UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
----- of 1934
For the fiscal year ended December 31, 2001
Transition report under Section 13 or 15(d) of the Securities Exchange
----- Act of 1934
For the transition period from to
--------------- --------------
Commission file number: 000-28635
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) (Zip Code)
Registrant's telephone number: 703.534.0700
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock , $1.00 par
value
Indicate by check mark whether the registrant; (1) 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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained in this form,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The issuer's revenues for the fiscal year ended December 31, 2001 were
approximately $38.6 million.
The aggregate market value of the outstanding common stock held by nonaffiliates
as of March 1, 2002 was approximately $51.4 million.
As of March 1, 2002, the number of outstanding shares of registrant's common
stock, $1.00 par value, was 2,720,816.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are hereby incorporated by reference into
this Form 10-K:
Portions of the registrant's Annual Report to Shareholders for the Year Ended
December 31, 2001 are incorporated byreference in part II hereof.
Portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Shareholders, to be held on April 24, 2002 are incorporated by
reference in part III hereof.
PART I
Item 1. Business
Virginia Commerce Bancorp, Inc. (the "Company") was organized under
Virginia law on November 5, 1999 to become the holding company for Virginia
Commerce Bank (the "Bank"). The Company acquired all of the outstanding shares
of the Bank on December 22, 1999 upon the effectiveness of the Agreement and
Plan of Share Exchange dated September 22, 1999 between the Company and the
Bank. As a result of the Agreement and Plan of Share Exchange, each shares of
the Bank's common stock was automatically exchanged for and converted into one
share of the Company's common stock.
The Bank was organized as a national banking association and commenced
operations on May 16, 1988. On June 1, 1995, the Bank converted from a national
banking association to a Virginia chartered bank which is a member of the
Federal Reserve System.
The Company's and the Bank's executive offices and a branch with a
drive-in facility are located at 5350 Lee Highway, Arlington, Virginia. The Bank
has eleven additional full service branch offices, located at: 2930 Wilson
Boulevard and 6500 Williamsburg Boulevard, both in Arlington, Virginia; 1414
Prince Street, 5140 Duke Street and 506 King Street in Alexandria, Virginia,
1356 Chain Bridge Road in McLean, Virginia, 4230 John Marr Drive in Annandale,
Virginia, 10777 Main Street in Fairfax, Virginia, 374 Maple Avenue East in
Vienna, Virginia, 13881 G Metrotech Drive in Chantilly, Virginia and 2030 Old
Bridge Road in Lake Ridge, Virginia. Additionally, the Bank maintains
residential mortgage lending offices, located in Vienna and Warrenton, Virginia.
The Company engages in a general commercial banking business through
its sole direct subsidiary, the Bank. The Bank's customer base includes small-
to medium-sized businesses, including firms that have contracts with the U.S.
government, associations, retailers and industrial businesses, professionals and
business executives and consumers. The economic base of the Bank's service area
is Arlington and Fairfax Counties and the City of Alexandria in Northern
Virginia, and the metropolitan Washington, D.C. area generally. Northern
Virginia has experienced significant population and economic growth during the
past decade. The Bank participated in this growth through its commercial and
retail banking activities.
The Bank's primary service area consists of the Northern Virginia
suburbs of Washington DC, including Arlington County, the City of Alexandria,
Fairfax County and Prince William County. This area's banking business is
dominated by a small number of large commercial banks with extensive branch
networks. Most are branches of national, state-wide or regional banks. The
Bank's primary service area is also served by a large number of other financial
institutions, including savings banks, credit unions and non-bank financial
institutions such as securities brokerage firms, insurance companies and mutual
funds. The Bank's primary service area is oriented toward independently owned
small to medium sized businesses, light industry and firms specializing in
government contracting. An increasing number of new community banking
organizations have been opened in the Bank's market area, potentially
representing an increased competitive threat to the Bank.
The banking business in Virginia generally, and in the Bank's primary
service area specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. Such banks offer certain services such as international banking,
which are not offered directly by the Bank (but are offered indirectly through
correspondent institutions) and, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Bank. The Bank competes for deposits and lendable funds with other commercial
banks, savings banks, credit unions and other governmental and corporate
entities which raise operating capital through the issuance of debt and equity
securities. The Bank also competes for available investment dollars with
non-bank financial institutions, such as brokerage firms, insurance companies
and mutual funds. With respect to loans, the Bank competes with other commercial
banks, savings banks, consumer finance companies, mortgage companies, credit
unions and other lending institutions. Additionally, as a result of enactment of
federal and Virginia interstate banking legislation, additional competitors
which are not currently operating in Virginia may enter the Bank's markets and
compete directly with the Bank. Recent legislation expanding the array of firms
that can own banks may also result in increased competition for the Company and
the Bank.
2
All of the Bank's deposits are attracted from individuals and
business-related sources. No material portion of the Bank's deposits have been
obtained from a single person or a few persons. The loss of any one or more of
the Bank's depositors would not have a materially adverse effect on the business
of the Bank. The Bank's loans are not concentrated within a single industry or
group of related industries.
The Bank provides businesses with a full range of deposit accounts,
merchant bankcard services, electronic funds transfer services, lock-box
services, PC banking, lines of credit for working capital, term loans and
commercial real estate loans, and provides consumers with a wide array of
deposit products, home equity and revolving lines of credit, installment loans
and internet banking services. The Bank also issues cashier's checks and money
orders, sells travelers checks and provides safe deposit boxes and other
customary banking services. The Bank is not authorized to offer trust services
nor does it offer international services but makes these services available to
its customers through financial institutions with which the Bank has
correspondent banking relationships.
The Bank also offers a wide variety of residential mortgage loans
through its mortgage lending division which are originated on a pre-sold basis
to numerous investors. Offered types include conventional single family first
trusts, FAA and VA mortgages for both purchase and refinance purposes. In
addition, the Bank offers construction loans to both individuals and commercial
builders on single family residential properties which are generally for terms
of less than one year. Changes in the local real estate market and interest
rates could adversely impact the level of loans originated for sale and the
level of construction loans originated and outstanding, and the resulting fees
and earnings thereon.
The Bank does not depend upon seasonal business. The Bank relies
substantially on local promotional activity, personal contact by its officers,
directors, employees and stockholders, personalized service and its reputation
in the communities served to compete effectively.
The Bank has one wholly owned subsidiary, Northeast Land and Investment
Company, a Virginia corporation, organized to hold and market foreclosed real
estate.
On December 31, 2001, the Company had 138 full-time equivalent
employees, including four executive officers. None of the Company's employees
presently is represented by a union or covered under a collective bargaining
agreement. Management of the Company believes that its employee relations are
satisfactory. The Company does not have any employees that are not also
employees of the Bank.
Banking is dependent upon interest rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate earned by the Bank on loans, securities
and other interest-earning assets comprises the major source of the Bank's
earnings, while increasingly fees and net gains on mortgage loans originated for
sale have made a significant contribution to the Bank's non-interest earnings.
Thus, the earnings and growth of the Bank are subject to the influence of
economic conditions generally, both domestic and foreign, and also of the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policy, such as seeking to curb inflation and combat recession, by its
open-market activities in United States government securities, by adjusting the
required level of reserves for financial institutions subject to reserve
requirements and through adjustments to the discount rate applicable to
borrowings by banks which are members of the Federal Reserve System. The actions
of the Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Bank cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting the Bank's net income.
From time to time, new legislation or regulations are adopted which
increase the cost of doing business, limit or expand permissible activities, or
otherwise affect the competitive balance between banks and other financial
institutions. Bills have been introduced in each of the last three Congresses
which would permit banks to pay interest on checking
3
and demand deposit accounts established by businesses, a practice which is
currently prohibited by regulation. If the legislation effectively permitting
the payment of interest on business demand deposits is enacted, of which there
can be no assurance, it is likely that we may be required to pay interest on
some portion of our non-interest bearing deposits in order to compete against
other banks. As a significant portion of our deposits are non-interest bearing
demand deposits established by businesses, payment of interest on these deposits
could have a significant negative impact on our net income, net interest income,
interest margin, return on assets and equity, and other indices of financial
performance. We expect that other banks would be faced with similar negative
impacts. We also expect that the primary focus of competition would continue to
be based on other factors, such as quality of service.
Banks or bank holding companies which are undercapitalized and either
have not timely approved a capital plan or have failed to implement the plan
become subject to extraordinary powers pursuant to which the bank regulatory
agencies may close the bank, restrict its growth, force its sale, restrict
interest rates paid on deposits, and dismiss directors or senior executive
officers. Each agency has prescribed standards relating to internal controls and
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, and other operational and managerial
standards. The agencies have also adopted standards relating to asset quality,
earnings, valuation and compensation. Banks or bank holding companies which do
not meet such standards may be subject to restrictions and consequences
comparable to those which apply to undercapitalized banks and bank holding
companies. Bank regulatory authority to appoint a conservator or receiver for a
bank is broad, including grounds such as substantial dissipation of assets or
earnings due to violations of law or regulation or due to any unsafe or unsound
practices, an unsafe or unsound condition, and certain violations of law or
regulation likely to weaken the institution's condition.
Regulations promulgated by the Federal Reserve Board prohibit state
member banks such as the Bank from paying any dividend on common stock out of
capital. Dividends can be paid only to the extent of net profits then on hand,
less losses and bad debts. Without the prior approval of the Federal Reserve
Board, a state member bank cannot pay dividends in any calendar year in excess
of the retained net profits for the prior two years and the profits of the
current year, less any required transfers to surplus.
SUPERVISION AND REGULATION
The Company. The Company is a bank holding company registered under
Bank Holding Company Act of 1956, as amended, (the "BHCA") and is subject to
supervision by the Federal Reserve Board. As a bank holding company, the Company
is required to file with the Federal Reserve Board an annual report and such
other additional information as the Federal Reserve Board may require pursuant
to the BHCA. The Federal Reserve Board may also make examinations of the Company
and each of its subsidiaries.
BHCA - Activities and other Limitations. The BHCA requires approval of
the Federal Reserve Board for, among other things, the acquisition by a proposed
bank holding company of control of more than five percent (5%) of the voting
shares, or substantially all the assets, of any bank or the merger or
consolidation by a bank holding company with another bank holding company. The
BHCA also generally permits the acquisition by a bank holding company of control
or substantially all the assets of any bank located in a state other than the
home state of the bank holding company, except where the bank has not been in
existence for the minimum period of time required by state law, but if the bank
is at least 5 years old, the Federal Reserve Board may approve the acquisition.
Under current law, with certain limited exceptions, a bank holding
company is prohibited from acquiring control of any voting shares of any company
which is not a bank or bank holding company and from engaging directly or
indirectly in any activity other than banking or managing or controlling banks
or furnishing services to or performing service for its authorized subsidiaries.
A bank holding company may, however, engage in or acquire an interest in, a
company that engages in activities which the Federal Reserve Board has
determined by order or regulation to be so closely related to banking or
managing or controlling banks as to be properly incident thereto. In making such
a determination, the Federal Reserve Board is required to consider whether the
performance of such activities can reasonably be expected to produce benefits to
the public, such as convenience, increased competition or gains in efficiency,
which outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by the
acquisition, in whole or in part, of
4
a going concern. Some of the activities that the Federal Reserve Board has
determined by regulation to be closely related to banking include making or
servicing loans, performing certain data processing services, acting as a
fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
Effective on March 11, 2000, the Gramm Leach-Bliley Act of 1999 (the
"GLB Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank company or any of its subsidiaries, or investments in the stock or
other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount, deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to company
or any other subsidiary of the company; or (iii) the customer not obtain some
other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
Commitments to Subsidiary Banks. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances when it might not do so
absent such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve Board has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act or which would represent the single largest interest in the voting
stock would, under the circumstances set forth in the presumption, constitute
the acquisition of control.
In addition, with limited exceptions, any "company" would be required
to obtain the approval of the Federal Reserve under the BHCA before acquiring
25% (5% in the case of an acquirer that is a bank holding company) or more of
the outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquirer registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines are
substantially similar to those which are applicable to the Bank, discussed
below.
The Bank. The Bank, as a Virginia chartered commercial bank which is a
member of the Federal Reserve System (a "state member bank") and whose accounts
are insured by the Bank Insurance Fund of the FDIC up to the maximum legal
limits of the FDIC, is subject to regulation, supervision and regular
examination by the Bureau of Financial Institutions and the Federal Reserve
Board. The regulations of these various agencies govern most aspects of the
Bank's business, including required reserves against deposits, loans,
investments, mergers and acquisitions, borrowing, dividends and location and
number of branch offices. The laws and regulations governing the Bank generally
have been promulgated to protect depositors and the deposit insurance funds, and
not for the purpose of protecting stockholders.
5
Competition among commercial banks, savings banks, and credit unions
has increased following enactment of legislation which greatly expanded the
ability of banks and bank holding companies to engage in interstate banking or
acquisition activities. As a result of federal and state legislation, banks in
the Washington D.C./Maryland/Virginia area can, subject to limited restrictions,
acquire or merge with a bank in another of the jurisdictions, and can branch de
novo in any of the jurisdictions. The GLB Act allows a wider array of companies
to own banks, which could result in companies with resources substantially in
excess of the Company's entering into competition with the Company and the Bank.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") by adopting a law after the date of enactment of the
Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in
the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. The District of Columbia, Maryland and
Virginia have all enacted laws which permit interstate acquisitions of banks and
bank branches and permit out-of-state banks to establish de novo branches.
Capital Adequacy Guidelines. The Federal Reserve Board and the FDIC
have adopted risk based capital adequacy guidelines pursuant to which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based
capital requirements determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total
qualifying capital (the sum of core capital (Tier 1) and supplementary capital
(Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%)
should be in the form of core capital.
Tier 1 Capital generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stock which may be included as Tier 1
Capital), less goodwill, without adjustment for changes in the market value of
securities classified as "available for sale" in accordance with FAS 115. Tier 2
Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash and certain U.S. government and agency
securities, to 100% for the bulk of assets which are typically held by a bank
holding company, including commercial real estate loans, commercial business
loans and consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which effectively increases the minimum Leverage Capital Ratio for such other
banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk
6
exposure, excellent asset quality, high liquidity, good earnings and, in
general, those which are considered a strong banking organization. A bank having
less than the minimum Leverage Capital Ratio requirement shall, within 60 days
of the date as of which it fails to comply with such requirement, submit a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum Leverage Capital Ratio requirement. A bank which fails to file such
plan is deemed to be operating in an unsafe and unsound manner, and could
subject a bank to a cease-and-desist order. Any insured depository institution
with a Leverage Capital Ratio that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the Federal
Deposit Insurance Act (the "FDIA") and is subject to potential termination of
deposit insurance. However, such an institution will not be subject to an
enforcement proceeding solely on account of its capital ratios, if it has
entered into and is in compliance with a written agreement to increase its
Leverage Capital Ratio and to take such other action as may be necessary for the
institution to be operated in a safe and sound manner. The capital regulations
also provide, among other things, for the issuance of a capital directive, which
is a final order issued to a bank that fails to maintain minimum capital or to
restore its capital to the minimum capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
At December 31, 2001, the Bank's Tier 1 risk based capital ratio was
6.32%, its Total risk based capital ratio was 10.09% and its Leverage Capital
ratio was 5.41%. At December 31, 2001, the Company's Tier 1 Capital was 6.35%,
its Total Capital was 7.41% and its Leverage Capital ratio was 5.44%.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions. At
December 31, 2001, the Bank was considered to be a "well capitalized"
institution for purposes of Section 38 of the FDIA.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that
7
the institution is viable and is not expected to fail, an institution that
remains critically undercapitalized on average during the fourth calendar
quarter after the date it becomes critically undercapitalized must be placed in
receivership. The general rule is that the FDIC will be appointed as receiver
within 90 days after a bank becomes critically undercapitalized unless extremely
good cause is shown and an extension is agreed to by the federal regulators. In
general, good cause is defined as capital which has been raised and is
imminently available for infusion into the bank except for certain technical
requirements which may delay the infusion for a period of time beyond the 90 day
time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or unsound
condition; (iv) there is a willful violation of a cease-and-desist order; (v)
the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of law
or unsafe or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the institution
is undercapitalized and has no reasonable prospect that it will become
adequately capitalized, fails to become adequately capitalized when required to
do so, or fails to submit or materially implement a capital restoration plan; or
(x) the institution is critically undercapitalized or otherwise has
substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants
substantial enforcement powers to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Deposit Insurance Premiums. The FDIA establishes a risk based deposit
insurance assessment system. Under applicable regulations, deposit premium
assessments are determined based upon a matrix formed utilizing capital
categories - well capitalized, adequately capitalized and undercapitalized -
defined in the same manner as those categories are defined for purposes of
Section 38 of the FDIA. Each of these groups is then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from 0.04% of insured deposits for well
capitalized institutions having the lowest level of supervisory concern, to
0.31% of insured deposits for undercapitalized institutions having the highest
level of supervisory concern. In general, while the Bank Insurance Fund of the
FDIC ("BIF") maintains a reserve ratio of 1.25% or greater, no deposit insurance
premiums are required. When the BIF reserve ratio falls below that level, all
insured banks would be required to pay premiums at a uniform rate of 0.23% of
insured deposits. Certain studies by the FDIC and other agencies project that
the BIF will fall below the required reserve ratio in 2002, which would likely
result in the imposition of deposit premiums at the uniform rate in 2003,
although there can be no assurance of this.
8
Item 2. Properties
The Bank offers its services from its main office, located at 5350 Lee
Highway in Arlington, Virginia, and eleven additional banking offices, and its
bank operations center. The Bank purchased the 5350 Lee Highway property for
$1,400,000 in cash in April 1994. That property, consisting of two connected red
brick buildings, contains an aggregate of approximately 18,000 square feet of
space on three levels. The Bank utilizes one of the buildings, containing
approximately 10,000 square feet, as the executive offices and a branch
facility. In August 1995, the Bank sold the connected building which it had
previously leased out, for $690,000. The Bank operates a branch located at 2930
Wilson Boulevard, Arlington, Virginia. That property, which consists of a stand
alone brick building containing approximately 2,400 square feet on a parcel of
approximately 18,087 square feet, was purchased by the Bank for $1,500,000 in
April 1997. The Bank also operates a branch location at 5140 Duke Street,
Alexandria, Virginia. That property, which consists of a two story brick
building containing approximately 4,800 square feet on a parcel of approximately
16,800 square feet, was purchased by the Bank for $850,000 in April 1997. The
Bank leases ten locations: the Alexandria Office, located at 1414 Prince Street,
Alexandria, Virginia, consists of 2,500 square feet; the McLean Office, located
at 1356 Chain Bridge Road, McLean, Virginia, consists of 1,625 square feet; the
Williamsburg Boulevard Office, located at 6500 Williamsburg Road, Arlington,
Virginia, consists of 1,781 square feet; the Annandale Office, located at 4230
John Marr Drive, Annandale, Virginia, consists of 2,400 square feet; the Fairfax
Office, located at 10777 Main Street, Fairfax Virginia, consists of 2,038 square
feet; the Vienna Office, located at 374 Maple Avenue, Vienna, Virginia, consists
of 5,831 square feet; the King Street Office, located at 506 King Street,
Alexandria Virginia, consists of 1,484 square feet; the Chantilly Office,
located at 13881 G Metrotech Drive, Chantilly Virginia, consists of 1,950 square
feet; the Lake Ridge office, located at 2030 Old Bridge Road, Lake Ridge,
Virginia consists of 2,492 square feet, and the Bank's operations center,
located at 14201 Sullyfield Circle, Chantilly, Virginia consists of 9,177 square
feet. Generally the leases contain renewal option clauses for one or two
additional five-year terms, and in some instances require payment of certain
operating charges. The total rental expense under the leases was $948 thousand
in 2001. The total minimum rental commitment under the leases as of December 31,
2001 is as follows: $953 thousand for 2002; $851 thousand for 2003; $802
thousand for 2004, $800 thousand for 2005 and $2.9 million for 2006 and beyond.
Item 3. Legal Proceedings
From time to time the Company is a participant in various legal
proceedings incidental to its business. In the opinion of management, the
liabilities (if any) resulting from such legal proceedings will not have a
material effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders of the
Company during the fourth quarter of 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required under Item 5 is hereby incorporated herein by
reference from the material under the caption "Market Price of Stock and
Dividends" on page 20 of the Company's Annual Report for the fiscal year ended
December 31, 2001.
Item 6. Selected Financial Data
The information required under Item 6 is hereby incorporated herein by
reference from the material under the caption "Five Year Financial Summary" on
the inside over page of the Company's Annual Report for the fiscal year ended
December 31, 2001.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The information required under Item 6 is hereby incorporated herein by
reference from the material under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 9 through 20
of the Company's Annual Report for the fiscal year ended December 31, 2001.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required under Item 7A is hereby incorporated herein by
reference from the material under the caption "Asset/Liability Management and
Quantitative and Qualitative Disclosures About Market Risk" on page 12 of the
Company's Annual Report for the fiscal year ended December 31, 2001.
Item 8. Financial Statements and Supplementary Data.
The information required under Item 8 is hereby incorporated herein by
reference from the material under the caption "Financial Statements" on pages 21
through 40 of the Company's Annual Report for the fiscal year ended December 31,
2001.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required under Item 10 is hereby incorporated herein by
reference from the material under the caption "Proposal I - Election of
Directors" contained on pages 3 through 6, and under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" on page 12 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 24, 2002.
Item 11. Executive Compensation.
The information required under Item 11 is hereby incorporated herein by
reference from the material under the caption "Executive Officer Compensation
and Certain Transactions," contained on pages 7 through 12 of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 24,
2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required under Item 12 is hereby incorporated herein by
reference from the material under the captions "Voting Securities and Principal
Holders Thereof" contained on pages 2 and 3 of the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 24, 2002.
Item 13. Certain Relationships and Related Transactions.
The information required under Item 13 is hereby incorporated herein by
reference from the material under the caption "Transactions with Management and
Others" contained on page 10 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on April 24, 2002.
10
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Consolidated Balance Sheets at December 31, 2000 and 2001
Consolidated Statements of Income for the years ended December
31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 2000 and 2001
Notes to the Consolidated Financial Statements Report of
Independent Auditors
(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated
financial statements or related notes.
(3) Exhibits
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of Virginia Commerce Bancorp, Inc. (1)
3.2 Bylaws of Virginia Commerce Bancorp, Inc. (1)
10.1 1998 Stock Option Plan (1)
10.2 Loan Agreement, dated December 26, 2001 between Virginia Commerce Bancorp, Inc. and
Provident Bank, as Lender, and related Promissory Note
10.3 Pledge and Assignment Agreement, dated December 26, 2001 between Virginia Commerce
Bancorp, Inc. and Provident Bank
11 Statement Regarding Computation of Per Share Earnings
See Note 8 to the Consolidated Financial Statements
13 2001 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
23 Consent of Yount, Hyde & Barbour, PC, Independent Auditors
(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.
(B) REPORTS ON FORM 8-K
On October 9, 2001, the Company filed a report on Form 8-K, under Item
5, disclosing the issuance of a press release announcing third quarter earnings.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VIRGINIA COMMERCE BANCORP, INC.
By: /s/ Peter A. Converse
-----------------------------------
Peter A. Converse, President
and Chief Executive Officer
Dated: March 21, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Capacity Date
/s/ Leonard Adler Director March 21, 2002
- --------------------------------------------
Leonard Adler
/s/ Peter A. Converse Director, President and Chief Executive March 21, 2002
- -------------------------------------------- Officer (Principal Executive Officer)
Peter A. Converse
/s/ Frank L. Cowles, Jr. Director March 21, 2002
- --------------------------------------------
Frank L. Cowles, Jr.
/s/ W. Douglas Fisher Chairman of the Board of Directors March 21, 2002
- --------------------------------------------
W. Douglas Fisher
/s/ David M. Guernsey Vice Chairman of the Board of Directors March 21, 2002
- --------------------------------------------
David M. Guernsey
/s/ Robert H. L'Hommedieu Director March 21, 2002
- --------------------------------------------
Robert H. L'Hommedieu
/s/ Norris E. Mitchell Director March 21, 2002
- --------------------------------------------
Norris E. Mitchell
/s/ Arthur L. Walters Director March 21, 2002
- --------------------------------------------
Arthur L. Walters
/S/ William K. Beauchesne Treasurer and Chief Financial Officer March 21, 2002
- -------------------------------------------- (Principal Financial and Accounting Officer)
William K. Beauchesne