Attached files
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EX-32 - EXHIBIT 32 - ALLIANCE BANKSHARES CORP | d296256dex32.htm |
EX-31.1 - EXHIBIT 31.1 - ALLIANCE BANKSHARES CORP | d296256dex311.htm |
EX-31.2 - EXHIBIT 31.2 - ALLIANCE BANKSHARES CORP | d296256dex312.htm |
EX-23.1 - EXHIBIT 23.1 - ALLIANCE BANKSHARES CORP | d296256dex231.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-49976
ALLIANCE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA | 46-0488111 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
14200 Park Meadow Drive, Suite 200 South, Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)
(703) 814-7200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $4.00 par value per share |
The NASDAQ Stock Market LLC | |
Title of each class | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of Alliance Bankshares Corporation common stock held by non-affiliates as of June 30, 2011 was $23,855,189 based on the closing sale price of $4.90 per common share.
The number of shares of common stock outstanding as of April 10, 2012 was 5,109,969.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report will be included in an amendment to this annual report on Form 10-K filed on or before April 30, 2012.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the Amendment) amends Alliance Bankshares Corporations (Bankshares) Annual Report on Form 10-K for the fiscal year ended December 31, 2011, originally filed with the Securities and Exchange Commission (the SEC) on April 17, 2012 (the Original Filing). Bankshares is filing the Amendment solely for the purpose of updating (i) the Report of Independent Registered Public Accounting Firm in Item 8, Financial Statements and Supplementary Data, to reflect changes in language provided by Yount Hyde & Barbour, P.C. and (ii) the Exhibit 23 auditors consent to correct a typographical error in the file number of one of the registration statements referenced therein. No attempt has been made in this Amendment to modify or update other disclosures presented in the Original Filing. This Amendment does not reflect events occurring after the date of the filing of the Original Filing or modify or update disclosures, including the exhibits to the Original Filing, affected by subsequent events.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), new certifications by our principal executive officer and principal financial officer are filed as exhibits to the Amendment under Item 15 of Part IV hereof.
2
Item 8. Financial Statements and Supplementary Data
Alliance Bankshares Corporation
Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
With Report of Independent Registered Public Accounting Firm
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Alliance Bankshares Corporation
Chantilly, Virginia
We have audited the accompanying consolidated balance sheets of Alliance Bankshares Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Bankshares Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
April 17, 2012
4
Alliance Bankshares Corporation
Consolidated Balance Sheets
December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 45,837 | $ | 24,078 | ||||
Federal funds sold |
16,567 | 17,870 | ||||||
Trading securites, at fair value |
596 | 2,075 | ||||||
Investment securites available-for-sale, at fair value |
123,463 | 135,852 | ||||||
Restricted stock, at cost |
4,772 | 6,355 | ||||||
Loans, net of allowance for loan losses of $5,393 and $5,281 |
301,483 | 327,029 | ||||||
Premises and equipment, net |
1,415 | 1,584 | ||||||
Other real estate owned |
3,748 | 4,627 | ||||||
Accrued interest and other assets |
8,602 | 19,041 | ||||||
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|
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TOTAL ASSETS |
$ | 506,483 | $ | 538,511 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY |
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LIABILITIES: |
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Non-interest bearing deposits |
$ | 112,450 | $ | 124,639 | ||||
Savings and NOW deposits |
51,475 | 56,569 | ||||||
Money market deposits |
23,370 | 25,524 | ||||||
Time deposits |
193,148 | 200,211 | ||||||
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Total deposits |
380,443 | 406,943 | ||||||
Repurchase agreements |
40,420 | 43,153 | ||||||
Federal Home Loan Bank advances ($29,350 and $26,208 at fair value) |
44,350 | 41,208 | ||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | ||||||
Other liabilities |
2,838 | 3,212 | ||||||
Commitments and contingent liabilities |
| | ||||||
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Total liabilities |
478,361 | 504,826 | ||||||
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SHAREHOLDERS EQUITY: |
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Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 and 5,106,819 shares issued and outstanding at December 31, 2011 and 2010 |
20,440 | 20,427 | ||||||
Capital surplus |
25,915 | 25,857 | ||||||
Retained (deficit) |
(18,269 | ) | (12,311 | ) | ||||
Accumulated other comprehensive income (loss), net |
36 | (288 | ) | |||||
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|
|
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Total shareholders equity |
28,122 | 33,685 | ||||||
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 506,483 | $ | 538,511 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
Alliance Bankshares Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
2011 | 2010 | |||||||
INTEREST INCOME: |
||||||||
Loans |
$ | 18,073 | $ | 20,476 | ||||
Investment securities |
3,513 | 6,084 | ||||||
Trading securities |
67 | 214 | ||||||
Federal funds sold |
53 | 64 | ||||||
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|
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Total interest income |
21,706 | 26,838 | ||||||
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INTEREST EXPENSE: |
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Savings and NOW deposits |
124 | 216 | ||||||
Time deposits |
3,671 | 5,577 | ||||||
Money market deposits |
178 | 270 | ||||||
Repurchase agreements |
238 | 354 | ||||||
FHLB advances |
1,042 | 1,134 | ||||||
Trust preferred capital notes |
380 | 367 | ||||||
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Total interest expense |
5,633 | 7,918 | ||||||
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Net interest income |
16,073 | 18,920 | ||||||
Provision for loan losses |
1,549 | 1,753 | ||||||
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Net interest income after provision for loan losses |
14,524 | 17,167 | ||||||
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OTHER INCOME: |
||||||||
Deposit account service charges |
151 | 220 | ||||||
Net gain on sale of available-for-sale securities |
3,372 | 2,237 | ||||||
Fair value adjustments |
(3,132 | ) | (511 | ) | ||||
Other operating income |
299 | 213 | ||||||
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Total other income |
690 | 2,159 | ||||||
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OTHER EXPENSES: |
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Salaries and employee benefits |
5,355 | 6,906 | ||||||
Occupancy expense |
2,309 | 2,663 | ||||||
Equipment expense |
632 | 772 | ||||||
Other Real Estate Owned expense |
454 | 841 | ||||||
Merger Expenses |
1,158 | | ||||||
Operating expenses |
6,300 | 7,095 | ||||||
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Total other expenses |
16,208 | 18,277 | ||||||
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Income (loss) before income taxes |
(994 | ) | 1,049 | |||||
Income tax expense |
4,964 | 344 | ||||||
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NET INCOME (LOSS) |
$ | (5,958 | ) | $ | 705 | |||
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Net income (loss) per common share, basic |
$ | (1.17 | ) | $ | 0.14 | |||
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Net income (loss) per common share, diluted |
$ | (1.17 | ) | $ | 0.14 | |||
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The accompanying notes are an integral part of these consolidated financial statements.
6
Alliance Bankshares Corporation
Consolidated Statements of Changes in Shareholders Equity
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
Common Stock |
Capital Surplus |
Retained (Deficit) |
Acccumulated Other Comprehensive Income (Loss) |
Comprehensive Income (Loss) |
Total Share- holders Equity |
|||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
$ | 20,427 | $ | 25,835 | $ | (13,016 | ) | $ | (112 | ) | $ | 33,134 | ||||||||||||
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Comprehensive income |
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Net income |
| | 705 | | $ | 705 | 705 | |||||||||||||||||
Other comprehensive (loss) net of tax: |
||||||||||||||||||||||||
Unrealized holding gains on securities available-for-sale, net of tax of $670 |
| | | | 1,300 | | ||||||||||||||||||
Less: reclassification adjustment, net income taxes of ($761) |
| | | | (1,476 | ) | | |||||||||||||||||
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Other comprehensive (loss), net of tax |
| | | (176 | ) | $ | (176 | ) | (176 | ) | ||||||||||||||
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Total comprehensive income |
| | | | $ | 529 | | |||||||||||||||||
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Stock-based compensation expense |
| 22 | | | 22 | |||||||||||||||||||
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BALANCE, DECEMBER 31, 2010 |
$ | 20,427 | $ | 25,857 | $ | (12,311 | ) | $ | (288 | ) | $ | 33,685 | ||||||||||||
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Comprehensive (loss) |
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Net loss |
| | (5,958 | ) | | $ | (5,958 | ) | (5,958 | ) | ||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains on securities available-for-sale, net of tax of $1,314 |
| | | | 2,550 | | ||||||||||||||||||
Less: reclassification adjustment, net income taxes of ($1,146) |
| | | | (2,226 | ) | | |||||||||||||||||
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Other comprehensive income , net of tax |
| | | 324 | $ | 324 | 324 | |||||||||||||||||
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Total comprehensive (loss) |
| | | | $ | (5,634 | ) | | ||||||||||||||||
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Exercise of stock options |
13 | (5 | ) | | | 8 | ||||||||||||||||||
Stock-based compensation expense |
| 63 | | | 63 | |||||||||||||||||||
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BALANCE, DECEMBER 31, 2011 |
$ | 20,440 | $ | 25,915 | $ | (18,269 | ) | $ | 36 | $ | 28,122 | |||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
Alliance Bankshares Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (5,958 | ) | $ | 705 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation, amortization and accretion |
1,530 | 1,074 | ||||||
Gain (loss) on disposal of fixed assets |
(20 | ) | 9 | |||||
Provision for loan losses |
1,549 | 1,753 | ||||||
Losses and valuation adjustments on Other Real Estate Owned |
354 | 358 | ||||||
Proceeds from sale of loans held for sale |
| 1,983 | ||||||
Stock-based compensation expense |
63 | 22 | ||||||
Net (gain) on sale of securities available-for-sale |
(3,372 | ) | (2,237 | ) | ||||
Fair value adjustments |
3,132 | 511 | ||||||
Deferred tax expense |
4,964 | 344 | ||||||
Changes in assets and liabilities affecting operations: |
||||||||
Accrued interest and other assets |
4,783 | 2,934 | ||||||
Other liabilities |
(374 | ) | 280 | |||||
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Net cash provided by operating activities |
6,651 | 7,736 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Net change in federal funds sold |
1,303 | (14,900 | ) | |||||
Purchase of securities available-for-sale |
(162,134 | ) | (99,880 | ) | ||||
Proceeds from sale of securities available-for-sale |
166,591 | 92,953 | ||||||
Paydowns on securities available-for-sale |
10,881 | 17,675 | ||||||
Net change in trading securities |
2,012 | 5,324 | ||||||
Net change in restricted stock |
1,583 | (37 | ) | |||||
Net change in loan portfolio |
23,563 | 23,006 | ||||||
Proceeds from sale of fixed assets |
36 | | ||||||
Proceeds from sale of Other Real Estate Owned |
959 | 4,918 | ||||||
Capital improvements on Other Real Estate Owned |
| (55 | ) | |||||
Purchase of premises and equipment |
(461 | ) | (231 | ) | ||||
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Net cash provided by investing activities |
44,333 | 28,773 | ||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net change in cash (expended on): |
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Non-interest bearing deposits |
(12,189 | ) | 31,793 | |||||
Savings and NOW deposits |
(5,094 | ) | 2,952 | |||||
Money market deposits |
(2,154 | ) | 3,062 | |||||
Time deposits |
(7,063 | ) | (62,772 | ) | ||||
Repurchase agreements |
(2,733 | ) | (4,137 | ) | ||||
Proceeds from exercise of stock options |
8 | | ||||||
FHLB advances |
| (10,000 | ) | |||||
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Net cash (used in) financing activities |
(29,225 | ) | (39,102 | ) | ||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
21,759 | (2,593 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
24,078 | 26,671 | ||||||
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CASH AND CASH EQUIVALENTS, END OF YEAR |
$ | 45,837 | $ | 24,078 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
8
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
1. | NATURE OF BUSINESS |
Alliance Bankshares Corporation (Bankshares or Company) is a bank holding company that conducts substantially all its operations through its subsidiaries. Alliance Bank Corporation (the Bank) is state-chartered and a member of the Federal Reserve System. The Bank places special emphasis on serving the needs of individuals, small and medium size businesses and professional concerns in the greater Washington D.C. Metropolitan region, primarily in the Northern Virginia submarket.
On November 15, 2005, the Bank formed Alliance Insurance Agency (AIA) through the acquisition of Danaher Insurance Agency. AIA was a wholly-owned subsidiary of the Bank and sold a wide array of insurance and financial products. In 2006 and 2007, AIA acquired two additional insurance agencies. The combined AIA operations offered insurance products in the Alliance trade area. On December 29, 2009, the Bank sold AIA and no longer offers insurance products.
On June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a subsidiary of Alliance Bankshares Corporation, was formed for the purpose of issuing Bankshares trust preferred debt.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation and consolidation The consolidated financial statements include the accounts of Alliance Bankshares Corporation, Alliance Virginia Capital Trust I and Alliance Bank Corporation. In consolidation all significant inter-company accounts and transactions have been eliminated. The subordinated debt of the trust is reflected as a liability of Bankshares.
Business The Bank is a state-chartered commercial bank. Our main business line is commercial banking. We provide services and products to clients located in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia area.
Use of estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, fair value of financial assets and liabilities, other-than-temporary impairment of securities, valuation of deferred income taxes and proper valuation of other real estate owned.
Cash and cash equivalents For the purposes of the consolidated Statements of Cash Flows, Bankshares has defined cash and cash equivalents as those amounts included in the balance sheet caption Cash and due from banks.
Trading activities Bankshares previously engaged in trading activities. Securities that are held principally for resale in the near term are recorded in the trading securities account at fair value with changes in fair value recorded in earnings. Interest and dividends are included in net interest income.
Securities Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on managements intent. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
9
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (a) the Company intends to sell the security or (b) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that it will be required to sell the security before recovery, it must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on the Companys ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income.
The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, the Companys intention with regard to holding the security to maturity and the likelihood that it would be required to sell the security before recovery.
Fair Value Accounting Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Accounting Standards Codification (ASC) 820-10-20, Fair Value Accounting, states that valuation techniques consistent with the market approach, income approach and/or cost approach should be used to measure fair value. Unobservable inputs should reflect the reporting entitys own assumptions about the assumptions that market participants would use in pricing the asset or the liability. As of December 31, 2011, Bankshares utilized a more advanced model to estimate the fair value of the FHLB advance accounted for under fair value accounting. For the year ended December 31, 2011, there was a negative $3.1 million adjustment to the fair value of the FHLB advance, driven by the decrease in interest rates during the period, and the change in accounting estimate.
Loans The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans throughout the Washington, D.C. metropolitan area. The ability of the Banks debtors to honor their contracts is dependent upon the real estate and general economic conditions of the lending area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the life of the loan or currently upon the sale or repayment of a loan.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off after 90 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
10
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for loan losses The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. Loan losses are charged against the allowance when management believes the inability to collect the loan has been confirmed. All classes of loans are typically charged-off no later than 180 days past due unless they are well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular basis, not less than quarterly, by management. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
The allowance represents an estimate that, in managements judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Managements judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrowers ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan segment:
Real estate residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
Real estate construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
Commercial business and commercial real estate loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.
Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
11
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Our allowance for loan losses has two basic components: the specific allowance for impaired credits and the general allowance based on relevant risk factors. Each of these components is determined based upon estimates that can and do change when the actual events occur.
The specific allowance is used to individually allocate an allowance for loans identified as impaired. Impairment testing includes consideration of the borrowers overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of the collateral. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. These factors are combined to estimate the probability and severity of inherent losses. When impairment is identified, a specific reserve is established based on Bankshares calculation of the loss embedded in the individual loan. Bankshares does not separately identify individual consumer and residential loans for impairment testing unless loans become 60 days or more past due.
The general component is the largest component of the total allowance and is determined by aggregating un-criticized loans by loan type based on common purpose, collateral, repayment source or other credit characteristics. We then apply allowance factors, which in the judgment of management represent the expected losses over the life of the loans. In determining those factors, we consider the following: (1) delinquencies and overall risk ratings, (2) loss history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the experience and depth of the borrowers management, (6) national and local economic trends, (7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g., regulatory requirements).
The characteristics of the loan ratings are as follows:
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loans, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
Special mention loans have a specific defined weakness in the borrowers operations and the borrowers ability to generate positive cash flow on a sustained basis. The borrowers recent payment history is characterized by late payments. Bankshares risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-managed, well maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of Bankshares credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect Bankshares. There is a distinct possibility that Bankshares will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrowers performance and financial condition provide evidence that it is probable that Bankshares will be unable to collect all amounts due. Substandard non-accrual loans have the same characteristics as substandard loans; however they have a non-accrual classification.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Doubtful rated loans have all the weakness inherent in a loan that is classified as substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
A loan is considered impaired when, based on current information and events, it is probable that Bankshares will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management reviews commercial, construction and real estate loans on the internal watch list as well as loans greater than $250,000 for impairment at least quarterly. Consumer and residential real estate loans are not individually reviewed for impairment unless they are 60 days or more past due on principal and/or interest payments. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled payments when due. Management determines the significance of payment delays and payment shortfalls taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrowers prior payment history, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan level basis by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. These factors are combined to estimate the probability and severity of inherent loss. When impairment is identified, a specific reserve may be established based on Bankshares calculation of the loss embedded in the individual loan. If an impaired loan is 90 days or more past due or if the collection of interest or principal is doubtful, the loan will be placed on nonaccrual status. Any payments received from the borrower will be accounted for on a cash basis.
Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrowers financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. As of December 31, 2011, there were $1.2 million of loans classified as TDRs of which $257 thousand were classified as non-accrual. There was $212 thousand in loans classified as TDRs as of December 31, 2010.
Premises and equipment Furniture and equipment are stated at cost less accumulated depreciation and amortization and are depreciated over their estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Foreclosed assets or Other Real Estate Owned (OREO) Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the underlying valuation are included in Other Real Estate Owned Expense in the Consolidated Statements of Operations
Income taxes Bankshares uses the liability (or balance sheet) approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the Consolidated Statements of Operations.
Repurchase agreements The Bank routinely enters into repurchase agreements with customers. As part of the repurchase agreements, the Bank uses marketable investment securities from its investment portfolio as collateral for the customer agreements. The repurchase agreements bear interest at a current market rate.
Stock-based compensation ASC 718-10, Stock Compensation, requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and non-vested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Included within salaries and employee benefits expense for the years ended December 31, 2011 and 2010, is $63 thousand and $22 thousand of stock-based compensation, respectively. As of December 31, 2011 and December 31, 2010, there was $82 thousand and $179 thousand, respectively, of total unrecognized compensation expense, related to stock options, which will be recognized over the remaining requisite service period ending December 31, 2014. For the year ended December 31, 2011, the weighted-average remaining contractual life is 4.8 years.
Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model. There were no grants of stock options in 2011.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Earnings (loss) per share Basic earnings (loss) per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Bankshares relate solely to outstanding stock options and are determined using the treasury method.
Off-balance-sheet instruments In the ordinary course of business, Bankshares, through its banking subsidiary, has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and rate lock commitments. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Advertising and marketing expense Advertising and marketing costs are expensed as incurred. Advertising and marketing costs for the years ended December 31, 2011 and 2010 were $76 and, $77 thousand, respectively.
Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Reclassifications there were no reclassifications in the current year.
Recent Accounting Pronouncements In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance significantly expands the existing requirements and has led to greater transparency into an entitys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures has been required for periods beginning on or after December 15, 2010. Bankshares has included the required disclosures in its consolidated financial statements. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, Interactive Data to Improve Financial Reporting. The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. generally accepted accounting principles (GAAP) were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. Bankshares has submitted financial statements in extensible business reporting language (XBRL) format with their SEC filings in accordance with the phased-in schedule.
In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASBs Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 was March 28, 2011. The adoption of the new guidance did not have a material impact on the Bankshares consolidated financial statements.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings. The amendments in this ASU temporarily delayed the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay was intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring was effective for interim and annual periods ending after June 15, 2011. Bankshares has adopted ASU 2011-01 and included the required disclosures in its consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditors evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Bankshares has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application was not permitted. Bankshares is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income. The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in shareholders equity. The amendments require that all non-owner changes in shareholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption was permitted because compliance with the amendments was already permitted. The amendments do not require transition disclosures. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
In August 2011, the SEC issued Final Rule No. 33-9250, Technical Amendments to Commission Rules and Forms related to the FASBs Accounting Standards Codification. The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities. This ASU requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Bankshares is currently assessing the impact that ASU 2011-11 will have on its consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of the new guidance did not have a material impact on Bankshares consolidated financial statements.
3. | DISPOSTION OF AIA |
On December 29, 2009, the Bank entered into and closed on a Stock Purchase Agreement (Agreement) between the Bank as the seller and a group of former AIA executives. The Agreement provides for the purchase of all of the issued and outstanding shares (Shares) of AIA, a wholly-owned insurance agency subsidiary of the Bank. Pursuant to the Agreement, AIA sold the Shares for a total purchase price of $5,025,000. At closing, the Bank received $3,750,000 in cash and closing credits, with the remainder of the purchase price payable pursuant to promissory notes that do not bear interest (Notes), as follows: (1) $650,000 pursuant to the terms of one promissory note that was due and payable in full on February 15, 2011, and (2) $625,000 pursuant to the terms of five promissory notes in the original principal amount of $125,000 each, which are due and payable on February 15, 2011, 2012, 2013, 2014 and 2015, respectively. The Notes contain usual and customary conditions and are secured by a pledge of 9,800 of the 10,000 shares sold at closing.
The $650,000 promissory note due and payable on February 15, 2011 was refinanced as a commercial loan in the normal course of business. This note was paid in full. We received a payment of $90,000 and $83,000 in full satisfaction for the promissory notes due on February 15, 2011 and 2012 respectively. The payment of $90,000 was based on certain performance metrics realized in the ordinary course of business. We established an allowance of $140,000 in 2010 against the remaining promissory notes due through February 2015.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The results of the operations and the loss on the sale were reported as discontinued operations in the 2009 and 2010 financial statements.
4. | FAIR VALUE MEASUREMENTS |
Bankshares uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (FASB), ASC 820-10, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Bankshares various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, Bankshares groups its financial assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
| Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets. |
| Level 2 Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. |
| Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect Bankshares own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following describes the valuation techniques used by Bankshares to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Trading and Available-for-Sale Securities Trading and available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Financial assets and liabilities that are traded infrequently have values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements own view about the assumptions that market participants would use in pricing the asset or liability (Level 3). As a result, some of Bankshares securities are hand priced using customary spreads over similar maturity treasury instruments.
FHLB Advances Under the fair value accounting standards, certain liabilities can be carried at fair value. The designated instruments are recorded on a fair value basis at the time of issuance. As of December 31, 2011, Bankshares had one wholesale liability as a fair value instrument: a long-term Federal Home Loan Bank (FHLB) advance. Wholesale instruments are designated as either Level 2 or Level 3 under the ASC 820-10 fair value hierarchy. Level 2 liabilities are based on quoted market prices using independent valuation techniques for similar instruments with like characteristics. This information is deemed to be observable market data. Level 3 liabilities are financial instruments that are difficult to value due to dysfunctional, distressed markets or lack of actual trading volume. Management gathers certain data to value the instrument, including swap curves, conversion swaptions and discounted cash flows. These data points are modeled to reflect the estimate of the fair value of the liability.
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010:
Fair Value Measurements at December 31, 2011 | ||||||||||||||||||||
Descriptions |
Fair Value | Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total Changes in Fair Value Included in YTD Results |
|||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Trading securities - PCMOs |
$ | 596 | $ | | $ | 596 | $ | | $ | 10 | ||||||||||
Available-for-sale securities: |
||||||||||||||||||||
U.S. government treasuries |
71,115 | 71,115 | | | | |||||||||||||||
U.S. government corporations and agencies |
9,751 | | 9,751 | | | |||||||||||||||
U.S. government CMOs |
31,038 | | 31,038 | | | |||||||||||||||
U.S. government agency MBS |
7,698 | | 7,698 | | | |||||||||||||||
PCMOs |
950 | | 950 | | | |||||||||||||||
Municipal securities |
2,911 | | 2,911 | | ||||||||||||||||
Liabilities: |
||||||||||||||||||||
FHLB advance |
29,350 | | | 29,350 | (3,142 | ) | ||||||||||||||
|
|
|||||||||||||||||||
$ | (3,132 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
Fair Value Measurements at December 31, 2010 | ||||||||||||||||||||
Descriptions |
Fair Value | Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
Total Changes in Fair Value Included in YTD Results |
|||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Trading securities - PCMOs |
$ | 2,075 | $ | | $ | | $ | 2,075 | $ | (87 | ) | |||||||||
Available-for-sale securities: |
||||||||||||||||||||
U.S. government treasuries |
| | | | | |||||||||||||||
U.S. government corporations and agencies |
51,763 | | 25,773 | 25,990 | | |||||||||||||||
U.S. government CMOs |
22,576 | | 22,576 | | | |||||||||||||||
U.S. government agency MBS |
14,805 | | 14,805 | | | |||||||||||||||
PCMOs |
17,621 | | | 17,621 | | |||||||||||||||
Municipal securities |
29,087 | | 29,087 | | | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Brokered certificates of deposit |
| | | | 23 | |||||||||||||||
FHLB advance |
26,208 | | | 26,208 | (447 | ) | ||||||||||||||
|
|
|||||||||||||||||||
$ | (511 | ) | ||||||||||||||||||
|
|
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Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables present the activity in Level 3 fair value measurements for the years ended December 31, 2011 and December 31, 2010:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||
(Dollars in thousands) | ||||||||||||
Trading Securities |
FHLB Advances | AFS Securities | ||||||||||
Beginning balance, January 1, 2011 |
$ | 2,075 | $ | 26,208 | $ | 43,611 | ||||||
Transfers into (out of) Level 3 |
(596 | ) | | (26,940 | ) | |||||||
Sales, maturities or calls |
(1,489 | ) | | (16,286 | ) | |||||||
Realized gains (losses) on assets |
10 | | 170 | |||||||||
Realized (gains) losses on liabilities |
| 3,142 | | |||||||||
Unrealized gains (losses) on assets |
| | (555 | ) | ||||||||
|
|
|
|
|
|
|||||||
Ending balance, December 31, 2011 |
$ | | $ | 29,350 | $ | | ||||||
|
|
|
|
|
|
|||||||
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||
(Dollars in thousands) | ||||||||||||
Trading Securities |
FHLB Advances | AFS Securities | ||||||||||
Beginning balance, January 1, 2010 |
$ | 7,460 | $ | 25,761 | $ | 71,862 | ||||||
Transfers into Level 3 |
| | | |||||||||
Sales, maturities or calls |
(5,298 | ) | | (58,942 | ) | |||||||
Realized gains (losses) on assets |
(87 | ) | | 1,103 | ||||||||
Realized (gains) losses on liabilities |
| 447 | | |||||||||
Unrealized gains (losses) on assets |
| | 263 | |||||||||
Purchases |
| | 29,325 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance, December 31, 2010 |
$ | 2,075 | $ | 26,208 | $ | 43,611 | ||||||
|
|
|
|
|
|
For the assets and liabilities selected for fair value accounting where available, management obtained pricing on each instrument from independent third parties who relied upon pricing models using widely available and industry standard yield curves. At December 31, 2011, the securities previously carried at level three were moved to level two due to the fact that the pricing was identical to the normal market price. Management will continue to monitor these instruments. Changes in fair values associated with fluctuations in market values reported above are reported as fair value adjustments on the Consolidated Statements of Operations.
22
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Certain financial and nonfinancial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by Bankshares to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the underlying collateral, if any. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered to be Level 3. Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.
Other Real Estate Owned (OREO) OREO is measured at fair value using an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if an appraisal of the real estate property is over two years old, then the fair value is considered to be Level 3. Any fair value adjustments are recorded in the period recognized as Other Real Estate Owned expense in the Consolidated Statements of Operations.
23
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables summarize Bankshares assets that were measured at fair value on a non-recurring basis during the period:
Carrying Value at December 31, 2011 | ||||||||||||||||
Description |
Carrying Value |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans, net of valuation allowance |
$ | 6,760 | $ | | $ | 6,760 | $ | | ||||||||
OREO |
$ | 3,748 | $ | | $ | 2,275 | $ | 1,473 | ||||||||
Carrying Value at December 31, 2010 | ||||||||||||||||
Description |
Carrying Value |
Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Impaired loans, net of valuation allowance |
$ | 3,124 | $ | | $ | 3,124 | $ | | ||||||||
OREO |
$ | 4,627 | $ | | $ | 4,627 | $ | |
The following describes the valuation techniques used by Bankshares to measure certain financial assets and liabilities not previously described in this note that are not recorded at fair value on a recurring basis in the financial statements:
Cash, Due from Banks and Federal Funds Sold For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Loans Receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
24
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Restricted Stock Restricted investments in correspondent banks are carried at cost based on the underlying redemption provisions of the instruments and therefore are not included in the fair value disclosures.
Accrued Interest The carrying amounts of accrued interest approximate fair value.
Deposit Liabilities The fair values disclosed for demand deposits (e.g., interest and noninterest checking, statement savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on Bankshares current incremental borrowing rates for similar types of borrowing arrangements.
Trust Preferred Capital Notes The fair value of Bankshares Trust Preferred Capital Notes, which are discussed in Note 12, is estimated using discounted cash flow analyses based on Bankshares current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Fair value of off-balance sheet financial commitments are considered immaterial and are therefore not included in the table below.
25
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following table reflects the fair value of financial instruments for the years ended December 31, 2011 and December 31, 2010:
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 45,837 | $ | 45,837 | $ | 24,078 | $ | 24,078 | ||||||||
Federal funds sold |
16,567 | 16,567 | 17,870 | 17,870 | ||||||||||||
Trading securities |
596 | 596 | 2,075 | 2,075 | ||||||||||||
Available-for-sale securities |
123,463 | 123,463 | 135,852 | 135,852 | ||||||||||||
Loans, net |
301,483 | 297,163 | 327,029 | 324,164 | ||||||||||||
Accrued interest receivable |
1,815 | 1,815 | 2,758 | 2,758 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Noninterest-bearing deposits |
$ | 112,450 | $ | 112,450 | $ | 124,639 | $ | 124,639 | ||||||||
Interest-bearing deposits |
267,993 | 268,691 | 282,304 | 264,176 | ||||||||||||
Short-term borrowings |
40,420 | 40,420 | 43,153 | 43,148 | ||||||||||||
FHLB advances |
15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
FHLB advances, at fair value |
29,350 | 29,350 | 26,208 | 26,208 | ||||||||||||
Trust Preferred Capital Notes |
10,310 | 10,310 | 10,310 | 10,310 | ||||||||||||
Accrued interest payable |
1,155 | 1,155 | 976 | 976 |
5. | TRADING SECURITIES |
The following table reflects the remaining trading securities accounted for on a fair value basis and the effective yield of the instruments as of the dates indicated:
December 31, 2011 | December 31, 2010 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Fair Value | Yield | Fair Value | Yield | |||||||||||||
Trading securities: |
||||||||||||||||
PCMOs |
596 | 5.44 | % | 2,075 | 5.32 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading securities |
$ | 596 | 5.44 | % | $ | 2,075 | 5.32 | % | ||||||||
|
|
|
|
|
|
|
|
At December 31, 2011 and 2010, none of the trading securities were pledged. Proceeds from sales and calls of trading securities were $1.2 million and $5.3 million for the years ended December 31, 2011 and 2010, respectively.
26
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
6. | INVESTMENT SECURITIES |
The amortized cost, unrealized holding gains and losses, and the fair value of investment securities at December 31, 2011 are summarized as follows:
Amortized Cost |
Unrealized | Fair Value |
||||||||||||||
Gains | Losses | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. treasuries |
$ | 71,119 | $ | | $ | (4 | ) | $ | 71,115 | |||||||
U.S. government corporations and agencies |
9,737 | 35 | (21 | ) | 9,751 | |||||||||||
U.S. government agency CMOs |
30,893 | 195 | (50 | ) | 31,038 | |||||||||||
U.S. government agency MBS |
7,672 | 26 | | 7,698 | ||||||||||||
PCMOs |
1,005 | | (55 | ) | 950 | |||||||||||
Municipal securities |
2,982 | 70 | (141 | ) | 2,911 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 123,408 | $ | 326 | $ | (271 | ) | $ | 123,463 | |||||||
|
|
|
|
|
|
|
|
The amortized cost, unrealized holding gains and losses, and the fair value of investment securities at December 31, 2010 are summarized as follows:
Amortized Cost |
Unrealized | Fair Value |
||||||||||||||
Gains | Losses | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. government corporations and agencies |
$ | 51,684 | $ | 657 | $ | (578 | ) | $ | 51,763 | |||||||
U.S. government CMOs |
22,185 | 596 | (205 | ) | 22,576 | |||||||||||
U.S. government agency MBS |
14,587 | 218 | | 14,805 | ||||||||||||
PCMOs |
17,180 | 468 | (27 | ) | 17,621 | |||||||||||
Municipal securities |
30,653 | 201 | (1,767 | ) | 29,087 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 136,289 | $ | 2,140 | $ | (2,577 | ) | $ | 135,852 | |||||||
|
|
|
|
|
|
|
|
There were no held-to-maturity investments as of December 31, 2011 or 2010.
The amortized cost and fair value of available-for-sale securities as of December 31, 2011, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.
27
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Amortized Cost | Fair Value | |||||||
(Dollars in thousands) | ||||||||
Due within one year |
$ | 71,119 | $ | 71,115 | ||||
Due after ten years |
52,289 | 52,348 | ||||||
|
|
|
|
|||||
Total |
$ | 123,408 | $ | 123,463 | ||||
|
|
|
|
Proceeds from sales and calls of securities available for sale were $166.6 million and $93.0 million for the years ended December 31, 2011 and 2010, respectively. Gross gains of $4.2 million and $2.3 million and gross losses of $784 thousand and $45 thousand were realized on these sales during 2011 and 2010, respectively. The tax provision applicable to the net realized gain amounted to $1.1 million and $761 thousand, respectively.
At December 31, 2011 and 2010, available-for-sale securities with a carrying value of $111.1 million and $119.8 million, respectively, were pledged to secure repurchase agreements, Federal Home Loan Bank advances, and public deposits and for other purposes required or permitted by law.
The following tables present the aggregate amount of unrealized loss in investment securities as of December 31, 2011 and 2010. The aggregate is determined by summation of all the related securities that have a continuous loss at year end, and the length of time that the loss has been unrealized is shown by terms of less than 12 months and 12 months or more. The fair value is the approximate market value as of year-end.
December 31, 2011 12 months or more |
||||||||||||||||||||||||
Less than 12 months | Total | |||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. treasuries |
$ | 71,115 | $ | (4 | ) | $ | | $ | | $ | 71,115 | $ | (4 | ) | ||||||||||
U.S. government corporations and agencies |
3,327 | (21 | ) | | | 3,327 | (21 | ) | ||||||||||||||||
U.S. government agency CMOs |
7,401 | (50 | ) | | | 7,401 | (50 | ) | ||||||||||||||||
PCMOs |
| | 950 | (55 | ) | 950 | (55 | ) | ||||||||||||||||
Municipal securities |
526 | (4 | ) | 525 | (137 | ) | 1,051 | (141 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired investment securities: |
$ | 82,369 | $ | (79 | ) | $ | 1,475 | $ | (192 | ) | $ | 83,844 | $ | (271 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
28
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
December 31,
2010 12 months or more |
||||||||||||||||||||||||
Less than 12 months | Total | |||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. government corporations and agencies |
$ | 25,195 | $ | (578 | ) | $ | | $ | | $ | 25,195 | $ | (578 | ) | ||||||||||
U.S. government agency CMOs |
7,252 | (205 | ) | | | 7,252 | (205 | ) | ||||||||||||||||
PCMOs |
4,103 | (27 | ) | | | 4,103 | (27 | ) | ||||||||||||||||
Municipal securities |
19,862 | (1,112 | ) | 1,966 | (655 | ) | 21,828 | (1,767 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired investment securities: |
$ | 56,412 | $ | (1,922 | ) | $ | 1,966 | $ | (655 | ) | $ | 58,378 | $ | (2,577 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Bankshares investment security portfolio is primarily comprised of U.S. Treasury Notes and fixed rate bonds, whose prices move inversely with interest rates. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Unrealized losses within Bankshares portfolio typically occur as market interest rates rise. Such unrealized losses are considered temporary in nature. Under ASC 320-10-35, Debt and Equity Securities Recognition and Presentation of Other-Than-Temporary Impairments, an impairment is considered other than temporary if any of the following conditions are met: Bankshares intends to sell the security, it is more likely than not that Bankshares will be required to sell the security before recovery of its amortized cost basis, or Bankshares does not expect to recover the securitys entire amortized cost basis (even if Bankshares does not intend to sell). In the event that a security would suffer impairment for a reason that was other than temporary, Bankshares would be expected to write down the securitys value to its new fair value, and the amount of the write-down would be included in earnings as a realized loss. As of December 31, 2011 and 2010, management does not consider any of the unrealized losses to be other-than-temporarily impaired and no impairment charges have been recorded.
There are a total of 27 investment securities totaling $83.8 million that have an unrealized loss and are considered temporarily impaired as of December 31, 2011. Management believes the unrealized losses noted in the table above are a result of current market conditions and interest rates, and do not reflect on the ability of the issuers to repay the obligations. Approximately $81.8 million or 97.6% of the investment securities with an unrealized loss are backed by U.S. Government Agencies or Corporations and other forms of underlying collateral.
Bankshares investment in FHLB stock totaled $3.4 million at December 31, 2011. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Bankshares does not consider this investment to be other than temporarily impaired as of December 31, 2011 and no impairment has been recognized. FHLB stock is included in restricted stock on the Consolidated Balance Sheets.
29
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
7. | LOANS |
The following table summarizes the composition of the loan portfolio by dollar amount and percentage as of the dates indicated:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Real estate: |
||||||||||||||||
Residential real estate |
$ | 101,248 | 33.0 | % | $ | 110,862 | 33.4 | % | ||||||||
Commercial real estate |
137,610 | 44.8 | % | 146,222 | 44.0 | % | ||||||||||
Construction/land |
39,176 | 12.8 | % | 43,017 | 12.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
278,034 | 90.6 | % | 300,101 | 90.3 | % | ||||||||||
Commercial and industrial |
26,820 | 8.7 | % | 27,517 | 8.3 | % | ||||||||||
Consumer |
2,022 | 0.7 | % | 4,692 | 1.4 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross loans |
306,876 | 100.0 | % | 332,310 | 100.0 | % | ||||||||||
|
|
|
|
|||||||||||||
Less: allowance for loan losses |
(5,393 | ) | (5,281 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net loans |
$ | 301,483 | $ | 327,029 | ||||||||||||
|
|
|
|
As of December 31, 2011 and 2010, there were $25 thousand and $894 thousand respectively in checking account overdrafts that were reclassified on the Consolidated Balance Sheets as loans.
30
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables represent the credit quality of assets by class:
Credit Quality Asset By Class As Of December 31, 2011 |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES |
Pass | Watch | Special Mention |
Substandard | Doubtful | Loss | Total Loans | |||||||||||||||||||||
Risk Rating Number1 |
1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Commercial and industrial |
$ | 23,901 | $ | 927 | $ | 224 | $ | 1,768 | $ | | $ | | $ | 26,820 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
63,192 | 625 | 1,742 | 2,610 | | | 68,169 | |||||||||||||||||||||
Non-owner occupied |
60,069 | 1,231 | 8,141 | | | | 69,441 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
9,356 | 175 | 599 | 3,753 | 876 | | 14,759 | |||||||||||||||||||||
Other construction & land |
16,018 | | 1,662 | 5,837 | 900 | | 24,417 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
27,311 | 430 | 718 | 95 | 552 | | 29,106 | |||||||||||||||||||||
Single family |
56,134 | 4,876 | | 5,347 | | | 66,357 | |||||||||||||||||||||
Multifamily |
5,785 | | | | | | 5,785 | |||||||||||||||||||||
Consumernon real estate |
1,836 | | 186 | | | | 2,022 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Totals |
$ | 263,602 | $ | 8,264 | $ | 13,272 | $ | 19,410 | $ | 2,328 | $ | | $ | 306,876 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Credit Quality Asset By Class As Of December 31, 2010 (Dollars in thousands) |
||||||||||||||||||||||||||||
INTERNAL RISK RATING GRADES |
Pass | Watch | Special Mention |
Substandard | Doubtful | Loss | Total Loans | |||||||||||||||||||||
Risk Rating Number1 |
1 to 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Commercial and industrial |
$ | 24,539 | $ | 437 | $ | 734 | $ | 1,807 | $ | | $ | | $ | 27,517 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
73,834 | 634 | 2,074 | 3,273 | | | 79,815 | |||||||||||||||||||||
Non-owner occupied |
59,757 | 2,732 | 3,918 | | | | 66,407 | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
17,483 | 1,553 | | 3,300 | 872 | | 23,208 | |||||||||||||||||||||
Commercial |
7,723 | 1,633 | 1,492 | 8,961 | | | 19,809 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
43,266 | 958 | 348 | 397 | | | 44,969 | |||||||||||||||||||||
Single family |
45,520 | 6,627 | 3,312 | 5,846 | | | 61,305 | |||||||||||||||||||||
Multifamily |
4,588 | | | | | | 4,588 | |||||||||||||||||||||
Consumernon real estate |
4,501 | | | 191 | | | 4,692 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Totals |
$ | 281,211 | $ | 14,574 | $ | 11,878 | $ | 23,775 | $ | 872 | $ | | $ | 332,310 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets. |
31
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following table sets forth the aging and non-accrual loans by class for December 31, 2011:
Aging and Non-accrual Loans By Class As of December 31, 2011 |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | 90-days Past Due and Still Accruing |
Non-accrual Loans |
||||||||||||||||||||||
Commercial and industrial |
$ | 1,228 | $ | 367 | $ | | $ | 1,595 | $ | 25,225 | $ | | $ | 977 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
121 | | 2,610 | 2,731 | 65,438 | | 2,610 | |||||||||||||||||||||
Non-owner occupied |
| 992 | | 992 | 68,449 | | | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential construction |
| | 540 | 540 | 14,219 | | 540 | |||||||||||||||||||||
Other construction & land |
| 1,225 | 5,988 | 7,213 | 17,204 | | 7,139 | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
304 | 33 | 184 | 521 | 28,585 | | 236 | |||||||||||||||||||||
Single Family |
74 | 29 | 1,733 | 1,836 | 64,521 | | 1,762 | |||||||||||||||||||||
Multifamily |
| | | | 5,785 | | | |||||||||||||||||||||
Consumer -non real estate |
186 | | | 186 | 1,836 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans |
$ | 1,913 | $ | 2,646 | $ | 11,055 | $ | 15,614 | $ | 291,262 | $ | | $ | 13,264 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Aging and Non-accrual Loans By Class As of December 31, 2010 |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current | 90-days Past Due and Still Accruing |
Non-accrual Loans |
||||||||||||||||||||||
Commerical and industrial |
$ | 718 | $ | | $ | | $ | 718 | $ | 26,799 | $ | | $ | | ||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
1,992 | | 291 | 2,283 | 77,532 | | 291 | |||||||||||||||||||||
Non-owner occupied |
328 | | | 328 | 66,079 | | | |||||||||||||||||||||
Construction/land |
||||||||||||||||||||||||||||
Residential |
2,585 | | 1,128 | 3,713 | 19,495 | 256 | 872 | |||||||||||||||||||||
Commercial |
1,859 | 1,917 | | 3,776 | 16,033 | | | |||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||
Equity Lines |
427 | | | 427 | 44,541 | | | |||||||||||||||||||||
Single Family |
5,608 | | 478 | 6,086 | 55,220 | | 740 | |||||||||||||||||||||
Multifamily |
| | | | 4,588 | | | |||||||||||||||||||||
Consumer -non real estate |
| 91 | | 91 | 4,601 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans |
$ | 13,517 | $ | 2,008 | $ | 1,897 | $ | 17,422 | $ | 314,888 | $ | 256 | $ | 1,903 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
8. | ALLOWANCE FOR LOAN LOSSES |
The following table summarizes activity in the allowance for loan losses for the year ended December 31:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 5,281 | $ | 5,619 | ||||
Provision for loan losses |
1,549 | 1,753 | ||||||
Loans charged off |
(1,702 | ) | (2,239 | ) | ||||
Recoveries of loans charged off |
265 | 148 | ||||||
|
|
|
|
|||||
Net charge-offs |
(1,437 | ) | (2,091 | ) | ||||
|
|
|
|
|||||
Balance, end of year |
$ | 5,393 | $ | 5,281 | ||||
|
|
|
|
The following table represents the allocation of allowance for loan losses by segment:
Allowance for Loan Losses As of December 31, 2011 |
||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Construction Land |
Residential Real Estate |
Consumer | Total | |||||||||||||||||||
Beginning Balance: |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
Charge-offs |
(10 | ) | (173 | ) | (404 | ) | (1,044 | ) | (71 | ) | (1,702 | ) | ||||||||||||
Recoveries |
116 | 9 | | 134 | 6 | 265 | ||||||||||||||||||
Provision |
(359 | ) | 252 | 1,512 | 123 | 21 | 1,549 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending Balance: |
$ | 210 | $ | 1,508 | $ | 1,808 | $ | 1,826 | $ | 41 | $ | 5,393 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Individually evaluated for impairment |
$ | | $ | 135 | $ | 1,376 | $ | 760 | $ | | $ | 2,271 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Collectively evaluated for impairment |
$ | 210 | $ | 1,373 | $ | 432 | $ | 1,066 | $ | 41 | $ | 3,122 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 26,820 | $ | 137,610 | $ | 39,176 | $ | 101,248 | $ | 2,022 | $ | 306,876 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Individually evaluated for impairment |
$ | 977 | $ | 2,610 | $ | 7,678 | $ | 1,999 | $ | | $ | 13,264 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Collectively evaluated for impairment |
$ | 25,843 | $ | 135,000 | $ | 31,498 | $ | 99,249 | $ | 2,022 | $ | 293,612 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
33
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Allowance for Loan Losses As of December 31, 2010 |
||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial & Industrial |
Commercial Real Estate |
Construction Land |
Residential Real Estate |
Consumer | Total | |||||||||||||||||||
Ending Balance: |
$ | 463 | $ | 1,420 | $ | 700 | $ | 2,613 | $ | 85 | $ | 5,281 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Individually evaluated for impairment |
$ | | $ | 77 | $ | 696 | $ | 100 | $ | | $ | 873 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Collectively evaluated for impairment |
$ | 463 | $ | 1,343 | $ | 4 | $ | 2,513 | $ | 85 | $ | 4,408 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans: |
||||||||||||||||||||||||
Ending Balance: |
$ | 27,517 | $ | 146,222 | $ | 43,017 | $ | 110,862 | $ | 4,692 | $ | 332,310 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Individually evaluated for impairment |
$ | | $ | 291 | $ | 3,272 | $ | 740 | $ | | $ | 4,303 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Collectively evaluated for impairment |
$ | 27,517 | $ | 145,931 | $ | 39,745 | $ | 110,122 | $ | 4,692 | $ | 328,007 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
34
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
The following tables represent specific allocation for impaired loans by class:
Specific Allocation for Impaired Loans by Class As of December 31, 2011 |
||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
With no related allowance: |
||||||||||||||||||||
Commercial & Industrial |
$ | 977 | $ | 1,033 | $ | | $ | 1,037 | $ | 15 | ||||||||||
Commercial Real Estate |
||||||||||||||||||||
Owner occupied |
| | | | | |||||||||||||||
Non-owner occupied |
| | | | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential |
| | | | | |||||||||||||||
Other construction & land |
2,293 | 2,293 | | 2,199 | 87 | |||||||||||||||
Residential real estate |
||||||||||||||||||||
Single family |
963 | 963 | | 968 | 37 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial & Industrial |
| | | | | |||||||||||||||
Commercial real estate |
||||||||||||||||||||
Owner occupied |
2,610 | 2,669 | 135 | 2,311 | 20 | |||||||||||||||
Non-owner occupied |
| | | | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential |
540 | 546 | 259 | 546 | | |||||||||||||||
Other construction & land |
4,845 | 5,049 | 1,118 | 5,436 | 53 | |||||||||||||||
Residential Real Estate |
||||||||||||||||||||
Single family |
1,036 | 1,039 | 759 | 1,041 | 22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total: |
$ | 13,264 | $ | 13,592 | $ | 2,271 | $ | 13,538 | $ | 234 | ||||||||||
|
|
|
|
|
|
|
|
|
|
35
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Specific Allocation for Impaired Loans by Class As of December 31, 2010 |
||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
With no related allowance: |
||||||||||||||||||||
Residential real estate: |
||||||||||||||||||||
Single Family |
$ | 306 | $ | 322 | $ | | $ | 320 | $ | 9 | ||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||
Owner occupied |
291 | 291 | 77 | 293 | 20 | |||||||||||||||
Non-owner occupied |
| | | | | |||||||||||||||
Construction/Land |
||||||||||||||||||||
Residential |
3,272 | 3,428 | 696 | 3,353 | 197 | |||||||||||||||
Commercial |
| | | | | |||||||||||||||
Residential real estate |
||||||||||||||||||||
Single family |
434 | 457 | 100 | 434 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total: |
$ | 4,303 | $ | 4,498 | $ | 873 | $ | 4,400 | $ | 226 | ||||||||||
|
|
|
|
|
|
|
|
|
|
There were no non-accrual loans excluded from impaired loan disclosures as of December 31, 2011 and 2010. No additional funds are committed to be advanced in connection with impaired loans. At December 31, 2011, there were $1.2 million of loans classified as troubled debt restructured loans of which $257 thousand was classified as non-accrual. There were $212 thousand at December 31, 2010. Of the $1.2 million in troubled debt restructured at December 31, 2011, loans totaling $1.2 thousand are in compliance with the terms of the notes and a loan totaling $257 thousand is in nonaccrual status. The following table reflects loan modifications classified as TDRs for the year ended of December 31, 2011.
Modifications | ||||||||||||
For the Year Ended December 31, 2011 | ||||||||||||
(Dollars in thousands) | ||||||||||||
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||
Troubled debt restructurings |
||||||||||||
Residential Real Estate-Single family |
6 | $ | 1,213 | $ | 1,213 | |||||||
|
|
|
|
|
|
36
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
TDR payment defaults during the year ended December 31, 2011 were as follows:
For the Year Ended December 31, 2011 | ||||||||
Number of Contracts |
Recorded Investment |
|||||||
(Dollars in thousands) | ||||||||
Troubled debt restructurings that subsequently defaulted |
||||||||
Residential Real Estate- Single family |
1 | $ | 257 | |||||
|
|
|
|
|||||
Total |
1 | $ | 257 | |||||
|
|
|
|
For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either the TDR is placed in nonaccrual status or a charge-off has occurred.
9. | OTHER REAL ESTATE OWNED |
The table below reflects changes in Other Real Estate Owned (OREO) for the periods indicated:
For the Year Ended December 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance, beginning of year |
$ | 4,627 | $ | 7,875 | ||||
Properties acquired at foreclosure |
434 | 1,973 | ||||||
Capital improvements on foreclosed properties |
| 55 | ||||||
Sales on foreclosed properties |
(959 | ) | (4,918 | ) | ||||
Valuation adjustments |
(354 | ) | (358 | ) | ||||
|
|
|
|
|||||
Balance, end of year |
$ | 3,748 | $ | 4,627 | ||||
|
|
|
|
The table below reflects expenses applicable to OREO for the periods indicated:
For the Year Ended December 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net loss on sales of OREO |
$ | 12 | $ | 303 | ||||
Valuation adjustments |
354 | 358 | ||||||
Operating expenses |
88 | 180 | ||||||
|
|
|
|
|||||
Total OREO related expenses |
$ | 454 | $ | 841 | ||||
|
|
|
|
37
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
10. | PREMISES AND EQUIPMENT |
Premises and equipment are summarized as follows at December 31:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Leasehold improvements |
$ | 1,783 | $ | 1,742 | ||||
Furniture, fixtures and equipment |
6,003 | 5,667 | ||||||
|
|
|
|
|||||
7,786 | 7,409 | |||||||
Less: accumulated depreciation and amortization |
(6,371 | ) | (5,825 | ) | ||||
|
|
|
|
|||||
Premises and equipment, net |
$ | 1,415 | $ | 1,584 | ||||
|
|
|
|
Depreciation and amortization charged to operations in 2011 and 2010 totaled $614 thousand and $695 thousand, respectively.
11. | FEDERAL HOME LOAN BANK ADVANCES |
Bankshares has two advances from the FHLB: one fixed rate advance and one floating rate advance. At December 31, 2011 and December 31, 2010, the FHLB advance accounted for on a fair value basis had a value of $29.4 and $26.2 million, respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB advance accounted for on a fair value basis was 3.985% at December 31, 2011 and December 31, 2010. The par value of the FHLB advance accounted for on a fair value basis was $25.0 million at December 31, 2011 and December 31, 2010. The negative adjustment of $3.1 million in 2011, was due to lower market rates and management electing to use a more advanced model in valuing the FHLB advance starting in the third quarter of 2011.
At December 31, 2011 and December 31, 2010, there was one FHLB advance accounted for on a cost basis. Bankshares entered into this floating rate advance in the first quarter of 2010 for $15.0 million. The advance matures in 2012 and the interest rate at December 31, 2011 and December 31, 2010 was 0.379% and 0.184%, respectively. The weighted average interest rate for both FHLB advances outstanding is 3.07%.
12. | TRUST PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST |
On June 30, 2003, Bankshares wholly-owned Delaware statutory business trust privately issued $10.0 million face amount of the Trusts floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption Trust preferred capital notes. Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest
38
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through December 31, 2011, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of December 31, 2011, the total amount of deferred and compounded interest owed under the indenture is $953 thousand. The base interest rate as of December 31, 2011 was 3.70% and as of December 31, 2010 was 3.45%.
All or a portion of the Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to 25% of shareholders equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At December 31, 2011 and December 31, 2010, the entire amount was considered Tier 1 capital.
13. | INCOME TAXES |
Allocation of federal and state income taxes between current and deferred portions is as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Current |
$ | | $ | | ||||
Deferred tax |
4,964 | 344 | ||||||
|
|
|
|
|||||
Income tax expense |
$ | 4,964 | $ | 344 | ||||
|
|
|
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rate are summarized as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Computed at the expected statutory rate |
$ | (338 | ) | $ | 357 | |||
Tax exempt income, net |
(56 | ) | (109 | ) | ||||
Other |
67 | 96 | ||||||
Change in valuation allowance |
5,291 | | ||||||
|
|
|
|
|||||
Income tax expense |
$ | 4,964 | $ | 344 | ||||
|
|
|
|
39
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
Deferred Taxes. Bankshares has recorded a deferred tax asset (DTA) as of December 31, 2011 and 2010. In accordance with ASC 740-10, Income Taxes (formerly SFAS No. 109, Accounting for Income Taxes), deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of the tax benefit generated by net operating losses depends upon the existence of sufficient taxable income within the applicable carryback and carry forward periods. Bankshares periodically assesses the need to establish, increase, or decrease a valuation allowance for deferred tax assets.
Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Our analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. We considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss, (NOL) carry forwards within the prescribed time periods. In addition, we considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it is not considered more likely than not that Bankshares will be able to realize all its deferred tax assets. A valuation allowance of $5.3 million related to the deferred tax assets has been recorded at December 31, 2011.
Bankshares evaluated the DTA related to the fair value adjustment of an FHLB advance separately from other DTAs. As the future taxable income implicit in the recovery of the book basis of the fair value adjustment offsets any potential future deductions underlying the DTA, Bankshares determined that no valuation allowance was necessary for this DTA. Bankshares has the ability and intent to retain the FHLB advance until such time as it recovers in value, which could be maturity.
The components of the net deferred tax assets and liabilities are as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Deferred tax assets: |
||||||||
Bad debt expense |
$ | 1,833 | $ | 1,795 | ||||
Deferred rent |
17 | 21 | ||||||
Deferred data processing costs |
130 | 77 | ||||||
Unrealized loss on available-for-sales securities |
| 149 | ||||||
Other real estate owned |
1,164 | 1,088 | ||||||
Net operating loss carryforward |
1,905 | 2,690 | ||||||
Other |
447 | 72 | ||||||
Fair value adjustment |
1,553 | 689 | ||||||
|
|
|
|
|||||
7,049 | 6,581 | |||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Unrealized gain on available-for-sale securities |
19 | | ||||||
Deferred loan costs, net |
96 | 107 | ||||||
Depreciation and amortization |
66 | 18 | ||||||
Other |
24 | 34 | ||||||
|
|
|
|
|||||
205 | 159 | |||||||
|
|
|
|
|||||
Net deferred tax assets |
$ | 6,844 | $ | 6,422 | ||||
Valuation allowance |
(5,291 | ) | | |||||
|
|
|
|
|||||
Deferred tax assets |
$ | 1,553 | $ | 6,422 | ||||
|
|
|
|
On November 6, 2009, a new law was enacted that changes the rules and regulations for NOL carrybacks for large corporations (as defined by the Internal Revenue Service (IRS)). The new rules allow for a carryback period of five years. Bankshares filed the appropriate tax forms seeking a refund of $3.9 million.
40
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In early 2010, Bankshares received approximately $3.4 million of the refund. The remaining amounts due are related to alternative minimum taxes and we anticipate a full refund of the alternative minimum taxes paid.
Bankshares files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few exceptions, Bankshares is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2008.
14. | OPERATING EXPENSES |
The components of other operating expenses for the years ended December 31, were as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Business development |
$ | 216 | $ | 361 | ||||
Office expense |
303 | 549 | ||||||
Bank operations expense |
589 | 296 | ||||||
Data processing |
1,651 | 1,023 | ||||||
Professional fees |
1,598 | 2,192 | ||||||
FDIC insurance |
850 | 1,369 | ||||||
Merger Expenses |
1,158 | | ||||||
Other |
1,093 | 1,305 | ||||||
|
|
|
|
|||||
Total |
$ | 7,458 | $ | 7,095 | ||||
|
|
|
|
15. | RELATED PARTY TRANSACTIONS AND LETTERS OF CREDIT |
Bankshares grants loans and letters of credit to its executive officers, directors and their affiliated entities. These loans are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or present other unfavorable features. The aggregate amount of such loans outstanding at December 31, 2011 and 2010 was approximately $1.5 million and $2.3 million, respectively. During 2011, new loans and line of credit advances to such related parties amounted to $19 thousand in the aggregate and payments amounted to $807 thousand in the aggregate.
Bankshares also maintains deposit accounts with some of its executive officers, directors and their affiliated entities. The aggregate amount of these deposit accounts at December 31, 2011 and 2010 amounted to $5.5 million and $1.1 million, respectively.
16. | COMMITMENTS AND CONTINGENCIES |
As a member of the Federal Reserve System, Bankshares is required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 2011 and 2010, the aggregate amounts of daily average required balances were $7.9 million and $10.2 million, respectively.
41
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying consolidated financial statements. Bankshares does not anticipate losses as a result of these transactions. See Note 19 with respect to financial instruments with off-balance-sheet risk. Bankshares is obligated under several operating leases, with initial terms of three to ten years, for its office locations and branch sites.
Total rental expense for the occupancy leases for the years ended December 31, 2011 and 2010 was $1.9 million and $2.3 million, respectively. Bankshares also leases office equipment and vehicles pursuant to operating leases with various expiration dates. Total rental expense for office equipment for the years ended December 31, 2011 and 2010 was $52 thousand and $130 thousand, respectively.
Bankshares leases office space for six of its branch locations, corporate headquarters location, and space in Fredericksburg. These non-cancelable agreements, which expire through March 2019, in some instances require payment of certain operating charges. At December 31, 2011, minimum annual rental commitments under these leases are as follows:
Year |
Amount | |||
(Dollars in thousands) |
| |||
2012 |
$ | 1,791 | ||
2013 |
1,543 | |||
2014 |
1,239 | |||
2015 |
1,274 | |||
2016 |
1,163 | |||
Thereafter |
760 | |||
|
|
|||
Total |
$ | 7,770 | ||
|
|
Bankshares made a decision to exit the Fredericksburg, Virginia market place and is actively attempting to sublease a single facility under lease agreement in the Fredericksburg, Virginia market. Bankshares has recorded a liability of $205 thousand as of December 31, 2011 for the estimated present value of the potential differential between the contractual rental obligations and potential subleasing income.
42
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
17. | SUPPLEMENTAL CASH FLOW INFORMATION |
Supplemental disclosures of cash flow information for the year ended December 31:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest paid during the year |
$ | 5,454 | $ | 8,714 | ||||
Income taxes paid during the year |
$ | | $ | | ||||
Supplemental Disclosures of Noncash Activities: |
||||||||
Fair value adjustment for securities |
$ | 492 | $ | (267 | ) | |||
Transfer of loans to foreclosed assets |
$ | 434 | $ | 1,973 |
18. | DEPOSITS |
The aggregate amount of time deposits in denominations of $100 thousand or more at December 31, 2011 and 2010 was $38.6 million and $48.8 million, respectively. Brokered deposits totaled $122.4 million and $100.0 million at December 31, 2011 and 2010, respectively.
At December 31, 2011, the scheduled maturities of time deposits are as follows:
Year |
Amount | |||
(Dollars in thousands) | ||||
2012 |
$ | 96,993 | ||
2013 |
53,444 | |||
2014 |
28,302 | |||
2015 |
12,976 | |||
2016 |
1,433 | |||
|
|
|||
Total |
$ | 193,148 | ||
|
|
Bankshares has made a special effort to obtain deposits from title and mortgage loan closing companies. These balances represent a substantial portion of our non-interest bearing deposits, which creates a real estate industry concentration.
43
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
19. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK |
Bankshares, through its banking subsidiary, is party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
Bankshares exposure to credit loss is represented by the contractual amount of these commitments. Bankshares follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2011 and 2010, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands):
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Financial instruments whose contract amounts represent credit risk |
||||||||
Commitments to extend credit |
$ | 49,424 | $ | 34,773 | ||||
Standby letters of credit |
2,139 | 2,274 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bankshares evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bankshares, is based on managements credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which Bankshares is committed.
Standby letters of credit are conditional commitments issued by Bankshares to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Bankshares generally holds collateral supporting those commitments if deemed necessary.
From time to time Bankshares will enter into forward purchase agreements for investment securities. These purchases generally will settle within 90 days of the end of the reporting period. As of December 31, 2011 Bankshares had no forward purchase commitments.
Bankshares maintains cash accounts and federal funds sold in other commercial banks. The amount on deposit with correspondent institutions, including federal funds sold at December 31, 2011, exceeded the insurance limits of the Federal Deposit Insurance Corporation by $14.4 million.
44
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
20. | SIGNIFICANT CONCENTRATIONS |
Substantially all of Bankshares loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia area. Bankshares overall business includes a significant focus on real estate activities, including real estate lending, title companies and real estate settlement businesses. Commercial real estate loans are 44.8% of the total gross loan portfolio as of December 31, 2011 and total real estate loans are 90.6% of the total gross loan portfolio as of December 31, 2011. The impact of this concentration can create more volatility in our funding mix, especially during periods of declines in the real estate market, which can have an impact on organizational profitability.
21. | EMPLOYEE BENEFITS |
Bankshares has a 401(k) defined contribution plan covering substantially all full-time employees and provides that an employee becomes eligible to participate immediately on employment provided they are age 21 or older. Under the plan, a participant may contribute up to 15% of his or her covered compensation for the year, subject to certain limitations. In the first quarter of 2010, Bankshares elected to discontinue the 401(k) matching contributions Matching contributions totaled $3 thousand for the year ended December 31, 2010. Bankshares may also make, but is not required to make, a discretionary contribution for each participant. The amount of contribution, if any, is determined on an annual basis by the Board of Directors. No discretionary contributions were made by Bankshares during the years ended December 31, 2011 and 2010
22. | REGULATORY MATTERS |
Federal and state banking regulations place certain restrictions on cash dividends paid and loans or advances made by the Bank to Bankshares. The total amount of dividends which may be paid at any date is generally limited to a portion of retained earnings as defined. As of December 31, 2011, no funds were available to be transferred from the banking subsidiary to the Parent Company, without prior regulatory approval. As of December 31, 2011 and 2010, no cash dividends were declared.
As a member of the Federal Reserve Bank system, the Bank is required to subscribe to shares of $100 par value Federal Reserve Bank stock equal to 6% of the Banks capital and surplus. The Bank is only required to pay for one-half of the subscription. The remaining amount is subject to call when deemed necessary by the Board of Governors of the Federal Reserve.
Bankshares (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bankshares financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt correction action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require Bankshares and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that Bankshares and the Bank met all capital adequacy requirements to which they are subject.
45
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
As of December 31, 2011, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks category. Bankshares and the Banks actual capital amounts and ratios as of December 31, 2011 and 2010 are also presented in the table.
Actual | Minimum Capital Requirement |
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of December 31, 2011: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 41,914 | 13.8 | % | $ | 24,374 | 8.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 41,670 | 13.7 | % | $ | 24,292 | 8.0 | % | $ | 30,158 | 10.0 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 38,086 | 12.5 | % | $ | 12,187 | 4.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 37,855 | 12.5 | % | $ | 12,146 | 4.0 | % | $ | 18,095 | 6.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 38,086 | 7.5 | % | $ | 20,242 | 4.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 37,855 | 7.6 | % | $ | 19,843 | 4.0 | % | $ | 24,804 | 5.0 | % | ||||||||||||
As of December 31, 2010: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 45,383 | 12.9 | % | $ | 28,182 | 8.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 44,910 | 12.8 | % | $ | 28,089 | 8.0 | % | $ | 35,111 | 10.0 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 40,983 | 11.6 | % | $ | 14,091 | 4.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 40,510 | 11.5 | % | $ | 14,044 | 4.0 | % | $ | 21,067 | 6.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 40,983 | 7.5 | % | $ | 21,880 | 4.0 | % | N/A | N/A | ||||||||||||||
Alliance Bank Corporation |
$ | 40,510 | 7.4 | % | $ | 21,838 | 4.0 | % | $ | 27,298 | 5.0 | % |
46
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
23. | STOCK OPTION PLAN |
Effective June 30, 1999, as amended on May 28, 2003 and June 22, 2005, Bankshares established an incentive and non-qualified stock option plan called Alliance Bankshares Corporation 1999 Stock Option Plan (1999 Plan). The 1999 Plan is administered by the Board of Directors of Bankshares acting upon recommendations made by the Compensation Committee appointed by the Board. The 1999 Plan is currently authorized to grant a maximum of 1,143,675 shares to directors, key employees and consultants. The options are granted at the fair market value of Bankshares common stock at the date of grant. The term of the options shall not exceed ten years from the date of grant. The options vest on a schedule determined by the Compensation Committee based on financial performance criteria.
Effective June 13, 2007, Bankshares established a new incentive stock option plan called Alliance Bankshares Corporation 2007 Incentive Stock Plan (2007 Plan). The 2007 Plan is administered by the Compensation Committee appointed by the Board. The maximum number of shares authorized is 200,000 common shares. The 2007 Plan permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and stock awards to employees, non-employee directors and non-employee service providers. The options are granted at the fair market value of Bankshares common stock at the date of grant. The term of the options shall not exceed ten years from the date of grant. The options vest on a schedule determined by the Compensation Committee based on financial performance criteria.
The 1999 Plan and the 2007 Plan are summarized in the following tables:
The fair value of each grant is estimated at the grant date using the Black-Scholes Option-Pricing Model with the following weighted average assumptions (no grants were made in 2011):
December
31, 2010 | ||
Dividend yield |
0.00% | |
Expected life |
7 years | |
Expected volatility |
71.37% | |
Risk-free interest rate |
2.29% |
The expected volatility is based on historical volatility. The risk-free interest rates for the periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on Bankshares history and expectation of dividend payouts.
47
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
A summary of the status of Bankshares stock option plan is presented below:
2011 | 2010 | |||||||||||||||||
Number of Shares |
Weighted Average Exercise Price |
Aggregate Intrinsic Value |
Number of Shares |
Weighted Average Exercise Price |
||||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Outstanding at January 1 |
500,210 | $ | 10.26 | 684,005 | $ | 11.27 | ||||||||||||
Granted |
| | 60,000 | 2.89 | ||||||||||||||
Forfeited |
(228,864 | ) | 12.19 | (243,795 | ) | 11.27 | ||||||||||||
Exercised |
(3,150 | ) | 2.41 | | | |||||||||||||
Expired |
(10,350 | ) | 4.25 | | | |||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
Outstanding at December 31 |
257,846 | $ | 8.88 | 500,210 | $ | 10.26 | ||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
Exercisable at end of year |
198,096 | $ | 10.73 | 373,985 | $ | 11.80 | ||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
Weighted-average fair value per option of options granted during the year |
$ | | $ | 1.82 | ||||||||||||||
|
|
|
|
The status of the options outstanding at December 31, 2011 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Year of Expiration |
Number Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price |
|||||||||||||||
2012 |
18,803 | 1 year | $ | 4.72 | 18,803 | $ | 4.72 | |||||||||||||
2013 |
39,243 | 2 years | $ | 9.41 | 39,243 | $ | 9.41 | |||||||||||||
2014 |
28,175 | 3 years | $ | 16.44 | 28,175 | $ | 16.44 | |||||||||||||
2015 |
32,775 | 4 years | $ | 14.01 | 32,775 | $ | 14.01 | |||||||||||||
2017 |
66,250 | 6 years | $ | 10.72 | 66,250 | $ | 10.72 | |||||||||||||
2018 |
1,600 | 7 years | $ | 2.32 | | $ | | |||||||||||||
2019 |
11,000 | 8 years | $ | 2.08 | 3,850 | $ | 2.08 | |||||||||||||
2020 |
60,000 | 9 years | $ | 2.89 | 9,000 | $ | 2.89 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
257,846 | 4.8 years | $ | 8.88 | 198,096 | $ | 10.73 | ||||||||||||||
|
|
|
|
48
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
24. | NET INCOME (LOSS) PER SHARE |
The following table shows the weighted average number of shares used in computing net income (loss) per common share and the effect on weighted average number of shares of potential dilutive common stock. Potential dilutive common stock had no effect on income (loss) available to common shareholders for the periods presented.
2011 | 2010 | |||||||||||||||
Shares | Per Share Amount |
Shares | Per Share Amount |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Basic net income per share |
5,108,757 | $ | (1.17 | ) | 5,106,819 | $ | 0.14 | |||||||||
|
|
|
|
|||||||||||||
Effect of dilutive securities, stock options |
| 981 | ||||||||||||||
|
|
|
|
|||||||||||||
Diluted net income per share |
5,108,757 | $ | (1.17 | ) | 5,107,800 | $ | 0.14 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) utilized in the earnings per share calculations above |
$ | (5,958 | ) | $ | 705 | |||||||||||
|
|
|
|
Average potential common shares of 167,306 and 478,210 have been excluded from the earnings (loss) per share calculation for 2011 and 2010, because their effects were anti-dilutive.
49
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
25. | PARENT ONLY FINANCIAL INFORMATION |
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 2011 and 2010
( Dollars in thousands)
2011 | 2010 | |||||||
Assets |
||||||||
Cash |
$ | 192 | $ | 299 | ||||
Investment in subsidiaries |
37,994 | 43,364 | ||||||
Other assets |
1,209 | 905 | ||||||
|
|
|
|
|||||
Total assets |
$ | 39,395 | $ | 44,568 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Trust preferred capital notes |
$ | 10,310 | $ | 10,310 | ||||
Other liabilities |
963 | 573 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 11,273 | $ | 10,883 | ||||
|
|
|
|
|||||
Stockholders Equity |
||||||||
Common stock |
$ | 20,440 | $ | 20,427 | ||||
Capital surplus |
25,915 | 25,857 | ||||||
Retained (deficit) |
(18,269 | ) | (12,311 | ) | ||||
Accumulated other comprehensive income (loss), net |
36 | (288 | ) | |||||
|
|
|
|
|||||
Total shareholders equity |
$ | 28,122 | $ | 33,685 | ||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 39,395 | $ | 44,568 | ||||
|
|
|
|
50
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Statements of Operations
For the Years Ended December 31, 2011 and 2010
( Dollars in thousands)
2011 | 2010 | |||||||
Other income |
$ | 110 | (6 | ) | ||||
|
|
|
|
|||||
Expenses |
||||||||
Interest expense |
$ | 380 | $ | 367 | ||||
Professional fees |
5 | 15 | ||||||
Other expense |
207 | 83 | ||||||
|
|
|
|
|||||
Total expense |
$ | 592 | $ | 465 | ||||
|
|
|
|
|||||
Loss before income tax (benefit) and undistributed income (loss) of subsidiaries |
$ | (482 | ) | $ | (471 | ) | ||
Income tax (benefit) |
(194 | ) | (160 | ) | ||||
|
|
|
|
|||||
Loss before undistributed income (loss) of subsidiaries |
$ | (288 | ) | $ | (311 | ) | ||
|
|
|
|
|||||
Undistributed income (loss) of subsidiaries |
(5,670 | ) | 1,016 | |||||
|
|
|
|
|||||
Net income (loss) |
$ | (5,958 | ) | $ | 705 | |||
|
|
|
|
51
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
Cash Flows from Operating Activities |
||||||||
Net income (loss) |
$ | (5,958 | ) | $ | 705 | |||
Adjustments to reconcile net income (loss) to net cash (used in) operating activities: |
||||||||
Undistributed (income) loss of subsidiaries |
5,670 | (1,016 | ) | |||||
Stock-based compensation expense |
63 | 22 | ||||||
Increase (decrease) in other assets |
(271 | ) | 115 | |||||
Increase in accrued expenses |
381 | 49 | ||||||
|
|
|
|
|||||
Net cash (used in) operating activities |
(115 | ) | (125 | ) | ||||
|
|
|
|
|||||
Cash Flows from Financing Activities |
||||||||
Net proceeds from exercise of stock options |
$ | 8 | $ | | ||||
Common stock repurchased |
| | ||||||
|
|
|
|
|||||
Net cash (used in) financing activities |
8 | | ||||||
|
|
|
|
|||||
Cash and Cash Equivalents |
||||||||
Net (decrease) in Cash and Cash Equivalents |
(107 | ) | (125 | ) | ||||
Beginning of Year |
299 | 424 | ||||||
|
|
|
|
|||||
End of Year |
$ | 192 | $ | 299 | ||||
|
|
|
|
52
Alliance Bankshares Corporation
Notes To Consolidated Financial Statements
26. | MERGER TERMINATION |
On July 27, 2011, Eagle Bancorp, Inc. (Eagle), Bankshares and the Bank entered into an Agreement of Merger (Merger Agreement), pursuant to which Bankshares was to merge with and into Eagle, with Eagle being the surviving corporation.
On November 28, 2011, Eagle, Bankshares and the Bank mutually agreed to terminate the Merger Agreement.
In connection with the termination of the Merger Agreement, Bankshares, the Bank and Eagle entered into a Merger Termination Agreement, dated November 28, 2011 (the Termination Agreement). The Termination Agreement provided, among other things, that neither party would incur any termination fee or penalty in connection with termination of the Merger Agreement, including in connection with any solicitation or consummation by Bankshares of a transaction with any third party. In addition, the Termination Agreement provided for mutual releases by the parties from any claims of liability to one another relating to the Merger Agreement or the transactions contemplated thereby and that each party shall be solely responsible for its own expenses and costs incurred in connection with the Merger Agreement and the transactions contemplated thereby.
Bankshares total transaction expenses related to the Merger and its subsequent termination totaled approximately $1.2 million.
27. | SUBSEQUENT EVENTS |
Bankshares evaluated subsequent events that occurred after the balance sheet date, but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provided evidence about conditions that did not exist at the date of the balance sheet but arose after that date. As of the report date there were no subsequent events that would cause adjustments to or disclosures in the financial statements.
53
PART IV.
Item 15. Exhibits, Financial Statement Schedules
(a) |
Exhibits | |||
2.1 | Agreement and Plan of Reorganization between Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of May 22, 2002 (incorporated by reference to Exhibit 2.0 to Form 8-K12g-3 filed August 21, 2002). | |||
2.4 | Stock Purchase Agreement between Alliance Bank Corporation, as the seller, and Thomas P. Danaher and Oswald H. Skewes, as the purchasers, dated as of December 29, 2009 (incorporated by reference to Exhibit 2.4 to Form 10-K filed May 28, 2010). | |||
3.1 | Articles of Incorporation of Alliance Bankshares Corporation (as amended July 6, 2006) (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 14, 2006). | |||
3.2 | Bylaws of Alliance Bankshares Corporation (amended and restated as of December 19, 2007) (incorporated by reference to Exhibit 3.2 to Form 8-K filed December 27, 2007). | |||
Certain instruments relating to trust preferred capital securities not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. | ||||
10.1* | Alliance Bankshares Corporation Stock Option Plan, as restated effective March 25, 2003, and further amended April 27, 2005 (incorporated by reference to Appendix A to the definitive proxy statement filed May 2, 2005). | |||
10.1.1* | Form of Stock Option Agreement for Alliance Bankshares Corporation Stock Option Plan (incorporated by reference to Exhibit 10.1.1 to Form 10-K filed March 31, 2006). | |||
10.3* | Amended and Restated Employment Agreement between Alliance Bank and Paul M. Harbolick, Jr. dated March 1, 2007 (incorporated by reference to Exhibit 10.3 to Form 10-Q filed May 10, 2007). | |||
10.3.1* | Amendment to the Employment Agreement between Alliance Bank and Paul M. Harbolick, Jr. dated as of December 30, 2008 (incorporated by reference to Exhibit 10.3.1 to Form 10-K filed April 15, 2009). | |||
10.4* | Amended and Restated Employment Agreement between Alliance Bank and Craig W. Sacknoff dated March 1, 2007 (incorporated by reference to Exhibit 10.4 to Form 10-Q filed May 10, 2007). | |||
10.4.1* | Amendment to the Employment Agreement between Alliance Bank and Craig W. Sacknoff, dated as of December 30, 2008 (incorporated by reference to Exhibit 10.4.1 to Form 10-K filed April 15, 2009). | |||
10.7* | Base Salaries of Named Executive Officers (incorporated by reference to Exhibit 10.7 to Form 10-K filed April 17, 2012). | |||
10.8* | Non-Employee Director Compensation (incorporated by reference to Exhibit 10.8 to Form 10-K filed April 17, 2012). |
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10.11* | Alliance Bankshares Corporation 2007 Incentive Stock Plan, effective as of June 13, 2007 (incorporated by reference to Appendix A to definitive proxy statement filed April 30, 2007). | |||
10.12* | Form of Stock Option Agreement for Alliance Bankshares Corporation 2007 Incentive Stock Plan (incorporated by reference to Exhibit 10.12 to Form 8-K filed November 9, 2007). | |||
10.13* | Employment Agreement between Alliance Bankshares Corporation, Alliance Bank Corporation, and William E. Doyle, Jr., dated as of May 4, 2010 (incorporated by reference to Exhibit 10.13 to Form 10-Q filed August 16, 2010). | |||
10.14* | Employment Agreement between Alliance Bank Corporation and George F. Cave, dated as of October 22, 2010 (incorporated by reference to Exhibit 10.14 to Form 10-Q filed November 15, 2010). | |||
10.15* | Employennt Agreement between Alliance Bank Corporation and Jean S. Houpert, dated as of March 23, 2012 (incorporated by reference to Exhibit 10.15 to Form 8-K filed March 29, 2012) | |||
21 | Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form 10-K filed April 17, 2012). | |||
23.1 | Consent of Yount, Hyde & Barbour, P.C. | |||
31.1 | Certification of CEO pursuant to Rule 13a-14(a). | |||
31.2 | Certification of CFO pursuant to Rule 13a-14(a). | |||
32 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. | |||
101 | The following materials from Alliance Bankshares Corporations Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Shareholders Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements (incorporated by reference to Exhibit 101 to Form 10-K filed April 17, 2012). |
* | Management Contracts |
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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)
April 18, 2012 | /s/ William E. Doyle, Jr. | |||||
Date | William E. Doyle, Jr. | |||||
Director, President & Chief Executive Officer | ||||||
(principal executive officer) | ||||||
April 18, 2012 | ` | /s/ Jean S. Houpert | ||||
Date | Jean S. Houpert | |||||
Executive Vice President & | ||||||
Chief Financial Officer | ||||||
(principal financial and accounting officer) |
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