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WFBI > SEC Filings for WFBI > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for WASHINGTONFIRST BANKSHARES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WASHINGTONFIRST BANKSHARES, INC.


14-May-2013

Quarterly Report


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, 2012 filed with the SEC on March 22, 2013.
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, 2012 filed with the SEC on March 22, 2013 and below in " - Cautionary Note Regarding Information Regarding Forward-Looking Statements."
On December 21, 2012, WashingtonFirst consummated its acquisition of Alliance. The transaction, which was accounted for as a purchase and constituted a reorganization for U.S. federal income tax purposes, resulted in the issuance by WashingtonFirst of 1,812,933 shares of WashingtonFirst common stock and the payment of approximately $5.4 million in cash to the holders of Alliance common stock. In conjunction with the merger, WashingtonFirst listed its shares of common stock on the NASDAQ. As a condition of the merger agreement of WashingtonFirst and Alliance, WashingtonFirst agreed to raise at least $20.0 million of qualifying regulatory capital. Consequently, in connection with the Alliance merger and pursuant to private placements of 1,351,656 shares of its common stock and 1,044,152 shares of its Series A non-voting common stock, WashingtonFirst raised aggregate gross proceeds of approximately $27.1 million. During 2012, WashingtonFirst incurred approximately $4.9 million in expenses associated with the Alliance merger. In reviewing the business and financial information presented in this report and comparing the performance of WashingtonFirst to prior periods, readers must consider the effects of the Alliance merger on the performance of WashingtonFirst. Recent Developments
On April 5, 2013, the Board of Directors declared a five percent (5%) share dividend on WashingtonFirst's outstanding shares of common stock and Series A non-voting common stock. WashingtonFirst will pay cash in lieu of fractional shares of common stock and Series A non-voting common stock. The dividend shares and cash will be distributed on or about May 17, 2013 to stockholders of record at the close of business on April 26, 2013. 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, 2012 filed with the SEC on March 22, 2013 and the following:
the risk that the businesses of WashingtonFirst and Alliance will not be integrated successfully, or such integration may be more difficult, time-consuming or costly than expected, resulting in less revenue or cost savings than expected, or higher deposit attrition and customer losses than expected;

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;


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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 serve change or are less favorable than expected;

legislative or regulatory changes adversely affect WashingtonFirst's businesses;

fiscal and regulatory policies of the United States 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;

changes in the way the FDIC insurance premiums are assessed;

changes in business conditions and inflation;

increase in personal or commercial bankruptcies or defaults;

changes occur in the securities markets; and,

technology-related changes are harder to make or more expensive than expected.

Forward-looking statements 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, service charges on customer accounts and income from investment securities. 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 deposits and borrowings which are used to fund those assets. Net interest income is the Company's largest source of revenue. Net interest income for the three months ended March 31, 2013 and 2012 was $10.0 million and $5.4 million, respectively, producing a $4.7 million increase in earnings. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin. The Company has recognized increased net interest income due primarily to an increase in the volume of interest-earning assets as a result of the Alliance acquisition.
Net income available to common shareholders was $1.4 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively, and diluted earnings per share were $0.18 and $0.21, respectively, for those same periods. The increase in net income available to common shareholders for first quarter 2013 compared to the same period in 2012 is primarily the result of the acquisition of Alliance in December 2012, while lower earnings per diluted share is primarily the result of the issuance of new stock in connection with the Alliance acquisition. In addition to the increased revenues earned as a result of the larger loan portfolio, increased costs were incurred in the first quarter 2013 compared to first quarter 2012. Compensation and employee benefit expenses increased by $1.4 million primarily due to an increase in the number of employees as five additional branches were added in the acquisition of Alliance. Additionally, premises and equipment expenses increased as a result of the increase in number of branches by $0.7 million in first quarter 2013 compared to first quarter 2012. The Company also incurred increased other operating expenses in the first quarter 2013 compared to the first quarter 2012, primarily as a result on the increased size of operations. (See Note 18 - Other Expenses of WashingtonFirst's Consolidated Financial Statements for further details). As of March 31, 2013 and December 31, 2012, total assets were $1.1 billion. Total loans increased $11.1 million from December 31, 2012 to March 31, 2013. Tier 1 capital increased by $3.0 million to $108.0 million as of March 31, 2013, compared to $105.0 million as of December 31, 2012.
As of March 31, 2013, WashingtonFirst had $21.5 million in nonperforming assets, a decrease of $0.6 million from December 31, 2012. The company also had a decrease in the allowance of loan losses in the first quarter 2013, resulting in a $6.2 million allowance for loan losses as of March 31, 2013, compared to $6.3 million as of December 31, 2012.


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A further discussion of WashingtonFirst's financial condition and results of operations, including relative contributions of the Alliance and WashingtonFirst businesses, is contained in the sections following. Critical Accounting Policies and Estimates The preparation of WashingtonFirst's consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from those estimates. The critical accounting policies that are both important to the portrayal of WashingtonFirst's financial condition and results of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance for losses, (2) purchase accounting, (3) goodwill and other intangible asset impairment, (4) accounting for income taxes, and (3) fair value measurements.
For a discussion of these critical accounting policies and the related use of estimates and assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in WashingtonFirst's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 22, 2013. Results of Operations
WashingtonFirst's net income available to common shareholders for first quarter 2013 was $1.4 million or $0.18 per diluted common share, compared to $0.7 million or $0.21 per diluted common share for first quarter 2012. Basic net income per common share was $0.19 per share and $0.22 per common share for first quarter 2013 and 2012, respectively. The key factor contributing to the increase in net income as compared to the same period in 2012 is the increased size of the loan portfolio and operations of the Company as a result of the acquisition of Alliance in December 2012. The following sections provide more detail regarding specific components of WashingtonFirst's results of operations. Net Interest Income.
Net interest income for the three months ended March 31, 2013 was $10.0 million, compared to $5.4 million for the same period during 2012. The overall net interest margin was 3.99 percent for the three months ended March 31, 2013, compared to 4.08 percent for the three months ended March 31, 2012. The following table provides information regarding interest-earning assets and funding for the three months ended March 31, 2013 and 2012. 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 average rate earned on interest-bearing balances reflects lower short-term market rates during 2013 compared to 2012. The lower average rate on loans during 2013 reflects the decline in market rates reflected in the rates on loans acquired or reset during the past year. 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 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.


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Average Balances, Interest Income and Expense and Average Yield and Rates

                                                       For the Three Months Ended
                                         March 31, 2013                          March 31, 2012
                                Average       Income/      Yield/       Average       Income/      Yield/
                                Balance       Expense     Rate (6)      Balance       Expense     Rate (6)
                                                         (dollars in thousands)
Assets
Interest-earning assets:
Loans (1)                    $   753,057     $ 10,899        5.79 %   $ 420,506     $   6,195        5.89 %
Interest-bearing balances         10,081           14        0.56 %      12,136            18        0.60 %
Investment securities (2)        127,460          561        1.76 %      61,263           341        2.23 %
Federal funds sold               126,077           74        0.24 %      45,216            25        0.22 %
Total interest earning
assets                         1,016,675       11,548        4.54 %     539,121         6,579        4.88 %
Non-interest earning assets:
Cash and due from banks            4,182                                  2,096
Premises and equipment             3,464                                  2,472
Other real estate owned
(OREO)                             3,061                                    615
Other assets                      26,811                                  9,585
Less: allowance for loan
losses                            (6,360 )                               (5,147 )
Total non-interest earning
assets                            31,158                                  9,621
Total Assets                 $ 1,047,833                              $ 548,742

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $    79,318     $     45        0.23 %   $  18,718     $      15        0.32 %
Money market deposit
accounts                         106,849          146        0.55 %      50,125            96        0.78 %
Savings accounts                  97,770          223        0.93 %      76,938           182        0.96 %
Time deposits                    361,935          745        0.83 %     201,514           722        1.45 %
Total interest-bearing
deposits                         645,872        1,159        0.72 %     347,295         1,015        1.17 %
FHLB advances                     40,315          226        2.24 %      24,234           206        3.40 %
Other borrowings and
long-term borrowings              25,041          147        2.35 %           -             -           - %
Total interest-bearing
liabilities                      711,228        1,532        0.87 %     371,529         1,221        1.33 %
Non-interest-bearing
liabilities:
Demand deposits                  225,965                                120,392
Other liabilities                  7,036                                  2,524
Total non-interest-bearing
liabilities                      233,001                                122,916
Total Liabilities                944,229                                494,445
Shareholders' Equity             103,604                                 54,297
Total Liabilities and
Shareholders' Equity         $ 1,047,833                              $ 548,742

Interest Spread (3)                                          3.67 %                                  3.55 %
Net Interest Margin (4)(5)                   $ 10,016        3.99 %                 $   5,358        4.08 %

(1) Loans placed on non-accrual status are included in loan balances.

(2) Includes available-for-sale investment securities and other equity securities.

(3) Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.

(4) Interest income and yields are presented on a fully taxable equivalent basis using 38.5 percent tax rate.

(5) Net interest margin is net interest income, expressed as a percentage of average earning assets.

(6) Annualized income/expense used for the yield/rate.


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The following table sets forth information regarding the changes in the components of WashingtonFirst's net interest income for the periods indicated. For each category, information is provided on 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 reflect the decreased cost of funding due to lower interest rates in the debt markets. The increases due to changes in volume reflect the increase in on-balance sheet assets during the first three months of 2013 compared to the first three months of 2012.

                                                For the Three Months Ended March 31, 2013
                                                       Compared to Same Period 2012
                                                        (Decrease)/Increase Due to
                                              Rate                Volume               Total
                                                              (in thousands)
Income from interest-earning assets:
Loans                                   $         (751 )     $        5,455       $        4,704
Interest-bearing balances                           (1 )                 (3 )                 (4 )
Investment securities                             (442 )                663                  221
Federal funds sold                                   1                   47                   48
Total income from interest-earning
assets                                          (1,193 )              6,162                4,969
Expense from interest-bearing
liabilities:
Interest-bearing deposits                       (2,145 )              2,289                  144
FHLB Advances                                     (363 )                385                   22
Borrowed funds                                       -                  145                  145
Total expense from interest-bearing
liabilities                                     (2,508 )              2,819                  311
Increase in net interest income         $        1,315       $        3,343       $        4,658

Interest Earning Assets
Average loan balances were $753.1 million for the three months ended March 31, 2013 compared to $420.5 million for the same period in 2012. Loans grew primarily due to the Alliance acquisition in December 2012. The related interest income from loans was $10.9 million for the three months ended March 31, 2013 resulting in an average yield of 5.79 percent, compared to $6.2 million for the three months ended March 31, 2012, resulting in an average yield of 5.89 percent. The decrease in average yield on loans reflects a declining interest rate environment. 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.
Investment securities averaged $127.5 million for the three months ended March 31, 2013, compared to $61.3 million for the same period in 2012. The increase in the average investment securities in the first quarter 2013 compared to the first quarter 2012 is primarily a result of the Alliance acquisition in December 2012. Interest income generated on these investment securities for the three months ended March 31, 2013 totaled $0.6 million, or a 1.76 percent yield, compared to $0.3 million or a 2.23 percent yield for the three months ended March 31, 2012.
Short-term investments in federal funds sold averaged $126.1 million for the three months ended March 31, 2013, compared to $45.2 million for the same period in 2012. The increase in the average short-term investments in the first quarter 2013 compared to the first quarter 2012 is primarily a result of the Alliance acquisition in December 2012. Interest income generated on these assets for the three months ended March 31, 2013 totaled $0.1 million, or a 0.24 percent yield, compared to $25,000 or a 0.22 percent yield for the three months ended March 31, 2012.
Interest Bearing Liabilities
Average interest-bearing deposits were $645.9 million for the three months ended March 31, 2013 compared to $347.3 million for the same period in 2012. The increase in the average interest-bearing deposits in the first quarter 2013 compared to the first quarter 2012 is primarily a result of the Alliance acquisition in December 2012. The related interest expense from interest-bearing deposits was $1.2 million for the three months ended March 31, 2013, compared to $1.0 million for the three months ended March 31, 2012. The average rate on these deposits was 0.72 percent during the three months ended March 31, 2013, compared to 1.17 percent for the same periods in 2012. The lower interest rate environment allowed for competitive repricing of interest bearing demand accounts, money market accounts, savings accounts and time deposits.


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FHLB advances averaged $40.3 million for the three months ended March 31, 2013, compared to $24.2 million for the same periods in 2012. Interest expense incurred on these borrowing for the three months ended March 31, 2013 totaled $0.2 million, or a 2.24 percent rate, compared to $0.2 million or a 3.40 percent rate for the three months ended March 31, 2012.

Selected Performance Ratios
                                                     For the Three Months Ended
                                             March 31, 2013             March 31, 2012
                                                      (dollars in thousands)
Average total assets                     $          1,047,833       $            548,742
Average shareholders' equity                          103,604                     54,297
Net income                                              1,453                        750
Return on average assets (1)                             0.55 %                     0.55 %
Return on average shareholders' equity
(1)                                                      5.61 %                     5.53 %
Return on average common equity (1)                      6.77 %                     8.22 %
Average shareholders' equity to average
total assets                                             9.89 %                     9.89 %
(1) Annualized.

Provision for Loan Losses. During the three months ended March 31, 2013, WashingtonFirst recorded provisions to its allowance for loan losses of $1.1 million, charge-offs of $1.2 million and recoveries of $34,000. During the three months ended March 31, 2012, WashingtonFirst recorded provisions to its allowance for loan losses of $1.2 million, charge-offs of $0.4 million and recoveries of $3,000. The increase in charge-offs in the first quarter of 2013, compared to the first quarter of 2012, was primarily attributable to the charge-off of a commercial loan to a non-profit organization in the amount of $1.0 million that had been previously identified and was fully reserved for as of December 31, 2012.
Service Charges on Deposit Accounts. During both the three months ended March 31, 2013 and 2012, service charges on deposit accounts were $0.1 million. Other Operating Income. During the three months ended March 31, 2013, WashingtonFirst recorded $0.4 million of other operating income compared to $0.3 million for the same period in 2012.
Gain on Sale of Available-for-Sale Investment Securities. During the three months ended March 31, 2013, WashingtonFirst realized $16,000 of losses on the calls or sales of available-for-sale investments, compared to immaterial amounts in the same period 2012.
Compensation and Employee Benefits. Compensation and employee benefits were $3.2 million and $1.8 million for the three months ended March 31, 2013 and 2012, respectively. The increase in compensation and employee benefits in first quarter 2013 compared to first quarter 2012 is primarily the result of increased headcount as the Company nearly doubled in size after the acquisition of Alliance in December 2012.
Premises and Equipment. Premises and equipment expenses were $1.4 million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively. The increase was primarily due to the increase in rent expenses associated with the addition of five branch locations with the acquisition of Alliance in December 2012.
Data Processing. Data processing expenses were $0.9 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively. The increase was primarily due to the increased size of the Company after the acquisition. A portion of the expenses incurred in first quarter 2013 are nonrecurring one time conversion expenses related to the acquisition.
Professional Fees. Professional fees, which includes legal, accounting and other professional services, were $0.4 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively. The increase in professional fees is primarily a result of the Company nearly doubling in size with the acquisition of Alliance in December 2012 and became a public company in the fourth quarter 2012, resulting in additional required professional services. Other Operating Expenses. Other operating expenses were $1.1 million for the three months ended March 31, 2013 compared to $0.4 million for the same period . . .

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