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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-28635
VIRGINIA COMMERCE BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1964895
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207
-------------------------------------------
(Address of Principal Executive Offices)
703-534-0700
------------
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check 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 .
--- ---
Indicate by check whether the registrant is an accelerated file as defined in
Rule 12b-2 of the Securities Exchange Act of 1934. Yes X No .
--- ---
As of May 5, 2004, the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 7,932,583
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share data)
Unaudited Audited
March 31, December 31,
2004 2003
--------- ------------
ASSETS
Cash and due from banks $ 20,641 $ 22,434
Securities (fair value: 2004, $138,438; 2003, $149,894) 137,253 149,245
Federal funds sold 44,187 31,622
Loans held-for-sale 12,453 3,513
Loans, net of allowance for loan losses of $7,948 in 2004 and
$7,457 in 2003 722,739 654,851
Bank premises and equipment, net 6,264 6,189
Accrued interest receivable 3,059 3,372
Other assets 9,847 9,898
--------- ---------
Total assets $ 956,443 $ 881,124
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand deposits $ 131,027 $ 119,785
Savings and interest-bearing demand deposits 340,168 340,122
Time deposits 374,003 313,604
--------- ---------
Total deposits $ 845,198 $ 773,511
Securities sold under agreement to repurchase and federal funds
purchased 30,574 30,887
Trust preferred capital notes 18,000 18,000
Accrued interest payable 1,293 1,024
Other liabilities 2,193 2,610
Commitments and contingent liabilities -- --
--------- ---------
Total liabilities $ 897,258 $ 826,032
========= =========
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par, 1,000,000 shares authorized and $ -- $ --
un-issued
Common stock, $1.00 par, 20,000,000 shares authorized, issued and
outstanding 2004, 7,932,285; 2003, 7,860,291 7,932 7,860
Surplus 18,344 17,891
Retained earnings 32,439 29,354
Accumulated other comprehensive income (loss), net 470 (13)
--------- ---------
Total stockholders' equity $ 59,185 $ 55,092
--------- ---------
Total liabilities and stockholders' equity $ 956,443 $ 881,124
========= =========
Notes to consolidated financial statements are an integral part of these
statements.
2
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except per share data)
(Unaudited)
Three Months Ended March 31,
2004 2003
------- -------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $11,130 $ 9,692
Interest and dividends on investment securities:
Taxable 1,259 716
Tax-exempt 73 67
Dividends 24 24
Interest on federal funds sold 47 89
------- -------
Total interest and dividend income $12,533 $10,588
------- -------
INTEREST EXPENSE:
Deposits $ 3,292 $ 3,140
Securities sold under agreement to repurchase and federal
funds purchased 31 28
Other borrowed funds 4 6
Trust preferred capital notes 207 213
------- -------
Total interest expense $ 3,534 $ 3,387
------- -------
NET INTEREST INCOME: $ 8,999 $ 7,201
Provision for loan losses 487 356
------- -------
Net interest income after provision for loan losses $ 8,512 $ 6,845
------- -------
NON-INTEREST INCOME:
Service charges and other fees $ 447 $ 418
Non-deposit investment services commissions 82 2
Fees and net gains on loans held-for-sale 591 1,299
Other 89 24
------- -------
Total non-interest income $ 1,209 $ 1,743
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 2,848 $ 2,998
Occupancy expense 781 785
Data processing 313 284
Other operating expense 1,105 851
------- -------
Total non-interest expense $ 5,047 $ 4,918
------- -------
Income before taxes on income $ 4,674 $ 3,670
Provision for income taxes 1,588 1,252
------- -------
NET INCOME $ 3,086 $ 2,418
======= =======
Earnings per common share, basic (1) $ 0.39 $ 0.32
Earnings per common share, diluted (1) $ 0.36 $ 0.29
(1) Adjusted giving effect to a two-for-one split in the form of a 100% stock
dividend in May 2003. Notes to consolidated financial statements are an
integral part of these statements.
3
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 2004 and 2003
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other Total
Preferred Common Retained Comprehensive Comprehensive Stockholders'
Stock Stock Surplus Earnings Income (Loss) Income Equity
--------- -------- -------- -------- ------------- ------------- -------------
Balance, January 1, 2003 $ -- $ 3,739 $ 19,622 $ 17,807 $ 682 $ 41,850
Comprehensive Income:
Net Income 2,418 $ 2,418 2,418
Other comprehensive income, net of tax,
unrealized holding losses arising
during the period (net of tax of $85) (165) (165) (165)
Total comprehensive income $ 2,253
========
Stock options/warrants exercised -- 153 1,771 -- -- 1,924
--------------------------------------------------- --------
Balance, March 31, 2003 $ -- $ 3,892 $ 21,393 $ 20,225 $ 517 $ 46,027
=================================================== ========
Balance, January 1, 2004 $ -- $ 7,860 $ 17,891 $ 29,353 $ (13) $ 55,091
Comprehensive Income:
Net Income 3,086 $ 3,086 3,086
Other comprehensive income, net of tax,
unrealized holding gains arising
during the period (net of tax of $260) 483 483 483
Total comprehensive income $ 3,569
========
Stock options/warrants exercised -- 72 453 -- -- 525
--------------------------------------------------- --------
Balance, March 31, 2004 $ -- $ 7,932 $ 18,344 $ 32,439 $ 470 $ 59,185
=================================================== ========
Notes to consolidated financial statements are an integral part of these
statements.
4
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,086 $ 2,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 249 239
Provision for loan losses 487 356
Deferred tax benefit (127) (142)
Amortization of security premiums and (accretion) of discounts (40) (7)
Origination of loans held-for-sale (31,620) (69,823)
Sales of loans 22,679 73,532
Changes in other assets and other liabilities:
Decrease (increase) in accrued interest receivable 313 (104)
(Increase) decrease in other assets (82) 16
Decrease in other liabilities (148) (1,504)
-------- --------
Net Cash Provided by (Used In) Operating Activities $ (5,203) $ 4,981
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (68,375) (31,451)
Purchase of securities available-for-sale (18,767) (35,915)
Purchase of securities held-to-maturity -- (5,000)
Proceeds from principal payments on securities available-for-sale 909 2,209
Proceeds from principal payments on securities held-to-maturity 927 1,170
Proceeds from calls and maturities of securities available-for-sale 29,705 11,000
Purchase of bank premises and equipment (323) (238)
-------- --------
Net Cash (Used In) Investing Activities $(55,924) $(58,225)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 71,687 $ 58,895
Net decrease in repurchase agreements (313) (3,552)
Net proceeds from issuance of capital stock 525 1,924
-------- --------
Net Cash Provided by Financing Activities $ 71,899 $ 57,267
Net Increase In Cash and Cash Equivalents 10,772 4,023
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 54,056 43,978
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 64,828 $ 48,001
======== ========
Notes to consolidated financial statements are an integral part of these
statements.
5
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements of Virginia
Commerce Bancorp, Inc. and its subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. All significant intercompany balances
and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
and reclassifications consisting of a normal and recurring nature considered
necessary to present fairly the financial positions as of March 31, 2004 and
December 31, 2003, the results of operations for the three months ended March
31, 2004 and 2003, and statements of cash flows and stockholders' equity for the
three months ended March 31, 2004 and 2003.
Operating results for the three month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
2. INVESTMENT SECURITIES
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of March 31, 2004 are as follows (dollars in thousands):
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $81,257 $ 586 $ -- $81,843
Domestic corporate debt obligations 6,000 17 -- 6,017
Obligations of states and political subdivisions 1,230 120 -- 1,350
Restricted stock:
Federal Reserve Bank 782 -- -- 782
Federal Home Loan Bank 1,598 -- -- 1,598
Community Bankers' Bank 55 -- -- 55
----------------------------------------------
$90,922 $ 723 $ -- $91,645
HELD-TO-MATURITY:
U.S. Government Agency obligations $37,577 $ 874 $ -- $38,451
Obligations of states and political subdivisions 7,542 255 -- 7,797
Domestic corporate debt obligations 489 56 -- 545
----------------------------------------------
$45,608 $ 1,185 $ -- $46,793
==============================================
As of March 31, 2004 the Company held no securities in an unrealized loss
position.
6
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of December 31, 2003 are as follows (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 93,363 $ 466 $ (555) $ 93,274
Domestic corporate debt obligations 6,000 -- (5) 5,995
Obligations of states and political subdivisions 1,220 75 -- 1,295
Restricted stock:
Federal Reserve Bank 758 -- -- 758
Federal Home Loan Bank 1,355 -- -- 1,355
Community Bankers' Bank 55 -- -- 55
--------------------------------------------------------
$ 102,751 $ 541 $ (560) $ 102,732
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 38,490 $ 476 $ -- $ 38,966
Obligations of states and political subdivisions 7,535 155 (38) 7,652
Domestic corporate debt obligations 488 56 -- 544
--------------------------------------------------------
$ 46,513 $ 687 $ (38) $ 47,162
========================================================
3. LOANS
Major classifications of loans are summarized as follows:
March 31, 2004 December 31, 2003
---------------------------------
(In Thousand of Dollars)
Commercial $ 75,308 $ 61,178
Real estate-one-to-four family residential 95,033 88,789
Real estate-multi-family residential 32,752 29,954
Real estate-non-farm, non-residential 341,839 325,668
Real estate-construction 183,243 153,400
Consumer 5,833 6,061
-------- --------
Total Loans $734,008 $665,050
Less unearned income 3,321 2,742
Less allowance for loan losses 7,948 7,457
-------- --------
Loans, net $722,739 $654,851
======== ========
7
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. EARNINGS PER SHARE
The following shows the weighted average number of shares used in computing
earnings per share and the effect on the weighted average number of shares of
diluted potential common stock. The weighted average number of shares for the
three months ended March 31, 2003, have been adjusted to give effect to a
two-for-one stock split in the form of a 100% stock dividend in May 2003.
March 31, 2004 March 31, 2003
-------------- --------------
Per Per
Share Share
Shares Amount Shares Amount
------ ------ ------ -------
Basic earnings per share 7,930,650 $0.39 7,686,528 $0.32
----- -----
Effect of dilutive securities:
Stock options 677,144 636,088
Warrants 36,712 31,456
--------- ---------
Diluted earnings per share 8,644,506 $0.36 8,354,072 $0.29
========= ===== ========= =====
5. STOCK COMPENSATION PLAN
At March 31, 2004, the Company has a stock-based compensation plan. The Company
accounts for the plan under the recognition and measurement principles of APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share for
the three months ended March 31, 2004, and 2003 had the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
been adopted.
(Dollars in thousands except per share amounts) MARCH 31, 2004 MARCH 31, 2003
- -------------------------------------------------------------------------------
NET INCOME, AS REPORTED $3,086 $2,418
Deduct: total stock-based employee compensation (120) (89)
expense determined based on fair value
method of awards, net of tax
PRO FORMA NET INCOME $2,966 $2,329
BASIC EARNINGS PER SHARE:
As reported $ 0.39 $ 0.32
Pro forma $ 0.37 $ 0.30
DILUTED EARNING PER SHARE:
As reported $ 0.36 $ 0.29
Pro Forma $ 0.34 $ 0.28
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2004, and 2003, respectively: price volatility of
29.67% and 28.78%, risk-free interest rates of 4.37% and 4.02%, dividend rate of
..02% and expected lives of 10 years.
8
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital ratios as of March 31, 2004 with the minimum
regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 10.58% 8.00% --
Bank 10.43% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 9.59% 4.00% --
Bank 7.18% 4.00% 6.00%
Leverage Ratio:
Company 8.57% 4.00% --
Bank 6.48% 4.00% 5.00%
7. TRUST PREFERRED SECURITIES
On November 13, 2002, the Company completed a private placement issuance of $3.0
million of trust preferred securities through a newly formed, wholly-owned,
subsidiary trust (VCBI Capital Trust I). The securities bear a floating rate of
interest, adjusted semi-annually, of 340 basis points over six month Libor,
currently 4.67%, with a maximum rate of 12.0% until November 15, 2007. The
securities have a thirty year term and are callable at par beginning November
15, 2007. On December 19, 2002, the Company completed a separate private
placement issuance of $15.0 million of trust preferred securities through
another newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II).
These securities bear a floating rate of interest, adjusted semi-annually, of
330 basis points over six month Libor, currently 4.53%, with a maximum rate of
11.9% until December 30, 2007. These securities also have a thirty year term and
are callable at par beginning December 30, 2007. The principal asset of each
trust is a similar amount of the Company's junior subordinated debt securities
with like maturities and interest rates to the trust preferred securities. The
obligations of the Company with respect to the issuance of the trust preferred
securities constitute a full and unconditional guarantee by the Company of each
Trust's obligations with respect to the trust preferred securities to the extent
set forth in the related guarantees. Subject to certain exceptions and
limitations, the Company may elect from time to time to defer interest payments
on the junior subordinated debt securities, resulting in a deferral of
distribution payments on the related trust preferred securities.
The Trust Preferred Securities may be included in Tier 1 capital for regulatory
capital adequacy purposes up to 25.0% of Tier 1 capital after its inclusion. The
portion of the trust preferred securities not qualifying as Tier 1 capital may
be included as part of total qualifying capital in Tier 2 capital. All of the
trust preferred securities currently qualify for inclusion in Tier 1 capital.
NOTE 8: SEGMENT REPORTING
In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" the Company has two reportable segments, its community
banking operations and its mortgage banking division. Community banking
operations, the major segment, involves making loans and gathering deposits from
individuals and businesses in the Bank's market area, while the mortgage banking
division originates and sells mortgage loans,
9
servicing released, on one-to-four family residential properties. Revenues from
mortgage lending consist of interest earned on mortgage loans held-for-sale,
loan origination fees, and net gains on the sale of loans in the secondary
market. The Bank provides the mortgage division with short term funds to
originate loans and charges it interest on the funds based on what the Bank
earns on overnight funds. Expenses include both fixed overhead and variable
costs on originated loans such as loan officer commissions, document preparation
and courier fees. The following table presents segment information for the three
months ended March 31, 2004, and 2003. Eliminations consist of overhead and
interest charges by the Bank to the mortgage lending division.
- ------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004
- ------------------------------------------------------------------------------------------
(In thousands) Community Mortgage
Banking Lending Eliminations Total
- ------------------------------------------------------------------------------------------
Interest income $ 12,466 $ 67 $ -- $ 12,533
Non-interest income 618 591 -- 1,209
- ------------------------------------------------------------------------------------------
Total operating income $ 13,084 $ 658 $ -- $ 13,742
Interest expense $ 3,534 $ 10 $ (10) $ 3,534
Provision for loan losses 487 -- -- 487
Non-interest expense 4,563 496 (12) 5,047
Total operating expense $ 8,584 $ 506 $ (22) $ 9,068
- ------------------------------------------------------------------------------------------
Income before taxes on income $ 4,500 $ 152 $ 22 $ 4,674
Provision for income taxes 1,535 53 -- 1,588
- ------------------------------------------------------------------------------------------
Net Income $ 2,965 $ 99 $ 22 $ 3,086
- ------------------------------------------------------------------------------------------
Total Assets $943,851 $ 12,592 $ -- $956,443
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003
- ------------------------------------------------------------------------------------------
(In thousands) Community Mortgage
Banking Lending Eliminations Total
- ------------------------------------------------------------------------------------------
Interest income $ 10,375 $ 213 $ -- $ 10,588
Non-interest income 444 1,299 -- 1,743
- ------------------------------------------------------------------------------------------
Total operating income $ 10,819 $ 1,512 $ -- $ 12,331
Interest expense $ 3,387 $ 33 $ (33) $ 3,387
Provision for loan losses 356 -- -- 356
Non-interest expense 4,060 868 (10) 4,918
Total operating expense $ 7,803 $ 901 $ (43) $ 8,661
- ------------------------------------------------------------------------------------------
Income before taxes on income $ 3,016 $ 611 $ 43 $ 3,670
Provision for income taxes 1,044 208 -- 1,252
- ------------------------------------------------------------------------------------------
Net Income $ 1,972 $ 403 $ 43 $ 2,418
- ------------------------------------------------------------------------------------------
Total Assets $705,467 $ 15,434 $ -- $720,901
- ------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This management's discussion and analysis and other portions of this report,
contain forward-looking statements within the meaning of the Securities and
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases,
forward-looking statements can be identified by use of words such as "may,"
"will," "anticipates," "believes," "expects," "plans," "estimates," "potential,"
"continue," "should," and similar words or phrases. These statements are based
upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policy, competitive factors,
and other conditions which by their nature, are not susceptible to accurate
forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the
forward-looking statements are based, actual future operations and results may
differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward-looking statements. The Company's
past results are not necessarily indicative of future performance.
Non-GAAP Presentations
- ----------------------
This management's discussion and analysis refers to the efficiency ratio, which
is computed by dividing non-interest expense by the sum of net interest income
on a tax equivalent basis and non-interest income. This is a non-GAAP financial
measure which we believe provides investors with important information regarding
our operational efficiency. Comparison of our efficiency ratio with those of
other companies may not be possible because other companies may calculate the
efficiency ratio differently. The Company, in referring to its net income, is
referring to income under accounting principals generally accepted in the United
States, or "GAAP".
General
- -------
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Virginia Commerce Bancorp, Inc.
and subsidiaries (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this report. The Company is the parent bank holding company for
Virginia Commerce Bank (the "Bank"), a Virginia state-chartered bank that
commenced operations in May 1988. The Bank pursues a traditional community
banking strategy, offering a full range of business and consumer banking
services through thirteen branch offices, two residential mortgage offices and
one investment services office.
Headquartered in Arlington, Virginia, Virginia Commerce serves the Northern
Virginia suburbs of Washington, D.C., including Arlington, Fairfax and Prince
William Counties and the cities of Alexandria, Falls Church and Manassas. Its
service area also covers, to a lesser extent, Washington, D.C. and the nearby
Maryland counties of Montgomery and Prince Georges. The Bank's customer base
includes small-to-medium size businesses including firms that have contracts
with the U.S. government, associations, retailers and industrial businesses,
professionals and their firms, business executives, investors and consumers.
Additionally, the Bank has strong market niches in commercial real estate,
construction and residential mortgage lending.
Critical Accounting Policies
- ----------------------------
During the quarter ended March 31, 2004 there were no changes in the Company's
critical accounting policies as reflected in the last report.
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred.
11
A variety of factors could affect the ultimate value that is obtained either
when earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan portfolio. Actual losses could
differ significantly from the historical factors that we use. In addition, GAAP
itself may change from one previously acceptable method to another method.
Although the economics of our transactions would be the same, the timing of
events that would impact our transactions could change.
The allowance for loan losses is an estimate of the losses that are inherent in
our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, 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.
Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance for loans identified as impaired. Impairment testing includes
consideration of the borrower's overall financial condition, resources and
payment record, support available from financial guarantors and the fair market
value of collateral. These factors are combined to estimate the probability and
severity of inherent losses. When impairment is identified, then a specific
reserve is established based on the Company's calculation of the loss embedded
in the individual loan. Large groups of smaller balance, homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for impairment.
The formula allowance is used for estimating the loss on internally risk rated
loans exclusive of those identified as impaired. The loans meeting the criteria
for special mention, substandard, doubtful and loss, as well as, impaired loans
are segregated from performing loans within the portfolio. Internally classified
loans are then grouped by loan type (commercial, commercial real estate,
commercial construction, residential real estate, residential construction or
installment). Each loan type is assigned an allowance factor based on
management's estimate of the associated risk, complexity and size of the
individual loans within the particular loan category. Classified loans are
assigned a higher allowance factor than non-rated loans due to management's
concerns regarding collectibility or management's knowledge of particular
elements surrounding the borrower. Allowance factors grow with the worsening of
the internal risk rating. The unallocated formula is used to estimate the loss
of non-classified loans and loans identified for impairment testing for which no
impairment was identified. These un-criticized loans are also segregated by loan
type and allowance factors are assigned by management based on delinquencies,
loss history, trends in volume and terms of loans, effects of changes in lending
policy, the experience and depth of management, national and local economic
trends, concentrations of credit, quality of the loan review system and the
effect of external factors (i.e. competition and regulatory requirements). The
factors assigned differ by loan type. The unallocated allowance captures losses
whose impact on the portfolio has occurred but has yet to be recognized in
either the formula or specific allowance. Allowance factors and the overall size
of the allowance may change from period to period based on management's
assessment of the above described factors and the relative weights given to each
factor. Further information regarding the allowance for loan losses is provided
under the caption: Allowance for Loan Losses/Provision for Loan Loss Expense,
later in this report.
Results of Operations
- ---------------------
Total assets increased $75.3 million, or 8.6%, from $881.1 million at December
31, 2003, to $956.4 million at March 31, 2004, as total deposits grew $71.7
million, or 9.3%, from $773.5 million to $845.2 million.
Loans, net of allowance for loan losses and excluding mortgage loans
held-for-sale, increased $67.8 million, or 10.4%, from $654.9 million at
December 31, 2003, to $722.7 million at March 31, 2004, and represented 85.5% of
total deposits at March 31, 2004. The majority of loan growth occurred in real
estate construction loans which increased $29.8 million, or 19.5%, from $153.4
million at December 31, 2003, to $183.2 million at March 31, 2004. Non-farm
non-residential real estate loans represented the second largest dollar increase
rising $16.2 million, or 5.0%, from $325.7 million at December 31, 2003, to
$341.8 million at March 31, 2004. Commercial loans increased $14.1 million, or
23.1%, from $61.2 million at December 31, 2003, to $75.3 million. The growth in
commercial loans is reflective of the hiring of new loan officers focused in
this area.
12
Loans held-for-sale, which represent one-to-four family residential real estate
loans originated on a pre-sold basis to various investors, increased $8.9
million, from $3.5 million at December 31, 2003 to $12.4 million at March 31,
2004, as volume increased in the later part of the quarter. Originations were
down $38.2 million, or 54.7%, from $69.8 million during the three months ended
March 31, 2003, to $31.6 million during the current three month period.
Refinancing loans represented $55.1 million and $15.5 million of total
originations for the three-month periods ended March 31, 2003, and 2004,
respectively.
With the increase in loans utilizing the majority of funding from deposit growth
during the three month period, investment securities decreased $12.0 million, or
8.0%, from $149.2 million at December 31, 2003, to $137.2 million at March 31,
2004, as several calls on short-term agency securities were not replaced. The
proceeds from these calls were placed in federal funds sold which increased
$12.6 million, or 39.7%, from $31.6 million at December 31, 2003, to $44.2
million at March 31, 2004.
Deposit growth occurred in all categories with demand deposits increasing $11.2
million, or 9.4%, from $119.8 million at December 31, 2003, to $131.0 million at
March 31, 2004. Savings and interest-bearing demand deposits were mostly
unchanged from $340.1 million at December 31, 2003, to $340.2 million, while
time deposits grew by $60.4 million, or 19.3%, from $313.6 million at December
31, 2003, to $374.0 million at March 31, 2004. The growth in time deposits was
due to the promotion of thirteen and twenty-six month time deposits in order to
fund the exceptionally high level of loans originated during the quarter.
Although the majority of the Bank's deposits are attracted from individuals and
businesses in the Northern Virginia and the Metropolitan Washington, D.C. area,
$38.1 million of the $60.4 million in time deposit growth was attracted from
out-of-market financial institutions and funds of public entities. All deposits
from out-of-market bear the same interest rates paid by the Bank on comparable
deposits from local consumers and businesses.
For the three months ended March 31, 2004, net income of $3.1 million reflected
an increase of 27.6% compared to $2.4 million for the three months ended March
31, 2003, as net interest income increased $1.8 million, or 25.0%, non-interest
income fell $534 thousand, or 30.6%, and non-interest expense was up $129
thousand, or 2.6%. Provisions for loan losses increased $131 thousand from $356
thousand for the three months ended March 31, 2003, to $487 thousand for the
three months ended March 31, 2004. Diluted earnings per share of $0.36 were up
$0.07, or 24.1%, compared to $0.29 for the same period in 2003, as adjusted to
give effect to a two-for-one stock split in the form of a 100% stock dividend in
May 2003. The Company's annualized return on average assets and return on
average equity were 1.37% and 21.64% for the current three month period compared
to 1.41% and 22.04% for the three months ended March 31, 2003. Overall, while
non-interest income declined due to lower fees and net gains on mortgage loans
held-for-sale, total revenue increased as net interest income rose due to strong
balance sheet growth and increases in non-interest expense were minimal. As a
result, the Company's efficiency ratio improved to 49.3% during the first
quarter 2004 as compared to 54.9% for the same period in 2003.
Stockholders' equity increased $4.1 million, or 7.4%, from $55.1 million at
December 31, 2003, to $59.2 million at March 31, 2004, on earnings of $3.1
million, $524 thousand in proceeds and tax benefits received from the exercise
of stock options by Company directors and officers and an increase of $483
thousand in other comprehensive income, net of tax.
Net Interest Income
- -------------------
Net interest income is the excess of interest earned on loans and investments
over the interest paid on deposits and borrowings. The Company's net interest
income increased $1.8 million, or 25.0%, from $7.2 million for the three months
ended March 31, 2003, to $9.0 million for the three month period ended March 31,
2004, due to growth in earning assets as the net interest margin declined from
4.50% in the first quarter of 2003 to 4.23% for the current three month period.
The Company's yields on earning assets and costs of interest-bearing liabilities
have continued to fall along with market interest rates since early 2001. The
yield on earning assets dropped seventy-three basis points from 6.61% for the
three months ended March 31, 2003, to 5.88% for the three months ended March 31,
2004, while the average rate paid on interest-bearing liabilities fell
fifty-eight basis points from 2.56% to 1.98%. As a result, the net interest
margin dropped twenty-seven basis points. This lower margin is mostly due to a
seventy-seven basis point drop in
13
the average rate earned on loans as new loans have continued to be added over
the last year at rates below the portfolios average yield in March 2003. As the
Company expects new loans will continue to be added at rates below the
portfolio's existing yield and as the decline in deposit rates has slowed, it is
likely the net interest margin could decline slightly further in the second
quarter.
The following table shows the average balance sheets for each of the three
months ended March 31, 2004, and 2003. In addition, the amounts of interest
earned on earning assets, with related yields on a tax-equivalent basis, and
interest expense on interest-bearing liabilities, with related rates, are shown.
Loans placed on a non-accrual status are included in the average balances. Net
loan fees and late charges included in interest income on loans totaled $513
thousand and $383 thousand for 2004 and 2003, respectively.
14
----------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------------------------------
2004 2003
------------------------------- -------------------------------
(Dollars in thousands) Interest Average Interest Average
Average Income- Yields Average Income- Yields
Balance Expense /Rates Balance Expense /Rates
ASSETS
Securities(1) $140,599 $ 1,356 3.92% $ 74,258 $ 807 4.46%
Loans, net of unearned income 695,931 11,130 6.33% 546,097 9,692 7.10%
Federal funds sold 19,950 47 0.94% 30,831 89 1.15%
----------------------------- -----------------------------
TOTAL INTEREST-EARNING ASSETS $856,480 $ 12,533 5.88% $651,186 $ 10,588 6.61%
Other assets 44,009 33,500
-------- --------
TOTAL ASSETS $900,489 $684,686
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $206,254 $ 687 1.34% $117,276 $ 495 1.71%
Money market accounts 110,851 384 1.39% 69,511 322 1.88%
Savings accounts 19,043 26 0.54% 19,249 49 1.02%
Time deposits 328,683 2,195 2.68% 283,074 2,274 3.26%
----------------------------- -----------------------------
Total interest-bearing deposits $664,831 $ 3,292 1.99% $489,110 $ 3,140 2.60%
Securities sold under agreement to
repurchase and federal funds purchased 31,172 31 0.41% 29,509 28 0.38%
Other borrowed funds 1,235 4 1.23% 400 6 5.93%
Trust preferred capital notes 18,000 207 4.55% 18,000 213 4.74%
----------------------------- -----------------------------
TOTAL INTEREST-BEARING LIABILITIES $715,238 $ 3,534 1.98% $537,019 $ 3,387 2.56%
Demand deposits and other liabilities 128,046 103,790
-------- --------
TOTAL LIABILITIES $843,284 $640,809
Stockholders' equity 57,205 43,877
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $900,489 $684,686
======== ========
Interest rate spread 3.90% 4.05%
Net interest income and margin $ 8,999 4.23% $ 7,201 4.50%
(1) Yields on securities available-for-sale have been calculated on the basis of
historical cost and do not give effect to changes in the fair value of those
securities, which are reflected as a component of stockholders' equity. Average
yields on securities are stated on a tax equivalent basis, using a 35% rate.
15
Allowance for Loan Losses / Provision for Loan Loss Expense
- -----------------------------------------------------------
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses reflective of the
risks in the loan portfolio. For the three months ended March 31, 2004, the Bank
realized a net recovery of $4 thousand compared to a net charge-off of $6
thousand for the same period in 2003. The provision for loan loss expense for
the first three months of 2004 was $487 thousand compared to $356 thousand in
2003. As a result, the total allowance for loan losses increased $491 thousand,
or 6.6%, from $7.5 million at December 31, 2003, to $7.9 million at March 31,
2004. This increase in the provision for loan loss expense was due to the
increase in total loans outstanding in the fourth quarter of 2003 as provision
needs are calculated on a ninety day delayed basis.
Management feels that the allowance for loan losses is adequate; however, 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 Company's market
area, or changes in the circumstances of particular borrowers.
The Company generates a quarterly analysis of the allowance for loan losses,
with the objective of quantifying portfolio risk into a dollar figure of
inherent losses, thereby translating the subjective risk value into an objective
number. Emphasis is placed on semi-annual independent external loan reviews and
monthly internal reviews. The determination of the allowance for loan losses is
based on applying and summing the results of eight qualitative factors and one
quantitative factor to each category of loans along with any specific allowance
for impaired and adversely classified loans within the particular category. Each
factor is assigned a percentage weight and that total weight is applied to each
loan category. The resulting sum from each loan category is then combined to
arrive at a total allowance for all categories. Factors are different for each
loan category. Qualitative factors include: levels and trends in delinquencies
and non-accruals, trends in volumes and terms of loans, effects of any changes
in lending policies, the experience, ability and depth of management, national
and local economic trends and conditions, concentrations of credit, quality of
the Company's loan review system, and regulatory requirements. The total
allowance required thus changes as the percentage weight assigned to each factor
is increased or decreased due to its particular circumstance, as the various
types and categories of loans change as a percentage of total loans and as
specific allowances are required due to an increase in impaired and adversely
classified loans.
The following schedule summarizes the changes in the allowance for loan losses:
Three Months Three Months Twelve Months
Ended Ended Ended
March 31, 2004 March 31, 2003 December 31, 2003
------------------------------------------------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 7,457 $ 5,924 $ 5,924
Provision charged against income 487 356 1,575
Recoveries:
Consumer loans 2 2 12
Commercial loans 11 -- 2
Losses charged to reserve:
Consumer loans (9) (8) 26
Commercial loans -- -- 30
------- ------- -------
Net recoveries (charge-offs) 4 (6) (42)
------- ------- -------
Allowance, at end of period $ 7,948 $ 6,274 $ 7,457
======= ======= =======
Ratio of net charge-offs to average total loans
outstanding during period .00% .001% .01%
18
Risk Elements and Non-performing Assets
- ---------------------------------------
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed real properties). The total
non-performing assets and loans that are ninety days or more past due and still
accruing interest decreased 1.9% from $1.337 million at December 31, 2003 to
$1.312 million at March 31, 2004, and increased $50 thousand, or 4.0%, from
$1.262 million at March 31, 2003.
Loans are placed in non-accrual status when in the opinion of management the
collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
The ratio of non-performing assets and loans past due ninety days and still
accruing to total loans decreased from 0.21% at December 31, 2003, to 0.18% at
March 31, 2004, and decreased from 0.23% at March 31, 2003, as the level of
non-performing assets was mostly unchanged while total loans outstanding
increased significantly. The Company expects its ratio of non-performing assets
to total loans to remain low relative to its peers; however, it could increase
from its current level due to identified other potential problem loans of $2.1
million as of March 31, 2004, for which management has identified risk factors
that may result in them not being repaid in accordance with their terms. These
loans are primarily well secured, are currently performing and are down slightly
from $2.2 million at December 31, 2003.
Foreclosed real properties include properties that have been substantively
repossessed or acquired in complete or partial satisfaction of debt. Such
properties, which are held for resale, are carried at the lower of cost or fair
value, including a reduction for the estimated selling expenses, or principal
balance of the related loan. As of March 31, 2004, March 31, 2003, and December
31, 2003, the Company held no foreclosed real properties.
Total non-performing assets consist of the following:
March 31, 2004 March 31, 2003 December 31, 2003
--------------------------------------------------
(In Thousands of Dollars)
Non-accrual loans $ 46 $1,121 $ 46
Impaired loans 391 141 416
Restructured loans 875 -- 875
------ ------ ------
Total non-performing assets $1,312 $1,262 $1,337
Loans past due 90 days and still
accruing -- 1 84
Total non-performing assets and
loans past due 90 days and
still accruing $1,312 $1,263 $1,421
====== ====== ======
As a percentage of total loans 0.18% 0.23% 0.21%
As a percentage of total assets 0.14% 0.18% 0.16%
17
Concentrations of Credit Risk
- -----------------------------
The Bank does a general banking business, serving the commercial and personal
banking needs of its customers. The Bank's primary service area consists of the
Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax,
Fauquier, Loudoun and Prince William counties and the cities of Alexandria,
Fairfax, Falls Church, Manassas and Manassas Park. Our service area also covers,
to a lesser extent, Washington, D.C. and the nearby Maryland counties of
Montgomery and Prince Georges. Substantially all of the Company's loans are made
within its market area.
The ultimate collectibility of the Bank's loan portfolio and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely related to the economic conditions and trends in the
Metropolitan Washington, DC area.
At March 31, 2004, the Company had $557.8 million, or 76.0%, of total loans
concentrated in commercial real estate. Commercial real estate for purposes of
this discussion includes all construction loans, loans secured by multi-family
residential properties and loans secured by non-farm, non-residential
properties. At December 31, 2003, commercial real estate loans were $509.0
million, or 76.5%, of total loans. Total construction loans of $183.2 million at
March 31, 2004, represented 25.0% of total loans, loans secured by multi-family
residential properties of $32.7 million represented 4.5% of total loans, and
loans secured by non-farm, non-residential properties of $341.8 million
represented 46.6%.
Construction loans at March 31, 2004, included $137.0 million in loans to
commercial builders of single family residential property and $13.2 million to
individuals on single family residential property, representing 18.7% and 1.8%
of total loans, respectively, and together representing 20.5% of total loans.
These loans are made to a number of unrelated entities and generally have a term
of twelve to eighteen months. In addition the Company had $33.1 million of
construction loans on non-residential commercial property at March 31, 2004,
representing 4.5% of total loans. These total construction loans of $183.2
million include $72.3 million in land acquisition and or development loans on
residential property and $22.2 million in land acquisition and or development
loans on commercial property, together totaling $94.5 million, or 12.9% of total
loans. Adverse developments in the Northern Virginia real estate market or
economy including substantial increases in mortgage interest rates, slower
housing sales, and increased commercial property vacancy rates could have an
adverse impact on these groups of loans and the Bank's income and financial
position. At March 31, 2004, the Company had no other concentrations of loans in
any one industry exceeding 10% of its total loan portfolio. An industry for this
purpose is defined as a group of counterparties that are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions.
The Bank has established formal policies relating to the credit and collateral
requirements in loan originations including policies that establish limits on
various loan types as a percentage of total loans and total capital. Loans to
purchase real property are generally collateralized by the related property with
limitations based on the property's appraised value. Credit approval is
primarily a function of collateral and the evaluation of the creditworthiness of
the individual borrower, guarantors and or the individual project. Management
considers the concentration of credit risk to be minimal due to the
diversification of borrowers over numerous business and industries.
Non-Interest Income
- -------------------
Non-interest income decreased $534 thousand, or 30.6%, from $1.7 million for the
three months ended March 31, 2003, to $1.2 million for the same period ended
March 31, 2004. Fees and net gains on loans held-for-sale were the contributing
factor decreasing $708 thousand, or 54.5%, from $1.3 million in 2003 to $591
thousand for the three months ended March 31, 2004, as originations declined
$38.2 million, or 54.7%, from $69.8 million during the first three months of
2003 to $31.6 million for the current three-month period. These lower levels of
originations are attributable to a slow down in the level of refinancing loans.
Loans classified as held-for-sale represent loans on one-to-four family
residential real estate, originated on a pre-sold and servicing released basis
to various investors, and carried on the balance sheet at the lower of cost or
market.
18
Adverse changes in the local real estate market, consumer confidence, and
interest rates could adversely impact the level of loans originated and sold,
and the resulting fees and earnings thereon.
Non-Interest Expense
- --------------------
For the three months ended March 31, 2004, non-interest expense increased $129
thousand, or 2.6%, compared to the same period in 2003. Salaries and benefits
were down $150 thousand, or 5.0%, from just under $3.0 million in 2003 to
slightly over $2.8 for the three months ended March 31, 2004. Lower levels of
commissions on mortgage loans held-for-sale was the main reason for the decrease
in salaries and benefits expense.
Other operating expense increased $254 thousand, or 29.9%, due to higher
franchise taxes, marketing, legal and professional services expenses. As a
percentage of total revenue sources (net interest and non-interest income, on a
tax equivalent basis) non-interest expense fell from 54.9% for the three months
ended March 31, 2003, to 49.3% for same period in 2004. This reduction is a
result of both increases in total revenue and on-going cost containment efforts.
Provision for Income Taxes
- --------------------------
The Company's income tax provisions are adjusted for non-deductible expenses and
non-taxable interest after applying the U.S. federal income tax rate of 35% in
2004 and 34% in 2003. Provision for income taxes totaled $1.6 million and $1.3
million for the three months ended March 31, 2004 and 2003, respectively.
Liquidity
- ---------
The Company's principal sources of liquidity and funding are its deposit base.
The level of deposits necessary to support the Company's lending and investment
activities is determined through monitoring loan demand. Considerations in
managing the Company's liquidity position include, but are not limited to,
scheduled cash flows from existing loans and investment securities, anticipated
deposit activity including the maturity of time deposits, and projected needs
from anticipated extensions of credit. The Company's liquidity position is
monitored daily by management to maintain a level of liquidity conducive to
efficiently meet current needs and is evaluated for both current and longer term
needs as part of the asset/liability management process.
The Company measures total liquidity through cash and cash equivalents,
securities available-for-sale, mortgage loans held-for-sale, other loans and
investment securities maturing within one year, less securities pledged as
collateral for repurchase agreements, public deposits and other purposes, and
less any outstanding federal funds purchased. These liquidity sources increased
$41.0 million, or 15.1%, from $271.5 million at December 31, 2003, to $312.5
million at March 31, 2004, due to an increase in the amount of loans maturing
within one-year and higher levels of fed funds sold.
Additional sources of liquidity available to the Company include the capacity to
borrow funds through established short-term lines of credit with various
correspondent banks, and the Federal Home Loan Bank of Atlanta. Available funds
from these liquidity sources were approximately $165.4 million and $129.7
million at March 31, 2004, and December 31, 2003, respectively. The Bank's line
of credit with the Federal Home Loan Bank of Atlanta, which requires the
pledging of collateral in the form of certain loans and or securities, is $143.4
million of the $165.4 million as of March 31, 2004.
Off-Balance Sheet Arrangements
- ------------------------------
The Company enters into certain financial transactions in the ordinary course of
performing traditional banking services that result in off-balance sheet
arrangements. The off-balance sheet arrangements recognized as of March 31,
2004, and December 31, 2003, were commitments to extend credit, which include
unfunded lines of credit, and standby letter of credit only. Except as disclosed
herein and in the Company's annual report on Form 10-K for the year ended
December 31, 2003, the Company has no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition,
19
revenues or expenses, results of operations, liquidity, capital expenditures, or
capital resources, that is material to investors.
Commitments to extend credit which amounted to $224.8 million at March 31, 2004,
and $209.7 million at December 31, 2003, represent legally binding 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. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
March 31, 2004, and December 31, 2003, the Company had $13.6 million and $14.7
million, respectively, in outstanding standby letters of credit.
Capital
- -------
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, changing competitive conditions and
economic forces, and the overall level of growth. The adequacy of the Company's
current and future capital is monitored by management on an ongoing basis.
Management seeks to maintain a capital structure that will assure an adequate
level of capital to support anticipated asset growth and to absorb potential
losses.
The capital position of the Bank continues to meet regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier 1 risk-based capital, total risk-based capital, and
leverage ratios. Tier 1 capital consists of common and qualifying preferred
stockholders' equity less goodwill. Total risk-based capital consists of Tier 1
capital, qualifying subordinated debt, and a portion of the allowance for loan
losses. Risk-based capital ratios are calculated with reference to risk-weighted
assets. The leverage ratio compares Tier 1 capital to total average assets for
the most recent quarter end. The Bank's Tier 1 risk-based capital ratio was
7.18% at March 31, 2004, compared to 7.51% at December 31, 2003. The total
risk-based capital ratio was 10.43% at March 31, 2004, compared to 11.03% at
December 31, 2003. These ratios are in excess of the mandated minimum
requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was
6.48% at March 31, 2004, compared to 6.33% at December 31, 2002 and is also in
excess of the mandated minimum requirement of 4.00%. Based on these ratios, the
Bank is considered "well capitalized" under regulatory prompt corrective action
guidelines. The Company's Tier 1 risk-based capital ratio, total risk-based
capital ratio, and leverage ratio was 9.59%, 10.58% and 8.57%, respectively, at
March 31, 2004. The declines in capital ratios for the three months ended March
31, 2004, was due to the significant level of growth in assets.
The ability of the Company to continue to grow is dependent on its earnings and
the ability to obtain additional funds for contribution to the Bank's capital,
through borrowing, the sale of additional common stock, or through the issuance
of additional trust preferred securities. In the event that the Company is
unable to obtain additional capital for the Bank on a timely basis, or there is
a change in the regulatory treatment of trust preferred securities as capital,
the growth of the Company and the Bank may be curtailed, and the Company and the
Bank may be required to reduce their level of assets in order to maintain
compliance with regulatory capital requirements. Under those circumstances net
income and the rate of growth of net income may be adversely affected. In April
2004, the Company filed with the Securities and Exchange Commission a
registration statement relating to a proposed offering of up to 810,000 shares
of common stock. There can be no assurance that the offering will be
consummated, as to the net proceeds of the proposed offering, or that the
Company will be able to profitably deploy the proceeds of the offering.
The Federal Reserve is currently reviewing the capital treatment of trust
preferred securities, in light of recent accounting pronouncements and
interpretations regarding variable interest entities, which have been read to
encompass the subsidiary trusts established to issue trust preferred securities,
and to which the Company issued subordinated debentures. As a result of such
review, the capital treatment of trust preferred securities, which can be
20
counted as Tier 1 capital at the holding company level, up to 25% of total
capital, may be adversely affected. At March 31, trust preferred securities
represented 24.6% of the Company's tier one capital and 22.3% of its total
capital. Future trust preferred issuances to increase holding company capital
levels may not be available. In the event of adverse changes in the capital
treatment for trust preferred securities, the Company may be required to raise
additional equity capital, through the sale of common stock or otherwise, sooner
than it would otherwise do so.
Recent Accounting Pronouncements
- --------------------------------
During the three months ended March 31, 2004 there were no new accounting
pronouncements requiring the Company's review and adoption.
Internet Access To Company Documents
- ------------------------------------
The Company provides access to its SEC filings through the Bank's Web site at
www.vcbonline.com. After accessing the Web site, the filings are available upon
selecting "about us/stock information/financial information." Reports available
include the annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after the reports are electronically filed or furnished to the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk, or
interest rate risk, as its net income is largely dependent on its net interest
income. Market risk is managed by the Company's Asset/Liability Management
Committee that formulates and monitors the performance of the Company based on
established levels of market risk as dictated by policy. In setting tolerance
levels, or limits on market risk, the Committee considers the impact on earnings
and capital, the level and general direction of interest rates, liquidity, local
economic conditions and other factors. Interest rate risk, or interest
sensitivity, can be defined as the amount of forecasted net interest income that
may be gained or lost due to favorable or unfavorable movements in interest
rates. Interest rate risk, or sensitivity, arises when the maturity or repricing
of interest-bearing assets differs from the maturing or repricing of
interest-bearing liabilities and as a result of the difference between total
interest-bearing assets and interest-bearing liabilities. The Company seeks to
manage interest rate sensitivity while enhancing net interest income by
periodically adjusting this asset/liability position.
One of the tools used by the Company to assess interest sensitivity on a monthly
basis is the static gap analysis that measures the cumulative differences
between the amounts of assets and liabilities maturing or repricing within
various time periods. It is the Company's goal to limit the one-year cumulative
difference to plus or minus 10% of total interest-earning assets in an attempt
to limit changes in future net interest income from sudden changes in market
interest rates. The following table shows a gap analysis reflecting the earlier
of the maturity or repricing dates for various assets and liabilities as of
March 31, 2004. At that point in time, the Company had a cumulative net asset
sensitive twelve-month gap position of $50.4 million, or a positive 5.46% of
total interest-earning assets and up from 0.46% at December 31, 2003, due to
higher levels of adjustable rate loans added in the first quarter.
This position would generally indicate that over a period of one-year earnings
should rise in a rising interest rate environment as more assets would reprice
than liabilities and should decline in a falling interest rate environment.
Importantly, this measurement of interest rate risk sensitivity represents a
static position as of a single day and is not necessarily indicative of the
Company's position at any other point in time, does not take into account the
sensitivity of yields and costs of specific assets and liabilities to changes in
market rates, and it does not take into account the specific timing of when
changes to a specific asset or liability will occur. More accurate measures of
interest sensitivity are provided to the Company using earnings simulation
models.
21
At March 31, 2004 Interest Sensitivity Periods
----------------------------------------------------------------
Within 91 to 365 Over 1 to 5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
----------------------------------------------------------------
INTEREST EARNING ASSETS
Securities, at amortized cost $ 59,597 $ 26,301 $ 25,905 $ 24,727 $136,530
Federal funds sold 44,187 -- -- -- 44,187
Loans, net of unearned income 340,777 89,582 287,565 25,216 743,140
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Total interest earning assets $444,561 $115,883 $313,470 $ 49,943 $923,857
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INTEREST-BEARING LIABILITIES
NOW accounts $ 88,204 $ 77,306 $ 41,353 $ -- $206,863
Money market accounts 50,637 47,470 15,786 -- 113,893
Savings accounts 1,553 4,853 13,006 -- 19,412
Time deposits 44,310 147,106 181,969 618 374,003
Securities sold under agreement to
repurchase and federal funds purchased 30,574 -- -- -- 30,574
Trust preferred capital notes 18,000 -- -- -- 18,000
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Total interest-bearing liabilities $233,278 $276,735 $252,114 $ 618 $762,745
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Cumulative maturity / interest $211,283 $ 50,431 $111,787 $161,112 $161,112
sensitivity gap
As % of total earnings assets 22.87% 5.46% 12.10% 17.44%
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In order to more closely measure interest sensitivity, the Company uses earnings
simulation models on a quarterly basis. These models utilize the Company's
financial data and various management assumptions as to growth and earnings to
forecast a base level of net interest income and earnings over a one-year
period. This base level of earnings is then shocked assuming a sudden 200 basis
points increase or decrease in interest rates. At December 31, 2003, even though
the Company's GAP analysis reflected an asset sensitive position within twelve
months, the earnings model projected that forecasted net income would decrease
by 14.6% if interest rates would immediately rise by 200 basis points. This was
due to $82.5 million in callable U.S. Government Agency securities, slotted on
the GAP analysis as repricing within one-year, which would not reprice upward as
they would not be called if interest rates suddenly rose 200 basis points. At
the time of issuance of this report earnings simulation models had not been
updated as of March 31, 2004; however, it is expected that the decline in
forecasted net income resulting from an immediate 200 basis point increase in
rates will be lower as a result of the increase in the twelve month asset
sensitive position to 5.46%. The Company has set a limit on this measurement of
interest sensitivity to a maximum decline in earnings of 20%. Since the earnings
model uses numerous assumptions regarding the effect of changes in interest
rates on the timing and extent of repricing characteristics, future cash flows
and customer behavior, the model cannot precisely estimate net income and the
effect on net income from sudden changes in interest rates. Actual results will
differ from simulated results due to the timing, magnitude and frequency of
interest rate changes and changes in market conditions and management
strategies, among other factors.
22
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, evaluated, as
of the last day of the period covered by this report, the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter
ended March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) Modification of Rights of Registered Securities. None
(b) Issuance or Modification of Other Securities Affecting Rights of
Registered Securities. None
(c) Sales of Unregistered Securities. None
(d) Use of Proceeds. Not Applicable.
(e) Issuer Purchases of Securities. None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders- None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K
a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of Virginia Commerce Bancorp, Inc.
(3)
3.2 Bylaws of Virginia Commerce Bancorp, Inc. (1)
4.1 Junior Subordinated Indenture, dated as of November 15, 2002
between Virginia Commerce Bancorp, Inc. and The Bank of New
York, as Trustee (2)
4.2 Amended and Restated Declaration of Trust, dated as of
November 15, 2002 among Virginia Commerce Bancorp, Inc., The
Bank of New York, as Property Trustee, The Bank of New York
(Delaware), as Delaware Trustee, and Peter A. Converse,
William K. Beauchesne and Marcia J. Hopkins as Administrative
Trustees (2)
4.3 Guarantee Agreement dated as of November 15, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York, as
Guarantee Trustee (2)
4.4 Junior Subordinated Indenture, dated as of December 19, 2002
between Virginia Commerce Bancorp, Inc. and The Bank of New
York, as Indenture Trustee (2)
4.5 Amended and Restated Declaration of Trust, dated as of
December 19, 2002 among Virginia Commerce Bancorp, Inc., The
Bank of New York, as Property Trustee, The Bank of New York
(Delaware), as Delaware Trustee, and Peter A. Converse,
William K. Beauchesne and Marcia J. Hopkins as Administrative
Trustees (2)
4.6 Guarantee Agreement dated as of December 19, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York, as
Guarantee Trustee (2)
23
10.1 1998 Stock Option Plan (1)
10.2 2003 VCBI Employee Stock Purchase Plan (4)
11 Statement Regarding Computation of Per Share Earnings
See Note 4 to the Consolidated Financial Statements included
in this report
21 Subsidiaries of the Registrant:
Virginia Commerce Bank-Virginia
VCBI Capital Trust I-Delaware
VCBI Capital Trust II-Delaware
Subsidiaries of Virginia Commerce Bank:
Northeast Land and Development Corporation-Virginia
Virginia Commerce Insurance Agency, L.L.C.-Virginia
31(a) Certification of Peter A. Converse, President and Chief
Executive Officer
31(b) Certification of William K. Beauchesne, Treasurer and Chief
Financial Officer
32(a) Certification of Peter A. Converse, President and Chief
Executive Officer
32(b) Certification of William K. Beauchesne, Treasurer and Chief
Financial Officer
- -----------
(1) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999
(2) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. The Company agrees to provide a copy of these documents to
the Commission upon request.
(3) Incorporated by reference to the same numbered exhibit to the Company'
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003.
(4) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 (No. 333-109079)
b) Form 8-K
On January 13, 2004, the Company filed a current report on Form 8-K, reflecting
the announcement of earnings for the period ended December 31, 2004.
On April 12, 2004, the Company filed a current report on Form 8-K, reflecting
the announcement of earnings for the period ended March 31, 2004.
On April 28, 2004, the Company filed a current report on Form 8-K, reporting the
filing of a registration statement.
24
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.
Date: May 5, 2004 BY /s/ Peter A. Converse
----------------------------------------------------------
Peter A. Converse, President and Chief Executive Officer
Date: May 5, 2004 BY /s/ William K. Beauchesne
-----------------------------------------------------------
William K. Beauchesne, Treasurer and Chief Financial Officer
25