.6 million with
an unrealized loss are all rated AAA by at least one national rating service. The municipalities
have taxing authority and the ability to support their debt. Bankshares does not intend to sell
the investments and it is not likely that Bankshares will be required to sell the investments
before recovery of the unrealized losses.
Bankshares investment in Federal Home Loan Bank (FHLB) stock totaled $5.0 million at March 31,
2011. FHLB stock is generally viewed as a long term investment and as a restricted investment
security which is carried at cost, because there is no market for the stock other than the FHLBs or
member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on
ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Despite the FHLBs temporary suspension of repurchases of excess capital stock that started in 2009
and ended in 2010, and because the FHLB has shown consistent profitability during 2010 and the
first quarter of 2011, Bankshares does not consider this investment to be other than temporarily
impaired as of March 31, 2010 and no impairment has been recognized. FHLB stock is included in
restricted stock on the Consolidated Balance Sheets.
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5. Loans
The following table summarizes the composition of the loan portfolio by dollar amount and
percentage as of the dates indicated:
March 31, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Real estate: |
||||||||||||||||
Residential real estate |
$ | 107,514 | 33.6 | % | $ | 110,862 | 33.4 | % | ||||||||
Commercial real estate |
139,820 | 43.8 | % | 146,222 | 44.0 | % | ||||||||||
Construction |
41,854 | 13.1 | % | 43,017 | 12.9 | % | ||||||||||
Total real estate |
289,188 | 90.5 | % | 300,101 | 90.3 | % | ||||||||||
Commercial and industrial |
26,014 | 8.1 | % | 27,517 | 8.3 | % | ||||||||||
Consumer |
4,405 | 1.4 | % | 4,692 | 1.4 | % | ||||||||||
Gross loans |
319,607 | 100.0 | % | 332,310 | 100.0 | % | ||||||||||
Less: allowance for loan losses |
(5,611 | ) | (5,281 | ) | ||||||||||||
Net loans |
$ | 313,996 | $ | 327,029 | ||||||||||||
As of March 31, 2011 and December 31, 2010, there were $190 thousand and $894 thousand,
respectively, in checking account overdrafts that were reclassified on the Consolidated Balance
Sheets as loans.
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The following tables represent the credit quality of loans by class:
Credit Quality Loans By Class | ||||||||||||||||||||||||||||
As Of March 31, 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES | Pass | Watch | Mention | Substandard | Doubtful | Loss | Loans | |||||||||||||||||||||
Risk Rating Number | 1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
Commercial and industrial |
$ | 22,765 | $ | 875 | $ | 727 | $ | 1,647 | $ | | $ | | $ | 26,014 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
67,631 | 1,242 | 791 | 1,699 | 443 | | 71,806 | |||||||||||||||||||||
Non-owner occupied |
59,545 | 2,614 | 3,900 | 1,955 | | | 68,014 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
17,339 | 181 | 683 | 3,260 | 1,499 | | 22,962 | |||||||||||||||||||||
Commercial |
7,507 | 1,658 | 3,108 | 6,619 | | | 18,892 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
29,270 | 769 | | | | | 30,039 | |||||||||||||||||||||
Single family |
60,392 | 1,819 | 3,987 | 6,554 | 686 | | 73,438 | |||||||||||||||||||||
Multifamily |
4,037 | | | | | | 4,037 | |||||||||||||||||||||
Consumer non real estate |
4,216 | 189 | | | | | 4,405 | |||||||||||||||||||||
Totals |
$ | 272,702 | $ | 9,347 | $ | 13,196 | $ | 21,734 | $ | 2,628 | $ | | $ | 319,607 | ||||||||||||||
Credit Quality Loan By Class | ||||||||||||||||||||||||||||
As Of December 31, 2010 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES | Pass | Watch | Mention | Substandard | Doubtful | Loss | Loans | |||||||||||||||||||||
Risk Rating Number1 | 1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
Commercial and industrial |
$ | 24,539 | $ | 437 | $ | 734 | $ | 1,807 | $ | | $ | | $ | 27,517 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
73,834 | 634 | 2,074 | 3,273 | | | 79,815 | |||||||||||||||||||||
Non-owner occupied |
59,757 | 2,732 | 3,918 | | | | 66,407 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
17,483 | 1,553 | | 3,300 | 872 | | 23,208 | |||||||||||||||||||||
Commercial |
7,723 | 1,633 | 1,492 | 8,961 | | | 19,809 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
43,266 | 958 | 348 | 397 | | | 44,969 | |||||||||||||||||||||
Single family |
45,520 | 6,627 | 3,312 | 5,846 | | | 61,305 | |||||||||||||||||||||
Multifamily |
4,588 | | | | | | 4,588 | |||||||||||||||||||||
Consumer non real estate |
4,501 | | | 191 | | | 4,692 | |||||||||||||||||||||
Totals |
$ | 281,211 | $ | 14,574 | $ | 11,878 | $ | 23,775 | $ | 872 | $ | | $ | 332,310 | ||||||||||||||
1 | Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets. |
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The following tables sets forth aging and non-accrual loans by class:
Aging and Nonaccrual Loans by Class | ||||||||||||||||||||||||||||
As of March 31, 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
90-days | ||||||||||||||||||||||||||||
90 Days or | Past Due | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | More Past | Total Past | and Still | Nonaccrual | |||||||||||||||||||||||
Past Due | Past Due | Due | Due | Current | Accruing | Loans | ||||||||||||||||||||||
Commerical & Industrial |
$ | 1,234 | $ | | $ | | $ | 1,234 | $ | 24,780 | $ | | $ | 967 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
1,699 | 443 | | 2,142 | 69,664 | | 2,142 | |||||||||||||||||||||
Non-owner occupied |
104 | | | 104 | 67,910 | | 104 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
644 | 411 | 3,651 | 4,706 | 18,256 | | 4,062 | |||||||||||||||||||||
Commercial |
5,622 | | | 5,622 | 13,270 | | 2,110 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
589 | | 44 | 633 | 29,406 | | 44 | |||||||||||||||||||||
Single Family |
2,272 | 313 | 2,145 | 4,730 | 68,708 | | 2,145 | |||||||||||||||||||||
Multifamily |
| | | | 4,037 | | | |||||||||||||||||||||
Consumer-Non real estate |
| | | | 4,405 | | | |||||||||||||||||||||
Total loans |
$ | 12,164 | $ | 1,167 | $ | 5,840 | $ | 19,171 | $ | 300,436 | $ | | $ | 11,574 | ||||||||||||||
Aging and Nonaccrual Loans By Class | ||||||||||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
90-days | ||||||||||||||||||||||||||||
30-59 | 60-89 | 90 Days or | Past Due | |||||||||||||||||||||||||
Days Past | Days Past | More Past | Total Past | and Still | Nonaccrual | |||||||||||||||||||||||
Due | Due | Due | Due | Current | Accruing | Loans | ||||||||||||||||||||||
Commerical and industrial |
$ | 718 | $ | | $ | | $ | 718 | $ | 26,799 | $ | | $ | | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
1,992 | | 291 | 2,283 | 77,532 | | 291 | |||||||||||||||||||||
Non-owner occupied |
328 | | | 328 | 66,079 | | | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
2,585 | | 1,128 | 3,713 | 19,495 | 256 | 872 | |||||||||||||||||||||
Commercial |
1,859 | 1,917 | | 3,776 | 16,033 | | | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
427 | | | 427 | 44,541 | | | |||||||||||||||||||||
Single Family |
5,608 | | 478 | 6,086 | 55,220 | | 740 | |||||||||||||||||||||
Multifamily |
| | | | 4,588 | | | |||||||||||||||||||||
Consumer -non real estate |
| 91 | | 91 | 4,601 | | | |||||||||||||||||||||
Total loans |
$ | 13,517 | $ | 2,008 | $ | 1,897 | $ | 17,422 | $ | 314,888 | $ | 256 | $ | 1,903 | ||||||||||||||
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6. Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for the periods
presented:
Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of
period |
$ | 5,281 | $ | 5,619 | $ | 5,619 | ||||||
Provision for loan losses |
306 | 1,753 | 275 | |||||||||
Loans charged off |
(206 | ) | (2,239 | ) | (165 | ) | ||||||
Recoveries of loans
charged off |
230 | 148 | 8 | |||||||||
Net (charge-offs)
recoveries |
24 | (2,091 | ) | (157 | ) | |||||||
Balance, end of period |
$ | 5,611 | $ | 5,281 | $ | 5,737 | ||||||
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The following table represents the allocation of allowance for loan losses by segment:
Allowance for Loan Losses | ||||||||||||||||||||||||
As of March 31, 2011 | ||||||||||||||||||||||||
Commercial | (dollars in thousands) | |||||||||||||||||||||||
and | Commercial | Construction | Residential | |||||||||||||||||||||
Industrial | Real Estate | Land | Real Estate | Consumer | Total | |||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||
Beginning Balance: |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
Charge-offs |
(10 | ) | (80 | ) | | (116 | ) | | (206 | ) | ||||||||||||||
Recoveries |
116 | 4 | | 109 | 1 | 230 | ||||||||||||||||||
Provision |
(215 | ) | (13 | ) | 1,219 | (668 | ) | (17 | ) | 306 | ||||||||||||||
Ending Balance: |
$ | 354 | $ | 1,331 | $ | 1,919 | $ | 1,938 | $ | 69 | $ | 5,611 | ||||||||||||
Individually evaluated for impairment |
$ | | $ | 77 | $ | 1,424 | $ | 279 | $ | | $ | 1,780 | ||||||||||||
Collectively evaluated for impairment |
$ | 354 | $ | 1,254 | $ | 495 | $ | 1,659 | $ | 69 | $ | 3,831 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 26,014 | $ | 139,820 | $ | 41,854 | $ | 107,514 | $ | 4,405 | $ | 319,607 | ||||||||||||
Individually evaluated for impairment |
$ | 967 | $ | 2,142 | $ | 6,172 | $ | 2,293 | $ | | $ | 11,574 | ||||||||||||
Collectively evaluated for impairment |
$ | 25,047 | $ | 137,678 | $ | 35,682 | $ | 105,221 | $ | 4,405 | $ | 308,033 | ||||||||||||
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Allowance for Loan Losses | ||||||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial | Commercial | Construction | Residential | |||||||||||||||||||||
and Industrial | Real Estate | Land | Real Estate | Consumer | Total | |||||||||||||||||||
Ending Balance: |
||||||||||||||||||||||||
Allowance for Loan Losses |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
Individually evaluated for impairment |
$ | | $ | 77 | $ | 696 | $ | 100 | $ | | $ | 873 | ||||||||||||
Collectively evaluated for impairment |
$ | 463 | $ | 1,343 | $ | 4 | $ | 2,513 | $ | 85 | $ | 4,408 | ||||||||||||
Ending Balance: |
||||||||||||||||||||||||
Loans |
$ | 27,517 | $ | 146,222 | $ | 43,017 | $ | 110,862 | $ | 4,692 | $ | 332,310 | ||||||||||||
Individually evaluated for impairment |
$ | | $ | 291 | $ | 3,272 | $ | 740 | $ | | $ | 4,303 | ||||||||||||
Collectively evaluated for impairment |
$ | 27,517 | $ | 145,931 | $ | 39,745 | $ | 110,122 | $ | 4,692 | $ | 328,007 | ||||||||||||
Impaired loans and nonaccrual loans are summarized as follows as of the dates indicated:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(dollars in thousands) | ||||||||
Impaired loans without a valuation allowance |
$ | 2,997 | $ | 306 | ||||
Impaired loans with a valuation allowance |
8,577 | 3,997 | ||||||
Total impaired loans |
$ | 11,574 | $ | 4,303 | ||||
Valuation allowance related to impaired loans |
$ | 1,780 | $ | 873 | ||||
Total loans past due 90 days and still accruing |
$ | | $ | 256 | ||||
Average investment in impaired loans |
$ | 11,760 | $ | 4,400 | ||||
Interest income recognized on impaired loans |
$ | 61 | $ | 226 | ||||
Interest income recognized on a cash basis on
impaired loans |
$ | 61 | $ | 226 | ||||
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The following tables represent specific allocation for impaired loans by class:
Specific Allocation for Impaired Loans By Class | ||||||||||||||||||||
As of March 31, 2011 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
With no related allowance: |
||||||||||||||||||||
Commercial & Industrial |
$ | 968 | $ | 968 | $ | | $ | 968 | $ | 14 | ||||||||||
Commercial Real Estate |
||||||||||||||||||||
Owner occupied |
1,699 | 1,699 | | 1,706 | 20 | |||||||||||||||
Non-owner occupied |
104 | 104 | | 104 | | |||||||||||||||
With an allowance Recorded: |
||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||
Owner occupied |
443 | 443 | 77 | 443 | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential |
4,115 | 4,271 | 1,116 | 4,271 | | |||||||||||||||
Commercial |
2,110 | 2,110 | 308 | 2,110 | 27 | |||||||||||||||
Residential Real Estate |
||||||||||||||||||||
Single Family |
2,135 | 2,158 | 279 | 2,158 | | |||||||||||||||
Total: |
$ | 11,574 | $ | 11,753 | $ | 1,780 | $ | 11,760 | $ | 61 | ||||||||||
Specific Allocation for Impaired Loans by Class | ||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
With no related allowance: |
||||||||||||||||||||
Residential real estate: |
||||||||||||||||||||
Single Family |
$ | 306 | $ | 322 | $ | | $ | 320 | $ | 9 | ||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||
Owner occupied |
291 | 291 | 77 | 293 | 20 | |||||||||||||||
Non-owner occupied |
| | | | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential |
3,272 | 3,428 | 696 | 3,353 | 197 | |||||||||||||||
Commercial |
| | | | | |||||||||||||||
Residential real estate |
||||||||||||||||||||
Single family |
434 | 457 | 100 | 434 | | |||||||||||||||
Total: |
$ | 4,303 | $ | 4,498 | $ | 873 | $ | 4,400 | $ | 226 | ||||||||||
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There were no nonaccrual loans excluded from impaired loan disclosures as of March 31, 2011
and December 31, 2010. No additional funds are committed to be advanced in connection with
impaired loans. At March 31, 2011, there were $843 thousand in troubled debt restructured loans
and $212 thousand in troubled debt restructured loans as of December 31, 2010.
7. Other Real Estate Owned (OREO)
The table below reflects changes in OREO for the periods indicated:
Three Months | Twelve Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 4,627 | $ | 7,875 | $ | 7,875 | ||||||
Properties acquired at
foreclosure |
210 | 1,973 | 610 | |||||||||
Capital improvements on
foreclosed properties |
| 55 | | |||||||||
Sales of foreclosed properties |
(304 | ) | (4,918 | ) | (115 | ) | ||||||
Valuation adjustments |
| (358 | ) | | ||||||||
Balance, end of period |
$ | 4,533 | $ | 4,627 | $ | 8,370 | ||||||
The table below reflects expenses applicable to OREO for the periods indicated:
Three Months | Twelve Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Net loss on sales of OREO |
$ | 12 | $ | 303 | $ | | ||||||
Valuation adjustments |
| 358 | | |||||||||
Operating expenses,
net of rental income |
23 | 180 | 43 | |||||||||
Total OREO expense |
$ | 35 | $ | 841 | $ | 43 | ||||||
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8. Federal Home Loan Bank Advances
Bankshares has two advances from the FHLB: one fixed rate advance and one floating rate advance.
At March 31, 2011 and December 31, 2010, the FHLB advance accounted for on a fair value basis had a
value of $26.1 and $26.2 million, respectively, and matures in 2021. The weighted average interest
rate on the long-term FHLB advance accounted for on a fair value basis was 3.985% at March 31, 2011
and December 31, 2010. The par value of the FHLB advance accounted for on a fair value basis was
$25.0 million at March 31, 2011 and December 31, 2010.
At March 31, 2011 and December 31, 2010, there was one FHLB advance accounted for on a cost basis.
Bankshares entered into this floating rate advance in the first quarter of 2010 for $15.0 million.
The advance matures in 2012 and the interest rate at March 31, 2011 and December 31, 2010 was
0.213% and 0.184%, respectively. The weighted average interest rate for both FHLB advances
outstanding is 2.570%.
9. Trust Preferred Capital Notes of Subsidiary Trust
On June 30, 2003, Bankshares wholly-owned Delaware statutory business trust privately issued $10.0
million face amount of the Trusts floating rate trust preferred capital securities (Trust
Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued
$310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of the
sale to purchase $10.3 million principal amount of Bankshares floating rate junior subordinated
debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the
Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured
obligation of Bankshares and are junior in right of payment to all present and future senior
indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a
subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance
Sheets of Bankshares under the caption Trust Preferred Capital Notes. Bankshares records
distributions payable on the Trust Preferred Capital Notes as an interest expense in its
Consolidated Statements of income. 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 March 31, 2011, Bankshares elected to defer the interest
payments as permitted under the indenture. The interest deferred under the indenture compounds
quarterly at the interest rate then in effect. As of March 31, 2011 the total amount of
deferred and compounded interest owed under the indenture is $666 thousand. The base interest rate
as of March 31, 2011 was 3.46% and as of December 31, 2010 was 3.45%.
All or a portion of Trust Preferred Capital Notes may be included in the regulatory computation of
capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to
25% of stockholders equity excluding accumulated other comprehensive income (loss) in the form of
Trust Preferred Capital Notes. At March 31,
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2011 and December 31, 2010, the entire amount was
considered Tier 1 capital.
10. Net Income Per Share
The following tables show the weighted average number of shares used in computing net income per
share and the effect on weighted average number of shares of potential dilutive common stock.
Potential dilutive common stock had no effect on income available to common shareholders for the
periods presented.
Three Months Ended March 31, | 2011 | 2010 | ||||||||||||||
Per Share | Per Share | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Basic net income per share |
5,108,048 | $ | 0.07 | 5,106,819 | $ | 0.02 | ||||||||||
Effect of dilutive securities,
stock options |
14,981 | 1,266 | ||||||||||||||
Diluted net income per share |
5,123,029 | $ | 0.07 | 5,108,085 | $ | 0.02 | ||||||||||
Net income utilized in the
earnings per share calculations
above: |
$ | 365,000 | $ | 114,000 | ||||||||||||
Average shares of 310,341 and 606,949 have been excluded from the calculation for the three
months ended March 31, 2011 and March 31, 2010, respectively, because their effects were
anti-dilutive.
11. Supplemental Cash Flow Information
March 31, 2011 | March 31, 2010 | |||||||
(dollars in thousands) | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest paid during the three months |
$ | 1,435 | $ | 2,584 | ||||
Income taxes paid during the three months |
$ | | $ | | ||||
Supplemental Disclosures of Noncash Activities: |
||||||||
Fair value adjustment on available-for-sale securities |
$ | (448 | ) | $ | 302 | |||
Transfer of loans to foreclosed assets |
$ | 210 | $ | 610 | ||||
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12. Subsequent Event
Bankshares evaluated subsequent events that occurred after the balance sheet date, but before
the financial statements are issued. There are two types of subsequent events (1) recognized, or
those that provide additional evidence about conditions that existed at the date of the balance
sheet, including estimates inherent in the process of preparing financial statements, and (2)
nonrecognized, or those that provided evidence about conditions that did not exist at the date of
the balance sheet but arose after that date. As of the report date there were no subsequent
events.
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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, 2010, 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 profitability, liquidity, the Bankshares loan portfolio, adequacy of the
allowance for loan losses and provisions for loan losses, trends regarding net charge-offs, trends
regarding levels of nonperforming assets, interest rates and yields, interest rate sensitivity,
market risk, regulatory developments, capital requirements, business strategy 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 we use in this report are subject
to significant risks, assumptions and uncertainties, including among other things, the following
important factors that could affect the actual outcome of future events:
| Changes in the strength of the national economy in general and the local economies in our market areas that adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral; | ||
| Loss of key production or managerial personnel; | ||
| Retention of existing employees; | ||
| Maintaining and developing well established and valuable client relationships and referral source relationships; |
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| Changing trends in customer profiles and behavior; | ||
| Direct and substantive competition from other financial services companies targeting certain key business lines; | ||
| Other competitive factors within the financial services industry; | ||
| Changes in the availability of funds resulting in increased costs or reduced liquidity; | ||
| Changes in accounting policies, rules and practices; | ||
| Changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions we do business with; | ||
| The timing of and value realized upon the sale of Other Real Estate Owned (OREO) property; | ||
| Changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates; | ||
| Fiscal and governmental policies of the United States federal government; | ||
| 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; | ||
| The impact of changes to capital requirements that apply to financial institutions and depository institutions, including changes related to the proposed Basel III capital standards; | ||
| Changes in the way the FDIC insurance premiums are assessed; | ||
| Changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations; | ||
| Timing and implementation of certain balance sheet strategies; | ||
| Impairment concerns and risks related to our investment portfolio, and the impact of fair value accounting, including income statement volatility; | ||
| Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models; | ||
| Changes in tax laws and regulations; | ||
| Our ability to recognize future tax benefits; | ||
| Our ability to operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; | ||
| Impacts of implementing various accounting standards; and | ||
| Other factors described from time to time in our SEC filings. |
In addition, our 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 our counterparties and by changes in the regulatory and competitive landscape.
Additionally, other risks that cause actual results to differ from predicted results are set forth
in Item1A of Bankshares Annual Report on Form 10-K for the year ended December 31, 2010.
Because of these and other uncertainties, our actual results and performance may be materially
different from results indicated by these forward-looking statements. In addition, our past
results of operations are not necessarily indicative of future performance.
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We caution 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 we 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 our
statements is, to a significant extent, based on measures of the financial effects of transactions
and events that have already occurred. A variety of factors could affect the ultimate value that
is obtained either when earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from the historical
factors that we use in estimating risk. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions would be the same,
the timing of events that would impact our financial statements could change.
Allowance for Loan Losses. The allowance for loan losses is an estimate of the losses that may
be sustained in our loan portfolio. The allowance is based on two basic 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 and represents the largest component of the total allowance. It is determined by
aggregating un-criticized 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 over the life of the loans. In determining
those factors, we consider the following: (1) delinquencies and overall risk ratings, (2) loss
history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the
experience and depth of the borrowers management, (6) national and local economic trends, (7)
concentrations of credit by individual credit size and by class of loans, (8) quality of loan
review system and (9) the effect of external factors (e.g., competition and regulatory
requirements).
ASC 310-10-35, Receivables is the basis upon which we determine 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
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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. Our analysis reviews various forms of positive and negative evidence in
determining whether a valuation allowance is necessary and if so to what degree a valuation
allowance is warranted.
We considered positive evidence such as recent financial performance, previous earnings
patterns, the recent history of loan charge-offs, nonperforming assets, OREO expenses, multiyear
business projections and the potential realization of net operating loss (NOL) carry forwards
within the prescribed time periods. We considered negative evidence such as operating losses in
prior fiscal periods and trends in market values of our real estate collateral. We considered
several different economic scenarios in evaluating whether the projected income in future periods
was sufficient to recover the NOL over the prescribed period. In addition, we considered tax
planning strategies that would impact the timing and extent of taxable income. The projected
performance metrics over the period of NOL recognition indicates that, as of March 31, 2011, it is
more likely than not that Bankshares will have sufficient taxable income in the future to recognize
the deferred tax assets. Therefore, Bankshares has concluded that a valuation allowance for
deferred tax assets is not necessary as of March 31, 2011.
Overview
Bankshares primary long-term financial goals are to maximize earnings and deploy capital in
profit driven initiatives that will enhance shareholder value in a sustainable fashion.
Bankshares current emphasis is on optimizing profitability in the near term and strengthening the
financial performance of the company, while also transitioning its operations to focus more closely
on traditional banking activities and to reposition Bankshares for the future. Bankshares
transitional strategies to achieve these goals include, among others, the following initiatives:
| Diversifying the loan portfolio by increasing our 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; | ||
| Reducing the investment securities portfolio and eliminating the trading assets portfolio. | ||
| Continuing to attentively manage the level of nonperforming assets by addressing problem loans on a timely basis. | ||
| Increasing low cost deposits by local commercial and retail customers and reducing our brokered deposit portfolio; and | ||
| Reducing our operating and funding costs. |
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Performance Highlights
| Net income for the quarter ended March 31, 2011 was $365 thousand compared to net income of $114 thousand for the same period in 2010, an improvement of $251 thousand. Earnings per common share, basic and diluted, amounted to $0.07 at March 31, 2011, compared to $0.02 at March 31, 2010. | ||
| Total assets were $528.3 million at March 31, 2011, a decrease of $10.2 million from December 31, 2010 total assets of $538.5 million. The decrease in total assets is directly related to the payoff of a number of loan relationships in the quarter, a reduction in federal funds sold and reductions in our investment securities portfolio. | ||
| Total loans were $319.6 million at March 31, 2011, a decrease of $12.7 million, or 3.82% from the December 31, 2010 balance of $332.3 million. The continued reductions in construction/land loan exposure, seasonal reductions in credit line usage from the Commercial and Industrial (C&I) segment, and full repayment on several commercial real estate loans contributed to the lower March 31, 2011 balance. | ||
| Our ratio of nonperforming assets to total assets was 3.21% as of March 31, 2011 compared to 1.75% as of December 31, 2010, or an increase of 146 basis points. This increase is due to management electing to include as nonaccrual loans two substandard relationships that displayed signs of additional weaknesses totaling $6.5 million. | ||
| As of March 31, 2011, the composition of nonperforming assets was $11.6 million of nonaccrual loans, $4.5 million of OREO, and $843 thousand of troubled debt restructured loans for a total of $16.9 million, compared to total nonperforming assets as of December 31, 2010, of $9.4 million. The nonaccrual balance increased by $7.5 million at March 31, 2011. This increase is attributable to including in nonaccrual loans two relationships which are rated substandard. These loans are secured by various real estate holdings and we believe we are applying appropriate strategies to the circumstances reflected in each relationship. | ||
| The investment securities portfolio totaled $125.5 million at March 31, 2011. This compares to $135.9 million of investments as of December 31, 2010, a decrease of $10.4 million. Targeted efforts by management to strategically restructure the balance sheet led to the reduction in the investment securities portfolio. | ||
| The net interest margin for the quarter ended March 31, 2011 was 3.78% compared to 3.66% for the same 2010 period, an increase of 12 basis points. | ||
| Deposits were $406.1 million at March 31, 2011, a minimal decrease from the December 31, 2010 balance of $406.9 million. | ||
| Demand deposits were $120.1 million at March 31, 2011, or 29.6% of total deposits. This compares to the December 31, 2010 level of $124.6 million or 30.6% of total deposits. |
Financial Performance Measures. Bankshares net income for the three month period ended March
31, 2011 was $365 thousand, an improvement of $251 thousand over the first quarter of 2010 net
income of $114 thousand. The net income of $365 thousand includes net interest income of $4.4
million compared to $4.7 million for the same period last year, a decrease of $283 thousand. That
decrease is due primarily to a decrease in interest income in the amount of $1.1 million, which was
partially offset by a decrease of $789 thousand in the cost of funds.
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For the three months ended March 31, 2011, total interest expense was $1.5 million compared to $2.3
million for the three months ended March 31, 2010. These results led to $0.07 basic and diluted
earnings per share for the quarter ended March 31, 2011, compared to $0.02 basic and diluted
earnings per share for the quarter ended March 31, 2010. Weighted average basic shares outstanding
were 5,108,048 for the three months ended March 31, 2011 and 5,106,819 for the three months ended
March 31, 2010. Weighted average diluted shares outstanding were 5,123,029 for the three months
ended March 31, 2011 and 5,108,085 for the three months ended March 31, 2010.
Net interest margin increased to 3.78% for the three months ended March 31, 2011 compared to
3.66% for the three months ended March 31, 2010, an increase of 12 basis points. A key
contributing factor to the improved net interest margin was the lower cost of funds during 2011.
Net interest margin for the quarter was negatively affected by the increase in non-accrual loans
and by a decrease in the yield on interest earning assets. Total interest income reversed for the
first quarter ended March 31, 2011 was $193 thousand compared to $62 thousand for the first quarter
ended March 31, 2010.
Results of Operations
Net Interest Income. Net interest income (on a fully tax equivalent basis) for the three
months ended March 31, 2011 was $4.4 million compared to $4.8 million for the same period in 2010.
Interest income on earning assets was $1.2 million lower for the three months ended March 31, 2011,
compared to the first quarter of 2010. Of the $1.2 million decrease in interest income, $457
thousand is attributable to the $32.4 million lower average balance in loans. The reduction in the
average balance in the investment securities portfolio was $19.4 million and contributed $208
thousand to the reduction in interest income. The decrease in yield from 4.69% to 3.89% in the
investment securities portfolio also contributed to $292 thousand to the decrease in interest
income. This was offset by the decrease in interest expense of $789 thousand. The average balance
of interest bearing deposits decreased by $60.3 million and contributed $343 thousand to the
reduction in interest expense. The average rate paid on deposits improved to 1.62% from 2.24%,
which reduced interest expense by $396 thousand.
The following table illustrates average balances of total interest-earning assets and total
interest-bearing liabilities for the three month periods indicated, showing the average
distribution of assets, liabilities, stockholders 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.
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Average Balances, Interest Income and Expense and Average Yield and Rates(1)
Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
Balance | Expense | Rate1 | Balance | Expense | Rate1 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans (2) |
$ | 325,151 | $ | 4,545 | 5.67 | % | $ | 357,555 | $ | 5,140 | 5.83 | % | ||||||||||||
Trading securities |
1,828 | 33 | 7.32 | % | 5,773 | 88 | 6.18 | % | ||||||||||||||||
Investment securities |
140,745 | 1,350 | 3.89 | % | 160,140 | 1,850 | 4.69 | % | ||||||||||||||||
Federal funds sold |
6,567 | 10 | 0.62 | % | 6,792 | 11 | 0.66 | % | ||||||||||||||||
Total interest earning assets |
474,291 | 5,938 | 5.08 | % | 530,260 | 7,089 | 5.42 | % | ||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
19,296 | 19,473 | ||||||||||||||||||||||
Premises and equipment |
1,603 | 2,000 | ||||||||||||||||||||||
Other real estate owned (OREO) |
4,501 | 7,921 | ||||||||||||||||||||||
Other assets |
18,578 | 21,038 | ||||||||||||||||||||||
Less: allowance for loan losses |
(5,479 | ) | (5,638 | ) | ||||||||||||||||||||
Total non-interest earning assets |
38,499 | 44,794 | ||||||||||||||||||||||
Total Assets |
$ | 512,790 | $ | 575,054 | ||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 41,879 | $ | 25 | 0.24 | % | $ | 42,628 | $ | 69 | 0.66 | % | ||||||||||||
Money market deposit accounts |
25,533 | 49 | 0.78 | % | 23,054 | 79 | 1.39 | % | ||||||||||||||||
Savings accounts |
3,819 | 7 | 0.74 | % | 3,541 | 3 | 0.34 | % | ||||||||||||||||
Time deposits |
198,045 | 997 | 2.04 | % | 260,358 | 1,666 | 2.60 | % | ||||||||||||||||
Total interest-bearing deposits |
269,276 | 1,078 | 1.62 | % | 329,581 | 1,817 | 2.24 | % | ||||||||||||||||
FHLB advances(3) |
41,206 | 259 | 2.55 | % | 57,603 | 280 | 1.97 | % | ||||||||||||||||
Other borrowings |
78,448 | 180 | 0.93 | % | 66,875 | 209 | 1.27 | % | ||||||||||||||||
Total interest-bearing liabilities |
388,930 | 1,517 | 1.58 | % | 454,059 | 2,306 | 2.06 | % | ||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
87,960 | 85,310 | ||||||||||||||||||||||
Other liabilities |
2,281 | 2,272 | ||||||||||||||||||||||
Total liabilities |
479,171 | 541,641 | ||||||||||||||||||||||
Stockholders Equity |
33,619 | 33,413 | ||||||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 512,790 | $ | 575,054 | ||||||||||||||||||||
Interest Spread (4) |
3.51 | % | 3.36 | % | ||||||||||||||||||||
Net Interest Margin (5) |
$ | 4,421 | 3.78 | % | $ | 4,783 | 3.66 | % | ||||||||||||||||
(1) | The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate. | |
(2) | The Bank had average nonaccrual loans of $5.4 million and $4.6 million in the first quarter of 2011 and 2010, respectively. The 2011 and 2010 interest income on nonaccrual loans excluded from the loans above was $193 thousand and $62 thousand, respectively. | |
(3) | Average fair value of FHLB advances for the first quarter of 2011 and 2010 was $26.1 million and $25.1 million, respectively. | |
(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. |
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Average loan balances were $325.2 million for the three months ended March 31, 2011
compared to $357.6 million for the same period in 2010. The decrease in average loans is a result
of managements short-term strategy to reduce certain types of real estate lending, such as land
acquisition and development financing. The longer-term strategy is to grow small business
commercial loans and owner occupied commercial real estate. The related interest income from loans
was $4.5 million in the three months ended March 31, 2011compared to $5.1 million in the same
period in 2010. The average yield on loans of 5.67% during the three months ended March 31, 2011
was 16 basis points lower than the yield of 5.83% in the first quarter of 2010. 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.
Trading securities averaged $1.8 million for the three months ended March 31, 2011, compared
to $5.8 million for the three months ended March 31, 2010. Trading securities interest income for
the three months ended March 31, 2011was $33 thousand compared to $88 thousand for the three months
ended March 31, 2010. The reduction in average trading securities reflects managements business
strategy to reduce the trading securities portfolio as we reposition the balance sheet and led to
the reduction in associated interest income. At March 31, 2011, there was a single instrument in
the trading securities portfolio with a carrying value of $605 thousand.
The average balance of investment securities was $140.7 million for the quarter ended March
31, 2011 compared to $160.1 million for the same quarter in 2010. Investment securities income (on
a fully tax equivalent basis) was $1.4 million for the three months ended March 31, 2011 compared
to $1.9 million for the three months ended March 31, 2010. The tax equivalent average yield on
investment securities for the three months ended March 31, 2011 was 3.89% compared to 4.69% for the
three months ended March 31, 2010. The reduction in average investment securities from the sale of
securities reflects managements business strategy to reduce the investment securities portfolio.
Short-term investments in federal funds sold contributed $10 thousand to interest income in
the three month period ended March 31, 2011, compared to $11 thousand for the same period in 2010.
The average balance for the three months ended March 31, 2011was $6.6 million, a $200 thousand
decrease from the prior year average balance of $6.8 million.
The average balance of cash and due from banks was $19.3 million and $19.5 million for the
three months ended March 31, 2011and 2010, respectively. The deposit flows from the title and
escrow clients can have significant volatility especially at month end or quarter end and explains
some of the variance between the average cash and due from banks balances and the period-end
balances.
Total average interest earning assets yielded 5.08% for the three months ended March 31, 2011
compared to the yield of 5.42% for the same period in 2010. Total interest income (on a fully tax
equivalent basis) was $5.9 million for the three months ended March 31, 2011 compared to $7.1
million for the three months ended March 31, 2010. As discussed above, interest income decreased
from the first quarter of 2010 to the first quarter of 2011 due to smaller average loans and
securities balances, which are a product of our strategy to reposition our
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balance sheet, and lower yields generated by our interest-earning assets in the low interest
rate environment.
Total average interest-bearing liabilities were $388.9 million in the first quarter of 2011,
or $65.2 million lower than the first quarter of 2010 level of $454.1 million. A key driver of the
decrease is the decrease in average time deposits. The average balance for time deposits for the
first quarter of 2011 was $198.0 million compared to the first quarter of 2010 average balance of
$260.4 million, a decrease of $62.4 million. Interest expense for all interest-bearing liabilities
amounted to $1.5 million for the three months ended March 31, 2011 compared to $2.3 million for the
three months ended March 31, 2010, or a savings of $789 thousand. The average cost of
interest-bearing liabilities for the first quarter of 2011 was 1.58% or 48 basis points lower than
the first quarter of 2010 level of 2.06%. The lower interest rate environment allowed for
competitive repricing of interest bearing demand accounts, money market accounts, savings accounts
and client based time deposits. The Bank prices these deposit accounts on a competitive basis
with local market financial institutions, general economic conditions and market interest rates.
In addition, the Bank benefited from significant downward repricing of the brokered certificate of
deposit portfolio. Many of the larger wholesale deposits with higher rates have matured or
repriced downward. The benefits of the repricing are seen in the lower time deposit cost of 2.04%
during the first quarter of 2011 compared to 2.60% during the same period of 2010.
As of March 31, 2011, the brokered certificate of deposit portfolio carried an average coupon
rate of 1.72% compared to an average coupon rate of 2.09% at March 31, 2010.
Non-interest bearing demand deposits averaged $88.0 million for the first three months of
2011, or $2.7 million more than the first quarter of 2010 level of $85.3 million.
The following table describes the impact on our tax equivalent interest income and expense
resulting from changes in average balances and average rates for the periods indicated. The change
in interest income due to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in each.
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Volume and Rate Analysis | ||||||||||||
Three Months Ended March 31 | ||||||||||||
2011 compared to 2010 | ||||||||||||
Change Due To: | ||||||||||||
(Decrease) | Volume | Rate | ||||||||||
(dollars in thousands) | ||||||||||||
Interest Earning Assets: |
||||||||||||
Loans |
$ | (595 | ) | $ | (457 | ) | $ | (138 | ) | |||
Trading securities |
(55 | ) | (75 | ) | 20 | |||||||
Investment securities |
(500 | ) | (208 | ) | (292 | ) | ||||||
Federal funds sold |
(1 | ) | | (1 | ) | |||||||
Total (decrease) in interest income |
(1,151 | ) | (740 | ) | (411 | ) | ||||||
Interest-Bearing Liabilities: |
||||||||||||
Interest-bearing deposits |
(739 | ) | (343 | ) | (396 | ) | ||||||
Borrowed funds |
(50 | ) | (19 | ) | (31 | ) | ||||||
Total (decrease) in interest expense |
(789 | ) | (362 | ) | (427 | ) | ||||||
(Decrease) in net interest income |
$ | (362 | ) | $ | (378 | ) | $ | 16 | ||||
Non-interest Income (Other Income). Non-interest income amounted to $184 thousand
during the three months ended March 31, 2011, a decrease of $77 thousand from $261 thousand for the
same period of 2010.
Bankshares recorded a net gain of $79 thousand on the sale of investment securities in the
three months ended March 31, 2011, compared to a net gain of $256 thousand in the three months
ended March 31, 2010. Bankshares views the available for sale investment portfolio as a tool in
managing the overall balance sheet and liquidity positions of the organization. From time to time,
Bankshares will sell investment securities to achieve certain business objectives. These sales may
result in gains or losses depending on the timing and book value of instruments sold.
Trading activity and fair value adjustments recorded for the three months ended March 31, 2011
resulted in a net gain of $24 thousand, compared to a net loss of $190 thousand for the same period
in 2010, an increase of $214 thousand. The net gain of $24 thousand is primarily driven by a
positive fair value adjustment of $151 thousand on the FHLB advance. At contractual maturity, the
FHLB advance will become due at par and any unrealized loss will be recognized as trading income as
maturity approaches. For the three months ended March 31, 2011, trading activity and fair value
adjustments in the associated with the trading investment assets generated a net loss of $127
thousand.
Non-interest Expense (Other Expenses). During the three months ended March 31, 2011, we made
important progress toward our strategic goal of optimizing profitability by decreasing our
non-interest expenses.
Non-interest expense for the three months ended March 31, 2011, amounted to $3.7 million
compared to $4.5 million for the same period in 2010, a decrease of $800 thousand. A
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key component of non-interest expense is salary and benefits expense. This expense for the
quarter ended March 31, 2011 was $1.4 million, compared to the first quarter of 2010 level of $2.0
million, a substantial decrease of $600 thousand. Occupancy and furniture and equipment costs were
$729 thousand compared to the 2010 level of $822, a decrease of $93 thousand.
OREO expense was $35 thousand for the first quarter ended March 31, 2011 compared to $43
thousand for the same period in 2010. This decrease is a result of the continued effort by
management to manage problem assets in a timely manner.
Income Taxes. We recorded income tax expense of $182 thousand in the first quarter of 2011.
Bankshares periodically evaluates the likelihood of the recognition of deferred tax assets.
The analysis is used to determine if a valuation allowance for deferred tax assets is necessary.
Our analysis reviews various forms of positive and negative evidence in determining whether a
valuation allowance is necessary and if so, to what degree a valuation allowance is warranted. As
of March 31, 2011 and 2010, Bankshares has concluded that a valuation allowance for deferred tax
assets is not necessary. For more information on the deferred tax asset valuation allowance
analysis, please see Critical Accounting Policies Deferred Tax Asset in Part 1, Item 2 of this
Quarterly Report on Form 10-Q.
Analysis of Financial Condition
Trading Securities. At March 31, 2011, the trading portfolio consisted of one PCMO security
with a fair value of $605 thousand compared to four PCMO securities with a fair value of $3.4
million for the same period in 2010. The current effective portfolio yield is 5.43%.
The following table reflects our trading assets and effective yield on the instruments as of
the dates indicated:
Trading Securities | ||||||||||||||||||||||||
March 31, | December 31, | March 31, | ||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||
Fair | Fair | Fair | ||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
PCMOs (1) |
$ | 605 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 3,430 | 5.36 | % | ||||||||||||
Totals |
$ | 605 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 3,430 | 5.36 | % | ||||||||||||
(1) | As of March 31, 2011, trading securities 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 currently performing as expected. |
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Trading Securities Classified as Level 3. Beginning in the third quarter of 2008, and
continuing through to 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. Bankshares believes that some of the
investment and debt markets remain depressed. Although certain portions of the investment and
debt markets have improved, the fair value of an investment security may not be the same as a
liquidation value. As such, Level 3 evaluations of the fair value are used. The fair value
methods used to evaluate trading assets include typical market spreads for the instruments, option
adjusted spreads, swap curves, discounted cashflow models, default levels, prepayment spreads,
tranche classification, previously observable non-distressed valuations and bond issuance rates and
spreads for investment and non-investment grade instruments. We believe this approach more
accurately reflects the fair value of the PCMO security in the portfolio.
Investment Securities Available for Sale. On March 31, 2011, our investment portfolio
contained callable and non-callable U.S. government agency securities, U.S. government agency
collateralized mortgage obligations (CMOs), U.S. government agency mortgage backed securities
(MBS), PCMOs, and municipal securities. U.S. government agency securities were $43.0 million or
34.3% of the March 31, 2011 investment portfolio. As of March 31, 2011, PCMOs, CMOs and MBS made up
42.5% of the portfolio or $53.4 million. Municipal securities were 23.2% of the portfolio or $29.1
million as of March 31, 2011.
We actively manage our portfolio duration and composition with changing market conditions and
changes in balance sheet risk management needs. Additionally, the securities are pledged as
collateral for certain borrowing transactions and repurchase agreements. The total amount of the
investment securities accounted for under available-for-sale accounting was $125.5 million on March
31, 2011 compared to $135.9 million at December 31, 2010. Targeted efforts to strategically
restructure our balance sheet led to shifts in our investment portfolio mix and reduced the
investment securities portfolios balance at March 31, 2011.
The yield on the investment securities portfolio as of March 31, 2011 was 4.27%. During the
first quarter of 2011, the bank earned $1.350 million on the investment securities portfolio or an
effective tax equivalent yield of 3.89%. 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 premium amortization increases which adversely impacts the
portfolio yield. During the quarter the Bank experienced greater than expected prepayments on a
variety of investment securities.
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Table of Contents
Investment Securities- Available-for-Sale | ||||||||||||||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||
Fair | % of | Fair | % of | Fair | % of | |||||||||||||||||||||||||||||||
Value | Yield | Total | Value | Yield | Total | Value | Yield | Total | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
U.S. government corporations
and agencies |
$ | 42,972 | 3.82 | % | 34.3 | % | $ | 51,763 | 4.50 | % | 38.1 | % | $ | 59,756 | 4.42 | % | 40.4 | % | ||||||||||||||||||
U.S. government agency CMOs |
20,098 | 3.96 | % | 16.0 | % | 22,576 | 3.96 | % | 16.6 | % | 40,596 | 3.97 | % | 27.5 | % | |||||||||||||||||||||
U.S. government agency MBS |
19,601 | 3.68 | % | 15.6 | % | 14,805 | 3.82 | % | 10.9 | % | 21,898 | 5.32 | % | 14.8 | % | |||||||||||||||||||||
PCMOs |
13,715 | 5.11 | % | 10.9 | % | 17,621 | 5.16 | % | 13.0 | % | 7,876 | 3.85 | % | 5.3 | % | |||||||||||||||||||||
Municipal securities |
29,083 | 5.11 | % | 23.2 | % | 29,087 | 5.11 | % | 21.4 | % | 17,716 | 5.99 | % | 12.0 | % | |||||||||||||||||||||
Total Investment Securities
Available-for-Sale |
$ | 125,469 | 4.27 | % | 100.0 | % | $ | 135,852 | 4.32 | % | 100.0 | % | $ | 147,842 | 4.59 | % | 100.0 | % | ||||||||||||||||||
The following table summarizes the contractual maturity of the investment securities on
an amortized cost basis and their weighted average yield as of March 31, 2011:
Contractual Maturities of Investment Securities | ||||||||||||||||||||||||||||||||||||||||
March 31, 2011 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
After One | After Five | |||||||||||||||||||||||||||||||||||||||
Within | Year but Within | Years but Within | ||||||||||||||||||||||||||||||||||||||
One Year | Five Years | Ten Years | After Ten Years | |||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Total(4,5) | Yield | |||||||||||||||||||||||||||||||
Available-For-Sale Securities |
||||||||||||||||||||||||||||||||||||||||
U.S. government corporations and agencies |
$ | | 0.00 | % | $ | | 0.00 | % | $ | 13,977 | 3.65 | % | $ | 29,055 | 3.90 | % | $ | 43,032 | 3.82 | % | ||||||||||||||||||||
U.S. government agency CMOs (1) |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 19,703 | 3.95 | % | 19,703 | 3.95 | % | |||||||||||||||||||||||||
U.S. government agency MBS (1) |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 19,463 | 3.69 | % | 19,463 | 3.69 | % | |||||||||||||||||||||||||
PCMOs(1) |
| 0.00 | % | | 0.00 | % | 5,339 | 5.49 | % | 8,150 | 4.86 | % | 13,489 | 5.11 | % | |||||||||||||||||||||||||
Municipal securities (2) |
| 0.00 | % | | 0.00 | % | 5,890 | 4.64 | % | 24,777 | 5.20 | % | 30,667 | 5.09 | % | |||||||||||||||||||||||||
Total Available-For-Sale Securities (3) |
$ | | 0.00 | % | $ | | 0.00 | % | $ | 25,206 | 4.27 | % | $ | 101,148 | 4.27 | % | $ | 126,354 | 4.27 | % | ||||||||||||||||||||
(1) | Contractual maturities of CMOs, PCMOs and MBS are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time. | |
(2) | Municipal securities yield is on a fully tax equivalent basis assuming a 34% federal tax rate. | |
(3) | We do not have any held-to-maturity securities as of March 31, 2011. | |
(4) | Total above is amortized cost and does not include unrealized loss of $885 thousand. | |
(5) | Total available for sale securities amounted to $125.5 million. The fair value of the contractual maturities listed in the total above amounts to $125.5 million. |
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Restricted Securities. Bankshares security portfolio contains restricted securities that
are required to be held as part of the Companys banking operations. These include stock of the
Federal Reserve Bank, the FHLB and others. The following table summarizes the balances of
restricted stock at the dates indicated:
Restricted Stock | ||||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Federal Reserve Bank Stock |
$ | 1,201 | $ | 1,201 | $ | 1,201 | ||||||
FHLB stock |
4,967 | 4,948 | 5,305 | |||||||||
Bankers Bank stock |
206 | 206 | 206 | |||||||||
Total Restricted Stock |
$ | 6,374 | $ | 6,355 | $ | 6,712 | ||||||
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. The
company has made significant efforts to be responsive to the lending needs in the markets served,
while maintaining sound asset quality and credit practices. We grant credit to commercial markets,
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 $319.6 million as
of March 31, 2011 or $12.7 million lower than the December 31, 2010 levels of $332.3 million and
$27.8 million less than March 31, 2010 level of $347.4 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 | ||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Residential real estate |
$ | 107,514 | 34 | % | $ | 110,862 | 34 | % | $ | 111,976 | 32 | % | ||||||||||||
Commercial real estate |
139,820 | 44 | % | 146,222 | 44 | % | 147,568 | 43 | % | |||||||||||||||
Construction/land |
41,854 | 13 | % | 43,017 | 13 | % | 47,571 | 14 | % | |||||||||||||||
Commercial and industrial |
26,014 | 8 | % | 27,517 | 8 | % | 35,539 | 10 | % | |||||||||||||||
Consumer non real estate |
4,405 | 1 | % | 4,692 | 1 | % | 4,340 | 1 | % | |||||||||||||||
Other |
| 0 | % | | 0 | % | 372 | 0 | % | |||||||||||||||
Total Loans |
$ | 319,607 | 100 | % | $ | 332,310 | 100 | % | $ | 347,366 | 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.
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Commercial real
estate is secured by income producing 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 $658 thousand as of
March 31, 2011.
The table also shows a continuing reduction in the real estate construction portion of the
portfolio, which represented 13% of the portfolio at March 31, 2010 compared to 20% at December 31,
2008. The current levels of real estate construction loans are a product of managements efforts
to de-emphasize this type of lending in recent years. New originations in this segment are being
underwritten in the context of current market conditions and are particularly focused in
sub-markets which appear to be the strongest in the region. Legacy loans, particularly in the land
portion of this portfolio, have been largely converted to amortizing loans with regular principal
and interest payments. We expect to see further reductions in our land exposure offset by
potential increases in certain residential construction activities as market conditions improve.
Loans secured by residential real estate have remained relatively constant since March 31,
2010, with growth in our 1-4 family first trust loans partially offset by the reductions in our 1-4
family subordinate trust loans (HELOCs and closed-end 2nd mortgages). All loans in both
categories represent loans underwritten by us (we do not purchase loans in this portfolio) to
customers with whom we have direct contact in the local communities we serve. We believe that our
underwriting criteria reflect current market conditions. The portfolio of first mortgage loans had
an average size per housing unit of $321 thousand as of March 31, 2011. Our subordinate trust
loans averaged $99 thousand per property as of March 31, 2011. While we recognize that the
Metropolitan Washington, D.C. residential real estate market is in a nascent recovery, we believe
our current underwriting standards, our emphasis on serving the sub-markets we know, the
granularity of our portfolio, and our continued reduction of our subordinate trust portfolio
represent appropriate risk management for this portfolio.
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Table of Contents
The following table presents the maturities or repricing periods of selected loans outstanding
at March 31, 2011:
Loan Maturity Distribution | ||||||||||||||||
As Of March 31, 2011 | ||||||||||||||||
One Year | After One Year | After | ||||||||||||||
or Less | Through Five Years | Five Years | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Commercial and industrial |
$ | 14,869 | $ | 6,614 | $ | 4,531 | $ | 26,014 | ||||||||
Construction/land |
25,419 | 12,634 | 3,801 | 41,854 | ||||||||||||
Total |
$ | 40,288 | $ | 19,248 | $ | 8,332 | $ | 67,868 | ||||||||
Loans with: |
||||||||||||||||
Fixed rates |
$ | 63,830 | $ | 75,967 | $ | 73,447 | $ | 213,244 | ||||||||
Variable rates |
42,268 | 59,597 | 4,498 | 106,363 | ||||||||||||
Total |
$ | 106,098 | $ | 135,564 | $ | 77,945 | $ | 319,607 | ||||||||
Asset Quality
We segregate loans meeting the criteria for special mention, substandard, doubtful and loss
from non-classified, or pass rated, loans. We review the characteristics of each rating at least
annually, generally during the first quarter of each year. The characteristics of these ratings
are as follows:
Pass and watch rated loans (risk ratings 1 to 6) are to persons or business entities with an
acceptable financial condition, appropriate collateral margins, appropriate cash flow to service
the existing loans, and an appropriate leverage ratio. The borrower has paid all obligations as
agreed and it is expected that the borrower will maintain this type of payment history. When
necessary, acceptable personal guarantors support the loan.
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 our 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.
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Table of Contents
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, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. The possibility of loss related to doubtful rated loans is extremely
high.
Loss (risk rating 10) rated loans are not considered collectible under normal circumstances
and there is no realistic expectation for any future payment on the loan. Loss rated loans are
fully charged off.
The table below represents the Companys loan portfolio by risk rating, classification, and
loan portfolio segment as of March 31, 2011.
As of March 31, 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES |
Pass | Watch | Mention | Substandard | Doubtful | Loss | Loans | |||||||||||||||||||||
Risk Rating Number1 |
1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
Commercial and Industrial |
$ | 22,765 | $ | 875 | $ | 727 | $ | 1,647 | $ | | $ | | $ | 26,014 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
67,631 | 1,242 | 791 | 1,699 | 443 | | 71,806 | |||||||||||||||||||||
Non-owner occupied |
59,545 | 2,614 | 3,900 | 1,955 | | | 68,014 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
17,339 | 181 | 683 | 3,260 | 1,499 | | 22,962 | |||||||||||||||||||||
Commercial |
7,507 | 1,658 | 3,108 | 6,619 | | | 18,892 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
29,270 | 769 | | | | | 30,039 | |||||||||||||||||||||
Single family |
60,392 | 1,819 | 3,987 | 6,554 | 686 | | 73,438 | |||||||||||||||||||||
Multifamily |
4,037 | | | | | | 4,037 | |||||||||||||||||||||
Consumer non real estate |
4,216 | 189 | | | | | 4,405 | |||||||||||||||||||||
Totals |
$ | 272,702 | $ | 9,347 | $ | 13,196 | $ | 21,734 | $ | 2,628 | $ | | $ | 319,607 | ||||||||||||||
1 | Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets. |
As part of our normal credit risk management practices, we regularly monitor the payment
performance of our borrowers. Substantially all loans require some form of payment on a monthly
basis, with a high percentage requiring regular amortization of principal. However, certain
HELOCs, commercial and industrial lines of credit, and construction loans generally require only
monthly interest payments.
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Table of Contents
The following table sets forth the aging and non-accrual loans by class, as of March 31,
2011:
Aging and Nonaccrual Loans By Class | ||||||||||||||||||||||||||||
As of March 31, 2011: | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
90-days | ||||||||||||||||||||||||||||
30-59 | 60-89 | 90 Days or | Past Due | |||||||||||||||||||||||||
Days Past | Days Past | More Past | Total Past | and Still | Nonaccrual | |||||||||||||||||||||||
Due | Due | Due | Due | Current1 | Accruing | Loans | ||||||||||||||||||||||
| | | | | | | | | |||||||||||||||||||||||||||
Commerical and
Industrial |
$ | 1,234 | $ | | $ | | $ | 1,234 | $ | 24,780 | $ | | $ | 967 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
1,699 | 443 | | 2,142 | 69,664 | | 2,142 | |||||||||||||||||||||
Non-owner
occupied |
104 | | | 104 | 67,910 | | 104 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
644 | 411 | 3,651 | 4,706 | 18,256 | | 4,062 | |||||||||||||||||||||
Commercial |
5,622 | | | 5,622 | 13,270 | | 2,110 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
589 | | 44 | 633 | 29,406 | | 44 | |||||||||||||||||||||
Single Family |
2,272 | 313 | 2,145 | 4,730 | 68,708 | | 2,145 | |||||||||||||||||||||
Multifamily |
| | | | 4,037 | | | |||||||||||||||||||||
Consumer -non real
estate |
| | | | 4,405 | | | |||||||||||||||||||||
Total loans |
$ | 12,164 | $ | 1,167 | $ | 5,840 | $ | 19,171 | $ | 300,436 | $ | | $ | 11,574 | ||||||||||||||
1 | For purpose of this table only, loans 1-29 days past due are included in the balance of current loans. |
When payments are 90 days or more in arrears or when we determine that it is no longer
prudent to recognize current interest income on a loan, we classify the loan as non-accrual. As of
March 31, 2011, we had one relationship with an aggregate exposure of $4.8 million which was 30
days in arrears but we determined that current events could impact the capacity of the borrower in
future periods. Another relationship totaling $1.7 million, consisting of 14 mortgage loans
secured by small income properties, filed for bankruptcy during the first quarter of 2011 due to
financial circumstances unrelated to the Banks exposure. We have applied to the court for the
release of post-petition rent payments, or in the alternative, relief from the bankruptcy stay to
pursue our collateral. The third relationship, a $2.4 million real estate secured loan, was
classified as impaired at December 31, 2010. Until there is greater clarity about the borrowers
financial condition in future periods, we determined that non-accrual status was appropriate for
these loans
From time to time, a loan may be past due for 90 days or more but it is in the process of
collection and thus warrants remaining on accrual status. We had no such loans at March 31, 2011.
45
Table of Contents
Allowance for Loan Losses
The allowance for loan losses is an estimate of losses that may be sustained in our loan
portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05,
Contingencies which requires that losses be accrued when they are probable of occurring and
estimable, and (2) ASC 310-10-35, Receivables which requires that losses be accrued based on the
differences between the value of collateral, present value of future cash flows, or values that are
observable in the secondary market and the loan balance.
The allowance for loan losses was $5.6 million at March 31, 2011, or 1.76% of loans
outstanding, compared to $5.3 million or 1.59% of loans outstanding, at December 31, 2010. We have
allocated $1.8 million at March 31, 2011 compared to $873 thousand at December 31, 2010 for
specific non-performing loans. For the first quarter of 2011, we had net recoveries of $24
thousand compared to net charge-offs $157 thousand in the same period of 2010.
As part of our routine credit administration process, we engage an outside consulting firm to
review our loan portfolio periodically. The information from these reviews is used to monitor
individual loans as well as to evaluate the overall adequacy of the allowance for loan losses.
In reviewing the adequacy of the allowance for loan losses at each period, management takes
into consideration the historical loan losses experienced by Bankshares, current economic
conditions affecting the borrowers ability to repay, the volume of loans, trends in delinquent,
nonaccruing, and potential problem loans, and the quality of collateral securing loans. Loan
losses are charged against the allowance when we believe 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 credit losses is an estimate, as the loan portfolio and allowance for
credit losses review process continues to evolve, there may be changes to this estimate and
elements used in the methodology used that may have an effect on the overall level of allowance
maintained.
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Table of Contents
The following table represents an analysis of the allowance for loan losses for the periods
presented:
Three Months | Twelve Months | Three Months | ||||||||||
Ended March 31, | December 31, | Ended March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 5,281 | $ | 5,619 | $ | 5,619 | ||||||
Provision for loan losses |
306 | 1,753 | 275 | |||||||||
Chargeoffs: |
||||||||||||
Commerical and industrial |
(10 | ) | (477 | ) | (1 | ) | ||||||
Construction/land |
| (173 | ) | | ||||||||
Residential real estate |
(116 | ) | (1,450 | ) | (94 | ) | ||||||
Commercial real estate |
(80 | ) | (69 | ) | (70 | ) | ||||||
Consumer non real estate |
| (70 | ) | | ||||||||
Total chargeoffs |
(206 | ) | (2,239 | ) | (165 | ) | ||||||
Recoveries: |
||||||||||||
Commerical and industrial |
116 | 10 | 1 | |||||||||
Construction/land |
| 18 | 5 | |||||||||
Residential real estate |
109 | 66 | 1 | |||||||||
Commercial real estate |
4 | 35 | 1 | |||||||||
Consumer non real estate |
1 | 19 | | |||||||||
Total recoveries |
230 | 148 | 8 | |||||||||
Net (chargeoffs) recoveries |
24 | (2,091 | ) | (157 | ) | |||||||
Balance, end of period |
$ | 5,611 | $ | 5,281 | $ | 5,737 | ||||||
Allowance for loan losses to
total loans |
1.76 | % | 1.59 | % | 1.65 | % | ||||||
Allowance for loan losses to
non-accrual loans |
0.48 | X | 2.80 | X | 1.33 | X | ||||||
Non-performing assets to
allowance for loan losses |
302.08 | % | 177.96 | % | 230.85 | % | ||||||
Non-performing assets to total
assets |
3.21 | % | 1.75 | % | 2.23 | % | ||||||
Net chargeoffs to average loans |
0.01 | % | 0.61 | % | 0.18 | % |
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Table of Contents
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, not withstanding 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 March 31, 2011 | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
and | Commercial | Construction | Residential | |||||||||||||||||||||
Industrial | Real Estate | Land | Real Estate | Consumer | Total | |||||||||||||||||||
Allowance for Loan Losses |
||||||||||||||||||||||||
Beginning Balance |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
Charge-offs |
(10 | ) | (80 | ) | | (116 | ) | | (206 | ) | ||||||||||||||
Recoveries |
116 | 4 | | 109 | 1 | 230 | ||||||||||||||||||
Provision |
(215 | ) | (13 | ) | 1,219 | (668 | ) | (17 | ) | 306 | ||||||||||||||
Ending Balance: |
$ | 354 | $ | 1,331 | $ | 1,919 | $ | 1,938 | $ | 69 | $ | 5,611 | ||||||||||||
Individually evaluated for
impairment |
$ | | $ | 77 | $ | 1,424 | $ | 279 | $ | | $ | 1,780 | ||||||||||||
Collectively evaluated for
impairment |
$ | 354 | $ | 1,254 | $ | 495 | $ | 1,659 | $ | 69 | $ | 3,831 | ||||||||||||
Ending Balance: |
||||||||||||||||||||||||
Loans |
$ | 26,014 | $ | 139,820 | $ | 41,854 | $ | 107,514 | $ | 4,405 | $ | 319,607 | ||||||||||||
Individually evaluated for
impairment |
$ | 967 | $ | 2,142 | $ | 6,172 | $ | 2,293 | $ | | $ | 11,574 | ||||||||||||
Collectively evaluated for
impairment |
$ | 25,047 | $ | 137,678 | $ | 35,682 | $ | 105,221 | $ | 4,405 | $ | 308,033 | ||||||||||||
Nonperforming Assets
Impaired Loans (Loans with a Specific Allowance Allocation). As of March 31, 2011, there were
no loans with impairment allocations that were not also in non-accrual status. At December 31,
2010, a $2.4 million loan was carried as impaired which has subsequently been placed on non-accrual
status as of March 31, 2011.
Non-accrual Loans. A loan may be placed on non-accrual status when the loan is specifically
determined to be impaired or when principal or interest is delinquent 90 days or more. We closely
monitor 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. We
maintain 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
48
Table of Contents
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 March 31, 2011, there was $11.6 million in loans on non-accrual status compared to $1.9 at
December 31, 2010 and $4.3 million at March 31, 2010. The $11.6 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 March 31, 2011 is $1.8 million.
The increase in non-accruals during the first quarter of 2011 is attributable to three
relationships. The largest is $4.8 million, which includes a Commercial and Industrial
relationship with two related real estate loans. This substandard credit displayed signs of
additional weakness during the quarter, although scheduled payments continue to be made. The
second relationship placed on non-accrual status totals $1.7 million which consists of 14 mortgage
loans secured by small income properties. The third relationship that was classified as impaired
at December 31, 2010 was added to the non-accrual at March 31, 2011, in the amount of $2.4 million.
In each of these cases, Bankshares believes that the appropriate strategy was applied to move
these loans to non-accrual given the circumstances reflected in the individual relationships. These
relationships originated in 2006 or earlier.
Total Non-Performing Assets. As of March 31, 2011, we had $17.0 million of non-performing
assets on the balance sheet compared to $9.4 million as of December 31, 2010, an increase of $7.6
million. This increase is due to the addition of several non-accrual lending relationships and
troubled debt restructurings during the quarter. The ratio of non-performing assets to total
assets increased to 3.21% as of March 31, 2011 from 1.75% as of December 31, 2010, a 146 basis
point increase.
The following table reflects the Credit Quality for periods presented:
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Credit Quality Information | (dollars in thousands) | |||||||||||
Non-performing assets: |
||||||||||||
Accruing impaired loans |
$ | | $ | 2,400 | $ | 542 | ||||||
Non-Accrual loans |
11,574 | 1,903 | 4,332 | |||||||||
Total loans past due 90 days and still accruing |
| 256 | | |||||||||
Troubled debt restructurings |
843 | 212 | | |||||||||
OREO |
4,533 | 4,627 | 8,370 | |||||||||
Total non-performing assets |
$ | 16,950 | $ | 9,398 | $ | 13,244 | ||||||
Specific reserves associated with impaired
loans |
$ | 1,780 | $ | 873 | $ | 1,687 | ||||||
Non-performing assets to total assets |
3.21 | % | 1.75 | % | 2.23 | % | ||||||
Specific Reserves. As of March 31, 2011, we had $1.8 million in specific reserves for
non-performing loans, compared to $873 thousand at December 31, 2010.
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Table of Contents
Other Real Estate Owned (OREO). As of March 31, 2011, we had $4.5 million classified as OREO on the balance sheet, compared to $4.6 million as of December 31, 2010 and $8.4 million at March 31, 2010. The OREO balance consists of $1.6 million which relates
to residential acreage in the Winchester, Virginia area, $879 thousand which relates to residential
building lots in Woodstock, Virginia, and $837 thousand which relates to residential building lots
in Charles Town, West Virginia. The remainder is made up of five additional properties totaling
$1.2 million at March 31, 2011.
The table below reflects the OREO activity in the periods presented:
Year Ended December 31, | ||||||||||||
Three Months | Twelve Months | Three Months | ||||||||||
Ended March 31, | Ended December 31, | Ended March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 4,627 | $ | 7,875 | $ | 7,875 | ||||||
Properties acquired at foreclosure |
210 | 1,973 | 610 | |||||||||
Capital improvements on foreclosed properties |
| 55 | | |||||||||
Sales of foreclosed properties |
(304 | ) | (4,918 | ) | (115 | ) | ||||||
Valuation adjustments |
| (358 | ) | | ||||||||
Balance, end of period |
$ | 4,533 | $ | 4,627 | $ | 8,370 | ||||||
Deposits. We seek deposits within our market area by offering high-quality customer
service, using technology to deliver deposit services effectively and paying competitive interest
rates. A significant portion of our client base and deposits are directly related to home sales
and refinancing activity, including from title and escrow agency customers.
At March 31, 2011, the deposit portfolio was $406.1 million, a minimal decrease compared to
the December 31, 2010 level of $406.9 million. The interest-bearing deposits cost the Bank 1.62%
for the quarter ended March 31, 2011 or 62 basis points less than the quarter ended March 31, 2010
average cost of 2.24%. As key interest rates declined over the past year, we repriced deposits at
lower levels
At March 31, 2011, our non-interest bearing demand deposits were $120.7 million compared to
$124.6 million at December 31, 2010, a $3.9 million decrease. Average non-interest bearing demand
deposits were $88.0 million for the quarter ended March 31, 2011 compared to average demand
deposits of $85.3 million for the quarter ended March 31, 2010, an increase of $2.7 million. The
disparity between the March 31, 2011 balance of non-interest bearing deposits of $120.7 million and
the first quarter of 2011 average balance of non-interest bearing deposits of $88.0 million is
directly related to seasonal and cyclical changes in business of our title and escrow deposit
client base. Frequently, our title and escrow deposit clients experience strong deposit growth
around the end of a month or quarter.
50
Table of Contents
We currently use wholesale brokered deposits. We believe these types of funds offer a
reliable stable source of funds for the Bank. Frequently the interest rates associated with
wholesale brokered deposits are significantly lower than general customer rates in our markets. As
market conditions warrant and balance sheet needs dictate, we may continue to participate in the
wholesale brokered certificate of deposit market. As with any deposit product, we have potential
risk for non-renewal by the customer and/or broker. Over the long term, managements strategic goal
is to lower our wholesale brokered deposits and replace them with attractively
priced local commercial and retail deposits.
As of March 31, 2011, we had $125.0 million of wholesale brokered certificates of deposit
which is $25.0 million higher than the December 31, 2010 level of $100.0 million. This increase is
due to management utilizing these instruments to lengthen the duration of the liabilities on the
balance sheet in advance of some expected maturities in 2011
The following table shows the maturity distribution and coupon rate of wholesale brokered
certificate of deposits at March 31, 2011:
Maturity Distribution of Brokered Deposits by Year
Average | ||||||||
Maturity | Coupon | |||||||
Year | Amount | Rate | ||||||
(dollars in thousands) | ||||||||
2011 |
$ | 22,500 | 2.18 | % | ||||
2012 |
40,000 | 1.55 | % | |||||
2013 |
30,062 | 1.65 | % | |||||
2014 |
22,423 | 1.58 | % | |||||
2015 |
10,000 | 1.90 | % | |||||
$ | 124,985 | 1.72 | % | |||||
Purchased Funds and Other Borrowings. Purchased funds and other borrowings
include repurchase agreements (repos), which we offer 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 $34.0
million at March 31, 2011, compared to $43.1 million at December 31, 2010 and $26.7 million at
March 31, 2010. FHLB advances amounted to $41.1 million at March 31, 2011, compared to $41.2
million at December 31, 2010 and $65.9 million at March 31, 2010. Other borrowings were $0, $549
thousand and $5 thousand at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
The Trust Preferred Capital Notes were $10.3 million for all periods presented.
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Purchased Funds Distribution | ||||||||||||
Three Months | Twelve Months | Three Months | ||||||||||
Ended March 31, | Ended December 31, | Ended March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
At Period End |
||||||||||||
FHLB long-term advances, at fair value |
$ | 26,057 | $ | 26,208 | $ | 25,883 | ||||||
FHLB long-term advances |
15,000 | 15,000 | 40,000 | |||||||||
Customer repos |
33,992 | 43,148 | 26,744 | |||||||||
Purchased funds and other borrowings |
| 5 | 549 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Total at period end |
$ | 85,359 | $ | 94,671 | $ | 103,486 | ||||||
Average Balances |
||||||||||||
FHLB long-term advances, at fair value |
$ | 26,205 | $ | 26,196 | $ | 31,801 | ||||||
FHLB long-term advances |
15,000 | 28,105 | 25,802 | |||||||||
Customer repos |
35,152 | 35,759 | 32,343 | |||||||||
Purchased funds and other borrowings |
32,987 | 9,133 | 24,222 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Total average balance |
$ | 119,654 | $ | 109,503 | $ | 124,478 | ||||||
Average rate paid on all
borrowed funds, end of period |
1.49 | % | 1.69 | % | 1.59 | % | ||||||
Customer repurchase agreements are standard commercial banking transactions that involve
a Bank customer instead of a wholesale bank or broker. We offer 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. We believe this product offers us a stable source
of financing at a reasonable market rate of interest. We do 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, we have used
overnight advances (daily rate credit) to support our short-term liquidity needs. On a longer term
basis, we augment our funding portfolio with our 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 March 31, 2011, December 31, 2010 and March 31, 2010, the FHLB long-term advance accounted
for on a fair value basis had a value of $26.1 million, $26.2 million and $25.9 million
respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB
advance accounted for on a fair value basis was 3.985% for all periods presented. The par value of
the FHLB advance accounted for on a fair value basis was $25.0 million at March 31, 2011, December
31 2010, and March 31, 2010.
At March 31, 2011, there was one FHLB advance accounted for on a cost basis. Bankshares
entered into this floating rate advance in the first quarter of 2010 for $15.0 million.
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The
advance matures in 2012 and the interest rate at March 31, 2011 was 0.213%. The weighted average
interest rate for both FHLB advances at March 31, 2011 is 2.570%.
Trading Liabilities 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 may not be the same as a liquidation value. In
evaluating the fair value of funding instruments, we determined that the typical valuation
techniques did not take into account the distressed investment and debt markets. As such, we
considered other factors such as typical spreads for the instruments, option adjusted spreads, swap
curves, discounted cashflow models, previously observable non-distressed valuations and bond
issuance rates and spreads for investment and non-investment grade instruments. As of March 31,
2011 and December 31, 2010, the fair value of the long-term FHLB advance accounted for on a fair
value basis was $26.1 million and $26.2 million respectively.
The following table reflects the fair value of liabilities accounted for under ASC 820-10 as
of the dates indicated:
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||||||||||||||||||||
Par | Fair | Par | Fair | Par | Fair | |||||||||||||||||||||||||||||||
Value | Value | Yield | Value | Value | Yield | Value | Value | Yield | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
FHLB long-term advances |
$ | 25,000 | $ | 26,057 | 3.99 | % | $ | 25,000 | $ | 26,208 | 3.99 | % | $ | 25,000 | $ | 25,883 | 3.99 | % |
Liquidity. Bankshares specifically focuses on liquidity management to meet the demand
for funds from our depositors and lending clients as well as expenses that we incur in the
operation of our business. We have 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. Our 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, 2010 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 our liquidity position
through a reduction in average deposits.
Our funding department and Chief Financial Officer monitor our overall liquidity position
daily. We 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. Our 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, we use wholesale funding techniques to support our
balance sheet and asset portfolios, although our longer term
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plan is to increase deposits from our
local retail and commercial deposits and maintain available wholesale funding sources as additional
liquidity.
As of March 31, 2011, Bankshares had $49.6 million in cash to support the business activities
and deposit flows of our clients. The Bank maintains credit lines at the FHLB and other
correspondent banks. At March 31, 2011, the Bank had a total credit line of $107.5 million with the
FHLB with an unused portion of $67.5 million. Borrowings with the FHLB have certain collateral
requirements and are subject to disbursement approval by the FHLB. At March 31, 2011, the Bank had
$30.0 million in secured borrowing capacity and $4.5 million in unsecured borrowing capacity (both
reverse repurchase agreements and federal funds purchased) from correspondent banks. As of March
31, 2011, the Bank did not have any outstanding borrowings from its correspondent banks. All
borrowings from correspondent banks are subject to disbursement approval. The Bank is also eligible
to borrow from the Federal Reserve Discount Window subject to the collateral requirements and other
terms and conditions that may exist. In addition to the borrowing capacity described above,
Bankshares and the Bank may sell investment securities, loans and other assets to generate
additional liquidity. We anticipate 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 stockholders equity was $33.8 million as of March 31, 2011 compared to the December 31,
2010 level of $33.7 million. The change in equity is primarily attributable to our net income for
2011 of $365 thousand. Book value per common share was $6.61 as of March 31, 2011, compared to
$6.60 as of December 31, 2010. The net unrealized loss on available-for-sale securities amounted
to $584 thousand, net of tax as of March 31, 2011, compared to a net unrealized loss on
available-for-sale securities of $288 thousand, net of tax as of December 31, 2010. Recent
fluctuations in interest rates and spreads have had an adverse effect on the net unrealized loss on
available-for-sale securities.
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The following table reflects the components of stockholders equity on a book value per share
basis.
Three Months | Twelve Months | Three Months | ||||||||||
Ended March 31, | Ended December 31, | Ended March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in Thousands) | ||||||||||||
Book Value Per Share, beginning of the period |
$ | 6.60 | $ | 6.49 | $ | 6.49 | ||||||
Net income per common share |
0.07 | 0.14 | 0.02 | |||||||||
Stock based compensation |
| | | |||||||||
Effects of changes in Other Comprehensive |
||||||||||||
Income (Loss)1 |
(0.06 | ) | (0.03 | ) | 0.04 | |||||||
Book Value Per Share, end of the period |
$ | 6.61 | $ | 6.60 | $ | 6.55 | ||||||
1 | Other Comprehensive Income represents the unrealized gains or losses associated with available-for-sale secutities |
Payment of dividends is at the discretion of Bankshares Board of Directors and is
subject to various federal and state regulatory limitations. It is our current policy to retain
earnings to support our banking operations and our business risk profile.
On June 30, 2003, Bankshares wholly-owned Delaware statutory business trust privately issued
$10.0 million face amount of the trusts floating rate trust preferred capital securities
(Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust
issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds
of the sale to purchase $10.3 million principal amount of Bankshares floating rate junior
subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes
and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an
unsecured obligation of Bankshares and are junior in right of payment to all present and future
senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares
on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated
Balance Sheets of Bankshares under the caption Trust Preferred Capital Notes. Bankshares records
distributions payable on the Trust Preferred Capital Notes as an interest 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 March 31, 2011, Bankshares elected to defer the interest
payments as permitted under the indenture. The interest deferred under the indenture compounds
quarterly at the interest rate then in effect. As of March 31, 2011 the total amount of deferred
and compounded interest owed under the indenture is $666 thousand. The base interest rate as of
March 31, 2011 was 3.46% and as of December 31, 2010 was 3.45%.
All or a portion of Trust Preferred Capital Notes may be included in the regulatory
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computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may
include up to 25% of stockholders equity excluding accumulated other comprehensive income (loss)
in the form of Trust Preferred Capital Notes. At March 31, 2011 and December 31, 2010, the entire
amount was considered Tier 1 capital. Management does not expect the restrictions on Tier 1
capital treatment of trust preferred securities that were enacted by the Dodd-Frank Act to impact
the Tier 1 capital status of the Trust Preferred Capital Notes, as the Dodd-Frank Acts
restrictions generally do not apply to trust preferred securities issued prior to enactment by
institutions with fewer than $15 billion in assets.
Bankshares is considered well capitalized as of March 31, 2011, December 31, 2010 and March
31, 2010. The following table shows our capital categories, capital ratios and the minimum capital
ratios currently required by bank regulators:
Risk Based Capital Analysis | ||||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Tier 1 Capital: |
||||||||||||
Common stock |
$ | 20,433 | $ | 20,427 | $ | 20,427 | ||||||
Capital surplus |
25,855 | 25,857 | 25,822 | |||||||||
Retained (deficit) |
(11,946 | ) | (12,311 | ) | (12,903 | ) | ||||||
Less: disallowed assets |
(4,545 | ) | (4,904 | ) | (1,211 | ) | ||||||
Add: Qualifying Trust Preferred Securities |
10,000 | 10,000 | 10,000 | |||||||||
Total Tier 1 capital |
39,797 | 39,069 | 42,135 | |||||||||
Tier 2 Capital: |
||||||||||||
Qualifying allowance for loan losses |
4,144 | 4,400 | 4,873 | |||||||||
Total Tier 2 capital |
4,144 | 4,400 | 4,873 | |||||||||
Total Risk Based Capital |
$ | 43,941 | $ | 43,469 | $ | 47,008 | ||||||
Risk weighted assets |
$ | 331,226 | $ | 352,277 | $ | 389,949 | ||||||
Quarterly average assets |
$ | 508,245 | $ | 547,008 | $ | 575,054 | ||||||
March 31, | December 31, | March 31, | Regulatory | |||||||||||||
2011 | 2010 | 2010 | Minimum | |||||||||||||
Capital Ratios: | ||||||||||||||||
Tier 1 risk based capital ratio |
12.0 | % | 11.1 | % | 10.8 | % | 4.0 | % | ||||||||
Total risk based capital ratio |
13.3 | % | 12.3 | % | 12.1 | % | 8.0 | % | ||||||||
Leverage ratio |
7.8 | % | 7.1 | % | 7.3 | % | 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 March 31, 2011, the Bank had capital ratios of 7.8%, 12.0% and 13.3%, 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.
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The ratio of net income to average assets and average equity and certain other ratios are as
follows for the periods indicated:
Return on Average Assets and Return on Average Equity | ||||||||||||
Three | Twelve | Three | ||||||||||
Months Ended | Months Ended | Months Ended | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Average total assets |
$ | 512,790 | $ | 558,945 | $ | 575,054 | ||||||
Average stockholders equity |
$ | 33,619 | $ | 37,395 | $ | 33,413 | ||||||
Net income |
$ | 365 | $ | 705 | $ | 114 | ||||||
Cash dividends declared |
$ | | $ | | $ | | ||||||
Return on average assets (annualized) |
0.29 | % | 0.13 | % | 0.08 | % | ||||||
Return on average stockholders
equity (annualized) |
4.40 | % | 1.89 | % | 1.38 | % | ||||||
Average stockholders equity to
average total assets |
6.56 | % | 6.69 | % | 5.81 | % |
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 March 31, 2011, commercial real estate loans were 43.8%
and residential real estate loans were 33.6% of the total gross loan portfolio. In addition, a
substantial portion of our noninterest bearing deposits is generated by our title and escrow
company clients. As of March 31, 2011, the noninterest bearing deposits were 29.7% 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
As of March 31, 2011, 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, 2010.
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Recent Accounting Pronouncements In January 2010, the FASB issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures,
require new disclosures, and includes conforming amendments to guidance on employers disclosures
about postretirement benefit plan assets. ASU 2010-06 is effective for 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
are effective for fiscal years beginning after December 15, 2010 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 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The new disclosure guidance significantly
expands the existing requirements and will lead to greater transparency into a companys exposure
to credit losses from lending arrangements. The extensive new disclosures of information as of the
end of a reporting period will become effective for both interim and annual reporting periods
ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before
the issuance of the ASU, such as the allowance roll forward and modification disclosures will be
required for periods beginning on or after December 15, 2010. Bankshares has included the required
disclosures in its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations. The guidance requires pro forma disclosure for business
combinations that occurred in the current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as of the beginning of the annual
reporting period. If comparative financial statements are presented, the pro forma information
should be reported as though the acquisition date for all business combinations that occurred
during the current year had been as of the beginning of the comparable prior annual reporting
period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2010.
Early adoption is permitted. The adoption of the new guidance did not have a material impact on
Bankshares consolidated financial statements.
In December 2010, the FASB issued ASU 2010-28, 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. For
public entities, the amendments in this update are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2010. Early adoption is not permitted. The
adoption of the new guidance did not have a material impact on Bankshares consolidated financial
statements.
The SEC has issued Final Rule No. 33-9002, Interactive Data to Improve Financial Reporting,
which requires companies to submit financial statements in XBRL (extensible business reporting
language) format with their SEC filings on a phased-in schedule. Large accelerated filers and
foreign large accelerated filers using U.S. GAAP were required to provide
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interactive data reports
starting with their first quarterly report for fiscal periods ending on or after June 15, 2010.
All remaining filers are required to provide interactive data reports starting with their first
quarterly report for fiscal periods ending on or after June 15, 2011. Bankshares is currently
assessing the impact that the final rule will have on its consolidated financial statements.
In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or
rescinds portions of the interpretive guidance included in the codification of the Staff Accounting
Bulletin Series. This update is intended to make the relevant interpretive guidance consistent
with current authoritative accounting guidance issued as a part of the FASBs Codification. The
principal changes involve revision or removal of accounting guidance references and other
conforming changes to ensure consistency of referencing through the SAB Series. The effective date
for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on
Bankshares consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance
on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify
the guidance on a creditors evaluation of whether a debtor is experiencing financial difficulty.
The amendments in this update are effective for the first interim or annual period beginning on or
after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of
the annual period of adoption for modifications occurring on or after the beginning of the annual
adoption period is required. As a result of applying these amendments, an entity may identify
receivables that are newly considered to be impaired. For purposes of measuring impairment of
those receivables, an entity should apply the amendments prospectively for the first interim or
annual period beginning on or after June 15, 2011. Bankshares is currently assessing the impact
that ASU 2011-02 will have on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Asset Liability Management (ALM) Risk Management. We engage a consulting firm to model our
short-term and long-term interest rate risk profile. The model includes basic business assumptions,
interest rates, repricing information and other relevant market data necessary to project our
interest rate risk. The Board of Directors has established interest rate risk limits for both
short-term and long-term interest rate exposure. On a periodic basis, management reports to the
Board of Directors on our base interest rate risk profile and expectations of changes in the
profiles based on certain interest rate shocks.
Net Interest Income Sensitivity (Short-term Interest Rate Risk). Bankshares ALM process
evaluates the effect of upward and downward changes in market interest rates on future net interest
income. This analysis involves shocking the interest rates used in determining net interest income
over the next twelve months. The resulting percentage change in net interest income in various
rate scenarios is an indication of Bankshares shorter-term interest rate risk. This analysis is
accomplished by assuming a static balance sheet over a period of time with maturing and repayment
dollars being rolled back into like instruments for new terms at current market rates. Additional
assumptions are applied to modify volumes and pricing under various
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rate scenarios. These
assumptions include prepayments, the sensitivity of non-maturity deposit rates, and other factors
deemed significant by Bankshares.
The ALM model results for March 31, 2011 are shown in the table below. Assuming an immediate
upward shift in market interest rates of 100 basis points, the results indicate Bankshares would
expect net interest income to increase over the next twelve months by 5.1%. Assuming a shift
downward of 100 basis points, Bankshares would expect net interest income to decrease over the next
twelve months by 1.8%.
Economic Value of Equity (Long-term Interest Rate Risk). The economic value of equity process
models the cashflows of financial instruments to maturity. The model incorporates growth and
pricing assumptions to develop a baseline EVE. The interest rates used in the model are then
shocked for an immediate increase or decrease in interest rates. The results of the shocked model
are compared to the baseline results to determine the percentage change in EVE under the various
scenarios. The resulting percentage change in EVE is an indication of the longer term repricing
risk and options embedded in the balance sheet.
The table below shows as of March 31, 2011, ALM model results under various interest rate
shocks:
March 31, 2011 | ||||||||
Interest Rate Shocks | NII | EVE | ||||||
-200 bp |
-6.6 | % | 4.4 | % | ||||
-100 bp |
-1.8 | % | 3.0 | % | ||||
+100 bp |
5.1 | % | -4.7 | % | ||||
+200 bp |
10.3 | % | -7.6 | % | ||||
All results above are within Bankshares current interest rate risk policy guidelines.
Interest Rate Gap. In addition to the NII and EVE models, management reviews our static gap
position. The cumulative negative gap position within one year was $68.7 million, or 12.8% of
total assets, at March 31, 2011. While this measurement technique is common in the financial
services industry, it has limitations and is not our sole tool for measuring interest rate
sensitivity. We do not believe this model accurately reflects Bankshares true short-term and
long-term interest rate exposure. As an example, $113.2 million of the investment and trading
securities at March 31, 2011 are classified as greater than five years due to the contractual
maturity of the instruments. Investment and trading securities are easily marketed and can be
liquidated in a short period of time. As a result, it is reasonable to consider a portion of, or
perhaps all of, the $113.2 million of investment and trading securities as the within three month
category, which further suggests a more balanced short-term interest rate position for Bankshares.
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The following table reflects our March 31, 2011 static interest rate gap position:
March 31, 2011 | ||||||||||||||||||||
Maturing or Repricing | ||||||||||||||||||||
Within | 4 12 | 1 5 | Over | |||||||||||||||||
3 Months | Months | Years | 5 Years | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||
Investment securities |
$ | | $ | | $ | 12,822 | $ | 112,647 | $ | 125,469 | ||||||||||
Trading securities |
| | | 605 | 605 | |||||||||||||||
Loans* |
58,287 | 41,324 | 132,588 | 75,834 | 308,033 | |||||||||||||||
Interest-bearing deposits |
48,137 | | | | 48,137 | |||||||||||||||
Federal funds sold |
8,272 | | | | 8,272 | |||||||||||||||
Total interest earning assets |
114,696 | 41,324 | 145,410 | 189,086 | 490,516 | |||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Interest-bearing demand deposits |
50,038 | | | | 50,038 | |||||||||||||||
Money market deposit accounts |
24,671 | | | | 24,671 | |||||||||||||||
Savings accounts |
3,195 | | | | 3,195 | |||||||||||||||
Time deposits |
28,945 | 58,563 | 103,512 | 16,519 | 207,539 | |||||||||||||||
Total interest-bearing deposits |
106,849 | 58,563 | 103,512 | 16,519 | 285,443 | |||||||||||||||
FHLB long term advances, at fair value |
| | | 26,057 | 26,057 | |||||||||||||||
FHLB long term advances |
15,000 | | | | 15,000 | |||||||||||||||
Customer repurchase agreements |
33,992 | | | | 33,992 | |||||||||||||||
Trust Preferred Capital Notes |
10,310 | | | | 10,310 | |||||||||||||||
Total interest-bearing
liabilities |
166,151 | 58,563 | 103,512 | 42,576 | 370,802 | |||||||||||||||
Period Gap |
$ | (51,455 | ) | $ | (17,239 | ) | $ | 41,898 | $ | 146,510 | $ | 119,714 | ||||||||
Cumulative Gap |
$ | (51,455 | ) | $ | (68,694 | ) | $ | (26,796 | ) | $ | 119,714 | $ | 119,714 | |||||||
Cumulative Gap / Total Assets |
-9.6 | % | -12.8 | % | -5.0 | % | 22.2 | % | 22.2 | % | ||||||||||
* | Excludes nonaccrual assets of $11.6 million. |
Interest Rate Risk Management Summary. As part of our interest rate risk management, we
typically use the trading and investment portfolios and our wholesale funding instruments to
balance our interest rate exposure. There is no guarantee that the risk management techniques and
balance sheet management strategies we employ will be effective in periods of rapid rate movements
or extremely volatile periods. We believe our strategies are prudent and within our policy
guidelines in the base case of our modeling efforts as of March 31, 2011.
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Item 4. Controls and Procedures
We have disclosure controls and procedures to ensure that the information required to be
disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as
amended (the Exchange Act) is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and regulations, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Our management evaluated,
with the participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective as of March 31, 2011.
Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that our disclosure controls and procedures will detect or uncover every
situation involving the failure of persons within Bankshares to disclose material information
required to be set forth in our periodic reports.
No changes in our internal control over financial reporting occurred during the quarter ended
March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising in the normal
course of our business. In the opinion of management final disposition of any pending or threatened
legal matters will not have a material adverse effect on our financial condition or results of
operations.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
None.
Item 5. Other Information
As previously disclosed, current
Executive Vice President and Chief Financial Officer, Paul M. Harbolick, Jr., has resigned his positions with Bankshares
and the Bank, with an effective last day of employment of May 18, 2011. On May 16, 2011, Bankshares and the Bank entered
into a consulting agreement with Mr. Harbolick, effective as of May 19, 2011, pursuant to which Mr. Harbolick will serve
as a consultant and advisor to Bankshares and the Bank with respect to financial accounting and other matters for up to
six months following his resignation. In his capacity as a consultant, Mr. Harbolick will perform such advisory services
as are requested by the Board of Directors, up to a maximum of 32 hours per month. Mr. Harbolick will receive $125,000
under the consulting agreement, with half to be paid in a lump sum on May 19, 2011 (subject to repayment in the event
consulting services are not provided as requested) and the remaining half to be paid in monthly installments as the
services are provided. Under the agreement, Mr. Harbolick will also be reimbursed for reasonable travel and business
expenses incurred in connection with providing such consulting services
The consulting agreement is included as Exhibit 10.15 to this report and is incorporated by reference herein.
Item 6. Exhibits
2.1 | Agreement and Plan of Reorganization between Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of May 22, 2002 (incorporated by reference to Exhibit 2.0 to Form 8-K12g-3 filed August 21, 2002). | ||
2.4 | Stock Purchase Agreement between Alliance Bank Corporation, as the seller, and Thomas P. Danaher and Oswald H. Skewes, as the purchasers, dated as of December 29, 2010 (incorporated by reference to Exhibit 2.4 to Form 10-K filed May 28, 2010). | ||
3.1 | Articles of Incorporation of Alliance Bankshares Corporation (as amended July 6, 2006) (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 14, 2006). |
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3.2 | Bylaws of Alliance Bankshares Corporation (amended and restated as of December 19, 2007) (incorporated by reference to Exhibit 3.2 to Form 8-K filed December 27, 2007). | ||
10.15 | Consulting Agreement between Alliance Bankshares Corporation, Alliance Bank Corporation and Paul M. Harbolick, Jr., dated as of May 19, 2011. | ||
31.1 | Certification of CEO pursuant to Rule 13a-14(a). | ||
31.2 | Certification of CFO pursuant to Rule 13a-14(a). | ||
32 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLIANCE BANKSHARES CORPORATION
(Registrant)
(Registrant)
May 16, 2011 | /s/ William E. Doyle, Jr. | |||
Date | William E. Doyle, Jr. | |||
President & Chief Executive Officer (principal executive officer) |
||||
May 16, 2011 | /s/ Paul M. Harbolick, Jr. | |||
Date | Paul M. Harbolick, Jr. | |||
Executive Vice President & Chief Financial Officer (principal financial and accounting officer) |
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