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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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
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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 November 1, 2002, the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 3,739,330
1
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)
September 30, December 31,
ASSETS: 2002 2001
--------------- -------------
Cash and due from banks $ 19,838 $ 15,155
Securities available-for-sale (at market value) 58,298 42,073
Securities held-to-maturity (market value of
$13,607 and $11,070) 13,080 10,941
Federal funds sold 21,559 --
Loans held-for-sale 16,079 15,842
Loans, net of allowance for loan
losses of $5,689 and $4,356 488,008 395,108
Bank premises and equipment, net 6,735 6,238
Accrued interest receivable 2,361 2,211
Other assets 2,260 1,943
--------------- -------------
TOTAL ASSETS $ 628,218 $ 489,511
=============== =============
LIABILITIES:
Deposits
Non-interest bearing demand deposits $ 100,724 $ 66,448
Savings and interest bearing demand deposits 169,507 132,811
Time deposits 276,756 207,663
--------------- --------------
TOTAL DEPOSITS 546,987 406,922
Securities sold under agreement to
repurchase and federal funds purchased 30,617 42,452
Other borrowed funds 8,400 11,400
Other liabilities 3,001 2,517
--------------- -------------
TOTAL LIABILITIES 589,005 463,291
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;
3,708,449 and 2,720,816 issued and outstanding 3,708 2,721
Surplus 19,321 13,190
Retained earnings 15,455 10,138
Accumulated other comprehensive income,
net of tax 729 171
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY 39,213 26,220
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 628,218 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $9,329 $ 7,688 $25,977 $ 22,101
Interest and dividends on investment
securities 784 939 2,352 2,568
Interest on federal funds sold 112 199 278 641
------- -------- --------- ---------
Total Interest and Dividend Income 10,225 8,826 28,607 25,310
INTEREST EXPENSE:
Deposits 3,462 3,818 9,975 11,127
Securities sold under agreement to
repurchase and federal funds purchased 61 223 202 845
Other borrowed funds 120 117 406 388
------- -------- --------- ---------
Total Interest Expense 3,643 4,158 10,583 12,360
------- -------- --------- ---------
Net Interest Income 6,582 4,668 18,024 12,950
PROVISION FOR LOAN LOSSES 571 225 1,414 675
Net Interest Income After ------- -------- --------- ---------
Provision for Loan Losses 6,011 4,443 16,610 12,275
NON-INTEREST INCOME:
Service charges and other fees 408 325 1,181 933
Fees and net gains on loans held-for-sale 947 899 2,619 2,285
Gains (losses) on sale of securities -- -- (1) --
Other 13 13 30 34
------- -------- --------- ---------
Total Non-Interest Income 1,368 1,237 3,829 3,252
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,510 2,093 7,300 5,903
Occupancy expense 756 586 2,143 1,700
Data processing 242 210 748 671
Other operating expense 727 640 2,224 1,899
------- -------- --------- ---------
Total Non-Interest Expense 4,235 3,529 12,415 10,173
------- -------- --------- ---------
Income before taxes on income 3,144 2,151 8,024 5,354
Provision for income taxes 1,058 728 2,700 1,818
------- -------- --------- ---------
NET INCOME $2,086 $1,423 $5,324 $3,536
======= ======== ========= =========
EARNINGS PER COMMON SHARE, BASIC 0.56 0.42 1.52 1.04
======= ======== ========= =========
EARNINGS PER COMMON SHARE, DILUTED 0.50 0.38 1.35 0.96
======= ======== ========= =========
Notes to consolidated financial statements are an integral part of these
statements.
3
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the nine months ended September 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 -- -- -- 3,536 $3,536 3,536
Other comprehensive income, net of tax
Unrealized holding gains on securities
available-for-sale arising during the
period (net of tax of $311) 604
---
Other comprehensive income, net of tax -- -- -- -- 604 604 604
---
Total comprehensive income -- -- -- -- -- $4,140 --
======
Issuance of common stock-
25% stock split -- 541 (541) -- -- --
Stock options exercised -- 14 84 -- -- 98
Cash paid in lieu of fractional shares -- -- -- (4) -- (4)
Balance, September 30, 2001 $ -- $ 2,721 $ 13,191 $ 9,008 $ 480 $ 25,400
==== ======= ======== ======= ===== ========
Balance, January 1, 2002 $ -- $ 2,721 $ 13,190 $ 10,138 $ 171 $ 26,220
Comprehensive Income:
Net Income -- -- -- 5,324 $5,324 5,324
Other comprehensive income, net of tax
Unrealized holding gains on securities
available-for-sale arising during the
period (net of tax of $288) 558
---
Other comprehensive income, net of tax -- -- -- -- 558 558 558
---
Total comprehensive income -- -- -- -- -- $5,882 --
======
Issuance of common stock-
25% stock split -- 680 (680) -- -- --
Rights offering, net of costs of $45 -- 291 6,666 -- -- 6,957
Stock options/warrants exercised -- 16 145 -- -- 161
Cash paid in lieu of fractional shares -- -- -- (7) -- (7)
Balance, September 30, 2002 $ -- $ 3,708 $ 19,321 $ 15,455 $ 729 $ 39,213
==== ======= ======== ======== ===== ========
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)
Nine Months Ended
September 30,
----------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,324 $ 3,536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 746 644
Provision for loan losses 1,414 675
Deferred tax benefit (511) (251)
Amortization of security premiums and (accretion) of discounts 2 (19)
Loss on sale of securities available-for-sale 1 --
Origination of loans held-for-sale (135,102) (121,692)
Sales of loans 134,866 116,901
Changes in other assets and other liabilities:
Increase in accrued interest receivable (150) (141)
Increase in other assets (94) (174)
Increase (decrease) in other liabilities 483 (320)
----------- ---------
Net Cash Provided by (Used In) Operating Activities $ 6,979 $ (841)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (94,314) (59,370)
Purchase of securities available-for-sale (45,694) (61,238)
Purchase of securities held-to-maturity (4,371) (4,768)
Proceeds from sales of securities available-for-sale 1,350 --
Proceeds from principal payments on securities available-for-sale 4,968 3,640
Proceeds from principal payments on securities held-to-maturity 1,724 1,338
Proceeds from calls and maturities of securities available-for-sale 24,000 33,152
Proceeds from calls and maturities of securities held-to-maturity 502 6,020
Purchase of bank premises and equipment (1,243) (1,031)
----------- ---------
Net Cash (Used In) Investing Activities $ (113,078) $(82,257)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 140,065 $ 81,234
Net (decrease) increase in repurchase agreements (11,835) 6,032
Net (decrease) increase in other borrowed funds (3,000) 3,000
Net proceeds from issuance of capital stock 7,118 98
Cash paid in lieu of fractional shares (7) (4)
---------- --------
Net Cash Provided by Financing Activities $ 132,341 $ 90,360
Net Increase In Cash and Cash Equivalents 26,242 7,262
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,155 10,952
----------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 41,397 $ 18,214
=========== =========
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 September 30, 2002 and
December 31, 2001, the results of operations for the three and nine months
ended September 30, 2002 and 2001, and statements of cash flows and
stockholders' equity for the nine months ended September 30, 2002 and
2001.
Operating results for the nine month period ended September 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:
September 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 $ 54,233 $ 1,027 $ -- $ 55,260
Obligations of state/political subdivisions 1,169 78 -- 1,247
Federal Reserve Bank stock 542 -- -- 542
Federal Home Loan Bank stock 1,194 -- -- 1,194
Community Bankers' Bank stock 55 -- -- 55
--------------- --------------- -------------- -------------
$ 57,193 $ 1,105 $ -- $ 58,298
=============== =============== ============== =============
Amortized cost and estimated market value of securities held-to-maturity
are summarized as follows:
September 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 $ 8,254 $ 303 $ -- $ 8,557
Obligations of states/political subdivisions 4,345 163 -- 4,508
Domestic corporate debt obligations 481 61 -- 542
---------- ------------- ------------ ------------
$ 13,080 $ 527 $ -- $13,607
========== ============== ============ ============
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 Loss 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:
September 30, 2002 December 31, 2001
------------------- -----------------
(In Thousand of Dollars)
Commercial $ 41,548 $ 39,153
Real estate -1-4 family residential 77,549 60,493
Real estate -multifamily residential 24,644 19,323
Real estate -non-farm, non-residential 236,970 179,483
Real estate -construction and land 107,166 94,452
Consumer 7,802 8,004
-------------- ----------
Total Loans 495,679 400,908
Less unearned income (1,982) (1,444)
Less allowance for loan losses (5,689) (4,356)
-------------- ----------
Loans, net $ 488,008 $ 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 September 30, 2001 have been restated giving effect to a five for
four stock split in the form of a dividend in April 2002.
September 30, 2002 September 30, 2001
------------------ ------------------
Per Per
Share Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic earnings per share 3,499,899 $1.52 3,385,328 $1.04
Effect of dilutive securities:
Stock options 277,793 175,755
Warrants 165,010 138,718
------- ---------
Diluted earnings per share 3,942,702 $1.35 3,699,801 $ .96
========= ===== ========= =====
5. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital as of September 30, 2002 with the minimum
regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 8.60% 8.00% --
Bank 10.10% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 7.49% 4.00% --
Bank 6.27% 4.00% 6.00%
Leverage Ratio:
Company 6.42% 4.00% --
Bank 5.37% 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 may
differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward-looking statements. The Company does
not 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 offices, principally to
individuals and small to medium-size businesses in the Metropolitan Washington,
D.C. area.
Critical Accounting Policies
- ----------------------------
During the quarter ended September 30, 2002 there were no changes in the
Company's critical accounting policies as reflected in the last report.
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. 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
9
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
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 the loan review system and the effect of external factors
(i.e. competition and regulatory requirements). The factors assigned differ by
loan type. The unallocated allowance captures losses whose impact on the
portfolio have occurred but have yet to be recognized in either the formula or
specific allowance. Allowance factors and the overall size of the allowance may
change from period to period based on management's assessment of the above
described factors and the relative weights given to each factor. Further
information regarding the allowance for loan losses is provided under the
caption: Allowance for Loan Losses/Provision for Loan Loss Expense, later in
this report.
Results of Operations
- ---------------------
Total assets increased $138.7 million, or 28.3%, from $489.5 million at December
31, 2001 to $628.2 million at September 30, 2002 as total deposits grew $140.1
million, or 34.4%, from $406.9 million to $547.0 million. Other funding sources
declined during the nine month period ended September 30, 2002 with securities
sold under agreement to repurchase and federal funds purchased decreasing $11.9
million, or 27.9%, from $42.5 million at December 31, 2001 to $30.6 million and
other borrowed funds decreasing $3 million from $11.4 million to $8.4 million as
of September 30, 2002. In July 2002 the Company raised $7.0 million in
additional capital through the sale of 291,738 shares of common stock on a
rights offering basis to its existing shareholders.
Loans, net of allowance for loan losses, increased $92.9 million, or 23.5%, from
$395.1 million at December 31, 2001 to $488.0 million at September 30, 2002, and
represented 89.2% of total deposits at September 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 $57.5 million, or 32.0%, from
$179.5 million to $237.0 million during the nine months ended September 30,
2002. One-to-four family residential estate loans represented the second largest
dollar increase rising $17.0 million, or 28.2%, from $60.5 million to $77.5
million during the period, while construction and land loans increased $12.7
million, or 13.5%, from $94.5 million at December 31, 2001 to $107.2 million at
September 30, 2002. Loans on multi-family residential properties also increased
during the nine month period rising $5.3 million, or 27.6%, from $19.3 million
at December 31, 2001 to $24.6 million at September 30, 2002.
Loans held-for-sale, which represent 1-4 family residential real estate loans
originated on a pre-sold basis to various investors, increased $237 thousand
from $15.8 million at December 31, 2001 to $16.1 million at September 30, 2002
with $135.1 million in originations and $134.9 million in sales. The outstanding
10
amounts held-for-sale at December 31, 2001 and September 30, 2002 are abnormally
high for the Company due to back-logs with the investors in funding their
purchases as a result of high levels of refinancing activity nation-wide.
With the increase in loans trailing deposit growth during the nine month period,
cash and cash equivalents grew $26.3 million, or 173.2%, from $15.1 million at
December 31, 2001 to $41.4 million at September 30, 2002 and investment
securities increased $18.4 million, or 34.6%, during the same period. Growth in
investment securities was generally limited to short term U.S. government
corporations and agencies.
Deposit growth occurred in all categories with non-interest bearing demand
deposits representing the largest percentage increase rising $34.3 million, or
51.6%, from $66.4 million to $100.7 million. Savings and interest bearing demand
deposits increased $36.7 million, or 27.6%, and time deposits grew by $69.1
million, or 33.3%, from $207.7 million at December 31, 2001 to $276.8 million at
September 30, 2002. The Company considers most of the growth in deposits to be
within the normal course of business; however, some growth may be as a result of
recent stock market declines. Those amounts, if any, cannot be readily
determined.
Growth for the three months ended September 30, 2002 was similar to what the
Company experienced for the nine month period with total assets rising $50.4
million, or 8.7%, from $577.8 million at June 30, 2002 to $628.2 million at
September 30, 2002, total deposits increasing $41.3 million from $505.7 million
to $547.0 million, and total loans, net of allowance for loan losses, growing
$19.1 million, or 4.1%, from $468.9 million at June 30, 2002 to $488.0 million
at September 30, 2002. As deposits again outpaced loan growth, investment
securities grew by $7.9 million, cash and cash equivalents increased by $11.7
million, and loans held-for-sale grew $11.9 million from $4.2 million
outstanding at June 30, 2002 to $16.1 million as of September 30, 2002 as lower
interest rates spurred higher levels of refinancing activity.
Loan activity for the three months ended September 30, 2002 included an increase
in non-farm, non-residential real estate loans of $22.0 million, or 10.2%, from
$215.0 million at June 30, 2002 to $237.0 million at September 30, 2002, and a
decrease in construction and land loans of $7.9 million, or 6.9%, from $115.1
million at June 30, 2002 to $107.2 million at September 30, 2002. One-to-four
family residential real estate loans grew $3.5 million, or 4.7%. The decline in
construction and land loans was due an unusually high level of pay-offs during
the period as opposed to declines in new loan activity.
For the nine months ended September 30, 2002 net income of $5.3 million
reflected an increase of 50.6% compared to $3.5 million for the nine months
ended September 30, 2001 as net interest income increased $5.1 million, or
39.2%, non-interest income rose $577 thousand, or 17.7%, and non-interest
expense was up $2.2 million, or 22.0%. Provisions for loan losses increased $739
thousand from $675 thousand for the nine months ended September 30, 2001 to $1.4
million for the nine months ended September 30, 2002. Diluted earnings per share
of $1.35 were up $0.39, or 40.6% from $0.96 for the comparable period in 2001.
The Company's annualized return on average assets and return on average equity
were 1.26% and 23.00% for the current nine month period compared to 1.10% and
20.59% for the nine months ended September 30, 2001.
For the three months ended September 30, 2002 net income of $2.1 million
increased $663 thousand, or 46.6% compared to $1.4 million for the same period
in 2001 as net interest income rose $1.9 million, non-interest income increased
by $131 thousand and non-interest expenses were up $706 thousand. Provisions for
loan losses also increased from $225 thousand for the three months ended
September 30, 2001 to $571 thousand for this recent three month period. Diluted
earnings per share increased $0.12 from $0.38 for the three months ended
September 30, 2001 to $0.50 for the three month period ended September 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 historically
low mortgage rates have provided consistently
11
higher levels of fees and net gains within the Company's mortgage lending
operations. Loan loss provisions have risen relatively consistent with the
strong growth in loans while earnings have also 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 $13.0 million from $26.2 million at December 31,
2001 to $39.2 million at September 30, 2002 on earnings of $5.3 million, an
increase in accumulated other comprehensive income of $558 thousand (net of tax)
and $7.0 million in additional capital from the sale of 291,738 shares of common
stock to existing shareholders in July 2002.
In addition to the shares issued with respect to the rights offering the Company
issued 679,955 shares on April 12, 2002 in connection with a five for four stock
split, issued 15,940 shares upon the exercise of stock options and director
stock warrants in the third quarter of 2002, and subsequent to September 30,
2002, issued 30,881 shares upon the exercise of director stock warrants.
Net Interest Income
- -------------------
Net interest income increased $5.1 million, or 39.2%, from $12.9 million for the
nine months ended September 30, 2001 to $18.0 million for the nine month period
ended September 30, 2002. Growth in total average earning assets outstanding
from $411.1 million during the first nine months of 2001 to $535.9 million for
the current nine month period and an increase in the net interest spread from
3.40% to 3.85% were the contributing factors as the net interest margin on
earning assets grew from 4.11% for the nine months ended September 30, 2001 to
4.41% for the nine month period ended September 30, 2002.
The Company's yields on earning assets and costs of interest bearing liabilities
have fallen along with market interest rates since early 2001. The yield on
earning assets dropped 108 basis points from 8.13% for the nine months ended
September 30, 2001 to 7.05% for the nine months ended September 30, 2002 while
the average rate paid on interest bearing liabilities decreased by a larger
amount falling 153 basis points from 4.73% to 3.20%. As a result, the net
interest spread grew 45 basis points.
This higher interest rate spread for the first nine 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 slowed in the later part of 2001 the fall in yields on
earning assets began to slow 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.
In addition to the effect lower interest rates had on the net interest margin,
the composition of average earning assets also effected it with loans, as a
percentage of earning assets, having grown from 81.8% of average earning assets
during the first nine months of 2001 to 84.7% for the nine months ended
September 30, 2002. Additionally, net loan fees, included in income on loans
increased $464 thousand, or 39.0%, from $726 thousand for the nine months ended
September 30, 2001 to $1.2 million for the nine months ended September 30, 2002
due to higher levels of pre-payment penalties and fees associated with increases
in construction and land loans. 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, an expectation for lower levels of loan fees earned, and with the
Company having moved to a more neutral interest rate risk position as of
September 30, 2002, the Company expects its net interest margin to remain fairly
stable, to possibly slightly lower, for the remainder of 2002, although there
can be no assurance.
The following table shows the average balance sheets for each of the nine months
ended September 30, 2002 and 2001. In addition, the amounts of interest earned
on earning assets, with related yields on a
12
tax-equivalent basis, and interest expense on interest-bearing liabilities, with
related rates, are shown. Loans placed on a non-accrual status are included in
the average balances. Net loan fees included in interest income on loans totaled
$1.2 million and $706 thousand for 2002 and 2001, respectively.
13
Nine Months Ended September 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) $ 59,811 $ 2,352 5.32% $ 54,710 $ 2,568 6.26%
Loans, before allowance for losses 453,968 25,977 7.55% 336,412 22,101 8.66%
Federal funds sold 22,150 278 1.65% 19,963 641 4.24%
-------- -------- ---- -------- -------- ----
Total Earning Assets $535,929 $ 28,607 7.05% $411,085 $ 25,310 8.13%
Non-earning assets 27,344 17,297
-------- --------
TOTAL ASSETS $563,273 $428,382
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits $400,967 $ 9,975 3.33% $305,951 $ 11,127 4.85%
Fed funds purchased and, securities
sold U/A to repurchase 34,168 202 0.79% 34,570 845 3.27%
Other borrowed funds 10,605 406 5.04% 7,766 388 6.59%
-------- -------- ---- -------- -------- ----
TOTAL INTEREST-BEARING $445,740 $ 10,583 3.20% $348,287 $ 12,360 4.73%
LIABILITIES
Demand deposits and other
non-interest bearing liabilities 86,581 57,159
-------- --------
TOTAL LIABILITIES $532,321 $405,446
Stockholders' equity 30,952 22,936
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $563,273 $428,382
======== ========
Interest rate spread 3.85% 3.40%
Net interest income and margin $ 18,024 4.41% $ 12,950 4.11%
(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 nine months ended September 30, 2002
charge-offs totaled $118 thousand compared to $3 thousand for the same period
ended September 30, 2001. The provision for loan loss expense in the first nine
months of 2002 was $1.4 million compared to $675 thousand in 2001, and was $571
thousand for the three months ended September 30, 2002 compared to $225 thousand
for the same period in 2001. The total
14
allowance for loan losses of $5.7 million at September 30, 2002 increased 30.6%
from $4.4 million at December 31, 2001, and increased $2.2 million, or 63.6%,
from $3.5 million at September 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 nonperforming and identified potential
problem loans and the growth in loans as net loans outstanding increased $92.9
million, or 23.5%, from $395.1 million at December 31, 2001 to $488.0 million at
September 30, 2002 and increased $128.5 million, or 35.8%, from $359.5 million
at September 30, 2001. Identified potential problem loans increased $766
thousand, or 51.9%, from $1.5 million at September 30, 2001 to $2.2 million as
of September 30, 2002 and declined $353 thousand from $2.6 million at December
31, 2001. These loans are primarily well-secured and currently performing.
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 quarterly analysis of the allowance for loan losses,
with the objective of quantifying portfolio risk into a dollar figure of
inherent losses, thereby translating the subjective risk value into an objective
number. Emphasis is placed on semi-annual independent external loan reviews and
monthly internal reviews. The determination of the allowance for loan losses is
based on applying and summing the results of eight qualitative factors and one
quantitative factor to each category of loans along with any specific allowance
for impaired and adversely classified loans within the particular category. Each
factor is assigned a percentage weight and that total weight is applied to each
loan category. The resulting sum from each loan category is then combined to
arrive at a total allowance for all categories. Factors are different for each
loan category. Qualitative factors include: levels and trends in delinquencies
and non-accruals, trends in volumes and terms of loans, effects of any changes
in lending policies, the experience, ability and depth of management, national
and local economic trends and conditions, concentrations of credit, quality of
the Company's loan review system, and regulatory requirements. The total
allowance required thus changes as the percentage weight assigned to each factor
is increased or decreased due to its particular circumstance, as the various
types and categories of loans change as a percentage of total loans and as
specific allowances are required due to an increase in impaired and adversely
classified loans.
The following schedule summarizes the changes in the allowance for loan losses:
Nine Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, December 31,
2002 2001 2001
-------------------------------------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 4,356 $ 2,803 $ 2,803
Provision charged against income 1,414 675 1,572
Recoveries:
Consumer loans 33 3 2
Commercial loans 4 -- 2
Losses charged to reserve:
Consumer loans (63) (3) (23)
Commercial loans (55) -- --
---- -- --
Net (charge-offs) recoveries (81) -- (19)
Allowance, at end of period $ 5,689 $ 3,478 $ 4,356
======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding
for the period: .02% -- .01%
15
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 past due and still
accruing interest increased 151.8% from $554 thousand at December 31, 2001 to
$1.4 million at September 30, 2002, and increased $1.2 million, or 583.8%, from
$204 thousand at September 30, 2001. As of September 30, 2002 loans that are
past due 90 days or more and still accruing interest included one loan for $1.0
million on a single-family residential property. Based on information subsequent
to September 30, 2002 this loan was placed on non-accrual status.
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 increased from 0.11% at December 31, 2001 to 0.22% at September
30, 2002, and increased from 0.04% at September 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 September 30, 2002. As of September 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 $1.5
million at September 30, 2001 and $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:
September 30, September 30, December 31,
2002 2001 2001
------------------------------------------
(In Thousands of Dollars)
Non-accrual loans $ 67 $ 104 $ 106
Impaired loans 255 84 119
------ ------ ------
Total non-performing assets 322 188 225
Loans past due 90 days and still
accruing 1,073 16 329
Total non-performing assets and
loans past due 90 days and
still accruing $1,395 $ 204 $ 554
====== ====== ======
As a percentage of total loans 0.28% 0.06% 0.14%
As a percentage of total assets 0.22% 0.04% 0.11%
Loan Concentrations
- -------------------
At September 30, 2002 the Company had $60.9 million of construction and land
loans to commercial builders on single family residential property and $20.9
million of construction and land loans to individuals on single family
residential property in the Northern Virginia market, together representing
16.5% 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 $25.4
million of construction and land loans for non-residential commercial property
and representing 5.1% of total loans. Adverse developments in the Northern
Virginia real estate market or economy including substantial increases in
mortgage interest rates, slower housing sales, and increased commercial property
vacancy rates could have an adverse
16
impact on these groups of loans and the Bank's income and financial position. At
September 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 $237.0
million at September 30, 2002 and represent 47.8% of total loans. The Company's
loans are concentrated in the Northern Virginia/Washington, D.C. metropolitan
area.
Non-Interest Income
- -------------------
Non-interest income increased $577 thousand, or 17.7%, from $3.3 million for the
nine months ended September 30, 2001 to $3.8 million for the same period ended
September 30, 2002. Service charges and other fees grew $248 thousand, or 26.6%,
from $933 thousand for the nine months ended September 30, 2001 to $1.2 million
for the current nine month period due to overall growth in deposit accounts. Fee
and net gains on loans held-for-sale increased $334 thousand, or 14.6%, from
$2.3 million in 2001 to $2.6 million for the nine months ended September 30,
2002 as originations increased from $121.7 million during the first nine months
of 2001 to $135.1 million for the comparable period in 2002. Sales also
increased rising $18.0 million from $116.9 million in 2001 to $134.9 million in
the first nine 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 September 30, 2002
non-interest income increased $131 thousand, or 10.6% with an increase of $83
thousand in service charges and other fees and $48 thousand in fees and net
gains on loans held-for-sale.
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. The Company expects
that fees and net gains on mortgage loans originated for sale would be lower in
a rising interest rate environment.
Non-Interest Expense
- --------------------
For the three months ended September 30, 2002, non-interest expense increased
$706 thousand, or 20.0%, compared to the same period in 2001 and increased $2.2
million, or 22.0%, from $10.2 million for the nine months ended September 30,
2001 to $12.4 million for the nine months ended September 30, 2002. Salaries and
benefits for the three month and nine month periods ended September 30 accounted
for $417 thousand and $1.4 million, respectively, or 59.1% and 62.3%, 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 $170 thousand, or 29.0%, and $443 thousand, or 26.1% for the
three and nine months periods ended September 30, 2002 due to the opening of the
Bank's thirteenth office in May 2002 and investment in new and expanded computer
systems for both internal use and customer related electronic banking services.
Other operating expense increases of $87 thousand and $325 for the three months
and nine months ended September 30 were up 13.6% and 17.1%. As a percentage of
total revenue sources (net interest and non-interest income) non-interest
expense fell from 59.8% for the three months ended September 30, 2001 to 53.3%
for the same period in 2002, and fell from 62.8% during the first nine months of
2001 to 56.8% for the nine months ended September 30, 2002. These reductions are
a result of both increases in total revenue sources and on-going cost
containment efforts.
17
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 $1.8 million and $2.7 million for the nine
months ended September 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
$80.8 million, or 64.5%, from $125.3 million at December 31, 2001 to $206.1
million at September 30, 2002 as net loans, as a percentage of total deposits,
declined from 97.1% at December 31, 2001 to 89.2% at September 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 $29.5 million and $29.2 million at
September 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
6.27% at September 30, 2002, compared to 6.32% at December 31, 2001. The total
risk-based capital ratio was 10.10% at September 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
5.37% at September 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 "well capitalized" under regulatory prompt corrective
action guidelines. The Company's Tier 1 risk-based capital ratio, total
risk-based capital ratio, and leverage ratio was 7.49%, 8.60% and 6.42%,
respectively, at September 30, 2002.
18
During the nine months ended September 30, 2002, the Company continued to use
borrowed funds under a line of credit agreement with a correspondent bank in
order to provide capital to fund growth and expansion of the Bank. At September
30, 2002, the amount outstanding under the line of credit was $8 million, as
compared to $11 million at December 31, 2001. Under terms of the agreement the
Company was required, by April 30, 2002, to find a participating lender for
amounts outstanding on the line of credit in excess of $8 million. As a
participating lender did not materialize by April 30, 2002, the Company paid
down $3 million of the amount outstanding to $8 million as of June 30, 2002.
This is the maximum amount available under the line of credit agreement at this
time. The agreement matures December 31, 2004.
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 subsequently closed on July 30, 2002
with gross proceeds received of $7.0 million and 291,738 shares issued. Proceeds
of the offering were used by the Company to increase the capital positions of
the Company and the Bank and thereby providing support for 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 the issuance of other potential qualifying
instruments. 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.
Recent Accounting Pronouncements
- --------------------------------
In April 2002, the Financial Accounting Standards Board issued Statement 145,
Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 are effective for transactions occurring after
May 15, 2002, with early application encouraged.
In June 2002, the Financial Accounting Standards Board issued Statement 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31 2002, with early application encouraged.
The Financial Accounting Standards Board issued Statement No. 147, Acquisitions
of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, this
19
Statement removes acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions with the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the purchase
method of accounting, is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the definition of
a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill.
The transition provisions state that if the transaction that gave rise to the
unidentifiable intangible asset was a business combination, the carrying amount
of that asset shall be reclassified to goodwill as of the later of the date of
acquisition or the date Statement 142 was first applied (fiscal years beginning
after December 15, 2001). If no core deposit study was performed, then the
entire unidentifiable intangible asset will continue to be amortized. Any
previously issued interim statements that reflect amortization of the
unidentifiable intangible asset subsequent to the Statement 142 application date
shall be restated to remove that amortization expense. The carrying amounts of
any recognized intangible assets that meet the recognition criteria of Statement
141 that have been included in the amount reported as an unidentifiable
intangible asset and for which separate accounting records have been maintained
shall be reclassified and accounted for as assets apart from the unidentifiable
intangible asset and shall not be reclassified to goodwill.
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
20
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 September 30, 2002. At that point
in time, the Company had a cumulative net asset sensitive twelve-month gap
position of $8.4 million, or a positive 1.39% of total earning assets as
compared to a net asset sensitive position of a positive 0.32% at June 30, 2002,
and a net liability sensitive position of a negative 4.20% at December 31, 2001
The current position is considered 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.
Interest Sensitivity Periods
--------------------------------------------------------
September 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 $ 13,751 $ 21,657 $ 19,687 $ 15,178 $ 70,273
Federal funds sold 21,559 -- -- -- 21,559
Loans, before loan loss reserves 203,742 78,212 207,458 20,364 509,776
-------- -------- -------- -------- --------
Total earning assets $239,052 $ 99,869 $227,145 $ 35,542 $601,608
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Savings and interest bearing $120,248 $ 17,819 $ 31,440 $ -- $169,507
demand deposits
Time deposits 30,090 123,775 122,885 6 276,756
Securities sold under agreement to
repurchase and federal funds 30,617 -- -- -- 30,617
purchased
Other borrowings 8,000 -- 400 -- 8,400
-------- -------- -------- -------- --------
Total interest-bearing liabilities $188,955 $141,594 $154,725 $ 6 $485,280
-------- -------- -------- -------- --------
Cumulative maturity / interest $ 50,097 $ 8,372 $ 80,792 $116,328 $116,328
sensitivity gap
As % of total earnings assets 8.33% 1.39% 13.43% 19.34%
======== ======== ======== ======== ========
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 June 30, 2002. Consistent with the
net asset sensitive position of a positive 0.32% at that time the model
projected net income would increase by 1.3% if interest rates would immediately
rise by 200 basis points and would decrease by 2.5% 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. It is expected that projections for changes in
earnings based on data as of September 30, 2002 would be similar in result,
although slightly higher up and down, due to the increase in the net asset
sensitive position from 0.32% at June 30, 2002 to 1.39% as of September 30,
2002.
21
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the Company's
management, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13a-14 under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in the Company's internal
controls or in other factors subsequent to the date of the evaluation that could
significantly affect those controls.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds-None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K
a) Exhibits
Exhibit No. Description
----------- -------------------------------------------------------
3.1 Articles of Incorporation of Virginia Commerce Bancorp,
Inc. (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
99(a) Section 906 Certification of Peter A. Converse,
President and Chief Executive Officer
99(b) Section 906 Certification of William K. Beauchesne,
Treasurer and Chief Financial Officer
(1) Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999
(2) 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 July 9, 2002, the Company filed a current report on Form 8-K, under item 5
thereof, reflecting the announcement of earnings for the period ended June 30,
2002.
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 291,738 shares were received with gross proceeds of
$7,001,712.
23
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: November 1, 2002 BY /s/ Peter A. Converse
----------------------------------------
Peter A. Converse, President and
Chief Executive Officer
Date: November 1, 2002 BY /s/ William K. Beauchesne
-------------------------------------
William K. Beauchesne, Treasurer and
Chief Financial Officer
24
SECTION 302 CERTIFICATION
I, Peter A. Converse, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Virginia Commerce
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002 /s/ Peter A. Converse
---------------------
President and Chief Executive Officer
25
SECTION 302 CERTIFICATION
I, William K. Beauchesne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Virginia Commerce
Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002 /s/ William K. Beauchesne
-------------------------
Treasurer and Chief Financial Officer
26