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EXCEL - IDEA: XBRL DOCUMENT - ALLIANCE BANKSHARES CORP | Financial_Report.xls |
EX-32 - EX-32 - ALLIANCE BANKSHARES CORP | w83157aexv32.htm |
EX-31.1 - EX-31.1 - ALLIANCE BANKSHARES CORP | w83157aexv31w1.htm |
EX-31.2 - EX-31.2 - ALLIANCE BANKSHARES CORP | w83157aexv31w2.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 June 30, 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 (State or other jurisdiction of incorporation or organization) |
46-0488111 (I.R.S. Employer 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 þ 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 (Do not check if a smaller reporting company) | Smaller reporting company þ |
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 August 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
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EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Alliance Bankshares Corporation
Alliance Bankshares Corporation
Consolidated Balance Sheets
June 30, 2011, December 31, 2010 and June 30, 2010
(Dollars in thousands except per share amounts)
(Dollars in thousands except per share amounts)
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(unaudited) | (audited) | (unaudited) | ||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 62,436 | $ | 24,078 | $ | 93,083 | ||||||
Federal funds sold |
20,359 | 17,870 | 25,238 | |||||||||
Trading securities, at fair value |
658 | 2,075 | 2,250 | |||||||||
Investment securities available-for-sale, at fair value |
108,805 | 135,852 | 128,907 | |||||||||
Restricted stock, at cost |
5,565 | 6,355 | 6,937 | |||||||||
Loans, net of allowance for loan losses of $5,610, $5,281 and $5,203 |
315,879 | 327,029 | 336,886 | |||||||||
Premises and equipment, net |
1,644 | 1,584 | 1,864 | |||||||||
Other real estate owned |
4,312 | 4,627 | 7,366 | |||||||||
Accrued interest and other assets |
16,330 | 19,041 | 17,029 | |||||||||
TOTAL ASSETS |
$ | 535,988 | $ | 538,511 | $ | 619,560 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
LIABILITIES: |
||||||||||||
Non-interest bearing deposits |
$ | 130,838 | $ | 124,639 | $ | 158,724 | ||||||
Savings and NOW deposits |
57,633 | 56,569 | 69,804 | |||||||||
Money market deposits |
23,933 | 25,524 | 27,746 | |||||||||
Time deposits |
199,628 | 200,211 | 230,079 | |||||||||
Total deposits |
412,032 | 406,943 | 486,353 | |||||||||
Repurchase agreements, federal funds purchased and other borrowings |
33,882 | 43,153 | 33,125 | |||||||||
Federal Home Loan Bank advances ($26,281, $26,208 and $26,223 at fair value) |
41,281 | 41,208 | 51,223 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Other liabilities |
2,704 | 3,212 | 2,899 | |||||||||
Commitments and contingent liabilities |
| | | |||||||||
Total liabilities |
500,209 | 504,826 | 583,910 | |||||||||
STOCKHOLDERS EQUITY: |
||||||||||||
Common stock, $4 par value; 15,000,000 shares authorized;
5,108,969 shares issued and outstanding at June 30, 2011 and
5,106,819 shares at December 31, 2010 and June 30, 2010, respectively |
20,436 | 20,427 | 20,427 | |||||||||
Capital surplus |
25,854 | 25,857 | 25,822 | |||||||||
Retained (deficit) |
(11,552 | ) | (12,311 | ) | (12,712 | ) | ||||||
Accumulated other comprehensive income (loss), net |
1,041 | (288 | ) | 2,113 | ||||||||
Total stockholders equity |
35,779 | 33,685 | 35,650 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 535,988 | $ | 538,511 | $ | 619,560 | ||||||
See Notes to Consolidated Financial Statements.
2
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended June 30, 2011 and 2010
(Dollars in thousands, except for per share data)
(Unaudited)
For the Three Months Ended June 30, 2011 and 2010
(Dollars in thousands, except for per share data)
2011 | 2010 | |||||||
INTEREST INCOME: |
||||||||
Loans |
$ | 4,555 | $ | 5,228 | ||||
Investment securities |
1,167 | 1,637 | ||||||
Trading securities |
12 | 49 | ||||||
Federal funds sold |
12 | 11 | ||||||
Total interest income |
5,746 | 6,925 | ||||||
INTEREST EXPENSE: |
||||||||
Savings and NOW deposits |
30 | 55 | ||||||
Time deposits |
971 | 1,468 | ||||||
Money market deposits |
45 | 72 | ||||||
Repurchase agreements, federal funds purchased and other borrowings |
52 | 82 | ||||||
FHLB advances |
256 | 305 | ||||||
Trust preferred capital notes |
93 | 88 | ||||||
Total interest expense |
1,447 | 2,070 | ||||||
Net interest income |
4,299 | 4,855 | ||||||
Provision for loan losses |
769 | 675 | ||||||
Net interest income after provision for loan losses |
3,530 | 4,180 | ||||||
OTHER INCOME: |
||||||||
Deposit account service charges |
39 | 45 | ||||||
Net gain on sale of available-for-sale securities |
835 | 803 | ||||||
Trading activity and fair value adjustments |
(130 | ) | (426 | ) | ||||
Other operating income (loss) |
75 | (9 | ) | |||||
Total other income |
819 | 413 | ||||||
OTHER EXPENSES: |
||||||||
Salaries and employee benefits |
1,404 | 1,547 | ||||||
Occupancy expense |
564 | 645 | ||||||
Equipment expense |
155 | 185 | ||||||
Other real estate owned expense |
16 | 351 | ||||||
FDIC assessments |
290 | 302 | ||||||
Operating expenses |
1,335 | 1,381 | ||||||
Total other expenses |
3,764 | 4,411 | ||||||
Income before income taxes |
585 | 182 | ||||||
Income tax expense (benefit) |
191 | (9 | ) | |||||
NET INCOME |
$ | 394 | $ | 191 | ||||
Net income per common share, basic |
$ | 0.08 | $ | 0.04 | ||||
Net income per common share, diluted |
$ | 0.08 | $ | 0.04 | ||||
Weighted average number of shares, basic |
5,108,821 | 5,106,819 | ||||||
Weighted average number of shares, diluted |
5,134,153 | 5,107,788 | ||||||
See Notes to Consolidated Financial Statements.
3
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands, except for per share data)
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands, except for per share data)
2011 | 2010 | |||||||
INTEREST INCOME: |
||||||||
Loans |
$ | 9,100 | $ | 10,368 | ||||
Investment securities |
2,488 | 3,379 | ||||||
Trading securities |
45 | 137 | ||||||
Federal funds sold |
22 | 22 | ||||||
Total interest income |
11,655 | 13,906 | ||||||
INTEREST EXPENSE: |
||||||||
Savings and NOW deposits |
62 | 127 | ||||||
Time deposits |
1,968 | 3,134 | ||||||
Money market deposits |
94 | 151 | ||||||
Repurchase agreements, federal funds purchased and other borrowings |
140 | 206 | ||||||
FHLB advances |
515 | 584 | ||||||
Trust preferred capital notes |
185 | 174 | ||||||
Total interest expense |
2,964 | 4,376 | ||||||
Net interest income |
8,691 | 9,530 | ||||||
Provision for loan losses |
1,075 | 950 | ||||||
Net interest income after provision for loan losses |
7,616 | 8,580 | ||||||
OTHER INCOME: |
||||||||
Deposit account service charges |
76 | 123 | ||||||
Net gain on sale of available-for-sale securities |
914 | 1,059 | ||||||
Trading activity and fair value adjustments |
(106 | ) | (616 | ) | ||||
Other operating income |
119 | 108 | ||||||
Total other income |
1,003 | 674 | ||||||
OTHER EXPENSES: |
||||||||
Salaries and employee benefits |
2,796 | 3,550 | ||||||
Occupancy expense |
1,125 | 1,273 | ||||||
Equipment expense |
323 | 379 | ||||||
Other real estate owned expense |
51 | 394 | ||||||
FDIC assessments |
640 | 665 | ||||||
Operating expenses |
2,552 | 2,697 | ||||||
Total other expenses |
7,487 | 8,958 | ||||||
Income before income taxes |
1,132 | 296 | ||||||
Income tax expense (benefit) |
373 | (9 | ) | |||||
NET INCOME |
$ | 759 | $ | 305 | ||||
Net income per common share, basic |
$ | 0.15 | $ | 0.06 | ||||
Net income per common share, diluted |
$ | 0.15 | $ | 0.06 | ||||
Weighted average number of shares, basic |
5,108,436 | 5,106,819 | ||||||
Weighted average number of shares, diluted |
5,125,151 | 5,107,737 | ||||||
See Notes to Consolidated Financial Statements.
4
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands)
Accumulated | Total | |||||||||||||||||||||||
Other | Stock- | |||||||||||||||||||||||
Common | Capital | Retained | Comprehensive | Comprehensive | holders | |||||||||||||||||||
Stock | Surplus | (Deficit) | Income (Loss) | Income | Equity | |||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
$ | 20,427 | $ | 25,835 | $ | (13,016 | ) | $ | (112 | ) | $ | 33,134 | ||||||||||||
COMPREHENSIVE INCOME: |
||||||||||||||||||||||||
Net income |
| | 305 | | $ | 305 | 305 | |||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains on securities
available-for-sale, net of tax of $1,506 |
| | | | 2,924 | | ||||||||||||||||||
Reclassification adjustment, net of
income taxes of $(360) |
| | | | (699 | ) | | |||||||||||||||||
Other comprehensive income, net of tax |
| | | 2,225 | 2,225 | 2,225 | ||||||||||||||||||
Total comprehensive income |
| | | | $ | 2,530 | | |||||||||||||||||
Stock-based compensation expense |
| (13 | ) | (1 | ) | | (14 | ) | ||||||||||||||||
BALANCE, June 30, 2010 |
$ | 20,427 | $ | 25,822 | $ | (12,712 | ) | $ | 2,113 | $ | 35,650 | |||||||||||||
BALANCE, DECEMBER 31, 2010 |
$ | 20,427 | $ | 25,857 | $ | (12,311 | ) | $ | (288 | ) | $ | 33,685 | ||||||||||||
COMPREHENSIVE INCOME: |
||||||||||||||||||||||||
Net income |
| | 759 | | $ | 759 | 759 | |||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains on securities
available-for-sale, net of tax of $995 |
| | | | 1,933 | | ||||||||||||||||||
Reclassification adjustment, net of
income taxes of ($310) |
| | | | (604 | ) | | |||||||||||||||||
Other comprehensive income, net of tax |
| | | 1,329 | 1,329 | 1,329 | ||||||||||||||||||
Total comprehensive income |
| | | | $ | 2,088 | | |||||||||||||||||
Exercise of stock options |
9 | (3 | ) | | | 6 | ||||||||||||||||||
BALANCE, June 30, 2011 |
$ | 20,436 | $ | 25,854 | $ | (11,552 | ) | $ | 1,041 | $ | 35,779 | |||||||||||||
See Notes to Consolidated Financial Statements.
5
Table of Contents
Alliance Bankshares Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 759 | $ | 305 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation, amortization and accretion |
622 | 492 | ||||||
Disposal of fixed assets |
15 | | ||||||
Provision for loan losses |
1,075 | 950 | ||||||
Losses and valuation adjustments on other real estate owned |
10 | 255 | ||||||
Proceeds from sale of loans held for sale |
| 1,983 | ||||||
Stock-based compensation expense |
| (13 | ) | |||||
Net (gain) on sale of securities available-for-sale |
(914 | ) | (1,059 | ) | ||||
Trading activity and fair value adjustments |
106 | 616 | ||||||
Changes in assets and liabilities affecting operations: |
||||||||
Accrued interest and other assets |
1,502 | 4,052 | ||||||
Other liabilities |
(508 | ) | (33 | ) | ||||
Net cash provided by operating activities |
2,667 | 7,548 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Net change in federal funds sold |
(2,489 | ) | (22,268 | ) | ||||
Purchase of securities available-for-sale |
(26,943 | ) | (34,636 | ) | ||||
Proceeds from sale/calls of securities available-for-sale |
50,430 | 45,815 | ||||||
Paydowns on securities available-for-sale |
6,175 | 9,221 | ||||||
Net change in trading securities |
1,908 | 5,061 | ||||||
Net change in restricted stock |
790 | (619 | ) | |||||
Net change in loan portfolio |
9,641 | 14,325 | ||||||
Proceeds from sale of other real estate owned |
739 | 1,854 | ||||||
Purchase of premises and equipment |
(384 | ) | (169 | ) | ||||
Net cash provided by investing activities |
39,867 | 18,584 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net change in cash realized from (expended on): |
||||||||
Non-interest bearing deposits |
6,199 | 65,878 | ||||||
Savings and NOW deposits |
1,064 | 16,187 | ||||||
Money market deposits |
(1,591 | ) | 5,284 | |||||
Time deposits |
(583 | ) | (32,904 | ) | ||||
Repurchase agreements, federal funds purchased and other borrowings |
(9,271 | ) | (14,165 | ) | ||||
FHLB long term advances issued |
| 15,000 | ||||||
FHLB long term advances repaid |
| (15,000 | ) | |||||
Proceeds from exercise of stock options |
6 | | ||||||
Net cash provided by (used in) financing activities |
(4,176 | ) | 40,280 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
38,358 | 66,412 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
24,078 | 26,671 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 62,436 | $ | 93,083 | ||||
See Notes to Consolidated Financial Statements.
6
Table of Contents
Notes to Consolidated Financial Statements (Unaudited)
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 was a wholly-owned mortgage
banking subsidiary of the Bank and originated residential mortgages for subsequent sale. AHF did
not retain the servicing rights on mortgages sold. On December 27, 2006, Bankshares announced it
would no longer offer mortgage banking operations via AHF. AHF was terminated effective June 27,
2011, and no longer exists. Alliance Bank Mortgage Division (ABMD) was created in 2007 as a
division within the Bank.
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.
On July 27, 2011, Eagle Bancorp, Inc. (Eagle), Bankshares and the Bank entered into an Agreement of
Merger (Merger Agreement), pursuant to which Bankshares will merge with and into Eagle, with Eagle
being the surviving corporation, and each share of Bankshares outstanding common stock will be
converted into the right to receive 0.4317 shares of Eagles common stock, subject to certain
adjustments (Merger). Completion of the Merger is subject to (i) approval of the Merger by the
shareholders of Bankshares, (ii) applicable regulatory approvals, including the Federal Reserve
Board, the Maryland Department of Financial Regulation and the Virginia State Corporation
Commission, and (iii) other customary closing conditions.
Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while
the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain
from, among other things, redeeming, purchasing or otherwise acquiring any shares of its capital
stock, amending its articles of incorporation or bylaws, soliciting any third party acquisition
proposals and entering into any new line of business, without the consent of Eagle.
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
7
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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 June 30, 2011, December 31, 2010 and June 30, 2010, the results of operations for the three
and six month periods ended June 30, 2011 and 2010, and cash flows and changes in stockholders
equity for the six month periods ended June 30, 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 and six month periods ended June 30, 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 value of an award on the grant date and
is recognized over the service period, which is usually the vesting period.
As of June 30, 2011, there was $115 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 six months of 2011.
8
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Stock option activity for the six months ended June 30, 2011 is summarized below:
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value1 | |||||||||||||
Shares | Price | Life (in years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2011 |
500,210 | $ | 10.26 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(2,150 | ) | 2.45 | |||||||||||||
Forfeited |
(94,876 | ) | 12.05 | |||||||||||||
Expired |
(10,350 | ) | 4.25 | |||||||||||||
Outstanding at June 30, 2011 |
392,834 | $ | 10.03 | 4.8 | $ | | ||||||||||
Exercisable at June 30, 2011 |
293,334 | $ | 11.71 | 4.8 | $ | | ||||||||||
1 | Intrinsic value is the difference between the underlying stocks price and the strike price. If the difference is negative, the intrinsic value is given as zero. |
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,
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.
9
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Fair Value Hierarchy
In accordance with this guidance, Bankshares groups its financial assets and liabilities generally
measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value.
| Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. | ||
| Level 2 Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. | ||
| Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect Bankshares own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
A financial instruments categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
The following describes the valuation techniques used by Bankshares to measure certain financial
assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Trading and Available-for-Sale Securities Trading and available-for-sale securities are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when
available (Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party
vendors compile prices from various sources and may determine the fair value of identical or
similar securities by using pricing models that consider observable market data (Level 2).
Financial assets and liabilities that are traded infrequently have values based on prices or
valuation techniques that require inputs that are both unobservable and significant to the overall
fair value measurement. These inputs reflect managements own view about the assumptions that
market participants would use in pricing the asset or liability (Level 3). As a result, some of
Bankshares securities are hand priced using customary spreads over similar maturity treasury
instruments.
FHLB Advances 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 June 30, 2011, Bankshares had one wholesale liability as a fair value
instrument: a long-term Federal Home Loan Bank (FHLB) advance.
10
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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 tables present the balances of financial assets and liabilities measured at fair
value on a recurring basis as of June 30, 2011 and December 31, 2010:
Fair Value Measurements at June 30, 2011 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Quoted | Significant | Significant | Changes in | |||||||||||||||||
Prices in | Other | Other | Fair Value | |||||||||||||||||
Active | Observable | Unobservable | Included in | |||||||||||||||||
Fair | Markets | Inputs | Inputs | YTD | ||||||||||||||||
Description | Value | (Level 1) | (Level 2) | (Level 3) | Results | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Trading securities PCMOs |
$ | 658 | $ | | $ | | $ | 658 | $ | (33 | ) | |||||||||
Available-for-sale securities: |
||||||||||||||||||||
U.S. government corporations
and agencies |
34,208 | | 34,208 | | | |||||||||||||||
U.S. government CMOs |
23,282 | | 23,282 | | | |||||||||||||||
U.S. government agency MBS |
16,833 | | 16,833 | | | |||||||||||||||
PCMOs |
8,884 | | | 8,884 | | |||||||||||||||
Municipal securities |
25,598 | | 25,598 | | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
FHLB advances |
26,281 | | | 26,281 | (73 | ) | ||||||||||||||
$ | (106 | ) | ||||||||||||||||||
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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 June 30, 2011:
Fair Value Measurements Using | ||||||||||||
Significant Unobservable Inputs | ||||||||||||
(Level 3) | ||||||||||||
(dollars in thousands) | ||||||||||||
Available for Sale | ||||||||||||
Trading Securities | FHLB Advances | Securities | ||||||||||
Beginning balance, March 31, 2011 |
$ | 605 | $ | 26,057 | $ | 13,715 | ||||||
Transfers into (out of) Level 3 |
| | | |||||||||
Sales, maturities or calls |
(41 | ) | | (4,835 | ) | |||||||
Realized gains (losses) on assets |
94 | | 21 | |||||||||
Realized (gains) losses on liabilities |
| 224 | | |||||||||
Unrealized gains (losses) on assets |
| | (17 | ) | ||||||||
Ending balance, June 30, 2011 |
$ | 658 | $ | 26,281 | $ | 8,884 | ||||||
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The following table presents the activity in Level 3 fair value measurements for the six
months ended June 30, 2011:
Fair Value Measurements Using | ||||||||||||
Significant Unobservable Inputs | ||||||||||||
(Level 3) | ||||||||||||
(dollars in thousands) | ||||||||||||
Available for Sale | ||||||||||||
Trading Securities | FHLB 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 |
(1,384 | ) | | (8,585 | ) | |||||||
Realized gains (losses) on assets |
(33 | ) | | 80 | ||||||||
Realized (gains) losses on liabilities |
| 73 | ||||||||||
Unrealized gains (losses) on assets |
| | (232 | ) | ||||||||
Ending balance, June 30, 2011 |
$ | 658 | $ | 26,281 | $ | 8,884 | ||||||
For the assets and liabilities selected for fair value accounting, management obtained pricing
on each instrument from independent third parties who relied upon pricing 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
13
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an appraisal conducted by
an independent, licensed appraiser using observable market data (Level 2). However, if the
collateral is a house or building in the process of construction or if an appraisal of the real
estate property is over two years old, then the fair value is considered to be Level 3. Impaired
loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring
basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses
on the Consolidated Statements of 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 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.
The following tables summarize Bankshares assets that were measured at fair value on a
nonrecurring basis during the period.
Carrying Value at June 30, 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 |
$ | 7,739 | $ | | $ | 7,739 | $ | | ||||||||
OREO |
$ | 4,312 | $ | | $ | 4,312 | $ | | ||||||||
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 | $ | | ||||||||
14
Table of Contents
The following describes the valuation techniques used by Bankshares to measure certain
financial assets and liabilities not previously described in this note that are not recorded at
fair value on a recurring basis in the financial statements:
Cash, Due from Banks, and Federal Funds Sold
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four
family residential), credit card loans, and other consumer loans are based on quoted market prices
of similar loans sold in conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values for other loans (e.g., commercial real estate and investment
property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for nonperforming loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable.
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
15
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discounted cash flow analyses based on Bankshares current incremental borrowing rates for similar
types of borrowing arrangements.
Trust Preferred Capital Notes
The fair value of Bankshares Trust Preferred Capital Notes, which are discussed in Note 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 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:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 62,436 | $ | 62,436 | $ | 24,078 | $ | 24,078 | ||||||||
Federal funds sold |
20,359 | 20,359 | 17,870 | 17,870 | ||||||||||||
Trading securities |
658 | 658 | 2,075 | 2,075 | ||||||||||||
Available-for-sale securities |
108,805 | 108,805 | 135,852 | 135,852 | ||||||||||||
Loans, net |
315,879 | 312,884 | 327,029 | 324,164 | ||||||||||||
Accrued interest receivable |
2,257 | 2,257 | 2,758 | 2,758 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Non-interest bearing deposits |
$ | 130,838 | $ | 130,838 | $ | 124,639 | $ | 124,639 | ||||||||
Interest bearing deposits |
281,194 | 260,670 | 282,304 | 264,176 | ||||||||||||
Short-term borrowings |
33,882 | 33,882 | 43,153 | 43,148 | ||||||||||||
FHLB advances |
15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
FHLB advances, at fair value |
26,281 | 26,281 | 26,208 | 26,208 | ||||||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | 10,310 | ||||||||||||
Accrued interest payable |
1,091 | 1,091 | 976 | 976 |
16
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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:
June 30, | December 31, | June 30, | ||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||
Fair | Fair | Fair | ||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
PCMOs |
$ | 658 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 2,250 | 5.33 | % | ||||||||||||
Total trading securities |
$ | 658 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 2,250 | 5.33 | % | ||||||||||||
4. Investment Securities
The amortized cost, unrealized holding gains and losses, and the fair value of investment
securities at June 30, 2011 are summarized as follows:
June 30, 2011 | ||||||||||||||||
Amortized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S.
government corporations and agencies |
$ | 33,775 | $ | 461 | $ | (28 | ) | $ | 34,208 | |||||||
U.S. government agency CMOs |
22,433 | 854 | (5 | ) | 23,282 | |||||||||||
U.S. government agency MBS |
16,401 | 432 | | 16,833 | ||||||||||||
PCMOs |
8,675 | 226 | (17 | ) | 8,884 | |||||||||||
Municipal securities |
25,944 | 546 | (892 | ) | 25,598 | |||||||||||
Total available-for-sale securities |
$ | 107,228 | $ | 2,519 | $ | (942 | ) | $ | 108,805 | |||||||
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 | |||||||
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There were no held-to-maturity investments at June 30, 2011 or December 31, 2010.
The following tables present the aggregate amount of unrealized loss in investment securities as of
June 30, 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.
June 30, 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 |
$ | 5,446 | $ | (28 | ) | $ | | $ | | 5,446 | $ | (28 | ) | |||||||||||
U.S. government agency CMOs |
2,492 | (5 | ) | | | 2,492 | (5 | ) | ||||||||||||||||
PCMOs |
1,043 | (17 | ) | | | 1,043 | (17 | ) | ||||||||||||||||
Municipal securities |
8,964 | (295 | ) | 2,068 | (597 | ) | 11,032 | (892 | ) | |||||||||||||||
Total
temporarily impaired investment securities |
$ | 17,945 | $ | (345 | ) | $ | 2,068 | $ | (597 | ) | $ | 20,013 | $ | (942 | ) | |||||||||
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
18
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intend to sell). In the event that a security would suffer impairment for a reason that was
other than temporary, Bankshares would be expected to write down the securitys value to its new
fair value, and the amount of the write-down would be included in earnings as a realized loss. As
of June 30, 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 24 investment securities totaling $20 million that have an unrealized loss and
are considered temporarily impaired as of June 30, 2011. Management believes the unrealized losses
noted in the table above are a result of current market conditions and interest rates, and do not
reflect on the ability of the issuers to repay the obligations. Approximately $5.4 million or
27.2% 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 $1.0 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 $4.2 million at June 30,
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 six months of 2011, Bankshares does not consider
this investment to be other than temporarily impaired as of June 30, 2011 and no impairment has
been recognized. FHLB stock is included in restricted stock on the Consolidated Balance Sheets.
19
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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:
June 30, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Real estate: |
||||||||||||||||
Residential real estate |
$ | 107,685 | 33.5 | % | $ | 110,862 | 33.4 | % | ||||||||
Commercial real estate |
143,133 | 44.5 | % | 146,222 | 44.0 | % | ||||||||||
Construction / Land |
39,546 | 12.3 | % | 43,017 | 12.9 | % | ||||||||||
Total real estate |
290,364 | 90.3 | % | 300,101 | 90.3 | % | ||||||||||
Commercial and industrial |
27,317 | 8.5 | % | 27,517 | 8.3 | % | ||||||||||
Consumer |
3,808 | 1.2 | % | 4,692 | 1.4 | % | ||||||||||
Gross loans |
321,489 | 100.0 | % | 332,310 | 100.0 | % | ||||||||||
Less: allowance for loan losses |
(5,610 | ) | (5,281 | ) | ||||||||||||
Net loans |
$ | 315,879 | $ | 327,029 | ||||||||||||
As of June 30, 2011 and December 31, 2010, there were $54 thousand and $894 thousand,
respectively, in checking account overdrafts that were reclassified on the Consolidated Balance
Sheets as loans.
The following tables represent the credit quality of loans by class:
As Of June 30, 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 |
$ | 23,983 | $ | 864 | $ | 719 | $ | 1,736 | $ | 15 | $ | | $ | 27,317 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
66,506 | 1,601 | 789 | 2,677 | | | 71,573 | |||||||||||||||||||||
Non-owner occupied |
63,136 | 2,601 | 3,883 | 1,940 | | | 71,560 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
14,275 | | | | 536 | | 14,811 | |||||||||||||||||||||
Other construction & land |
15,476 | 1,837 | 556 | 6,530 | 336 | | 24,735 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
29,075 | 999 | | 44 | 122 | | 30,240 | |||||||||||||||||||||
Single family |
59,066 | 1,579 | 3,636 | 7,770 | 578 | | 72,629 | |||||||||||||||||||||
Multifamily |
4,816 | | | | | | 4,816 | |||||||||||||||||||||
Consumer non real estate |
3,549 | 259 | | | | | 3,808 | |||||||||||||||||||||
Totals |
$ | 279,882 | $ | 9,740 | $ | 9,583 | $ | 20,697 | $ | 1,587 | $ | | $ | 321,489 | ||||||||||||||
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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 construction |
17,483 | 1,553 | | 3,300 | 872 | | 23,208 | |||||||||||||||||||||
Other construction & land |
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. |
The following tables set forth aging and non-accrual loans by class:
Aging and Non-accrual Loans by Class | ||||||||||||||||||||||||||||
As of June 30, 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
90-days | ||||||||||||||||||||||||||||
30-59 | 90 Days or | Past Due | Non- | |||||||||||||||||||||||||
Days Past | 60-89 Days | More Past | Total Past | and Still | accrual | |||||||||||||||||||||||
Due | Past Due | Due | Due | Current | Accruing | Loans | ||||||||||||||||||||||
Commerical & Industrial |
$ | 979 | $ | 205 | $ | | $ | 1,184 | $ | 26,133 | $ | | $ | 1,067 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
2,677 | | 15 | 2,692 | 68,881 | 2,692 | ||||||||||||||||||||||
Non-owner occupied |
100 | | 408 | 508 | 71,052 | 408 | 100 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
| | 536 | 536 | 14,275 | | 536 | |||||||||||||||||||||
Other construction & land |
1,781 | 180 | 2,896 | 4,857 | 19,878 | | 4,033 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
1,114 | | 166 | 1,280 | 28,960 | | 166 | |||||||||||||||||||||
Single Family |
1,916 | 1,397 | 652 | 3,965 | 68,664 | | 1,927 | |||||||||||||||||||||
Multifamily |
| | | | 4,816 | | | |||||||||||||||||||||
Consumer-Non real estate |
76 | | | 76 | 3,732 | | | |||||||||||||||||||||
Total loans |
$ | 8,643 | $ | 1,782 | $ | 4,673 | $ | 15,098 | $ | 306,391 | $ | 408 | $ | 10,521 | ||||||||||||||
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Aging and Non-accrual Loans By Class | ||||||||||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
90-days | ||||||||||||||||||||||||||||
90 Days or | Past Due | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | More Past | Total Past | and Still | Non-accrual | |||||||||||||||||||||||
Past Due | Past 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 construction |
2,585 | | 1,128 | 3,713 | 19,495 | 256 | 872 | |||||||||||||||||||||
Other construcion & land |
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 | ||||||||||||||
6. Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for the periods
presented:
Six Months | Year | Six Months | ||||||||||
Ended | Ended | Ended | ||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of
period |
$ | 5,281 | $ | 5,619 | $ | 5,619 | ||||||
Provision for loan losses |
1,075 | 1,753 | 950 | |||||||||
Loans charged off |
(986 | ) | (2,239 | ) | (1,408 | ) | ||||||
Recoveries of loans
charged off |
240 | 148 | 42 | |||||||||
Net (charge-offs) |
(746 | ) | (2,091 | ) | (1,366 | ) | ||||||
Balance, end of period |
$ | 5,610 | $ | 5,281 | $ | 5,203 | ||||||
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The following tables represent the allocation of allowance for loan losses by segment as of
the dates indicated:
June 30, 2011 | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | Commercial | Construction | Residential | |||||||||||||||||||||
and 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 | ) | (158 | ) | (404 | ) | (414 | ) | | (986 | ) | |||||||||||||
Recoveries |
116 | 8 | | 114 | 2 | 240 | ||||||||||||||||||
Provision |
(216 | ) | 265 | 1,186 | (126 | ) | (34 | ) | 1,075 | |||||||||||||||
Ending Balance: |
$ | 353 | $ | 1,535 | $ | 1,482 | $ | 2,187 | $ | 53 | $ | 5,610 | ||||||||||||
Individually evaluated for
impairment |
$ | | $ | 217 | $ | 812 | $ | 504 | $ | | $ | 1,533 | ||||||||||||
Collectively evaluated for
impairment |
$ | 353 | $ | 1,318 | $ | 670 | $ | 1,683 | $ | 53 | $ | 4,077 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 27,317 | $ | 143,133 | $ | 39,546 | $ | 107,685 | $ | 3,808 | $ | 321,489 | ||||||||||||
Individually evaluated for
impairment |
$ | 1,067 | $ | 2,792 | $ | 4,569 | $ | 2,093 | $ | | $ | 10,521 | ||||||||||||
Collectively evaluated for
impairment |
$ | 26,250 | $ | 140,341 | $ | 34,977 | $ | 105,592 | $ | 3,808 | $ | 310,968 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | Commercial | Construction | Residential | |||||||||||||||||||||
and Industrial | Real Estate | Land | Real Estate | Consumer | Total | |||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||
Ending Balance: |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
Individually evaluated for impairment |
| $ | 77 | $ | 696 | $ | 100 | | $ | 873 | ||||||||||||||
Collectively evaluated for impairment |
$ | 463 | $ | 1,343 | $ | 4 | $ | 2,513 | $ | 85 | $ | 4,408 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 27,517 | $ | 146,222 | $ | 43,017 | $ | 110,862 | $ | 4,692 | $ | 332,310 | ||||||||||||
Individually evaluated for impairment |
| $ | 291 | $ | 3,272 | $ | 740 | $ | | $ | 4,303 | |||||||||||||
Collectively evaluated for impairment |
$ | 27,517 | $ | 145,931 | $ | 39,745 | $ | 110,122 | $ | 4,692 | $ | 328,007 | ||||||||||||
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Impaired loans and non-accrual loans are summarized as follows as of the dates indicated:
June 30, 2011 | December 31, 2010 | |||||||
(dollars in thousands) | ||||||||
Impaired loans without a valuation allowance |
$ | 1,249 | $ | 306 | ||||
Impaired loans with a valuation allowance |
9,272 | 3,997 | ||||||
Total impaired loans |
$ | 10,521 | $ | 4,303 | ||||
Valuation allowance related to impaired loans |
$ | 1,533 | $ | 873 | ||||
Total loans past due 90 days and still accruing |
$ | 408 | $ | 256 | ||||
Average investment in impaired loans |
$ | 11,038 | $ | 4,400 | ||||
Interest income recognized on impaired loans |
$ | 155 | $ | 226 | ||||
Interest income recognized on a cash basis on impaired loans |
$ | 155 | $ | 226 | ||||
The following tables represent specific allocation for impaired loans by class:
Specific Allocation for Impaired Loans By Class | ||||||||||||||||||||
As of June 30, 2011 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
With no related allowance: |
||||||||||||||||||||
Commercial & Industrial |
$ | 1,067 | $ | 1,081 | $ | | $ | 1,022 | $ | 28 | ||||||||||
Commercial Real Estate |
||||||||||||||||||||
Owner occupied |
| | | | | |||||||||||||||
Non-owner occupied |
100 | 103 | | 104 | 3 | |||||||||||||||
Residential Real Estate |
182 | 184 | | 185 | 5 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||
Owner occupied |
2,692 | 2,782 | 217 | 2,442 | 33 | |||||||||||||||
Non-owner occupied |
| | | | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential construction |
536 | 541 | 150 | 542 | | |||||||||||||||
Other construction & Land |
4,033 | 4,209 | 662 | 4,802 | 37 | |||||||||||||||
Residential Real Estate |
||||||||||||||||||||
Single Family |
1,789 | 1,807 | 395 | 1,819 | 48 | |||||||||||||||
Equity Lines |
122 | 122 | 109 | 122 | 1 | |||||||||||||||
Total: |
$ | 10,521 | $ | 10,829 | $ | 1,533 | $ | 11,038 | $ | 155 | ||||||||||
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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 | ||||||||||
There were no non-accrual loans excluded from impaired loan disclosures as of June 30, 2011
and December 31, 2010. No additional funds are committed to be advanced in connection with
impaired loans. At June 30, 2011, there were $749 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:
Six Months | Twelve Months | Six Months | ||||||||||
Ended | Ended | Ended | ||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 4,627 | $ | 7,875 | $ | 7,875 | ||||||
Properties acquired at foreclosure |
434 | 1,973 | 1,600 | |||||||||
Capital improvements on
foreclosed properties |
| 55 | | |||||||||
Sales of foreclosed properties |
(749 | ) | (4,918 | ) | (2,109 | ) | ||||||
Valuation adjustments |
| (358 | ) | | ||||||||
Balance, end of period |
$ | 4,312 | $ | 4,627 | $ | 7,366 | ||||||
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The table below reflects expenses applicable to OREO for the periods indicated:
Six Months | Twelve Months | Six Months | ||||||||||
Ended | Ended | Ended | ||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Loss on sales of OREO |
$ | 12 | $ | 303 | $ | 255 | ||||||
Valuation adjustments |
| 358 | | |||||||||
Operating expenses, net of rental income |
39 | 180 | 139 | |||||||||
Total OREO expense |
$ | 51 | $ | 841 | $ | 394 | ||||||
8. Federal Home Loan Bank Advances
Bankshares has two advances from the FHLB: one fixed rate advance and one floating rate advance.
At June 30, 2011 and December 31, 2010, the FHLB advance accounted for on a fair value basis had a
value of $26.3 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 June 30, 2011
and December 31, 2010. The par value of the FHLB advance accounted for on a fair value basis was
$25.0 million at June 30, 2011 and December 31, 2010.
At June 30, 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 June 30, 2011 and December 31, 2010 was 0.159%
and 0.184%, respectively. The weighted average interest rate for both FHLB advances outstanding is
2.550%.
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
26
Table of Contents
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 June 30, 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 June 30, 2011 the total amount of deferred and compounded
interest owed under the indenture is $759 thousand. The base interest rate as of June 30, 2011 was
3.40% and as of December 31, 2010 was 3.45%.
All or a portion of the Trust Preferred Capital Notes may be included in the regulatory computation
of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up
to 25% of stockholders equity excluding accumulated other
comprehensive income (loss) in the form of Trust Preferred Capital Notes. At June 30, 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 June 30, | 2011 | 2010 | ||||||||||||||
Per Share | Per Share | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Basic net income per share |
5,108,821 | $ | 0.08 | 5,106,819 | $ | 0.04 | ||||||||||
Effect of dilutive securities,
stock options |
25,332 | 969 | ||||||||||||||
Diluted net income per share |
5,134,153 | $ | 0.08 | 5,107,788 | $ | 0.04 | ||||||||||
Net income utilized in the
earnings per share calculations
above: |
$ | 394,000 | $ | 191,000 | ||||||||||||
27
Table of Contents
Six Months Ended June 30, | 2011 | 2010 | ||||||||||||||
Per Share | Per Share | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Basic net income per share |
5,108,436 | $ | 0.15 | 5,106,819 | $ | 0.06 | ||||||||||
Effect of dilutive securities,
stock options |
16,715 | 918 | ||||||||||||||
Diluted net income per share |
5,125,151 | $ | 0.15 | 5,107,737 | $ | 0.06 | ||||||||||
Net income utilized in the
earnings per share calculations
above: |
$ | 759,000 | $ | 305,000 | ||||||||||||
Average shares of 287,699 and 514,001 have been excluded from the calculation for the six
months ended June 30, 2011 and June 30, 2010, respectively, because their effects were
anti-dilutive.
11. Supplemental Cash Flow Information
June 30, 2011 | June 30, 2010 | |||||||
(dollars in thousands) | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest paid during the six months |
$ | 2,849 | $ | 4,906 | ||||
Income taxes paid during the six months |
$ | | $ | | ||||
Supplemental Disclosures of Noncash Activities: |
||||||||
Fair value adjustment on available-for-sale securities |
$ | 2,014 | $ | 3,371 | ||||
Transfer of loans to foreclosed assets |
$ | 434 | $ | 1,600 | ||||
12. Mergers and Acquisitions
On July 27, 2011, Eagle, Bankshares and the Bank entered into the Merger Agreement with respect to
the Merger and a related bank merger agreement by and between the Bank and EagleBank (EagleBank),
Eagles wholly owned subsidiary bank (Bank Merger). The consummation of the Merger and the Bank
Merger are conditioned upon, among other things, approvals of applicable regulatory agencies and
the shareholders of Bankshares.
The Merger is structured as a stock-for-stock transaction, under which the shareholders of
Bankshares will receive 0.4317 shares of Eagle common stock for each
28
Table of Contents
share of Bankshares common stock, subject to adjustment based upon certain factors set forth in the Agreement.
The Merger is expected to close in the fourth quarter of 2011, pending approval of the
shareholders of Bankshares and the receipt of all required regulatory approvals, as well as other
customary conditions as described in the previously filed 8-K on July
29, 2011.
13. 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 that
would cause adjustments to or disclosures in the financial statements
other than the Merger as described in Note 12.
29
Table of Contents
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 the proposed merger of Bankshares into Eagle Bancorp, Inc., 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; | ||
| Retention of existing employees; | ||
| Maintaining and developing well established and valuable client relationships and referral source relationships; | ||
| Changing trends in customer profiles and behavior; |
30
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| 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; | ||
| Reactions in financial markets related to potential or actual downgrades in the sovereign credit rating of the United States and the budget deficit or national debt of the United States government; | ||
| The impact of the Dodd-Frank 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; | ||
| Impacts of implementing various accounting standards; | ||
| Deposit attrition, operating costs, customer losses and business disruption in connection with the Merger, including adverse effects on relationships with employees, may be greater than expected; | ||
| The ability to complete the Merger as expected and within the expected timeframe; | ||
| The possibility that required regulatory and shareholder approvals of the Merger may not be obtained, or one or more of the other conditions to the completion of the Merger may not be satisfied; | ||
| The expected growth opportunities or cost savings from the merger may not be fully realized or may take longer to realize than expected; and | ||
| Other factors described from time to time in our SEC filings. |
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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 Item 1A 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.
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 unclassified loans and unimpaired loans by loan type based on common purpose,
collateral, repayment source or other credit characteristics and then applying factors which in the
judgment of management represent the expected losses 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).
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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 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 June 30, 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 June 30, 2011.
Overview
On July 27, 2011, Eagle Bancorp, Inc. (Eagle), Bankshares and the Bank entered into an
Agreement of Merger (Merger Agreement), pursuant to which Bankshares will merge with and into
Eagle, with Eagle being the surviving corporation. Under the Merger Agreement, Bankshares agreed
to conduct its business in the ordinary course while the Merger is pending,
and, except as permitted under the Merger Agreement, to generally refrain from specific actions
without the consent of Eagle. Completion of the Merger is subject to approval by Bankshares
shareholders, applicable regulatory approval and customary closing conditions.
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Notwithstanding the Merger Agreement, Bankshares primary long-term goals continue to be
maximizing earnings and deploying capital in profit driven initiatives that will enhance
shareholder value in a sustainable fashion. In pursuit of these goals, Bankshares current
emphasis is on optimizing profitability in the near term and strengthening the financial
performance of the Company, while also transitioning its operations to focus more closely on
traditional banking activities and to reposition Bankshares for the future. Bankshares
transitional strategies include, among others, continuing the following initiatives:
| Diversifying the loan portfolio by increasing 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, while working to reduce our brokered deposit portfolio. | ||
| Reducing our operating and funding costs. |
Performance Highlights
| Net income for the quarter ended June 30, 2011 was $394 thousand compared to net income of $191 thousand for the same period in 2010, an improvement of $203 thousand. Net income was $759 thousand for the six months ended June 30, 2011 compared to net income of $305 thousand for the six months ended June 30, 2010. Earnings per common share, basic and diluted, amounted to $0.15 for the six months ended June 30, 2011, compared to $0.06 for the six months ended June 30, 2010. | ||
| Total assets were $536.0 million at June 30, 2011, a decrease of $2.5 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 and reductions in our investment securities portfolio, offset by an increase in cash and due from banks. The increase in cash relates to the cyclical nature of our title and escrow clients. | ||
| Total loans were $321.5 million at June 30, 2011, a decrease of $10.8 million, or 3.25% from the December 31, 2010 balance of $332.3 million. The decrease results from the payoffs of a number of loan relationships as well as scheduled principal repayments. While new loan activity has increased in the first six months of 2011, the volume of originations has not kept pace with repayments. Each loan segment as a percentage of total loans at June 30, 2011 is nearly unchanged from the percentages at December 31, 2010. | ||
| Our ratio of nonperforming assets to total assets was 2.98% as of June 30, 2011 compared to 1.75% as of December 31, 2010, an increase of 123 basis points. As of June 30, 2011, the composition of nonperforming assets was $10.5 million of nonaccrual loans, $408 thousand of loans 90 days past due and still accruing, $4.3 million of OREO, and $749 thousand of troubled debt restructured loans for a total of $16.0 million, compared to total nonperforming assets as of December 31, 2010, of $9.4 million. The nonaccrual balance increased by $8.6 million at June 30, 2011. The level of nonperforming assets continues to reflect the increase that occurred as of March 31, 2011 |
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when two large commercial relationships were moved to nonaccrual status. In one case, the majority of the relationship exposure is expected to return to performing status prior to year-end 2011 as payments have resumed on a majority of the notes. In the second case, the borrower has continued to make payments on the notes, but the borrowers future prospects continue to present a higher risk profile. | ||
| The investment securities portfolio totaled $108.8 million at June 30, 2011. This compares to $135.9 million of investments as of December 31, 2010, a decrease of $27.1 million. Targeted efforts by management to strategically restructure the balance sheet as well as opportunistic gains taking led to the reduction in the investment securities portfolio. | |
| The net interest margin for the quarter ended June 30, 2011 was 3.86% compared to 3.84% for the same 2010 period, an increase of 2 basis points. For the six months ended June 30, 2011, the interest margin of 3.82% was 7 basis points higher than the net interest margin of 3.75% for the six months ended June 30, 2010. | |
| Deposits were $412.0 million at June 30, 2011, an increase of $5.1 million from the December 31, 2010 balance of $406.9 million. | |
| Demand deposits were $130.8 million at June 30, 2011, or 31.7% of total deposits. This compares to the December 31, 2010 level of $124.6 million or 30.6% of total deposits. | |
| Non-interest expense for the three months ended June 30, 2011, amounted to $3.8 million compared to $4.4 million for the same period in 2010, a decrease of $647 thousand. The key components of the decrease in non-interest expense are salary and benefit expense and occupancy and equipment costs. |
Financial Performance Measures. Bankshares net income for the three month period ended June
30, 2011 was $394 thousand, an improvement of $203 thousand over the second quarter of 2010 net
income of $191 thousand. The net income of $394 thousand includes net interest income of $4.3
million compared to $4.9 million for the same period last year, a decrease of $556 thousand. That
decrease is due primarily to a decrease in interest income in the amount of $1.2 million, which was
partially offset by a decrease of $623 thousand in the cost of funds. For the three months ended
June 30, 2011, total interest expense was $1.4 million compared to $2.1 million for the three
months ended June 30, 2010. These results led to $0.08 basic and diluted earnings per share for the
quarter ended June 30, 2011, compared to $0.04 basic and diluted earnings per share for the quarter
ended June 30, 2010. Weighted average basic shares outstanding were 5,108,821 for the three months
ended June 30, 2011 and 5,106,819 for the three months ended June 30, 2010. Weighted average
diluted shares outstanding were 5,134,153 for the three months ended June 30, 2011 and 5,107,788
for the three months ended June 30, 2010.
For the six month period ended June 30, 2011, Bankshares had net income of $759 thousand
compared to $305 thousand for the same period in the prior year, an improvement of $454 thousand.
The net income of $759 thousand includes net interest income of $8.7 million compared to $9.5
million for the same period last year, a decrease of $839 thousand. That decrease is due primarily
to a decrease in interest income in the amount of $2.3 million, which was partially offset by a
decrease of $1.4 million in the cost of funds. For the six months ended June 30, 2011, total
interest expense was $3.0 million compared to $4.4 million for the six
months ended June 30, 2010. These results led to $0.15 basic and diluted income per share for the
six months ended June 30, 2011. The basic and diluted income per share for the six months ended
June 30, 2010 was $0.06. Weighted average basic shares outstanding were 5,108,436 for the six
months ended June 30, 2011 and 5,106,819 for the six months ended June 30, 2010.
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Weighted average
diluted shares outstanding were 5,125,151 and 5,107,737 for the six months ended June 30, 2011 and
June 30, 2010, respectively.
Net interest margin increased to 3.86% for the three months ended June 30, 2011 compared to
3.84% for the three months ended June 30, 2010, an increase of 2 basis points. Net interest margin
was 3.82% for the six months ended June 30, 2011 compared to 3.75% for the six months ended June
30, 2010, an improvement of 7 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 first six months 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 six months ended June 30, 2011 was $311
thousand compared to $116 thousand for the six months ended June 30, 2010.
Results of Operations
Net Interest Income. Net interest income (on a fully tax equivalent basis) for the three
months ended June 30, 2011 was $4.3 million compared to $5.0 million for the same period in 2010.
Interest income on earning assets was $1.3 million lower for the three months ended June 30, 2011,
compared to the second quarter of 2010, while interest expense decreased $623 thousand in the same
time period.
Net interest income (on a fully tax equivalent basis) for the six months ended June 30, 2011
was $8.7 million compared to $9.7 million for the same period in 2010. Interest income on earning
assets was $2.4 million lower for the six months ended June 30, 2011, compared to the first six
months of 2010. Of the $2.4 million decrease in interest income, $858 thousand is attributable to
the $30.0 million lower average balance in loans. The decrease in yield from 5.92% to 5.68% in the
loan portfolio also contributed $410 thousand to the decrease in interest income. The reduction in
the average balance in the investment securities portfolio was $26.2 million and contributed $551
thousand to the reduction in interest income. The decrease in yield from 4.64% to 3.94% in the
investment securities portfolio also contributed $497 thousand to the decrease in interest income.
This was offset by the decrease in interest expense of $1.4 million. The average balance of
interest bearing deposits decreased by $49.4 million and contributed $540 thousand to the reduction
in interest expense. The average rate paid on deposits improved to 1.58% from 2.15%, which reduced
interest expense by $749 thousand. A lower average balance of borrowed funds offset a higher rate
paid on borrowed funds.
The following table illustrates average balances of total interest-earning assets and total
interest-bearing liabilities for the periods indicated, showing the average distribution of assets,
liabilities, 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 June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
Balance | Expense | Rate 1 | Balance | Expense | Rate 1 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans (2) |
$ | 320,845 | $ | 4,555 | 5.69 | % | $ | 348,425 | $ | 5,228 | 6.02 | % | ||||||||||||
Trading securities |
745 | 12 | 6.46 | % | 2,961 | 49 | 6.64 | % | ||||||||||||||||
Investment securities |
119,314 | 1,192 | 4.01 | % | 152,167 | 1,740 | 4.59 | % | ||||||||||||||||
Federal funds sold |
8,866 | 12 | 0.54 | % | 14,601 | 11 | 0.30 | % | ||||||||||||||||
Total interest earning assets |
449,770 | 5,771 | 5.15 | % | 518,154 | 7,028 | 5.44 | % | ||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
22,882 | 21,746 | ||||||||||||||||||||||
Premises and equipment |
1,581 | 1,930 | ||||||||||||||||||||||
Other real estate owned (OREO) |
4,453 | 8,746 | ||||||||||||||||||||||
Other assets |
16,514 | 17,978 | ||||||||||||||||||||||
Less: allowance for loan losses |
(5,386 | ) | (5,509 | ) | ||||||||||||||||||||
Total non-interest earning assets |
40,044 | 44,891 | ||||||||||||||||||||||
Total Assets |
$ | 489,814 | $ | 563,045 | ||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 42,601 | $ | 28 | 0.26 | % | $ | 46,473 | $ | 53 | 0.46 | % | ||||||||||||
Money market deposit accounts |
24,173 | 45 | 0.75 | % | 25,162 | 72 | 1.15 | % | ||||||||||||||||
Savings accounts |
2,850 | 2 | 0.28 | % | 3,782 | 2 | 0.21 | % | ||||||||||||||||
Time deposits |
201,855 | 971 | 1.93 | % | 234,682 | 1,468 | 2.51 | % | ||||||||||||||||
Total interest-bearing deposits |
271,479 | 1,046 | 1.55 | % | 310,099 | 1,595 | 2.06 | % | ||||||||||||||||
FHLB advances(3) |
41,059 | 256 | 2.50 | % | 63,743 | 305 | 1.92 | % | ||||||||||||||||
Other borrowings |
48,860 | 145 | 1.19 | % | 53,915 | 170 | 1.26 | % | ||||||||||||||||
Total interest-bearing liabilities |
361,398 | 1,447 | 1.61 | % | 427,757 | 2,070 | 1.94 | % | ||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
91,033 | 97,884 | ||||||||||||||||||||||
Other liabilities |
2,802 | 2,741 | ||||||||||||||||||||||
Total liabilities |
455,233 | 528,382 | ||||||||||||||||||||||
Stockholders Equity |
34,581 | 34,663 | ||||||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 489,814 | $ | 563,045 | ||||||||||||||||||||
Interest Spread (4) |
3.54 | % | 3.50 | % | ||||||||||||||||||||
Net Interest Margin (5) |
$ | 4,324 | 3.86 | % | $ | 4,958 | 3.84 | % | ||||||||||||||||
(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 $11.0 million and $3.7 million in the second quarter of 2011 and 2010, respectively. The 2011 and 2010 interest income on nonaccrual loans excluded from the loans above was $117 thousand and $54 thousand, respectively. | |
(3) | Average fair value of FHLB advances for the second quarter of 2011 and 2010 was $26.1 million and $26.1 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 $320.8 million for the three months ended June 30, 2011
compared to $348.4 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 and focus
on our geographical area. The related interest income from loans
was $4.6 million in the three months ended June 30, 2011 compared to $5.2 million in the same
period in 2010. The average yield on loans of 5.69% during the three months ended June 30, 2011
was 33 basis points lower than the yield of 6.02% in the second 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 $745 thousand for the three months ended June 30, 2011, compared
to $3.0 million for the three months ended June 30, 2010. Trading securities interest income for
the three months ended June 30, 2011 was $12 thousand compared to $49 thousand for the three months
ended June 30, 2010. The reduction in average trading securities reflects managements business
strategy to eliminate the trading securities portfolio as we reposition the balance sheet and led to
the reduction in associated interest income. At June 30, 2011, there was a single instrument in the
trading securities portfolio with a carrying value of $658 thousand.
The average balance of investment securities was $119.3 million for the quarter ended June 30,
2011 compared to $152.2 million for the same quarter in 2010. Investment securities income (on a
fully tax equivalent basis) was $1.2 million for the three months ended June 30, 2011 compared to
$1.7 million for the three months ended June 30, 2010. The tax equivalent average yield on
investment securities for the three months ended June 30, 2011 was 4.01% compared to 4.59% for the
three months ended June 30, 2010. The reduction in the average balance of investment securities
from the sale of securities reflects managements business strategy to reduce the investment
securities portfolio and the opportunistic taking of gains.
Short-term investments in federal funds sold contributed $12 thousand to interest income in
the three month period ended June 30, 2011, compared to $11 thousand for the same period in 2010.
The average balance for the three months ended June 30, 2011 was $8.9 million, a $5.7 million
decrease from the prior year average balance of $14.6 million. This relates to the lower average
balance of interest bearing and non-interest bearing demand deposits for the second quarter of 2011
compared to the second quarter of 2010.
The average balance of cash and due from banks was $22.9 million and $21.8 million for the
three months ended June 30, 2011 and 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 5.15% for the three months ended June 30, 2011
compared to the yield of 5.44% for the same period in 2010. Total interest income (on a fully tax
equivalent basis) was $5.8 million for the three months ended June 30, 2011 compared to $7.0
million for the three months ended June 30, 2010. Interest income decreased from the
second quarter of 2010 to the second quarter of 2011 due to smaller average loans and
securities
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balances, which are a product of our strategy to reposition our balance sheet, and lower
yields generated by our interest-earning assets in the low interest rate environment.
Total average interest-bearing liabilities were $361.4 million in the second quarter of 2011,
or $66.4 million lower than the second quarter of 2010 level of $427.8 million. A key driver of
the decrease is the decrease in average time deposits. The average balance for time deposits for
the second quarter of 2011 was $201.9 million compared to the second quarter of 2010 average
balance of $234.7 million, a decrease of $32.8 million. Interest expense for all interest-bearing
liabilities amounted to $1.4 million for the three months ended June 30, 2011 compared to $2.1
million for the three months ended June 30, 2010, or a savings of $623 thousand. The average cost
of interest-bearing liabilities for the second quarter of 2011 was 1.61% or 33 basis points lower
than the second quarter of 2010 level of 1.94%. 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 average balance of brokered deposits for the second quarter of
2011 was $122.6 million at an average cost of 1.88%. The average balance of brokered deposits for
the second quarter of 2010 was $104.1 million at an average cost of 2.36%. The benefits of the
repricing are seen in the lower time deposit cost of 1.93% during the second quarter of 2011
compared to 2.51% during the same period of 2010.
Non-interest bearing demand deposits averaged $91.0 million for the second quarter of 2011, or
$6.9 million less than the second quarter of 2010 level of $97.9 million.
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Table of Contents
Average Balances, Interest Income and Expense and Average Yield and Rates(1)
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income / | Yield / | Average | Income / | Yield / | |||||||||||||||||||
Balance | Expense | Rate 1 | Balance | Expense | Rate 1 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans (2) |
$ | 322,986 | $ | 9,100 | 5.68 | % | $ | 352,965 | $ | 10,368 | 5.92 | % | ||||||||||||
Trading securities |
1,283 | 45 | 7.07 | % | 4,359 | 137 | 6.34 | % | ||||||||||||||||
Investment securities |
129,970 | 2,542 | 3.94 | % | 156,132 | 3,590 | 4.64 | % | ||||||||||||||||
Federal funds sold |
7,723 | 22 | 0.57 | % | 10,718 | 22 | 0.41 | % | ||||||||||||||||
Total interest earning assets |
461,962 | 11,709 | 5.11 | % | 524,174 | 14,117 | 5.43 | % | ||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Cash and due from banks |
21,099 | 20,616 | ||||||||||||||||||||||
Premises and equipment |
1,592 | 1,965 | ||||||||||||||||||||||
Other real estate owned (OREO) |
4,477 | 8,336 | ||||||||||||||||||||||
Other assets |
17,540 | 19,518 | ||||||||||||||||||||||
Less: allowance for loan losses |
(5,432 | ) | (5,573 | ) | ||||||||||||||||||||
Total non-interest earning assets |
39,276 | 44,862 | ||||||||||||||||||||||
Total Assets |
$ | 501,238 | $ | 569,036 | ||||||||||||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 42,242 | $ | 58 | 0.28 | % | $ | 44,561 | $ | 122 | 0.55 | % | ||||||||||||
Money market deposit accounts |
24,849 | 94 | 0.76 | % | 24,114 | 151 | 1.26 | % | ||||||||||||||||
Savings accounts |
3,332 | 4 | 0.24 | % | 3,662 | 6 | 0.33 | % | ||||||||||||||||
Time deposits |
199,960 | 1,968 | 1.98 | % | 247,453 | 3,134 | 2.55 | % | ||||||||||||||||
Total interest-bearing deposits |
270,383 | 2,124 | 1.58 | % | 319,790 | 3,413 | 2.15 | % | ||||||||||||||||
FHLB advances(3) |
41,132 | 515 | 2.52 | % | 60,690 | 584 | 1.94 | % | ||||||||||||||||
Other borrowings |
63,572 | 325 | 1.03 | % | 60,359 | 379 | 1.27 | % | ||||||||||||||||
Total interest-bearing liabilities |
375,087 | 2,964 | 1.59 | % | 440,839 | 4,376 | 2.00 | % | ||||||||||||||||
Non-interest-bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
89,505 | 91,632 | ||||||||||||||||||||||
Other liabilities |
2,544 | 2,524 | ||||||||||||||||||||||
Total liabilities |
467,136 | 534,995 | ||||||||||||||||||||||
Stockholders Equity |
34,102 | 34,041 | ||||||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 501,238 | $ | 569,036 | ||||||||||||||||||||
Interest Spread (4) |
3.52 | % | 3.43 | % | ||||||||||||||||||||
Net Interest Margin (5) |
$ | 8,745 | 3.82 | % | $ | 9,741 | 3.75 | % | ||||||||||||||||
(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 $8.2 million and $4.2 million for the first six months of 2011 and 2010, respectively. The 2011 and 2010 interest income on nonaccrual loans excluded from the loans above was $311 thousand and $116 thousand, respectively. | |
(3) | Average fair value of FHLB advances for the first six months of 2011 and 2010 was $26.1 million and $26.0 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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For the six months ended June 30, 2011, average loan balances were $323.0 million
compared to $353.0 million for the same period in 2010, a decrease of $30.0 million. Interest
income from loans was $9.1 million in the first six months of 2011 compared to $10.4 million in the
same period of 2010, with the average yield decreasing to 5.68% from 5.92%. The lower average
balance contributed $858 thousand and the lower yield contributed $410 thousand to the $1.3 million
decrease in interest income on loans.
For the six months ended June 30, 2011 average trading securities were $1.3 million, compared
to $4.4 million for the same period in 2010. The decrease is a result of managements
continued efforts to eliminate the trading securities portfolio. Trading securities interest income for the six months
ended June 30, 2011 was $45 thousand compared to $137 thousand for the six months ended June 30,
2010. The lower average balance contributed $110 thousand to the lower income and was offset with
the higher yield contribution of $18 thousand resulting in the decrease of $92 thousand in interest
income on trading securities.
Investment securities averaged $130.0 million for the six months ended June 30, 2011 compared
to $156.1 million for the same period in 2010. Investment securities income (on a fully tax
equivalent basis) was $2.5 million for the six months ended June 30, 2011 compared to $3.6 million
for the six months ended June 30, 2010, a decrease of $1.1 million. The tax equivalent average
yield on investment securities for the six months ended June 30, 2011 was 3.94% compared to the
yield of 4.64% for the same period in 2010. The lower average balance contributed $551 thousand
and the lower yield contributed $497 thousand to the $1.1 million decrease in interest income on
investment securities.
Short-term investments in federal funds sold contributed $22 thousand to interest income in
the six month period ended June 30, 2011 and 2010. A decrease in the average balance of federal
funds sold was offset by the increase in the yield.
Total average earning assets yielded 5.11% for the six months ended June 30, 2011 or 32 basis
points lower than the yield of 5.43% for the same period in 2010. Total interest income (on a
fully tax equivalent basis) was $11.7 million for the six months ended June 30, 2011 compared to
$14.1 million for the six months ended June 30, 2010.
Total average interest-bearing liabilities were $375.1 million in the first six months of 2011
or $65.7 million less than the first six months of 2010 level of $440.8 million. The average
balance of time deposits was $47.5 million lower than the same period last year. For the six
months ended June 30, 2011, interest expense was $3.0 million compared to $4.4 million for the six
months ended June 30, 2010. The $1.4 million decrease in interest expense primarily resulted from
$1.5 million decrease attributable to lower average volume of interest bearing liabilities. The
average cost of interest-bearing liabilities for the first six months of 2011 was 1.59% or 41 basis
points lower than the 2010 level of 2.00%. Many of the larger wholesale deposits have matured and
new brokered deposits were issued at lower interest rates.
The average balance of brokered deposits for the first six months of 2011 was $115.8 million
at an average cost of 1.92%. The average balance of brokered deposits for the first six months of
2010 was $120.1 million at an average cost of 2.34%. Favorable market conditions
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have allowed for reissuance of maturing brokered deposits at lower effective rates. Total
brokered deposits at June 30, 2011 were $122.5 million with an average rate of 1.62%.
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.
Volume and Rate Analysis | ||||||||||||
Six Months Ended June 30 | ||||||||||||
2011 compared to 2010 | ||||||||||||
Change Due To: | ||||||||||||
(Decrease) | Volume | Rate | ||||||||||
(dollars in thousands) | ||||||||||||
Interest Earning Assets: |
||||||||||||
Loans |
$ | (1,268 | ) | $ | (858 | ) | $ | (410 | ) | |||
Trading securities |
(92 | ) | (110 | ) | 18 | |||||||
Investment securities |
(1,048 | ) | (551 | ) | (497 | ) | ||||||
Federal funds sold |
| (3 | ) | 3 | ||||||||
Total (decrease) in interest income |
(2,408 | ) | (1,522 | ) | (886 | ) | ||||||
Interest-Bearing Liabilities: |
||||||||||||
Interest-bearing deposits |
(1,289 | ) | (540 | ) | (749 | ) | ||||||
Borrowed funds |
(123 | ) | (934 | ) | 811 | |||||||
Total (decrease) in interest expense |
(1,412 | ) | (1,474 | ) | 62 | |||||||
(Decrease) in net interest income |
$ | (996 | ) | $ | (48 | ) | $ | (948 | ) | |||
Non-interest Income (Other Income). Non-interest income amounted to $819 thousand
during the three months ended June 30, 2011, an increase of $406 thousand from $413 thousand for
the same period of 2010.
Bankshares recorded a net gain of $835 thousand on the sale of investment securities in the
three months ended June 30, 2011, compared to a net gain of $803 thousand in the three months ended
June 30, 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
security activity and fair value adjustments recorded for the three months ended June 30, 2011
resulted in a net loss of $130 thousand, compared to a net loss of $426 thousand for the same
period in 2010, a decrease of $296 thousand. The net loss of $130 thousand is primarily driven by a
negative fair value adjustment of $224 thousand on the FHLB advance offset by the $94 thousand
positive adjustment in trading securities. At contractual maturity, the FHLB
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advance will become
due at par and any unrealized loss will be recognized as trading income as maturity approaches.
For the six months ended June 30, 2011, non-interest income was $1.0 million compared to $674
thousand for the 2010 period. The increase is attributable to the
lower level of adjustments in trading securities and FHLB advance
fair value adjustments. At June 30, 2011, this loss was $106
thousand compared to the $616 thousand
loss at June 30, 2010.
Non-interest Expense (Other Expenses). During the three and six months ended June 30, 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 June 30, 2011, amounted to $3.8 million
compared to $4.4 million for the same period in 2010, a decrease of $647 thousand. A key component
of non-interest expense is salary and benefits expense. This expense for the quarter ended June 30,
2011 was $1.4 million, compared to the second quarter of 2010 level of $1.5 million, a decrease of
$143 thousand. Occupancy and equipment costs were $719 thousand compared to the 2010 level of
$830, a decrease of $111 thousand.
OREO expense was $16 thousand for the second quarter ended June 30, 2011 compared to $351
thousand for the same period in 2010. In the quarter ended June 30, 2010 there were losses on sale
of OREO of $254 thousand with no similar charge in the quarter ended June 30, 2011. In addition,
the OREO balance consists of mostly undeveloped land with no maintenance cost.
For the six months ended June 30, 2011, non-interest expense was $7.5 million compared to $9.0
million for the 2010 period, a decrease of $1.5 million. Salaries and employee benefits decreased
by $754 thousand, occupancy and equipment costs decreased by $204 thousand, OREO expense decreased
by $343 thousand, FDIC assessments decreased by $25 thousand, and
other operating expenses decreased by
$145 thousand.
Income Taxes. We recorded income tax expense of $373 thousand for the six months ended June
30, 2011. This income tax expense was an increase of $382 thousand over the same period in 2010.
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Analysis of Financial Condition
Trading Securities. At June 30, 2011, the trading portfolio consisted of one PCMO security
with a fair value of $658 thousand compared to three PCMO securities with a fair value of $2.2
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 | ||||||||||||||||||||||||
June 30, | December 31, | June 30, | ||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||
Fair | Fair | Fair | ||||||||||||||||||||||
Value | Yield | Value | Yield | Value | Yield | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
PCMOs (1) |
$ | 658 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 2,250 | 5.33 | % | ||||||||||||
Totals |
$ | 658 | 5.43 | % | $ | 2,075 | 5.32 | % | $ | 2,250 | 5.33 | % | ||||||||||||
(1) | As of June 30, 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. |
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 June 30, 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. As of June 30, 2011, U.S. government agency securities were
$34.2 million or 31.4% of the portfolio, PCMOs, CMOs and MBS made up 45.1% of the portfolio or
$49.0 million and municipal securities were 23.5% of the portfolio or $25.6 million.
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
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$108.8 million at June
30, 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. Management has taken opportunistic gains, while
shortening the duration of the portfolio.
The yield on the investment securities portfolio as of June 30, 2011 was 4.0%. During the
first six months of 2011, the Bank earned $2.5 million on the investment securities portfolio or an
effective tax equivalent yield of 3.94%. The investment securities portfolio contains mortgage
oriented products (CMO, PCMO, and MBS) and SBA securities.
Investment Securities- Available-for-Sale | ||||||||||||||||||||||||||||||||||||
June 30, 2011 | December 31, 2010 | June 30, 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 |
$ | 34,208 | 2.78 | % | 31.4 | % | $ | 51,763 | 4.50 | % | 38.1 | % | $ | 51,812 | 4.28 | % | 40.1 | % | ||||||||||||||||||
U.S. government agency CMOs |
23,282 | 3.56 | % | 21.4 | % | 22,576 | 3.96 | % | 16.6 | % | 28,333 | 3.75 | % | 22.0 | % | |||||||||||||||||||||
U.S. government agency MBS |
16,833 | 3.65 | % | 15.5 | % | 14,805 | 3.82 | % | 10.9 | % | 10,949 | 3.82 | % | 8.5 | % | |||||||||||||||||||||
PCMOs |
8,884 | 5.39 | % | 8.2 | % | 17,621 | 5.16 | % | 13.0 | % | 20,582 | 5.24 | % | 16.0 | % | |||||||||||||||||||||
Municipal securities |
25,598 | 5.14 | % | 23.5 | % | 29,087 | 5.11 | % | 21.4 | % | 17,231 | 5.77 | % | 13.4 | % | |||||||||||||||||||||
Total Investment Securities
Available-for-Sale |
$ | 108,805 | 4.00 | % | 100.0 | % | $ | 135,852 | 4.32 | % | 100.0 | % | $ | 128,907 | 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 June 30, 2011:
Contractual Maturities of Investment Securities | |||||||||||||||||||||||||||||||||||||||
June 30, 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 | % | $ | 9,174 | 1.3 | % | $ | | 0.0 | % | $ | 24,601 | 3.3 | % | $ | 33,775 | 2.8 | % | |||||||||||||||||||
U.S. government agency CMOs (1)
|
| 0 | % | | 0.0 | % | | 0.0 | % | 22,433 | 3.6 | % | 22,433 | 3.6 | % | ||||||||||||||||||||||||
U.S. government agency MBS (1)
|
| 0 | % | | 0.0 | % | | 0.0 | % | 16,401 | 3.7 | % | 16,401 | 3.7 | % | ||||||||||||||||||||||||
PCMOs(1)
|
| 0 | % | | 0.0 | % | 4,962 | 5.5 | % | 3,713 | 5.2 | % | 8,675 | 5.4 | % | ||||||||||||||||||||||||
Municipal securities (2)
|
| 0 | % | | 0.0 | % | 5,379 | 4.5 | % | 20,565 | 5.3 | % | 25,944 | 5.1 | % | ||||||||||||||||||||||||
Total Available-For-Sale Securities (3)
|
$ | | 0 | % | $ | 9,174 | 1.3 | % | $ | 10,341 | 5.1 | % | $ | 87,713 | 4.2 | % | $ | 107,228 | 4.0 | % | |||||||||||||||||||
(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 June 30, 2011. | |
(4) | Total above is amortized cost and does not include unrealized gain of $1,577 thousand. | |
(5) | Total available for sale securities amounted to $108.8 million. The fair value of the contractual maturities listed in the total above amounts to $108.8 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 | ||||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Federal Reserve Bank Stock |
$ | 1,201 | $ | 1,201 | $ | 1,201 | ||||||
FHLB stock |
4,158 | 4,948 | 5,530 | |||||||||
Bankers Bank stock |
206 | 206 | 206 | |||||||||
Total Restricted Stock |
$ | 5,565 | $ | 6,355 | $ | 6,937 | ||||||
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 business,
commercial real estate, real estate construction, residential real estate and consumer borrowers in
the normal course of business. The loan portfolio net of discounts and fees was $321.5 million as
of June 30, 2011 or $10.8 million lower than the December 31, 2010 level of $332.3 million and
$20.6 million less than June 30, 2010 level of $342.1 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 | ||||||||||||||||||||||||
June 30, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Residential real estate |
$ | 107,685 | 33 | % | $ | 110,862 | 34 | % | $ | 108,963 | 32 | % | ||||||||||||
Commercial real estate |
143,133 | 45 | % | 146,222 | 44 | % | 145,318 | 43 | % | |||||||||||||||
Construction/land |
39,546 | 12 | % | 43,017 | 13 | % | 49,555 | 14 | % | |||||||||||||||
Commercial and industrial |
27,317 | 9 | % | 27,517 | 8 | % | 34,145 | 10 | % | |||||||||||||||
Consumer non real estate |
3,808 | 1 | % | 4,692 | 1 | % | 4,108 | 1 | % | |||||||||||||||
Total Loans |
$ | 321,489 | 100 | % | $ | 332,310 | 100 | % | $ | 342,089 | 100 | % | ||||||||||||
Substantially all loans are initially underwritten based on identifiable cash flows and
supported by appropriate advance rates on collateral which is independently valued. Commercial
loans are generally secured by accounts receivable, equipment and business assets. Commercial real
estate is secured by 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
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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 $679 thousand as of
June 30, 2011.
The table also shows a continuing reduction in the real estate construction portion of the
portfolio, which represented 12% of the portfolio at June 30, 2011 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 June 30,
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 $331 thousand as of June 30, 2011. Our subordinate trust loans
averaged $99 thousand per property as of June 30, 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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The following table presents the maturities or repricing periods of selected loans outstanding
at June 30, 2011:
Loan Maturity Distribution | ||||||||||||||||
As Of June 30, 2011 | ||||||||||||||||
One Year | After One Year | After | ||||||||||||||
or Less | Through Five Years | Five Years | Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Commercial and industrial |
$ | 14,748 | $ | 8,729 | $ | 3,840 | $ | 27,317 | ||||||||
Construction/land |
26,501 | 11,072 | 1,973 | 39,546 | ||||||||||||
Total |
$ | 41,249 | $ | 19,801 | $ | 5,813 | $ | 66,863 | ||||||||
Loans with: |
||||||||||||||||
Fixed rates |
$ | 68,281 | $ | 77,534 | $ | 72,520 | $ | 218,335 | ||||||||
Variable rates |
40,296 | 57,116 | 5,742 | 103,154 | ||||||||||||
Total |
$ | 108,577 | $ | 134,650 | $ | 78,262 | $ | 321,489 | ||||||||
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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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 June 30, 2011.
Credit Quality Asset By Class | ||||||||||||||||||||||||||||
As of June 30, 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Special | Total | |||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES | Pass | Watch | Mention | Substandard | Doubtful | Loss | Loans | |||||||||||||||||||||
Risk Rating Number 1 | 1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
Commercial and Industrial |
$ | 23,983 | $ | 864 | $ | 719 | $ | 1,736 | $ | 15 | $ | | $ | 27,317 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
66,506 | 1,601 | 789 | 2,677 | | | 71,573 | |||||||||||||||||||||
Non-owner occupied |
63,136 | 2,601 | 3,883 | 1,940 | | | 71,560 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
14,275 | | | | 536 | | 14,811 | |||||||||||||||||||||
Other construction & land |
15,476 | 1,837 | 556 | 6,530 | 336 | | 24,735 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
29,075 | 999 | | 44 | 122 | | 30,240 | |||||||||||||||||||||
Single family |
59,066 | 1,579 | 3,636 | 7,770 | 578 | | 72,629 | |||||||||||||||||||||
Multifamily |
4,816 | | | | | | 4,816 | |||||||||||||||||||||
Consumer non real estate |
3,549 | 259 | | | | | 3,808 | |||||||||||||||||||||
Totals |
$ | 279,882 | $ | 9,740 | $ | 9,583 | $ | 20,697 | $ | 1,587 | $ | | $ | 321,489 | ||||||||||||||
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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The following table sets forth the aging and non-accrual loans by class, as of June 30, 2011:
Aging and Non-accrual Loans By Class | ||||||||||||||||||||||||||||
As of June 30, 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 1 | Accruing | Loans | ||||||||||||||||||||||
Commerical and Industrial |
$ | 979 | $ | 205 | $ | | $ | 1,184 | $ | 26,133 | $ | | $ | 1,067 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
2,677 | | 15 | 2,692 | 68,881 | 2,692 | ||||||||||||||||||||||
Non-owner occupied |
100 | | 408 | 508 | 71,052 | 408 | 100 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
| | 536 | 536 | 14,275 | | 536 | |||||||||||||||||||||
Other construction & land |
1,781 | 180 | 2,896 | 4,857 | 19,878 | | 4,033 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
1,114 | | 166 | 1,280 | 28,960 | | 166 | |||||||||||||||||||||
Single Family |
1,916 | 1,397 | 652 | 3,965 | 68,664 | | 1,927 | |||||||||||||||||||||
Multifamily |
| | | | 4,816 | | | |||||||||||||||||||||
Consumer non real estate |
76 | | | 76 | 3,732 | | | |||||||||||||||||||||
Total loans |
$ | 8,643 | $ | 1,782 | $ | 4,673 | $ | 15,098 | $ | 306,391 | $ | 408 | $ | 10,521 | ||||||||||||||
1 | For the purposes 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. At
March 31, 2011, three lending relationships were briefly described that were major contributors to the
increase in nonaccrual levels as of that date. The first relationship with an aggregate exposure of
$4.8 million, continues to make its note payments but its ability to sustain payments through its
winter operating season remains in question. The second relationship with an aggregate exposure of
$1.7 million that included 14 real estate secured notes, has improved by virtue of the bankruptcy
court releasing prior and future rental payments to be applied to 11 of the notes, allowing those
notes to move back to accrual status prior to year end 2011. The third relationship, with an aggregate
exposure of $2.4 million, is currently in settlement negotiations such that a $1.48 million
repayment is now expected as early as September 30, 2011.
From time to time, a loan may be past due 90 days or more but is in the process of collection
and thus warrants remaining on accrual status. We had one such loan of $408 thousand at June 30,
2011.
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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 June 30, 2011, or 1.75% of loans
outstanding, compared to $5.3 million or 1.59% of loans outstanding, at December 31, 2010. We have
allocated $1.5 million at June 30, 2011 compared to $873 thousand at December 31, 2010 for specific
non-performing loans. For the first six months of 2011, we had net charge-offs of $746 thousand
compared to net charge-offs $1.4 million 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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The following table represents an analysis of the allowance for loan losses for the periods
presented:
Six Months | Twelve Months | Six Months | ||||||||||
Ended June 30, | December 31, | Ended June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 5,281 | $ | 5,619 | $ | 5,619 | ||||||
Provision for loan losses |
1,075 | 1,753 | 950 | |||||||||
Chargeoffs: |
||||||||||||
Commerical and industrial |
(10 | ) | (477 | ) | (475 | ) | ||||||
Construction/land |
(404 | ) | (173 | ) | (150 | ) | ||||||
Residential real estate |
(414 | ) | (1,450 | ) | (707 | ) | ||||||
Commercial real estate |
(158 | ) | (69 | ) | (70 | ) | ||||||
Consumer non real estate |
| (70 | ) | (6 | ) | |||||||
Total chargeoffs |
(986 | ) | (2,239 | ) | (1,408 | ) | ||||||
Recoveries: |
||||||||||||
Commerical and industrial |
116 | 10 | | |||||||||
Construction/land |
| 18 | 18 | |||||||||
Residential real estate |
114 | 66 | 7 | |||||||||
Commercial real estate |
8 | 35 | 13 | |||||||||
Consumer non real estate |
2 | 19 | 4 | |||||||||
Total recoveries |
240 | 148 | 42 | |||||||||
Net (chargeoffs) |
(746 | ) | (2,091 | ) | (1,366 | ) | ||||||
Balance, end of period |
$ | 5,610 | $ | 5,281 | $ | 5,203 | ||||||
Allowance for loan losses to
total loans |
1.75 | % | 1.59 | % | 1.52 | % | ||||||
Allowance for loan losses to
non-accrual loans |
0.53X | 2.80X | 1.47X | |||||||||
Non-performing assets to
allowance for loan losses |
285.03 | % | 177.96 | % | 221.87 | % | ||||||
Non-performing assets to total assets |
2.98 | % | 1.75 | % | 1.86 | % | ||||||
Net chargeoffs to average loans |
0.46 | % | 0.61 | % | 0.77 | % |
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The following table provides a breakdown of the allocation of the allowance for loan
losses by loan type. However, management does not believe that the allowance for loan losses can
be fragmented by category with any precision that would be useful to investors. As such, the
entire allowance is available for losses in any particular category, notwithstanding this
allocation. The breakdown of the allowance for loan losses is based primarily upon those factors
discussed above in computing the allowance for loan losses as a whole. Because all of these
factors are subject to change, the allocation and actual results are not necessarily indicative of
the exact category of potential loan losses.
Allowance for Loan Losses | ||||||||||||||||||||||||
As of June 30, 2011 | ||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | Commercial | Construction | Residential | |||||||||||||||||||||
and 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 | ) | (158 | ) | (404 | ) | (414 | ) | | $ | (986 | ) | ||||||||||||
Recoveries |
116 | 8 | | 114 | 2 | $ | 240 | |||||||||||||||||
Provision |
(216 | ) | 265 | 1,186 | (126 | ) | (34 | ) | $ | 1,075 | ||||||||||||||
Ending Balance: |
$ | 353 | $ | 1,535 | $ | 1,482 | $ | 2,187 | $ | 53 | $ | 5,610 | ||||||||||||
Individually evaluated for
impairment |
$ | | $ | 217 | $ | 812 | $ | 504 | $ | | $ | 1,533 | ||||||||||||
Collectively evaluated for
impairment |
$ | 353 | $ | 1,318 | $ | 670 | $ | 1,683 | $ | 53 | $ | 4,077 | ||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 27,317 | $ | 143,133 | $ | 39,546 | $ | 107,685 | $ | 3,808 | $ | 321,489 | ||||||||||||
Individually evaluated for
impairment |
$ | 1,067 | $ | 2,792 | $ | 4,569 | $ | 2,093 | $ | | $ | 10,521 | ||||||||||||
Collectively evaluated for
impairment |
$ | 26,250 | $ | 140,341 | $ | 34,977 | $ | 105,592 | $ | 3,808 | $ | 310,968 | ||||||||||||
Nonperforming Assets
Impaired Loans (Loans with a Specific Allowance Allocation). As of June 30, 2011, there were
no loans with impairment allocations that were not also in non-accrual status. At December 31,
2010, a $2.4 million loan was carried as impaired which was subsequently placed on non-accrual
status in the first quarter of 2011.
Non-accrual Loans. A loan may be placed on non-accrual status when the loan is specifically
determined to be impaired or when principal or interest is delinquent 90 days or more. 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
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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 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 June 30, 2011, there was $10.5 million in loans on non-accrual status compared to $1.9 at
December 31, 2010 and $3.5 million at June 30, 2010. The $10.5 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 June 30, 2011 is $1.5 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 six months ended June 30, 2011, 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 of $2.4
million classified as impaired at December 31, 2010, was subsequently added to non-accrual in the
first quarter of 2011. 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. Strategies to resolve these loan
situations are being actively pursued which management believes will reduce the loan amounts and/or
risk exposure attributable to these situations prior to the end of 2011.
Total Non-Performing Assets. As of June 30, 2011, we had $16.0 million of non-performing
assets on the balance sheet compared to $9.4 million as of December 31, 2010, an increase of $6.6
million. This increase is due to the addition of several non-accrual lending relationships and
troubled debt restructurings during the first quarter of 2011. The ratio of
non-performing assets to total assets increased to 2.98% as of June 30, 2011 from 1.75% as of
December 31, 2010, a 123 basis point increase.
The following table provides information regarding credit quality at the dates presented:
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Credit Quality Information |
||||||||||||
Non-performing assets: |
||||||||||||
Accruing impaired loans |
$ | | $ | 2,400 | $ | 541 | ||||||
Non-Accrual loans |
10,521 | 1,903 | 3,537 | |||||||||
Total loans past due 90 days and still accruing |
408 | 256 | | |||||||||
Troubled debt restructurings |
749 | 212 | | |||||||||
OREO |
4,312 | 4,627 | 7,366 | |||||||||
Total non-performing assets |
$ | 15,990 | $ | 9,398 | $ | 11,444 | ||||||
Specific reserves associated with impaired loans |
$ | 1,533 | $ | 873 | $ | 938 | ||||||
Non-performing assets to total assets |
2.98 | % | 1.75 | % | 1.86 | % | ||||||
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Specific Reserves. As of June 30, 2011, we had $1.5 million in specific reserves for
non-performing loans, compared to $873 thousand at December 31, 2010.
Other Real Estate Owned (OREO). As of June 30, 2011, we had $4.3 million classified as OREO
on the balance sheet, compared to $4.6 million as of December 31, 2010 and $7.4 million at June 30,
2010. The OREO balance includes $1.5 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 six additional properties totaling $1.1 million at June 30,
2011.
The table below reflects the OREO activity in the periods presented:
Six Months | Twelve Months | Six Months | ||||||||||
Ended June 30, | Ended December 31, | Ended June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance, beginning of period |
$ | 4,627 | $ | 7,875 | $ | 7,875 | ||||||
Properties acquired at foreclosure |
434 | 1,973 | 1,600 | |||||||||
Capital improvements on foreclosed properti |
| 55 | | |||||||||
Sales of foreclosed properties |
(749 | ) | (4,918 | ) | (2,109 | ) | ||||||
Valuation adjustments |
| (358 | ) | | ||||||||
Balance, end of period |
$ | 4,312 | $ | 4,627 | $ | 7,366 | ||||||
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 June 30, 2011, the deposit portfolio was $412.0 million, an increase of $5.1 million
compared to the December 31, 2010 level of $406.9 million. The interest-bearing deposits on
average cost the Bank 1.58% for the six months ended June 30, 2011, or 57 basis points less than
the six months ended June 30, 2010 average cost of 2.15%. As key interest rates declined over the
past year, we repriced deposits at lower levels.
At June 30, 2011, our non-interest bearing demand deposits were $130.8 million compared to
$124.6 million at December 31, 2010, a $6.2 million increase. Average non-interest bearing demand
deposits were $89.5 million for the six months ended June 30, 2011 compared to average demand
deposits of $91.6 million for the six months ended June 30, 2010, a decrease of $2.1 million. The
disparity between the June 30, 2011 balance of non-interest bearing deposits of $130.8 million and
the average balance for the first six months of 2011 of non-interest bearing deposits of $89.5
million is directly related to seasonal and cyclical changes in the
business activities of our
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title and
escrow agency client base. Frequently, our title and escrow agency clients experience
strong deposit growth around the end of a month or quarter.
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.
As of June 30, 2011, we had $122.5 million of wholesale brokered certificates of deposit which
is $22.5 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 June 30, 2011:
Maturity Distribution of Brokered Deposits by Year | ||||||||
Maturity | Average Coupon | |||||||
Year | Amount | Rate | ||||||
(dollars in thousands) | ||||||||
2011 |
$ | 12,500 | 2.00 | % | ||||
2012 |
40,000 | 1.55 | % | |||||
2013 |
37,562 | 1.53 | % | |||||
2014 |
22,423 | 1.58 | % | |||||
2015 |
10,000 | 1.90 | % | |||||
$ | 122,485 | 1.62 | % | |||||
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 $33.9
million at June 30, 2011, compared to $43.1 million at December 31, 2010 and $33.1 million at June
30, 2010. FHLB advances amounted to $41.3 million at June 30, 2011, compared to $41.2 million at
December 31, 2010 and $51.2 million at June 30, 2010. Other borrowings were $0, $549 thousand and
$6 thousand at June 30, 2011, December 31, 2010 and June 30, 2010, respectively. The Trust
Preferred Capital Notes were $10.3 million for all periods presented.
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Six Months | Twelve Months | Six Months | ||||||||||
Ended June 30, | Ended December 31, | Ended June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
At Period End |
||||||||||||
FHLB long-term advances, at fair value |
$ | 26,281 | $ | 26,208 | $ | 26,223 | ||||||
FHLB long-term advances |
15,000 | 15,000 | 25,000 | |||||||||
Customer repos |
33,882 | 43,148 | 33,119 | |||||||||
Purchased funds and other borrowings |
| 5 | 6 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Total at period end |
$ | 85,473 | $ | 94,671 | $ | 94,658 | ||||||
Average Balances |
||||||||||||
FHLB long-term advances, at fair value |
$ | 26,132 | $ | 26,196 | $ | 25,900 | ||||||
FHLB long-term advances |
15,000 | 28,105 | 34,945 | |||||||||
Customer repos |
32,440 | 35,759 | 31,983 | |||||||||
Purchased funds and other borrowings |
| 9,133 | 18,065 | |||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | |||||||||
Total average balance |
$ | 83,882 | $ | 109,503 | $ | 121,203 | ||||||
Average rate paid on all
borrowed funds, end of period |
1.82 | % | 1.77 | % | 1.61 | % | ||||||
Average rate paid on all
borrowed funds, during the period |
1.62 | % | 1.69 | % | 2.98 | % | ||||||
Maximum outstanding during
period |
$ | 118,741 | $ | 126,156 | $ | 119,137 | ||||||
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 June 30, 2011, December 31, 2010 and June 30, 2010, the FHLB long-term advance accounted
for on a fair value basis had a value of $26.3 million, $26.2 million 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% for all periods presented. The par value of
the FHLB advance accounted for on a fair value basis was $25.0 million at June 30, 2011, December
31 2010, and June 30, 2010.
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At June 30, 2011, there was one FHLB advance accounted for on a cost basis. Bankshares
entered into this floating rate advance in the first quarter of 2010 for $15.0 million. The
advance matures in 2012 and the interest rate at June 30, 2011 was 0.159%. The weighted average
interest rate for both FHLB advances at June 30, 2011 is 2.550%.
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 June 30,
2011 and December 31, 2010, the fair value of the long-term FHLB advance accounted for on a fair
value basis was $26.3 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:
June 30, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||||||||||||||||||||||||||
Par | Fair | Par | Fair | Par | Fair | |||||||||||||||||||||||||||||||
Value | Value | Yield | Value | Value | Yield | Value | Value | Yield | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
FHLB long-term
advance |
$ | 25,000 | $ | 26,281 | 3.99 | % | $ | 25,000 | $ | 26,208 | 3.99 | % | $ | 25,000 | $ | 26,223 | 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 on our liquidity position
through a reduction in average deposits.
Our funding department and Interim Chief Financial Officer and Controller 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,
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although our longer term plan is to increase deposits from our local retail and commercial
deposits and maintain available wholesale funding sources as additional liquidity.
As of June 30, 2011, Bankshares had $62.4 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 June 30, 2011, the Bank had a total credit line of $105.4 million with the
FHLB with an unused portion of $65.4 million. Borrowings with the FHLB have certain collateral
requirements and are subject to disbursement approval by the FHLB. At June 30, 2011, the Bank had
$30.0 million in secured borrowing capacity and $4.0 million in unsecured borrowing capacity (both
reverse repurchase agreements and federal funds purchased) from correspondent banks. As of June
30, 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 $35.8 million as of June 30, 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 $759 thousand and unrealized gains on securities of $1.3 million. Book value per common share was $7.00 as of June 30, 2011, compared to
$6.60 as of December 31, 2010. The net unrealized gain on available-for-sale securities amounted
to $1.0 million, net of tax as of June 30, 2011, compared to a net unrealized loss on
available-for-sale securities of $288 thousand, net of tax as of December 31, 2010.
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The following table reflects the components of stockholders equity on a book value per share
basis.
Six Months | Twelve Months | Six Months | ||||||||||
Ended June 30, | Ended December 31, | Ended June 30, | ||||||||||
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 |
0.15 | 0.14 | 0.06 | |||||||||
Effects of changes in Other Comprehensive Income (Loss)1 |
0.25 | (0.03 | ) | 0.43 | ||||||||
Book Value Per Share, end of the period |
$ | 7.00 | $ | 6.60 | $ | 6.98 | ||||||
1 | Other Comprehensive Income represents the unrealized gains or losses associated with available-for-sale secutities and related reclassification adjustments. |
Payment of dividends is at the discretion of Bankshares Board of Directors and is
subject to various federal and state regulatory limitations. It is our current policy to retain
earnings to support our banking operations and our business risk profile. In addition, the terms of
the Merger Agreement restrict Bankshares from declaring, setting aside or paying any dividends or
other distributions on any class of its capital stock without the consent of Eagle while the Merger
is pending.
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 June 30, 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 June 30, 2011 the total amount of deferred
and compounded interest owed under the indenture is $759 thousand. The base interest rate as of
June 30, 2011 was 3.40% 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
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may
include up to 25% of stockholders equity excluding accumulated other comprehensive income (loss)
in the form of Trust Preferred Capital Notes. At June 30, 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 June 30, 2011, December 31, 2010 and June
30, 2010. The following table shows our capital categories, capital ratios and the minimum capital
ratios currently required by bank regulators:
Risk Based Capital Analysis | ||||||||||||
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Tier 1 Capital: |
||||||||||||
Common stock |
$ | 20,436 | $ | 20,427 | $ | 20,427 | ||||||
Capital surplus |
25,854 | 25,857 | 25,822 | |||||||||
Retained (deficit) |
(11,552 | ) | (12,311 | ) | (12,712 | ) | ||||||
Less: disallowed assets |
(4,504 | ) | (2,990 | ) | (4,303 | ) | ||||||
Add: Qualifying Trust Preferred Securities |
10,000 | 10,000 | 10,000 | |||||||||
Total Tier 1 capital |
40,234 | 40,983 | 39,234 | |||||||||
Tier 2 Capital: |
||||||||||||
Qualifying allowance for loan losses |
4,152 | 4,400 | 4,634 | |||||||||
Total Tier 2 capital |
4,152 | 4,400 | 4,634 | |||||||||
Total Risk Based Capital |
$ | 44,386 | $ | 45,383 | $ | 43,868 | ||||||
Risk weighted assets |
$ | 331,934 | $ | 352,277 | $ | 371,164 | ||||||
Quarterly average assets |
$ | 485,310 | $ | 547,008 | $ | 558,742 | ||||||
June 30, | December 31, | June 30, | Regulatory | |||||||||||||
2011 | 2010 | 2010 | Minimum | |||||||||||||
Capital Ratios: | ||||||||||||||||
Tier 1 risk based capital ratio |
12.1 | % | 11.6 | % | 10.6 | % | 4.0 | % | ||||||||
Total risk based capital ratio |
13.4 | % | 12.9 | % | 11.8 | % | 8.0 | % | ||||||||
Leverage ratio |
8.3 | % | 7.5 | % | 7.0 | % | 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 June 30, 2011, the Company had capital ratios of 8.3%, 12.1% and 13.4%, 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:
Three | Six | Twelve | ||||||||||
Months Ended | Months Ended | Months Ended | ||||||||||
June 30, | June 30, | December 31, | ||||||||||
2011 | 2011 | 2010 | ||||||||||
(dollars in thousands) | ||||||||||||
Average total assets |
$ | 489,814 | $ | 501,238 | $ | 558,945 | ||||||
Average stockholders equity |
$ | 34,581 | $ | 34,102 | $ | 37,395 | ||||||
Net income |
$ | 394 | $ | 759 | $ | 705 | ||||||
Cash dividends declared |
$ | | $ | | $ | | ||||||
Return on average assets (annualized) |
0.32 | % | 0.31 | % | 0.13 | % | ||||||
Return on average stockholders
equity (annualized) |
4.57 | % | 4.49 | % | 1.89 | % | ||||||
Average stockholders equity to
average total assets |
7.06 | % | 6.80 | % | 6.69 | % | ||||||
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 June 30, 2011, commercial real estate loans were 44.5%
and residential real estate loans were 33.5% 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 June 30, 2011, the noninterest bearing deposits were 31.8% 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 June 30, 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.
Recent Accounting Pronouncements In January 2010, the Financial Accounting Standards Board
(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
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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, Receivables (Topic 310) Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. The
new disclosure guidance significantly expands the existing requirements and will lead to
greater transparency into a companys exposure to credit losses from lending arrangements. The
extensive new disclosures of information as of the end of a reporting period became effective for
both interim and annual reporting periods ending on or after December 15, 2010. Specific
disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance
roll forward and modification disclosures 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 2010-28, Intangible Goodwill and Other (Topic 350)
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. The amendments in this ASU 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.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805)
Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance
requires pro forma disclosure for business combinations that occurred in the current reporting
period as though the acquisition date for all business combinations that occurred during the year
had been as of the beginning of the annual reporting period. If comparative financial statements
are presented, the pro forma information should be reported as though the acquisition date for all
business combinations that occurred during the current year had been as of the beginning of the
comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new
guidance did not have a material impact on Bankshares consolidated financial statements.
The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, Interactive Data to
Improve Financial Reporting. The rule requires companies to submit financial statements in
extensible business reporting language (XBRL) format with their SEC filings on a phased-in
schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were
required to provide interactive data reports starting with their first quarterly report for fiscal
periods ending on or after June 15, 2010. All remaining filers are required to provide interactive
data reports starting with their first quarterly report for fiscal periods ending on or after June
15, 2011. The adoption of the new guidance did not have a material impact on Bankshares
consolidated financial statements.
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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, Receivables (Topic 310) A Creditors
Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this
ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a
debtor. They also clarify the guidance on a creditors evaluation of whether a debtor is
experiencing financial difficulty. The amendments in this ASU are effective for the first interim
or annual period beginning on or after June 15, 2011. 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 has adopted ASU 2011-02 and will include the required disclosures in its consolidated
financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860)
Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove
from the assessment of effective control (1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the
event of default by the transferee and (2) the collateral maintenance implementation guidance
related to that criterion. The amendments in this ASU are effective for the first interim or
annual period beginning on or after December 15, 2011. The guidance should be applied prospectively
to transactions or modifications of existing transactions that occur on or after the effective
date. Early adoption is not permitted. Bankshares is currently assessing the impact that ASU
2011-03 will have on its consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This
ASU is the result of joint efforts by the FASB and International Accounting Standards Board to
develop a single, converged fair value framework on how (not when) to measure fair value and what
disclosures to provide about fair value measurements. The ASU is largely consistent with existing
fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to
eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting
Standards (IFRS). The amendments are effective for interim and annual periods beginning after
December 15, 2011 with prospective application. Early application is not permitted. Bankshares is
currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.
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In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation
of Comprehensive Income. The objective of this ASU is to improve the comparability, consistency
and transparency of financial reporting and to increase the prominence of items reported in other
comprehensive income by eliminating the option to present components of other comprehensive income
as part of the statement of changes in stockholders equity. The amendments require that all
non-owner changes in stockholders equity be presented either in a single continuous statement of
comprehensive income or in two
separate but consecutive statements. The single statement of comprehensive income should
include the components of net income, a total for net income, the components of other comprehensive
income, a total for other comprehensive income, and a total for comprehensive income. In the
two-statement approach, the first statement should present total net income and its components
followed consecutively by a second statement that should present all the components of other
comprehensive income, a total for other comprehensive income, and a total for comprehensive income.
The amendments do not change the items that must be reported in other comprehensive income, the
option for an entity to present components of other comprehensive income either net of related tax
effects or before related tax effects, or the calculation or reporting of earnings per share. The
amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal
years and interim periods within those years beginning after December 15, 2011. Early adoption is
permitted because compliance with the amendments is already permitted. The amendments do not
require transition disclosures. Bankshares is currently assessing the impact that ASU 2011-05 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 (NII) Sensitivity (Short-term Interest Rate Risk). Bankshares ALM
process evaluates the effect of upward and downward changes in market interest rates on future net
interest income. This analysis involves shocking the interest rates used in determining net
interest income over the next twelve months. The resulting percentage change in net interest
income in various rate scenarios is an indication of Bankshares shorter-term interest rate risk.
This analysis is accomplished by assuming a static balance sheet over a period of time with
maturing and repayment dollars being rolled back into like instruments for new terms at current
market rates. Additional assumptions are applied to modify volumes and pricing under various rate
scenarios. These assumptions include prepayments, the sensitivity of non-maturity deposit rates,
and other factors deemed significant by Bankshares.
The ALM model results for June 30, 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 4.8%.
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Assuming a shift
downward of 100 basis points, Bankshares would expect net interest income to decrease over the next
twelve months by 2.2%.
Economic Value of Equity (Long-term Interest Rate Risk). The economic value of equity process
models the cashflows of financial instruments to maturity. The model incorporates growth and
pricing assumptions to develop a baseline Economic Value of Equity (EVE). The interest rates used
in the model are then shocked for an immediate increase or
decrease in interest rates. The results of the shocked model are compared to the baseline
results to determine the percentage change in EVE under the various scenarios. The resulting
percentage change in EVE is an indication of the longer term repricing risk and options embedded in
the balance sheet.
The table below shows as of June 30, 2011, ALM model results under various interest rate
shocks:
June 30, 2011 | ||||||||
Interest Rate Shocks | NII | EVE | ||||||
-200 bp |
-7.2 | % | 1.5 | % | ||||
-100 bp |
-2.2 | % | 0.9 | % | ||||
+100 bp |
4.8 | % | -2.2 | % | ||||
+200 bp |
9.8 | % | -2.9 | % |
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 $45.1 million, or 8.4% of total
assets, at June 30, 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, $90.0 million of the investment and trading securities at June 30,
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 $90.0 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 June 30, 2011 static interest rate gap position:
June 30, 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 |
$ | | $ | | $ | 19,553 | $ | 89,252 | $ | 108,805 | ||||||||||
Trading securities |
| | | 658 | 658 | |||||||||||||||
Loans* |
49,659 | 48,396 | 134,651 | 78,262 | 310,968 | |||||||||||||||
Interest-bearing deposits |
60,835 | | | | 60,835 | |||||||||||||||
Federal funds sold |
20,359 | | | | 20,359 | |||||||||||||||
Total interest earning assets |
130,853 | 48,396 | 154,204 | 168,172 | 501,625 | |||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Interest-bearing demand deposits |
54,675 | | | | 54,675 | |||||||||||||||
Money market deposit accounts |
23,933 | | | | 23,933 | |||||||||||||||
Savings accounts |
2,958 | | | | 2,958 | |||||||||||||||
Time deposits |
26,872 | 56,756 | 116,000 | | 199,628 | |||||||||||||||
Total interest-bearing deposits |
108,438 | 56,756 | 116,000 | | 281,194 | |||||||||||||||
FHLB long term advances, at fair value |
| | | 26,281 | 26,281 | |||||||||||||||
FHLB long term advances |
15,000 | | | | 15,000 | |||||||||||||||
Customer repurchase agreements |
33,882 | | | | 33,882 | |||||||||||||||
Trust Preferred Capital Notes |
10,310 | | | | 10,310 | |||||||||||||||
Total interest-bearing liabilities |
167,630 | 56,756 | 116,000 | 26,281 | 366,667 | |||||||||||||||
Period Gap |
$ | (36,777 | ) | $ | (8,360 | ) | $ | 38,204 | $ | 141,891 | $ | 134,958 | ||||||||
Cumulative Gap |
$ | (36,777 | ) | $ | (45,137 | ) | $ | (6,933 | ) | $ | 134,958 | $ | 134,958 | |||||||
Cumulative Gap / Total Assets |
-6.8 | % | -8.4 | % | -1.3 | % | 25.1 | % | 25.1 | % | ||||||||||
* | Excludes nonaccrual assets of $10.5 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 June 30, 2011.
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
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and
communicated to management, including our Chief Executive Officer and Interim Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Our management
evaluated, with the participation of our Chief Executive Officer and Interim 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 Interim Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of June 30, 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.
The resignation of the Companys Chief Financial Officer during the Companys most recent
fiscal quarter has not materially affected, nor is reasonably likely to materially affect, the
Companys internal control over financial reporting due to the necessary reassignment of the
duties of that office to the Interim Chief Financial Officer. The resulting changes in the
Companys internal control structure will not affect the Companys ability to record, process,
summarize, and report financial information.
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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
Termination of the Merger Agreement could negatively impact Bankshares.
If the Merger Agreement is terminated and the parties fail to consummate the Merger, there may
be various negative consequences to Bankshares and the Bank. For example, Bankshares businesses may
have been impacted adversely by the failure to pursue other beneficial opportunities due to the
focus of management on the Merger, without realizing any of the anticipated benefits of completing
the Merger. If the Merger Agreement is terminated and Bankshares board of directors seeks another
merger or business combination, shareholders of Bankshares cannot be certain that Bankshares will
be able to find a party willing to pay the equivalent or greater consideration than that which
Eagle has agreed to pay with respect to the Merger. In addition, under certain circumstances, the
termination of the Merger Agreement may require Bankshares to pay to Eagle a termination fee in the
amount of $1.35 million.
Bankshares will be subject to business uncertainties and contractual restrictions while the Merger
is pending.
Uncertainty about the effect of the Merger on employees and customers may have an adverse
effect on Bankshares. These uncertainties may impair Bankshares ability to attract, retain and
motivate key personnel until the Merger is completed, and could cause customers and others that
deal with Bankshares to seek to change existing business relationships with the Bank. Retention of
certain employees by Bankshares may be challenging while the Merger is pending, as certain
employees may experience uncertainty about their future roles with the Bank. If key employees
depart because of issues relating to the uncertainty and difficulty of integration or a desire not
to remain with Bankshares and the Bank, Bankshares business following the Merger could be harmed.
In addition, subject to certain exceptions, Bankshares has agreed to operate its business in the
ordinary course prior to closing.
Combining the two companies may be more difficult, costly or time-consuming than expected.
Eagle and Bankshares have operated and, until the completion of the Merger, will continue to
operate, independently. The success of the Merger will depend, in part, on our ability to
successfully combine the businesses of Eagle and Bankshares. To realize these anticipated benefits,
after the completion of the Merger Eagle expects to integrate
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Bankshares business into its own. It is possible that the integration process could result in the
loss of key employees, the disruption of each companys ongoing businesses or inconsistencies in
standards, controls, procedures and policies that adversely affect the combined companys ability
to maintain relationships with clients, customers, depositors and employees or to achieve the
anticipated benefits of the Merger. The loss of key employees could adversely affect Eagles
ability to successfully conduct its business in the markets in which Bankshares now operates, which
could have an adverse effect on Eagles financial results and the value of its common stock. If
Eagle experiences difficulties with the integration process, the anticipated benefits of the Merger
may not be realized fully or at all, or may take longer to realize than expected. As with any
merger of financial institutions, there also may be business disruptions that cause the Bank to
lose customers or cause customers to remove their accounts from the Bank and move their business to
competing financial institutions. Integration efforts between Eagle and Bankshares will also divert
management attention and resources. These integration matters could have an adverse effect on each
of Bankshares and Eagle during this transition period and for an undetermined period after
consummation of the Merger.
Our ability to complete the Merger with Eagle is subject to the receipt of consents and approvals
from regulatory agencies which may impose conditions that could adversely affect us or cause the
Merger to be abandoned.
Before the Merger may be completed, we must obtain various approvals or consents from the
Federal Reserve Board and various bank regulatory and other authorities. These regulators may
impose conditions on the completion of the Merger or require changes to the terms of the Merger.
Although Eagle and Bankshares do not currently expect that any such conditions or changes would be
imposed, there can be no assurance that they will not be, and such conditions or changes could have
the effect of delaying completion of the Merger or imposing additional costs on or limiting the
revenues of Eagle following the Merger. There can be no assurance as to whether the regulatory
approvals will be received, the timing of those approvals, or whether any conditions will be
imposed.
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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
None.
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). | ||
2.2 | Agreement of Merger between Eagle Bancorp, Inc., Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of July 27, 2011 (incorporated by reference to Exhibit 2.1 to Form 8-K filed on July 29, 2011) | ||
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). | ||
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 16, 2011 (incorporated by reference to Exhibit 10.15 to Form 10-Q filed May 16, 2011). |
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31.1 | Certification of CEO pursuant to Rule 13a-14(a). | ||
31.2 | Certification of Interim CFO pursuant to Rule 13a-14(a). | ||
32 | Certification of CEO and Interim CFO pursuant to 18 U.S.C. Section 1350. | ||
101 | The following materials from Alliance Bankshares Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Changes in Stockholders Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited). |
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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)
August 12, 2011
|
/s/ William E. Doyle, Jr.
|
|||
Date
|
William E. Doyle, Jr. | |||
President & Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
August 12, 2011
|
/s/ Jean S. Houpert
|
|||
Date
|
Jean S. Houpert | |||
Senior Vice President & | ||||
Interim Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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