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EX-31.1 - EXHIBIT - WashingtonFirst Bankshares, Inc.wfbi-09302014xexx311.htm
EX-32.1 - EXHIBIT - WashingtonFirst Bankshares, Inc.wfbi-09302014xexx321.htm
EX-31.2 - EXHIBIT - WashingtonFirst Bankshares, Inc.wfbi-09302014xexx312.htm

As filed with the Securities and Exchange Commission on November 12, 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014
            
Commission File Number: 001-35768 
_____________________________________________________________________________________________

WASHINGTONFIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter) 
VIRGINIA
 
26-4480276
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
11921 Freedom Drive, Suite 250, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)

(703) 840-2410
(Registrant’s telephone number, including area code)

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
  
Accelerated filer
o
Non-accelerated filer
 
o  
  
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No x

As of November 10, 2014, the registrant had outstanding 6,971,365 shares of voting common stock and 1,151,176 shares of non-voting common stock.






Table of Contents to Third Quarter 2014 Form 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
WashingtonFirst Bankshares, Inc.
Consolidated Balance Sheets
(unaudited)
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from bank balances
$
3,285

 
$
3,569

Federal funds sold
78,722

 
99,364

Interest bearing balances
18,755

 
6,231

Cash and cash equivalents
100,762

 
109,164

Investment securities, available-for-sale, at fair value
170,960

 
145,367

Other equity securities
4,336

 
3,530

Loans held for sale, at lower of cost or fair value
1,957

 

Loans held for investment:
 
 
 
Loans held for investment, at amortized cost
1,022,937

 
838,120

Allowance for loan losses
(8,974
)
 
(8,534
)
Total loans held for investment, net of allowance
1,013,963

 
829,586

Premises and equipment, net
6,008

 
5,395

Intangibles
6,937

 
3,943

Deferred tax asset, net
9,129

 
10,548

Accrued interest receivable
3,651

 
3,466

Other real estate owned
1,161

 
1,463

Bank-owned life insurance
13,049

 
10,283

Other assets
3,623

 
4,814

Total Assets
$
1,335,536

 
$
1,127,559

Liabilities and Shareholders' Equity:
 
 
 
Liabilities:
 
 
 
Non-interest bearing deposits
$
322,186

 
$
231,270

Interest bearing deposits
804,176

 
717,633

Total deposits
1,126,362

 
948,903

Other borrowings
14,397

 
10,157

FHLB advances
66,411

 
43,478

Long-term borrowings
9,984

 
9,854

Accrued interest payable
524

 
524

Other liabilities
6,733

 
7,039

Total Liabilities
1,224,411

 
1,019,955

Shareholders' Equity:
 
 
 
Preferred stock:
 
 
 
Series D, $5.00 par value, 13,347 and 17,796 shares issued and outstanding, respectively, 1% dividend
67

 
89

Additional paid-in capital - preferred
13,280

 
17,707

Common stock:
 
 
 
Common Stock Voting, $0.01 par value, 50,000,000 shares authorized, 6,971,365 and 6,552,136 shares issued and outstanding, respectively
70

 
66

Common Stock Non-Voting, $0.01 par value, 10,000,000 shares authorized, 1,151,176 and 1,096,359 shares issued and outstanding, respectively
12

 
10

Additional paid-in capital - common
92,238

 
85,636

Accumulated earnings
5,663

 
5,605

Accumulated other comprehensive loss related to available-for-sale securities
(205
)
 
(1,509
)
Total Shareholders' Equity
111,125

 
107,604

Total Liabilities and Shareholders' Equity
$
1,335,536

 
$
1,127,559

.
See accompanying notes to consolidated financial statements.

3


WashingtonFirst Bankshares, Inc.
Consolidated Statements of Operations
(unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands, except per share amounts)
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
13,464

 
$
10,948

 
$
37,658

 
$
32,891

Interest and dividends on investments:
 
 
 
 
 
 
 
Taxable
727

 
501

 
2,122

 
1,407

Tax-exempt
26

 
39

 
112

 
115

Dividends on other equity securities
36

 
17

 
106

 
71

Interest on Federal funds sold and other short-term investments
89

 
89

 
249

 
250

Total interest and dividend income
14,342

 
11,594

 
40,247

 
34,734

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
1,412

 
1,165

 
4,015

 
3,611

Interest on borrowings
466

 
326

 
1,242

 
1,044

Total interest expense
1,878

 
1,491

 
5,257

 
4,655

Net interest income
12,464

 
10,103

 
34,990

 
30,079

Provision for loan losses
900

 
1,800

 
2,205

 
3,875

Net interest income after provision for loan losses
11,564

 
8,303

 
32,785

 
26,204

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
120

 
141

 
352

 
391

Earnings on bank-owned life insurance
98

 
87

 
266

 
186

Gain on sale of other real estate owned, net

 
19

 
69

 
246

Gain on sale of loans, net
168

 
821

 
241

 
821

Gain/(loss) on sale of available-for-sale investment securities, net
22

 

 
166

 
(20
)
Other operating income
143

 
187

 
425

 
423

Total non-interest income
551

 
1,255

 
1,519

 
2,047

Non-interest expense:
 
 
 
 
 
 
 
Compensation and employee benefits
4,793

 
3,432

 
13,390

 
10,087

Premises and equipment
1,417

 
1,381

 
4,342

 
4,150

Data processing
774

 
775

 
2,174

 
2,438

Professional fees
355

 
415

 
1,090

 
1,078

Other operating expenses
1,112

 
836

 
3,481

 
2,999

Total non-interest expense
8,451

 
6,839

 
24,477

 
20,752

Income before provision for income taxes
3,664

 
2,719

 
9,827

 
7,499

Provision for income taxes
833

 
579

 
2,958

 
2,356

Net income
2,831

 
2,140

 
6,869

 
5,143

Preferred stock dividends and accretion
(39
)
 
(44
)
 
(128
)
 
(133
)
Net income available to common shareholders
$
2,792

 
$
2,096

 
$
6,741

 
$
5,010

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per common share (1)
$
0.34

 
$
0.27

 
$
0.83

 
$
0.63

Fully diluted earnings per common share (1)
$
0.33

 
$
0.26

 
$
0.81

 
$
0.62

(1) Retroactively adjusted to reflect the effect of all stock dividends.
See accompanying notes to consolidated financial statements.

4


WashingtonFirst Bankshares, Inc.
Consolidated Statements of Comprehensive Income
(unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Net income
$
2,831

 
$
2,140

 
$
6,869

 
$
5,143

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net unrealized holding (losses)/gains, net of tax
(415
)
 
(290
)
 
1,197

 
(1,923
)
Reclassification adjustment for realized losses/(gains)
14

 

 
107

 
(13
)
Net change from available-for-sale securities (1)
(401
)
 
(290
)
 
1,304

 
(1,936
)
Comprehensive income
$
2,430

 
$
1,850

 
$
8,173

 
$
3,207

 
 
 
 
 
 
 
 
(1) Unrealized gains/(losses) on available for sale securities is shown net of income tax benefit of $0.2 million and income tax expense of $0.7 million for the three and nine months ended September 30, 2014, compared to income tax benefits of $0.2 million and $1.0 million for the three and nine months ended September 30, 2013, respectively.
 See accompanying notes to consolidated financial statements.

5


WashingtonFirst Bankshares, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Shares
 
Amount
 
Shares
 
Amount
 
(in thousands, except share data)
Preferred stock:
 
 
 
 
 
 
 
Balance, beginning of period
17,796

 
$
89

 
17,796

 
$
89

Redemption of preferred stock
(4,449
)
 
(22
)
 

 

Balance, end of period
13,347

 
$
67

 
17,796

 
$
89

Additional paid-in capital - preferred:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
17,707

 
 
 
$
17,707

Redemption of preferred stock
 
 
(4,427
)
 
 
 

Balance, end of period
 
 
$
13,280

 
 
 
$
17,707

Common stock:
 
 
 
 
 
 
 
Balance, beginning of period
7,648,495

 
$
76

 
7,143,781

 
$
71

Exercise of stock options
76,873

 
1

 

 

Exercise of warrants

 

 
125,674

 
2

Issuance of common stock under restricted stock agreements
10,932

 

 

 

Common stock dividends
386,241

 
5

 
363,339

 
3

Balance, end of period
8,122,541

 
$
82

 
7,632,794

 
$
76

Additional paid-in capital - common:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
85,636

 
 
 
$
80,460

Exercise of stock options
 
 
709

 
 
 

Exercise of warrants
 
 

 
 
 
1,434

Common stock dividends
 
 
5,727

 
 
 
3,469

Stock compensation expense
 
 
166

 
 
 
150

Balance, end of period
 
 
$
92,238

 
 
 
$
85,513

Accumulated earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
5,605

 
 
 
$
3,226

Net income
 
 
6,869

 
 
 
5,143

Preferred stock dividends
 
 
(128
)
 
 
 
(133
)
Common stock dividends
 
 
(5,732
)
 
 
 
(3,473
)
Cash dividends declared
 
 
(946
)
 
 
 

Common stock cash-in-lieu dividends
 
 
(5
)
 
 
 
(3
)
Balance, end of period
 
 
$
5,663

 
 
 
$
4,760

Accumulated other comprehensive loss:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
(1,509
)
 
 
 
$
(33
)
Change in unrealized loss on available-for-sale securities, net of tax and reclassification adjustments
 
 
1,304

 
 
 
(1,936
)
Balance, end of period
 
 
$
(205
)
 
 
 
$
(1,969
)
Total shareholders' equity
 
 
$
111,125

 
 
 
$
106,176

See accompanying notes to consolidated financial statements.

6


WashingtonFirst Bankshares, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
6,869

 
$
5,143

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,426

 
129

Amortization of purchase accounting marks
(3,229
)
 
(2,132
)
(Gain)/loss on sale of available-for-sale investment securities
(166
)
 
20

Gain on sale of other real estate owned
(69
)
 
(246
)
Provision for loan losses
2,205

 
3,875

Write-down of other real estate owned
258

 
425

Deferred income taxes
707

 

Earnings on bank-owned life insurance
(266
)
 
(186
)
Net amortization on available-for-sale investment securities
788

 
1,111

Stock based compensation
166

 
150

Originations of loans held for sale
(18,424
)
 

Proceeds from sales of loans held for sale
16,467

 

Net change in:
 
 
 
Accrued interest receivable
(185
)
 
217

Other assets
1,608

 
3,896

Accrued interest payable

 
(1,492
)
Other liabilities
(363
)
 
(1,050
)
Net cash provided by operating activities
7,792

 
9,860

Cash flows from investing activities:
 
 
 
Net cash received in Millennium Transaction
59,047

 

Purchase of available-for-sale investment securities
(44,656
)
 
(31,491
)
Proceeds from repayment of available-for-sale investment securities
19,655

 
40,375

Proceeds from sale/call of available-for-sale investment securities
20,050

 
2,540

Net increase in loans held for investment
(133,223
)
 
(63,727
)
Purchase of bank-owned life insurance
(2,500
)
 
(5,000
)
Net (increase)/decrease in FHLB stock
(123
)
 
698

Proceeds from sale of real estate owned
473

 
2,065

Purchases of premises and equipment, net
(1,544
)
 
(895
)
Net cash used in investing activities
(82,821
)
 
(55,435
)
Cash flows from financing activities:
 
 
 
Net increase/(decrease) in deposits
56,077

 
(13,417
)
Net increase/(decrease) in FHLB advances
11,114

 
(10,350
)
Net increase/(decrease) in other borrowings
4,240

 
(1,895
)
Proceeds from issuance of common stock, net

 
1,435

Proceeds from exercise of stock options
710

 

Redemption of preferred stock
(4,449
)
 

Cash dividends paid
(932
)
 

Dividends paid - cash portion for fractional shares on 5% dividend
(5
)
 
(3
)
Preferred stock dividends paid
(128
)
 
(133
)
Net cash provided by/(used in) financing activities
66,627

 
(24,363
)
Net decrease in cash and cash equivalents
(8,402
)
 
(69,938
)
Cash and cash equivalents at beginning of period
109,164

 
224,207

Cash and cash equivalents at end of period
$
100,762

 
$
154,269

See accompanying notes to consolidated financial statements.

7


WashingtonFirst Bankshares, Inc.
Notes to the Consolidated Financial Statements
(unaudited)

In this report, WashingtonFirst Bankshares Inc. is sometimes referred to as “WashingtonFirst,” the “Company,” “we,” “our” or “us” and these references include WashingtonFirst’s wholly owned subsidiary, WashingtonFirst Bank, unless the context requires otherwise. In this report, WashingtonFirst Bank is sometimes referred to as the “Bank”.
1. ORGANIZATION
WashingtonFirst Bankshares Inc. was organized in 2009 under the laws of the Commonwealth of Virginia as a bank holding company. WashingtonFirst is the parent company of WashingtonFirst Bank, which was organized in 2004 under the laws of Washington, D.C. to operate as a commercial bank. In 2007, WashingtonFirst Bank converted its charter to the Commonwealth of Virginia. WashingtonFirst Bank is headquartered in Reston, Virginia and serves the greater Washington, D.C. metropolitan area.
On February 28, 2014, WashingtonFirst entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all the deposits and certain assets of Millennium Bank, NA (“Millennium”), a federally chartered commercial bank headquartered in Sterling, Virginia (“Millennium Transaction”). For more information regarding the Millennium Transaction, see Note 3 – Millennium Transaction.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of WashingtonFirst conform with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”). The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities (including, but not limited to, the allowance for loan losses, provision for loan losses, other-than-temporary impairment of investment securities and fair value measurements) as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following are the significant accounting policies that WashingtonFirst follows in preparing and presenting its consolidated financial statements:
(a)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of WashingtonFirst Bankshares, Inc. and its wholly-owned subsidiary WashingtonFirst Bank. All significant inter-company accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to predominant practices within the banking industry.


8


(b)
Cash and Cash Equivalents and Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents consists of cash and due from banks, interest bearing balances and federal funds sold. The Bank maintains deposits with other commercial banks in amounts that may exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with these transactions and believes that the Bank is not exposed to any significant credit risks on cash and cash equivalents. The Bank is required to maintain certain average reserve balances with the Federal Reserve Bank of Richmond. Those balances include usable vault cash and amounts on deposit with the Federal Reserve Bank of Richmond. The Bank had no compensating balance requirements or required cash reserves with correspondent banks as of September 30, 2014. The Bank maintains interest bearing balances at other banks to help ensure sufficient liquidity and provide additional return compared to overnight Federal Funds.
Table 2: Certain Cash and Non-Cash Transactions
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Cash paid during the period for:
 
 
 
Interest paid on interest-bearing deposits
$
4,018

 
$
3,521

Income taxes paid
400

 
1,500

Non-cash activity:
 
 
 
Loans converted into other real estate owned
360

 
1,190

Non-cash activity resulting from the Millennium Transaction:
 
 
 
Fair value of assets acquired:
 
 
 
Investment securities
19,240

 

Other equity securities
683

 

Loans, net of unearned income
51,332

 

Core deposit intangibles
470

 

Other assets
440

 

Fair value of liabilities assumed:
 
 
 
Deposits
121,592

 

FHLB advances
12,209

 

Other liabilities
50

 

(c)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 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, the fair values and impairments of financial instruments, the status of contingencies and the valuation of deferred tax assets and goodwill.
(d)
Investment Securities
The Bank maintains an investment securities portfolio to help ensure sufficient liquidity and provide additional return versus overnight Federal Funds and interest bearing balances. Securities that management has both the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of income taxes.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. All securities were classified as available-for-sale as of September 30, 2014 and December 31, 2013.
The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Securities are monitored to determine whether a decline in their value is other-than-temporary. Management evaluates the investment portfolio on a quarterly basis to determine the collectibility of amounts due per the contractual terms of the investment security.

9


(e)
Other-than-Temporary Impairments
The Company evaluates all securities in its investment portfolio for other- than-temporary impairments. A security is generally defined to be impaired if the carrying value of such security exceeds its estimated fair value. Based on the provisions of FASB Accounting Standards Codification (“ASC”) 320, a security is considered to be other-than- temporarily impaired if the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required to sell the security before recovery of the security’s amortized cost basis. The charge to earnings is limited to the amount of credit loss if the investor does not intend, and more-likely-than-not will not be required, to sell the security before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. In certain instances, as a result of the other-than-temporary impairment analysis, the recognition or accrual of interest will be discontinued and the security will be placed on non-accrual status.
(f)
Restricted Stock
As a member of the Federal Home Loan Bank of Atlanta (FHLB), the Bank is required to purchase and maintain stock in the FHLB in an amount equal to 4.5 percent of aggregate outstanding advances in addition to the membership stock requirement of 0.2 percent of the Bank’s total assets. Unlike other types of stock, FHLB stock and the stock of correspondent banks (“Banker’s Bank Stock”) is acquired primarily for the right to receive advances and loan participations rather than for the purpose of maximizing dividends or stock growth. No ready market exists for the FHLB stock and Bankers’ Bank stock, and they have no quoted market value. Restricted stock, such as FHLB stock and Banker’s Bank Stock, is carried at cost.
(g)
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market, determined in the aggregate. Market value considers commitment agreements with investors and prevailing market prices. Loans originated by the Company’s mortgage banking unit and held for sale to outside investors, are made on a pre-sold basis with servicing rights released. Gains and losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
(h)
Loans Held for Investment
The Bank grants real estate, including construction and development, commercial, and residential, commercial and industrial, and consumer loans to customers primarily in the greater Washington, D.C. metropolitan area. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The ability of the Bank’s debtors to honor their loan contracts is dependent upon the real estate and general economic conditions in the Bank’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less 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. 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 and other loans typically are charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual 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 of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
(i) Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450-10, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310-10, which requires that losses be accrued based on the differences between the net realizable value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
An allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance represents an amount that, in management’s judgment will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower’s ability to repay, 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 allowance consists of specific, general and unallocated components.

10


The specific component relates to loans that are classified as doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer loans for impairment disclosures.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated over their estimated useful lives; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Depreciation is computed using the straight-line method over the lesser of the estimated useful life or the remaining term of the lease for leasehold improvements; and 3 to 15 years for furniture, fixtures, and equipment. Costs of maintenance and repairs are expensed as incurred; improvements and betterments are capitalized. When items are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the determination of net income.
(k) Leases
The Bank leases certain buildings under operating leases with terms greater than one year and with minimum lease payments associated with these agreements. Rent expense is recognized on a straight-line basis over the expected lease term in accordance with ASC 840. Within the provisions of certain leases, there are predetermined fixed escalations of the minimum rental payments over the base lease term. The effects of the escalations have been reflected in rent expense on a straight-line basis over the lease term, and the difference between the recognized rental expense and the amounts payable under the lease is recorded as deferred lease payments. The amortization period for leasehold improvements is the term used in calculating straight-line rent expense or their estimated economic life, whichever is shorter.
(l) Other Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially at the lower of the specific loan amount or fair value, less expected sales costs, each as determined by management. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and current market conditions. Gains or losses on sales of real estate owned are recognized upon disposition.

11


(m) Income Taxes
The provision for income taxes is based on the results of operations, adjusted primarily for (1) tax-exempt income and (2) the earnings from BOLI and stock-based compensation which are in excess of the tax-exempt income amounts. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax basis of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” (i.e., more than 50% likely) that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more likely than not to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company and the Bank are subject to U.S. federal income tax, the District of Columbia income tax, the State of Maryland income tax and the State of Virginia franchise tax, in lieu of income tax. The Company is no longer subject to examination by Federal or State taxing authorities for the years before 2010. As of September 30, 2014 and December 31, 2013 the Company did not have any unrecognized tax benefits. The Company does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other non-interest expense. As of September 30, 2014 and December 31, 2013, the Company does not have any amounts accrued for interest and/or penalties.
(n) Stock-Based Compensation Plans
Under ASC 718, the Company recognizes compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. Compensation cost is measured based on the fair value of the equity instrument issued at the date of grant.
(o) Valuation of Long-Lived Assets
The Company accounts for the valuation of long-lived assets under ASC 205-20, which requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reportable at the lower of the carrying amount or the fair value, less costs to sell.
(p) Transfer 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 Company, (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 Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
(q) Earnings Per Common Share
Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding, which includes both voting and non-voting common shares outstanding. Diluted earnings per common share is computed by dividing applicable net income by the weighted average number of common shares outstanding and any dilutive potential common shares and dilutive stock options. It is assumed that all dilutive stock options were exercised at the beginning of each period and that the proceeds were used to purchase shares of the Company’s common stock at the average market price during the period. Prior years per share information has been retroactively adjusted to date in order to give effect to all stock dividends declared.

12


(r) Goodwill
Goodwill represents the excess of purchase price over fair value of net assets and liabilities acquired. Under ASC 350-10, goodwill is not amortized over an estimated life, but rather it is evaluated at least annually for impairment by comparing its fair value with its recorded amount and is written down when appropriate. Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and if the estimated net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value. In the first quarter 2014, the Company recorded $2.6 million of additional goodwill related to the Millennium Transaction. For more information regarding this addition, see Note 3—Millennium Transaction. There was no impairment of goodwill during the nine months ended September 30, 2014 and September 30, 2013. For more information regarding goodwill, see Note 9—Intangible Assets.
(s) Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.
FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amendments in this Update require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. This Update also requires additional disclosures about discontinued operations including pretax profit or loss, and any ongoing involvement with the discontinued operation. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.
FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update creates a new topic in the FASB Accounting Standards Codification® (ASC or Codification), Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The impact of adoption of this ASU by the Company is not expected to be material.
FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. However, to the extent that a net operating loss carryforward or tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability. No new recurring disclosures are required. The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods. The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted. The impact of prospective adoption of this ASU by the Company in the first quarter of 2014 was not material.


13


FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The impact of adoption of this ASU by the Company is not expected to be material.
(t) Reclassifications
Certain reclassifications of prior year information were made to conform to the 2014 presentation. These reclassifications had no material impact of the Company’s financial position or results of operations.
3. MILLENNIUM TRANSACTION
On February 28, 2014, the Company entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits and certain assets of Millennium Bank, NA (“Millennium”), a federally chartered commercial bank headquartered in Sterling, Virginia. Millennium operated two branches in Virginia – Sterling and Herndon. These branches reopened Monday, March 3, 2014 as branches of WashingtonFirst.
The Millennium Transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the merger date. The excess of fair value of net liabilities assumed exceeded cash received in the transaction resulting in goodwill of $2.6 million being recorded. The Company also recorded $0.5 million in core deposit intangibles which will be amortized over five to eight years, depending on the underlying instrument.
The consideration paid, and the fair value of identifiable assets acquired and liabilities assumed, as of the purchase and assumption agreement date are summarized in the following table:
Table 3: Goodwill on Millennium Transaction
 
Amount
 
(in thousands)
Assets acquired:
 
Cash and cash equivalents
$
43,235

Investment securities
19,240

Other equity securities
683

Loans, net of unearned income
51,332

Core deposit intangibles
470

Other assets
440

Total assets
115,400

Liabilities assumed:
 
Deposits
121,592

FHLB advances
12,209

Other liabilities
50

Total liabilities
133,851

Net liabilities acquired
18,451

Consideration received:
 
Cash paid to WashingtonFirst Bank by the FDIC
15,812

Goodwill
$
2,639

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was the acquired loans. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.
Those loans for which specific credit-related deterioration since origination was identified were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

14


4. CASH AND CASH EQUIVALENTS
Regulation D of the Federal Reserve Act requires that banks maintain non-interest reserve balance with the Federal Reserve Bank based principally on the type and amount of their deposits. During the first nine months of 2014 and 2013, the Bank maintained balances at the Federal Reserve Bank of Richmond (in addition to vault cash) to meet the reserve requirements as well as balances to partially compensate for services provided by the Federal Reserve Bank of Richmond. The Bank has an interest bearing account with the FHLB and maintains eight non-interest bearing accounts with domestic correspondents to off-set the cost of services they provide to the Bank for maintaining an account with them.
In addition, the Bank has short term investments in the form of certificates of deposits with banks insured by the Federal Deposit Insurance Corporation (“FDIC”), classified as interest bearing balances, as of September 30, 2014 and December 31, 2013. All balances are fully insured up to the applicable limits by the FDIC.
5. INVESTMENT SECURITIES
Table 5.1: Available-For-Sale Investment Securities Summary
 
As of September 30, 2014
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
U.S. Treasuries
$
2,998

 
$
6

 
$

 
$
3,004

U.S. Government agencies
52,773

 
107

 
(264
)
 
52,616

Mortgage-backed securities
52,729

 
257

 
(292
)
 
52,694

Collateralized mortgage obligations
47,366

 
154

 
(888
)
 
46,632

Taxable state and municipal securities
12,156

 
611

 
(5
)
 
12,762

Tax-exempt state and municipal securities
3,237

 
34

 
(19
)
 
3,252

Total available-for-sale investment securities
$
171,259

 
$
1,169

 
$
(1,468
)
 
$
170,960

 
As of December 31, 2013
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
U.S. Treasuries
$
2,998

 
$

 
$
(2
)
 
$
2,996

U.S. Government agencies
38,548

 
81

 
(590
)
 
38,039

Mortgage-backed securities
44,240

 
158

 
(544
)
 
43,854

Collateralized mortgage obligations
44,262

 
76

 
(1,621
)
 
42,717

Taxable state and municipal securities
11,711

 
541

 
(82
)
 
12,170

Tax-exempt state and municipal securities
5,935

 

 
(344
)
 
5,591

Total available-for-sale investment securities
$
147,694

 
$
856

 
$
(3,183
)
 
$
145,367


15


The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase and for other purposes amounted to $69.1 million and $80.1 million as of September 30, 2014 and December 31, 2013, respectively.
WashingtonFirst did not recognize in earnings any other-than-temporary impairment losses on available-for-sale investment securities during the three and nine months ended September 30, 2014 or 2013. During the three months ended September 30, 2014, WashingtonFirst received proceeds of $6.5 million from the call or sale of securities from its available-for-sale investment portfolio resulting in gains of $33,000, compared to no call or sale of securities in the same period in 2013. During the nine months ended September 30, 2014, WashingtonFirst received proceeds of $20.2 million from the call or sale of securities from its available-for-sale investment portfolio, resulting in gross realized gains of $0.2 million and gross realized losses of $48,000, compared to proceeds of $1.8 million from the call or sale of securities resulting in gross realized gains of $4,000 and gross realized losses of $24,000 for the same periods in 2013.
Table 5.2: Gross Unrealized Loss and Fair Value of Available-for-Sale Securities
 
As of September 30, 2014
 
Unrealized loss position for less than 12 months
 
Unrealized loss position for more than 12 months
 
Fair Value
 
 Unrealized Loss
 
Fair Value
 
 Unrealized Loss
 
(in thousands)
U.S. Government agencies
$
28,773

 
$
(113
)
 
$
8,859

 
$
(151
)
Mortgage-backed securities
27,595

 
(106
)
 
4,655

 
(186
)
Collateralized mortgage obligations
15,525

 
(118
)
 
19,741

 
(770
)
Taxable state and municipal securities
1,054

 
(4
)
 
515

 
(1
)
Tax-exempt state and municipal securities
964

 
(11
)
 
534

 
(8
)
Total
$
73,911

 
$
(352
)
 
$
34,304

 
$
(1,116
)
 
As of December 31, 2013
 
Unrealized loss position for less than 12 months
 
Unrealized loss position for more than 12 months
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
 (in thousands)
U.S. Treasuries
$
2,996

 
$
(2
)
 
$

 
$

U.S. Government agencies
28,335

 
(590
)
 

 

Mortgage-backed securities
25,735

 
(306
)
 
3,056

 
(238
)
Collateralized mortgage obligations
32,648

 
(1,483
)
 
3,139

 
(138
)
Taxable state and municipal securities
2,387

 
(82
)
 

 

Tax-exempt state and municipal securities
5,591

 
(344
)
 

 

Total
$
97,692

 
$
(2,807
)
 
$
6,195

 
$
(376
)

16


As of September 30, 2014 and December 31, 2013, twenty-six and five, respectively, of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $1.1 million and $0.4 million, respectively.
The temporary unrealized losses presented above are principally due to a general increase in market rates and a widening of credit spreads from the dates of acquisition to September 30, 2014 and December 31, 2013, as applicable. The resulting increases in fair values reflect a decrease in the perceived risk by the financial markets related to those securities. As of September 30, 2014, all U.S. Treasuries and U.S. Government Agencies are rated AA+ or higher, and any fluctuations in their fair value are caused by changes in interest rates and are not considered credit related as the contractual cash flows of these investments are either explicitly or implicitly backed by the full faith and credit of the U.S. Government. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity. As of September 30, 2014, the fair market value of U.S. Treasuries and U.S. Government Agencies were $3.0 million and $52.6 million, respectively. The mortgage-backed securities portfolio at September 30, 2014, is composed of GNMA, FNMA or FHLMC mortgage-backed securities reported at fair value of $52.7 million and GNMA collateralized mortgage obligations reported at fair value of $46.6 million. Any associated unrealized losses are caused by changes in interest rates and are not considered credit related as the contractual cash flows of these investments are either explicitly or implicitly backed by the full faith and credit of the U.S. Government. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity. As of September 30, 2014, the fair value of the taxable state and municipal securities portfolio totaled $12.8 million, while the tax-exempt state and municipal securities portfolio totaled $3.3 million. The municipal bond portfolio has no concentration in any state greater than 20 percent and carries bond ratings of A or higher.
The amortized cost and fair value of investments by remaining contractual maturity for available-for-sale investment securities as of September 30, 2014 are set forth below. Mortgage-backed securities and collateralized mortgage obligations are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.
 
Table 5.3: Amortized Cost and Fair Value by Contractual Maturity of Available-For-Sale Securities
 
As of September 30, 2014
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due within one year
$
1,220

 
$
1,247

Due after one year through five years
47,260

 
47,570

Due after five years through ten years
41,176

 
41,157

Due after ten years
81,603

 
80,986

Total
$
171,259

 
$
170,960



17


6. LOANS
Table 6.1: Composition of Loans Held for Investment by Loan Class
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Construction and development
$
150,408

 
$
97,324

Commercial real estate
604,589

 
521,760

Residential real estate
121,734

 
95,428

Real estate loans
876,731

 
714,512

Commercial and industrial
137,120

 
120,833

Consumer
9,086

 
2,775

Total loans
1,022,937

 
838,120

Less: allowance for loan losses
8,974

 
8,534

Net loans
$
1,013,963

 
$
829,586

As of September 30, 2014, $460.0 million of loans were pledged as collateral for FHLB advances.
Table 6.2: Loans Held for Investment Aging Analysis by Loan Class
 
As of September 30, 2014
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
150,159

 
$

 
$

 
$

 
$
249

 
$
249

 
$
150,408

Commercial real estate
596,135

 
3,573

 

 

 
4,881

 
8,454

 
604,589

Residential real estate
119,276

 
453

 
597

 

 
1,408

 
2,458

 
121,734

Commercial and industrial
132,024

 
2,405

 
671

 

 
2,020

 
5,096

 
137,120

Consumer
8,929

 

 

 
157

 

 
157

 
9,086

Balance at end of period
$
1,006,523

 
$
6,431

 
$
1,268

 
$
157

 
$
8,558

 
$
16,414

 
$
1,022,937

 
As of December 31, 2013
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
95,271

 
$

 
$

 
$

 
$
2,053

 
$
2,053

 
$
97,324

Commercial real estate
510,043

 
613

 
2,771

 

 
8,333

 
11,717

 
521,760

Residential real estate
93,338

 
97

 
101

 

 
1,892

 
2,090

 
95,428

Commercial and industrial
117,531

 
250

 
381

 

 
2,671

 
3,302

 
120,833

Consumer
2,532

 
100

 
5

 

 
138

 
243

 
2,775

Balance at end of period
$
818,715

 
$
1,060

 
$
3,258

 
$

 
$
15,087

 
$
19,405

 
$
838,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) For the purpose of this table, loans 1-29 days past due are included in the balance of current loans


18


WashingtonFirst divides its loans into the following categories based on credit quality: pass, watch, special mention, substandard, doubtful and loss. WashingtonFirst reviews the characteristics of each rating at least annually, generally during the first quarter of each year.
The characteristics of these ratings are as follows:
Pass and watch rated loans (risk ratings 1 to 6) are to persons or business entities with an acceptable financial condition, specified collateral margins, specified cash flow to service the existing loans, and a specified leverage ratio. The borrower has paid all obligations as agreed and it is expected that the borrower will maintain this type of payment history. Acceptable personal guarantors routinely support these loans.
Special mention loans (risk rating 7) have a specifically defined weakness in the borrower’s operations and/or the borrower’s ability to generate positive cash flow on a sustained basis. For example, the borrower’s recent payment history may be characterized by late payments. WashingtonFirst’s risk exposure to special mention loans is partially mitigated by collateral supporting the loan, however, loans in this category have collateral that is considered to be degraded.
Substandard loans (risk rating 8) are considered to have specific and well-defined weaknesses that jeopardize the viability of WashingtonFirst’s credit extension. The payment history for the loan may have been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan, or the estimated net liquidation value of the collateral pledged and/or ability of the personal guarantors to pay the loan may not adequately protect WashingtonFirst. For loans in this category, there is a distinct possibility that WashingtonFirst 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 WashingtonFirst’s definition of an impaired loan unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable WashingtonFirst will be unable to collect all amounts due. Substandard non-accrual loans have the same characteristics as substandard loans. However these loans have a non-accrual classification generally because the borrower’s principal or interest payments are 90 days or more past due.
Doubtful rated loans (risk rating 9) have all the weakness inherent in a loan that is classified as substandard but with the added characteristic that the weakness makes collection or liquidation in full highly questionable and improbable based upon current existing facts, conditions, and values. The possibility of loss related to doubtful rated loans is extremely high.
Loss (risk rating 10) rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
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.

19


Table 6.3: Risk Categories of Loans Held for Investment by Loan Class
 
As of September 30, 2014
Internal risk rating grades
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Risk rating number
1 to 5
 
6
 
7
 
8
 
9
 
 
 
(in thousands)
Construction and development
$
150,159

 
$

 
$

 
$
249

 
$

 
$
150,408

Commercial real estate
569,288

 
11,656

 
11,418

 
12,227

 

 
604,589

Residential real estate
117,278

 
2,149

 
746

 
1,561

 

 
121,734

Commercial and industrial
121,433

 
6,101

 
3,801

 
5,785

 

 
137,120

Consumer
8,951

 
123

 

 
12

 

 
9,086

Balance at end of period
$
967,109

 
$
20,029

 
$
15,965

 
$
19,834

 
$

 
$
1,022,937

 
As of December 31, 2013
Internal risk rating grades
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Risk rating number
1 to 5
 
6
 
7
 
8
 
9
 
 
 
(in thousands)
Construction and development
$
95,271

 
$

 
$

 
$
2,053

 
$

 
$
97,324

Commercial real estate
488,373

 
11,511

 
6,308

 
15,568

 

 
521,760

Residential real estate
91,616

 
1,722

 
163

 
1,927

 

 
95,428

Commercial and industrial
110,122

 
4,851

 
2,945

 
2,915

 

 
120,833

Consumer
2,239

 
398

 

 
138

 

 
2,775

Balance at end of period
$
787,621

 
$
18,482

 
$
9,416

 
$
22,601

 
$

 
$
838,120

Table 6.4: Non-Accrual Loans by Loan Class
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Construction and development
$
249

 
$
2,053

Commercial real estate
4,881

 
8,333

Residential real estate
1,408

 
1,892

Commercial and industrial
2,020

 
2,671

Consumer

 
138

Total non-accrual loans
$
8,558

 
$
15,087


20


Table 6.5: Changes in Troubled Debt Restructurings
 
September 30, 2014
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
For the Three Months Ended:
 
Beginning Balance
$
254

 
$
2,058

 
$
1,452

 
$
397

 
$

 
$
4,161

New TDRs

 
2,637

 

 

 

 
2,637

Increases to existing TDRs

 

 
2

 

 

 
2

Sales, principal payments, or other decreases
(5
)
 
(14
)
 
(3
)
 
(41
)
 

 
(63
)
Ending Balance
$
249

 
$
4,681

 
$
1,451

 
$
356

 
$

 
$
6,737

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
266

 
$
4,886

 
$
1,167

 
$
1,844

 
$
95

 
$
8,258

New TDRs

 
2,637

 
1,268

 

 

 
3,905

Increases to existing TDRs

 
251

 
5

 

 

 
256

Charge-offs post modification

 

 

 

 
(95
)
 
(95
)
Sales, principal payments, or other decreases
(17
)
 
(3,093
)
 
(989
)
 
(1,488
)
 

 
(5,587
)
Ending Balance
$
249

 
$
4,681

 
$
1,451

 
$
356

 
$

 
$
6,737

 
September 30, 2013
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
For the Three Months Ended:
 
Beginning Balance
$
307

 
$
3,849

 
$
1,173

 
$
453

 
$
100

 
$
5,882

Increases to existing TDRs

 

 
1

 

 

 
1

Sales, principal payments, or other decreases
(34
)
 
(1,647
)
 
(4
)
 
(42
)
 
(3
)
 
(1,730
)
Ending Balance
$
273

 
$
2,202

 
$
1,170

 
$
411

 
$
97

 
$
4,153

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
409

 
$
3,913

 
$
1,539

 
$
274

 
$
20

 
$
6,155

New TDRs

 

 
503

 
167

 
100

 
770

Increases to existing TDRs

 
2

 
4

 
18

 

 
24

Charge-offs post modification

 

 
(864
)
 

 

 
(864
)
Sales, principal payments, or other decreases
(136
)
 
(1,713
)
 
(12
)
 
(48
)
 
(23
)
 
(1,932
)
Ending Balance
$
273

 
$
2,202

 
$
1,170

 
$
411

 
$
97

 
$
4,153




21


Table 6.6: New Troubled Debt Restructurings Details
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Number of Loans
 
Pre-Modification
Outstanding
Recorded
Balance
 
Post-Modification
Outstanding
Recorded
Balance
 
Number of Loans
 
Pre-Modification
Outstanding
Recorded
Balance
 
Post-Modification
Outstanding
Recorded
Balance
 
(dollars in thousands)
Commercial real estate
1
 
$
2,720

 
$
2,637

 
 
$

 
$

Residential real estate
4
 
1,268

 
1,268

 
2
 
576

 
503

Commercial and industrial
 

 

 
1
 
163

 
167

Consumer
 

 

 
1
 
100

 
100

Total loans
5
 
$
3,988

 
$
3,905

 
4
 
$
839

 
$
770

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). When the Company has granted a concession, as a result of the restructuring, it does not expect to collect all amounts due in a timely manner, including interest accrued at the original contract rate. In making its determination of whether a borrower is experiencing financial difficulties, the Company considers several factors, including whether (1) the borrower has declared or is in the process of declaring bankruptcy, (2) there is substantial doubt as to whether the borrower will continue to be a going concern, and (3) the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics. The Company evaluates TDRs similarly to other impaired loans for purposes of the allowance for losses.
In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession. These modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.
Table 6.7: Troubled Debt Restructuring in Default in Past Twelve Months
 
September 30, 2014
 
September 30, 2013
 
Number
of
Loans
 
Pre-Modification
Outstanding
Recorded
Balance
 
Post-Modification
Outstanding
Recorded
Balance
 
Number
of
Loans
 
Pre-Modification
Outstanding
Recorded
Balance
 
Post-Modification
Outstanding
Recorded
Balance
 
(dollars in thousands)
Construction and development
1
 
$
405

 
$
249

 
1
 
$
428

 
$
273

Commercial real estate
3
 
4,792

 
4,681

 
1
 
456

 
456

Total loans
4
 
$
5,197

 
$
4,930

 
2
 
$
884

 
$
729

Table 6.8: Non-Performing Assets
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Non-accrual loans
$
8,558

 
$
15,087

90+ days past due still accruing
157

 

Troubled debt restructurings still accruing
1,807

 
5,715

Other real estate owned
1,161

 
1,463

Total non-performing assets
$
11,683

 
$
22,265

As of September 30, 2014 there was one consumer loan past due more than 90 days that was still accruing interest. This loan is considered well secured and in the process of collection. As of December 31, 2013, there were no loans past due more than 90 days that were still accruing. If interest had been earned on the non-accrual loans, interest income on these loans would have been approximately $0.2 million and $0.6 million for the three and nine months ended September 30, 2014, respectively, compared to $0.2 million and $0.7 million for three and nine months ended September 30, 2013, respectively. 

22


7. ALLOWANCE FOR LOAN LOSSES
Table 7.1: Changes in Allowance for Loan Losses
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Balance at beginning of period
$
8,332

 
$
5,938

 
$
8,534

 
$
6,260

Provision for loan losses
900

 
1,800

 
2,205

 
3,875

Charge-offs
(287
)
 
(237
)
 
(2,021
)
 
(2,707
)
Recoveries
29

 
7

 
256

 
80

Balance at end of period
$
8,974

 
$
7,508

 
$
8,974

 
$
7,508

Table 7.2: Changes in Allowance for Loan Losses by Loan Class
 
September 30, 2014
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
For the Three Months Ended:
 
Beginning Balance
$
1,001

 
$
4,407

 
$
599

 
$
2,302

 
$
23

 
$
8,332

Provision for/(release of) loan losses
135

 
769

 
184

 
(179
)
 
(9
)
 
900

Charge-offs

 
(147
)
 
(140
)
 

 

 
(287
)
Recoveries

 

 
17

 
6

 
6

 
29

Ending Balance
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
681

 
$
5,027

 
$
920

 
$
1,801

 
$
105

 
$
8,534

Provision for loan losses
555

 
838

 
285

 
386

 
141

 
2,205

Charge-offs
(100
)
 
(938
)
 
(681
)
 
(70
)
 
(232
)
 
(2,021
)
Recoveries

 
102

 
136

 
12

 
6

 
256

Ending Balance
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974

 
September 30, 2013
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
749

 
$
3,286

 
$
441

 
$
1,453

 
$
9

 
$
5,938

Provision for loan losses
78

 
484

 
358

 
790

 
90

 
1,800

Charge-offs
(17
)
 

 
(220
)
 

 

 
(237
)
Recoveries
(11
)
 

 
9

 
1

 
8

 
7

Ending Balance
$
799

 
$
3,770

 
$
588

 
$
2,244

 
$
107

 
$
7,508

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
899

 
$
2,499

 
$
597

 
$
2,238

 
$
27

 
$
6,260

(Release of)/provision for loan losses
(83
)
 
1,528

 
643

 
1,714

 
73

 
3,875

Charge-offs
(17
)
 
(265
)
 
(681
)
 
(1,743
)
 
(1
)
 
(2,707
)
Recoveries

 
8

 
29

 
35

 
8

 
80

Ending Balance
$
799

 
$
3,770

 
$
588

 
$
2,244

 
$
107

 
$
7,508



23


Table 7.3: Loan Held for Investment and Related Allowance for Loan Losses by Impairment Method and Loan Class
 
As of September 30, 2014
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
150,159

 
$
579,286

 
$
117,536

 
$
127,509

 
$
8,917

 
$
983,407

Evaluated individually for impairment
249

 
25,303

 
4,198

 
9,611

 
169

 
39,530

 
$
150,408

 
$
604,589

 
$
121,734

 
$
137,120

 
$
9,086

 
$
1,022,937

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
1,124

 
$
3,499

 
$
368

 
$
880

 
$
19

 
$
5,890

Evaluated individually for impairment
12

 
1,530

 
292

 
1,249

 
1

 
3,084

 
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974

 
As of December 31, 2013
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
95,271

 
$
498,345

 
$
92,335

 
$
114,903

 
$
2,543

 
$
803,397

Evaluated individually for impairment
2,053

 
23,415

 
3,093

 
5,930

 
232

 
34,723

 
$
97,324

 
$
521,760

 
$
95,428

 
$
120,833

 
$
2,775

 
$
838,120

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
676

 
$
2,770

 
$
292

 
$
792

 
$
7

 
$
4,537

Evaluated individually for impairment
5

 
2,257

 
628

 
1,009

 
98

 
3,997

 
$
681

 
$
5,027

 
$
920

 
$
1,801

 
$
105

 
$
8,534


24


The following tables show the allocation of the allowance for loan losses among various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any loan category.
Table 7.4: Allocation of Allowance for Loan Losses by Loan Class
 
September 30, 2014
 
December 31, 2013
 
Amount
 
% Total
 
Amount
 
% Total
 
(dollars in thousands)
Construction and development
$
1,136

 
12.7
%
 
$
681

 
8.0
%
Commercial real estate
5,029

 
56.0
%
 
5,027

 
58.9
%
Residential real estate
660

 
7.4
%
 
920

 
10.8
%
Commercial and industrial
2,129

 
23.7
%
 
1,801

 
21.1
%
Consumer
20

 
0.2
%
 
105

 
1.2
%
Total allowance for loan losses
$
8,974

 
100.0
%
 
$
8,534

 
100.0
%
Table 7.5: Specific Allocation for Impaired Loans by Loan Class
 
As of September 30, 2014
 
As of December 31, 2013
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
(in thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
Construction and development
$

 
$

 
$

 
$
1,787

 
$
1,787

 
$

Commercial real estate
6,254

 
6,253

 

 
3,663

 
3,650

 

Residential real estate
743

 
731

 

 
1,395

 
1,313

 

Commercial and industrial
3,069

 
1,916

 

 
1,159

 
865

 

Consumer

 

 

 
96

 
95

 

Total with no related allowance
10,066

 
8,900

 

 
8,100

 
7,710

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Construction and development
405

 
249

 
12

 
422

 
266

 
5

Commercial real estate
19,775

 
19,050

 
1,530

 
20,347

 
19,765

 
2,257

Residential real estate
3,652

 
3,467

 
292

 
1,788

 
1,780

 
628

Commercial and industrial
7,883

 
7,695

 
1,249

 
5,415

 
5,065

 
1,009

Consumer
169

 
169

 
1

 
137

 
137

 
98

Total with an allowance recorded
31,884

 
30,630

 
3,084

 
28,109

 
27,013

 
3,997

Total impaired loans
$
41,950

 
$
39,530

 
$
3,084

 
$
36,209

 
$
34,723

 
$
3,997


25


Table 7.6: Average Impaired Loan Balance by Loan Class - 3 Months
 
For the Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
(in thousands)
With no related allowance:
 
 
 
 
 
 
 
Construction and development
$

 
$

 
$
1,776

 
$

Commercial real estate
6,258

 
93

 
5,966

 
52

Residential real estate
710

 
7

 
1,992

 
21

Commercial and industrial
1,911

 
29

 
1,277

 
13

Consumer

 

 
236

 
2

Total with no related allowance
8,879

 
129

 
11,247

 
88

With an allowance recorded:
 
 
 
 
 
 
 
Construction and development
251

 

 
324

 

Commercial real estate
19,100

 
186

 
12,830

 
121

Residential real estate
3,501

 
23

 
1,122

 

Commercial and industrial
7,806

 
91

 
4,832

 
34

Consumer
161

 
2

 
5

 

Total with an allowance recorded
30,819

 
302

 
19,113

 
155

Total average impaired loans
$
39,698

 
$
431

 
$
30,360

 
$
243

Table 7.7: Average Impaired Loan Balance by Loan Class - 9 Months
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
(in thousands)
With no related allowance:
 
 
 
 
 
 
 
Construction and development
$

 
$

 
$
1,818

 
$

Commercial real estate
4,641

 
279

 
6,975

 
157

Residential real estate
519

 
21

 
1,995

 
62

Commercial and industrial
1,763

 
87

 
1,412

 
40

Consumer

 

 
240

 
5

Total with no related allowance
6,923

 
387

 
12,440

 
264

With an allowance recorded:
 
 
 
 
 
 
 
Construction and development
258

 

 
374

 

Commercial real estate
18,224

 
558

 
12,889

 
362

Residential real estate
3,140

 
71

 
1,129

 

Commercial and industrial
8,080

 
272

 
4,861

 
103

Consumer
162

 
6

 
5

 

Total with an allowance recorded
29,864

 
907

 
19,258

 
465

Total average impaired loans
$
36,787

 
$
1,294

 
$
31,698

 
$
729


26


8. OTHER REAL ESTATE OWNED
As of September 30, 2014, WashingtonFirst had $1.2 million classified as other real estate owned (“OREO”) on the balance sheet, compared to $1.5 million as of December 31, 2013 and $2.2 million as of September 30, 2013. During the three months ended September 30, 2014, WashingtonFirst sold one OREO property resulting in immaterial gain. During the nine months ended September 30, 2014, WashingtonFirst sold five OREO properties collecting cash proceeds of $0.5 million, realizing net gains of $0.1 million. During the three and nine months ended September 30, 2014, WashingtonFirst acquired one property with a fair market value of $0.4 million that was classified as OREO through foreclosure. There were no OREO properties acquired as a result of the Millennium Transaction. During the three months ended September 30, 2013, WashingtonFirst sold two OREO properties collecting cash proceeds of $19,000, and realizing net gains of $19,000. During the nine months ended September 30, 2013, WashingtonFirst sold eight OREO properties collecting cash proceeds of $2.1 million, realizing net gains of $0.2 million. In addition, during the three and nine months ended September 30, 2013, WashingtonFirst acquired one and three properties with fair values of $0.2 million and $1.2 million, respectively.
Table 8.1: Changes in OREO
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Balance at beginning of period
$
889

 
$
2,068

 
$
1,463

 
$
3,294

Properties acquired at foreclosure
360

 
180

 
360

 
1,190

Sales of foreclosed properties
(20
)
 

 
(404
)
 
(1,838
)
Valuation adjustments
(68
)
 
(27
)
 
(258
)
 
(425
)
Balance at end of period
$
1,161

 
$
2,221

 
$
1,161

 
$
2,221

Table 8.2: OREO Expenses
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Write-downs
$
68

 
$
27

 
$
258

 
$
425

Operating expenses, net of rental income
10

 
21

 
53

 
60

Total OREO expense
$
78

 
$
48

 
$
311

 
$
485


27


9. INTANGIBLE ASSETS
Intangible assets includes goodwill and core deposit intangibles. Goodwill is tested for impairment annually or more frequently if events or circumstances indicate a possible impairment. Core deposit intangibles arise when an acquired bank or branch has a stable deposit base comprised of funds associated with long-term customer relationships. The intangible asset value derives from customer relationships that provide a low-cost source of funding. In the Millennium Transaction in February 2014, the Company recorded additional goodwill of $2.6 million. The Company also recorded $0.5 million of core deposit intangibles which consists of $0.3 million related to non-interest bearing deposits and interest-bearing NOW accounts which is being amortized over a five year period and $0.1 million related to savings accounts which is being amortized over a eight year period. See Note 3 for further details on the Millennium Transaction. In the acquisition of Alliance in December 2012, the Company recorded $0.4 million of core deposit intangibles, which is being amortized over a five year period. The Company performs annual impairment tests on goodwill in the fourth quarter of each year using the fair value approach.
Table 9: Goodwill and Core Deposit Intangibles
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Goodwill:
 
 
 
Balance, beginning of period
$
3,601

 
$
3,601

Goodwill recorded in Millennium Transaction
2,639

 

Balance, end of period
$
6,240

 
$
3,601

Core deposit intangibles:
 
 
 
Balance, beginning of period
$
342

 
$
428

Core deposit intangibles recorded in Millennium Transaction
470

 

Amortization of core deposit intangibles
(115
)
 
(65
)
Balance, end of period
$
697

 
$
363

Total intangibles
$
6,937

 
$
3,964

10. DEPOSITS
Table 10.1: Composition of Deposits
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Demand deposit accounts
$
322,186

 
$
231,270

NOW accounts
95,623

 
91,107

Money market accounts
219,245

 
188,170

Savings accounts
128,678

 
113,987

Time deposits under $100,000
103,083

 
116,055

Time deposits $100,000 and over
257,547

 
208,314

Total deposits
$
1,126,362

 
$
948,903

Table 10.2: Scheduled Maturities of Time Deposits
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Within 1 Year
$
201,519

 
$
191,470

1 - 2 years
78,916

 
67,888

2 - 3 years
40,064

 
38,098

3 - 4 years
19,083

 
8,493

4 - 5 years
20,089

 
18,420

5+ years
959

 

Total
$
360,630

 
$
324,369


28


Time deposits include Certificate of Deposit Account Registry Service (“CDARS”) balances and brokered deposits. The CDARS deposits are customer deposits that are placed in the CDARS network to maximize the FDIC insurance coverage. These CDARS balances were $49.6 million and $33.2 million as of September 30, 2014 and December 31, 2013, respectively. Brokered deposits were $10.0 million and $32.6 million as of September 30, 2014 and December 31, 2013, respectively. 
11. OTHER BORROWINGS
Other borrowings consist of $14.4 million and $10.2 million of customer repurchase agreements as of September 30, 2014 and December 31, 2013, respectively. Customer repurchase agreements are standard commercial banking transactions that involve a Bank customer instead of a wholesale bank or broker.
12. FEDERAL HOME LOAN BANK ADVANCES
As a member of the FHLB, the Bank has access to numerous borrowing programs with total credit availability established at 20 percent of total quarter-end assets. FHLB advances are fully collateralized by pledges of certain qualifying real estate secured loans (see Note 4 - Cash and Cash Equivalents). As of September 30, 2014, the Bank had pledged a total of $460.0 million in qualifying home equity lines of credit, commercial real estate loans, multifamily real estate loans, and residential real estate secured loans as security for FHLB advances. As of September 30, 2014, the Bank had $214.3 million in remaining credit available with the FHLB.
 
Table 12.1: Composition of FHLB Advances
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
As of period ended:
 
 
 
FHLB advances
$
63,297

 
$
40,000

FHLB purchase accounting mark
3,114

 
3,478

FHLB total
$
66,411

 
$
43,478

Weighted average outstanding effective interest rate
1.95
%
 
1.30
%
Table 12.2: FHLB Advances Average Balances
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(dollars in thousands)
Averages for the period:
 
 
 
 
 
 
 
FHLB advances
$
71,160

 
$
30,180

 
$
54,541

 
$
34,385

Average effective interest rate paid during the period
1.56
%
 
1.84
%
 
1.69
%
 
2.04
%
Maximum month-end balance outstanding
$
76,491

 
$
30,181

 
$
76,491

 
$
40,689

Table 12.3: Contractual Maturities of FHLB Advances
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Within one year
$

 
$
15,000

3 - 4 years
7,500

 

4 - 5 years
16,461

 

5+ years
42,450

 
28,478

Total FHLB advances
$
66,411

 
$
43,478

13. LONG-TERM BORROWINGS
Table 13: Long-term Borrowings Detail
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Subordinated debt
$
2,273

 
$
2,247

Trust preferred capital notes
7,711

 
7,607

Long-term borrowings
$
9,984

 
$
9,854


29


On June 15, 2012, the Bank issued $2.5 million in subordinated debt (the “Bank Subordinated Debt”) to Community Bancapital LP (“CBC”). The Bank Subordinated Debt has a maturity of nine (9) years, is due in full on June 14, 2021, and bears interest at 8.00 percent per annum, payable quarterly. In connection with the issuance of the Bank Subordinated Debt, the Company issued warrants to CBC that would allow it to purchase 60,657 shares of Company common stock at a share price equal to $10.30. These warrants have been retroactively adjusted to reflect the effect of all stock dividends and expire if not exercised on or before June 15, 2020. In recording this transaction, the warrants were valued at $0.3 million, which was treated as an increase in additional paid-in capital, and the liability associated with the Bank Subordinated Debt was recorded at $2.2 million. The $0.3 million discount on the Bank Subordinated Debt is being expensed monthly over the life of the debt.
On June 30, 2003, Alliance invested $0.3 million as common equity into a wholly-owned Delaware statutory business trust (the “Trust”). Simultaneously, the Trust privately issued $10.0 million face amount of thirty-year floating rate trust preferred capital securities (the “Trust Preferred Capital Notes”) in a pooled trust preferred capital securities offering. The Trust used the offering proceeds, plus the equity, to purchase $10.3 million principal amount of Alliance’s floating rate junior subordinated debentures due 2033 (the “Subordinated Debentures”). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time, without penalty. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15 percent subject to quarterly interest rate adjustments. The interest rates as of September 30, 2014 and December 31, 2013 were 3.38 percent and 3.39 percent, respectively. The Trust Preferred Capital Notes are guaranteed by WashingtonFirst on a subordinated basis, and were recorded on WashingtonFirst’s books at the time of the Alliance acquisition at a discounted amount of $7.5 million, which was the fair value of the instruments at the time of the acquisition. The $2.5 million discount is being expensed monthly over the life of the obligation. Under the indenture governing the Trust Preferred Capital Notes, WashingtonFirst has the right to defer payments of interest for up to twenty consecutive quarterly periods.
Under current regulatory guidelines, the Trust Preferred Capital Notes may constitute no more than 25 percent of total Tier 1 Capital. Any amount not eligible to be counted as Tier 1 Capital is considered to be Tier 2 Capital. As of September 30, 2014, the entire amount of Trust Preferred Capital Notes was considered Tier 1 Capital.

30


14. SHAREHOLDERS’ EQUITY

In August 2011, WashingtonFirst elected to participate in the Small Business Lending Fund, or “SBLF,” and issued 17,796 shares of its Series D Preferred Stock to the United States Treasury for $17.8 million. Under the terms of the SBLF transaction, during the first ten quarters (ending December 31, 2013) in which the Series D Preferred Stock was outstanding, the preferred shares earned dividends at a rate that could fluctuate on a quarterly basis. From the eleventh dividend period (ending March 31, 2014) through the year 4.5 years after the closing of the SBLF transaction, because WashingtonFirst Bank’s qualified small business lending, or “QSBL,” as of December 31, 2013 had increased sufficiently as compared with the QSBL baseline, the annual dividend rate will be fixed at a rate of 1%. On August 14, 2014, WashingtonFirst redeemed $4.4 million (4,449 shares), or 25% of the $17.8 million outstanding Series D Preferred Stock that had been issued to the Secretary of the Treasury in August 2011 through the Company’s participation in the Small Business Lending Fund. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends through August 14, 2014, for a total redemption price of $4.5 million.
In connection with the issuance of the Bank Subordinated Debt on June 15, 2012, the Company issued warrants to Community Bancapital LP (“CBC”) that would allow it to purchase 60,657 shares of common stock at a share price equal to $10.30. These warrants have been retroactively adjusted to reflect the effect of all stock dividends and expire if not exercised on or before June 15, 2020. The warrants were valued at $0.3 million using the Black-Scholes option pricing model and are being expensed monthly over the life of the debt.
In connection with the Alliance acquisition, the Company issued 1,812,933 shares of its common stock to former stockholders of Alliance. In addition, pursuant to a private placement in 2012, the Company issued 1,351,656 shares of its common stock and 1,044,152 shares of its Series A non-voting common stock at $11.30 per share.
The Company had 158,743 warrants outstanding as of December 31, 2012, expiring February, 2013 with a weighted average exercise price of $11.42 per share, that were issued in connection with the acquisition of First Liberty Bancorp in 2006. In  February 2013, 125,674 of these warrants were exercised generating $1.4 million in additional common equity and the remaining 33,069 warrants expired.
The Board of Directors has declared three (3) stock dividends, on the Company’s outstanding shares of common stock and Series A non-voting common stock, in the amount of five percent (5%) each: on January 23, 2012 (paid February 29, 2012), on April 5, 2013 (paid May 17, 2013), and on July 21, 2014 (paid September 2, 2014).  All per share amounts in this report have been retroactively adjusted to reflect these stock dividends.
The Company commenced paying cash dividends in 2014 and has paid a dividend of four cents ($0.04) per share -- on the Company’s outstanding shares of common stock and Series A non-voting common stock -- on January 2, April 1, July 1 and October 1, 2014.  Although the Company expects to declare and pay quarterly cash dividends in the future, any such dividend would be at the discretion of the Board of Directors of the Company and would be subject to various federal and state regulatory limitations.



31


15. COMMITMENTS AND CONTINGENCIES
Credit Extension Commitments
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and unfunded loan commitments. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. 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 by the customer. Unfunded commitments under lines of credit, revolving credit lines, and overdraft protection are agreements for possible future extensions of credit to existing customers. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally consists of real property, liquid assets or business assets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Bank had $208.5 million and $159.2 million in outstanding commitments to extend credit as of September 30, 2014 and December 31, 2013, respectively.
Litigation
In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company is unable to reasonably estimate a range of possible losses on its remaining outstanding legal proceedings; however, in the opinion of management and after consultation with legal counsel, the Company believes that the ultimate disposition of these matters is not expected to have a material adverse effect on the financial condition of the Company.
Other Contractual Arrangements
The Bank is party to a contract dated October 7, 2010, with Fiserv, for core data processing and item processing services integral to the operations of the Bank. Under the terms of the agreement, the Bank may cancel the agreement subject to a substantial cancellation penalty based on the current monthly billing and remaining term of the contract. The initial term of services provided shall end seven years following the date services are first used. Services were first provided beginning May 16, 2011 and will expire on May 15, 2018. The Bank expects to pay Fiserv approximately $4.0 million over the remaining life of the contract.

32


16. CAPITAL REQUIREMENTS
The Company is subject to regulatory capital requirements of federal banking agencies. Failure to meet minimum capital requirements can result in mandatory—and possibly additional discretionary—actions by regulators that could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital requirements that involve quantitative measures of the Company’s 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.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, in each case as those terms are defined in the regulations. Management believes the Company satisfied all capital adequacy requirements to which it was subject as of September 30, 2014.
As of September 30, 2014, the Company was “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios, as set forth in the table below.
Table 16: Capital Amounts, Ratios and Regulatory Requirements Summary
 
Actual
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
For Minimum Capital Adequacy Purposes
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(dollars in thousands)
As of September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
123,578

 
11.37
%
 
$
108,688

 
 >10.0%
 
$
86,950

 
 >8.0%
Tier 1 risk-based capital ratio
112,104

 
10.31
%
 
65,240

 
 >6.0%
 
43,493

 
 >4.0%
Tier 1 leverage ratio
112,104

 
8.73
%
 
64,206

 
 >5.0%
 
51,365

 
 >4.0%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
123,811

 
14.05
%
 
$
88,122

 
 >10.0%
 
$
70,497

 
 >8.0%
Tier 1 risk-based capital ratio
112,777

 
12.80
%
 
52,864

 
 >6.0%
 
35,243

 
 >4.0%
Tier 1 leverage ratio
112,777

 
10.53
%
 
53,550

 
 >5.0%
 
42,840

 
 >4.0%

33


17. EARNINGS PER SHARE
The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock has no effect on income available to common shareholders.
Table 17: Basic and Dilutive Earnings Per Share
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(dollars in thousands, except for per share amounts)
Net income
$
2,831

 
$
2,140

 
$
6,869

 
$
5,143

Less: SBLF dividends
(39
)
 
(44
)
 
(128
)
 
(133
)
Net income available to common shareholders
$
2,792

 
$
2,096

 
$
6,741

 
$
5,010

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding (1)
8,118,122

 
8,025,349

 
8,085,517

 
7,991,327

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock, stock options and warrants (1)
228,671

 
119,724

 
225,075

 
99,948

Diluted weighted average number of shares outstanding (1)
8,346,793

 
8,145,073

 
8,310,592

 
8,091,275

 
 
 
 
 
 
 
 
Basic earnings per share (1)
$
0.34

 
$
0.27

 
$
0.83

 
$
0.63

Diluted earnings per share (1)
$
0.33

 
$
0.26

 
$
0.81

 
$
0.62

(1) Retroactively adjusted to reflect the effect of all stock dividends.
18. OTHER OPERATING EXPENSES
Table 18: Consolidated Statement of Operations - Other Operating Expenses Detail
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Other real estate owned expenses
$
78

 
$
48

 
$
311

 
$
485

Business and franchise tax
217

 
183

 
609

 
486

Advertising and promotional expenses
172

 
102

 
467

 
393

FDIC premiums
211

 
190

 
650

 
611

Postage, printing and supplies
45

 
30

 
158

 
125

Directors' fees
79

 
52

 
214

 
165

Insurance
23

 
35

 
70

 
80

Merger related expenses

 

 
186

 
6

Other
287

 
196

 
816

 
648

Other expenses
$
1,112

 
$
836

 
$
3,481

 
$
2,999


34


19. FAIR VALUE DISCLOSURES
Fair value is defined as 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 (also referred to as an exit price). In determining fair value, WashingtonFirst uses various valuation approaches, including market and income approaches. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. When available, the fair value of WashingtonFirst’s financial instruments is based on quoted market prices, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information obtained from third parties is internally validated for reasonableness prior to use in the consolidated financial statements.
When observable market prices are not readily available, WashingtonFirst estimates fair value using techniques that rely on alternate market data or internally-developed models using significant inputs that are generally less readily observable. Market data includes prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. If market data needed to estimate fair value is not available, WashingtonFirst estimates fair value using internally-developed models that employ a discounted cash flow approach. Even when market assumptions are not readily available, WashingtonFirst’s assumptions reflect those that market participants would likely use in pricing the asset or liability at the measurement date.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The standard describes the following three levels used to classify fair value measurements:
 
Level 1
  
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
 
 
 
Level 2
  
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
 
 
 
 
 
Level 3
  
Prices or valuations that require unobservable inputs that are significant to the fair value measurement.
WashingtonFirst performs a detailed analysis of the assets and liabilities carried at fair value to determine the appropriate level based on the transparency of the inputs used in the valuation techniques. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. WashingtonFirst’s assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument. While WashingtonFirst believes its valuation methods are appropriate and consistent with those of other market participants, using different methodologies or assumptions to determine fair value could result in a materially different estimate of fair value for some financial instruments.
The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above. Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as non-recurring fair value measurements.
Recurring Fair Value Measurements and Classification
Available-for-Sale Investment Securities
The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. WashingtonFirst classifies these fair value measurements as level 1.
For a significant portion of WashingtonFirst’s investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, and Government/GSE guaranteed mortgage-backed securities, fair value is determined using a reputable and nationally recognized third party pricing service. The prices obtained are non-binding and generally representative of recent market trades. WashingtonFirst corroborates its primary valuation source by obtaining a secondary price from another independent third party pricing service. WashingtonFirst classifies these fair value measurements as level 2.
For certain investment securities that are thinly traded or not quoted, WashingtonFirst estimates fair value using internally-developed models that employ a discounted cash flow approach. WashingtonFirst maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. WashingtonFirst generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either

35


over time or among independent pricing services or dealers; or (4) there is a limited availability of public market information. WashingtonFirst classifies these fair value measurements as level 3.
Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no transfers within the fair value hierarchy for fair value measurements of WashingtonFirst’s investment securities during the nine months ended September 30, 2014 or 2013.
Nonrecurring Fair Value Measurements and Classification
Loans
Certain loans in WashingtonFirst’s loan portfolio are measured at fair value when they are determined to be impaired. Impaired loans are reported at fair value less estimated cost to sell. The fair value of the loan generally is based on the fair value of the underlying property, which is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. WashingtonFirst classifies these fair values as level 3 measurements.
Other Real Estate Owned
WashingtonFirst initially records OREO properties at fair value less estimated costs to sell and subsequently records them at the lower of carrying value or fair value less estimated costs to sell. The fair value of OREO is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. WashingtonFirst classifies the OREO fair values as level 3 measurements.
Fair Value Classification and Transfers
As of September 30, 2014, WashingtonFirst’s assets and liabilities recorded at fair value included financial instruments valued at $28.7 million whose fair values were estimated by management in the absence of readily determinable fair values (i.e., level 3). These financial instruments measured as level 3 represented 2.1 percent of total assets and 14.4 percent of financial instruments measured at fair value as of September 30, 2014. As of December 31, 2013, WashingtonFirst’s assets and liabilities recorded at fair value included financial instruments valued at $24.5 million whose fair values were estimated by management in the absence of readily determinable fair values. These financial instruments measured as level 3 represented 2.2 percent of total assets and 14.4 percent of financial instruments measured at fair value as of December 31, 2013.

36


The following tables present information about WashingtonFirst’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2014 and December 31, 2013, respectively, and indicate the fair value hierarchy of the valuation techniques used by WashingtonFirst to determine such fair value:
Table 19.1: Summary of Assets and Liabilities Measured at Fair Value
As of September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
U.S. Treasuries
$
3,004

 
$

 
$

 
$
3,004

U.S. Government agencies

 
52,616

 

 
52,616

Mortgage-backed securities

 
52,694

 

 
52,694

Collateralized mortgage obligations

 
46,632

 

 
46,632

Taxable state and municipal securities

 
12,762

 

 
12,762

Tax-exempt state and municipal securities

 
3,252

 

 
3,252

Total recurring assets at fair value
$
3,004

 
$
167,956

 
$

 
$
170,960

 
 
 
 
 
 
 
 
Nonrecurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for investment (1)
$

 
$

 
$
27,546

 
$
27,546

Other real estate owned (2)

 

 
1,161

 
1,161

Total nonrecurring assets at fair value
$

 
$

 
$
28,707

 
$
28,707

As of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
U.S. Treasuries
$
2,996

 
$

 
$

 
$
2,996

U.S. Government agencies

 
38,039

 

 
38,039

Mortgage-backed securities

 
43,854

 

 
43,854

Collateralized mortgage obligations

 
42,717

 

 
42,717

Taxable state and municipal securities

 
12,170

 

 
12,170

Tax-exempt state and municipal securities

 
5,591

 

 
5,591

Total recurring assets at fair value
$
2,996

 
$
142,371

 
$

 
$
145,367

 
 
 
 
 
 
 
 
Nonrecurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for investment (1)
$

 
$

 
$
23,016

 
$
23,016

Other real estate owned (2)

 

 
1,463

 
1,463

Total nonrecurring assets at fair value
$

 
$

 
$
24,479

 
$
24,479


(1)
Represents the impaired loans, net of allowance, that have been individually evaluated and reserved for.
(2)
Other real estate owned is transferred from loans to OREO at the lower of cost or market.


37


The following table presents additional information about assets and liabilities measured at fair value on a recurring basis for which WashingtonFirst has used significant level 3 inputs to determine fair value. Net transfers in and/or out of level 3 are based on the fair values of the assets and liabilities as of the beginning of the reporting period.
Table 19.2: Change in Level 3 Fair Value Assets
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Balance at beginning of period
$

 
$
55

 
$

 
$
106

Unrealized gains/(losses)

 
1

 

 
(50
)
Balance at end of period
$

 
$
56

 
$

 
$
56

Fair Value of Financial Instruments
Table 19.3: Estimated Fair Values and Carrying Values for Financial Assets, Liabilities and Commitments
 
September 30, 2014
 
December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(in thousands)
Cash and cash equivalents
$
100,762

 
$
100,762

 
$
109,164

 
$
109,164

Investment securities
170,960

 
170,960

 
145,367

 
145,367

Other equity securities
4,336

 
4,336

 
3,530

 
3,530

Loans held for sale
1,957

 
1,957

 

 

Loans held for investment, net
1,013,963

 
1,003,088

 
829,586

 
824,881

Bank-owned life insurance
13,049

 
13,049

 
10,283

 
10,283

Time deposits
360,630

 
363,292

 
324,369

 
325,946

Other borrowings
14,397

 
14,397

 
10,157

 
10,157

FHLB advances
66,411

 
70,773

 
43,478

 
43,681

Long-term borrowings
9,984

 
9,984

 
9,854

 
9,854

The following methods and assumptions were used in estimating the fair value of the financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
Cash and cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. As such they are classified as level 1 for non-interest-bearing deposits and level 2 for interest-bearing deposits due from banks or federal funds sold.
Investment securities. The fair value techniques and classification within the fair value hierarchy are discussed above under “Recurring Fair Value Measurements and Classification.”
Other equity securities. The fair value of other equity securities is not practical to determine due to the restrictions placed on transferability. Therefore, in the table above the fair value reported is the carrying amount.
Loans held for sale. The fair value of loans held for sale is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.
Loans, net. For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Therefore, the loans reported at fair value result in a level 2 classification.
Bank-owned life insurance. The fair value of bank-owned life insurance is based on the cash surrender value provide by the insurance provider, resulting in a level 3 classification.
Deposits. The fair value of deposits with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable on demand at year-end, resulting in a level 1 classification. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities thereby resulting in a level 2 classification.

38


Other borrowings. The carrying value of other borrowing, which consists of customer repurchase agreements, approximates the fair value as of the reporting date, therefore resulting in a level 2 classification.
FHLB advances. The fair value of FHLB advances is based on the discounted value of future cash flows using interest rates currently being offered for FHLB advances with similar terms and characteristics thereby resulting in a level 2 classification.
Long-term borrowings. The fair value of long-term borrowing, which consists of subordinated debt and trust preferred securities are based on the discounted value of future cash flows using interest rates currently being offered for FHLB advances with similar terms and characteristics thereby resulting in a level 2 classification.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited consolidated financial statements and the related notes that appear elsewhere in this report; and (2) WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014.
The discussion below and the other sections to which WashingtonFirst has referred you contains management’s comments on WashingtonFirst’s business strategy and outlook, such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management’s judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments and uncertainties. WashingtonFirst’s actual results could differ materially from those discussed in the forward-looking statements and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in Item 1A “Risk Factors” in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014 and below in “Cautionary Note Regarding Information Regarding Forward-Looking Statements.”
Cautionary Note Regarding Forward-Looking Statements
This report, as well as other periodic reports filed with the SEC, and written or oral communications made from time to time by or on behalf of WashingtonFirst, may contain statements relating to future events or future results and their effects that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may” or the negative of those terms or other variations of them or comparable terminology. Forward-looking statements include statements of WashingtonFirst’s goals, intentions and expectations; statements regarding its business plans, prospects, growth and operating strategies; statements regarding the quality of its loan and investment portfolios; and estimates of its risks and future costs and benefits.
Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements. These risk and uncertainties include, but are not limited to, the risks identified in Item 1A “Risk Factors” in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014 and the following:
competition among financial services companies may increase and adversely affect operations of WashingtonFirst;
changes in the level of nonperforming assets and charge-offs;
changes in the availability of funds resulting in increased costs or reduced liquidity;
changes in accounting policies, rules and practices;
changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates;
impairment concerns and risks related to WashingtonFirst’s investment portfolio, and the impact of fair value accounting, including income statement volatility;
changes in the interest rate environment and market prices may reduce WashingtonFirst’s net interest margins, asset valuations and expense expectations;
general business and economic conditions in the markets WashingtonFirst serves change or are less favorable than expected;
legislative or regulatory changes adversely affect WashingtonFirst’s businesses;
reactions in financial markets related to potential or actual downgrades in the sovereign credit rating of the United States and the budget deficit or national debt of the United States government;
changes in the way the FDIC insurance premiums are assessed;
increase in personal or commercial bankruptcies or defaults; and
technology-related changes are harder to make or more expensive than expected.

39


Forward-looking statements included herein speak only as of the date of this report. WashingtonFirst does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.
Overview
WashingtonFirst generates the majority of its revenues from interest income on loans, income from investment securities, and service charges on customer accounts. Revenues are partially offset by interest expense paid on deposits and other borrowings, and non-interest expenses such as compensation and employee benefits, other operating costs and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as the deposits and borrowings used to fund those assets. Net interest income is the Company’s largest source of revenue. Net interest income for the three and nine months ended September 30, 2014 was $12.5 million and $35.0 million, respectively, compared to $10.1 million and $30.1 million for the same periods in 2013. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin.
Net income available to common shareholders was $2.8 million and $6.7 million for the three and nine months ended September 30, 2014, compared to $2.1 million and $5.0 million for the same periods in 2013, respectively. Diluted earnings per share were $0.33 per common share and $0.81 per common share for the three and nine months ended September 30, 2014, compared to $0.26 per common shares and $0.62 per common share for the same periods in 2013. The increase in net income available to common shareholders during the first nine months of 2014 compared to the first nine months of 2013 is primarily the result of an increased average balance in interest earning assets due to organic growth of the Bank (notably the loan portfolio showed strong growth during the third quarter of 2014) and the Millennium Transaction at the end of February 2014. In addition to the increased revenues earned as a result of the larger loan portfolio, increased costs were incurred during the first nine months of 2014 compared to the same period in 2013. Compensation and employee benefit expenses for the nine months ended September 30, 2014 increased by $3.3 million compared to same period in 2013 primarily due to an increase in the number of employees as the bank continues to grow. Premises and equipment expenses increased by $0.2 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to the increase in number of branches. The Company’s other operating expenses increased by $0.5 million for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013 primarily as a result of increased business and franchise taxes as the bank continues grow and additional merger expenses incurred in the first nine months of 2014, compared to the same period in 2013.
As of September 30, 2014 and December 31, 2013, total assets were $1.3 billion and $1.1 billion, respectively. Total net loans increased $184.4 million from December 31, 2013 to September 30, 2014. Tier 1 capital decreased by $0.7 million to $112.1 million as of September 30, 2014, compared to $112.8 million as of December 31, 2013.
As of September 30, 2014, WashingtonFirst had $11.7 million in nonperforming assets, a decrease of $10.6 million from December 31, 2013. Allowance for loan losses increased by $0.4 million during the nine months ended September 30, 2014 compared to December 31, 2013. The increase in the allowance was driven by $2.0 million in charge-offs, fully offset by provision for loan losses of $2.2 million and recoveries of $0.3 million. This resulted in a $9.0 million allowance for loan losses as of September 30, 2014, compared to $8.5 million as of December 31, 2013.
A further discussion of WashingtonFirst’s financial condition and results of operations is contained in the following sections.

40


Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely to a greater extent on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary for assets and liabilities that are required to be recorded at fair value. A decline in the value of assets required to be recorded at fair value will warrant an impairment write-down or valuation allowance to be established. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available. Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results:
allowance for loan losses;
goodwill and other intangible asset impairment;
accounting for income taxes; and,
fair value measurements.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that are inherent in the loan portfolio at the balance sheet date. The allowance is based on the basic principle that a loss be accrued when it is probable that the loss has occurred at the date of the financial statements and the amount of the loss can be reasonably estimated.
Management believes that the allowance is adequate to absorb losses inherent in the loan portfolio. However, its determination of the allowance requires significant judgment, and estimates of probable losses in the lending portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions or reductions to the allowance may be necessary based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, resulting from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Company periodically review the loan portfolio and the allowance. Such reviews may result in additional provisions based on their judgments of information available at the time of each examination.
The Company’s allowance for loan and lease losses has two basic components: a general allowance reflecting historical losses by loan category, as adjusted by several factors the effects of which are not reflected in historical loss ratios, and specific allowances for individually identified loans. Each of these components, and the allowance methodology used to establish them, are described in detail in Note 2 of the Notes to the Consolidated Financial Statements included in this report. The amount of the allowance is reviewed monthly by the board of directors.
General allowances are based upon historical loss experience by portfolio segment measured over the prior 12 quarters. The historical loss experience is supplemented to address various risk characteristics of the Company’s loan portfolio including:
trends in delinquencies and other non-performing loans;
changes in the risk profile related to large loans in the portfolio;
changes in the categories of loans comprising the loan portfolio;
concentrations of loans to specific industry segments;
changes in economic conditions on both a local and national level;
changes in the Company’s credit administration and loan portfolio management processes; and
quality of the Company’s credit risk identification processes.
The general allowance constituted 65.6 percent of the total allowance at September 30, 2014 and 53.2 percent percent at December 31, 2013. The general allowance is calculated in two parts based on an internal risk classification of loans within each portfolio segment. Allowances on loans considered to be impaired under regulatory guidance are calculated separately from loans considered to be “pass” rated under the same guidance. This segregation allows the Company to monitor the allowance applicable to higher risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of the allowance for loan losses. The loans acquired in the Millennium Transaction were recorded at fair value, and the original credit marks from purchase accounting are not affecting the allowance for loan losses as of September 30, 2014. Allowances on those loans subsequent to the acquisition have been recorded in the allowance for loan losses.

41


As of September 30, 2014, the specific allowance accounted for 34.4 percent percent of the total allowance as compared to 46.8 percent percent at December 31, 2013. The estimated losses on impaired loans can differ substantially from actual losses. The portion of the allowance representing specific allowances is established on individually impaired loans. As a practical expedient, for collateral dependent loans, the Company measures impairment based on the net realizable value of the underlying collateral. For loans on which the Company has not elected to use a practical expedient to measure impairment, the Company will measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. In determining the cash flows to be included in the discount calculation the Company considers the following factors that combine to estimate the probability and severity of potential losses:
the borrower’s overall financial condition;
resources and payment record;
demonstrated or documented support available from financial guarantors; and
the adequacy of collateral value and the ultimate realization of that value at liquidation.
Goodwill and Other Intangible Asset Impairment
Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value be compared to the carrying amount of net assets, including goodwill. If the net fair value exceeds the net book value, no write-down of recorded goodwill is required. If the fair value is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. The Company tests for impairment of goodwill as of each fiscal year end and again at any quarter-end if any triggering events occur during a quarter that may affect goodwill. Examples of such events include, but are not limited to, a significant deterioration in future operating results, adverse action by a regulator or a loss of key personnel. Determining the fair value requires the Company to use a degree of subjectivity. Washington First recognized approximately $2.6 million of goodwill as a part of the Millennium Transaction. No goodwill impairment was recognized for the nine months ended September 30, 2014 and 2013.
Core deposit intangible assets arise when a bank has a stable deposit base comprised of funds associated with long-term customer relationships. The intangible asset value derives from customer relationships that provide a low-cost source of funding. In connection with the Millennium Transaction in 2014 and the acquisition of Alliance in 2012, the Company recorded $0.5 million and $0.4 million of core deposit intangibles, respectively, which is presented in the intangibles line item on the consolidated balance sheet. These are being amortized over a five year or eight year period, depending on the nature of the deposits underlying the intangible.
Accounting for Income Taxes
The Company accounts for income taxes by recording deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company’s accounting policy follows the prescribed authoritative guidance that a minimal probability threshold of a tax position must be met before a financial statement benefit is recognized. The Company recognized, when applicable, interest and penalties related to unrecognized tax benefits in other non-interest expenses in its consolidated statements of income. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the applicable reporting and accounting requirements.
Management expects that the Company’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates due to the requirement that any change in judgment or measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value in accordance with applicable accounting standards. Significant financial instruments measured at fair value on a recurring basis are investment securities available-for-sale, residential mortgages held for sale and commercial loan interest rate swap agreements. Loans where it is probable that the Company will not collect all principal and interest payments according to the contractual terms are considered impaired loans and are measured on a nonrecurring basis.
The Company conducts a quarterly review for all investment securities that have potential impairment to determine whether unrealized losses are other-than-temporary. Valuations for the investment portfolio are determined using quoted market prices, where

42


available. If quoted market prices are not available, valuations are based on pricing models, quotes for similar investment securities, and, where necessary, an income valuation approach based on the present value of expected cash flows. In addition, the Company considers the financial condition of the issuer, the receipt of principal and interest according to the contractual terms and the intent and ability of the Company to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. See Note 5 of the Notes to the Consolidated Financial Statements included in this report.
Millennium Transaction
On February 28, 2014, the Company entered into a purchase and assumption agreement with the FDIC to assume all of the deposits and certain assets of Millennium Bank, NA, a federally chartered commercial bank headquartered in Sterling, Virginia. Millennium operated two branches in Virginia – Sterling and Herndon. These branches reopened Monday, March 3, 2014 as branches of WashingtonFirst.
The Millennium Transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the transaction date. The excess of fair value of net liabilities assumed exceeded cash received in the transaction resulting in goodwill or $2.6 million being recorded. The Company also recorded $0.5 million in core deposit intangibles which will be amortized over five to eight years, depending on the underlying instrument.
Results of Operations
Table M1: Selected Performance Ratios
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(dollars in thousands)
Average total assets
$
1,290,932

 
$
1,066,239

 
$
1,237,554

 
$
1,055,508

Average shareholders' equity
113,127

 
105,385

 
112,032

 
104,769

Net income
2,831

 
2,140

 
6,869

 
5,143

Basic earnings per common share (1) (2)
0.34

 
0.27

 
0.83

 
0.63

Fully diluted earnings per common share (1) (2)
0.33

 
0.26

 
0.81

 
0.62

Return on average assets (1)
0.87
%
 
0.80
%
 
0.74
%
 
0.65
%
Return on average shareholders' equity (1)
9.93
%
 
8.06
%
 
8.20
%
 
6.56
%
Return on average common equity (1)
11.35
%
 
9.49
%
 
9.49
%
 
7.70
%
Average shareholders' equity to average total assets
8.76
%
 
9.88
%
 
9.05
%
 
9.93
%
Efficiency ratio
64.93
%
 
60.22
%
 
67.04
%
 
64.60
%
Dividend payout ratio
11.76
%
 
%
 
14.46
%
 
%
(1) Annualized
(2) Retroactively adjusted to reflect the effect of all stock dividends.
Table M2: Net Interest Income and Margin
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(dollars in thousands)
Net interest income
$
12,464

 
$
10,103

 
$
34,990

 
$
30,079

Yield on average interest-earning assets (1)
4.48
%
 
4.41
%
 
4.42
%
 
4.49
%
Rate on average interest-earning liabilities (1)
0.84
%
 
0.81
%
 
0.82
%
 
0.86
%
Net interest spread (1)
3.64
%
 
3.60
%
 
3.60
%
 
3.63
%
Net interest margin (1)
3.88
%
 
3.84
%
 
3.84
%
 
3.88
%
(1) Annualized
 
 
 
 
 
 
 
The following tables provide information regarding interest-earning assets and funding for the three and nine months ended September 30, 2014 and 2013. The balance of non-accruing loans is included in the average balance of loans presented, though the related income is accounted for on a cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly. The lower average rate on interest-bearing demand deposits, money market deposit accounts and savings accounts is consistent with general trends in average short-term rates during the periods presented. The

43


downward trend in the average rate on time deposits reflects the maturity of older time deposits and the issuance of new time deposits at lower market rates.
Table M3: Average Balances, Interest Income and Expense and Average Yield and Rates - 3 Months
 
For the Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate (6)
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate (6)
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
988,004

 
$
13,464

 
5.33
%
 
$
787,849

 
$
10,948

 
5.44
%
Investment securities - taxable
170,493

 
727

 
1.67
%
 
109,700

 
501

 
1.79
%
Investment securities - tax-exempt (2)
4,189

 
26

 
3.16
%
 
5,939

 
39

 
3.23
%
Other equity securities
4,541

 
36

 
3.18
%
 
2,925

 
17

 
2.29
%
Interest-bearing balances
19,221

 
30

 
0.62
%
 
9,717

 
13

 
0.54
%
Federal funds sold
67,777

 
59

 
0.34
%
 
113,464

 
76

 
0.26
%
Total interest earning assets
1,254,225

 
14,342

 
4.48
%
 
1,029,594

 
11,594

 
4.41
%
Non-interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
2,236

 
 
 
 
 
3,724

 
 
 
 
Premises and equipment
6,039

 
 
 
 
 
3,590

 
 
 
 
Other real estate owned
973

 
 
 
 
 
2,122

 
 
 
 
Other assets (3)
35,945

 
 
 
 
 
33,757

 
 
 
 
Less: allowance for loan losses
(8,486
)
 
 
 
 
 
(6,548
)
 
 
 
 
Total non-interest earning assets
36,707

 
 
 
 
 
36,645

 
 
 
 
Total Assets
$
1,290,932

 
 
 
 
 
$
1,066,239

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
89,528

 
$
45

 
0.20
%
 
$
90,823

 
$
40

 
0.17
%
Money market deposit accounts
217,687

 
259

 
0.47
%
 
131,399

 
158

 
0.48
%
Savings accounts
129,151

 
223

 
0.69
%
 
110,573

 
207

 
0.75
%
Time deposits
363,129

 
885

 
0.97
%
 
341,603

 
760

 
0.88
%
Total interest-bearing deposits
799,495

 
1,412

 
0.70
%
 
674,398

 
1,165

 
0.69
%
FHLB advances
71,160

 
283

 
1.56
%
 
30,180

 
142

 
1.84
%
Other borrowings and long-term borrowings
18,292

 
183

 
3.94
%
 
23,369

 
184

 
3.09
%
Total interest-bearing liabilities
888,947

 
1,878

 
0.84
%
 
727,947

 
1,491

 
0.81
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
283,096

 
 
 
 
 
227,831

 
 
 
 
Other liabilities
5,762

 
 
 
 
 
5,076

 
 
 
 
Total non-interest-bearing liabilities
288,858

 
 
 
 
 
232,907

 
 
 
 
Total Liabilities
1,177,805

 
 
 
 
 
960,854

 
 
 
 
Shareholders’ Equity
113,127

 
 
 
 
 
105,385

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
1,290,932

 
 
 
 
 
$
1,066,239

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Spread (4)
 
 
 
 
3.64
%
 
 
 
 
 
3.60
%
Net Interest Margin (2)(5)
 
 
$
12,464

 
3.88
%
 
 
 
$
10,103

 
3.84
%
(1)
Includes loans held for sale and loans placed on non-accrual status.
(2)
Interest income and yield are presented on a fully taxable equivalent basis using a federal statutory rate of 35 percent.
(3)
Includes intangibles, deferred tax asset, accrued interest receivable, bank-owned life insurance and other assets.
(4)
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.
(5)
Net interest margin is net interest income, expressed as a percentage of average earning assets.
(6)
Annualized income/expense is used for the yield/rate.

44


Table M4: Average Balances, Interest Income and Expense and Average Yield and Rates - 9 Months
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate (6)
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate (6)
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
920,379

 
$
37,658

 
5.40
%
 
$
772,061

 
$
32,891

 
5.62
%
Investment securities - taxable
162,509

 
2,122

 
1.72
%
 
113,165

 
1,407

 
1.64
%
Investment securities - tax-exempt (2)
5,287

 
112

 
3.59
%
 
5,942

 
115

 
3.25
%
Other equity securities
3,872

 
106

 
3.66
%
 
3,185

 
71

 
2.97
%
Interest-bearing balances
13,920

 
65

 
0.62
%
 
9,919

 
41

 
0.56
%
Federal funds sold
95,486

 
184

 
0.26
%
 
117,491

 
209

 
0.24
%
Total interest earning assets
1,201,453

 
40,247

 
4.42
%
 
1,021,763

 
34,734

 
4.49
%
Non-interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
3,213

 
 
 
 
 
4,228

 
 
 
 
Premises and equipment
5,857

 
 
 
 
 
3,479

 
 
 
 
Other real estate owned
1,109

 
 
 
 
 
2,474

 
 
 
 
Other assets (3)
34,259

 
 
 
 
 
30,003

 
 
 
 
Less: allowance for loan losses
(8,337
)
 
 
 
 
 
(6,439
)
 
 
 
 
Total non-interest earning assets
36,101

 
 
 
 
 
33,745

 
 
 
 
Total Assets
$
1,237,554

 
 
 
 
 
$
1,055,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
90,109

 
$
140

 
0.21
%
 
$
88,675

 
$
129

 
0.19
%
Money market deposit accounts
210,784

 
764

 
0.48
%
 
118,443

 
450

 
0.51
%
Savings accounts
123,272

 
672

 
0.73
%
 
103,230

 
582

 
0.75
%
Time deposits
361,690

 
2,439

 
0.90
%
 
353,851

 
2,450

 
0.93
%
Total interest-bearing deposits
785,855

 
4,015

 
0.68
%
 
664,199

 
3,611

 
0.73
%
FHLB advances
54,541

 
698

 
1.69
%
 
34,385

 
532

 
2.04
%
Other borrowings and long-term borrowings
18,529

 
544

 
3.89
%
 
25,019

 
512

 
2.71
%
Total interest-bearing liabilities
858,925

 
5,257

 
0.82
%
 
723,603

 
4,655

 
0.86
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
261,269

 
 
 
 
 
221,308

 
 
 
 
Other liabilities
5,328

 
 
 
 
 
5,828

 
 
 
 
Total non-interest-bearing liabilities
266,597

 
 
 
 
 
227,136

 
 
 
 
Total Liabilities
1,125,522

 
 
 
 
 
950,739

 
 
 
 
Shareholders’ Equity
112,032

 
 
 
 
 
104,769

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
1,237,554

 
 
 
 
 
$
1,055,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Spread (4)
 
 
 
 
3.60
%
 
 
 
 
 
3.63
%
Net Interest Margin (2)(5)
 
 
$
34,990

 
3.84
%
 
 
 
$
30,079

 
3.88
%

(1)
Includes loans held for sale and loans placed on non-accrual status.
(2)
Interest income and yield are presented on a fully taxable equivalent basis using a federal statutory rate of 35 percent.
(3)
Includes intangibles, deferred tax asset, accrued interest receivable, bank-owned life insurance and other assets.
(4)
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.
(5)
Net interest margin is net interest income, expressed as a percentage of average earning assets.
(6)
Annualized income/expense is used for the yield/rate.


45


The following tables set forth information regarding the changes in the components of WashingtonFirst’s net interest income for the periods indicated. For each category, information is provided for changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of variable rate investments, variable rate deposit accounts and adjustable rate mortgages to lower rates and the acquisition of new lower yielding investments and loans, as described above. The decreases in expense reflects the decreased cost of funding due to lower interest rates available in the debt markets. The increases due to changes in volume reflect the increase in on-balance sheet assets during the three and nine months ended September 30, 2014 and 2013.
Table M5: Changes in Rate and Volume Analysis
 
For the Three Months Ended September 30, 2014 Compared to Same Period 2013
 
For the Nine Months Ended September 30, 2014 Compared to Same Period 2013
 
(Decrease)/Increase Due to
 
(Decrease)/Increase Due to
 
Rate
 
Volume
 
Total
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
(1,420
)
 
$
3,936

 
$
2,516

 
$
(2,015
)
 
$
6,782

 
$
4,767

Investment securities - taxable
(210
)
 
436

 
226

 
72

 
643

 
715

Investment securities - tax exempt
(1
)
 
(12
)
 
(13
)
 
19

 
(22
)
 
(3
)
Other equity securities
7

 
12

 
19

 
18

 
17

 
35

Interest bearing balances
2

 
15

 
17

 
5

 
19

 
24

Federal funds sold
96

 
(113
)
 
(17
)
 
25

 
(50
)
 
(25
)
Total income from interest-earning assets
(1,526
)
 
4,274

 
2,748

 
(1,876
)
 
7,389

 
5,513

Expense from interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
18

 
229

 
247

 
(373
)
 
777

 
404

FHLB Advances
(138
)
 
279

 
141

 
(149
)
 
315

 
166

Borrowed funds
176

 
(177
)
 
(1
)
 
242

 
(210
)
 
32

Total expense from interest-bearing liabilities
56

 
331

 
387

 
(280
)
 
882

 
602

Increase in net interest income
$
(1,582
)
 
$
3,943

 
$
2,361

 
$
(1,596
)
 
$
6,507

 
$
4,911

Interest Earning Assets
Average loan balances were $920.4 million for the nine months ended September 30, 2014 compared to $772.1 million for the nine months ended September 30, 2013. The related interest income from loans was $37.7 million for the nine months ended September 30, 2014 resulting in an average yield of 5.40 percent, compared to $32.9 million for the nine months ended September 30, 2013, resulting in an average yield of 5.62 percent. The decrease in average yield on loans reflects competitive pressure on loan pricing during the period (including the repricing of adjustable rate loans). Interest rates are established for classes of loans that include variable rates based on the prime rate as reported by The Wall Street Journal or other identifiable bases while others carry fixed rates with terms as long as 15 years. Most variable rate originations include minimum initial rates and/or floors.
Taxable investment securities balances averaged $162.5 million for the nine months ended September 30, 2014, compared to $113.2 million for the same period in 2013. Interest income generated on these investment securities for the nine months ended September 30, 2014 totaled $2.1 million, or a 1.72 percent yield, compared to $1.4 million or a 1.64 percent yield for the nine months ended September 30, 2013.
Tax-exempt investment securities balances averaged $5.3 million for the nine months ended September 30, 2014, compared to $5.9 million for the same period in 2013. Interest income generated on these investment securities for the nine months ended September 30, 2014 totaled $0.1 million, or a 3.59 percent yield, compared to $0.1 million or a 3.25 percent yield for the nine months ended September 30, 2013. The yield for tax-exempt securities has been presented as a fully taxable equivalent.
Interest-bearing balances averaged $13.9 million for the nine months ended September 30, 2014, compared to $9.9 million for the same period in 2013. The increase in the average investment securities was primarily a result of shifting excess cash reserves into the investment portfolio. Interest income generated on these investment securities for the nine months ended September 30, 2014 totaled $0.1 million, or a 0.62 percent yield, compared to $41,000 or a 0.56 percent yield for the nine months ended September 30, 2013.
Short-term investments in federal funds sold averaged $95.5 million as of September 30, 2014, compared to $117.5 million as of September 30, 2013. The decrease in average short-term investments as of September 30, 2014 compared to September 30, 2013 is

46


primarily a result of the excess federal funds sold balances in the first quarter 2013 due to the Alliance acquisition in December 2012. Interest income generated on these assets for the nine months ended September 30, 2014 totaled $0.2 million, or a 0.26 percent yield, compared to $0.2 million or a 0.24 percent yield for the same period in 2013.
Interest Bearing Liabilities
Average interest-bearing deposits were $785.9 million as of September 30, 2014 compared to $664.2 million as of September 30, 2013. The increase in the average interest-bearing deposits during the the first nine months of 2014 was the result of organic growth and the Millennium Transaction at the end of February 2014. The related interest expense from interest-bearing deposits was $4.0 million for the nine months ended September 30, 2014, compared to $3.6 million for the nine months ended September 30, 2013. The average rate on these deposits was 0.68 percent for the nine months ended September 30, 2014, compared to 0.73 percent for the same period in 2013. The increase in interest expense is primarily attributable to an increase in the average balance of interest bearing liabilities as well as changes in the mix of deposit funding.
FHLB advances averaged $54.5 million as of September 30, 2014, compared to $34.4 million as of September 30, 2013. Interest expense incurred on these borrowing for the nine months ended September 30, 2014 totaled $0.7 million, or a 1.69 percent rate, compared to $0.5 million, or a 2.04 percent rate, for the nine months ended September 30, 2013.
Provision for Loan Losses. During the three months ended September 30, 2014, WashingtonFirst recorded provisions to its allowance for loan losses of $0.9 million, charge-offs of $0.3 million and recoveries of $29,000, compared to provisions to its allowance for loan losses of $1.8 million, charge-offs of $0.2 million and recoveries of $7,000 during the three months ended September 30, 2013. During the nine months ended September 30, 2014, WashingtonFirst recorded provisions to its allowance for loan losses of $2.2 million, charge-offs of $2.0 million and recoveries of $0.3 million, compared to provisions to its allowance for loan losses of $3.9 million, charge-offs of $2.7 million and recoveries of $0.1 million during the nine months ended September 30, 2013.
Service Charges on Deposit Accounts. Service charges on deposit accounts were $0.1 million for both the three months ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, service charges on deposit accounts were $0.4 million and $0.4 million, respectively.
Earnings on Bank-Owned Life Insurance. Earnings on bank-owned life insurance was $0.1 million for both the three months ended September 30, 2014 and 2013. During the nine months ended September 30, 2014 and 2013, earnings on bank-owned life insurance was $0.3 million and $0.2 million, respectively.
Gain on Sale of Other Real Estate Owned. During the nine months ended September 30, 2014, WashingtonFirst realized net gains of $0.1 million on sale or OREO properties, compared to $19,000 and $0.2 million for the three and nine months ended September 30, 2013. There were no sales in the three months ended September 30, 2014. See Note 8 - Other Real Estate Owned for further details.
Gain on Sale of Other Loans, net. During the three and nine months ended September 30, 2014, WashingtonFirst realized gains on the sale of loans of $0.2 million and $0.2 million, respectively, as a result of the newly created mortgage business. During the three and nine months ended September 30, 2013, WashingtonFirst realized $0.8 million and $0.8 million, respectively, on the sale of part of its HELOC portfolio. This was considered a one-time event and has not occurred since the third quarter of 2013.
Gain/Loss on Sale of Available-for-Sale Investment Securities. During the three and nine months ended September 30, 2014, WashingtonFirst received proceeds of $6.5 million and $20.2 million, respectively, from the call or sale of securities from its available-for-sale investment portfolio resulting in net realized gains of $22,000 and $0.2 million, respectively. Of the $20.2 million proceeds received from the call or sale of securities, the majority of the proceeds stem from the Millennium Transaction and management’s decision to reorganize the portfolio of securities received as a result of the Millennium Transaction. During both the three and nine months ended September 30, 2013, WashingtonFirst received proceeds of $1.8 million from the call or sale of securities from its available-for-sale investment portfolio, resulting in net realized losses of $20,000.
Other Operating Income. During the three and nine months ended September 30, 2014, WashingtonFirst recorded $0.1 million and $0.4 million, respectively, of other operating income compared to $0.2 million and $0.4 million, respectively, for the same period in 2013.
Compensation and Employee Benefits. Compensation and employee benefits were $4.8 million and $13.4 million for the three and nine months ended September 30, 2014, respectively, compared to $3.4 million and $10.1 million, respectively, for the same periods in 2013. The increase in compensation and employee benefits in 2014 compared to 2013 is primarily the result of increased headcount as the bank continues to grow, specifically the staffing of its newly created mortgage division and the additional branch locations.

47


Premises and Equipment. Premises and equipment expenses were $1.4 million and $4.3 million for the three and nine months ended September 30, 2014, respectively, compared to $1.4 million and $4.2 million, respectively, for the same periods in 2013. The increase was primarily due to the increase in rent expense associated with the addition of the new branches in Rockville, Maryland; Herndon, Virginia; and McLean, Virginia.
Data Processing. Data processing expenses were $0.8 million and $2.2 million for the three and nine months ended September 30, 2014, respectively, compared to $0.8 million and $2.4 million, respectively, for the same periods in 2013. The decrease was primarily due to cost efficiencies related to the hiring of in-house IT employees leading to decreased reliance on more costly third party contracting.
Professional Fees. Professional fees, which includes legal, accounting and other professional services, were $0.4 million and $1.1 million for both the three and nine months ended September 30, 2014 and 2013, respectively.
Other Operating Expenses. Other operating expenses were $1.1 million and $3.5 million for the three and nine months ended September 30, 2014, respectively, compared to $0.8 million and $3.0 million during the same periods in 2013. See Note 18 - Other Expenses for further details.
Provision for Income Taxes. Provision for income taxes were $0.8 million and $3.0 million for the three and nine months ended September 30, 2014, respectively, resulting in effective tax rates of 22.7 percent and 30.1 percent, respectively. Provision for income taxes were $0.6 million and $2.4 million for the three and nine months ended September 30, 2013, respectively, resulting in effective tax rates of 21.3 percent and 31.4 percent. The lower effective rates for the three month periods compared to the nine month periods is the result of return to provision adjustments and in the third quarter 2014 the release of a deferred tax asset valuation allowance.
Financial Condition
Total assets were $1.3 billion as of September 30, 2014, compared to $1.1 billion as of December 31, 2013. As of September 30, 2014, WashingtonFirst had $100.8 million of cash and cash equivalents, compared to $109.2 million as of December 31, 2013. As of September 30, 2014, WashingtonFirst had $1.0 billion of loans held for investment, net of allowance for loan losses, compared to $829.6 million as December 31, 2013. As of September 30, 2014, WashingtonFirst had $171.0 million of investments, compared to $145.4 million as December 31, 2013. The increase in the aforementioned line items is primarily attributable to the Millennium Transaction, except for loans, which increased due to both organic growth and the Millennium Transaction.
As of September 30, 2014 and December 31, 2013, total deposits were $1.1 billion and $948.9 million, respectively. The $177.5 million increase in deposits is primarily attributable to the Millennium Transaction which accounted for $121.6 million of the increase, with the remaining $55.9 million increase the result of organic growth.
As of September 30, 2014, WashingtonFirst had total equity of $111.1 million, compared to $107.6 million as of December 31, 2013. The increase in total equity during the nine months ended September 30, 2014 is primarily the result of current earnings and stock related transactions, partially offset by dividends.
Loans Held for Sale
Loans in this category are originated by the Mortgage Division and comprised of residential mortgage loans extended to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans and servicing are sold concurrently. The Loans Held for Sale (“LHFS”) are closed in our name and carried on our books until the loan is delivered to and purchased by an investor, generally within fifteen to forty-five days. WashingtonFirst’s Mortgage Division was recently created and commenced production in the first quarter of 2014. As of September 30, 2014, loans held for sale totaled $2.0 million. The amount of loans held for sale outstanding at the end of any given month fluctuates with the volume of loans closed during the month and the timing of loans purchased by investors.
Loans Held for Investment
In its lending activities, WashingtonFirst seeks to develop relationships with clients whose business and individual banking needs will grow with WashingtonFirst. WashingtonFirst has made significant efforts to be responsive to the lending needs in the markets served, while maintaining sound asset quality and credit practices. WashingtonFirst extends credit to construction and development, residential real estate, commercial real estate, commercial and industrial and consumer borrowers in the normal course of business. The loans held for investment portfolio totaled $1.0 billion as of September 30, 2014, an increase of $184.8 million from the December 31, 2013 balance of $838.1 million.

48


The following table summarizes the composition of the loan portfolio by dollar amount and each segment as a percentage of the total loan portfolio as of September 30, 2014 and December 31, 2013:
Table M6: Loan Portfolio by Loan Class
 
September 30, 2014
 
December 31, 2013
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
Construction and development
$
150,408

 
14.7
%
 
$
97,324

 
11.6
%
Commercial real estate
604,589

 
59.1
%
 
521,760

 
62.3
%
Residential real estate
121,734

 
11.9
%
 
95,428

 
11.4
%
Real estate loans
876,731

 
85.7
%
 
714,512

 
85.3
%
Commercial and industrial
137,120

 
13.4
%
 
120,833

 
14.4
%
Consumer
9,086

 
0.9
%
 
2,775

 
0.3
%
Total loans
$
1,022,937

 
100.0
%
 
$
838,120

 
100.0
%
Substantially all loans are initially underwritten based on identifiable cash flows and supported by appropriate advance rates on collateral, which is independently valued. Commercial and industrial loans are generally secured by accounts receivable, equipment and business assets. Commercial real estate loans are secured by owner-occupied or non-owner occupied commercial properties of all types. Construction and development loans are supported by projects which generally require an appropriate level of pre-sales or pre-leasing. Generally, all commercial and industrial loans and commercial real estate loans have full recourse to the owners and/or sponsors. Residential real estate loans are secured by first or second liens on both owner-occupied and investor-owned residential properties.
Loans secured by various types of real estate, which includes construction and development loans, commercial real estate loans, and residential real estate loans, constitute the largest portion of total loans. Of that portion, commercial real estate loans represent the largest dollar exposure. Substantially all of these loans are secured by properties in the greater Washington, D.C. metropolitan area with the heaviest concentration in Northern Virginia. Risk is managed through diversification by sub-market, property type, and loan size, and by seeking loans with multiple sources of repayment. The average outstanding loan balance in this portfolio is $0.5 million as of September 30, 2014.
Construction and development loans represented 14.7 percent and 11.6 percent of the total loan portfolio at September 30, 2014 and December 31, 2013, respectively. New originations in this segment are being underwritten in the context of current market conditions and are particularly focused in sub-markets which the Company believes to be relatively strong as compared to other markets in the region. Legacy loans, particularly in the land and speculative construction portion of this portfolio, have been largely converted to amortizing loans with regular principal and interest payments. WashingtonFirst expects any future reductions in its land and speculative construction exposure to be partially offset by increases in residential construction activities as market conditions improve.
Secured residential real estate loans represented 11.9 percent and 11.4 percent of total loans as of September 30, 2014 and December 31, 2013, respectively. In general, loans in these categories represent loans underwritten to customers who had or established a deposit relationship with the respective bank at the time the loan was originated. WashingtonFirst believes that its underwriting criteria reflect current market conditions.

49


The contractual maturity ranges or repricing schedules, as appropriate, of the loans in WashingtonFirst’s loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of September 30, 2014 are summarized in the following table:
Table M7: Loan Portfolio Maturity Schedule by Loan Class
 
As of September 30, 2014
 
One Year or Less
 
One to Five Years
 
Over Five Years
 
Total
 
(in thousands)
Construction and development
$
85,170

 
$
54,599

 
$
10,639

 
$
150,408

Commercial real estate
75,598

 
210,024

 
318,967

 
604,589

Residential real estate
8,762

 
25,361

 
87,611

 
121,734

Commercial and industrial
62,443

 
53,311

 
21,366

 
137,120

Consumer
997

 
5,878

 
2,211

 
9,086

Total loans
$
232,970

 
$
349,173

 
$
440,794

 
$
1,022,937

 
 
 
 
 
 
 
 
Loans with a predetermined interest rate
$
47,997

 
$
230,979

 
$
104,185

 
$
383,161

Loans with a floating or adjustable interest rate
184,973

 
118,194

 
336,609

 
639,776

Total loans
$
232,970

 
$
349,173

 
$
440,794

 
$
1,022,937

Asset Quality
WashingtonFirst separates its loans into the following categories, based on credit quality: pass; watch; special mention; substandard; doubtful; and loss. WashingtonFirst reviews the characteristics of each rating at least annually, generally during the first quarter of each year. For a discussion of the characteristics of these ratings, see Note 6 - Loans of WashingtonFirst’s Consolidated Financial Statements.
Table M8: Held of Investment Loan Portfolio by Risk Rating and Loan Class
 
As of September 30, 2014
Internal risk rating grades
Pass
 
Watch
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Risk rating number
1 to 5
 
6
 
7
 
8
 
9
 
 
 
(in thousands)
Construction and development
$
150,159

 
$

 
$

 
$
249

 
$

 
$
150,408

Commercial real estate
569,288

 
11,656

 
11,418

 
12,227

 

 
604,589

Residential real estate
117,278

 
2,149

 
746

 
1,561

 

 
121,734

Commercial and industrial
121,433

 
6,101

 
3,801

 
5,785

 

 
137,120

Consumer
8,951

 
123

 

 
12

 

 
9,086

Balance at end of period
$
967,109

 
$
20,029

 
$
15,965

 
$
19,834

 
$

 
$
1,022,937

As part of WashingtonFirst’s credit risk management practices, management regularly monitors the payment performance of its borrowers. A high percentage of all loans require some form of payment on a monthly basis, with a high percentage requiring regular amortization of principal. However, certain home equity lines of credit, commercial and industrial lines of credit, and construction loans generally require only monthly interest payments.
When payments are 90 days or more in arrears or when WashingtonFirst determines that it is no longer prudent to recognize current interest income on a loan, WashingtonFirst classifies the loan as non-accrual. Non-accrual loans decreased from $15.1 million as of December 31, 2013 to $8.6 million as of September 30, 2014. From time to time, a loan may be past due 90 days or more but is well secured and in the process of collection and thus warrants remaining on accrual status. As of September 30, 2014 there was one loan with a balance of $0.2 million past due more than 90 days and still accruing. As of December 31, 2013, there were no loans past due more than 90 days that were still accruing.

50


Table M9: Loan Portfolio Aging and Non-Accrual Loans by Loan Class
 
As of September 30, 2014
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
150,159

 
$

 
$

 
$

 
$
249

 
$
249

 
$
150,408

Commercial real estate
596,135

 
3,573

 

 

 
4,881

 
8,454

 
604,589

Residential real estate
119,276

 
453

 
597

 

 
1,408

 
2,458

 
121,734

Commercial and industrial
132,024

 
2,405

 
671

 

 
2,020

 
5,096

 
137,120

Consumer
8,929

 

 

 
157

 

 
157

 
9,086

Balance at end of period
$
1,006,523

 
$
6,431

 
$
1,268

 
$
157

 
$
8,558

 
$
16,414

 
$
1,022,937

 
As of December 31, 2013
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
95,271

 
$

 
$

 
$

 
$
2,053

 
$
2,053

 
$
97,324

Commercial real estate
510,043

 
613

 
2,771

 

 
8,333

 
11,717

 
521,760

Residential real estate
93,338

 
97

 
101

 

 
1,892

 
2,090

 
95,428

Commercial and industrial
117,531

 
250

 
381

 

 
2,671

 
3,302

 
120,833

Consumer
2,532

 
100

 
5

 

 
138

 
243

 
2,775

Balance at end of period
$
818,715

 
$
1,060

 
$
3,258

 
$

 
$
15,087

 
$
19,405

 
$
838,120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) For the purpose of this table, loans 1-29 days past due are included in the balance of current loans
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that are inherent in the loan portfolio at the balance sheet date. The allowance is based on the basic principle that a loss should be accrued when it is probable that the loss has occurred at the date of the financial statements and the amount of the loss can be reasonably estimated. The methodology that WashingtonFirst uses to determine the level of its allowance for loan losses is described in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Allowance for Loan Losses.”
The allowance for loan losses was $9.0 million as of September 30, 2014, or approximately 0.88 percent of loans outstanding, compared to $8.5 million or approximately 1.02 percent of loans outstanding as of December 31, 2013 and $7.5 million or approximately 0.92 percent of loans outstanding, as of September 30, 2013. WashingtonFirst has allocated $3.1 million as of September 30, 2014 for specific non-performing loans. For the three months ended September 30, 2014, WashingtonFirst recorded $0.9 million in provisions for loan losses, $0.3 million in charge-offs and $29,000 in recoveries, compared to $1.8 million in provision for loans losses, $0.2 million in charge-off and $7,000 in recoveries for the three months ended September 30, 2013. For the nine months ended September 30, 2014, WashingtonFirst recorded $2.2 million in provisions for loan losses, $2.0 million in charge-offs and $0.3 million in recoveries, compared to $3.9 million in provision for loans losses, $2.7 million in charge-off and $80,000 in recoveries for the nine months ended September 30, 2013.
In connection with the acquisition of Alliance in December 2012, as well as the Millennium Transaction in February 2014, the respective allowances for loan losses that had been on the books of Alliance and Millennium were eliminated and each loan was individually measured and recorded at fair value at the time of acquisition. At acquisition, the loan portfolio acquired from Alliance had a book value of $277.6 million, and was recorded at a fair value of $268.3 million. The Millennium loan portfolio had a book value of $57.2 million at the date of the transaction and was recorded at a fair value of $51.6 million.
Of the Bank’s $1.0 billion in gross loans outstanding as of September 30, 2014, approximately $178.2 million or 17.4 percent were recorded on the books at fair value in connection with the acquisition of Alliance and the Millennium Transaction and have an aggregate discount on the books of $6.6 million as of September 30, 2014. This discount is a net amount consisting of credit-related mark-downs of $7.3 million and yield-related mark-ups of $0.7 million.

51


The adjustment required to reconcile GAAP allowance for loan losses with WashingtonFirst’s non-GAAP adjusted allowance for loan losses and adjusted allowance for loan losses to total loans ratios is the addition of the credit purchase accounting marks on purchased loans in the portfolio. Loans that were acquired under the purchase accounting method are carried at book value with certain accounting marks set up on them at the time of purchase. These accounting marks can be pricing marks or credit marks. Pricing marks account for the difference in current interest rates and the interest rate on the loan being acquired, and may be either positive or negative. Credit marks may only be negative and are similar to an allowance for loans losses based on credit quality. Therefore, in determining the adjusted allowance for loan losses and related ratio, the credit mark component is added to the allowance for loan losses and to the total loans held for investment. Below is a reconciliation of the allowance for loan losses and related ratios to the non-GAAP adjusted allowance for loan losses and related ratios as of September 30, 2014 and December 31, 2013:
Table M10: Reconciliation of GAAP Allowance Ratio to Non-GAAP Allowance Ratio
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
GAAP allowance for loan losses
$
8,974

 
$
8,534

GAAP loans held for investment, at amortized cost
1,022,937

 
838,120

 
 
 
 
GAAP allowance for loan losses to total loans
0.88
%
 
1.02
%
 
 
 
 
GAAP allowance for loan losses
$
8,974

 
$
8,534

Plus: Credit purchase accounting marks
7,284

 
5,538

Non-GAAP adjusted allowance for loan losses
$
16,258

 
$
14,072

 
 
 
 
GAAP loans held for investment, at amortized cost
$
1,022,937

 
$
838,120

Plus: Credit purchase accounting marks
7,284

 
5,538

Non-GAAP loans held for investment, at amortized cost
$
1,030,221

 
$
843,658

 
 
 
 
Non-GAAP adjusted allowance for loan losses to total loans
1.58
%
 
1.67
%
As part of its routine credit administration process, WashingtonFirst periodically engages an outside consulting firm to review its loan portfolio and ALLL methodology. The information from these reviews is used to monitor individual loans as well as to evaluate the overall adequacy of the allowance for loan losses. In reviewing the adequacy of the allowance for loan losses at each period, management takes into consideration the historical loan losses experienced by WashingtonFirst, current economic conditions affecting the borrowers’ ability to repay, the volume of loans, trends in delinquent, non-accruing, and potential problem loans, and the quality of collateral securing loans. Loan losses are charged against the allowance when WashingtonFirst believes that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. After charging off all known losses incurred in the loan portfolio, management considers on a quarterly basis whether the allowance for loan losses remains adequate to cover its estimate of probable future losses, and establishes a provision for loan losses as appropriate. Because the allowance for loan losses is an estimate, the composition of the loan portfolio changes and allowance for loan losses review process continues to evolve, there may be changes to this estimate and elements used in the methodology that may have an effect on the overall level of allowance maintained.
The allowance for loan losses model is reviewed and evaluated each quarter by the Bank’s management to ensure its adequacy and applicability in relation to the Bank’s past and future experience with the loan portfolio, from a credit quality perspective.

52


Table M11: Analysis of the Allowance for Loan Losses
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Balance at beginning of period
$
8,332

 
$
5,938

 
$
8,534

 
$
6,260

Provision for loan losses
900

 
1,800

 
2,205

 
3,875

Charge-offs:
 
 
 
 
 
 
 
Construction and development

 
(17
)
 
(100
)
 
(17
)
Commercial real estate
(147
)
 

 
(938
)
 
(265
)
Residential real estate
(140
)
 
(220
)
 
(681
)
 
(681
)
Commercial and industrial

 

 
(70
)
 
(1,743
)
Consumer loans

 

 
(232
)
 
(1
)
Total charge-offs
(287
)
 
(237
)
 
(2,021
)
 
(2,707
)
Recoveries:
 
 
 
 
 
 
 
Construction and development

 
(11
)
 

 

Commercial real estate

 

 
102

 
8

Residential real estate
17

 
9

 
136

 
29

Commercial and industrial
6

 
1

 
12

 
35

Consumer
6

 
8

 
6

 
8

Total recoveries
29

 
7

 
256

 
80

Net charge-offs
(258
)
 
(230
)
 
(1,765
)
 
(2,627
)
Balance at end of period
$
8,974

 
$
7,508

 
$
8,974

 
$
7,508

 
 
 
 
 
 
 
 
Allowance for loan losses to total loans
0.88
%
 
0.92
%
 
0.88
%
 
0.92
%
Non-GAAP adjusted allowance for loan losses to total loans
1.58
%
 
1.89
%
 
1.58
%
 
1.89
%
Allowance for loan losses to non-accrual loans
104.86
%
 
50.65
%
 
104.86
%
 
50.65
%
Allowance for loan losses to non-performing assets
76.81
%
 
35.78
%
 
76.81
%
 
35.78
%
Non-performing assets to total assets
0.87
%
 
1.87
%
 
0.87
%
 
1.87
%
Net charge-offs to average loans (1)
0.10
%
 
0.12
%
 
0.26
%
 
0.45
%
(1) Annualized
 
 
 
 
 
 
 
Table M12: Changes in Allowance for Loan Losses by Loan Class
 
September 30, 2014
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
For the Three Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
1,001

 
$
4,407

 
$
599

 
$
2,302

 
$
23

 
$
8,332

Provision for/(release of) loan losses
135

 
769

 
184

 
(179
)
 
(9
)
 
900

Charge-offs

 
(147
)
 
(140
)
 

 

 
(287
)
Recoveries

 

 
17

 
6

 
6

 
29

Ending Balance
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974

 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
681

 
$
5,027

 
$
920

 
$
1,801

 
$
105

 
$
8,534

Provision for loan losses
555

 
838

 
285

 
386

 
141

 
2,205

Charge-offs
(100
)
 
(938
)
 
(681
)
 
(70
)
 
(232
)
 
(2,021
)
Recoveries

 
102

 
136

 
12

 
6

 
256

Ending Balance
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974


53


Table M13: Loan Held for Investment and Related Allowance for Loan Losses by Impairment Method and Loan Class
 
As of September 30, 2014
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
150,159

 
$
579,286

 
$
117,536

 
$
127,509

 
$
8,917

 
$
983,407

Evaluated individually for impairment
249

 
25,303

 
4,198

 
9,611

 
169

 
39,530

 
$
150,408

 
$
604,589

 
$
121,734

 
$
137,120

 
$
9,086

 
$
1,022,937

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
1,124

 
$
3,499

 
$
368

 
$
880

 
$
19

 
$
5,890

Evaluated individually for impairment
12

 
1,530

 
292

 
1,249

 
1

 
3,084

 
$
1,136

 
$
5,029

 
$
660

 
$
2,129

 
$
20

 
$
8,974

Non-performing Assets
Non-accrual Loans. A loan may be placed on non-accrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. WashingtonFirst closely monitors individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner with minimum exposure to WashingtonFirst. WashingtonFirst maintains a policy of adding an appropriate amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition, specific credit extended by it, general economic conditions and other factors and external circumstances identified during the process of estimating probable losses in its loan portfolio.
As of September 30, 2014, there was $8.6 million in loans on non-accrual status compared to $15.1 million as of December 31, 2013. The $8.6 million non-accrual loan balance consists primarily of loans secured by commercial real estate. The specific allowance for impaired loans as of September 30, 2014 was $3.1 million.
Total Non-performing Assets. As of September 30, 2014, WashingtonFirst had $11.7 million of non-performing assets compared to $22.3 million as of December 31, 2013, a decrease of $10.6 million. The ratio of non-performing assets to total assets decreased to 0.87 percent as of September 30, 2014 from 1.97 percent as of December 31, 2013, a 110 basis point decrease. The ratio of non-performing assets to total assets as of September 30, 2014 fell below WashingtonFirst’s historical trends primarily due to payoffs of loans that were on non-accrual status and reclassifications of loans out of TDR status.
Table M14: Non-Performing Assets
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
Non-accrual loans
$
8,558

 
$
15,087

90+ days past due still accruing
157

 

Troubled debt restructurings still accruing
1,807

 
5,715

Other real estate owned
1,161

 
1,463

Total non-performing assets
$
11,683

 
$
22,265

 
 
 
 
Non-performing assets to total assets
0.87
%
 
1.97
%
Other Real Estate Owned (OREO). As of September 30, 2014, WashingtonFirst had $1.2 million classified as OREO on the balance sheet, compared to $1.5 million as of December 31, 2013, and $2.2 million as of September 30, 2013. During the three months ended September 30, 2014, WashingtonFirst did not sell any OREO properties, but did collect $20,000 related to one OREO property sale that fell through, therefore, the the cash was applied to the OREO property book balance. Comparatively, during the three months ended September 30, 2013, WashingtonFirst sold two OREO properties collecting cash proceeds of $19,000, and realized a gain of $19,000. During the nine months ended September 30, 2014, WashingtonFirst sold 4 OREO properties collecting cash proceeds of $0.5 million, realizing net gains of $0.1 million, compared to the sale of eight OREO properties collecting cash proceeds of $2.1 million, realizing net gains of $0.2 million for the nine months ended September 30, 2014.

54


During the first nine months of 2014, WashingtonFirst did not acquire any properties that were classified as OREO through foreclosure. During the three and nine months ended September 30, 2013, WashingtonFirst acquired one OREO property with a fair value of $0.2 million.
Table M15: Changes in Other Real Estate Owned
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(in thousands)
Balance at beginning of period
$
889

 
$
2,068

 
$
1,463

 
$
3,294

Properties acquired at foreclosure
360

 
180

 
360

 
1,190

Sales of foreclosed properties
(20
)
 

 
(404
)
 
(1,838
)
Valuation adjustments
(68
)
 
(27
)
 
(258
)
 
(425
)
Balance at end of period
$
1,161

 
$
2,221

 
$
1,161

 
$
2,221

Investment Securities - Available-for-sale
WashingtonFirst actively manages its portfolio duration and composition in response to changing market conditions and changes in balance sheet risk management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions, public funds and repurchase agreements. The total fair value of the amount of the investment securities accounted for under available-for-sale accounting was $171.0 million as of September 30, 2014 compared to $145.4 million as of December 31, 2013. The increase is primarily attributable to additional purchases of investment securities in excess of amounts that matured during the course of the year in order to increase the proportion of investments on the balance sheet and to increase interest income.
The investment portfolio contains U.S. Treasury securities, callable and non-callable U.S. Government corporation and agency securities, U.S. Government collateralized mortgage obligations (“CMOs”), U.S. Government mortgage backed securities (“MBS”) and municipal securities. When prepayments on various CMOs and MBS instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield. As of September 30, 2014, U.S. Government and agency securities represented $55.6 million or 32.5 percent of the portfolio, while CMOs and MBS were $99.3 million, or 58.1 percent of the portfolio, and municipal securities were $16.0 million, or 9.4 percent of the portfolio.
The yield on the taxable available-for-sale investment securities portfolio for the three and nine months ended September 30, 2014 was 1.67 percent and 1.72 percent, respectively, compared to 1.79 percent and 1.64 percent for the three and nine months ended September 30, 2013. The tax equivalent yield on the tax-exempt available-for-sale investment securities portfolio for the three and nine months ended September 30, 2014 was 3.16 percent and 3.59 percent, respectively, compared to 3.23 percent and 3.25 percent for the three and nine months ended September 30, 2013.
The amortized cost, fair value and yield of investments by remaining contractual maturity for available-for-sale investment securities as of September 30, 2014 are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.
Table M16: Available-for-Sale Investment Securities Contractual Maturity
 
As of September 30, 2014
 
Amortized Cost
 
Fair Value
 
Weighted-Average Yield
 
(in thousands)
Due within one year
$
1,220

 
$
1,247

 
3.37
%
Due after one year through five years
47,260

 
47,570

 
1.71
%
Due after five years through ten years
41,176

 
41,157

 
1.93
%
Due after ten years
81,603

 
80,986

 
1.90
%
Total available-for-sale investment securities
$
171,259

 
$
170,960

 
1.86
%

55


Other Equity Securities
WashingtonFirst’s securities portfolio contains restricted stock investments that are required to be held as part of its banking operations. These include stock of the FHLB, Atlantic Central Bankers Bank (“ACBB”) and Community Bankers Bank (“CBB”).
Table M17: Composition of Other Equity Securities
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
FHLB stock
$
3,980

 
$
3,174

ACBB
100

 
100

CBB
256

 
256

Total other equity securities
$
4,336

 
$
3,530

Deposits
WashingtonFirst seeks deposits within its market area by offering high-quality customer service, using technology to deliver deposit services effectively and paying competitive interest rates. A significant portion of its client base and deposits are directly related to home sales and refinancing activity, including those from title and escrow agency customers.
As of September 30, 2014, the deposit portfolio totaled $1.1 billion, comprising of $322.2 million of non-interest bearing deposits and $804.2 million of interest bearing deposits. As of December 31, 2013, the deposit portfolio totaled $948.9 million, which was composed of $231.3 million of non-interest bearing deposits and $717.6 million of interest bearing deposits. The $177.5 million increase in deposits during the nine months ended September 30, 2014 is primarily the result of the Millennium Transaction during February 2014, as well as organic growth. For more information regarding the deposits acquired, see Note 3—Millennium Transaction.
The average balance of interest bearing deposits for the three and nine months ended September 30, 2014 was $799.5 million and $785.9 million, respectively, compared to $674.4 million and $664.2 million for the three and nine months ended September 30, 2013, respectively. This increase is also the result of the Millennium Transaction in February 2014, as well as organic growth of the deposit base. The average cost on these interest-bearing deposits for the three and nine months ended September 30, 2014 was 0.70 percent and 0.68 percent, respectively, compared to 0.69 percent and 0.73 percent for the same period in 2013. During the period, some deposits reset at lower rates concurrent with market conditions and the mix of interest bearing balances changed, leading to a lower interest expense.
Average non-interest bearing demand deposits for the three and nine months ended September 30, 2014 were $283.1 million and $261.3 million, respectively, compared to $227.8 million and $221.3 million, respectively, compared to the same periods in 2013, an increase resulting from the Millennium Transaction and organic growth.
Table M18: Certificates of Deposit Greater Than or Equal to $100,000 by Maturity
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Three months or less
$
52,119

 
$
31,521

Three through six months
36,165

 
62,096

Six through twelve months
53,125

 
37,344

Over twelve months
116,138

 
77,353

Total certificates of deposit greater than or equal to $100,000
$
257,547

 
$
208,314

Other Borrowings
Other borrowings consists of customer repurchase agreements which are standard commercial bank transactions that involve a WashingtonFirst customer instead of a wholesale bank or broker. This product is an accommodation to commercial customers and individuals that require safety for their funds beyond the FDIC deposit insurance limits. WashingtonFirst believes this product offers it a stable source of financing at a reasonable market rate of interest and is continuing the program. As of September 30, 2014, WashingtonFirst had $14.4 million of customer repurchase agreements, compared to $10.2 million as of December 31, 2013.

56


FHLB Advances
The FHLB is a significant source of funding for WashingtonFirst. WashingtonFirst augments its funding portfolio with FHLB advances for both liquidity and interest rate management. The book value as of September 30, 2014 and December 31, 2013 contains a $3.1 million and $3.5 million purchase price adjustment, respectively, associated with the advance acquired in the Alliance acquisition mentioned above and is being amortized over the life of the advance. Advances are secured by a lien on certain loans and securities of WashingtonFirst Bank that are pledged from time to time.
Table M19: Composition of FHLB Advances
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
As of period ended:
 
 
 
FHLB advances
$
66,411

 
$
43,478

Weighted average outstanding effective interest rate
1.95
%
 
1.30
%
Table M20: FHLB Advances Average Balances
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(dollars in thousands)
Averages for the period:
 
 
 
 
 
 
 
FHLB advances
$
71,160

 
$
30,180

 
$
54,541

 
$
34,385

Average effective interest rate paid during the period
1.56
%
 
1.84
%
 
1.69
%
 
2.04
%
Maximum month-end balance outstanding
$
76,491

 
$
30,181

 
$
76,491

 
$
40,689

Long-term Borrowings
Table M21: Long-term Borrowings Detail
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Subordinated debt
$
2,273

 
$
2,247

Trust preferred capital notes
7,711

 
7,607

Long-term borrowings
$
9,984

 
$
9,854

On June 15, 2012, the Bank issued $2.5 million in subordinated debt (the “Bank Subordinated Debt”) to Community Bancapital LP (“CBC”). The Bank Subordinated Debt has a maturity of nine (9) years, is due in full on June 14, 2021, and carries an 8.0 percent interest rate, payable quarterly. In connection with the issuance of the Bank Subordinated Debt, the Company issued warrants to CBC that would allow it to purchase 60,657 shares of common stock at a share price equal to $10.30. These warrants have been retroactively adjusted to reflect the effect of all stock dividends and expire if not exercised on or before June 15, 2020. In recording this transaction, the warrants were valued at $0.3 million, which was treated as an increase in additional paid-in capital, and the liability associated with the Bank Subordinated Debt was recorded at $2.2 million. The $0.3 million discount on the Bank Subordinated Debt is being expensed monthly over the life of the debt.
On June 30, 2003, Alliance invested $0.3 million as common equity into a wholly-owned Delaware statutory business trust (the “Trust”). Simultaneously, the Trust privately issued $10.0 million face amount of thirty-year floating rate trust preferred capital securities (the “Trust Preferred Capital Notes”) in a pooled trust preferred capital securities offering. The Trust used the offering proceeds, plus the equity, to purchase $10.3 million principal amount of Alliances’ floating rate junior subordinated debentures due 2033 (the “Subordinated Debentures”). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time, without penalty. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15 percent subject to quarterly interest rate adjustments. The interest rates as of September 30, 2014 and December 31, 2013 were 3.38 percent and 3.39 percent, respectively. The Trust Preferred Capital Notes are guaranteed by WashingtonFirst on a subordinated basis, and were recorded on WashingtonFirst’s books at the time of the Alliance acquisition at a discounted amount of $7.5 million, which was the fair value of the instruments at the time of the acquisition. The $2.5 million discount is being expensed monthly over the life of the obligation. Under the indenture governing the Trust Preferred Capital Notes, WashingtonFirst has the right to defer payments of interest for up to twenty consecutive quarterly periods.

57


Under the indenture governing the Trust Preferred Capital Notes, WashingtonFirst has the right to defer payments of interest for up to twenty consecutive quarterly periods. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. WashingtonFirst is not currently deferring the interest payments.
All or a portion of the Trust Preferred Capital Notes may be included as Tier 1 Capital in the regulatory computation of capital adequacy. Under current regulatory guidelines, the Trust Preferred Capital Notes may constitute no more than 25 percent of total Tier 1 Capital. Any amount not eligible to be counted as Tier 1 Capital is considered to be Tier 2 Capital. As of September 30, 2014, the entire amount of Trust Preferred Capital Notes was considered Tier 1 Capital.
Capital Resources
Capital management consists of providing equity to support WashingtonFirst’s current and future operations. The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve Board and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve Board currently require all bank holding companies to have “Tier 1 capital” of at least 4.0 percent and “total risk-based” capital (Tier 1 and Tier 2) of at least 8.0 percent of total risk-weighted assets. “Tier 1 capital” generally includes common shareholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. “Tier 2 capital” may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”
The Federal Reserve Board has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated tangible assets, or “leverage ratio,” of 3.0 percent for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0 percent. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.
Pursuant to the 1991 Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency revised its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Bank is subject to capital adequacy guidelines of the FDIC that are substantially similar to the Federal Reserve Board’s guidelines. Also pursuant to FDICIA, the FDIC has promulgated regulations setting the levels at which an insured institution such as the Bank would be considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the FDIC’s regulations, the Bank is classified “well-capitalized” for purposes of prompt corrective action.
Both the Company and the Bank are considered “well capitalized” under the risk-based capital guidelines currently in effect for the federal banking regulatory agencies, and maintaining a “well capitalized” regulatory position is important for each organization. Both WashingtonFirst and the Bank monitor their respective capital positions to ensure appropriate capital for the respective risk profile of each organization, as well as sufficient levels to promote depositor and investor confidence in the respective organizations.
Total shareholders’ equity was $111.1 million as of September 30, 2014 compared to the December 31, 2013 level of $107.6 million. The change in equity is primarily attributable to current earnings and cash dividends declared during 2014.

58


Table M22: Capital Categories, Capital Ratios and Minimum Capital Ratios Required by Bank Regulators
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Tier 1 Capital:
 
 
 
Common stock
$
82

 
$
76

Capital surplus
92,238

 
85,636

Preferred stock
13,347

 
17,796

Accumulated earnings
5,663

 
5,605

Less: disallowed assets
(6,937
)
 
(3,943
)
Add: Trust preferred
7,711

 
7,607

Total Tier 1 Capital
$
112,104

 
$
112,777

 
 
 
 
Tier 2 Capital:
 
 
 
Qualifying allowance for loan losses
$
8,974

 
$
8,534

Qualifying subordinated debt
2,500

 
2,500

Total Tier 2 Capital
$
11,474

 
$
11,034

 
 
 
 
Total risk-based capital
$
123,578

 
$
123,811

Risk weighted assets
1,087,090

 
881,235

Qualifying quarterly average assets
1,283,973

 
1,070,599

Table M23: Capital Ratios and Regulatory Requirements Summary
 
September 30, 2014
 
December 31, 2013
 
To Be Well Capitalized Under Prompt Corrective Action Provisions
 
For Minimum Capital Adequacy Requirements
Capital Ratios:
 
 
 
 
 
 
 
Total risk-based capital ratio
11.37
%
 
14.05
%
 
10.00%
 
8.00%
Tier 1 risk-based capital ratio
10.31
%
 
12.80
%
 
6.00%
 
4.00%
Tier 1 leverage ratio
8.73
%
 
10.53
%
 
5.00%
 
4.00%
WashingtonFirst Bank and WashingtonFirst monitor the capital levels and the risk profile of the entities to determine if capital levels are sufficient for the risk profiles of the organization. For a discussion of the new capital requirements in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014.
Liquidity
Liquidity is the ability to meet the demand for funds from depositors and borrowers as well as expenses incurred in the operation of the business. WashingtonFirst has a formal liquidity management policy and a contingency funding policy used to assist management in executing its liquidity strategies. Similar to other banking organizations, WashingtonFirst monitors the need for funds to support depositor activities and funding of loans. WashingtonFirst’s client base includes a significant number of title and escrow businesses which have more deposit inflows and outflows than a traditional commercial business relationship. WashingtonFirst maintains additional liquidity sources to support the needs of this client base. Loss of relationship officers or clients could have a material impact on WashingtonFirst’s liquidity position through a reduction in average deposits.
WashingtonFirst’s management monitors the Company’s overall liquidity position daily. WashingtonFirst has available federal funds lines with correspondent banks as well as FHLB advances at its disposal.
As of September 30, 2014, WashingtonFirst had $100.8 million in cash and cash equivalents to support the business activities and deposit flows of its clients. WashingtonFirst maintains credit lines at the FHLB and other correspondent banks. As of September 30, 2014, WashingtonFirst had a total credit line of $277.6 million with the FHLB with an unused portion of $214.3 million. Borrowings with the FHLB have certain collateral requirements and are subject to disbursement approval by the FHLB. As of September 30, 2014, WashingtonFirst also had $64.0 million in unsecured borrowing capacity from correspondent banks. As of September 30, 2014, WashingtonFirst did not have any outstanding borrowings from its correspondent banks. All borrowings from correspondent banks are subject to disbursement approval. In addition to the borrowing capacity described above, WashingtonFirst may sell investment securities, loans and other assets to generate additional liquidity. Management believes that it has sufficient liquidity to protect depositors, provide for business growth and comply with regulatory requirements.

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Concentrations
Substantially all of WashingtonFirst’s loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C. metropolitan area. WashingtonFirst’s overall business includes a significant focus on real estate activities, including real estate lending, title companies and real estate settlement businesses. As of September 30, 2014, commercial real estate loans were 59.1 percent of the total loan portfolio, construction and development loans were 14.7 percent of the total loan portfolio and residential real estate loans were 11.9 percent of the total loan portfolio. In addition, a substantial portion of our non-interest bearing deposits is generated by our title and escrow company clients. See “Item 1A. Risk Factors – Risks Associated With WashingtonFirst’s Business – WashingtonFirst’s profitability depends significantly on local economic conditions” in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014.
Off-Balance Sheet Arrangements
WashingtonFirst enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, WashingtonFirst has no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required as the Company is a smaller reporting company.
Item 4. Controls and Procedures
(a)
Management's Evaluation of Disclosure Controls and Procedures. WashingtonFirst Bank maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings under the Securities Exchange Act of 1934 (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to WashingtonFirst’s management on a timely basis to allow decisions regarding required disclosure. Management, including WashingtonFirst’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of WashingtonFirst’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2014.
WashingtonFirst carried out the evaluation of the effectiveness of its disclosure controls and procedures, required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that WashingtonFirst’s disclosure controls and procedures were effective as of September 30, 2014.

(b)
Changes in Internal Control Over Financial Reporting. There were no changes in WashingtonFirst’s internal control over financial reporting during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, WashingtonFirst’s internal control over financial reporting.


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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, WashingtonFirst becomes involved in litigation relating to claims arising in the normal course of its business. In the opinion of management, there are no pending or threatened legal proceedings which would have a material adverse effect on WashingtonFirst’s financial condition or results of operations.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 19, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity by WashingtonFirst during the fiscal period covered by this report that have not been previously reported on a From 8-K.
Item 3. Defaults Upon Senior Securities
(a)    None.
(b)    None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a)    None.
(b)    None.

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Item 6. Exhibits
(a)     The following financial statements, financial statement schedules and exhibits are filed as a part of this report:
1.
Financial Statements. WashingtonFirst’s consolidated financial statements are included in Item 1 of this report.
2.
Financial Statement Schedules. Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in WashingtonFirst’s financial statements and related notes.
3.
Exhibits. The following exhibits are filed herewith pursuant to the requirements of Item 601 of Regulation S-K:

EXHIBIT LIST

Exhibit
 
Description
 
 
 
2.1†
 
Agreement and Plan of Reorganization, dated as of May 3, 2012, by and among WashingtonFirst Bankshares, Inc., Alliance Bankshares Corporation and Alliance Bank Corporation (included as Appendix A to Amendment No. 3 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on November 9, 2012 (File No. 333-183255)).
 
 
 
2.2
 
Amendment No. 1, dated August 9, 2012, to the Agreement and Plan of Reorganization, dated as of May 3, 2012, by and among WashingtonFirst Bankshares, Inc., Alliance Bankshares Corporation and Alliance Bank Corporation (included as Appendix A to Amendment No. 3 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on November 9, 2012 (File No. 333-183255)).
 
 
 
2.3
 
Purchase and Assumption Agreement by and among the Federal Deposit Insurance Corporation, Receiver of Millennium Bank, N.A, the Federal Deposit Insurance Corporation and WashingtonFirst Bank, dated as of February 28, 2014 (filed as Exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on March 5, 2014 (File No. 001-35768)).
 
 
 
3.1
 
Articles of Incorporation of WashingtonFirst Bankshares, Inc. filed February 25, 2009, as amended (filed as Exhibit 3.1 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on December 21, 2012 (File No. 001-35768)).
 
 
 
3.2
 
Articles of Amendment to the Articles of Incorporation of WashingtonFirst Bankshares, Inc. filed January 28, 2013 (filed as Exhibit 3.1 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst on February 6, 2013 (File No. 001-35768)).
 
 
 
3.3
 
Bylaws of WashingtonFirst Bankshares, Inc. adopted February 25, 2009 (included as Exhibit 3.7 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255)).
 
 
 
4.1
 
Form of certificate representing shares of WashingtonFirst Bankshares, Inc.’s common stock (included as Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
4.2
 
WashingtonFirst Bankshares, Inc. Certificate of Designations of Senior Non-Cumulative Perpetual Preferred Stock, Series D (included as part of Exhibit 3.5 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255)).
 
 
 
4.3
 
Form of certificate representing shares of WashingtonFirst Bankshares, Inc.’s non-voting common stock (included as Exhibit 4.3 to Amendment No. 2 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on November 5, 2012 (File No. 333-183255)).
 
 
 
10.1
 
Second Amended and Restated Executive Employment Agreement, dated September 21, 2012, by and between WashingtonFirst Bank and Shaza L. Andersen (included as Exhibit 10.1 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
*
 
Filed with this Quarterly Report on Form 10-Q.
 
 
 
**
 
Furnished with this Quarterly Report on Form 10-Q.
 
 
 
 
The schedules to this agreement have been omitted for this filing pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish copies of such schedules to the SEC upon request.

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Exhibit
 
Description
 
 
 
10.2
 
Second Amended and Restated Severance Payment Agreement, dated September 21, 2012, by and between WashingtonFirst Bank and Richard D. Horn (included as Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
10.3
 
Second Amended and Restated Severance Payment Agreement, dated September 21, 2012, by and between WashingtonFirst Bank and George W. Connors, IV (included as Exhibit 10.3 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
10.4
 
Investment Agreement, dated as of May 3, 2012, by and between WashingtonFirst Bankshares, Inc. and Endicott Opportunity Partners III, L.P. (included as Exhibit 10.4 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255)).
 
 
 
10.5
 
Investment Agreement, dated as of June 20, 2012, by and between WashingtonFirst Bankshares, Inc. and Castle Creek Capital Partners IV, L.P. (included as Exhibit 10.5 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255)).
 
 
 
10.6
 
WashingtonFirst Bankshares, Inc. 2010 Equity Compensation Plan (including form of award agreement) (included as Exhibit 99.1 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on May 3, 2013 (File No. 001-35768)).
 
 
 
10.7
 
Form on Incentive Stock Option Agreement (included as Exhibit 99.2 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on May 3, 2013 (File No. 001-35768)).
 
 
 
10.8
 
Form of Nonqualified Stock Option Agreement (included as Exhibit 10.7 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255))).
 
 
 
10.9
 
Form of Restricted Stock Agreement (included as Exhibit 10.8 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on August 13, 2012 (File No. 333-183255)).
 
 
 
10.10
 
Form of Indemnification Agreement between WashingtonFirst Bankshares, Inc. and each of the directors and executive officers thereof (included as Exhibit 10.9 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
10.11
 
Amendment No. 1 to Investment Agreement, dated September 21, 2012, by and between WashingtonFirst Bankshares, Inc. and Endicott Opportunity Partners III, L.P. (included as Exhibit 10.10 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
10.12
 
Amendment No. 1 to Investment Agreement, dated September 21, 2012, by and between WashingtonFirst Bankshares, Inc. and Castle Creek Capital Partners IV, L.P. (included as Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on September 21, 2012 (File No. 333-183255)).
 
 
 
10.13
 
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective April 1, 2014 between WashingtonFirst Bank and Shaza L. Andersen (included as Exhibit 10.13 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on April 29, 2014 (File No. 001-35768)).
 
 
 
*
 
Filed with this Quarterly Report on Form 10-Q.
 
 
 
**
 
Furnished with this Quarterly Report on Form 10-Q.
 
 
 
 
The schedules to this agreement have been omitted for this filing pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish copies of such schedules to the SEC upon request.


63


Exhibit
 
Description
 
 
 
10.14
 
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective April 1, 2014 between WashingtonFirst Bank and George W. Connors, IV (included as Exhibit 10.14 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on April 29, 2014 (File No. 001-35768)).
 
 
 
10.15
 
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective April 1, 2014 between WashingtonFirst Bank and Matthew R. Johnson(included as Exhibit 10.15 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on April 29, 2014 (File No. 001-35768)).
 
 
 
10.16
 
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective April 1, 2014 between WashingtonFirst Bank and Richard D. Horn (included as Exhibit 10.16 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on April 29, 2014 (File No. 001-35768)).
 
 
 
10.17
 
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective October 1, 2014 between WashingtonFirst Bank and Joseph S. Bracewell (included as Exhibit 10.17 to Form 8-K filed with the Securities and Exchange Commission by WashingtonFirst Bankshares, Inc. on October 17, 2014 (File No. 001-35768)).
 
 
 
31.1*
 
Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
 
Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1*
 
Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101**
 
Interactive data files pursuant to Rule 405 of Regulation S-T: WashingtonFirst Bankshares, Inc.’s (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013; (iv) Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and 2013; (v) Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2014 and 2013; and (vi) the notes to the foregoing Consolidated Financial Statements.
 
 
 
*
 
Filed with this Quarterly Report on Form 10-Q.
 
 
 
**
 
Furnished with this Quarterly Report on Form 10-Q.
 
 
 
 
The schedules to this agreement have been omitted for this filing pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish copies of such schedules to the SEC upon request.






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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.
 
 
 
 
 
WASHINGTONFIRST BANKSHARES, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
November 12, 2014
 
 
 
/s/ Shaza Andersen
Date
 
 
 
Shaza L. Andersen
 
 
 
 
Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
November 12, 2014
 
 
 
/s/ Matthew Johnson
Date
 
 
 
Matthew R. Johnson
 
 
 
 
Executive Vice President & Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)


65