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 JUNE 30, 2002
-------------
[ ] 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 .
--- ---
As of August 1 2002, the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 3,693,043
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)
June 30, December 31,
ASSETS: 2002 2001
-----------------------------
Cash and due from banks $ 18,345 $ 15,155
Securities available-for-sale (at market value) 49,802 42,073
Securities held-to-maturity (market value of
$14,025 and $11,070) 13,644 10,941
Federal funds sold 11,388 --
Loans held-for-sale 4,174 15,842
Loans, net of allowance for loan
losses of $5,111 and $4,356 468,934 395,108
Bank premises and equipment, net 6,846 6,238
Accrued interest receivable 2,486 2,211
Other assets 2,221 1,943
--------------------------
TOTAL ASSETS $ 577,840 $ 489,511
==========================
LIABILITIES:
Deposits
Non-interest bearing demand deposits $ 92,692 $ 66,448
Savings and interest bearing demand deposits 157,534 132,811
Time deposits 255,474 207,663
--------------------------
TOTAL DEPOSITS 505,700 406,922
Securities sold under agreement to
repurchase and federal funds purchased 31,268 42,452
Other borrowed funds 8,400 11,400
Other liabilities 2,623 2,517
--------------------------
TOTAL LIABILITIES 547,991 463,291
STOCKHOLDERS' EQUITY:
Preferred stock; $1 par, 1,000,000 shares
authorized of which none have been issued $ -- $ --
Common stock; $1 par, 5,000,000 shares authorized;
3,400,771 and 2,720,816 issued and outstanding 3,401 2,721
Surplus 12,510 13,190
Retained earnings 13,369 10,138
Accumulated other comprehensive income,
net of tax 569 171
--------------------------
TOTAL STOCKHOLDERS' EQUITY 29,849 26,220
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 577,840 $ 489,511
==========================
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 Six Months Ended
June 30, June 30,
--------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 8,728 $ 7,373 $ 16,648 $ 14,413
Interest and dividends on investment
securities 832 834 1,568 1,628
Interest on federal funds sold 74 228 166 443
-------- -------- -------- --------
Total Interest and Dividend Income 9,634 8,435 18,382 16,484
INTEREST EXPENSE:
Deposits 3,345 3,737 6,513 7,309
Securities sold under agreement to
repurchase and federal funds purchased 67 288 141 622
Other borrowed funds 151 129 286 271
-------- -------- -------- --------
Total Interest Expense 3,563 4,154 6,940 8,202
-------- -------- -------- --------
Net Interest Income 6,071 4,281 11,442 8,282
PROVISION FOR LOAN LOSSES 322 180 843 450
-------- -------- -------- --------
Net Interest Income After
Provision for Loan Losses 5,749 4,101 10,599 7,832
NON-INTEREST INCOME:
Service charges and other fees 367 303 773 607
Fees and net gains on loans held-for-sale 818 822 1,672 1,386
Gains (losses) on sale of securities -- -- (1) --
Other 9 10 17 22
-------- -------- -------- --------
Total Non-Interest Income 1,194 1,135 2,461 2,015
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,386 1,990 4,790 3,809
Occupancy expense 720 578 1,387 1,114
Data processing 258 240 506 461
Other operating expense 752 647 1,497 1,260
-------- -------- -------- --------
Total Non-Interest Expense 4,116 3,455 8,180 6,644
-------- -------- -------- --------
Income before taxes on income 2,827 1,781 4,880 3,203
Provision for income taxes 952 605 1,642 1,090
-------- -------- -------- --------
NET INCOME $ 1,875 $ 1,176 $ 3,238 $ 2,113
======== ======== ======== ========
EARNINGS PER COMMON SHARE, BASIC 0.55 0.35 0.95 0.62
======== ======== ======== ========
EARNINGS PER COMMON SHARE, DILUTED 0.48 0.32 0.84 0.57
======== ======== ======== ========
Notes to consolidated financial statements are an
integral part of these statements.
3
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2002 and 2001
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other
Preferred Common Retained Comprehensive Comprehensive
Stock Stock Surplus Earnings Income (Loss) Income Total
--------------------------------------------------------------------------------
Balance, January 1, 2001 $ -- $ 2,166 $ 13,648 $ 5,476 $ (124) $ 21,166
Comprehensive income:
Net Income -- -- -- 2,113 $ 2,113 2,113
Other comprehensive income, net of tax
Unrealized holding gains on securities
available-for-sale arising during the
period (net of tax of $99) 192
-------
Other comprehensive income, net of tax -- -- -- -- 192 192 192
-------
Total comprehensive income -- -- -- -- -- $ 2,305 --
=======
Issuance of common stock-
25% stock split -- 541 (541) -- -- --
Cash paid in lieu of fractional shares -- -- -- (4) -- (4)
------ ------- -------- -------- ------- --------
Balance, June 30, 2001 $ -- $ 2,707 $ 13,107 $ 7,585 $ 68 $ 23,467
====== ======= ======== ======== ======= ========
Accumulated
Other
Preferred Common Retained Comprehensive Comprehensive
Stock Stock Surplus Earnings Income Income Total
--------------------------------------------------------------------------------
Balance, January 1, 2002 $ -- $ 2,721 $ 13,190 $ 10,138 $ 171 $ 26,220
Comprehensive income:
Net Income -- -- -- 3,238 $ 3,238 3,238
Other comprehensive income, net of tax
Unrealized holding gains on securities
available-for-sale arising during the
period (net of tax of $205) 398
-------
Other comprehensive income, net of tax -- -- -- -- 398 398 398
-------
Total comprehensive income -- -- -- -- -- $ 3,636 --
=======
Issuance of common stock-
25% stock split -- 680 (680) -- -- --
Cash paid in lieu of fractional shares -- -- -- (7) -- (7)
------ ------- -------- -------- ------- --------
Balance, June 30, 2002 $ -- $ 3,401 $ 12,510 $ 13,369 $ 569 $ 29,849
====== ======= ======== ======== ======= ========
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)
Six Months Ended
June 30,
-----------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,238 $ 2,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 474 414
Provision for loan losses 843 450
Deferred tax benefit (300) (173)
Amortization of security premiums and (accretion) of discounts 9 (33)
Loss on sale of securities available-for-sale 1 --
Origination of loans held-for-sale (86,299) (77,782)
Sales of loans 97,967 69,897
Changes in other assets and other liabilities:
Increase in accrued interest receivable (275) (55)
Increase in other assets (183) (203)
Increase (decrease) in other liabilities 107 (385)
----------------------------
Net Cash Provided (Used In) Operating Activities $ 15,582 $ (5,757)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (74,669) (40,634)
Purchase of securities available-for-sale (23,650) (35,432)
Purchase of securities held-to-maturity (4,371) (1,382)
Proceeds from sales of securities available-for-sale 1,350 --
Proceeds from principal payments on securities available-for-sale 3,169 1,929
Proceeds from principal payments on securities held-to-maturity 1,160 790
Proceeds from calls and maturities of securities available-for-sale 12,000 23,665
Proceeds from calls and maturities of securities held-to-maturity 502 6,020
Purchase of bank premises and equipment (1,082) (878)
----------------------------
Net Cash (Used In) Investing Activities $(85,591) $(45,922)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 98,778 $ 81,389
Net (decrease) increase in repurchase agreements (11,184) 9,037
Net (decrease) increase in other borrowed funds (3,000) 500
Cash paid in lieu of fractional shares (7) (4)
----------------------------
Net Cash Provided by Financing Activities $ 84,587 $ 90,922
Net Increase In Cash and Cash Equivalents 14,578 39,243
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,155 10,952
----------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 29,733 $ 50,195
============================
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 June 30, 2002 and December
31, 2001, the results of operations for the three and six months ended
June 30, 2002 and 2001, and statements of cash flows and stockholders'
equity for the six months ended June 30, 2002 and 2001.
Operating results for the six month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
2. INVESTMENT SECURITIES
Amortized cost and carrying amount (estimated market value) of securities
available-for-sale are summarized as follows:
June 30, 2002
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
(In Thousands of Dollars)
Obligations of U.S. government corporations
and agencies $ 47,031 $ 844 $ -- $47,875
Obligations of state/political subdivisions 270 16 -- 286
Federal Reserve Bank stock 392 -- -- 392
Federal Home Loan Bank stock 1,194 -- -- 1,194
Community Bankers' Bank stock 55 -- -- 55
------------------------------------------------------------
$ 48,942 $ 860 $ -- $49,802
============================================================
Amortized cost and estimated market value of securities held-to-maturity
are summarized as follows:
June 30, 2002
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
(In Thousands of Dollars)
Obligations of U.S. government corporations
and agencies $ 8,819 $ 250 $ -- $ 9,069
Obligations of states/political subdivisions 4,345 86 -- 4,431
Domestic corporate debt obligations 480 45 -- 525
------------------------------------------------------------
$ 13,644 $ 381 $ -- $14,025
============================================================
6
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Securities available-for-sale at December 31, 2001 consist of the
following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
(In Thousands of Dollars)
Obligations of U.S. government
corporations and agencies $ 40,365 $ 256 $ (2) $ 40,619
Obligations of states/political subdivisions 270 5 -- 275
Federal Reserve Bank stock 392 -- -- 392
Federal Home Loan Bank stock 732 -- -- 732
Community Bankers' Bank stock 55 -- -- 55
-------------------------------------------------------------
$ 41,814 $ 261 $ (2) $ 42,073
=============================================================
Securities held-to-maturity at December 31, 2001 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
(In Thousands of Dollars)
Obligations of U.S. government
corporations and agencies $ 6,017 $ 127 $ -- $ 6,144
Obligations of states/political subdivisions 3,945 16 (43) 3,918
Domestic corporate debt obligations 979 32 (3) 1,008
-------------------------------------------------------------
$ 10,941 $ 175 $ (46) $ 11,070
=============================================================
3. LOANS
Major classifications of loans are summarized as follows:
June 30, 2002 December 31, 2001
----------------------------------------
(In Thousand of Dollars)
Commercial $ 39,658 $ 39,153
Real estate -1-4 family residential 74,073 60,493
Real estate -multifamily residential 24,799 19,323
Real estate -non-farm, non-residential 214,953 179,483
Real estate -construction 115,088 94,452
Consumer 7,392 8,004
----------------------------------
Total Loans 475,963 400,908
Less unearned income (1,918) (1,444)
Less allowance for loan losses (5,111) (4,356)
----------------------------------
Loans, net $ 468,934 $ 395,108
==================================
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 weighted average number of shares of
diluted potential common stock. The weighted average number of shares for the
period ended June 30, 2001 have been restated giving effect to a five for four
stock split in the form of a dividend in April 2002.
June 30, 2002 June 30, 2001
------------- -------------
Per Per
Share Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic earnings per share 3,400,771 $ .95 3,383,398 $ .62
Effect of dilutive securities:
Stock options 273,949 160,381
Warrants 168,461 132,681
--------- ---------
Diluted earnings per share 3,843,181 $ .84 3,676,460 $ .57
========= ===== ========= =====
5. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital as of June 30, 2002 with the minimum
regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 7.17% 8.00% --
Bank 8.81% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 6.10% 4.00% --
Bank 5.24% 4.00% 6.00%
Leverage Ratio:
Company 5.21% 4.00% --
Bank 4.48% 4.00% 5.00%
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 in
the future may differ materially from those indicated herein. Readers are
cautioned against placing undue reliance on any such forward-looking statements.
The Company does undertake to update any forward-looking statements to reflect
occurrences or events that may not have been anticipated as of the date of such
statements.
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 offers
a full range of banking services through thirteen branch offices, principally to
individuals and small to medium-size businesses in the Metropolitan Washington,
D.C. area.
Critical Accounting Policies
- ----------------------------
During the quarter ended June 30, 2002 there were no changes in 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. 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 may be sustained
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 for impairment testing. Impairment testing
includes consideration of the borrower's overall financial condition, resources
and payment record, support available from financial
9
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 for
impairment testing. 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 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
have occurred but have yet to be recognized in either the formula or specific
allowance.
Results of Operations
- ---------------------
Total assets increased $88.3 million, or 18.0%, from $489.5 million at December
31, 2001 to $577.8 million at June 30, 2002 as total deposits grew $98.8
million, or 24.3%, from $406.9 million to $505.7 million. As deposit growth
outpaced assets, the balance in other funding sources declined with securities
sold under agreement to repurchase and federal funds purchased decreasing $11.2
million, or 26.4%, from $42.5 million at December 31, 2001 to $31.3 million and
other borrowed funds decreasing $3 million from $11.4 million to $8.4 million as
of June 30, 2002.
Total loans, net of allowance for loan losses, increased $73.8 million, or
18.7%, from $395.1 million at December 31, 2001 to $468.9 million at June 30,
2002, and represented 92.7% of total deposits at June 30, 2002 compared to 97.1%
at December 31, 2001. The bulk of loan growth was provided by non-farm
non-residential real estate loans which increased $35.5 million, or 19.8%, from
$179.5 million to $215.0 million during the six months ended June 30, 2002. Real
estate construction loans represented the second largest dollar increase rising
$20.6 million, or 21.9%, from $94.5 million to $115.1 million during the period,
while 1-4 family residential mortgage loans increased $13.6 million, or 22.5%,
from $60.5 million at December 31, 2001 to $74.1 million at June 30, 2002. Loans
on multi-family residential properties also increased during the six month
period rising $5.5 million, or 28.3%, from $19.3 million at December 31, 2001 to
$24.8 million, while only a slight increase of $505 thousand was recognized in
commercial purpose loans and a decline occurred in the outstanding balance of
consumer (non-real estate) purpose loans of $612 thousand, or 7.7%, from $8.0
million to $7.4 million as of June 30, 2002.
Loans held-for-sale which represent 1-4 family residential real estate loans
originated on a pre-sold basis to various investors, fell $11.6 million from
$15.8 million at December 31, 2001 to $4.2 million at June 30, 2002 with $86.4
million in originations and $98.0 million in sales. Sales exceeded originations
during the period due to a high level of loans held-for-sale at December 31,
2001 which represented a back-log in investor funding.
With the increase in loans trailing deposit growth during the six month period,
cash and cash equivalents grew $14.6 million, or 96.2%, from $15.1 million at
December 31, 2001 to $29.7 million at June 30, 2002 and investment securities
increased $10.4 million, or 19.7%, during the same period. Deposit growth
occurred in all categories with non-interest bearing demand deposits increasing
$26.3 million, or 39.5%, from $66.4 million to $92.7 million, savings and
interest bearing demand deposits rising $24.7 million, or
10
18.6%, and time deposits growing by $47.8 million, or 23.0%, from $207.7 million
at December 31, 2001 to $255.5 million at June 30, 2002.
Growth for the three months ended June 30, 2002 was similar to what the Company
experienced for the six month period with total assets rising $30.4 million, or
5.6%, from $547.4 million at March 31, 2002 to $577.8 million at June 30, 2002,
total deposits increasing $41.0 million from $464.7 million to $505.7 million,
securities sold under agreement to repurchase and federal funds purchased
falling $9.0 million, or 22.3%, and total loans, net of allowance for loan
losses, growing $47.8 million, or 11.4%, from $421.1 million at March 31, 2002
to $468.9 million at June 30, 2002. By category, loan growth was somewhat
different for the three month versus six month period ended June 30, 2002, with
the bulk of the loan growth provided by 1-4 family residential real estate loans
which increased $21.7 million, or 41.5%. Real estate construction loans again
represented the second largest dollar increase, rising $15.2 million, while
growth in non-farm non-residential real estate loans slowed to $6.9 million, or
3.3%, compared to the 19.8% growth rate for the entire six month period ended
June 30, 2002.
For the six months ended June 30, 2002 net income of $3.2 million reflected an
increase of 53.2% compared to $2.1 million for the six months ended June 30,
2001 as net interest income increased $3.2 million, or 38.2%, non-interest
income rose $446 thousand, or 22.1%, and non-interest expense was up $1.6
million, or 23.1%. Provisions for loan losses increased $393 thousand from $450
thousand for the six months ended June 30, 2001 to $843 thousand for the six
months ended June 30, 2002. Diluted earnings per share of $0.84 were up $0.27,
or 47.4% from $0.57 for the comparable period in 2001. The Company's annualized
return on average assets and return on average equity were 1.21% and 23.50% for
the current six month period compared to 1.04% and 19.09% for the six months
ended June 30, 2001.
For the three months ended June 30, 2002 net income of $1.9 million increased
$699 thousand, or 59.4% compared to $1.2 million for the same period in 2001 as
net interest income rose $1.8 million, non-interest income increased by $59
thousand and non-interest expenses were up $661 thousand. Provisions for loan
losses also increased from $180 thousand for the three months ended June 30,
2001 to $322 thousand for this recent three month period. Diluted earnings per
share increased $0.16 from $0.32 for the three months ended June 30, 2001 to
$0.48 for the three month period ended June 30, 2002.
Overall, strong loan growth and an increase in the Company's net interest
margin, have driven the Company's net interest income higher while lower
mortgage rates have provided consistent to higher levels of fees and net gains
within the Company's mortgage lending operations. Loan loss provisions have
risen consistent with the strong growth in loans while earnings have further
benefited from on-going cost containment efforts as reflected in the decline of
non-interest expense as a percentage of total revenue sources.
Stockholders' equity increased $3.6 million from $26.2 million at December 31,
2001 to $29.8 million at June 30, 2002 on earnings of $3.2 million and an
increase in accumulated other comprehensive income of $398 thousand, net of tax.
On April 12, 2002 the Company recorded a five for four stock split increasing
the number of shares outstanding by 679,955 from 2,720,816 to 3,400,771. In July
2002, the Company issued 500 shares on exercised options and 291,772 shares due
to a rights offering bringing the total number of shares outstanding to
3,693,043. Gross proceeds from the rights offering were $7.0 million.
11
Net Interest Income
- -------------------
Net interest income increased $3.2 million, or 38.2%, from $8.2 million for the
six months ended June 30, 2001 to $11.4 million for the six month period ended
June 30, 2002. Growth in total average earning assets outstanding from $392.1
million during the first six months of 2001 to $515.7 million for the current
six month period and an increase in the net interest spread from 3.47% to 3.85%
were the contributing factors as the net interest margin on earning assets grew
from 4.22% for the six months ended June 30, 2001 to 4.39% for the six month
period ended June 30, 2002. As interest rates fell significantly during 2001 the
Company's yield on earning assets dropped 131 basis points from 8.41% for the
six months ended June 30, 2001 to 7.10% for the six months ended June 30, 2002,
while the average rate paid on interest bearing liabilities decreased 169 basis
points from 4.94% to 3.25%, as a result the net interest spread grew 38 basis
points.
This higher interest rate spread for the first six months of 2002 is indicative
of the Company having had an asset sensitive interest rate risk position for
most of 2001 as Federal Reserve interest rate reductions pushed asset yields
down since loans, the majority of which are floating or variable rate repriced
quickly while interest-bearing liabilities, the majority of which are one-year
and eighteen month fixed rate certificates of deposit did not reprice as fast.
As these rate reductions ceased in the later part of 2001 and the Company moved
to a slightly liability sensitive interest rate risk position by year end,
yields on earning assets stabilized while high levels of certificates of deposit
continued to reprice in 2002, further pushing down the cost of interest bearing
liabilities and increasing the net interest margin. With expectations for
interest rates to remain within current levels for the remainder of 2002, having
had most of the certificates of deposits bearing rates above currently offered
rates already repriced, and with the Company having moved to a more neutral
interest rate risk position as of June 30, 2002, the Company expects its current
net interest margin to remain fairly stable, although there can be no assurance.
The following table shows the average balance sheets for each of the six months
ended June 30, 2002 and 2001. In addition, the amounts of interest earned on
earning assets, with related yields on a tax-equivalent, 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 included
in interest income on loans totaled $706 thousand and $468 thousand for 2002 and
2001, respectively.
12
Six Months Ended June 30,
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
Interest Average Interest Average
Average Income- Yields Average Income- Yields
(Dollars in thousands) Balance Expense /Rates Balance Expense /Rates
ASSETS
Securities(1) $ 58,756 $ 1,568 5.41% $ 50,792 $ 1,628 6.41%
Loans, before allowance for losses 437,012 16,648 7.58% 322,797 14,413 8.93%
Federal funds sold 19,936 166 1.66% 18,493 443 4.79%
------------------------------------------------------------------------------
Total Earning Assets $ 515,704 $ 18,382 7.10% $ 392,082 $ 16,484 8.41%
Non-earning assets 25,740 16,500
--------- ---------
TOTAL ASSETS $ 541,444 $ 408,582
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 383,923 $ 6,513 3.42% $ 290,950 $ 7,309 5.02%
Fed funds purchased and, securities
sold U/A to repurchase 34,897 141 0.82% 33,460 622 3.75%
Other borrowed funds 11,726 286 4.86% 7,657 271 7.04%
------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 430,546 $ 6,940 3.25% $ 322,067 $ 8,202 4.94%
Demand deposits and other
non-interest bearing liabilities 83,114 54,184
--------- ---------
TOTAL LIABILITIES $ 513,660 $ 386,251
Stockholders' equity 27,784 22,331
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 541,444 $ 408,582
========= =========
Interest rate spread 3.85% 3.47%
Net interest income and margin $ 11,442 4.39% $ 8,282 4.22%
- ---------------------
(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 stockholder's equity. Average
yields on securities are stated on a tax equivalent basis.
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 six months ended June 30, 2002 charge-offs
totaled $113 thousand compared to $1 thousand for the same period ended June 30,
2001. The provision for loan loss expense in the first six months of 2002 was
$843 thousand compared to $450 in 2001, and was $180 thousand for the three
months ended June 30, 2001 compared to $322 for the same period in 2002. The
total allowance for loan losses of $5.1 million at June 30, 2002
13
increased 17.3% from $4.4 million at December 31, 2001, and increased $1.9
million, or 57.1%, from $3.2 million at June 30, 2001. These increases in both
the provision for loan loss expense and the total allowance for loan losses are
reflective of increases in charge-offs, increases in identified potential
problem loans and the growth in loans as net loans outstanding increased $73.8
million, or 18.7%, from $395.1 million at December 31, 2001 to $468.9 million at
June 30, 2002 and increased $127.9 million, or 37.5%, from $341.0 million at
June 30, 2001. Identified potential problem loans increased from $46 thousand at
June 30, 2001 to $2.2 million as of June 30, 2002. Charge-offs for the six
months ended June 30, 2002 were $113 thousand compared to $1 thousand for the
six months ended June 30, 2001.
Management feels that the allowance for loan losses is adequate. There can be no
assurance, however, 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 monthly 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 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:
Six Months Six Months Twelve Months
Ended Ended Ended
June 30, 2002 June 30, 2001 December 31, 2001
------------------------------------------------------------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 4,356 $ 2,803 $ 2,803
Provision charged against income 843 450 1,572
Recoveries:
Consumer loans 24 2 2
Commercial loans 1 -- 2
Losses charged to reserve:
Consumer loans (57) (1) (23)
Commercial loans (56) -- --
------ ------ ------
Net (charge-offs) recoveries (88) 1 (19)
Allowance, at end of period $ 5,111 $ 3,254 $ 4,356
======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding for the period: .02% -- .01%
Risk Elements and Non-performing Assets
- ---------------------------------------
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed properties). The total
non-performing assets and loans that are 90 days or more
14
past due and still accruing interest decreased 35.6% from $554 thousand at
December 31, 2001 to $357 at June 30, 2002, and increased $166 thousand, or
86.9%, from $191 thousand at June 30, 2001.
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 90 days and still accruing
to total assets decreased from 0.14% at December 31, 2001 to 0.08% at June 30,
2002, and increased from 0.06% at June 30, 2001. This ratio is expected to
remain at its low level relative to the Company's peers; however it may increase
from its current level. This expectation is based on identified potential
problem loans on June 30, 2002. As of June 30, 2002, there were $2.2 million of
loans for which management has identified risk factors which could impair
repayment in accordance with their terms, compared to $2.6 million at December
31, 2001. These loans are mostly for commercial business purposes, are currently
performing and generally are well-secured.
Non-performing assets consist of the following:
June 30, 2002 June 30, 2001 December 31, 2001
----------------------------------------------------------------------
(In Thousands of Dollars)
Non-accrual loans $ 70 $ 99 $ 106
Impaired loans 287 92 119
----- ---- -----
Total non-performing assets 357 191 225
Loans past due 90 days and still
accruing -- -- 329
Total non-performing assets and
loans past due 90 days and
still accruing $ 357 $ 191 $ 554
===== ===== =====
As a percentage of total loans 0.08% 0.06% 0.14%
As a percentage of total assets 0.06% 0.04% 0.11%
Loan Concentrations
- -------------------
At June 30, 2002 the Company had $60.3 million of construction loans to
commercial builders of single family housing and $29.7 million of construction
loans for non-residential commercial property in the Northern Virginia market,
together representing 18.9% of total loans. These loans are made to a number of
unrelated entities and generally have a term of less than one year. In addition,
the Company has $25.1 million of construction loans to individuals for single
family housing representing 5.3% of total loans. Adverse developments in the
Northern Virginia real estate market or economy and substantial increases in
mortgage interest rates could have an adverse impact on these groups of loans
and the Bank's income and financial position. At June 30, 2002, 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. Loans
secured by non-farm non-residential real estate totaled $214.9 million at June
30, 2002 and represent 45.2% of total loans.
Non-Interest Income
- -------------------
Non-interest income increased $446 thousand, or 22.1%, from $2.0 million for the
six months ended June 30, 2001 to $2.5 million for the same period ended June
30, 2002. Service charges and other fees grew $166 thousand, or 27.4%, from $607
thousand for the six months ended June 30, 2001 to $773 thousand
15
for the current six month period due to overall growth in deposit accounts. Fee
and net gains on loans held-for-sale increased $286 thousand, or 20.6%, from
$1.4 million in 2001 to $1.7 million for the six months ended June 30, 2002 as
originations increased from $77.8 million during the first six months of 2001 to
$86.3 million for the comparable period in 2002. Sales also increased rising
$28.1 million from $69.9 million in 2001 to $98.0 million in the first six
months of 2002. These higher levels of originations and subsequent sales are
attributable to both continued lower interest rates and a strong local housing
market. For the three months ended June 30, 2002 non-interest income increased
$59 thousand, or 5.2% with an increase of $64 thousand in service charges and
other fees.
Loans classified as held-for-sale represent loans on 1-4 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.
Adverse changes in the local real estate market, consumer confidence, and
interest rates could adversely impact the level of loans originated and
held-for-sale, and the resulting fees and earnings thereon.
Non-Interest Expense
- --------------------
For the three months ended June 30, 2002, non-interest expense increased $661,
or 19.1%, compared to the same period in 2001 and increased $1.6 million, or
23.1%, from $6.6 million for the six months ended June 30, 2001 to $8.2 million
for the six months ended June 30, 2002. Salaries and benefits for the three
month and six month periods ended June 30 accounted for $396 thousand and $981
thousand, respectively, or greater than 60% of the total increases in
non-interest expenses. Commissions associated with the significant increase in
loans and staff increases due to overall growth and branch expansion were the
main reason for the increases.
Occupancy expense, which includes rents, depreciation, and equipment/systems
costs, increased $142 thousand, or 24.6%, and $273 thousand, or 24.5% for the
three and six months periods ended June 30, 2002 due to the opening of the
Bank's twelfth (March 2001) and thirteenth (May 2002) branch locations and
investment in new and expanded computer systems for both internal use and
customer related electronic banking services. Other operating expense increases
of $105 thousand and $237 for the three months and six months ended June 30 were
up 16.2% and 18.8% due mostly to higher advertising and promotional costs in
conjunction with the new branch openings. As a percentage of total revenue
sources (net interest and non-interest income) non-interest expense fell from
63.8% for the three months ended June 30, 2001 to 56.7% for the same period in
2002, and fell from 64.5% during the first six months of 2001 to 58.8% for the
six months ended June 30, 2002.
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 34%.
Provision for income taxes totaled $1.1 million and $1.6 million for the six
months ended June 30, 2001 and 2002, respectively.
Liquidity
- ---------
The Company's principal sources of liquidity and funding are its deposit base.
The level and maturity 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, 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
$31.2 million, or 24.9%, from
16
$125.3 million at December 31, 2001 to $156.5 million at June 30, 2002 as net
loans, as a percentage of total deposits, declined from 97.1% at December 31,
2001 to 92.7% at June 30, 2002.
Additional sources of liquidity available to the Company include the capacity to
borrow funds through established lines of credit with various correspondent
banks, and the Federal Home Loan Bank of Atlanta. Available funds from these
liquidity sources were approximately $29.6 million and $29.2 million at June 30,
2002 and December 31, 2001, respectively.
Capital
- -------
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, and changing competitive conditions
and economic forces. The adequacy of the Company's capital is reviewed 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
5.24% at June 30, 2002, compared to 6.32% at December 31, 2001. The total
risk-based capital ratio was 8.81% at June 30, 2002, compared to 10.09% at
December 31, 2001. These ratios are in excess of the mandated minimum
requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was
4.48% at June 30, 2002 compared to 5.41% at December 31, 2001 and is also in
excess of the mandated minimum requirement of 4.00%. Based on these ratios, the
Bank is considered "adequately 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 6.10%, 7.17% and 5.21%,
respectively, at June 30, 2002.
During the first three months of 2002, the Company continued to borrow funds
under a $12 million line of credit with a correspondent bank in order to provide
capital to fund growth and expansion at the Bank. At March 31, 2002, the amount
outstanding under the line of credit was $12 million, as compared to $11 million
at December 31, 2001. Under terms of the agreement the Company was required to
find a participating lender for a one-third interest in the line of credit by
April 30, 2002. As a participating lender did not materialize to purchase a
one-third interest by April 30, 2002, the Company was required to pay down the
amount outstanding to $8 million as of June 30, 2002. Although the reduction of
the outstanding balance of the loan caused the Bank to become less than well
capitalized for regulatory purposes at June 30, 2002, on a pro-form basis, due
to the successful completion of a preemptive rights offering, the Bank will be
well capitalized for regulatory purposes as of July, 31, 2002.
On June 3, 2002 the Company began offering, on a preemptive rights basis to
existing shareholders only, newly issued shares of its common stock, $1.00 par
value, at a price of $24.00 per share for a total offering amount of up to
approximately $8 million. The offering was closed on July 30, 2002 with gross
proceeds received of $7.0 million and 291,772 shares issued. Proceeds of the
offering will be used by the Company to increase the capital position of the
Company and the Bank, including restoring the Bank to a well capitalized
position, and to support future growth.
The ability of the Company to continue growing will continue to be dependent on
its level of earnings and its ability to obtain additional funds for
contribution to the Bank's capital, through additional borrowing, the sale of
additional common stock, or otherwise. In the event that the Company is unable
to obtain additional capital for the Bank on a timely basis 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.
17
Recent Accounting Pronouncements
- --------------------------------
There have been no new accounting pronouncements to disclose since the filing of
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
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 which formulates and monitors the performance of the Company based on
established levels of market risk as dictated by policy. In setting certain
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
repricng of interest-bearing assets differs from the maturity 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 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 which 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 June
30, 2002. At that point in time, the Company had a cumulative net asset
sensitive twelve-month gap position of $1.8 million, or a positive 0.32% of
total earning assets as compared to a net liability sensitive position of a
negative 7.60% as of March 31, 2002 and a negative 4.20% at December 31, 2001
The current position is generally flat or neutral but would indicate that
earnings should improve slightly in a rising interest rate environment as more
assets would reprice than liabilities; however, this measurement 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 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.
18
Interest Sensitivity Periods
--------------------------------------------------------------------------------------
June 30, 2002 Within 91 to 365 Over 1 to 5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Securities, at amortized cost $ 12,832 $ 13,882 $ 19,280 $ 16,591 $ 62,585
Federal funds sold 11,388 -- -- -- 11,388
Loans, before loan loss reserves 184,706 71,611 198,799 23,103 478,219
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 208,926 $ 85,493 $ 218,079 $ 39,694 $ 552,192
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Savings and interest bearing $ 108,267 $ 18,220 $ 31,047 $ -- $ 157,534
demand deposits
Time deposits 22,692 104,199 128,515 68 255,474
Securities sold under agreement to
repurchase and federal funds 31,268 -- -- -- 31,268
purchased
Other borrowings 8,000 -- 400 -- 8,400
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 170,227 $ 122,419 $ 159,962 $ 68 $ 452,676
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative maturity / interest $ 38,699 $ 1,773 $ 59,890 $ 99,516 $ 99,516
sensitivity gap
As % of total earnings assets 7.01% 0.32% 10.85% 18.08%
- -------------------------------------------------------------------------------------------------------------------------------
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. The most recent earnings
simulation model was run based on data as of March 31, 2002. Consistent with the
net liability sensitive position of a negative 7.60% at that time the model
projected net income would decrease by 2.9% if interest rates would immediately
rise by 200 basis points and also decrease by 0.5% if interest rates suddenly
fell by 200 basis points, as a majority of the Company's interest-bearing
liabilities would not reprice similarly to loans and investment securities due
to their already low rates. 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.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
Changes in Securities - None
Use of Proceeds: On June 3, 2002, the Company's first registration
statement under the Securities Act of 1933, on Form S-2 (No. 333-86084),
relating to its initial registered offering of common stock, $1.00 par
value, on a rights offering basis to shareholders as of record on June
4, 2002, was declared effective by the Securities and Exchange
Commission, and the offering commenced. The offering related to an
aggregate of up to 291,786 shares of common stock, at an offering price
of $24.00 per share, for an aggregate offering price of 7,002,864,
subject to increase by an additional 41,548 shares, for additional
proceeds of $997,152.
On July 31, 2002, the offering was completed. We accepted subscriptions
for and sold an aggregate of 291,772, for gross proceeds of $7,001,712.
Aggregate expenses of the offering were approximately $50,000, resulting
in net proceeds of the offering of approximately $6,951,712. No person
or entity underwrote the offering, which was made through the efforts of
the directors and executive officers. None of such directors or officers
received any special compensation in connection with the offering.
As of August 1, 2001, all of the proceeds of the offering have been
contributed to the capital of the Bank for use in support of its lending
and investment activities.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
On April 24, 2002, the annual meeting of shareholders of the Company
was held for the purpose of electing eight (8) directors to serve until
the next annual meeting and until their successors are duly elected
and qualified.
The name of each director elected at the meeting, and the votes cast for
such persons, who constitute the entire Board of Directors in office
following the meeting, are set forth below.
Name For Against/Withheld Abstentions Broker Non-votes
---- --- ---------------- ----------- ----------------
Leonard Adler 2,443,871 2,567 125 none
Peter A. Converse 2,446,438 -0- 125 none
Frank L. Cowles 2,441,681 4,757 125 none
W. Douglas Fisher 2,446,438 -0- 125 none
David M. Guernsey 2,446,438 -0- 125 none
Robert H. L'Hommedieu 2,443,871 2,567 125 none
Norris E. Mitchell 2,444,248 2,190 125 none
Arthur L. Walters 2,441,681 4,757 125 none
Item 5. Other Information - None
20
Item 6. Exhibits and reports on Form 8-K
a) 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 (2)
10.3 Pledge and Assignment Agreement, dated December 31, 2001
between Virginia Commerce Bancorp, Inc. and Provident Bank (2)
11 Statement Regarding Computation of Per Share Earnings-See Note 4 to
Consolidated Financial Statements included in this report.
21 Subsidiaries of the Registrant.
o Virginia Commerce Bank -Virginia
Subsidiaries of Virginia Commerce Bank
o Northeast Land and Development Corporation - Virginia
o Virginia Commerce Insurance Agency, L.L.C. - Virginia
- ----------------------
(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) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001
b) Form 8-K
On April 11, 2002, the Company filed a current report on Form 8-K, under item 5
thereof, reflecting the announcement of earnings for the period ended March 31,
2002.
On May 30, 2002, the Company filed a current report on Form 8-K, reflecting the
announcement of the terms of its offering of shares of common stock to current
shareholders on a preemptive rights basis. Each holder of record, as of the
close of business on June 4, 2002, will be entitled to purchase 0.0858 newly
issued shares of common stock for each share held on the record date, at an
offering price of $24.00 per share. The maximum aggregate number of shares to be
issued is approximately 291,786, provided, however, that the Company reserves
the right to sell up to an additional 41,548 at the same offering price under
oversubscription privileges, for a total offering of up to $8 million.
On July 31, 2002, the Company filed a current report on Form 8-K, reflecting the
announcement of the closing of its rights offering of shares of its common stock
to shareholders of record as of the close of business on June 4, 2002.
Subscriptions for 291,772 shares were received with gross proceeds of
$7,001,712.
21
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: August 1, 2002 BY /s/ Peter A. Converse
-----------------------------------
Peter A. Converse, President & CEO
Date: August 1, 2002 BY /s/ William K. Beauchesne
-----------------------------------
William K. Beauchesne, Treasurer
& Chief Financial Officer
22