Add
ABVA to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ABVA > SEC Filings for ABVA > Form 10-Q on 14-Nov-2012 | All Recent SEC Filings |
14-Nov-2012
Quarterly Report
The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of Bankshares and the Bank on a consolidated basis. This discussion and analysis should be read in conjunction with Bankshares' Annual Report on Form 10-K for the year ended December 31, 2011, and the unaudited consolidated financial statements and accompanying notes included elsewhere in this report.
Internet Access to Corporate Documents
Information about Bankshares can be found on the Bank's website at www.alliancebankva.com. Under "Documents / SEC Filings" in the Investor Relations section of the website, Bankshares posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). All such filings are available free of charge.
The information available on the Bank's website is not part of the Quarterly Report on Form 10-Q or any other report filed by Bankshares with the SEC.
Forward-Looking Statements
Some of the matters discussed below and elsewhere in this report include forward-looking statements. Forward-looking statements often use words such as "believe," "expect," "plan," "may," "will," "should," "project," "contemplate," "anticipate," "forecast," "intend" or other words of similar meaning. Forward-looking statements in this report may include, but are not limited to, statements regarding the proposed merger (the Merger) of Bankshares and WashingtonFirst Bankshares, Inc., estimated capital requirements under the MOU to be compliant with applicable capital adequacy rules, profitability, liquidity, Bankshares' loan portfolio, adequacy of the allowance for loan losses and provisions for loan losses, trends regarding net charge-offs, trends regarding levels of non-performing assets, interest rates and yields, interest rate sensitivity, market risk, regulatory developments, capital requirements, business strategy, the effects of Bankshares' efforts to reposition its business and other goals or objectives.
You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. The forward-looking statements Bankshares makes in this report are subject to significant risks, assumptions and uncertainties, including among other things, the following important factors that could affect the actual outcome of future events:
• Changes in the strength of the national economy in general and the local economies in Bankshares market areas that adversely affect Bankshares' customers and their ability to transact profitable business with us, including the ability of Bankshares' borrowers to repay their loans according to their terms or a change in the value of the related collateral;
• Retention of existing employees;
• Maintaining and developing well established and valuable client relationships and referral source relationships;
• Direct and substantive competition from other financial services companies targeting certain key business lines;
• Other competitive factors within the financial services industry;
• Changes in the availability of funds resulting in increased costs or reduced liquidity;
• Changes in accounting policies, rules and practices;
• Changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions Bankshares does business with;
• The timing of and value realized upon the sale of Other Real Estate Owned (OREO) property;
• Changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates;
• Fiscal and governmental policies of the United States federal government;
• Reactions in financial markets related to potential or actual downgrades in the sovereign credit rating of the United States and the budget deficit or national debt of the United States government;
• The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, related regulatory rulemaking processes and other legislative and regulatory initiatives on the regulation and supervision of financial institutions, specifically depository institutions;
• The impact of changes to capital requirements that apply to financial institutions and depository institutions, including changes related to the proposed Basel III capital standards;
• Changes in Bankshares' and the Bank's risk profile that cause the amount of new capital necessary for compliance with applicable capital adequacy rules to be materially different from Bankshares' estimate;
• Changes in the way the FDIC insurance premiums are assessed;
• Changes in interest rates and market prices, which could reduce Bankshares' net interest margins, asset valuations and expense expectations;
• Timing and implementation of certain balance sheet strategies;
• Impairment concerns and risks related to Bankshares' investment portfolio, and the impact of fair value accounting, including income statement volatility;
• Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;
• Changes in tax laws and regulations;
• Bankshares' ability to recognize future tax benefits;
• Impacts of implementing various accounting standards;
• Deposit attrition, operating costs, customer losses and business disruption in connection with the Merger, including adverse effects on relationships with employees, may be greater than expected;
• The ability to complete the Merger as expected and within the expected timeframe;
• The possibility that required regulatory and shareholder approvals of the Merger may not be obtained, or one or more of the other conditions to the completion of the Merger may not be satisfied;
• The expected growth opportunities or cost savings from the Merger may not be fully realized or may take longer to realize than expected; and
• Other factors described from time to time in our SEC filings.
In addition, Bankshares' business and financial performance could be impacted as the financial industry restructures in the current environment, both by changes in the creditworthiness and performance of Bankshares' counterparties and by changes in the regulatory and competitive landscape. Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A of Bankshares' Annual Report on Form 10-K for the year ended December 31, 2011.
Because of these and other uncertainties, Bankshares' actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, Bankshares' past results of operations are not necessarily indicative of future performance.
Bankshares cautions you that the above list of important factors is not exclusive. These forward-looking statements are made as of the date of this report, and Bankshares may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.
Critical Accounting Policies
Bankshares' financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within Bankshares' statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Bankshares uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that Bankshares uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of Bankshares' transactions would be the same, the timing of events that would impact its financial statements could change.
Allowance for Loan Losses. The allowance for loan losses is an estimate of the losses that may be sustained in Bankshares' loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05, Contingencies which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310-10-35, Receivables which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses has two basic components: the general allowance and the specific allowance.
The general allowance is developed following the accounting principles contained
in ASC 450-10-05, Contingencies and represents the largest component of the
total allowance. It is determined by aggregating unclassified loans and
unimpaired loans by loan type based on common purpose, collateral, repayment
source or other credit characteristics and then applying factors which in the
judgment of management represent the expected losses inherent in the portfolio.
In determining these factors, Bankshares considers the following:
(1) delinquencies and overall risk ratings, (2) loss history, (3) trends in
volume and terms of loans, (4) effects of changes in lending policy, (5) the
experience and depth of the borrowers' management, (6)
national and local economic trends, (7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g., competition and regulatory requirements).
ASC 310-10-35, Receivables is the basis upon which Bankshares determines specific reserves on individual loans which comprise the specific allowance. Specific loans to be evaluated for impairment are identified based on the borrower's loan size and the loan's risk rating, collateral position and payment history. If it is determined that it is likely that the Bank will not receive full payment in a timely manner, the loan is determined to be impaired. Each such identified loan is then evaluated to determine the amount of reserve that is appropriate based on ASC 310-10-35. This standard also requires that losses be accrued based on the differences between the value of collateral, present value of expected future cash flows or values that are observable in the secondary market and the loan balance.
Share-Based Compensation. ASC 718-10, Stock Compensation, requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the Black-Scholes model to estimate fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.
Deferred Tax Asset. Bankshares routinely evaluates the likelihood of the recognition of deferred tax assets. The analysis is used to determine if a valuation allowance for deferred tax assets is necessary. Bankshares reviews and analyzes various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted.
At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Its analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. As of September 30, 2012, the net deferred tax asset was $1.6 million, compared to $1.5 million as of December 31, 2011.
Overview
On May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving corporation. Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally
refrain from specific actions without the consent of WFBI. Completion of the Merger is subject to approval by the shareholders of each of Bankshares and WFBI, applicable regulatory approval and customary closing conditions.
On May 31, 2012, in contemplation of the pending Merger and after consulting with Washington First Bank, Bankshares exercised its' early termination clause in the lease agreement with Carr Properties on the Corporate Headquarters location in Chantilly, Virginia. This event triggered a payment of $675 thousand which is recorded in the financial statements as other assets according to the guidance outlined in ASC 805 and 420.
Notwithstanding the Merger Agreement, Bankshares' primary long-term goals continue to be maximizing earnings and deploying capital in profit driven initiatives that will enhance shareholder value in a sustainable fashion. In pursuit of these goals, Bankshares' current emphasis is on optimizing profitability in the near term and strengthening its financial performance, while also transitioning its operations to focus more closely on traditional banking activities and to reposition Bankshares for the future. Bankshares' transitional strategies include, among others, continuing the following initiatives:
• Diversifying the loan portfolio by increasing Bankshares' focus on commercial loans and loans secured by owner occupied commercial real estate, while continuing to be an active lender in attractive aspects of the residential and commercial real estate markets.
• Reducing the investment securities portfolio and eliminating the trading assets portfolio.
• Continuing to attentively manage the level of non-performing assets by addressing problem loans on a timely basis.
• Increasing low cost deposits by local commercial and retail customers, while working to reduce Bankshares' brokered deposit and repurchase agreement portfolios.
• Reducing Bankshares' operating and funding costs.
Additionally, Bankshares and the Bank are parties to a Memorandum of
Understanding (the MOU) with the Federal Reserve Bank of Richmond and the
Virginia Bureau of Financial Institutions, which is a regulatory means of
seeking correction through informal administrative action from institutions
considered to be of supervisory concern, but which have not deteriorated to the
point where they warrant formal administrative action. Among the specific
concerns cited in the MOU were asset quality, earnings, liquidity, and capital.
The MOU imposes restrictions and/or requirements on Bankshares and the Bank,
including (i) the requirement to be examined twice yearly by its regulators,
(ii) the requirement to provide regular quarterly progress reports to the
relevant regulators and (iii) the requirement that Bankshares and the Bank
receive regulatory approval to pay dividends, repurchase common stock, and make
interest or principal payments on subordinated debt and trust preferred
securities. Bankshares has implemented significant improvements in credit
policies, loan administration, and liquidity management in its efforts to comply
with the terms of the MOU. The MOU also requires Bankshares to maintain a
written plan for compliance with the capital adequacy rules applicable to all
state member banks under Federal Reserve Board Regulation H (12 CFR Part 208).
These rules require all state member banks, including the Bank, to maintain
adequate capital consistent with their risk profiles, which takes into account
the volume of adversely classified loans, the adequacy of the loan loss reserve,
any planned asset growth and the nature and level of asset concentrations, among
other things. Given this, it is the policy of federal banking regulators not to
specify or confirm that a given capital level will be "adequate" at a future
point in time. As a result, federal banking regulators have not, and Bankshares
cannot, identify a specific dollar amount of capital required under the MOU.
However, Bankshares estimates that it would need $7.5 million to $10 million in
new capital to be compliant with applicable capital adequacy rules.
Performance Highlights
• The net loss for the quarter ended September 30, 2012 was $170 thousand compared to a net loss of $503 thousand for the same period in 2011, an improvement of $333 thousand. The net loss was $1.5 million for the nine months ended September 30, 2012 compared to net income of $256 thousand for the nine months ended September 30, 2011, a decrease of $1.8 million. Loss per common share, basic and diluted, amounted to $0.30 for the nine months ended September 30, 2012, compared to earnings per share of $0.05 for the nine months ended September 30, 2011. Earnings for the nine months ended September 30, 2012, were negatively affected by merger related expenses of $666 thousand, the negative fair value adjustment on the FHLB advance of $668 thousand and a reduction in interest income of $3.9 million, from $17.1 million for the nine months ended September 30, 2011 to $13.2 million for the nine months ended September 30, 2012. Due to the improvement in the overall risk profile of the loan portfolio and the lower level of total loans, Alliance released $223 thousand of reserves into income and also did not recognized a provision expense during the quarter, this has positively affected net income for the period. The reduction in interest income is comprised of a $1.4 million decrease in the loan interest income and a $2.5 million decrease in the interest income from investment securities.
• Total loans were $288.0 million at September 30, 2012, a decrease of $18.9 million, or 6.2% from the December 31, 2011 balance of $306.9 million. The decrease in total loans results from a combination of strategic repositioning of lending activities, normal amortization and payoffs, the total of which offset new loan production during the period. Each loan segment as a percentage of total loans at September 30, 2012 is nearly unchanged from the percentages at December 31, 2011.
• Demand deposits were $145.3 million at September 30, 2012, or 35.1% of total deposits. This compares to the December 31, 2011 level of $112.5 million, or 29.6% of total deposits.
• The composition of non-performing assets as of September 30, 2012 was primarily comprised of $10.9 million of non-accrual loans, $3.6 million of OREO, $897 thousand of troubled debt restructured loans, compared to the composition of non-performing assets as of December 31, 2011, which was $13.3 million of non-accrual loans, $3.7 million of OREO and $956 thousand of troubled debt restructured loans for a total of $18.0 million. The non-performing assets balance decreased by $2.0 million at September 30, 2012 compared to December 31, 2011. The change resulted from the following: the charge off of six loans secured by residential real estate, totaling $838 thousand; the foreclosure and purchase into OREO of a residential property valued at $963 thousand; the full repayment of a commercial loan secured by land with a prior balance of $899 thousand; the movement back to accrual status of two loans secured by land totaling $325 thousand; and , the receipt of ongoing payments from a borrower with three outstanding loans secured by land and construction equipment totaling $4.4 million that are carried in non-accrual status; such payments reduced Bankshares' carrying balance by $85 thousand during 2012. Since December 31, 2011, six loans totaling $1.1 million have been added to the non-accrual and impaired loan list. Of these six loans, 95% are secured by residential real estate.
• The investment securities portfolio totaled $79.4 million at September 30, 2012. This compares to $123.5 million of investments as of December 31, 2011, a decrease of $44.1 million. This decrease is attributable to management's strategy to reduce the investment portfolio by taking some opportunistic gains to mitigate some of the losses realized in the CMO portfolio and to improve the overall yield. In addition, the investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. When prepayments on these instruments occur at a faster rate than anticipated, principal is paid down earlier than expected. During the nine months ended September 30, 2012, the Bank experienced greater than expected prepayments on a variety of investment securities.
• The net interest margin for the quarter ended September 30, 2012 was 3.02% compared to 3.61% for the same 2011 period, a decrease of 59 basis points. For the nine months ended September 30, 2012, the net interest margin of 3.10% was 64 basis points lower than the net interest margin of 3.74% for the nine months ended September 30, 2011.
• Deposits were $414.2 million at September 30, 2012, an increase of $33.8 million from the December 31, 2011 balance of $380.4 million. Strong growth in the title agency-related deposit coupled with a strategic shift of funding from repurchase agreements into deposits, contributed to the increase in overall deposit balance. Savings and NOW accounts increased by $32.6 million from $51.5 million at December 31, 2011 to $84.1 million at September 30, 2012 and non-interest bearing deposits increased by $32.8 million, from $112.5 million at December 31, 2011 to $145.3 million at September 30, 2012. These increases were offset by decreases in money market deposits of $5.3 million, from $23.4 million at December 31, 2011 to $18.1 million at September 30, 2012, and time deposits of $26.4 million, from $193.1 million at December 31, 2011 to $166.7 million at September 30, 2012.
• Non-interest expense for the three months ended September 30, 2012 amounted to $3.5 million compared to $4.1 million for the same period in 2011 a reduction of $601 thousand. For the nine months ended September 30, 2012, non-interest expense amounted to $10.8 million compared to $11.6 million in 2011, a reduction of $800 thousand. The non-interest expense for the nine months ended September 30, 2012, include merger related expenses of $666 thousand, consultant expenses related to contract employees of $445 thousand and OREO expenses including valuation adjustments of $340 thousand.
Financial Performance Measures. Bankshares' net loss for the three month period ended September 30, 2012 was $170 thousand, an improvement of $333 thousand over the third quarter of 2011 net loss of $503 thousand. The net loss of $170 thousand for the quarter ended September 30, 2012 includes net interest income of $3.1 million compared to $4.0 million for the same period last year, a decrease of $900 thousand. Results during the quarter ended September 30, 2012 were primarily impacted by reduced interest income, merger-related expenses, OREO expenses and valuation write-downs, and a negative adjustment to the $25 million FHLB advance recorded at fair value, the total of which offset gains on the sale of investment securities and favorable reductions in non-interest expenses and interest expenses. Due to the improvement in the overall risk profile of the loan portfolio and a lower level of total loans, In addition, Alliance released reserves into income and also did not recognize a provision expense during the quarter. For the three months ended September 30, 2012, total interest expense was $1.1 million compared to $1.4 million for the three months ended September 30, 2011. These factors led to $0.03 basic and diluted loss per share for the quarter ended September 30, 2012, compared to $0.10 basic and diluted loss per share for the quarter ended September 30, 2011. Weighted average basic shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for the three months ended September 30, 2011. Weighted average diluted shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for the three months ended September 30, 2011.
For the nine month period ended September 30, 2012, Bankshares had a net loss of $1.5 million compared to net income of $256 thousand for the same period in the prior year, a decline of $1.8 million. The net loss of $1.5 million for the nine months ended September 30, 2012 includes net interest income of $9.6 million compared to $12.7 million for the same period last year, a decrease of $3.1 million. The decrease is due primarily to a decrease in interest income in the amount of $3.9 million, from $17.1 million for the nine months ended September 30, 2011, to $13.2 million for the same period in 2012, and the lower average yield on the investment portfolio and the lower average balances on the loan portfolio. The decrease was partially offset by a reduction of $787 thousand in the cost of funds. For the nine months ended September 30, 2012, total interest expense was $3.5 million compared to $4.3 million for the nine months ended September 30, 2011. These factors led to a $0.30 basic and diluted loss per share for the nine months ended September 30, 2012. The basic and diluted earnings per share for the nine months ended September 30, 2011 was . . .
|
|