10-K 1 wfbi-201310kdoc.htm 10-K WFBI-2013 10K DOC
As filed with the Securities and Exchange Commission on March 19, 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2013
            
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

The aggregate market value of the common stock voting and common stock non-voting held by non-affiliates of the registrant was $67.2 million as of June 30, 2013, based upon the closing prices on June 30, 2013 reported by the NASDAQ Stock Market.

As of March 14, 2014, the registrant had outstanding 6,565,376 shares of voting common stock and 1,096,359 shares of non-voting common stock.



DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Party III is incorporated by reference to certain sections in the registrant’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
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.”

Item 1. Business
WashingtonFirst is a Virginia-based bank holding company with approximately $1.1 billion in assets, $948.9 million in deposits and $107.6 million in shareholders’ equity as of December 31, 2013. Through its wholly owned subsidiary, WashingtonFirst Bank, a Virginia state bank, WashingtonFirst provides banking products and services, including loans to consumers and small-to-medium sized businesses. As of December 31, 2013, in addition to its corporate office in Reston, Virginia, the Bank had 15 branch banking offices in Virginia, Washington, D.C. and Maryland.
General
The Bank’s primary market – the greater Washington, D.C. Metropolitan Area - is characterized by a highly educated work force, a diverse economy and a median household income that is one of the highest in the nation.
WashingtonFirst’s growth strategy is to pursue both organic growth as well as acquisition opportunities within its target market area of the Washington DC Metropolitan Area. Since its inception in 2004, WashingtonFirst has completed two branch acquisitions and two whole-bank acquisitions. Additionally, the Company has experienced consistent organic growth in assets and profitability since its inception. WashingtonFirst expects to maintain this growth by continuing to hire and develop skilled personnel, and by developing and maintaining a sound infrastructure to support continued business growth on a safe and sound basis.
WashingtonFirst’s business strategy is to compete by providing its customers with highly qualified personal and customized service utilizing up to date technology and delivery channels. The Company’s marketing efforts are directed to prospective clients who value high quality service and who are, or have the potential to become, highly profitable. WashingtonFirst’s view of the financial services market is that community banks must be effective in providing quality, tailored services to their customers rather than competing with large national institutions on a head-to-head basis for broad-based consumer business.
Revenues are derived from interest and fees received in connection with loans, deposits and investments. Major expenses include compensation and employee benefits, interest expense on deposits and borrowings and operating expenses.
Description of Services
WashingtonFirst offers a comprehensive range of commercial banking products and services to small and medium sized businesses, not-for-profit organizations, professional service firms and individuals in the greater Washington, D.C. Metropolitan Area. Many of WashingtonFirst’s services are also available online at www.wfbi.com.
WashingtonFirst’s lending activities include commercial real estate loans, residential real estate loans, commercial and industrial loans, construction and development loans and consumer loans. Loans originated by WashingtonFirst are classified as loans held for investment.
Lending activities are subject to lending limits imposed by federal and state law. While differing limits apply in certain circumstances based on the type of loan, WashingtonFirst’s lending limit to any one borrower on loans that are not fully secured by readily marketable or other permissible collateral generally is equal to 15 percent of WashingtonFirst’s unimpaired capital and surplus. As of December 31, 2013, WashingtonFirst Bank’s legal lending limit was $15.6 million. WashingtonFirst has established relationships with various correspondent banks to sell loan participations when loan amounts exceed WashingtonFirst’s legal lending limits or internal lending policies.
At present, WashingtonFirst does not offer other services that generate a significant volume of non-interest income. Many comparable banks that compete with WashingtonFirst offer mortgage origination, insurance, and/or wealth management and other fee based services. In the later part of 2013, WashingtonFirst established a new mortgage origination department to enhance its non-interest income.
WashingtonFirst has an established credit policy that includes procedures for underwriting each type of loan and lending personnel have been assigned specific loan approval authorities based upon their experience. Loans in excess of an individual loan officer’s authority are presented to the Bank’s Executive Loan Committee, or “ELC,” for approval. The ELC meets weekly to facilitate a timely approval process for WashingtonFirst’s clients. Loans are approved based on the borrower’s capacity for credit, collateral and sources of repayment. Loans are actively monitored to detect any potential performance issues. WashingtonFirst manages its loans within the context of a risk grading system developed by management based upon extensive experience in administering loan

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portfolios in its market. Payment performance is carefully monitored for all loans. When loan repayment is dependent upon an operating business or investment real estate, periodic financial reports, site visits and select asset verification procedures are used to ensure that WashingtonFirst accurately rates the relative risk of its assets. Based upon criteria established by management and the Bank’s board of directors, the degree of monitoring is escalated or relaxed for any given borrower based upon WashingtonFirst’s assessment of the future repayment risk.
Employees
At December 31, 2013, WashingtonFirst had 143 employees, 141 of which were full-time employees. All of WashingtonFirst’s employees are employed by the Bank. None of WashingtonFirst’s employees is subject to a collective bargaining agreement. Management considers employee relations to be good.
Loan Portfolio
The following outlines the composition of loans held for investment.
Construction and Development Loans
Construction and development loans represented 11.6 percent of WashingtonFirst’s loan portfolio as of December 31, 2013. These loans generally fall into one of four types: first, loans to construct owner-occupied commercial buildings; second, loans to individuals that are ultimately used to acquire property and construct an owner-occupied residence; third, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and fourth, loans to developers for the purpose of acquiring land to be developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by WashingtonFirst’s board of directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse to principal borrowers. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administrative procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.
Commercial Real Estate Loans
Commercial real estate loans represented 62.3 percent of WashingtonFirst’s loan portfolio as of December 31, 2013. These loans generally fall into one of three categories: loans supporting owner-occupied commercial property; properties used by non-profit organizations such as trade associations, churches or charter schools where repayment is dependent upon the cash flow of the non-profit organizations; and loans supporting a commercial property leased to third parties for investment. Commercial real estate Loans are secured by the subject property and underwritten to policy standards. Policy standards, approved by WashingtonFirst’s board of directors from time to time, set forth, among other considerations, loan to value limits, cash flow coverage ratios, and standards governing the general creditworthiness of the obligors.
Residential Real Estate Loans
Residential real estate loans include loans secured by first or second mortgages on one-to-four family residential properties. These loans represented 11.4 percent of the loan portfolio as of December 31, 2013. Of this amount, home equity lines of credit represented 8.9 percent and first trust mortgage loans represented 2.5 percent of total loans. Home equity loans are most frequently secured by a second lien on residential property. First trust mortgage loans are loans secured by one-to-four family dwellings, where the proceeds are used to acquire or refinance the primary financing of owner-occupied and residential investment properties. Loans in these categories are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by WashingtonFirst’s management and board of directors, and includes such considerations as repayment source and capacity, collateral value, credit history, savings pattern, and stability.
Commercial and Industrial Loans
Commercial and industrial loans represented 14.4 percent of WashingtonFirst’s loan portfolio as of December 31, 2013. These loans are to businesses or individuals within the greater Washington D.C. metropolitan area for business purposes. Typically the loan proceeds are used to support working capital and the acquisition of fixed assets of an operating business or to refinance a loan payable to another financial institution that was originally made for a similar purpose. Each loan is underwritten based upon WashingtonFirst’s assessment of the obligor’s ability to generate operating cash flow in the future necessary to repay the loan. To address the risks associated with the uncertainties of future cash flow, these loans are generally secured by assets owned by the business or its principal shareholders and the principal shareholders are typically required to guarantee the loan.

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Consumer Loans
Consumer loans are loans to individuals for a stated purpose such as to finance a car or boat, to refinance debt, or to fund general working capital needs. These loans are generally extended in a single disbursement and repaid over a specified period of time. Consumer loans made up 0.3 percent of the loan portfolio as of December 31, 2013. Most loans are well secured with assets other than real estate, such as marketable securities or automobiles. In general, management discourages unsecured lending. Loans in this category are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by WashingtonFirst’s management and board of directors, and includes such considerations as repayment source and capacity, collateral value, credit history, savings pattern, and stability.
Deposits
Deposits are the primary source of funding for the Bank. Deposit services include business and personal checking, NOW accounts, tiered savings and money market and time deposit accounts with varying maturity structures and customer options. A complete individual retirement account program is also available. Deposit services include cash management services such as electronic banking, sweep accounts, lockbox and account reconciliation services, merchant card depository, safe deposit boxes and automated clearing house origination. After hour depository and ATM services are also available.
Regulation
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities including, but not limited to, the Virginia Bureau of Financial Institutions, the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), U.S. Treasury and federal and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business activities, investments, reserves against deposits, capital levels, transactions with affiliates, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations, and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance fund, depositors and the banking system as a whole, rather than the creditors or shareholders of the Company and the Bank.
The following description summarizes some of the laws to which the Company and the Bank are subject. References herein to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank.
Regulation – WashingtonFirst Bankshares, Inc.
The Company is a bank holding company registered under the Bank Holding Company (“BHC Act”) and subject to supervision, regulation and examination by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Company is also registered in Virginia with the Virginia Bureau of Financial Institutions under the financial institution holding company laws of Virginia and is subject to regulation and supervision by the Virginia Bureau of Financial Institutions.
Scope of Permissible Activities. Generally, the Company is prohibited, with certain limited exceptions, from acquiring a direct or indirect interest in or control of more than 5.0 percent of the voting shares of any company which is not a bank or financial or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except the Company may engage in and may own shares of companies engaged in certain activities found by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In approving acquisitions by bank holding companies of companies engaged in banking- related activities or the addition of activities, the Federal Reserve considers a number of factors and weighs the expected benefits to the public (such as greater convenience, increased competition, or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices).
The Graham Leach Bliley Act, or “GLB Act,” amended the BHC Act and eliminated the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The GLB Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities

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that the Federal Reserve has determined to be closely related to banking. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.
Presently, the Company has no plans to become a financial holding company. The Company does not expect the GLB Act to materially affect the Company’s products, services, operations or other business activities. To the extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may experience further consolidation. The GLB Act may have the result of increasing competition that the Company faces from larger institutions and other companies offering financial products and services, many of which may have substantially greater financial resources than the Company.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10.0 percent or more of its consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for violation of laws, regulations or orders, for participation in an unsafe or unsound practice or breach of fiduciary duty.
Regulatory Restrictions on Dividends; Source of Strength. The Company is regarded as a legal entity separate and distinct from the Bank. The principal source of the Company’s revenue is dividends received from the Bank. As described in more detail below, both state and federal law place limitations on the amount that banks may pay in dividends, which the Bank must adhere to when paying dividends to the Company. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income earned over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not pay cash dividends at levels that undermine the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Given the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure. See Part II, Item 5., “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities-Dividend Policy.”
Virginia state law also restricts dividends to shareholders of the Company. The Company’s shareholders are entitled to receive dividends if, as and when declared by the Company’s Board of Directors in accordance with Section 13.1-653 of the Code of Virginia. Generally, dividends may be paid out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Under Federal Reserve policy, a bank holding company has historically been required to act as a source of financial strength to each of its banking subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or “Dodd-Frank Act,” codifies this policy as a statutory requirement. The Company is required to commit resources to support the Bank, and this obligation may arise at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and will be required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of the insured depository institution. Any claim for breach of such obligation will generally have priority over most other unsecured claims.
Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other non-banking services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system using risk-based capital guidelines under a two-tier capital framework to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consists of common shareholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and non-controlling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital

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generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities.
Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8.0 percent (of which at least 4.0 percent is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2013 the Company’s ratio of Tier 1 capital to total risk-weighted assets was 14.05 percent and its ratio of total capital to total risk-weighted assets was 12.80 percent.
In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.0 percent, but other bank holding companies are required to maintain a leverage ratio of at least 4.0 percent. As of December 31, 2013 the Company’s leverage ratio was 10.53 percent.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
As a bank holding company, the regulatory capital requirements of the Federal Reserve became applicable to the Company when the total consolidated assets equaled $500.0 million or more. The Bank, as described below, is subject to the capital requirements of the FDIC.
Revised Capital Adequacy Requirements. The Dodd-Frank Act required the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and the FDIC to adopt certain capital standards based on the capital accords of the Basel Committee on Banking Supervision, or the “Basel Committee.” On December 16, 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Basel III, when implemented by the U.S. banking agencies and fully phased in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. In December 2011, the Federal Reserve indicated that to comply with the requirements of the Dodd-Frank Act, it intended to implement many of the Basel III requirements, including those addressing risk-based capital and leverage requirements, liquidity requirements, stress tests, single- counterparty credit limits and early remediation requirements.
In July 2013, the Federal Reserve and the OCC issued a final rule and the FDIC issued an interim final rule implementing Basel III requirements as well as certain other regulatory capital and other requirements under the Dodd-Frank Act. The rules apply to all insured depository institutions and bank holding companies with consolidated assets over $500.0 million, such as WashingtonFirst. In broad terms, the regulations increase the required quality and quantity of the capital base, reduce the range of instruments that count as capital and increase the risk-weighted asset assessment for certain types of activities. WashingtonFirst and the Bank will be obligated to maintain higher capital ratios as the new regulatory standards are phased in beginning on January 1, 2015.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5 percent of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5 percent of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned the convenience and needs of the

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communities to be served, and various competitive factors. Acquisitions by Virginia bank holding companies are also subject to the provisions of Virginia law.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Any entity is required to obtain the approval of the Federal Reserve under the BHC Act before acquiring 25 percent (5 percent in the case of an acquirer that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over the company or bank. Under a rebuttable presumption established by the regulations of the Federal Reserve, the acquisition of 10 percent or more of a class of voting stock of a bank holding company, would, under the circumstances set forth in the presumption, constitute acquisition of control of a bank holding company. The statute and regulations set forth standards and certain presumptions concerning acquisition of control. Acquisitions of control are also subject to regulation by Virginia law.
In most circumstances, an entity that owns 25 percent or more of the total equity of a banking organization owns enough of the capital resources to have a controlling influence over such banking organization for purposes of the BHC Act. On September 22, 2008, the Federal Reserve issued a policy statement on equity investments in banks and bank holding companies. The key statutory limit restricting a non-controlling investor to 24.9 percent of voting securities for purposes of the BHC Act remains, but the policy statement loosens some restrictions on entities within this limit. The provisions of the policy statement generally allow the Federal Reserve to be able to conclude that an entity is not “controlling” if it does not own in excess of 15 percent of the voting power and 33 percent of the total equity of the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking organization, based on the policy statement the Federal Reserve will permit non-controlling investments in the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15 percent of any class of voting securities of the organization.
Regulation of the Bank
As a Virginia state non-member bank, the Bank is principally supervised, examined and regulated by the Virginia Bureau of Financial Institutions. The Bank is not a member of the Federal Reserve. Because the Bank’s deposits are insured by the FDIC, it is also subject to regulation pursuant to the Federal Reserve Act and Federal Deposit Insurance Act, or “FDIA.” The aspects of its business which are regulated under federal law include security requirements, reserve requirements, investments, transactions with affiliates, amounts it may lend to certain borrowers, business activities in which it may engage and minimum capital requirements. It is also subject to applicable provisions of Virginia law insofar as they do not conflict with and are not preempted by federal law, including laws relating to usury, various consumer and commercial loans and the operation of branch offices. Such supervision and regulation is intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and not for the protection of WashingtonFirst’s shareholders or creditors. The following references to applicable statutes and regulations are brief summaries which do not purport to be complete and which are qualified in their entirety by references to such statutes and regulations.
Equivalence to National Bank Powers. To the extent that the Virginia laws and regulations may have allowed state-chartered banks to engage in a broader range of activities than national banks, the Federal Deposit Insurance Corporation Improvement Act of 1991, or “FDICIA,” has operated to limit this authority. The FDICIA provides that no state bank or subsidiary thereof may engage as principal in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
Branching. Virginia law provides that a Virginia-chartered bank can establish a branch anywhere in Virginia provided that the branch is approved in advance by the Virginia Bureau of Financial Institutions. The branch must also be approved by the FDIC. Approval is based on a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if it were chartered by such state. Currently, the Bank operates branch offices in Virginia, Maryland and Washington, D.C.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its non-banking affiliates, including WashingtonFirst and any of its future non-banking subsidiaries, are subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with that bank. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of WashingtonFirst or its subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization. Because the federal regulatory agencies have not issued rules to implement the new restrictions, some additional time to apply is expected.

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Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The Federal Reserve has also issued Regulation W, which codifies prior pronouncements under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to in this section as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. The Dodd-Frank Act adds new requirements to bank transactions with insiders by requiring that credit exposure to derivatives and certain other transactions be treated as loans for the insider loan and general lending limits. Effective July 1, 2013, the Virginia state legislature implemented these requirements of Section 611 of the Dodd-Frank Act.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. The Bank’s payment of dividends is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. Dividends paid by the Bank have provided a substantial part of WashingtonFirst’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to WashingtonFirst will continue to be WashingtonFirst’s principal source of operating funds. The Bank’s ability to pay dividends is subject to the restrictions previously described for WashingtonFirst. In addition, capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be “undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend.
Because WashingtonFirst is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as WashingtonFirst) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks. These examinations review areas such as capital adequacy, reserves, loan portfolio quality and management, consumer and other compliance issues, investments and management practices. Based upon such an evaluation, the FDIC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the FDIC-determined value and the book value of such assets. The Virginia Bureau of Financial Institutions also conducts examinations of state banks but may accept the results of a federal examination in lieu of conducting an independent examination. In addition, the FDIC and the Virginia Bureau of Financial Institutions may elect to conduct a joint examination.
In addition to these regular exams, an insured bank is required to furnish quarterly and annual reports to the FDIC. The FDIC, as well as the Virginia Bureau of Financial Institutions, may exercise cease and desist or other supervisory powers over an insured bank if its actions represent unsafe or unsound practices or violations of law. Further, any proposed addition of any individual to the board of directors of the Bank or the employment of any individual as a senior executive officer of the Bank, or the change in responsibility of such an officer, will be subject to 90 days prior written notice to the FDIC if the Bank is not in compliance with the applicable minimum capital requirements, is otherwise a troubled institution or the FDIC determines that such prior notice is appropriate for the Bank. The FDIC then has the opportunity to disapprove any such appointment.
Audit Reports. Insured institutions with total assets of $500.0 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. For institutions with total assets of $1.0 billion or more, financial statements prepared in accordance with generally accepted accounting principles, management’s certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
Change in Control. The Change in Bank Control Act and regulations promulgated by the FDIC require that, depending on the particular circumstances, notice must be furnished to the FDIC and not disapproved prior to any person or group or persons acquiring “control” of an insured bank, subject to exemptions for certain transactions. Control is conclusively presumed to exist if a person acquires the power to vote, directly or indirectly, 25 percent or more of any class of voting securities of the bank. In addition, the term

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includes the power to direct the management and policies of the bank. Control is rebuttably presumed to exist if a person acquires 10 percent or more but less than 25 percent of any class of voting securities and either the bank has registered securities under Section 12 of the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption. Acquisitions of control are also subject to the provisions of Virginia law.
Capital Adequacy Requirements. Similar to the Federal Reserve’s requirements for bank holding companies, the FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured banks. The FDIC may establish higher minimum capital ratios if deemed appropriate by the FDIC, in its discretion, in light of the circumstances of a particular bank.
The FDIC’s regulations require insured banks to have and maintain a “Tier 1 risk-based capital” ratio of at least 4.0 percent and a “total risk-based capital” ratio of at least 8.0 percent of total risk-adjusted 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. Total risk-based capital represents the sum of Tier 1 capital and Tier 2 capital, as those terms are defined in the regulations. As of December 31, 2013 the Bank’s ratio of Tier 1 capital to total risk-weighted assets was 11.51 percent and its ratio of total capital to total risk weighted assets was 12.76 percent.
The FDIC also requires insured banks to meet a minimum “leverage ratio” of Tier 1 capital to total assets of not less than 3.0 percent for a bank that is not anticipating or experiencing significant growth and is highly rated (i.e., has a composite rating of 1 on a scale of 1 to 5). Banks that the FDIC determines are anticipating or experiencing significant growth or that are not highly rated must meet a minimum leverage ratio of 4.0 percent. As of December 31, 2013, the Bank’s ratio of Tier 1 capital to average total assets (leverage ratio) was 9.47 percent.
Corrective Measures for Capital Deficiencies. Federal bank regulators are required to take prompt corrective action with regard to capital deficient institutions. These rules also effectively impose capital requirements on insured banks, by subjecting banks with less capital to increasingly stringent supervisory actions. For purposes of the prompt corrective action regulations, a bank is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0 percent; a Tier 1 risk-based capital ratio of less than 4.0 percent; or a leverage ratio of less than 4.0 percent (or less than 3.0 percent if the bank has received a composite rating of 1 in its most recent examination report and is not experiencing significant growth). A bank is “adequately capitalized” if it has a total risk-based capital ratio of 8.0 percent or higher; a Tier 1 risk-based capital ratio of 4.0 percent or higher; a leverage ratio of 4.0 percent or higher (3.0 percent or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a “well capitalized” bank. A bank is “well capitalized” if it has a total risk-based capital ratio of 10.0 percent or higher; a Tier 1 risk-based capital ratio of 6.0 percent or higher; a leverage ratio of 5.0 percent or higher; and is not subject to any written requirement to meet and maintain any higher capital level(s). Based on the most recent notification from the FDIC, the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized, institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. Under the provisions of FDICIA and the prompt corrective action regulations, an “undercapitalized” bank is also subject to a limit on the interest it may pay on deposits and cannot make any capital distribution, including paying a dividend (with some exceptions), or pay any management fee (other than compensation to an individual in his or her capacity as an officer or employee of the bank). An undercapitalized bank may also be subject to other, discretionary, regulatory actions. Additional mandatory and discretionary regulatory actions apply to “significantly undercapitalized” and “critically undercapitalized” banks. Failure of a bank to maintain the required capital could result in such bank being declared insolvent and closed.
As an institution’s capital decreases, the sanctions available to the FDIC become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator. Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
The FDIC’s interim final rule issued in July 2013 revised the prompt corrective action requirements as of January 1, 2015 to reflect the proposed changes to the definitions of capital and revised regulatory minimum capital ratios. As such, the proposals would set a slightly higher standard for banks to be considered well capitalized than is currently required under the current framework.

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Deposit Insurance Assessments. The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund, or “DIF,” to the extent provided by law, and the Bank must pay assessments to the FDIC for such deposit insurance protection. The FDIC maintains the DIF by designating a required reserve ratio. If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable level generally within five years. The designated reserve ratio is currently set at 2.0 percent. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio.
The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. The assessment rate for an individual institution is determined according to a formula based on a combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have long-term debt ratings, the average ratings of its long-term debt.
On February 7, 2011, the FDIC approved a final rule that amended its existing DIF restoration plan and implemented certain provisions of the Dodd-Frank Act. Since taking effect on April 1, 2011, the assessment base has been determined using average consolidated total assets minus average tangible equity rather than using adjusted domestic deposits. Since the change resulted in a much larger assessment base, the final rule also lowered the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts being collected before the provisions took effect. The current assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions. For large institutions (generally those with total assets of $10 billion or more), which does not include the Bank, the initial base assessment rate range from 5 to 35 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. Assessment rates for large institutions are calculated using a scorecard that combines CAMELS ratings and certain forward-looking financial measures to assess the risk a large institution poses to the DIF.
Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject WashingtonFirst or the Bank, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed above under “–Corrective Measures for Capital Deficiencies,” the appropriate federal banking agency may appoint the FDIC (or the FDIC may appoint itself, under certain circumstances) as conservator or receiver for a banking institution if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan. The Virginia Bureau of Financial Institutions also has broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on any deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits. As previously noted, the Bank is categorized as “well capitalized.”
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 contains a cross-guarantee provision, which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100 percent or more of total capital, or (ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300 percent or more of total capital and the bank’s commercial real estate loan portfolio has increased 50 percent or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. WashingtonFirst recognizes that it has a high concentration of real estate loans and has implemented heightened risk management practices to monitor and control its exposure.

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Community Reinvestment Act. The Community Reinvestment Act of 1977, or “CRA,” and the corresponding regulations are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to acquire the assets and assume the liabilities of another bank. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. As of December 31, 2013, the Bank had a satisfactory CRA rating.
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in recent years has been combating money laundering and terrorist financing. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the “USA Patriot Act,” substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, a number of proposed regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. The USA Patriot Act requires financial institutions to prohibit correspondent accounts with foreign shell banks, establish an anti-money laundering program that includes employee training and an independent audit, follow minimum standards for identifying customers and maintaining records of the identification information and make regular comparisons of customers against agency lists of suspected terrorists, their organizations and money launderers. The potential impact of the USA Patriot Act on financial institutions of all kinds is significant and wide ranging.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control, or “OFAC.” The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Privacy. WashingtonFirst and its subsidiaries are subject to numerous privacy-related laws and their implementing regulations. For example, the GLB Act imposed requirements on financial institutions with respect to customer privacy. The GLB Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, are required to comply with state law if it is more protective of customer privacy than the GLB Act.

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Legislative Initiatives
Regulators have increased their focus on the regulation of financial institutions. A number of government initiatives, including those described below, designed to respond to recent conditions have been introduced over the past several years and have substantially intensified the regulation of financial institutions. From time to time, various legislative and regulatory initiatives may be introduced in Congress and state legislatures and may change banking statutes and the operating environment of WashingtonFirst and the Bank in substantial and unpredictable ways. WashingtonFirst cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of operations of WashingtonFirst or the Bank. A change in statutes, regulations, or regulatory policies applicable to WashingtonFirst or the Bank could have a material adverse effect on the financial condition, results of operation or business of WashingtonFirst and the Bank.
Dodd-Frank Act. In July 2010, the Dodd-Frank Act regulatory reform legislation became law. This law broadly affects the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector, including provisions that, among other things, enhance prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Dodd-Frank Act also contains reforms of consumer mortgage lending practices and creates a Consumer Financial Protection Bureau (“CFPB”) which is granted broad authority over consumer financial practices of banks and others. WashingtonFirst is not subject to regulation by the CFPB, as it has supervisory authority over depository institutions with total assets of $10.0 billion or greater. Nevertheless, it is unclear whether the CFPB’s focus on consumer regulation and the risks posed by financial products will ultimately impact institutions such as WashingtonFirst.

It is expected as the specific new or incremental requirements applicable to WashingtonFirst become effective that the costs and difficulties of remaining compliant with all such requirements will increase. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that limit the Tier 1 capital treatment of trust preferred securities could prevent or place dollar limitations on the amount of the trust preferred securities that WashingtonFirst may count as Tier 1 capital will not affect the trust preferred securities assumed in the acquisition of Alliance as the legislation grandfathers such instruments issued prior to May 19, 2010 into Tier 1 capital (subject to a limit of 25 percent of Tier 1 capital).. A number of aspects of the Dodd-Frank Act are still subject to rule making and will take effect over several years, making it difficult to anticipate the overall financial impact on WashingtonFirst, its customers or the financial industry more generally.

WashingtonFirst’s management continues to review and assess the provisions of the Dodd–Frank Act and assessing its probable impact on its business, financial condition, and results of operations.
Incentive Compensation. In June 2010, the federal bank regulators issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation programs of financial institutions do not undermine the safety and soundness of banking organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk- taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Also, on April 14, 2011, the FDIC published a proposed interagency rule to implement certain incentive compensation requirements of the Dodd-Frank Act. Under the proposed rule, financial institutions must prohibit incentive-based compensation arrangements that encourage inappropriate risk taking that are deemed excessive or that may lead to material losses. These rules have not yet been finalized.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as WashingtonFirst, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
U.S. Treasury Small Business Lending Fund. Enacted into law as part of the Small Business Jobs Act of 2010, the Small Business Loan Fund, or “SBLF,” was created to be a dedicated investment fund that provided capital to qualified community banks and bank holding companies to encourage lending to small businesses. The program is voluntary and allowed eligible institutions to apply for the purchase by the U.S. Treasury of senior non-cumulative perpetual preferred stock in an aggregate amount based on a participant’s consolidated risk-weighted assets at the measurement date. WashingtonFirst elected to participate in the SBLF, and on August 4,

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2011, WashingtonFirst issued and sold to the U.S. Treasury 17,796 shares of Series D Preferred Stock for an aggregate purchase price of $17.8 million in cash.
The rate of dividends is determined based on increases or decreases in lending compared to a “baseline” established for each institution at the time of the investment. Dividend rates are adjusted quarterly during the first nine quarters of the investment and may vary between 1.0 percent and 5.0 percent depending on the lending increase or decrease compared to the baseline. The rate in effect at the beginning of the tenth full quarter after the investment date will be payable until the expiration of the 4.5 year period beginning on the investment date. However, if the institution has not experienced an increase, or has experienced a decline in its small business lending at the beginning of the tenth quarter after the investment, then that institution’s dividend rate will increase to 7.0 percent. Further, the potential dividend rate reduction in any period is limited, such that the reduction will not apply to any Series D Preferred Stock proceeds that exceed the dollar amount of the increase in qualified small business lending for that period as compared to the baseline. To encourage timely repayment, the dividend rate for the SBLF investment increases to 9.0 percent for all participating institutions four and a half years after the initial investment which will begin on February 4, 2016. WashingtonFirst’s dividend rate initially was determined to be one percent and has continued at that rate for successive quarters. In addition, for the eleventh dividend period through 4.5 years after the closing of the SBLF transaction, the annual dividend rate becomes fixed at a rate between 1% to 5%, based upon the percentage increase in QSBL from the QSBL Baseline to the level as of the end of the ninth dividend period. The ninth dividend period coincided with September 30, 2013, and WashingtonFirst Bank’s QSBL as of September 30, 2013 had increased sufficiently such that the dividend rate for the eleventh dividend period (ending March 31, 2014) through 4.5 years after the closing of the SBLF transaction (February 4, 2016) shall be set at a fixed rate of 1% to be paid as dividends on the Series D Preferred Stock.
Participation in the SBLF subjects WashingtonFirst to various obligations, including certification obligations to the U.S. Treasury, access by governmental authorities to WashingtonFirst’s books and records and restrictions on WashingtonFirst’s ability to pay dividends. In addition, the U.S. Treasury is entitled to appoint an observer to the WashingtonFirst board of directors, if it fails to pay dividends on the Series D Preferred Stock in accordance with its terms.
In light of current conditions and the market outlook for continuing weak economic conditions, regulators have increased their focus on the regulation of financial institutions. A number of government initiatives, including those described below, designed to respond to the current conditions have been introduced over the past several years and have substantially intensified the regulation of financial institutions. From time to time, various legislative and regulatory initiatives may be introduced in Congress and state legislatures and may change banking statutes and the operating environment of WashingtonFirst and the Bank in substantial and unpredictable ways. WashingtonFirst cannot determine the ultimate effect that any potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition or results of operations of WashingtonFirst or the Bank. A change in statutes, regulations or regulatory policies applicable to WashingtonFirst or the Bank could have a material effect on the financial condition, results of operations or business of WashingtonFirst and the Bank.
Monetary Policy
The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of banks and bank holding companies. Among the means available to the Federal Reserve to regulate the supply of bank credit are open market purchases and sales of U.S. government securities, changes in the discount rate on borrowings from the Federal Reserve System and changes in reserve requirements with respect to deposits. These activities are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits on a national basis, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve monetary policies and the fiscal policies of the federal government have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. WashingtonFirst cannot predict the nature of future monetary and fiscal policies and the effect of such policies on the future business and earnings of WashingtonFirst or its subsidiaries.
Competition
WashingtonFirst competes with virtually all banks and non-bank financial institutions (e.g., savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations, and equipment suppliers) that offer services in its market area. Much of this competition comes from large financial institutions headquartered outside the region, each of which has greater financial and other resources than WashingtonFirst and is able to conduct large advertising campaigns and offer incentives. To attract business in this competitive environment, WashingtonFirst relies on personal contact by its officers and directors, local promotional activities, and the ability to provide personally tailored services to small businesses and professionals.


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Internet Access to Corporate Documents
Information about WashingtonFirst can be found on its website at www.wfbi.com. WashingtonFirst posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those reports under “Investor Relations” in the “About Us” section of the website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available free of charge.
The information available on WashingtonFirst’s website is not part of this Annual Report on Form 10-K or any other report filed by WashingtonFirst with the SEC.

Item 1A. Risk Factors
Risks Associated With WashingtonFirst’s Business
Future growth through acquisition may be more difficult, costly or time-consuming than expected and results of operation after a merger or acquisition may differ materially from the results of operation at the time of the merger.
WashingtonFirst’s growth strategy is to pursue both organic growth as well as acquisition opportunities within its target market area of the Washington DC Metropolitan Area. In the case of any acquisition, it is possible that the integration process could result in the loss of key employees, disruption of the ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect WashingtonFirst’s ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger. As with any merger of banking institutions, there also may be business disruptions that cause WashingtonFirst to lose customers or cause customers to move their deposits.
The success of WashingtonFirst following any merger or acquisition depends in large part on WashingtonFirst’s ability to integrate the businesses, business models and cultures. The process of integrating businesses may cause the management of WashingtonFirst to focus a portion of its time and energies on such matters that otherwise would be directed to the business and operations of WashingtonFirst. Any such diversion of management’s attention, if significant, could affect WashingtonFirst’s ability to service existing business and to develop new business and could adversely affect the business and earnings of WashingtonFirst. If WashingtonFirst is not able to integrate operations successfully and timely, the expected benefits of any merger or acquisition, including any anticipated cost savings, may not be realized.
The results of operations of WashingtonFirst after any merger or acquisition may be materially different from those anticipated at the time of the transaction. The actual costs of the transaction and the integration of the companies could exceed amounts anticipated. In addition, these charges may decrease capital of the combined company that could be used for profitable, income earning investments in the future.
WashingtonFirst may not be able to manage future growth and competition in the greater Washington, D.C. metropolitan area.
WashingtonFirst has grown rapidly in the past several years, through acquisition and through organic growth. WashingtonFirst can provide no assurance that it will continue to be able to maintain its rate of growth at acceptable risk levels and upon acceptable terms, while managing the costs and implementation risks associated with its growth strategy. WashingtonFirst may be unable to continue to increase its volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth. If WashingtonFirst is successful in continuing its growth, it cannot assure you that further growth would offer the same levels of potential profitability, or that it would be successful in controlling costs and maintaining asset quality.
WashingtonFirst’s future success will depend on its ability to compete effectively in the highly competitive financial services industry.
WashingtonFirst faces substantial competition in all phases of its operations from a variety of different competitors. In particular, there is very strong competition for financial services in the greater Washington, D.C. metropolitan area in which it conducts its business. WashingtonFirst competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, money market funds and other mutual funds, as well as other kinds of local and community, super-regional, national and international financial institutions and enterprises that operate offices in its primary market areas and elsewhere. WashingtonFirst’s future growth and success will depend on its ability to compete effectively in this highly competitive financial services environment.
Many of WashingtonFirst’s competitors are well-established, larger financial institutions and many offer products and services that it does not. Many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, some operate in less stringent regulatory environments. While WashingtonFirst believes it competes effectively with these other financial institutions in its primary markets, it may face a competitive disadvantage as a result of its smaller size, smaller asset

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base, lack of geographic diversification and inability to spread its marketing costs across a broader market. If WashingtonFirst has to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, its net interest margin and income could be negatively affected. Failure to compete effectively to attract new or to retain existing, clients may reduce or limit WashingtonFirst’s net income and its market share and may adversely affect its results of operations, financial condition and growth.
WashingtonFirst’s profitability depends on interest rates generally, and it may be adversely affected by changes in government monetary policy.
The economy, interest rates, monetary and fiscal policies of the federal government and regulatory policies have a significant influence on WashingtonFirst and the industry as a whole. WashingtonFirst’s profitability depends in substantial part on its net interest margin, which is the difference between the rates it receives on loans and investments and the rates it pays for deposits and other sources of funds. Its net interest margin depends on many factors that are partly or completely outside of its control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. In recent years, the bank’s interest income from its loan portfolio has been negatively impacted by the low interest rate environment. The Federal Reserve has conveyed that it anticipates maintaining interest rates at low levels in an effort to stimulate the economy. A persistent low interest rate environment will adversely affect WashingtonFirst’s ability to earn income on loans and investments. In addition, if market interest rates change so that the interest it pays on deposits and borrowings increases faster than the interest it earns on loans and investments, our net income could be negatively affected.
Changes in interest rates, particularly by the Federal Reserve, which implements national monetary policy in order to mitigate recessionary and inflationary pressures, also affect the value of its loans. In setting its policy, the Federal Reserve may utilize techniques such as: (i) engaging in open market transactions in United States government securities; (ii) setting the discount rate on member bank borrowings; and (iii) changing reserve requirements. These techniques may have an adverse effect on WashingtonFirst’s deposit levels, net interest margin, loan demand or its business and operations. The reduction by the Federal Reserve of its historic levels of securities purchases, or “tapering”, could cause the interest required to be paid by WashingtonFirst on deposits and borrowings to increase leading to a reduction in its net interest margin. In addition, an increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing variable rate loans or reduce their desire to borrow more money. This may lead to an increase in WashingtonFirst’s nonperforming assets, a decrease in loan originations, or a reduction in the value of and income from its loans, any of which could have a material adverse effect on WashingtonFirst’s results of operations. WashingtonFirst tries to minimize its exposure to interest rate risk, but it is unable to completely eliminate this risk. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may have a material adverse effect on WashingtonFirst’s business, financial condition and results of operations.
WashingtonFirst’s profitability depends significantly on local economic conditions, and may be adversely affected by reductions in Federal spending.
WashingtonFirst’s success is dependent to a significant extent upon general economic conditions in the greater Washington, D.C. metropolitan area which are, in turn, dependent to a large extent on the Federal government, particularly its local employment and spending levels. In addition, the banking industry in the greater Washington, D.C. metropolitan area, similar to other geographic markets, is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond WashingtonFirst’s control. The adverse economic and financial conditions prevailing in the United States and in WashingtonFirst’s market area since 2008 increased the number of loan defaults and foreclosures and resulted in a decline in credit quality, which negatively impacted WashingtonFirst’s financial results. Although recent improvements have occurred, there is no assurance that these will continue. Prolonged continuation of these conditions or other economic dislocation in the greater Washington, D.C. metropolitan area, including a substantial reduction in the level of employment or local spending by the Federal government, could cause increases in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital. For example, the reductions in Federal spending caused by a sequestration of funds, or “sequester,” could reduce and have reduced employment in the greater Washington D.C. metropolitan area. Temporary layoffs, salary reductions or furloughs of government employees or government contractors could have adverse impacts on other businesses in WashingtonFirst's market and the general economy of the greater Washington D.C. metropolitan area, and may indirectly lead to a loss of revenues by WashingtonFirst's customers, including vendors and lessors to the federal government and government contractors or to their employees, as well as a wide variety of commercial and retail businesses. Accordingly, sequestration could lead to increases in past due loans, nonperforming loans, loan loss reserves, and charge offs, and a decline in liquidity. WashingtonFirst cannot assure you that future adverse changes in the economy in the greater Washington, D.C. metropolitan area would not have a material adverse effect on the WashingtonFirst’s financial condition, results of operations or cash flows.

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WashingtonFirst’s loan portfolios have significant real estate concentration.
A substantial portion of WashingtonFirst’s loan portfolio is secured by real estate collateral. As of December 31, 2013, approximately 87 percent of WashingtonFirst’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. While we believe that our loan portfolio is well diversified, these concentrations expose us to the risk that a decline in the real estate market or in the economic conditions in the Washington, D.C. metropolitan area, could increase the levels of nonperforming loans and charge-offs, decrease the value of collateral and reduce loan demand. In that event, WashingtonFirst’s earnings and capital could be adversely affected.
Commercial, commercial real estate and construction loans tend to have larger balances than single family mortgages loans and other consumer loans. Because the loan portfolio contains a significant number of commercial and commercial real estate and construction loans, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in: a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
Further, under guidance adopted by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. We may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital sooner than we would otherwise seek it, which may reduce shareholder returns.
WashingtonFirst’s business strategy includes the continuation of its growth plans, and its financial condition and results of operations could be negatively affected if it fails to grow or fails to manage its growth effectively.
WashingtonFirst intends to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. WashingtonFirst’s prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies that are experiencing growth. WashingtonFirst cannot assure you it will be able to expand its market presence in its existing markets or successfully enter new markets, or that any expansion will not adversely affect its results of operations. Failure to manage WashingtonFirst’s growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations, and could adversely affect its ability to successfully implement its business strategy. Also, if WashingtonFirst’s growth occurs more slowly than anticipated or declines, its operating results could be materially affected in an adverse way.
WashingtonFirst’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in its market areas and its ability to manage its growth. While WashingtonFirst believes it has the management resources and internal systems in place to successfully manage its future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed. WashingtonFirst may face risks with respect to future acquisitions.

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As a strategy, WashingtonFirst has sought to increase the size of the Bank by business acquisitions, and it has grown rapidly since its incorporation. WashingtonFirst may acquire other financial institutions or parts of those entities in the future. Acquisitions and mergers involve a number of risks, including:
•
the time and costs associated with identifying and evaluating potential acquisitions and merger partners;
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the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target entity may not be accurate;
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the time and costs of evaluating new markets, hiring experienced management opening new offices, and the time lags between these activities and generating of sufficient assets and deposits to support the costs of the expansion;
•
WashingtonFirst’s ability to finance an acquisition and possible ownership or economic dilution to its current shareholders;
•
the diversion of WashingtonFirst’s management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;
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entry into new markets where WashingtonFirst lacks experience;
•
the introduction of new products and services into its business;
•
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on WashingtonFirst’s results of operations; and
•
the potential loss of key employees and clients.
WashingtonFirst may incur substantial costs to expand, and it can give no assurance such expansion will result in the levels of profits it seeks. There can be no assurance that integration efforts for any future mergers or acquisitions will be successful. Also, WashingtonFirst may issue equity securities, including common stock and securities convertible into shares of its common stock, in connection with future acquisitions, which could cause ownership and economic dilution to its current shareholders. There is no assurance that, following any future merger or acquisition, WashingtonFirst’s integration efforts will be successful or that, after giving effect to the acquisition, it will achieve profits comparable to or better than its historical experience.
WashingtonFirst’s allowance for loan losses could become inadequate and reduce its earnings and capital.
WashingtonFirst maintains an allowance for loan losses that it believes is adequate for absorbing the estimated future losses inherent in its loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of WashingtonFirst’s clients relative to their financial obligations with it. The amount of future losses, however, is susceptible to changes in economic and other market conditions, including changes in interest rates and collateral values, which are beyond WashingtonFirst’s control, and these future losses may exceed its current estimates. There can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy on a national basis or in the Bank’s market area, or changes in the circumstances of particular borrowers. Although WashingtonFirst believes the allowance for loan losses is adequate to absorb probable losses in its loan portfolio, WashingtonFirst cannot predict the amount of such losses or guarantee that its allowance will be adequate in the future. Excessive loan losses could have a material adverse effect on WashingtonFirst financial condition and results of operations.

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Liquidity needs could adversely affect WashingtonFirst’s results of operations and financial condition.
WashingtonFirst’s primary source of funds is client deposits in the Bank and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. The deposits from the title and escrow agency customers that WashingtonFirst acquired in the Alliance acquisition are expected to continue to be an important component of WashingtonFirst’s deposit base. Because deposits of title and escrow agency customers are directly related to home sales and refinancing activity, any decrease in this activity would adversely impact WashingtonFirst’s deposit levels. Accordingly, WashingtonFirst may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank, or “FHLB” advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While WashingtonFirst believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if WashingtonFirst continues to grow and experience increasing loan demand. Should such sources not be adequate, WashingtonFirst may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets.
WashingtonFirst is subject to extensive regulation that could limit or restrict its activities and adversely affect its earnings.
WashingtonFirst and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not WashingtonFirst’s shareholders. These regulations affect WashingtonFirst’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on WashingtonFirst, the Bank and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect WashingtonFirst’s powers, authority and operations, or the powers, authority and operations of the Bank in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on WashingtonFirst. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the WashingtonFirst’s business, financial condition and results of operations.
WashingtonFirst’s recent results may not be indicative of its future results.
WashingtonFirst may not be able to sustain its historical rate of growth or may not even be able to grow its business at all. In addition, its recent and rapid growth may distort some of its historical financial ratios and statistics. In the future, WashingtonFirst may not have the benefit of several recently favorable factors, such as a generally stable interest rate environment, an improving real estate market, the ability to find suitable expansion opportunities, or the relative resistance of the greater Washington, D.C. metropolitan area to economic downturns. Various factors, including economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit WashingtonFirst’s ability to expand its market presence. As our asset size and earnings increase, it may become more difficult to achieve high rates of increase in assets and earnings. Additionally, it may become more difficult to achieve continued improvement in our expense levels and efficiency ratio. We may not be able to maintain the relatively low levels of nonperforming assets that we have experienced. Declines in the rate of growth of income or assets or deposits, and increases in operating expenses or nonperforming assets may have an adverse impact on the value of the common stock. If WashingtonFirst experiences a significant decrease in its historical rate of growth, its results of operations and financial condition may be adversely affected due to the fixed nature of certain operating costs.
WashingtonFirst’s small to medium-sized business target market may have fewer financial resources to withstand a downturn in the economy.
WashingtonFirst’s commercial development and marketing strategy targets the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this economic sector in the markets in which WashingtonFirst operates, its results of operations and financial condition may be adversely affected.

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WashingtonFirst depends on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, WashingtonFirst may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information. WashingtonFirst also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, WashingtonFirst expects that a customer’s financial statements present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. WashingtonFirst’s financial condition and results of operations could be negatively impacted to the extent it relies on customer-provided financial statements or other information which are discovered to be materially misleading.
Negative public opinion could damage WashingtonFirst’s reputation and adversely impact its earnings.
Reputation risk, or the risk to its business, earnings and capital from negative public opinion, is inherent in WashingtonFirst’s business. Negative public opinion can result from WashingtonFirst’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect WashingtonFirst’s ability to keep and attract clients and employees and can expose WashingtonFirst to litigation and regulatory action. Although WashingtonFirst takes steps to minimize reputation risk in dealing with its clients and communities, this risk will always be present given the nature of its business.
WashingtonFirst depends on the services of key personnel, and a loss of any of those personnel could disrupt its operations and result in reduced revenues.
WashingtonFirst’s success depends upon the continued service of its senior management team and upon its ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. In management’s experience, it can take a significant period of time to identify and hire personnel with the combination of professional skills and personal attributes necessary for the successful implementation of WashingtonFirst’s strategy. If WashingtonFirst loses the services of its key personnel, including key client relationship personnel, or are unable to attract additional qualified personnel, its business, financial condition, results of operations and cash flows could be materially adversely affected.
WashingtonFirst depends on technology to compete effectively and may be required to make substantial investments in new technology, which could have a negative effect on WashingtonFirst’s operating results and the value of its common stock.
The market for financial services, including banking services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, mobile devices, computers, automation and Internet-based banking. This is particularly true for WashingtonFirst, which relies on technology to compete in its market. WashingtonFirst depends on third party vendors for portions of its data processing services. In addition to WashingtonFirst’s ability to finance the purchase of those services and integrate them into its operations, its ability to offer new technology-based services depends on WashingtonFirst’s vendors’ abilities to provide and support those services. Future advances in technology may require WashingtonFirst to incur substantial expenses that adversely affect its operating results, and WashingtonFirst’s limited capital resources may make it impractical or impossible for it to keep pace with competitors possessing greater capital resources. WashingtonFirst’s ability to compete successfully in its banking markets may depend on the extent to which WashingtonFirst and its vendors are able to offer new technology-based services and on WashingtonFirst’s ability to integrate technological advances into its operations.
WashingtonFirst’s reliance on technology exposes WashingtonFirst to cybersecurity risks.
WashingtonFirst relies on digital technologies to conduct its operations, and those technologies may be compromised by the deliberate attacks by others or unintentional cybersecurity incidents. Deliberate cybersecurity attacks may seek to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Other events may not seek unauthorized access, but may seek to prevent authorized users to be able to access digital systems, referred to as a “denial of service” attacks. A cybersecurity incident of this type, could require WashingtonFirst to incur substantial remediation and increased cybersecurity protection costs, such as implementing new technologies, hiring and training new employees and engaging third party experts and consultants. In addition, WashingtonFirst could become subject to litigation from customers whose sensitive data was obtained without their consent, and to damage to the company’s reputation, which could have an adverse effect on the company’s financial condition and results of operation. From time to time, WashingtonFirst is subject to cybersecurity attacks arising in the normal course of its business. In the opinion of management, there have been no cybersecurity attacks which would have a material adverse effect on WashingtonFirst’s financial condition, results of operation or products and services.



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WashingtonFirst may be unable to redeem its Senior Non-Cumulative Perpetual Preferred Stock before the dividend rate increases to 9%.
In August 2011, WashingtonFirst elected to participate in the SBLF, and issued 17,796 shares of its Senior Non-Cumulative Perpetual Preferred Stock, hereafter referred to as “Series D Preferred Stock”, to the United States Treasury for $17.8 million. Holders of the Series D Preferred Stock are entitled to receive non-cumulative cash dividends payable at the rate and in the manner prescribed in the Certificate of Designations of the Series D Preferred Stock. During the first ten quarters in which the Series D Preferred Stock was outstanding, the dividend rate was subject to fluctuation on a quarterly basis depending upon changes in the amount of WashingtonFirst’s qualified small business lending, or “QSBL,” as defined in the Supplemental Reports related to the SBLF transaction, from a “baseline” level or “QSBL Baseline.” For the second dividend period through the tenth dividend period, the annual dividend rate was 1.0 percent. Beginning with the eleventh dividend period through 4.5 years after the closing of the SBLF transaction, the annual dividend rate will be fixed at 1.0 percent.
On February 4, 2016, 4.5 years from the closing of the SBLF transaction will have passed, and the annual dividend rate will be fixed at 9.0 percent, regardless of the level of QSBL. Depending on a variety of factors, including market conditions, WashingtonFirst’s financial condition at the time, and its ability to obtain regulatory approval, WashingtonFirst may be unable redeem the Series D Preferred Stock, and any such increases in the dividend rate could have a material adverse effect on WashingtonFirst’s liquidity.
The failure by the Bank to make payments of principal and interest on its outstanding subordinated capital notes may have negative consequences, including external involvement in the board of directors of the Bank or WashingtonFirst.
On June 15, 2012, the Bank incurred $2.5 million in subordinated indebtedness, which bears interest at a rate of 8.0 percent per annum, payable quarterly in arrears. Principal is due and payable in full on June 14, 2021. The subordinated capital notes are as Tier 2 capital by bank regulatory authorities. The Bank may call the subordinated capital notes, without penalty, at any time after June 15, 2015. The notes are the subordinated unsecured obligations of the Bank and are not guaranteed by WashingtonFirst. For so long as the notes qualify as Tier 2 capital under applicable banking regulations, the notes will be subordinate to all deposits and general creditors of the Bank. In connection with the issuance of the subordinated capital notes, WashingtonFirst issued a warrant to purchase 57,769 shares of common stock to the lender, exercisable at $10.82 per share, subject to adjustment.
If the Bank fails to make any payment due under the subordinated capital notes or the warrant for a period of 30 days, or the ratio of classified assets to Tier 1 capital of the Bank is 40 percent or greater, the holder of the notes is entitled (subject to any prior required regulatory approval) to appoint an observer to attend the meetings of the boards of directors of WashingtonFirst and the Bank and any board committees. If WashingtonFirst’s failure to pay such amounts extends for a period of 120 days, or the ratio of classified assets to Tier 1 capital of the Bank is 70 percent or greater, then subject to any prior regulatory approval the holder of the notes shall be entitled to appoint one representative of the holder to the board of directors of either WashingtonFirst or the Bank. Once appointed, such observer or representative shall remain on the board until the expiration of 12 months after payment of all amounts due, or the reduction of the ratio to less than 40 percent or 70 percent, as the case may be.
Risks Associated with WashingtonFirst’s Common Stock
An active liquid trading market for WashingtonFirst’s common stock may not develop and WashingtonFirst’s stock price may be volatile.
WashingtonFirst’s common stock began trading on the NASDAQ Capital Market, or the “NASDAQ,” on December 24, 2012. However, an active and liquid trading market for WashingtonFirst’s common stock may not develop or be maintained. Liquid and active trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of WashingtonFirst’s common stock could vary significantly as a result of a number of factors, some of which are beyond WashingtonFirst’s control.
The following factors could affect WashingtonFirst’s stock price:
•
WashingtonFirst’s operating and financial performance;
•
quarterly variations in the rate of growth of WashingtonFirst’s financial indicators, such as net income per share, net income and revenues;
•
strategic actions by WashingtonFirst’s competitors;
•
changes in WashingtonFirst’s revenue or earnings estimates;
•
publication of reports or changes or withdrawals of research coverage by equity research analysts;
•
speculation in the press or investment community;

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•
sales of WashingtonFirst’s common stock by WashingtonFirst, members of its board of directors or management, or the perception that such sales may occur;
•
changes in accounting principles;
•
additions or departures of key management personnel;
•
actions by WashingtonFirst’s shareholders;
•
general market conditions, including fluctuations in interest rates; and
•
domestic and international economic, legal and regulatory factors unrelated to WashingtonFirst’s performance.
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of WashingtonFirst’s common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against WashingtonFirst, could result in very substantial costs, divert WashingtonFirst’s management’s attention and resources and harm WashingtonFirst’s business, operating results and financial condition.
WashingtonFirst is a relatively small public company, and compliance with the increased regulatory and reporting requirements of the Exchange Act and the Sarbanes-Oxley Act, may strain its resources, increase its costs and distract management; and WashingtonFirst may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company with listed equity securities, WashingtonFirst is required to comply with certain laws, regulations and requirements, including corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” related regulations of the SEC and the requirements of the NASDAQ. Amongst other things, WashingtonFirst is required to:
•
design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
•
design, establish, evaluate and maintain a systems of disclosure controls and procedures to ensure the information required to be disclosed in its filings with the SEC is recorded, processed, summarized and reported in a timely manner;
•
comply with enhanced corporate governance requirements and other rules promulgated by the NASDAQ;
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prepare and distribute periodic public reports in compliance with WashingtonFirst’s obligations under the federal securities laws;
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establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
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involve and retain to a greater degree outside counsel and accountants in the above activities; and
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enhance its investor relations function.
Complying with these statutes, regulations and requirements occupy a significant amount of time of WashingtonFirst’s board of directors and management and significantly increase its costs and expenses.

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WashingtonFirst’s articles of incorporation and bylaws and Virginia law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of WashingtonFirst’s common stock.
WashingtonFirst’s articles of incorporation authorize its board of directors to issue preferred stock without shareholder approval. If WashingtonFirst’s board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire WashingtonFirst. In addition, some provisions of WashingtonFirst’s articles of incorporation and bylaws could make it more difficult for a third party to acquire control of WashingtonFirst, even if the change of control would be beneficial to and desirable by WashingtonFirst’s shareholders, including:
•
a staggered board of directors;
•
the ability of the WashingtonFirst board of directors to issue shares of preferred stock without shareholder approval, which preferred stock could have voting, liquidation, dividend or other rights superior to those of the WashingtonFirst common stock;
•
the inability of WashingtonFirst shareholders to act without a meeting except by unanimous written consent;
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the inability of WashingtonFirst shareholders to call special meetings;
•
limitations on affiliated transactions and control share acquisitions;
•
if a two-thirds majority of the WashingtonFirst board of directors has not approved certain transactions, such as an amendment to the WashingtonFirst articles of incorporation, merger, share exchange, sale of substantially all of the assets, or dissolution, the transaction must receive the affirmative vote of at least 80 percent of each voting group of WashingtonFirst shareholders entitled to vote on the transaction for the transaction to be approved; and
•
the WashingtonFirst bylaws provide that the WashingtonFirst bylaws may be amended by the WashingtonFirst board of directors.
The VSCA contains provisions governing “affiliated transactions.” These include various transactions such as mergers, share exchanges, sales, leases, exchanges, mortgages, pledges, transfers or other material dispositions of assets, issuances of securities, dissolutions, and similar transactions with an “interested shareholder.” An interested shareholder is generally the beneficial owner of more than 10 percent of any class of a corporation’s outstanding voting shares. During the three years following the date a shareholder becomes an interested shareholder, any affiliated transaction with the interested shareholder must be approved by both a majority of the “disinterested directors” (those directors who were directors before the interested shareholder became an interested shareholder or who were recommended for election by a majority of disinterested directors) and by the affirmative vote of the holders of two-thirds of the corporation’s voting shares other than shares beneficially owned by the interested shareholder. These requirements do not apply to affiliated transactions if, among other things, a majority of the disinterested directors approve the interested shareholder’s acquisition of voting shares making such a person an interested shareholder before such acquisition. Beginning three years after the shareholder becomes an interested shareholder, the corporation may engage in an affiliated transaction with the interested shareholder if:
•
the transaction is approved by the holders of two-thirds of the corporation’s voting shares, other than shares beneficially owned by the interested shareholder;
•
the affiliated transaction has been approved by a majority of the disinterested directors; or
•
subject to certain additional requirements, in the affiliated transaction the holders of each class or series of voting shares will receive consideration meeting specified fair price and other requirements designed to ensure that all shareholders receive fair and equivalent consideration, regardless of when they tendered their shares.
Under the VSCA’s control share acquisitions law, voting rights of shares of stock of a Virginia corporation acquired by an acquiring person or other entity at ownership levels of 20 percent, 33 1/3 percent and 50 percent of the outstanding shares may, under certain circumstances, be denied. The voting rights may be denied:
•
unless conferred by a special shareholder vote of a majority of the outstanding shares entitled to vote for directors, other than shares held by the acquiring person and officers and directors of the corporation; or
•
among other exceptions, such acquisition of shares is made pursuant to an affiliation agreement with the corporation or the corporation’s articles of incorporation or bylaws permit the acquisition of such shares before the acquiring person’s acquisition thereof.

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If authorized in the corporation’s articles of incorporation or bylaws, the statute also permits the corporation to redeem the acquired shares at the average per share price paid for them if the voting rights are not approved or if the acquiring person does not file a “control share acquisition statement” with the corporation within 60 days of the last acquisition of such shares. If voting rights are approved for control shares comprising more than 50 percent of the corporation’s outstanding stock, objecting shareholders may have the right to have their shares repurchased by the corporation for “fair value.”
These provisions are only applicable to public corporations that have more than 300 shareholders, and, therefore, have only recently become applicable to WashingtonFirst. Corporations may provide in their articles of incorporation or bylaws to opt-out of these provisions, but WashingtonFirst has not done so.
Future sales of WashingtonFirst’s common stock in the public market could lower its stock price, and any additional capital raised by WashingtonFirst through the sale of equity or convertible securities may dilute the ownership of existing shareholders.
WashingtonFirst may sell additional shares of common stock in subsequent public offerings or otherwise issue additional shares of common stock or securities convertible into or exchangeable for common stock in the future. WashingtonFirst has filed a registration statement with the SEC on Form S-8 providing for the registration of WashingtonFirst’s common stock issued or reserved for issuance under the WashingtonFirst 2010 Equity Compensation Plan and predecessor WashingtonFirst incentive plans. Subject to the satisfaction of vesting conditions, shares registered under WashingtonFirst’s registration statement on Form S-8 will be available for resale immediately in the public market without restriction.
WashingtonFirst cannot predict the size of future issuances of its common stock or the effect, if any, that future issuances and sales of shares of its common stock will have on the market price of its common stock. Sales of substantial amounts of WashingtonFirst’s common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of WashingtonFirst’s common stock.
The concentration of WashingtonFirst’s capital stock ownership will limit your ability to influence corporate matters.
WashingtonFirst’s directors and executive officers as a group beneficially own approximately 28.9 percent of WashingtonFirst’s outstanding common stock and options exercisable within sixty days. Consequently, WashingtonFirst’s board of directors has significant influence over all matters that require approval by WashingtonFirst’s shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may limit the ability of other shareholders to influence corporate matters.
WashingtonFirst’s ability to pay dividends is subject to regulatory restrictions, and it may be unable to pay future dividends.
WashingtonFirst’s ability to pay dividends is subject to regulatory, statutory and contractual restrictions and the need to maintain sufficient capital. Its only source of funds with which to pay dividends to its shareholders are dividends received from the Bank, and the Bank’s ability to pay dividends is limited by its own obligations to maintain sufficient capital and regulatory restrictions. If these regulatory requirements are not satisfied, WashingtonFirst will be unable to pay dividends on its common stock. WashingtonFirst paid a share dividend on May 17, 2013 and declared a cash dividend on October 22, 2013, payable January 2, 2014.
Future dividend payments and common stock repurchases are subject to certain restrictions by the terms of the Secretary of the Treasury’s equity investment in WashingtonFirst.
Under the terms of the SBLF, for so long as any preferred stock issued under the SBLF remains outstanding, WashingtonFirst is prohibited from making a dividend payment or share repurchase if, after the payment or repurchase, its Tier 1 capital would not be at least 90 percent of the amount existing at the time immediately after August 4, 2011, excluding any subsequent net charge-offs and partial repayments of the SBLF funding. This 90 percent limitation will decrease by a dollar amount equal to 10.0 percent of the SBLF funding for every 1.0 percent increase in QSBL that WashingtonFirst has achieved over the QSBL Baseline. These restrictions will no longer apply to WashingtonFirst after it has repaid the SBLF funding in full.

Item 1B. Unresolved Staff Comments

None.


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Item 2. Properties
WashingtonFirst leases offices and branch locations that are used in the normal course of business. WashingtonFirst does not own any banking facilities. As of December 31, 2013, WashingtonFirst leased 17 properties, of which 15 were operating branches, one was a new branch that opened for service in February 2014 and one was a corporate headquarter office. The branches consist of nine in Virginia, four in Maryland, and three branches in the District of Columbia. All of the leased properties are in good operating condition and are adequate for WashingtonFirst’s present and anticipated future needs.
 
Corporate Office
 
 
Reston Town Center - Corporate Headquarters
11921 Freedom Drive
Reston, VA 20190
 
 
 
Virginia Branches
 
Annandale
Fair Lakes
Reston
7023 Little River Turnpike
12735 Shoppes Lane
11600 Plaza America Drive
Annandale, VA 22003
Fairfax, VA 22033
Reston, VA 20190
 
 
 
Ballston
Great Falls
Sterling
4501 North Fairfax Drive
9851 Georgetown Pike
46901 Cedar Lakes Plaza
Arlington, VA 22203
Great Falls, VA 22066
Sterling, VA 20164
 
 
 
Fairfax
Manassas Park
Tysons Corner
10777 Main Street
9113 Manassas Drive
2095 Chain Bridge Road
Fairfax, VA 22030
Manassas Park, VA 20111
Vienna, VA 22182
 
 
 
 
Maryland Branches
 
Bethesda
Oxon Hill
Greenbelt
7708 Woodmont Avenue
6089 Oxon Hill Road
6329 Greenbelt Road
Bethesda, MD 20814
Oxon Hill, MD 20745
College Park, MD 20740
 
 
 
Rockville (1)
 
 
14941 Shady Grove Road
 
 
Rockville, MD 20850
 
 
 
 
 
 
District of Columbia Branches
 
19th Street
K Street (2)
Connecticut Avenue
1146 19th Street, NW
1500 K Street, NW
1025 Connecticut Avenue, NW
Washington, DC 20036
Washington, DC 20005
Washington, DC 20036

(1)
This branch was leased as of December 31, 2013, but did not open for business until February 2014.
(2)
The lease on this property expired in at the end of February 2014 and was not renewed, therefore the branch was closed.

Item 3. 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 4. Mine Safety Disclosures

Not applicable.

26

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices
Our common stock is listed for trading on the NASDAQ under the symbol “WFBI.” Our non-voting common stock is not listed on any exchange. As of March 14, 2014, there were 6,565,376 shares of voting common stock issued and outstanding and 1,096,359 shares of non-voting common stock issued and outstanding. As of that date, our common stock was held by approximately 630 shareholders of record and the closing price of our common stock was $14.60. As of that date, our non-voting common stock was held by two shareholders of record.
The following table sets forth, for the year ended December 31, 2013 combined with the period from December 24, 2012 through December 31, 2012, the high and low closing sales prices per share for the common stock of WashingtonFirst as reported on the NASDAQ. For periods prior to December 24, 2012, the following table sets forth the high and low bid prices per share for WashingtonFirst common stock as reported on the OTCBB.
 
Sales Prices
 
2013
 
2012
 
High
Low
 
High
Low
 
(per share)
Fourth Quarter
$
15.03

$
12.61

 
$
11.80

$
9.75

Third Quarter
13.20

11.21

 
11.80

10.00

Second Quarter
12.00

11.04

 
11.96

10.00

First Quarter
14.00

10.30

 
10.60

9.75

Dividend Policy
Payment of dividends is at the discretion of the board of directors of WashingtonFirst and is subject to various federal and state regulatory limitations. The board of directors of WashingtonFirst declared a share dividend in the amount of five one-hundredths (.05) shares of common stock of the Company par value $0.01 per share, and Series A non-voting common stock of the Company, par value $0.01 per share, payable on May 17, 2013 to shareholders of record on April 26, 2013. In addition, the board of directors of WashingtonFirst declared its first cash dividend in the amount of four cents ($.04) per share of common stock payable on January 2, 2014 to shareholders of record on December 13, 2013.
As a holding company, the Company is dependent upon the Bank to provide funding for its operating expenses, debt service and dividends. Various banking laws applicable to the Bank limit the payment of dividends and other distributions by the Bank and may therefore limit the Company’s ability to pay dividends on its common stock. Regulatory authorities could impose administratively stricter limitations on the ability of the Bank to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements.
In addition, the Federal Reserve Board has indicated that bank holding companies should review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure. See “Item 1. Business – Regulation” for additional information about restrictions on the Company’s ability to pay dividends.
The terms of our trust preferred securities and the preferred stock we issued under the SBLF contain restrictions on our ability to declare and pay dividends on out common stock. See “Item 1A. Risk Factors – Risks Associated with WashingtonFirst’s Common Stock – Future dividend payments and common stock repurchases are subject to certain restrictions by the terms of the Secretary of the Treasury’s equity investment in WashingtonFirst” – WashingtonFirst assumed approximately $10.0 million in trust preferred capital notes in its acquisition of Alliance Bankshares Inc. in December 2012.

27

Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2013 regarding WashingtonFirst’s equity compensation plans under which its equity securities are authorized for issuance:
 
Plan Category
Number of securities to be issued upon exercise of
outstanding options, warrants and right (a)
 
Weighted-average exercise pricing of outstanding options, warrants and rights (b)
 
Number of securities remaining available for future issuance under equity compensation plans(excluding securities reflected in column (a)) (c)
Equity compensation plan approved by security holders
638,771

 
$
10.68

 
346,327

Equity compensation plan not approved by security holders
—

 
—

 
—

Total
638,771

 
$
10.68

 
346,327

Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities by WashingtonFirst during the fiscal year covered by this report that have not been previously reported on a Form 8-K.
Purchases of Equity Securities by the Issuer or an Affiliated Purchaser
None.


28

Item 6. Selected Financial Data
The selected consolidated financial data presented below should be reviewed in conjunction with the audited consolidated financial statements and related notes and with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.
 
2013
 
2012
 
2011
 
2010
 
2009
 
(Dollars in thousands, except per share data)
Results of Operations:
 
 
 
 
 
 
 
 
 
Interest income
$
46,100

 
$
27,876

 
$
24,387

 
$
19,958

 
$
17,513

Interest expense
6,130

 
4,949

 
5,009

 
5,516

 
6,265

Net interest income
39,970

 
22,927

 
19,378

 
14,442

 
11,248

Provision for loan losses
4,755

 
3,225

 
2,301

 
1,747

 
1,515

Net interest income after provision for loan losses
35,215

 
19,702

 
17,077

 
12,695

 
9,733

Non-interest income
1,868

 
3,884

 
1,159

 
938

 
1,224

Non-interest expenses
28,117

 
20,178

 
13,835

 
11,222

 
9,895

Income before taxes
8,966

 
3,408

 
4,401

 
3,411

 
1,063

Income tax expense
2,627

 
1,173

 
1,794

 
926

 
519

Net income
6,339

 
2,235

 
2,607

 
1,485

 
543

Net income available to common stockholders
6,161

 
2,057

 
1,930

 
705

 
86

Per Share Data (1):
 
 
 
 
 
 
 
 
 
Net income - basic per share
$
0.81

 
$
0.60

 
$
0.67

 
$
0.25

 
$
0.03

Net income - diluted per share
0.80

 
0.59

 
0.65

 
0.25

 
0.03

Book value per common share
11.74

 
11.72

 
12.27

 
11.23

 
10.68

Tangible book value per common share
11.23

 
11.16

 
11.03

 
9.99

 
9.34

Period End Balances:
 
 
 
 
 
 
 
 
 
Assets
$
1,127,559

 
$
1,147,818

 
$
559,462

 
$
434,526

 
$
355,260

Loans
838,120

 
753,355

 
419,937

 
329,759

 
271,724

Investments (2)
148,897

 
138,221

 
59,477

 
48,216

 
25,189

Deposits
948,903

 
972,660

 
479,001

 
353,818

 
276,610

Borrowings (3)
63,489

 
64,923

 
24,350

 
32,850

 
33,850

Shareholders’ equity
107,604

 
101,520

 
53,477

 
46,121

 
42,798

Average Balances:
 
 
 
 
 
 
 
 
 
Assets
$
1,060,309

 
$
575,751

 
$
494,121

 
$
401,942

 
$
326,271

Loans
783,683

 
443,578

 
369,009

 
292,170

 
251,190

Investments (2)
124,418

 
66,675

 
54,609

 
42,027

 
32,730

Deposits
892,167

 
487,318

 
414,568

 
322,601

 
252,240

Borrowings (3)
56,693

 
29,314

 
28,088

 
33,354

 
37,985

Shareholders’ equity
105,489

 
56,801

 
49,727

 
44,491

 
34,564

Performance Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets
0.60
%
 
0.39
%
 
0.53
%
 
0.37
%
 
0.17
%
Return on average shareholders' equity
6.01
%
 
3.92
%
 
5.24
%
 
3.34
%
 
1.57
%
Yield on average interest-earning assets
4.49
%
 
4.96
%
 
5.06
%
 
5.10
%
 
5.53
%
Rate on average interest-bearing liabilities
0.84
%
 
1.24
%
 
1.43
%
 
1.81
%
 
2.48
%
Net interest spread
3.65
%
 
3.72
%
 
3.63
%
 
3.29
%
 
3.05
%
Net interest margin
3.90
%
 
4.08
%
 
4.02
%
 
3.69
%
 
3.55
%
Efficiency ratio
67.2
%
 
75.3
%
 
67.4
%
 
72.3
%
 
78.7
%
Capital Ratios:
 
 
 
 
 
 
 
 
 
Total regulatory capital to risk-weighted assets
14.05
%
 
13.77
%
 
11.84
%
 
12.46
%
 
14.56
%
Tier 1 capital to risk-weighted assets
12.80
%
 
12.71
%
 
10.73
%
 
11.50
%
 
13.55
%
Tier 1 leverage
10.53
%
 
9.97
%
 
9.06
%
 
9.62
%
 
11.32
%
Tangible common equity to tangible assets
7.64
%
 
6.97
%
 
5.78
%
 
6.92
%
 
7.69
%
Average equity to average assets
9.95
%
 
9.87
%
 
10.06
%
 
11.07
%
 
10.59
%
Credit Quality Ratios:
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans
1.02
%
 
0.83
%
 
1.17
%
 
1.05
%
 
1.05
%
Non-GAAP adjusted allowance for loan losses to total loans (4)
1.81
%
 
2.09
%
 
n/a

 
n/a

 
n/a

Non-performing loans to total loans
2.48
%
 
2.48
%
 
1.50
%
 
1.27
%
 
1.14
%
Non-performing assets to total assets
1.97
%
 
1.92
%
 
1.25
%
 
1.23
%
 
1.11
%
Net charge-offs to average loans
0.32
%
 
0.43
%
 
0.22
%
 
0.35
%
 
0.32
%
 
 
 
 
 
 
 
 
 
 
(1) Retroactively adjusted to reflect the effect of all stock dividends.
(2) Includes the following categories from the balance sheet: available-for-sale investment securities and other equity securities.
(3) Includes the following categories from the balance sheet: other borrowings, FHLB advances, and long-term borrowings.
(4) Reconciliation to GAAP measure provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-
     Allowance for loan losses."

29

Item 7. 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 WashingtonFirst’s financial statements and the related notes to the financial statements for the fiscal years ended December 31, 2013 and 2012.
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” 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” 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 serve 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.
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.

30

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 year ended December 31, 2013 was $40.0 million, compared to $22.9 million for the year ended December 31, 2012. 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 primarily due to the increase in the volume of interest-earning assets resulting from its acquisition of Alliance bank in December 2012.
Net income available to common shareholders was $6.2 million and $2.1 million for the years ended December 31, 2013 and 2012, respectively, and diluted earnings per share were $0.80 per common share and $0.59 per common share for these same periods. The increase in net income available to common shareholders during fiscal year 2013 compared to 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 during fiscal year 2013 compared to fiscal year 2012. Compensation and employee benefit expenses for the year ended December 31, 2013 increased by $5.6 million compared to same period in 2012 primarily due to an increase in the number of employees resulting from the additional branches in the acquisition of Alliance. Premises and equipment expenses increased by $2.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 as a result of the increase in number of branches. The Company’s other operating expenses also increased for fiscal year ended 2013, compared to the fiscal year ended 2012, primarily as a result of the increased size of operations.
As of December 31, 2013 and 2012, total assets were $1.1 billion. Total net loans increased $82.5 million from December 31, 2012 to December 31, 2013. Tier 1 capital increased by $7.8 million to $112.8 million as of December 31, 2013, compared to $105.0 million as of December 31, 2012.
As of December 31, 2013, WashingtonFirst had $22.3 million in nonperforming assets, an increase of $0.2 million from December 31, 2012. The Company had an increase of $2.3 million in the allowance for loan losses during the year ended December 31, 2013, resulting in an $8.5 million allowance for loan losses as of December 31, 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.

31

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 52.0 percent of the total allowance at December 31, 2013 and 50.5 percent at December 31, 2012. 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 acquisition of Alliance were recorded at fair value, and are not affecting the allowance for loan losses as of December 31, 2012. Allowances on those loans subsequent to the acquisition have been recorded in the allowance for loan losses.

32

As of December 31, 2013, the specific allowance accounted for 48.0 percent percent of the total allowance as compared to 49.5 percent at December 31, 2012. 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. No goodwill impairment was recognized for the years ended December 31, 2013 and 2012.
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. With its acquisition of Alliance in December 2012, the Company recorded $0.4 million of core deposit intangibles, which is presented in other assets on the consolidated balance sheet. This is be amortized over a five year period ending December 2017.
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 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

33

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.
Results of Operations
For the year ended December 31, 2013, WashingtonFirst’s net income available to common shareholders was $6.2 million or $0.80 per diluted common share, compared to $2.1 million or $0.59 per diluted common share for the year ended December 31, 2012. Basic net income per common share for the year ended December 31, 2013 was $0.81 per common share compared to $0.60 per common share for the year ended December 31, 2012. The increase in net income during 2013 as compared to the same period 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 Year Ended December 31,
 
2013
 
2012
 
(dollars in thousands)
Average total assets
$
1,060,309

 
$
575,751

Average shareholders' equity
105,489

 
56,801

Net income
6,339

 
2,235

Return on average assets
0.60
%
 
0.39
%
Return on average shareholders' equity
6.01
%
 
3.92
%
Return on average common equity
7.03
%
 
5.28
%
Average shareholders' equity to average total assets
9.95
%
 
9.87
%
Efficiency ratio
67.20
%
 
75.26
%
Dividend payout ratio
4.94
%
 
—
%
Net Interest Income.
Net interest income was $40.0 million for 2013 compared to $22.9 million for 2012. The overall net interest margin was 3.90 percent for the year ended December 31, 2013 compared to 4.08 percent for the year ended December 31, 2012. The decrease in interest spread and net interest margin is primarily the result of a lower yield on the loan portfolio in the 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 2013, thus decreasing the yield on the loan portfolio. Additionally, the Bank had higher liquidity and a lower loan-to-deposit ratio during 2013 which lead to a lower yield on earnings assets. This, in turn, led to a reduction in the interest spread and net interest margin for the year ending December 31, 2013.

34

The following tables provide information regarding interest-earning assets and funding for the years ended December 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 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.
Average Balances, Interest Income and Expense and Average Yield and Rates
 
For the Year Ended December 31,
 
2013
 
2012
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1)
$
783,683

 
$
43,538

 
5.56
%
 
$
443,578

 
$
26,305

 
5.93
%
Interest-bearing balances
8,726

 
48

 
0.55
%
 
9,746

 
53

 
0.54
%
Investment securities (2)
124,418

 
2,254

 
1.81
%
 
66,675

 
1,410

 
2.11
%
Federal funds sold
109,291

 
260

 
0.24
%
 
42,268

 
108

 
0.26
%
Total interest earning assets
1,026,118

 
46,100

 
4.49
%
 
562,267

 
27,876

 
4.96
%
Non-interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
4,030

 
 
 
 
 
2,565

 
 
 
 
Premises and equipment
3,755

 
 
 
 
 
2,790

 
 
 
 
Other real estate owned (OREO)
2,432

 
 
 
 
 
744

 
 
 
 
Other assets
30,738

 
 
 
 
 
13,198

 
 
 
 
Less: allowance for loan losses
(6,764
)
 
 
 
 
 
(5,813
)
 
 
 
 
Total non-interest earning assets
34,191

 
 
 
 
 
13,484

 
 
 
 
Total Assets
$
1,060,309

 
 
 
 
 
$
575,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
88,479

 
$
167

 
0.19
%
 
$
19,817

 
$
58

 
0.29
%
Money market deposit accounts
134,514

 
666

 
0.50
%
 
60,723

 
376

 
0.62
%
Savings accounts
104,590

 
803

 
0.77
%
 
77,666

 
716

 
0.92
%
Time deposits
342,880

 
3,128

 
0.91
%
 
212,134

 
2,924

 
1.38
%
Total interest-bearing deposits
670,463

 
4,764

 
0.71
%
 
370,340

 
4,074

 
1.10
%
FHLB advances
33,269

 
672

 
2.02
%
 
28,013

 
724

 
2.58
%
Other borrowings and long-term borrowings
23,424

 
694

 
2.96
%
 
1,301

 
151

 
11.61
%
Total interest-bearing liabilities
727,156

 
6,130

 
0.84
%
 
399,654

 
4,949

 
1.24
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
221,704

 
 
 
 
 
116,978

 
 
 
 
Other liabilities
5,960

 
 
 
 
 
2,318

 
 
 
 
Total non-interest-bearing liabilities
227,664

 
 
 
 
 
119,296

 
 
 
 
Total Liabilities
954,820

 
 
 
 
 
518,950

 
 
 
 
Shareholders’ Equity
105,489

 
 
 
 
 
56,801

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
1,060,309

 
 
 
 
 
$
575,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Spread (3)
 
 
 
 
3.65
%
 
 
 
 
 
3.72
%
Net Interest Margin (4)(5)
 
 
$
39,970

 
3.90
%
 
 
 
$
22,927

 
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 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.


35

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 2013 and 2012.
 
2013 vs. 2012
 
2012 vs. 2011
 
(Decrease)/Increase Due to
 
(Decrease)/Increase Due to
 
Rate
 
Volume
 
Total
 
Rate
 
Volume
 
Total
 
(in thousands)
Income from interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
(1,739
)
 
$
18,972

 
$
17,233

 
$
(955
)
 
$
4,446

 
$
3,491

Interest-bearing balances
1

 
(6
)
 
(5
)
 
(64
)
 
(107
)
 
(171
)
Investment securities
(225
)
 
1,069

 
844

 
(133
)
 
266

 
133

Federal funds sold
(9
)
 
161

 
152

 
13

 
23

 
36

Total income from interest-earning assets
(1,972
)
 
20,196

 
18,224

 
(1,139
)
 
4,628

 
3,489

Expense from interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
(1,800
)
 
2,490

 
690

 
(496
)
 
496

 
—

FHLB Advances
(173
)
 
121

 
(52
)
 
(210
)
 
(2
)
 
(212
)
Borrowed funds
(193
)
 
736

 
543

 
—

 
152

 
152

Total expense from interest-bearing liabilities
(2,166
)
 
3,347

 
1,181

 
(706
)
 
646

 
(60
)
Increase in net interest income
$
194

 
$
16,849

 
$
17,043

 
$
(433
)
 
$
3,982

 
$
3,549

Interest Earning Assets
Average loan balances were $783.7 million for the year ended December 31, 2013 compared to $443.6 million in 2012. Loans grew primarily due to the Alliance acquisition in December 2012. The related interest income from loans was $43.5 million for the year ended December 31, 2013 resulting in an average yield of 5.56 percent, compared to $26.3 million for the year ended December 31, 2012, resulting in an average yield of 5.93 percent. The decrease in average yield on loans reflects a declining interest rate environment during most of the period and the effects of purchase accounting marks being fully recognized on loans paid off early during 2013. 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 $124.4 million for the year ended December 31, 2013, compared to $66.7 million for 2012. The increase in the average investment securities during 2013 compared to 2012 was primarily a result of the Alliance acquisition in December 2012. Interest income generated on these investment securities for the year ended December 31, 2013 totaled $2.3 million, or a 1.81 percent yield, compared to $1.4 million or a 2.11 percent yield for the year ended December 31, 2012.
Short-term investments in federal funds sold averaged $109.3 million for the year ended December 31, 2013, compared to $42.3 million for 2012. The increase in average short-term investments during 2013 compared to 2012 is primarily a result of the Alliance acquisition in December 2012. Interest income generated on these assets for the year ended December 31, 2013 totaled $0.3 million, or a 0.24 percent yield, compared to $0.1 million or a 0.26 percent yield for 2012.
Interest Bearing Liabilities
Average interest-bearing deposits were $670.5 million for the year ended December 31, 2013 compared to $370.3 million for 2012. The increase in the average interest-bearing deposits during 2013 compared to 2012 was primarily a result of the Alliance acquisition in December 2012. The related interest expense from interest-bearing deposits was $4.8 million for the year ended December 31, 2013, compared to $4.1 million for the year ended December 31, 2012. The average rate on these deposits was 0.71 percent for the year ended December 31, 2013, compared to 1.10 percent for 2012. The lower interest rate environment allowed for competitive repricing of interest bearing accounts.

36

FHLB advances averaged $33.3 million for the year ended December 31, 2013, compared to $28.0 million in 2012. Interest expense incurred on these borrowing for the year ended December 31, 2013 totaled $0.7 million, or a 2.02 percent rate, compared to $0.7 million, or a 2.58 percent rate, for the year ended December 31, 2012.
Provision for Loan Losses. During 2013, WashingtonFirst recorded provisions to its allowance for loan losses of $4.8 million, charge-offs of $3.0 million and recoveries of $0.5 million. During 2012, WashingtonFirst recorded provisions to its allowance for loan losses of $3.2 million, charge-offs of $2.1 million and recoveries of $0.2 million.
Service Charges on Deposit Accounts. Service charges on deposit accounts were $0.5 million for 2013 and 2012, respectively.
Earnings on bank-owned life insurance. Earnings on bank-owned life insurance were $0.3 million during 2013, compared to $10,000 during 2012. This increase is the result the original purchase of bank-owned life insurance occurring in late 2012 and additional purchases in 2013.
Gain on sale of other real estate owned. During 2013, WashingtonFirst realized net gains of $0.2 million on sale or OREO properties, compared to net gains of $0.1 million during 2012. See Note 8 - Other Real Estate Owned for further details.
Gain on Sale of Loans. During the year ended December 31, 2013, WashingtonFirst realized a gain on the sale of loans of $0.8 million as a result of selling a portfolio of loans acquired in the Alliance merger. No loans were sold in 2012.
Loss on Sale of Available-for-Sale Investment Securities. During the year ended December 31, 2013, WashingtonFirst realized $1.5 million of losses on the sale of available-for-sale securities, compared to immaterial amounts for the year ended December 31, 2012. The loss was primarily caused by the liquidation of an investment in a bank trust preferred collateralized debt obligation security (“Trapeza CDO”) because of uncertainty regarding the future accounting implications of such investment under the revised, final “Volcker Rule” of the Dodd-Frank Act, which was released jointly by the Federal Reserve and a number of federal regulatory agencies in December of 2013. The Trapeza CDO, which was purchased in 2007 and classified as “Available for Sale”, was sold on December 19, 2013.
Other Operating Income. During 2013, WashingtonFirst recorded $1.6 million of other operating income compared to $0.8 million in 2012. This increase is primarily the result of the overall increased size of the Bank resulting in greater transaction fee income.
Compensation and Employee Benefits. Compensation and employee benefits were $14.0 million and $8.4 million for 2013 and 2012, respectively. The increase in compensation and employee benefits in 2013 compared to 2012 is primarily the result of increased headcount, as the number of Company employees nearly doubled in size after the acquisition of Alliance in December 2012.
Premises and Equipment. Premises and equipment expenses were $5.5 million and $2.7 million during 2013 and 2012, respectively, The increase was primarily due to the increase in rent expense associated with the addition of five branch locations with the acquisition of Alliance in December 2012 and the expansion of the corporate office lease during the third quarter of 2013.
Data Processing. Data processing expenses were $3.0 million and $1.5 million during 2013 and 2012, respectively. The increase was primarily due to the increased size of the Company after the Alliance acquisition.
Professional Fees. Professional fees, which includes legal, accounting and other professional services, were $1.5 million and $0.4 million during 2013 and 2012, respectively. The increase in professional fees is primarily due to the Company going public and the substantial increase in size of the Company resulting from the acquisition of Alliance in December 2012.
Other Operating Expenses. Other operating expenses were $4.1 million and $2.2 million during 2013 and 2012, respectively. See Note 18 - Other Expenses for further details.
Financial Condition
Total assets were $1.1 billion as of December 31, 2013 and December 31, 2012, respectively. As of December 31, 2013, WashingtonFirst had $109.2 million of cash and cash equivalents, compared to $224.2 million as of December 31, 2012. As of December 31, 2013, WashingtonFirst had $829.6 million of loans, net of allowance for loan losses, compared to $747.1 million as December 31, 2012. As of December 31, 2013, WashingtonFirst had $145.4 million of investments, compared to $134.6 million as December 31, 2012.
As of December 31, 2013 and December 31, 2012, total deposits were $948.9 million and 972.7 million, respectively.
As of December 31, 2013, WashingtonFirst had total equity of $107.6 million, compared to $101.5 million as of December 31, 2012. The increase in total equity during the year ended 2013 is primarily the result of current earnings and the exercise of certain warrants.

37

Loan Portfolio
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 loan portfolio totaled $838.1 million as of December 31, 2013, an increase of $84.7 million from the December 31, 2012 balance of $753.4 million.
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 December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
Construction and development
$
97,324

 
11.6
%
 
$
91,586

 
12.2
%
Commercial real estate
521,760

 
62.3
%
 
408,359

 
54.2
%
Residential real estate
95,428

 
11.4
%
 
126,394

 
16.8
%
Real estate loans
714,512

 
85.3
%
 
626,339

 
83.2
%
Commercial and industrial
120,833

 
14.4
%
 
124,670

 
16.5
%
Consumer
2,775

 
0.3
%
 
2,346

 
0.3
%
Total loans
$
838,120

 
100.0
%
 
$
753,355

 
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 loan size in this portfolio is $0.5 million as of December 31, 2013.
Construction and development loans represented 11.6 percent and 12.2 percent of the total loan portfolio at December 31, 2013 and December 31, 2012, 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 11.4 percent and 16.8 percent of total loans as of December 31, 2013 and December 31, 2012, respectively. In general, loans in these categories represent loans underwritten by WashingtonFirst or Alliance, 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.

38

The contractual maturity ranges 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 December 31, 2013 are summarized in the following table:
 
One Year
or Less
 
One to
Five Years
 
Over Five
Years
 
Total
 
(in thousands)
Construction and development
$
62,141

 
$
32,219

 
$
2,964

 
$
97,324

Commercial real estate
87,110

 
236,439

 
198,211

 
521,760

Residential real estate
10,313

 
22,156

 
62,959

 
95,428

Commercial and industrial
58,403

 
48,885

 
13,545

 
120,833

Consumer
1,187

 
1,463

 
125

 
2,775

Total loans
$
219,154

 
$
341,162

 
$
277,804

 
$
838,120

 
 
 
 
 
 
 
 
Loans with a predetermined interest rate
$
55,612

 
$
223,212

 
$
69,385

 
$
348,209

Loans with a floating or adjustable interest rate
163,542

 
117,950

 
208,419

 
489,911

Total loans
$
219,154

 
$
341,162

 
$
277,804

 
$
838,120

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.
The table below represents WashingtonFirst’s loan portfolio by risk rating, classification, and loan portfolio segment as of December 31, 2013:
 
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

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 $15.6 million as of December 31, 2012 to $15.1 million as of December 31, 2013. 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. WashingtonFirst had no loans as of December 31, 2013 or December 31, 2012 that were past due 90 days or more but were still on accrual status.





39

The following tables set forth the aging and non-accrual loans by class as of December 31, 2013 and 2012:
 
As of December 31, 2013
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 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
 
As of December 31, 2012
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
86,745

 
$
475

 
$
246

 
$
4,120

 
$
4,841

 
$
91,586

Commercial real estate
397,698

 
3,630

 
648

 
6,383

 
10,661

 
408,359

Residential real estate
123,626

 
678

 
348

 
1,742

 
2,768

 
126,394

Commercial and industrial
120,685

 
639

 
—

 
3,346

 
3,985

 
124,670

Consumer
2,317

 
—

 
5

 
24

 
29

 
2,346

Balance at end of period
$
731,071

 
$
5,422

 
$
1,247

 
$
15,615

 
$
22,284

 
$
753,355

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


40

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 7—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 $8.5 million as of December 31, 2013, or approximately 1.02 percent of loans outstanding, compared to $6.3 million or approximately 0.83 percent of loans outstanding, as of December 31, 2012. WashingtonFirst has allocated $3.1 million as of December 31, 2013 for specific non-performing loans. For the year ended December 31, 2013, WashingtonFirst recorded $4.8 million in provisions for loan losses, $3.0 million in charge-offs and $0.5 million in recoveries, compared to $3.2 million in provision for loans losses, $2.1 million in charge-off and $0.2 million in recoveries for the year ended December 31, 2012. The increase in charge-offs during 2013 compared to 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.
In connection with the acquisition of Alliance in December 2012, the allowance for loan losses that had been on the books of Alliance was eliminated and Alliance’s loan portfolio, which had a book value of $277.6 million, was recorded on the Bank’s books at the fair value of $268.3 million. Of the Bank’s $838.1 million in gross loans outstanding as of December 31, 2013, $173.1 million or 20.7 percent were recorded on the books at fair value in connection with the acquisition of Alliance in December 2012 and have an aggregate discount on the books of $4.0 million as of December 31, 2013.
The adjustment required to reconcile from GAAP allowance for loan losses to 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 December 31, 2013 and 2012:
Reconciliation of Allowance for Loan Losses to Total Loans to
Non-GAAP Adjusted Allowance for Loan Losses to Non-GAAP Total Loans
 
As of December 31,
 
2013
 
2012
 
(dollars in thousands)
GAAP allowance for loan losses
$
8,534

 
$
6,260

GAAP loans held for investment, at amortized cost
838,120

 
753,355

 
 
 
 
GAAP allowance for loan losses to total loans
1.02
%
 
0.83
%
 
 
 
 
GAAP allowance for loan losses
$
8,534

 
$
6,260

Plus: Credit purchase accounting marks
6,716

 
9,700

Non-GAAP adjusted allowance for loan losses
$
15,250

 
$
15,960

 
 
 
 
GAAP loans held for investment, at amortized cost
$
838,120

 
$
753,355

Plus: Credit purchase accounting marks
6,716

 
9,700

Non-GAAP loans held for investment, at amortized cost
$
844,836

 
$
763,055

 
 
 
 
Non-GAAP adjusted allowance for loan losses to total loans
1.81
%
 
2.09
%

41

As part of its routine credit administration process, WashingtonFirst periodically engages an outside consulting firm to review its loan portfolio. 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 insure its adequacy and applicability in relation to the Bank’s past and future experience with the loan portfolio, from a credit quality perspective.
The following table represents an analysis of the allowance for loan losses for the years ended December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
6,260

 
$
4,932

Provision for loan losses
4,755

 
3,225

Charge-offs:
 
 
 
Construction and development
—

 
(508
)
Commercial real estate
(109
)
 
(694
)
Residential real estate
(817
)
 
(232
)
Commercial and industrial
(2,077
)
 
(647
)
Consumer loans
(1
)
 
(5
)
Total charge-offs
(3,004
)
 
(2,086
)
Recoveries:
 
 
 
Construction and development
74

 
19

Commercial real estate
234

 
138

Residential real estate
42

 
32

Commercial and industrial
164

 
—

Consumer
9

 
—

Total recoveries
523

 
189

Net charge-offs
(2,481
)
 
(1,897
)
Balance at end of period
$
8,534

 
$
6,260

 
 
 
 
Allowance for loan losses to total loans
1.02
%
 
0.83
%
Non-GAAP adjusted allowance for loan losses to total loans
1.81
%
 
2.09
%
Allowance for loan losses to non-accrual loans
56.57
%
 
40.09
%
Allowance for loan losses to non-performing assets
38.33
%
 
28.39
%
Non-performing assets to total assets
1.97
%
 
1.92
%
Net charge-offs to average loans
0.32
%
 
0.43
%

42

The following table presents the changes in the allowance for losses for the year ended December 31, 2013 by loan type:
 
For the Year Ended December 31, 2013
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Beginning Balance
$
863

 
$
2,655

 
$
573

 
$
2,142

 
$
27

 
$
6,260

(Release of)/provision for losses
(264
)
 
2,200

 
1,129

 
1,620

 
70

 
4,755

Charge-offs
—

 
(109
)
 
(817
)
 
(2,077
)
 
(1
)
 
(3,004
)
Recoveries
74

 
234

 
42

 
164

 
9

 
523

Ending Balance
$
673

 
$
4,980

 
$
927

 
$
1,849

 
$
105

 
$
8,534

The following tables present the ending balances of loans and the related allowance for losses by impairment method and loan type as of December 31, 2013:
 
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

 
$
498,225

 
$
93,338

 
$
114,655

 
$
2,637

 
$
804,126

Evaluated individually for impairment
2,053

 
23,535

 
2,090

 
6,178

 
138

 
33,994

 
$
97,324

 
$
521,760

 
$
95,428

 
$
120,833

 
$
2,775

 
$
838,120

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
668

 
$
2,696

 
$
299

 
$
770

 
$
6

 
$
4,439

Evaluated individually for impairment
5

 
2,284

 
628

 
1,079

 
99

 
4,095

 
$
673

 
$
4,980

 
$
927

 
$
1,849

 
$
105

 
$
8,534

Non-performing Assets
Impaired Loans (Loans with a Specific Allowance Allocation). As of December 31, 2013, all loans with impairment allocations were on non-accrual status.
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 December 31, 2013, there was $15.1 million in loans on non-accrual status compared to $15.6 million as of December 31, 2012. The $15.1 million non-accrual loan balance consists primarily of loans secured by residential and commercial real estate. The specific allowance for impaired loans as of December 31, 2013 was $3.1 million.
Total Non-performing Assets. As of December 31, 2013, WashingtonFirst had $22.3 million of non-performing assets compared to $22.1 million as of December 31, 2012, an increase of $0.2 million. The ratio of non-performing assets to total assets increased to 1.97 percent as of 2013 from 1.92 percent as of 2012, a 5 basis point increase. The ratio of non-performing assets to total assets as of 2013 increased compared to WashingtonFirst’s historical trends due to the acquisition of Alliance in December 2012.

43

The following table provides information regarding credit quality as of December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
(dollars in thousands)
Non-performing assets:
 
 
 
Non-accrual loans
$
15,087

 
$
15,615

Troubled debt restructurings still accruing
5,715

 
3,036

Asset-backed security
—

 
106

Other real estate owned
1,463

 
3,294

Total non-performing assets
$
22,265

 
$
22,051

 
 
 
 
Non-performing assets to total assets
1.97
%
 
1.92
%
Other Real Estate Owned (OREO). As of December 31, 2013, WashingtonFirst had $1.5 million classified as OREO on the balance sheet, compared to $3.3 million as of December 31, 2012. During the year ended December 31, 2013, WashingtonFirst sold ten OREO properties collecting cash proceeds of $3.7 million, realizing gains of $0.2 million. In addition, during the year ended December 31, 2013 WashingtonFirst acquired 5 properties with a fair value of $2.2 million, that were classified as OREO. During the year ended December 31, 2012, WashingtonFirst sold one OREO property collecting cash proceeds of $0.9 million, realizing a gain of $0.1 million. In addition, during the year ended December 31, 2012, WashingtonFirst acquired ten properties with a fair value of $3.8 million, of which eight with a fair value of $2.7 million were acquired in the acquisition of Alliance.
The table below reflects the OREO activity for the years ended December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
 
Balance at beginning of period
$
3,294

 
$
615

Properties acquired at foreclosure
2,176

 
1,161

Properties acquired in acquisition of Alliance
—

 
2,677

Sales of foreclosed properties
(3,573
)
 
(851
)
Valuation adjustments
(434
)
 
(308
)
Balance at end of period
$
1,463

 
$
3,294

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 $145.4 million as of December 31, 2013 compared to $134.6 million as of December 31, 2012. 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.
On December 31, 2013, the investment portfolio contained 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.
As of December 31, 2013, U.S. Government corporation and agency securities represented $41.0 million or 28.2 percent of the portfolio, while CMOs and MBS were $86.6 million, or 59.6 percent of the portfolio, and municipal securities were $17.8 million, or 12.2 percent of the portfolio.
The yield on the available-for-sale investment securities portfolio for the year ended December 31, 2013 was 1.81 percent compared to 2.11 percent for the year ended December 31, 2012. When prepayments on various CMOs and MBS instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield.



44

The amortized cost, fair value and yield of investments by remaining contractual maturity for available-for-sale investment securities as of December 31, 2013 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.
 
Investment Securities Available-for-Sale as of December 31, 2013
 
Amortized Cost
 
Fair Value
 
Weighted-Average Yield
 
(in thousands)
Due within one year
$
3,954

 
$
3,974

 
2.32
%
Due within one to five years
38,895

 
39,038

 
1.73
%
Due within five to ten years
31,031

 
30,410

 
1.91
%
Due after ten years
73,814

 
71,945

 
1.88
%
Total available-for-sale securities
$
147,694

 
$
145,367

 
1.86
%


45

Other Equity Investments
WashingtonFirst’s securities portfolio contains other equity 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”). The following table summarizes the balances of other equity securities as of December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(in thousands)
FHLB stock
$
3,174

 
$
3,267

ACBB
100

 
100

CBB
256

 
256

Total other equity securities
$
3,530

 
$
3,623

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 December 31, 2013, the deposit portfolio totaled $948.9 million, comprising of $231.3 million of non-interest bearing deposits and $717.6 million of interest bearing deposits. As of December 31, 2012, the deposit portfolio totaled $972.7 million, which was composed of $294.5 million of non-interest bearing deposits and $678.2 million of interest bearing deposits. The $23.8 million decrease in deposits during the year ended December 31, 2013 is primarily the result of management’s decision to decrease non-core deposits, including brokered deposits acquired in the December 2012 acquisition of Alliance. The average balance of interest bearing deposits as of December 31, 2013 was $670.5 million compared to $370.3 million as of December 31, 2012. This significant increase is also the result of the acquisition of Alliance in December 2012. The average cost on these interest-bearing deposits for the year ended December 31, 2013 was 0.71 percent compared to 1.10 percent for the same period in 2012. As interest rates declined over the past year, WashingtonFirst was able to reprice the interest rates on its deposits at lower levels.
Average non-interest bearing demand deposits were $221.7 million as of December 31, 2013 compared to $117.0 million as of December 31, 2012, reflecting the increase in these deposits resulting from the Alliance acquisition.
Scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 were as follows:
Certificates of Deposits Greater Than or Equal to $100,000
 
As of December 31, 2013
 
(in thousands)
Three months or less
$
31,521

Three through six months
62,096

Six through twelve months
35,267

Over twelve months
47,809

Total certificates of deposit
$
176,693


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. These customer repurchase agreements were acquired through the acquisition of Alliance. Alliance offered this product as an accommodation to larger retail and commercial customers and affluent individuals that request 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 December 31, 2013, WashingtonFirst had $10.2 million of customer repurchase agreements, compared to $14.4 million as of December 31, 2012.

46

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 2013 and 2012 contains a $3.5 million and $4.0 million fair market value adjustment, respectively, associated with the advance acquired from Alliance 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.
The following table provides information regarding WashingtonFirst’s FHLB advances as of 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(dollars in thousands)
As of period ended:
 
 
 
FHLB advances
$
43,478

 
$
40,813

Weighted average outstanding interest rate
1.30
%
 
2.26
%
The following table sets forth the composition of FHLB advances during the years ended December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
(dollars in thousands)
Averages for the period:
 
 
 
FHLB advances
$
33,269

 
$
28,013

Average interest rate paid during the period
2.02
%
 
2.58
%
Maximum month-end balance outstanding
$
43,478

 
$
67,850

Long-term Borrowings
Long-term borrowings consist of the following as of December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Subordinated debt
$
2,247

 
$
2,214

Trust preferred capital notes
7,607

 
7,468

 
$
9,854

 
$
9,682

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 57,769 shares of common stock at a share price equal to $10.82. These warrants 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. 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 December 31, 2013 and December 31, 2012 were 3.39 percent and 3.54 percent, respectively.
In connection with the acquisition of Alliance in December 2012, 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

47

of $7.5 million, which was the fair value of the instruments at the time of the acquisition. WashingtonFirst records distributions payable on the Trust Preferred Capital Notes as an interest expense in its consolidated statements of operations, and 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. 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 December 31, 2013, 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 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 act.
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 $107.6 million as of December 31, 2013 compared to the December 31, 2012 level of $101.5 million. The change in equity is primarily attributable current earnings and stock warrants exercised during 2013.

48

The following table shows WashingtonFirst’s capital categories, capital ratios and the minimum capital ratios currently required by bank regulators as of December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Tier 1 Capital:
 
 
 
Common stock
$
76

 
$
71

Capital surplus
85,636

 
80,460

Preferred stock
17,796

 
17,796

Accumulated earnings
5,605

 
3,226

Less: disallowed assets
(3,943
)
 
(4,029
)
Add: Trust preferred
7,607

 
7,468

Total Tier 1 Capital
$
112,777

 
$
104,992

 
 
 
 
Tier 2 Capital:
 
 
 
Qualifying allowance for loan losses
$
8,534

 
$
6,260

Qualifying subordinated debt
2,500

 
2,500

Total Tier 2 Capital
$
11,034

 
$
8,760

 
 
 
 
Total risk-based capital
$
123,811

 
$
113,752

Risk weighted assets
881,235

 
826,103

Qualifying quarterly average assets
1,070,599

 
1,052,614

 
As of December 31,
 
 
 
2013
 
2012
 
Regulatory Minimum
Capital Ratios:
 
 
 
 
 
Total risk-based capital ratio
14.05
%
 
13.77
%
 
8.00%
Tier 1 risk-based capital ratio
12.80
%
 
12.71
%
 
4.00%
Tier 1 leverage ratio
10.53
%
 
9.97
%
 
4.00%
The regulatory risk-based capital guidelines establish minimum capital levels for WashingtonFirst to be deemed “well capitalized.” The guidelines for “well capitalized” call for a leverage ratio of 5.0 percent, tier 1 risk-based capital ratio of 6.0 percent and total risk-based capital ratio of 10.0 percent. As of December 31, 2013, WashingtonFirst had a total risk-based capital ratio of 14.05 percent, a tier 1 risk-based capital ratio of 12.80 percent, and a leverage ratio of 10.53 percent all in excess of the regulatory minimums to be “well capitalized.” 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. See Item I “Business,” “Revisions to Capital Adequacy Requirements” for a discussion of the new capital requirements.
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, reverse repurchase agreement lines with correspondent banks and FHLB advances.
As of December 31, 2013, WashingtonFirst had $109.2 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 December 31, 2013, WashingtonFirst had a total credit line of $228.1 million with the FHLB with an unused portion of $184.6 million. Borrowings

49

with the FHLB have certain collateral requirements and are subject to disbursement approval by the FHLB. As of December 31, 2013, WashingtonFirst also had $49.0 million in unsecured borrowing capacity from correspondent banks. As of December 31, 2013, 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. WashingtonFirst believes that it has sufficient liquidity to protect depositors, provide for business growth and comply with regulatory requirements.
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 December 31, 2013, commercial real estate loans were 62.3 percent of the total loan portfolio, construction and development loans were 11.6 percent of the total loan portfolio and residential real estate loans were 11.4 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.”
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market prices and rates. The primary market risk that WashingtonFirst is exposed to is interest rate risk inherent in our lending, deposit taking and borrowing activities. Substantially all of our interest rate risk arises from these activities entered into for purposes other than trading.
The principal objective of our asset/liability management, or “ALM,” is to manage the sensitivity of net income to changing interest rates. ALM is governed by a policy approved annually by our board of directors. Our board of directors has delegated the oversight of the administration to the bank’s asset/liability committee. The overall interest rate risk position and strategies are reviewed by executive management and the bank’s board of directors on an ongoing basis.
Short-Term Interest Rate Risk: Net Interest Income Sensitivity (“NII”)
WashingtonFirst engages an outside consulting firm to model its short-term and long-term interest rate risk profile. The model includes basic business assumptions, interest rates, repricing information and other relevant market data necessary to project our interest rate risk. The board of directors has established interest rate risk limits for both short-term and long-term interest rate exposure. On a periodic basis, management reports to the board of directors on WashingtonFirst’s base interest rate risk profile and expectations of changes in the profiles based on certain interest rate shocks.
WashingtonFirst’s ALM process evaluates the effect of upward and downward changes in market interest rates on future net interest income. This analysis involves shocking the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of WashingtonFirst’s shorter-term interest rate risk. This analysis is accomplished by assuming a static balance sheet over a period of time with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under various rate scenarios. These assumptions include prepayments, the sensitivity of non-maturity deposit rates, and other factors deemed significant by WashingtonFirst.

As part of its interest rate risk management, the Company typically uses the trading and investment portfolio and its wholesale funding instruments to balance its interest rate exposure. There is no guarantee that the risk management techniques and balance sheet management strategies the Company employs will be effective in periods of rapid rate movements or extremely volatile periods. The Company believes its strategies are prudent and within its policy guidelines in the base case of its modeling efforts as of December 31, 2013.
Since WashingtonFirst’s actual balance sheet movement is not static (maturing and repayment dollars being rolled back into like instruments for new terms at current market rates), these changes in net interest income are indicative only of the magnitude of interest

50

rate risk in the balance sheet. These changes do not take into account actions we may take in response to changes in interest rates, and are not necessarily reflective of the income WashingtonFirst would actually receive.
Long-Term Interest Rate Risk: Economic Value of Equity (“EVE”)
The economic value of equity process models the cash flows of financial instruments to maturity. The model incorporates growth and pricing assumptions to develop a baseline EVE. The interest rates used in the model are then shocked for an immediate increase or decrease in interest rates. The results of the shocked model are compared to the baseline results to determine the percentage change in EVE under the various scenarios. The resulting percentage change in EVE is an indication of the longer term repricing risk and options embedded in the balance sheet.
The ALM model results for December 31, 2013 are shown in the table below. Assuming an immediate shift in market interest rates and a static balance sheet, the results indicate the Company would expect net interest income to change over the next twelve months as follows under various interest rate shocks:
 
 
Percentage Change in EVE and NII from Base Case
 
 
As of December 31,
Interest
 
2013
 
2012
Rate Shocks
 
NII
 
EVE
 
NII
 
EVE
 
 
 
 
 
 
 
 
 
+200 bp
 
(0.9
)%
 
0.3
%
 
11.0
%
 
15.0
 %
+100 bp
 
(0.7
)%
 
1.1
%
 
5.0
%
 
8.7
 %
-100 bp
 
5.6
 %
 
0.5
%
 
3.9
%
 
(10.1
)%




51

Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
WashingtonFirst Bankshares, Inc.
Reston, Virginia
We have audited the accompanying consolidated balance sheets of WashingtonFirst Bankshares, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WashingtonFirst Bankshares, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

March 19, 2014
Richmond, Virginia












BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.


52

WashingtonFirst Bankshares, Inc.
Consolidated Balance Sheets
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from bank balances
$
3,569

 
$
4,521

Federal funds sold
99,364

 
208,476

Interest bearing balances
6,231

 
11,210

Cash and cash equivalents
109,164

 
224,207

Investment securities, available-for-sale, at fair value
145,367

 
134,598

Other equity securities
3,530

 
3,623

Loans:
 
 
 
Loans held for investment, at amortized cost
838,120

 
753,355

Allowance for loan losses
(8,534
)
 
(6,260
)
Total loans, net of allowance
829,586

 
747,095

Premises and equipment, net
5,395

 
3,519

Intangibles
3,943

 
4,029

Deferred tax asset, net
10,548

 
11,419

Accrued interest receivable
3,466

 
3,424

Other real estate owned
1,463

 
3,294

Bank-owned life insurance
10,283

 
5,010

Other assets
4,814

 
7,600

Total Assets
$
1,127,559

 
$
1,147,818

Liabilities and Shareholders' Equity:
 
 
 
Liabilities:
 
 
 
Non-interest bearing deposits
$
231,270

 
$
294,439

Interest bearing deposits
717,633

 
678,221

Total deposits
948,903

 
972,660

Other borrowings
10,157

 
14,428

FHLB advances
43,478

 
40,813

Long-term borrowings
9,854

 
9,682

Accrued interest payable
524

 
2,012

Other liabilities
7,039

 
6,703

Total Liabilities
1,019,955

 
1,046,298

Shareholders' Equity:
 
 
 
Preferred stock:
 
 
 
Series D - 17,796 shares issued and outstanding, 1% dividend
89

 
89

Additional paid-in capital - preferred
17,707

 
17,707

Common stock:
 
 
 
Common Stock Voting, $0.01 par value, 50,000,000 shares authorized, 6,552,111 and 6,099,629 shares issued and outstanding, respectively
66

 
61

Common Stock Non-Voting, $0.01 par value, 10,000,000 shares authorized, 1,096,359 and 1,044,152 shares issued and outstanding, respectively
10

 
10

Additional paid-in capital - common
85,636

 
80,460

Accumulated earnings
5,605

 
3,226

Accumulated other comprehensive loss
(1,509
)
 
(33
)
Total Shareholders’ Equity
107,604

 
101,520

Total Liabilities and Shareholders' Equity
$
1,127,559

 
$
1,147,818

See accompanying notes to consolidated financial statements.

53

WashingtonFirst Bankshares, Inc.
Consolidated Statements of Operations
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands, except per share amounts)
Interest income:
 
Interest and fees on loans
$
43,538

 
$
26,305

Interest and dividends on investments
2,562

 
1,571

Total interest income
46,100

 
27,876

Interest expense:
 
 
 
Interest on deposits
4,764

 
4,074

Interest on borrowings
1,366

 
875

Total interest expense
6,130

 
4,949

Net interest income
39,970

 
22,927

Provision for loan losses
4,755

 
3,225

Net interest income after provision for loan losses
35,215

 
19,702

Non-interest income:
 
 
 
Service charges on deposit accounts
527

 
474

Earnings on bank-owned life insurance
273

 
10

Gain on sale of other real estate owned
160

 
73

Gain on acquisition
—

 
2,497

Gain on sale of loans
821

 
—

Loss on sale of available-for-sale investment securities
(1,472
)
 
—

Other operating income
1,559

 
830

Total non-interest income
1,868

 
3,884

Non-interest expense:
 
 
 
Compensation and employee benefits
14,036

 
8,441

Premises and equipment
5,496

 
2,729

Merger expenses
—

 
4,858

Data processing
3,015

 
1,485

Professional fees
1,492

 
442

Other operating expenses
4,078

 
2,223

Total other expenses
28,117

 
20,178

Income before provision for income taxes
8,966

 
3,408

Provision for income taxes
2,627

 
1,173

Net income
6,339

 
2,235

Preferred stock dividends and accretion
(178
)
 
(178
)
Net income available to common shareholders
$
6,161

 
$
2,057

 
 
 
 
Earnings per common share:
 
 
 
Basic earnings per common share (1)
$
0.81

 
$
0.60

Fully diluted earnings per common share (1)
$
0.80

 
$
0.59

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

54

WashingtonFirst Bankshares, Inc.
Consolidated Statements of Comprehensive Income
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Net income
$
6,339

 
$
2,235

Other comprehensive income, net of tax:
 
 
 
Net unrealized holding (losses)/gains, net of tax
(2,648
)
 
43

Adjustments to deferred tax asset rate
(140
)
 
—

Reclassification adjustment for realized gains
1,312

 
—

Net change from available-for-sale securities (1)
(1,476
)
 
43

Comprehensive income
$
4,863

 
$
2,278

 
 
 
 
(1) Unrealized (losses)/gains on available for sale securities is shown net of income tax benefit of $1.4 million and income tax expense of $27,000 for the years ended December 31, 2013 and 2012, respectively.
 
See accompanying notes to consolidated financial statements.

55

WashingtonFirst Bankshares, Inc.
Consolidated Statements of Changes in Shareholders' Equity
 
For the Year Ended December 31,
 
2013
 
2012
 
Shares
 
Amount
 
Shares
 
Amount
 
(in thousands, except share data)
Preferred stock:
 
 
 
 
 
 
 
Balance, beginning of period
17,796

 
$
89

 
17,796

 
$
89

Balance, end of period
17,796

 
$
89

 
17,796

 
$
89

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

 
 
 
$
17,707

Balance, end of period
 
 
$
17,707

 
 
 
$
17,707

Common stock:
 
 
 
 
 
 
 
Balance, beginning of period
7,143,781

 
$
71

 
2,770,653

 
$
13,853

Exercise of stock options
4,958

 
—

 
—

 
—

Exercise of warrants
125,674

 
2

 
—

 
—

Change in par value - $5.00 to $0.01
—

 
—

 
—

 
(13,826
)
Issuance of stock related to Alliance acquisition
—

 
—

 
1,812,933

 
18

Issuance of stock
—

 
—

 
2,395,808

 
24

Issuance of common stock under restricted stock agreements
11,058

 
—

 
26,514

 
—

Common stock dividends
362,999

 
3

 
137,873

 
2

Balance, end of period
7,648,470

 
$
76

 
7,143,781

 
$
71

Additional paid-in capital - common:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
80,460

 
 
 
$
19,286

Exercise of stock options
 
 
46

 
 
 
—

Exercise of warrants
 
 
1,434

 
 
 
—

Change in par value - $5.00 to $0.01
 
 
—

 
 
 
13,826

Issuance of stock related to Alliance acquisition
 
 
—

 
 
 
20,141

Issuance of stock
 
 
—

 
 
 
25,153

Warrants issued for sub-debt
 
 
—

 
 
 
305

Common stock dividends
 
 
3,469

 
 
 
1,446

Stock compensation expense
 
 
227

 
 
 
303

Balance, end of period
 
 
$
85,636

 
 
 
$
80,460

Accumulated earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
3,226

 
 
 
$
2,618

Net income
 
 
6,339

 
 
 
2,235

Preferred stock dividends
 
 
(178
)
 
 
 
(178
)
Common stock dividends
 
 
(3,472
)
 
 
 
(1,448
)
Common stock dividends (Partial shares - cash portion)
 
 
(4
)
 
 
 
(1
)
Cash dividends ($0.04 per share)
 
 
(306
)
 
 
 
—

Balance, end of period
 
 
$
5,605

 
 
 
$
3,226

Accumulated other comprehensive income:
 
 
 
 
 
 
 
Balance, beginning of period
 
 
$
(33
)
 
 
 
$
(76
)
Change in unrealized loss on available-for-sale securities, net of tax and reclassification adjustments
 
 
(1,476
)
 
 
 
43

Balance, end of period
 
 
$
(1,509
)
 
 
 
$
(33
)
Total shareholders' equity
 
 
$
107,604

 
 
 
$
101,520

See accompanying notes to consolidated financial statements.

56

WashingtonFirst Bankshares, Inc.
Consolidated Statements of Cash Flows
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
6,339

 
$
2,235

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
1,369

 
776

Amortization of purchase accounting marks
(3,348
)
 
—

Loss on sale of available-for-sale investment securities
1,472

 
—

Gain on sale of loans
(821
)
 
—

Gain on sale of other real estate owned
(160
)
 
(73
)
Provision for loan losses
4,755

 
3,225

Write-down of other real estate owned
434

 
308

Earnings on bank-owned life insurance
(273
)
 
(10
)
Gain on acquisition of Alliance
—

 
(2,497
)
Deferred income taxes
1,259

 
(790
)
Net amortization on available-for-sale investment securities
1,312

 
461

Stock based compensation
227

 
303

Net change in:
 
 
 
Interest receivable
(42
)
 
(1,702
)
Other assets
2,643

 
1,244

Interest payable
(1,488
)
 
1,536

Other liabilities
496

 
374

Net cash provided by operating activities
14,174

 
5,390

Cash flows from investing activities:
 
 
 
Net cash received in Alliance acquisition
—

 
115,452

Purchase of available-for-sale investment securities
(67,895
)
 
(18,378
)
Proceeds from repayment of available-for-sale investment securities
45,827

 
15,474

Proceeds from sale/call of available-for-sale investment securities
6,329

 
—

Net increase in loans
(87,020
)
 
(68,532
)
Purchase of bank-owned life insurance
(5,000
)
 
(5,000
)
Net decrease/(increase) in FHLB stock
93

 
(1,276
)
Purchases of Community Bankers Bank Stock
—

 
(206
)
Proceeds from sale of real estate owned
3,733

 
923

Purchases of premises and equipment, net
(2,777
)
 
(771
)
Net cash used in investing activities
(106,710
)
 
37,686

Cash flows from financing activities:
 
 
 
Net (decrease)/increase in deposits
(22,684
)
 
93,523

Net decrease in FHLB advances
3,150

 
(12,500
)
Net decrease in other borrowings
(4,271
)
 
259

Net increase in subordinated debt
—

 
2,530

Proceeds from issuance of common stock, net
1,435

 
25,177

Proceeds from exercise of stock options
45

 
—

Dividends paid - cash portion for fractional shares on 5% dividend
(4
)
 
(1
)
Preferred stock dividends paid
(178
)
 
(178
)
Net cash (used in)/provided by financing activities
(22,507
)
 
108,810

Net decrease in cash and cash equivalents
(115,043
)
 
151,886

Cash and cash equivalents at beginning of period
224,207

 
72,321

Cash and cash equivalents at end of period
$
109,164

 
$
224,207

See accompanying notes to consolidated financial statements.

57

WashingtonFirst Bankshares, Inc.
Notes to the Consolidated Financial Statements

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 December 21, 2012, WashingtonFirst completed its acquisition of Alliance Bankshares Corporation (“Alliance”), and Alliance’s wholly owned bank subsidiary Alliance Bank Corporation (“Alliance Bank”). For more information regarding the acquisition of Alliance, see Note 3 – Acquisition of Alliance Bankshares Corporation.
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, reserve for 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.
(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 December 31, 2013. The Bank maintains interest bearing balances at other banks to help ensure sufficient liquidity and provide additional return versus overnight Federal Funds.

58

The following table sets forth information regarding certain cash and non-cash transactions for the years ended December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Cash paid during the period for:
 
 
 
Interest paid on interest-bearing deposits
$
4,678

 
$
4,193

Income taxes paid
2,430

 
2,682

Non-cash activity:
 
 
 
Loans converted into other real estate owned
2,176

 
1,161

Non-cash activity resulting from acquisition of Alliance:
 
 
 
Common shares issued:
 
 
 
Common shares issued (1,812,933 shares)
—

 
20,160

Assets acquired:
 
 
 
Cash and cash equivalents
—

 
121,228

Investment securities
—

 
74,750

Loans, net of unearned income
—

 
268,294

Premises and equipment, net
—

 
813

Deferred income taxes
—

 
9,174

Core deposit intangible
—

 
430

Other real estate owned
—

 
2,326

Other assets
—

 
6,326

Liabilities assumed:
 
 
 
Deposits
—

 
400,136

FHLB advances
—

 
28,976

Other borrowings
—

 
21,626

Other liabilities
—

 
4,170

(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 December 31, 2013 and 2012.
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 collectability of amounts due per the contractual terms of the investment security.

59

(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)
Equity Securities
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
The Bank grants commercial, real estate, and consumer loans to customers primarily in the greater Washington, DC 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.
(h)
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 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 judgments 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. 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

60

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.
(i)
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.
(j)
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.
(k)
Other Real Estate Owned
Real estate properties acquired through loan foreclosures are recorded initially at 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.
(l)
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 and the State of Maryland income tax. The Company is no longer subject to examination by Federal or State taxing authorities for the years before 2010. As of December 31, 2013 and 2012 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 December 31, 2013 and 2012, the Company does not have any amounts accrued for interest and/or penalties.

61

(m)
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.
(n)
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.
(o)
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.
(p)
Earnings Per Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) 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 (loss) per common share is computed by dividing applicable net income (loss) 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.
(q)
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. There was no impairment of goodwill in the years ended December 31, 2013 or 2012. For more information regarding goodwill, see Note 10—Intangible Assets.
(r)
Recent Accounting Pronouncements
In January 2014, the FASB issued new guidance related to Troubled Debt Restructurings, which clarifies the timing of when an in substance repossession or foreclosure of collateralized residential real property is deemed to have occurred. The guidance also requires new disclosures related to the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This guidance is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this guidance is not expected to be material to the consolidated financial position, results of operations or cash flows.
 
In January 2014, the FASB issued new guidance related to Investments in Qualified Affordable Housing Projects. The new guidance allows an entity, provided certain criteria are met, to elect the proportional amortization method to account for these investments. The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of the provision for income taxes. This guidance is effective for interim and annual reporting periods beginning after December 15, 2014. WashingtonFirst is currently evaluating this guidance to determine the impact on its consolidated financial position, results of operations and cash flows.
(s)
Reclassifications
Certain reclassifications of prior year information were made to conform to the 2013 presentation.

62

3. ACQUISITION OF ALLIANCE BANKSHARES CORPORATION
On December 21, 2012, the Company completed its acquisition of Alliance (the “merger”) pursuant to the Agreement and Plan of Reorganization, dated May 3, 2012, as amended, between the Company and Alliance (the “merger agreement”). Alliance was headquartered in Chantilly, Virginia, and engaged in banking operations through its subsidiary bank, Alliance Bank. The merger expanded the Company’s presence in the greater Washington, D.C. metropolitan area by five additional branches to give the Company 15 branch locations.
The transaction, was accounted for as a purchase and constituted a reorganization for U.S. federal income tax purposes. In conjunction with the merger, WashingtonFirst listed its shares of common stock on the NASDAQ. 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.
Pursuant to the terms of the merger agreement, as a result of the merger, the holders of shares of Alliance common stock received 1,812,933 shares of the Company’s common stock and approximately $5.4 million in cash.
As a condition of the merger agreement, the Company agreed to raise at least $20.0 million of qualifying regulatory capital. Consequently, in connection with the merger and pursuant to private placements of its common stock and Series A non-voting common stock, the Company generated aggregate gross proceeds of approximately $27.1 million in new equity capital from individual and institutional investors. The private placements resulted in the issuance of 1,351,656 shares of the Company’s common stock and 1,044,152 shares of the Company’s Series A non-voting common stock.
The merger 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 assets acquired over consideration paid was recorded as a gain on acquisition of $2.5 million. The Company also recorded $0.4 million in core deposit intangibles which will be amortized over five years.

63

The consideration paid, and the fair value of identifiable assets acquired and liabilities assumed, as of the merger date are summarized in the following table:
Bargain Purchase Gain on Acquisition of Alliance
 
Amount
 
(in thousands)
Consideration paid:
 
Common shares issued (1,812,933 shares)
$
20,160

Cash paid to shareholders
5,597

Fair value of options
179

Value of consideration
25,936

Assets acquired:
 
Cash and cash equivalents
121,228

Investment securities
74,750

Loans, net of unearned income
268,294

Premises and equipment, net
813

Deferred income taxes
9,174

Core deposit tangible
430

Other real estate owned
2,326

Other assets
6,326

Total assets
483,341

Liabilities assumed:
 
Deposits
400,136

FHLB advances
28,976

Other borrowings
21,626

Other liabilities
4,170

Total liabilities
454,908

Net assets acquired
28,433

Bargain purchase gain
$
(2,497
)
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 Company acquired Alliance Bank’s $268.3 million loan portfolio. 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.
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 2013 and 2012, 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 December 31, 2013 and 2012. All balance are fully insured up to the applicable limits by the FDIC.

64

5. INVESTMENT SECURITIES
The following tables present the amortized cost and fair values of WashingtonFirst’s available-for-sale investment securities as of December 31, 2013 and 2012:
 
 
December 31, 2013
 
Available-for-Sale Securities
 
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

Municipal securities
17,646

 
541

 
(426
)
 
17,761

Total available-for-sale securities
$
147,694

 
$
856

 
$
(3,183
)
 
$
145,367


 
December 31, 2012
 
Available-for-Sale Securities
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
U.S. Treasuries
$
5,000

 
$
—

 
$
—

 
$
5,000

U.S. Government agencies
26,208

 
372

 
(10
)
 
26,570

Mortgage-backed securities
25,708

 
292

 
(41
)
 
25,959

Collateralized mortgage obligations
56,184

 
109

 
(34
)
 
56,259

Municipal securities
19,514

 
1,190

 
—

 
20,704

Asset-backed debt securities
2,589

 
—

 
(2,483
)
 
106

Total available-for-sale securities
$
135,203

 
$
1,963

 
$
(2,568
)
 
$
134,598

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase and for other purposes amounted to $115.9 million and $86.8 million as of December 31, 2013 and 2012, respectively.
WashingtonFirst did not recognize in earnings any other-than-temporary impairment losses on available-for-sale investment securities during the years ended December 31, 2013 or 2012. During 2013, WashingtonFirst received proceeds of $6.5 million from the call or sale of securities from its available-for-sale investment portfolio resulting in gross realized gains of $74,000 and gross realized losses of $1.5 million. The majority of gross realized losses in 2013 are the result of the sale of the bank’s investment in Trapeza XIII C-1 Collateralized Debt Obligation (“Trapeza CDO”) in December 2013. Due to the uncertainty at the time regarding the future accounting implications of such investment under the revised, final “Volcker Rule” of the Dodd-Frank Act, the Trapeza CDO was sold in December 2013 for proceeds of $0.7 million, resulting in a gross realized loss of $1.4 million. During 2012, WashingtonFirst received proceeds of $40,000 from the call or sale of securities from its available-for-sale investment portfolio, resulting in immaterial losses.
As of December 31, 2013 and 2012, unrealized losses on available-for-sale securities were as follows: 
 
December 31, 2013
 
Available-for-Sale Securities
 
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
)
Municipal securities
7,978

 
(426
)
 
—

 
—

Total
$
97,692

 
$
(2,807
)
 
$
6,195

 
$
(376
)

65

 
December 31, 2012
 
Available-for-Sale Securities
 
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
$
1,987

 
$
(10
)
 
$
—

 
$
—

Mortgage-backed securities
13,204

 
(41
)
 
—

 
—

Collateralized mortgage obligations
16,562

 
(34
)
 
—

 
—

Asset-backed debt securities
—

 
—

 
106

 
(2,483
)
Total
$
31,753

 
$
(85
)
 
$
106

 
$
(2,483
)
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 December 31, 2013 and 2012, as applicable. The resulting decreases in fair values reflect an increase in the perceived risk by the financial markets related to those securities. As of December 31, 2013, all U.S. Treasuries and U.S. Government Agencies are AAA rated 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. The mortgage-backed securities portfolio at December 31, 2013 is composed of GNMA collateralized mortgage obligations reported at fair value of $42.7 million, and GNMA, FNMA or FHLMC mortgage-backed securities reported at fair value of $43.9 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 December 31, 2013 and 2012, five and two, respectively, of the securities in loss positions had been in loss positions for more than 12 months and had a total unrealized loss of $0.4 million and $2.5 million, respectively. The unrealized losses on those securities as of December 31, 2012 are related to the Bank’s investment in Trapeza XIII C-1 Collateralized Debt Obligation (“Trapeza CDO”), which is discussed below in greater detail.
The amortized cost and fair value of investments by remaining contractual maturity for available-for-sale investment securities as of December 31, 2013 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.
 
 
Available-for-Sale Securities as of December 31, 2013
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due within one year
$
3,954

 
$
3,974

Due after one year through five years
31,912

 
32,091

Due after five years through ten years
35,764

 
35,130

Due after ten years
76,064

 
74,172

Total
$
147,694

 
$
145,367

Trapeza CDO
Management reviewed the Bank’s investment in the Trapeza CDO, the asset backed securities reported in the financial statements, quarterly, and more frequently when economic or market conditions warrant such an evaluation, for possible other-than-temporary impairment (“OTTI”) based on guidance in ASC Topic 320 – Investments in Debt and Equity Instruments. In order to determine whether the Trapeza CDO may have suffered impairment, management of the Company first determined if the market (fair) value of the security is greater than its carrying cost. If the fair value is determined to be greater than cost, management completed its analysis for anecdotal information, but the investment would not be considered for potential impairment. If the fair value is less than cost, management of the Company proceeded with its OTTI analysis to determine whether the variance between fair value and cost is a temporary variance that will be recouped over time or is OTTI.

To determine fair value of the Trapeza CDO, as of the end of each relevant reporting period, management of the Company reviewed the monthly reports from the trustee of the Trapeza CDO, which contain information about the security, including collateralization and interest coverage by tranche, performing and non-performing portfolio securities within the CDO, payment data, and ratings data by tranche. The monthly trustee reports permitted management of the Company to monitor collateralization, changes in deferred interest and cash flow from underlying issuers and periodic trustee notices on changes in interest deferrals and defaults.

66

As part of the fair value determination, management of the Company also prepared a separate analysis of the underlying issuers whose securities comprise the Trapeza CDO, using data obtained from SNL Financial. In addition to the portfolio balance, the report contains, for each such issuer, total assets, net income, return on average assets, return on average equity, risk-based capital ratio, non-performing assets as a percentage of total assets, loan loss reserves as a percentage of gross loans, and the ratio of the sum of non-performing assets plus loans 90 days or more past due divided by the sum of tangible equity and loan loss reserve. Management of the Company reviewed its report to ascertain trends in improvement or deterioration of the credit quality of each issuer compromising the Trapeza CDO (e.g., whether there has been an increase in the number of defaulting or deferring issuers, or whether trends are stable.)
Because the Trapeza CDO is not traded in a recognized market and is a complex structured security, in conducting the OTTI analysis with respect to the Trapeza CDO management of the Company incorporated into its analysis an independent assessment by a third-party specialist. This specialist was retained in prior years at year-end and also retained quarterly when management determined, based on its analysis of changes in the credit quality of the issuers the securities of which comprise the Trapeza CDO, that deterioration in the credit quality of such issuers may have occurred. The estimated fair value of the Trapeza CDO is calculated by the third party specialist using an INTEX CDO Deal Model Library, as well as information from Bloomberg, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and SNL Financial. The report prepared by management referred to in the preceding paragraph serves as a preceding internal analysis of the valuation determined by the third party.
Based on this analysis, the Company had determined that the fair market value of the Trapeza CDO was less than its cost. As of December 31, 2012, the Trapeza CDO has an amortized cost basis of $2.6 million and is valued at $0.1 million.
In determining whether the Trapeza CDO’s impairment is a temporary impairment, management of the Company endeavored to consider all relevant qualitative and quantitative evidence prescribed by ASC Topic 320, including:
i.
the length of time and the extent to which the fair value has been less than cost;
ii.
the financial condition and near-term prospects of the issuer;
iii.
whether the market decline was affected by macroeconomic conditions; and
iv.
whether the Company intends to sell, or more likely than not will be required to sell, the Trapeza CDO before its anticipated recovery.
In assessing the length of time and the extent to which the fair value has been less than cost, the Company monitored developments with respect to the Trapeza CDO and the securities comprising it, as well as the structure of the security. When evaluating the financial condition and near-term prospects of the issuer, the Company considered the financial strength of the issuers comprising the Trapeza CDO. In this regard, the following table provides certain summary information with respect to the Trapeza CDO and the underlying issuers within that security for the period indicated:
 
 
December 31, 2012
Current number of performing and non-performing issuers
Performing: 43
Deferring interest: 10
Defaulted: 10
Actual deferrals and defaults as a percentage of the original collateral
Deferral: 13.6%
Defaults: 14.1%
Expected deferrals and defaults as a percentage of the remaining performing collateral
Expected new deferrals: 0
Expected new defaults: 6.3%
Subordination level of the tranche held by the registrant as a percentage of the remaining performing collateral
11.0%
Subordination level of the tranche held by the registrant plus all superior tranche levels as a percentage of the remaining performing collateral
108.3%
External credit ratings (Moody’s / Fitch)
Ca / C

The default and deferral change in percentage is due to the outstanding balances of the asset-backed debt security declining from the prior period. In considering the extent of the deficiency, the Company considers whether the deficiency has been affected by macroeconomic factors applicable to the class generally and not to the Trapeza CDO in particular. Finally, the Company considered whether it intended to sell, or more likely than not would have be required to sell, the Trapeza CDO before its anticipated recovery. Based on the foregoing analysis by management of the Company, management believes the Trapeza CDO had temporary valuation differences due to market conditions and no additional OTTI was recorded during the years ended December 31, 2013 and 2012. 

67

6. LOANS
The composition of net loans is summarized as follows as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Construction and development
$
97,324

 
$
91,586

Commercial real estate
521,760

 
408,359

Residential real estate
95,428

 
126,394

Real estate loans
714,512

 
626,339

Commercial and industrial
120,833

 
124,670

Consumer
2,775

 
2,346

Total loans
838,120

 
753,355

Less: allowance for loan losses
8,534

 
6,260

Net loans
$
829,586

 
$
747,095

As of December 31, 2013, $300.8 million of loans were pledged as collateral for FHLB advances.
An aging analysis of the composition of past due loans and non-accrual loans by class of loans, as of December 31, 2013 and 2012:
 
As of December 31, 2013
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 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
 
As of December 31, 2012
 
Current
Loans (1)
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Non-
Accrual
 
Total
Past Due
 
Total
Loans
 
(in thousands)
Construction and development
$
86,745

 
$
475

 
$
246

 
$
4,120

 
$
4,841

 
$
91,586

Commercial real estate
397,698

 
3,630

 
648

 
6,383

 
10,661

 
408,359

Residential real estate
123,626

 
678

 
348

 
1,742

 
2,768

 
126,394

Commercial and industrial
120,685

 
639

 
—

 
3,346

 
3,985

 
124,670

Consumer
2,317

 
—

 
5

 
24

 
29

 
2,346

Balance at end of period
$
731,071

 
$
5,422

 
$
1,247

 
$
15,615

 
$
22,284

 
$
753,355

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


68

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 mitigated by collateral supporting the loan. Loans in this category have collateral that is considered to be well-managed, well maintained, accessible and readily marketable.
•
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.
The following table sets forth the risk categories of loans in the Bank’s loan portfolio as of December 31, 2013 and 2012:
 
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



69

 
As of December 31, 2012
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
$
80,393

 
$
1,547

 
$
163

 
$
8,588

 
$
895

 
$
91,586

Commercial real estate
378,001

 
10,068

 
12,169

 
7,022

 
1,099

 
408,359

Residential real estate
118,074

 
3,575

 
2,220

 
2,454

 
71

 
126,394

Commercial and industrial
111,349

 
4,128

 
5,211

 
2,777

 
1,205

 
124,670

Consumer
1,861

 
278

 
179

 
28

 
—

 
2,346

Balance at end of period
$
689,678

 
$
19,596

 
$
19,942

 
$
20,869

 
$
3,270

 
$
753,355

The following table presents a breakdown of non-accrual loans as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Construction and development
$
2,053

 
$
4,120

Commercial real estate
8,333

 
6,383

Residential real estate
1,892

 
1,742

Commercial and industrial
2,671

 
3,346

Consumer
138

 
24

Total non-accrual loans
$
15,087

 
$
15,615

The following table presents information regarding troubled debt restructurings during the years ended December 31, 2013 and 2012:
 
December 31, 2013
 
December 31, 2012
 
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

 
$
422

 
$
266

 
1

 
$
545

 
$
409

Commercial real estate
5

 
6,811

 
6,321

 
4

 
3,913

 
3,913

Residential real estate
8

 
1,167

 
1,167

 
8

 
1,539

 
1,539

Commercial and industrial
6

 
413

 
409

 
5

 
274

 
274

Consumer
1

 
95

 
95

 
1

 
20

 
20

Total loans
21

 
$
8,908

 
$
8,258

 
19

 
$
6,291

 
$
6,155


70

According to the accounting standards, not all loan modifications are troubled debt restructurings (TDRs). TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress in exchange for the modification or renewal. The Company reviews all modifications and renewals for determination of TDR status. 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.
The following table presents loan information by class regarding TDRs identified during the previous 12 months that were in default, under the modified terms for the years ended December 31, 2013 and 2012:
 
December 31, 2013
 
December 31, 2012
 
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

 
$
422

 
$
267

 
1

 
$
545

 
$
410

Commercial real estate
3

 
2,276

 
2,276

 
1

 
1,691

 
1,691

Residential real estate
—

 
—

 
—

 
1

 
725

 
725

Commercial and industrial
—

 
—

 
—

 
5

 
274

 
274

Consumer
—

 
—

 
—

 
1

 
19

 
19

Total loans
4

 
$
2,698

 
$
2,543

 
9

 
$
3,254

 
$
3,119

Non-performing assets were as follows as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Non-accrual loans
$
15,087

 
$
15,615

90+ days past due still accruing
—

 
—

Troubled debt restructurings still accruing
5,715

 
3,036

Asset-backed debt securities
—

 
106

Other real estate owned
1,463

 
3,294

Total non-performing assets
$
22,265

 
$
22,051


As of December 31, 2013 and 2012, 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 $0.9 million and $0.4 million for the years ended December 31, 2013 and 2012, respectively. 

71

7. ALLOWANCE FOR LOAN LOSSES
The following table sets forth changes in the allowance for loan losses for the years ended December 31, 2013 and 2012:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
6,260

 
$
4,932

Provision for loan losses
4,755

 
3,225

Charge-offs
(3,004
)
 
(2,086
)
Recoveries
523

 
189

Balance at end of period
$
8,534

 
$
6,260

The following table presents changes in the allowance for loan losses by segment for the years ended December 31, 2013 and 2012:
 
Allowance for Loan Losses
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Balance as of January 1, 2011
$
1,048

 
$
2,313

 
$
633

 
$
899

 
$
39

 
$
4,932

Provision for/(release of) loan losses
304

 
898

 
140

 
1,890

 
(7
)
 
3,225

Charge-offs
(508
)
 
(694
)
 
(232
)
 
(647
)
 
(5
)
 
(2,086
)
Recoveries
19

 
138

 
32

 
—

 
—

 
189

Balance as of December 31, 2012
863

 
2,655

 
573

 
2,142

 
27

 
6,260

(Release of)/provision for loan losses
(264
)
 
2,200

 
1,129

 
1,620

 
70

 
4,755

Charge-offs
—

 
(109
)
 
(817
)
 
(2,077
)
 
(1
)
 
(3,004
)
Recoveries
74

 
234

 
42

 
164

 
9

 
523

Balance as of December 31, 2013
$
673

 
$
4,980

 
$
927

 
$
1,849

 
$
105

 
$
8,534



72

The following tables present the ending balances of loans and the related allowance for losses, by impairment method and segment type as of December 31, 2013 and 2012:
 
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

 
$
498,225

 
$
93,338

 
$
114,655

 
$
2,637

 
$
804,126

Evaluated individually for impairment
2,053

 
23,535

 
2,090

 
6,178

 
138

 
33,994

 
$
97,324

 
$
521,760

 
$
95,428

 
$
120,833

 
$
2,775

 
$
838,120

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
668

 
$
2,696

 
$
299

 
$
770

 
$
6

 
$
4,439

Evaluated individually for impairment
5

 
2,284

 
628

 
1,079

 
99

 
4,095

 
$
673

 
$
4,980

 
$
927

 
$
1,849

 
$
105

 
$
8,534

 
As of December 31, 2012
 
Construction
and
Development
 
Commercial
Real Estate
 
Residential
Real Estate
 
Commercial
and
Industrial
 
Consumer
 
Total
 
(in thousands)
Ending Balance:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
86,840

 
$
387,262

 
$
121,829

 
$
115,909

 
$
2,184

 
$
714,024

Evaluated individually for impairment
4,746

 
21,097

 
4,565

 
8,761

 
162

 
39,331

 
$
91,586

 
$
408,359

 
$
126,394

 
$
124,670

 
$
2,346

 
$
753,355

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Losses:
 
 
 
 
 
 
 
 
 
 
 
Evaluated collectively for impairment
$
663

 
$
1,641

 
$
278

 
$
582

 
$
7

 
$
3,171

Evaluated individually for impairment
200

 
1,014

 
295

 
1,560

 
20

 
3,089

 
$
863

 
$
2,655

 
$
573

 
$
2,142

 
$
27

 
$
6,260

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.
 
 
As of December 31,
 
2013
 
2012
 
Amount
 
% Total
 
Amount
 
% Total
 
(dollars in thousands)
Construction and development
$
673

 
7.9
%
 
$
863

 
13.8
%
Commercial real estate
4,980

 
58.3
%
 
2,655

 
42.4
%
Residential real estate
927

 
10.9
%
 
573

 
9.2
%
Commercial and industrial
1,849

 
21.7
%
 
2,142

 
34.2
%
Consumer
105

 
1.2
%
 
27

 
0.4
%
Total allowance for loan losses
$
8,534

 
100.0
%
 
$
6,260

 
100.0
%

73


The following table represents specific allocation for impaired loans by class as of December 31, 2013 and 2012:
 
As of December 31, 2013
 
As of December 31, 2012
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
(in thousands)
With no related allowance:
 
 
 
 
 
 
 
 
 
 
 
Construction and development
$
2,194

 
$
1,786

 
$
—

 
$
2,000

 
$
2,000

 
$
—

Commercial real estate
1,195

 
1,175

 
—

 
5,251

 
5,251

 
—

Residential real estate
1,418

 
1,314

 
—

 
864

 
864

 
—

Commercial and industrial
201

 
185

 
—

 
1,404

 
1,404

 
—

Consumer
98

 
95

 
—

 
5

 
5

 
—

Total with no related allowance
5,106

 
4,555

 
—

 
9,524

 
9,524

 
—

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Construction and development
271

 
266

 
5

 
545

 
409

 
61

Commercial real estate
11,570

 
11,204

 
1,698

 
5,014

 
5,014

 
345

Residential real estate
1,891

 
1,745

 
628

 
1,898

 
1,691

 
296

Commercial and industrial
3,032

 
2,895

 
623

 
2,179

 
1,930

 
1,433

Consumer
180

 
137

 
98

 
19

 
19

 
19

Total with an allowance recorded
16,944

 
16,247

 
3,052

 
9,655

 
9,063

 
2,154

Total impaired loans
$
22,050

 
$
20,802

 
$
3,052

 
$
19,179

 
$
18,587

 
$
2,154

8. OTHER REAL ESTATE OWNED
As of December 31, 2013, WashingtonFirst had $1.5 million classified as other real estate owned (“OREO”) on the balance sheet, compared to $3.3 million as of December 31, 2012. During the year ended December 31, 2013, WashingtonFirst sold ten OREO properties collecting cash proceeds of $3.7 million, realizing gains of $0.2 million. In addition, during the year ended December 31, 2013 WashingtonFirst acquired 5 properties with a fair value of $2.2 million , that were classified as OREO. During the year ended December 31, 2012, WashingtonFirst sold one OREO property collecting cash proceeds of $0.9 million, realizing a gain of $0.1 million. In addition, during the year ended December 31, 2012, WashingtonFirst acquired ten properties with a fair value of $3.8 million , of which eight with a fair value of $2.7 million were acquired in the acquisition of Alliance.
The table below reflects changes in OREO for the years ended December 31, 2013 and 2012:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
3,294

 
$
615

Properties acquired at foreclosure
2,176

 
1,161

Properties acquired in acquisition of Alliance
—

 
2,677

Sales of foreclosed properties
(3,573
)
 
(851
)
Valuation adjustments
(434
)
 
(308
)
Balance at end of period
$
1,463

 
$
3,294

The table below reflects expenses applicable to OREO for the years ended December 31, 2013 and 2012:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
 
 
 
Write-downs
$
434

 
$
308

Operating expenses, net of rental income
91

 
119

Total OREO expense
$
525

 
$
427


74

9. PREMISES AND EQUIPMENT, NET
Premises and equipment is summarized in the following table as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Furniture and equipment
$
3,663

 
$
3,143

Leasehold improvements
5,746

 
3,740

Gross premises and equipment
9,409

 
6,883

Less: accumulated depreciation
(4,014
)
 
(3,364
)
Premises and equipment, net
$
5,395

 
$
3,519

Depreciation and amortization expense included in premises and equipment expenses for the years ended December 31, 2013 and 2012 was $0.9 million and $0.6 million, respectively.

The Bank leases all of its offices and branch facilities under non-cancelable operating lease arrangements. Certain leases contain options, which enable the Bank to renew the leases for additional periods. In addition to minimum rentals, the leases have escalation clauses based upon price indices and include provisions for additional payments to cover real estate taxes and common area maintenance. Rent expense associated with these operating leases for the year ended December 31, 2013 and 2012 totaled $2.9 million and $1.8 million, respectively.

The future minimum lease payments under WashingtonFirst’s non-cancelable leases as of December 31, 2013 are as follows:
 
 
 As of December 31, 2013
 
(in thousands)
2014
$
3,226

2015
3,408

2016
3,409

2017
3,160

2018
2,792

Thereafter
10,015

Total
$
26,010


10. 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 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 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.
The balances of goodwill and core deposit intangibles are presented below as of December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Goodwill
$
3,601

 
$
3,601

Core deposit intangible
342

 
428

Total intangibles
$
3,943

 
$
4,029


75

11. DEPOSITS
The following table sets forth the composition of deposits as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Demand deposit accounts
$
231,270

 
$
294,439

NOW accounts
91,107

 
99,043

Money market accounts
188,170

 
103,497

Savings accounts
113,987

 
93,422

Time deposits under $100,000
147,676

 
230,773

Time deposits $100,000 and over
176,693

 
151,486

Total deposits
$
948,903

 
$
972,660

The scheduled maturities of time deposits are as follows as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Within 1 Year
$
191,470

 
$
232,084

1 - 2 years
67,888

 
78,823

2 - 3 years
38,098

 
49,916

3 - 4 years
8,493

 
16,461

4 - 5 years
18,420

 
4,975

Total
$
324,369

 
$
382,259

Time deposits include Certificate of Deposit Account Registry Service (“CDARS”) balances and brokered deposits. The Bank had $33.2 million and $28.4 million in CDARS deposits as of December 31, 2013 and 2012, respectively. Brokered deposits were $32.4 million and $100.5 million as of December 31, 2013 and 2012, respectively. 
12. OTHER BORROWINGS
Other borrowings consist of $10.2 million and $14.4 million of customer repurchase agreements as of December 31, 2013 and 2012, respectively. Customer repurchase agreements are standard commercial banking transactions that involve a Bank customer instead of a wholesale bank or broker.
13. 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 December 31, 2013, the Bank had pledged a total of $300.8 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 December 31, 2013, the Bank had $184.6 million in remaining credit available with the FHLB.
The following table sets forth the composition of FHLB advances as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(dollars in thousands)
As of period ended:
 
 
 
FHLB advances
$
43,478

 
$
40,813

Weighted average outstanding interest rate
1.30
%
 
2.26
%

76

The following table sets forth the composition of FHLB advances during the year ended December 31, 2013 and 2012:
 
For the Year Ended December 31,
 
2013
 
2012
 
(dollars in thousands)
Averages for the year ended:
 
 
 
FHLB advances
$
33,269

 
$
28,013

Average interest rate paid during the period
2.02
%
 
2.58
%
Maximum month-end balance outstanding
$
43,478

 
$
67,850

The following table sets forth the contractual maturities of FHLB advances as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Within one year
$
15,000

 
$
11,850

In 2021
28,478

 
28,963

Total FHLB advances
$
43,478

 
$
40,813

14. LONG-TERM BORROWINGS
Long-term borrowings consist of the following as of December 31, 2013 and 2012:
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Subordinated debt
$
2,247

 
$
2,214

Trust preferred capital notes
7,607

 
7,468

Long-term borrowings
$
9,854

 
$
9,682

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 57,769 shares of Company common stock at a share price equal to $10.82. These warrants 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 December 31, 2013 and 2012 were 3.39 percent and 3.54 percent, respectively.
In connection with the acquisition of Alliance, the Subordinated Debentures became an unsecured obligation of WashingtonFirst and are junior in right of payment to all present and future senior indebtedness of WashingtonFirst. 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. WashingtonFirst records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations, and 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. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. WashingtonFirst is not currently deferring the interest payments.

77

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 December 31, 2013, the entire amount of Trust Preferred Capital Notes was considered Tier 1 Capital.
15. 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 in which the Series D Preferred Stock is outstanding, the preferred shares earn dividends at a rate that can fluctuate on a quarterly basis, based upon changes in the amount of qualified small business lending, or “QSBL,” as defined in the Supplemental Reports related to the SBLF transaction, from a “baseline” level or “QSBL Baseline.” For each dividend period since the SBLF transaction, WashingtonFirst has paid dividends at the rate of 1% based on the level of its QSBL in each applicable quarter.
For the eleventh dividend period through 4.5 years after the closing of the SBLF transaction, the annual dividend rate becomes fixed at between 1% and 5%, based upon the percentage increase in QSBL from the QSBL Baseline to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013). WashingtonFirst Bank’s QSBL as of December 31, 2013 had increased sufficiently as compared with the QSBL Baseline that for the eleventh dividend period (ending March 31, 2014) through 4.5 years after the closing of the SBLF transaction, WashingtonFirst will pay dividends on the Series D Preferred Stock at the fixed rate of 1%.
On January 23, 2012, the Board of Directors reduced the par value of the Company’s common stock from $5.00 to $0.01 per share.
On January 23, 2012, the Board of Directors declared a five percent stock dividend. The stock dividend was paid on February 29, 2012, to shareholders of record as of February 15, 2012. Following the stock dividend the number of outstanding shares increased by 137,873. The stock dividend required a reclassification of retained earnings in the amount of $1.4 million to common stock and paid-in-capital common. All per share amounts in this report have been retroactively adjusted to reflect the stock dividend.
In connection with the issuance of the Bank subordinated debt on June 15, 2012, the Company issued warrants to CBC that would allow it to purchase 57,769 shares of common stock at a share price equal to $10.82. These warrants 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. For more information regarding the issuance of the Company’s capital stock in connection with the Alliance acquisition, see Note 3 – Acquisition of Alliance Bankshares Corporation.
The Company had 158,745 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 33,048 warrants expired.
On April 5, 2013, the Board of Directors declared a five percent stock dividend. The stock dividend was paid on May 17, 2013, to shareholders of record as of April 26, 2013. Following the stock dividend the number of outstanding shares increased by 363,339. The stock dividend required a reclassification of retained earnings of $3.5 million to common stock and paid-in-capital common. All per share amounts in this report have been retroactively adjusted to reflect the stock dividend.
On October 21, 2013, the Board of Directors declared a cash dividend of $0.04 per share payable on January 2, 2014, to stockholders of record on December 13, 2013. The dividend payout of approximately $300,000, on 7.6 million shares of voting and non-voting common stock, represents what the Company expects to be the first of regular quarterly cash dividends. Although the Company expects to declare and pay quarterly 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.
On February 25, 2014, the Board of Directors declared a cash dividend of $0.04 per share payable on April 1, 2014, to stockholders of record on March 11, 2014. The dividend payout represents approximately $300,000 of dividends paid out on 7.6 million shares of voting and non-voting common stock. Although the Company expects to declare and pay quarterly 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.


78

16. SHARE BASED COMPENSATION
In February 2010, the Board of Directors of the Company approved the WashingtonFirst Bankshares, Inc. 2010 Equity Compensation Plan (the “2010 Equity Plan”). Pursuant to the terms of the 2010 Equity Plan all of the shares of common stock of the Company remaining unissued under the prior plans were canceled, and an identical number of shares of the Company’s common stock were reserved for issuance under the 2010 Equity Plan. The 2010 Equity Plan gives the Personnel/Compensation Committee of the Company the ability to grant Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and Stock Awards to employees and non-employee directors.
The following tables summarize stock options and non-vested restricted stock activity for the years ended December 31, 2013 and 2012:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
Stock Options
 
Weighted-Average
Exercise Price
 
Stock Options
 
Weighted-Average
Exercise Price
Outstanding, beginning of year
527,492

 
$
11.24

 
531,119

 
$
11.13

Options granted or exchanged
90,250

 
11.06

 
173,774

 
10.96

Exercised
(4,958
)
 
9.07

 
—

 
—

Expired or canceled
—

 
—

 
(157,500
)
 
10.45

Forfeited
(5,326
)
 
11.32

 
(19,901
)
 
12.09

Outstanding, end of year
607,458

 
$
11.23

 
527,492

 
$
11.24

Exercisable at end of year
356,335

 
$
11.39

 
292,950

 
$
11.04

* Retroactively adjusted to reflect all stock dividends.
 As of December 31, 2013 and 2012, the intrinsic value of options outstanding, exercisable and vested or expected to vest was $1.8 million and $0.2 million, respectively.

 
For the Year Ended December 31,
 
2013
 
2012
 
Non-vested
Restricted Stock
 
Weighted-Average
Grant Date
Fair Value
 
Non-vested
Restricted Stock
 
Weighted-Average
Grant Date
Fair Value
Outstanding, beginning of year
42,567

 
$
9.99

 
50,109

 
$
10.06

Granted
—

 
—

 
26,808

 
9.73

Canceled
(220
)
 
9.11

 
(7,816
)
 
10.14

Vested and issued
(11,034
)
 
—

 
(26,534
)
 
—

Outstanding, end of year
31,313

 
$
10.02

 
42,567

 
$
9.99

* Retroactively adjusted to reflect all stock dividends.
During the year ended December 31, 2012 the Company awarded 26,808 shares of restricted stock. The restricted stock vests equally over a five year period. The Company did award any restricted stock in 2013.
The total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan as of both December 31, 2013 and 2012 was $0.5 million and $0.4 million and is expected to be recognized over a weighted average period of 3.6 and 3.3, respectively. For the twelve months ended December 31, 2013 and 2012, the Company recognized $0.2 million and $0.3 million in expenses, respectively, related to these awards.


79

The following table summarizes information regarding stock options outstanding as of December 31, 2013:
 
 
 
Outstanding
 
Exercisable
Range of Exercise Prices
 
Stock
Options
 
Weighted-Average
Remaining
Contractual Life
 
Stock
Options
 
Weighted-Average
Remaining
Contractual Life
 
Weighted-Average
Exercise Price
$9.00 - $9.99
 
144,386

 
1.5 years
 
144,386

 
1.5 years
 
$
9.40

$10.00 - $10.99
 
52,360

 
4.9 years
 
30,311

 
2.4 years
 
10.89

$11.00 - $11.99
 
248,360

 
8.5 years
 
19,286

 
4.6 years
 
11.34

$12.00 - $12.99
 
112,981

 
3.7 years
 
112,981

 
3.7 years
 
12.70

$13.00 - $13.99
 
—

 
 
 
—

 
 
 
—

$14.00 - $14.99
 
49,371

 
3.4 years
 
49,371

 
3.4 years
 
14.52

$15.00 - $15.99
 
—

 
 
 
—

 
 
 
—

 
 
607,458

 
5.2 years
 
356,335

 
2.7 years
 
$
11.39


17. 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 $160.3 million in outstanding commitments to extend credit as of December 31, 2013.
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 the opinion of management, after consultation with legal counsel, 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 $3.6 million over the remaining life of the contract.

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18. RELATED PARTY TRANSACTIONS

The aggregate amount of loans outstanding to employees, officers, directors, and to companies in which the Company’s directors were principal owners, amounted to $22.7 million, or 2.7 percent of total loans, and $20.0 million, or 2.7 percent of total loans, as December 31, 2013 and 2012, respectively. In 2013, principal advance to related parties in the ordinary course of business with substantially the same terms (including interest rates and collateral) as those prevailing at the time totaled $17.6 million and principal repayments and other reductions totaled $16.1 million. Such loans were made in, for comparable transactions with other persons. They do not involve more than normal risk of collectability or present other unfavorable features.

Total deposit accounts with related parties totaled $31.1 million and $17.0 million as of December 31, 2013 and 2012, respectively.

19. INCOME TAXES

WashingtonFirst is subject to federal income taxes and various state and local income taxes. The components of the income tax expense for the years ended December 31, 2013 and 2012 were as follows:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Current income tax expense
$
1,368

 
$
1,963

Deferred tax expense/(benefit)
1,259

 
(790
)
Income tax expense
$
2,627

 
$
1,173

A reconciliation of tax at the statutory tax rate to the income tax expense for the years ended December 31, 2013 and 2012 is provided below. The statutory tax rate is the federal tax rate of 34 percent.
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Tax expense at statutory rate
$
3,048

 
$
1,159

Increase/(decrease) due to:
 
 
 
State income tax, net of federal tax benefit
30

 
153

Transaction costs
(331
)
 
582

Earnings on bank-owned life insurance
(93
)
 
(3
)
Tax exempt interest
(41
)
 
(1
)
Goodwill
—

 
(849
)
Change in valuation allowance
232

 
—

Other
(218
)
 
132

Income tax expense
$
2,627

 
$
1,173

Statutory tax rate
34.0
%
 
34.0
%
Effective tax rate
29.3
%
 
34.4
%


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The components of the deferred tax assets and liabilities as of December 31, 2013 and 2012 were as follows:
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Net operating loss and tax credit carry forwards
$
4,467

 
$
2,760

Provision for loan losses
2,912

 
2,235

Deferred fees
(722
)
 
(572
)
Depreciation and amortization
(203
)
 
232

Net unrealized (gains)/losses on available-for-sale securities
587

 
(126
)
OREO
487

 
2,198

Loans
1,889

 
3,472

Securities
386

 
1,108

Non-accrual interest
302

 
530

Deferred compensation
480

 
497

Other
395

 
(715
)
Valuation allowance
(432
)
 
(200
)
Net deferred tax assets
$
10,548

 
$
11,419

The net operating loss carry forward acquired in conjunction with the First Liberty Bancorp acquisition in 2006 is subject to annual limits under Section 382 of the Internal Revenue Code of $459,000 and expires in 2025. In conjunction with the acquisition of Alliance in 2012, the net operating loss carry forward is subject to annual limits under Section 382 of the Internal Revenue Code of $739,000 and expires in 2032.

20. 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 December 31, 2013.
As of December 31, 2013, 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.

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The Company’s actual capital amounts and ratios and regulatory requirements are presented in the following table as of December 31, 2013 and 2012:
 
Actual
 
For Capital Adequacy Purposes
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(dollars in thousands)
As of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
123,811

 
14.05
%
 
$
70,497

 
 >8.0%
 
$
88,122

 
 >10.0%
Tier 1 risk-based capital ratio
112,777

 
12.80
%
 
35,243

 
 >4.0%
 
52,864

 
 >6.0%
Tier 1 leverage ratio
112,777

 
10.53
%
 
42,840

 
 >4.0%
 
53,550

 
 >5.0%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
$
113,752

 
13.77
%
 
$
66,087

 
 >8.0%
 
$
82,609

 
 >10.0%
Tier 1 risk-based capital ratio
104,992

 
12.71
%
 
33,042

 
 >4.0%
 
49,563

 
 >6.0%
Tier 1 leverage ratio
104,992

 
9.97
%
 
42,123

 
 >4.0%
 
52,654

 
 >5.0%
21. 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.
The following table presents the basic and dilutive earnings per share for the years ended December 31, 2013 and 2012:
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(dollars in thousands, except for per share amounts)
Net income
$
6,339

 
$
2,235

Less: SBLF dividends
(178
)
 
(178
)
Net income available to common shareholders
$
6,161

 
$
2,057

 
 
 
 
Weighted average number of shares outstanding (1)
7,619,793

 
3,411,935

Effect of dilutive securities:
 
 
 
Restricted stock, stock options and warrants (1)
70,890

 
61,988

Dilutive weighted average number of shares outstanding (1)
7,690,683

 
3,473,923

 
 
 
 
Basic earnings per share (1)
$
0.81

 
$
0.60

Diluted earnings per share (1)
$
0.80

 
$
0.59

(1) Retroactively adjusted to reflect the effect of all stock dividends.
22. EMPLOYEE BENEFITS

The Company maintains a Defined Contribution 401K Plan (“401(k) Plan”), which authorizes a voluntary salary deferral of up to IRS limitations. All full-time employees are eligible to participate after three months of employment. The Company reserves the right to make an annual discretionary contribution to the account of each eligible employee based in part on the Company’s profitability for a given year, and on each participant’s yearly earnings up to IRS limitations. Participants are vested in the Company’s discretionary matching contributions evenly over a 3 year period and are fully vested in future Company matching contributions after three years of employment. The company incurred expenses of $0.3 million and $0.2 million for the years ended December 31, 2013 and 2012, respectively, under the 401(k). The Company also provides a benefit package which includes health, dental and optical insurance, 401K plan, life and long term disability insurance. Additionally, WashingtonFirst maintains a stock-based compensation plan for employees of WashingtonFirst.


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23. OTHER EXPENSES
The following table provides details of the other expenses reflected in the consolidated statements of operations for the years ended December 31, 2013 and 2012:
 
 
 For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Other real estate owned expenses
$
525

 
$
427

Business and franchise tax
668

 
174

Advertising and promotional expenses
594

 
301

FDIC premiums
836

 
521

Postage, printing and supplies
182

 
150

Directors' fees
224

 
179

Insurance
108

 
69

Other
941

 
402

Other expenses
$
4,078

 
$
2,223

24. 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

84

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 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 2013 or 2012.
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 December 31, 2013, WashingtonFirst’s assets and liabilities recorded at fair value included financial instruments valued at $22.3 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 2.0 percent of total assets and 13.3 percent of financial instruments measured at fair value as of December 31, 2013. As of December 31, 2012, WashingtonFirst’s assets and liabilities recorded at fair value included financial instruments valued at $22.0 million whose fair values were estimated by management in the absence of readily determinable fair values. These financial instruments measured as level 3 represented 1.9 percent of total assets and 14.1 percent of financial instruments measured at fair value as of December 31, 2012.

85

The following tables present information about WashingtonFirst’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2013 and 2012, respectively, and indicates the fair value hierarchy of the valuation techniques used by WashingtonFirst to determine such fair value:
 
Assets Measured at Fair Value 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

Municipal securities
—

 
17,761

 
—

 
17,761

Total recurring assets at fair value
$
2,996

 
$
142,371

 
$
—

 
$
145,367

 
 
 
 
 
 
 
 
Nonrecurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (1)
$
—

 
$
—

 
$
20,802

 
$
20,802

Other real estate owned (2)
—

 
—

 
1,463

 
1,463

Total nonrecurring assets at fair value
$
—

 
$
—

 
$
22,265

 
$
22,265

 
Assets Measured at Fair Value as of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Recurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
U.S. Treasuries
$
5,000

 
$
—

 
$
—

 
$
5,000

U.S. Government agencies
—

 
26,570

 
—

 
26,570

Mortgage-backed securities
—

 
25,959

 
—

 
25,959

Collateralized mortgage obligations
—

 
56,259

 
—

 
56,259

Municipal securities
—

 
20,704

 
—

 
20,704

Asset-backed debt securities
—

 
—

 
106

 
106

Total recurring assets at fair value
$
5,000

 
$
129,492

 
$
106

 
$
134,598

 
 
 
 
 
 
 
 
Nonrecurring:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Impaired loans (1)
$
—

 
$
—

 
$
18,587

 
$
18,587

Other real estate owned (2)
—

 
—

 
3,294

 
3,294

Total nonrecurring assets at fair value
$
—

 
$
—

 
$
21,881

 
$
21,881


(1)
Includes loans that have been measured for impairment at the fair value of the loans’ collateral.
(2)
Other real estate owned is transferred from loans to OREO at the lower of cost or market.


86

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.
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Balance at beginning of period
$
106

 
$
68

Unrealized gains
—

 
38

Realized losses
(106
)
 
—

Balance at end of period
$
—

 
$
106

Fair Value of Financial Instruments
The following table sets forth the estimated fair values and carrying values for financial assets, liabilities and commitments as of December 31, 2013 and 2012:
 
 
As of December 31,
 
2013
 
2012
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(in thousands)
Cash and cash equivalents
$
109,164

 
$
109,164

 
$
224,207

 
$
224,207

Investment securities
145,367

 
145,367

 
134,598

 
134,598

Other equity securities
3,530

 
3,530

 
3,623

 
3,623

Loans, net
829,586

 
824,881

 
747,095

 
752,567

Bank-owned life insurance
10,283

 
10,283

 
5,010

 
5,010

Time deposits
324,369

 
325,946

 
382,259

 
384,263

Other borrowings
10,157

 
10,157

 
14,428

 
14,428

FHLB advances
43,478

 
43,681

 
40,813

 
40,951

Long-term borrowings
9,854

 
9,854

 
9,682

 
9,682

Off balance sheet items
160,257

 
160,257

 
118,539

 
118,539

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 or 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, 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 provide, 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.

87

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.
Off-balance sheet instruments. The fair value of off-balance-sheet lending commitments is equal to the amount of commitments outstanding. This is based on the fact that the Company generally does not offer lending commitments or standby letters of credit to its customers for long periods, and therefore, the underlying rates of the commitments approximate market rates, resulting in a level 2 classification.

88

25. FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

WashingtonFirst Bankshares, Inc. (PARENT ONLY)
Condensed Balance Sheets
 
 
 
 
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
10,781

 
$
13,126

Investment in bank subsidiary
103,704

 
96,803

Deferred tax asset
423

 
423

Other assets
882

 
888

Total Assets
$
115,790

 
$
111,240

Liabilities and Shareholders' Equity:
 
 
 
Liabilities:
 
 
 
Accrued interest payable
$
21

 
$
1,418

Long-term borrowings
7,607

 
7,468

Other liabilities
558

 
834

Total Liabilities
8,186

 
9,720

Shareholders' Equity:
 
 
 
Total Shareholders’ Equity
107,604

 
101,520

Total Liabilities and Shareholders' Equity
$
115,790

 
$
111,240


WashingtonFirst Bankshares, Inc. (PARENT ONLY)
Condensed Statements of Operations and Comprehensive Income
 
 
 
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Interest income:
 
Dividends from subsidiary
$
—

 
$
950

Other interest income
86

 
40

Total interest income
86

 
990

Interest expense
451

 
23

Net interest income
(365
)
 
967

Non-interest income:
 
 
 
Gain on acquisition
—

 
2,497

Total non-interest income
—

 
2,497

Non-interest expense:
 
 
 
Merger expenses
—

 
1,737

Other operating expenses
2,222

 
29

Total other expenses
2,222

 
1,766

(Loss)/income before provision income taxes
(2,587
)
 
1,698

Income tax (benefit/)expense
(797
)
 
310

Net (loss)/income before undistributed income of subsidiaries
(1,790
)
 
1,388

Undistributed income of subsidiaries
8,129

 
847

Net income
6,339

 
2,235

Preferred stock dividends and accretion
(178
)
 
(178
)
Net income available to common stock shareholders
$
6,161

 
$
2,057

Comprehensive Income
$
4,863

 
$
2,278


89

WashingtonFirst Bankshares, Inc. (PARENT ONLY)
Condensed Statements of Cash Flows
 
 
 
 
 
For the Year Ended December 31,
 
2013
 
2012
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
6,339

 
$
2,235

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Undistributed income of subsidiaries
(8,129
)
 
(847
)
Gain on acquisition
—

 
(2,497
)
Net change in:
 
 
 
Other assets
163

 
17

Other liabilities
(1,977
)
 
(43
)
Net cash (used in)/provided by operating activities
(3,604
)
 
(1,135
)
Cash flows from investing activities:
 
 
 
Investment in subsidiaries
(178
)
 
(15,152
)
Net cash used in investing activities
(178
)
 
(15,152
)
Cash flows from financing activities:
 
 
 
Net increase in other borrowings
139

 
11

Proceeds from issuance of common stock, net
1,435

 
25,177

Dividends paid - cash portion for fractional shares on 5% dividend
(4
)
 
(1
)
Preferred stock dividends paid
(178
)
 
(178
)
Net cash provided by financing activities
1,392

 
25,009

Net (decrease)/increase in cash and cash equivalents
(2,390
)
 
8,722

Cash and cash equivalents at beginning of period
13,126

 
4,404

Cash and cash equivalents at end of period
$
10,736

 
$
13,126



90

26. QUARTERLY FINANCIAL INFORMATION (Unaudited)

 
2013 Quarter Ended
 
Dec. 31
 
Sept. 30
 
Jun. 30
 
Mar. 31
 
(in thousands, except per share amounts)
Interest income
$
11,976

 
$
11,315

 
$
11,261

 
$
11,548

Interest expense
1,475

 
1,491

 
1,632

 
1,532

Net interest income
10,501

 
9,824

 
9,629

 
10,016

Provision for loan losses
880

 
1,800

 
975

 
1,100

Net interest income after provision for loan losses
9,621

 
8,024

 
8,654

 
8,916

Non-interest (loss)/income
(789
)
 
1,534

 
629

 
494

Non-interest expense
7,365

 
6,839

 
6,868

 
7,045

Income before income taxes
1,467

 
2,719

 
2,415

 
2,365

Provision for income taxes
271

 
579

 
865

 
912

Net income
$
1,196

 
$
2,140

 
$
1,550

 
$
1,453

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per common share
$
0.15

 
$
0.27

 
$
0.20

 
$
0.19

Fully diluted earnings per common share
$
0.15

 
$
0.27

 
$
0.20

 
$
0.18

 
2012 Quarter Ended
 
Dec. 31
 
Sept. 30
 
Jun. 30
 
Mar. 31
 
(in thousands, except per share amounts)
Interest income
$
7,655

 
$
6,949

 
$
6,692

 
$
6,580

Interest expense
1,275

 
1,222

 
1,231

 
1,221

Net interest income
6,380

 
5,727

 
5,461

 
5,359

Provision for loan losses
639

 
515

 
850

 
1,221

Net interest income after provision for loan losses
5,741

 
5,212

 
4,611

 
4,138

Non-interest income
2,915

 
246

 
306

 
417

Non-interest expense
7,726

 
4,818

 
4,298

 
3,336

Income before income taxes
930

 
640

 
619

 
1,219

Provision for income taxes
211

 
257

 
236

 
469

Net income
$
719

 
$
383

 
$
383

 
$
750

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per common share
$
0.15

 
$
0.11

 
$
0.11

 
$
0.23

Fully diluted earnings per common share
$
0.15

 
$
0.11

 
$
0.10

 
$
0.23



91

27. SUBSEQUENT EVENTS
On February 25, 2014, the Board of Directors declared a cash dividend of $0.04 per share payable on April 1, 2014, to stockholders of record on March 11, 2014. The dividend payout represents approximately $300,000 of dividends paid out on 7.6 million shares of voting and non-voting common stock. Although the Company expects to declare and pay quarterly 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.

On February 28, 2014, the Bank announced that it had entered into an 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 operates two branches - Sterling and Herndon - both in Virginia. With this acquisition WashingtonFirst will now operate 16 retail banking offices, including ten in Virginia, four in Maryland, and two in Washington, D.C.
All Millennium depositors will automatically become depositors of WashingtonFirst Bank and deposits will continue to be insured by the FDIC. Depositors of Millennium will continue to have access to their accounts via checks, ATM and debit cards, as well as internet banking. Checks drawn on Millennium checks will continue to be processed. In the transaction, WashingtonFirst Bank will be receiving approximately $122 million in deposits, $60 million in loans, and $76 million in cash and marketable securities from Millennium. The FDIC will retain all other real estate owned (OREO) by Millennium. There will be no loss share agreement between the FDIC and WashingtonFirst Bank.



92

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

None.

Item 9A. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s periodic filings under 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 the Company’s management on a timely basis to allow decisions regarding required disclosure. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2013. Based on management’s assessment, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013.

Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed by, or under the supervision of, our CEO and CFO and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related notes for external purposes in accordance with generally accepted accounting principles in the United States of America.

An internal control system, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance that the control system’s objectives have been met. The inherent limitations include the realities that judgments in decision making can be deficient and breakdowns can occur because of simple errors or mistakes.

Company management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013 based on those criteria.

Limitations on Effectiveness of Controls and Procedures.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting during the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B. Other Information

None.

93

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholders
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.

Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.


Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the Company’s definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.



94

PART IV

Item 15. Exhibits, Financial Statement Schedules

(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 8 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)).
 
 
 
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 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. 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)).
 
 
 
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)).
 
 
 
*
 
Filed with this Annual Report on Form 10-K.
 
 
 
**
 
Furnished with this Annual Report on Form 10-K.
 
 
 
†
 
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.


95

Exhibit
 
Description
 
 
 
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 files 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)).
 
 
 
21*
 
Subsidiaries of WashingtonFirst Bankshares, Inc.
 
 
 
23*
 
Consent of BDO USA, LLP to the incorporation by reference in the Registration Statement on Form S-8, dated December 18, 2013 (File No. 333-192926), of the consolidated financial statements dated March 19, 2014 of WashingtonFirst Bankshares, Inc which are contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
 
 
 
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.

 
 
 
*
 
Filed with this Annual Report on Form 10-K.
 
 
 
**
 
Furnished with this Annual Report on Form 10-K.
 
 
 
†
 
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.

96

Exhibit
 
Description
 
 
 
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 years ended December 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012; (iii) Consolidated Balance Sheets as of December 31, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012; (v) Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2013 and 2012; and (vi) the notes to the foregoing Consolidated Financial Statements.
 
 
 
*
 
Filed with this Annual Report on Form 10-K.
 
 
 
**
 
Furnished with this Annual Report on Form 10-K.
 
 
 
†
 
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.


97

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)
 
 
 
 
 
March 19, 2014
 
 
 
/s/ Shaza Andersen
Date
 
 
 
Shaza L. Andersen
 
 
 
 
Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
March 19, 2014
 
 
 
/s/ Matthew Johnson
Date
 
 
 
Matthew R. Johnson
 
 
 
 
Executive Vice President & Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)


98