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

Show all filings for WASHINGTONFIRST BANKSHARES, INC.

Form 10-Q for WASHINGTONFIRST BANKSHARES, INC.


14-Nov-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. 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.
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;

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;


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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 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, 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 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, 2013 was $9.8 million and $29.5 million, respectively, compared to $5.7 million and $16.5 million for the three and nine months ended September 30, 2012, respectively. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities also impact net interest income and margin. The Company has recognized increased net interest income primarily due to the increase in the volume of interest-earning assets resulting from the Alliance acquisition.
Net income available to common shareholders was $2.1 million and $5.0 million for the three and nine months ended September 30, 2013, compared to $0.3 million and $1.4 million for the same periods in 2012. Diluted earnings per share were $0.27 per common share and $0.65 per common share for the three and nine months ended September 30, 2013, compared to $0.11 per common share and $0.44 per common share for the same periods in 2012. The increase in net income available to common shareholders in 2013 compared to the same periods in 2012 is primarily the result of the acquisition of Alliance in December 2012. In addition to the increased revenues earned as a result of the larger loan portfolio, increased costs were incurred in the third quarter 2013 compared to third quarter 2012. Compensation and employee benefit expenses for the nine months ended September 30, 2013 increased by $3.9 million compared to same period in 2012 primarily due to an increase in the number of employees resulting from the addition of five branches in the acquisition of Alliance. Premises and equipment expenses increased by $2.1 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 as a result of the increase in number of branches. The Company's other operating expenses also increased for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, primarily as a result on the increased size of operations. As of September 30, 2013 and December 31, 2012, total assets were $1.1 billion. Total loans increased $60.3 million from December 31, 2012 to September 30, 2013. Tier 1 capital increased by $6.8 million to $111.8 million as of September 30, 2013, compared to $105.0 million as of December 31, 2012. As of September 30, 2013, WashingtonFirst had $21.0 million in nonperforming assets, a decrease of $1.1 million from December 31, 2012. The Company had an increase in the allowance of loan losses during the nine months ended September 30, 2013, resulting in a $7.5 million allowance for loan losses as of September 30, 2013, compared to $6.3 million as of December 31, 2012. A further discussion of WashingtonFirst's financial condition and results of operations is contained in the following sections.


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Critical Accounting Policies and Estimates The preparation of WashingtonFirst's consolidated financial statements in conformity with U.S. 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 (5) 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 third quarter 2013 was $2.1 million or $0.27 per diluted common share, compared to $0.3 million or $0.11 per diluted common share for third quarter 2012. For the nine months ended September 30, 2013, WashingtonFirst's net income available to common shareholders was $5.0 million or $0.65 per diluted common share, compared to $1.4 million or $0.44 per diluted common share for the nine months ended September 30, 2012. Basic net income per common share for the three and nine months ended September 30, 2013 was $0.27 and $0.66 per common share, respectively, compared to $0.11 and $0.45 per common share for the three and nine months ended September 30, 2012, respectively. The increase in net income during the three and nine months ended September 30, 2013, as compared to the same periods in 2012, is primarily the result of the increased size of the loan portfolio and operations of the Company due to the Alliance acquisition in December 2012. The following sections provide more detail regarding specific components of WashingtonFirst's results of operations. Selected Performance Ratios

                                     For the Three Months Ended                      For the Nine Months Ended
                            September 30, 2013       September 30, 2012     September 30, 2013      September 30, 2012
                                                              (dollars in thousands)
Average total assets       $        1,066,239       $         562,000      $        1,055,508      $         552,914
Average shareholders'
equity                                105,385                  54,456                 104,769                 54,565
Net income                              2,140                     383                   5,143                  1,516
Return on average assets
(1)                                      0.80 %                  0.27 %                  0.65 %                 0.37 %
Return on average
shareholders' equity (1)                 8.06 %                  2.79 %                  6.56 %                 3.70 %
Return on average common
equity (1)                               9.49 %                  3.67 %                  7.70 %                 5.01 %
Average shareholders'
equity to average total
assets                                   9.88 %                  9.69 %                  9.93 %                 9.87 %
Efficiency ratio                        60.22 %                 80.66 %                 64.60 %                71.09 %
(1) Annualized.

Net Interest Income.
Net interest income for the three and nine months ended September 30, 2013 was $9.8 million and $29.5 million, respectively, compared to $5.7 million and $16.5 million for the same periods in 2012, respectively. The overall net interest margin was 3.73 percent and 3.80 percent for the three and nine months ended September 30, 2013, respectively, compared to 4.05 percent and 3.99 percent for the three and nine months ended September 30, 2012, respectively. The decrease in interest spread and net interest margin is primarily the result of a lower yield on the loan portfolio in the third quarter 2013, resulting from the early payoff of certain loans that had positive purchase accounting marks associated with them. These purchase accounting marks were being recognized over the life of the loans into interest income and, due to the early payoff, these amounts were fully recognized in the third quarter 2013, thus decreasing the yield on the loan portfolio.
The following tables provide information regarding interest-earning assets and funding for the three and nine months ended September 30, 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 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
                                       September 30, 2013                      September 30, 2012
                                Average       Income/      Yield/       Average       Income/      Yield/
                                Balance       Expense     Rate (6)      Balance       Expense     Rate (6)
                                                         (dollars in thousands)
Assets
Interest-earning assets:
Loans (1)                    $   787,849     $ 10,669        5.30 %   $ 451,421     $   6,609        5.73 %
Interest-bearing balances          9,717           13        0.53 %       6,738             8        0.47 %
Investment securities (2)        118,565          557        1.84 %      62,922           323        2.01 %
Federal funds sold               113,464           76        0.27 %      30,475             9        0.12 %
Total interest earning
assets                         1,029,595       11,315        4.30 %     551,556         6,949        4.93 %
Non-interest earning assets:
Cash and due from banks            3,724                                  2,480
Premises and equipment             3,590                                  2,833
Other real estate owned
(OREO)                             2,122                                  1,111
Other assets                      33,756                                  9,951
Less: allowance for loan
losses                            (6,548 )                               (5,931 )
Total non-interest earning
assets                            36,644                                 10,444
Total Assets                 $ 1,066,239                              $ 562,000

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $    90,823     $     39        0.17 %   $  18,620     $      11        0.23 %
Money market deposit
accounts                         131,399          158        0.48 %      58,186            80        0.55 %
Savings accounts                 110,573          208        0.75 %      75,243           175        0.92 %
Time deposits                    341,603          760        0.88 %     214,326           729        1.35 %
Total interest-bearing
deposits                         674,398        1,165        0.69 %     366,375           995        1.08 %
FHLB advances                     30,180          142        1.84 %      35,950           167        1.82 %
Other borrowings and
long-term borrowings              23,369          184        3.08 %       2,207            60       10.64 %
Total interest-bearing
liabilities                      727,947        1,491        0.81 %     404,532         1,222        1.20 %
Non-interest-bearing
liabilities:
Demand deposits                  227,831                                101,191
Other liabilities                  5,076                                  1,821
Total non-interest-bearing
liabilities                      232,907                                103,012
Total Liabilities                960,854                                507,544
Shareholders' Equity             105,385                                 54,456
Total Liabilities and
Shareholders' Equity         $ 1,066,239                              $ 562,000

Interest Spread (3)                                          3.49 %                                  3.73 %
Net Interest Margin (4)(5)                   $  9,824        3.73 %                 $   5,727        4.05 %

(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 yield are presented on a fully taxable equivalent basis.

(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.


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                                                       For the Nine Months Ended
                                       September 30, 2013                      September 30, 2012
                                Average       Income/      Yield/       Average      Income/      Yield/
                                Balance       Expense     Rate (6)      Balance      Expense     Rate (6)
                                                        (dollars in thousands)
Assets
Interest-earning assets:
Loans (1)                    $   772,061     $ 32,281        5.51 %   $ 434,364     $ 19,112        5.78 %
Interest-bearing balances          9,919           41        0.55 %       9,195           37        0.54 %
Investment securities (2)        122,292        1,593        1.72 %      63,177        1,012        2.10 %
Federal funds sold               117,491          209        0.24 %      36,293           60        0.22 %
Total interest earning
assets                         1,021,763       34,124        4.40 %     543,029       20,221        4.89 %
Non-interest earning assets:
Cash and due from banks            4,228                                  2,403
Premises and equipment             3,479                                  2,765
Other real estate owned
(OREO)                             2,474                                    376
Other assets                      30,003                                 10,040
Less: allowance for loan
losses                            (6,439 )                               (5,699 )
Total non-interest earning
assets                            33,745                                  9,885
Total Assets                 $ 1,055,508                              $ 552,914

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $    88,675     $    128        0.19 %   $  18,677     $     40        0.29 %
Money market deposit
accounts                         118,443          450        0.51 %      54,161          267        0.66 %
Savings accounts                 103,230          582        0.75 %      76,456          535        0.93 %
Time deposits                    353,851        2,451        0.93 %     207,223        2,176        1.40 %
Total interest-bearing
deposits                         664,199        3,611        0.73 %     356,517        3,018        1.13 %
FHLB advances                     34,385          531        2.04 %      31,373          586        2.45 %
Other borrowings and
long-term borrowings              25,019          513        2.70 %         859           70       10.71 %
Total interest-bearing
liabilities                      723,603        4,655        0.86 %     388,749        3,674        1.26 %
Non-interest-bearing
liabilities:
Demand deposits                  221,308                                107,624
Other liabilities                  5,828                                  1,976
Total non-interest-bearing
liabilities                      227,136                                109,600
Total Liabilities                950,739                                498,349
Shareholders' Equity             104,769                                 54,565
Total Liabilities and
Shareholders' Equity         $ 1,055,508                              $ 552,914

Interest Spread (3)                                          3.54 %                                 3.63 %
Net Interest Margin (4)(5)                   $ 29,469        3.80 %                 $ 16,547        3.99 %

(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 yield are presented on a fully taxable equivalent basis.

(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.


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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 reflect 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, 2013 compared to the three and nine months ended September 30, 2012.

                                               For the Three Months Ended September 30, 2013
                                                       Compared to Same Period 2012
                                                        (Decrease)/Increase Due to
                                               Rate                Volume               Total
                                                              (in thousands)
Income from interest-earning assets:
Loans                                   $        (3,155 )     $        7,215       $        4,060
Interest-bearing balances                             1                    4                    5
Investment securities                              (175 )                409                  234
Federal funds sold                                   21                   46                   67
Total income from interest-earning
assets                                           (3,308 )              7,674                4,366
Expense from interest-bearing
liabilities:
Interest-bearing deposits                        (1,948 )              2,118                  170
FHLB Advances                                        12                  (37 )                (25 )
Borrowed funds                                     (302 )                426                  124
Total expense from interest-bearing
liabilities                                      (2,238 )              2,507                  269
Increase in net interest income         $        (1,070 )     $        5,167       $        4,097


                                             For the Nine Months Ended September 30, 2013
                                                     Compared to Same Period 2012
                                                      (Decrease)/Increase Due to
                                              Rate                Volume             Total
                                                            (in thousands)
Income from interest-earning assets:
Loans                                   $       (1,466 )     $       14,635     $      13,169
Interest-bearing balances                            1                    3                 4
Investment securities                             (308 )                889               581
Federal funds sold                                   5                  144               149
Total income from interest-earning
assets                                          (1,768 )             15,671            13,903
Expense from interest-bearing
liabilities:
Interest-bearing deposits                       (1,850 )              2,443               593
FHLB Advances                                     (129 )                 74               (55 )
Borrowed funds                                    (123 )                566               443
. . .
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