U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-28635
VIRGINIA COMMERCE BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1964895
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207
-------------------------------------------
(Address of Principal Executive Offices)
703-534-0700
------------
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check whether the registrant is an accelerated file as defined in
Rule12b-2 of the Securities Exchange Act of 1934. Yes . No X .
--- ---
As of May 5, 2003, the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 3,892,769
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
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 20,931 $ 19,907
Securities (fair value: 2003, $98,020; 2002, $71,766) 97,524 71,231
Federal funds sold 27,070 24,071
Loans held-for-sale 15,239 18,948
Loans, net of allowance for loan losses of $6,274 in 2003 and
$5,924 in 2002 547,996 516,900
Bank premises and equipment, net 6,515 6,517
Accrued interest receivable 2,593 2,489
Other assets 3,034 2,824
-------- --------
Total assets $720,902 $662,887
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand deposits $108,674 $ 98,575
Savings and interest-bearing demand deposits 219,068 190,811
Time deposits 298,149 277,610
-------- --------
Total deposits $625,891 $566,996
Securities sold under agreement to repurchase and federal funds
purchased 28,529 32,081
Other borrowed funds 400 400
Trust preferred capital notes 18,000 18,000
Accrued interest payable 1,366 1,271
Other liabilities 689 2,289
-------- --------
Total liabilities $674,875 $621,037
======== ========
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par, 1,000,000 shares authorized and
un-issued $ -- $ --
Common stock, $1.00 par, 5,000,000 shares authorized, issued and
outstanding 2003, 3,891,833; 2002, 3,739,330 3,892 3,739
Surplus 21,393 19,622
Retained earnings 20,225 17,808
Accumulated other comprehensive income 517 681
-------- --------
Total stockholders' equity $ 46,027 $ 41,850
======== ========
Total liabilities and stockholders' equity $720,902 $662,887
======== ========
Notes to consolidated financial statements are an integral
part of these statements.
2
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except per share data)
(Unaudited)
Three Months Ended March 31,
2003 2002
------- -------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 9,692 $ 7,920
Interest and dividends on investment securities:
U.S. Treasury securities and agency obligations 674 648
Other securities 133 88
Interest on federal funds sold 89 92
------- -------
Total interest and dividend income $10,588 $ 8,748
------- -------
INTEREST EXPENSE:
Deposits $ 3,140 $ 3,167
Securities sold under agreement to repurchase and federal
funds purchased 28 74
Other borrowed funds 6 136
Trust preferred capital notes 213 --
------- -------
Total interest expense $ 3,387 $ 3,377
------- -------
NET INTEREST INCOME: $ 7,201 $ 5,371
Provision for loan losses 356 521
------- -------
Net interest income after provision for loan losses $ 6,845 $ 4,850
------- -------
NON-INTEREST INCOME:
Service charges and other fees $ 420 $ 406
Fees and net gains on loans held-for-sale 1,299 854
Gain (loss) on sale of securities -- (1)
Other 24 7
------- -------
Total non-interest income $ 1,743 $ 1,266
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 2,998 $ 2,404
Occupancy expense 785 667
Data processing 284 248
Other operating expense 851 745
------- -------
Total non-interest expense $ 4,918 $ 4,064
------- -------
Income before taxes on income $ 3,670 $ 2,052
Provision for income taxes 1,252 689
------- -------
NET INCOME $ 2,418 $ 1,363
------- -------
Earnings per common share, basic (1) $ 0.32 $ 0.20
Earnings per common share, diluted (1) $ 0.29 $ 0.18
(1) Restated giving effect to a two-for-one split in the form of a 100% stock
dividend payable May 30, 2003. Notes to consolidated financial statements
are an integral part of these statements.
3
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 2003 and 2002
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other
Preferred Common Retained Comprehensive Comprehensive
Stock Stock Surplus Earnings Income (Loss) Income Total
-------------------------------------------------------------------------------
Balance, January 1, 2002 $ -- $ 2,721 $ 13,190 $ 10,138 $ 171 $ 26,220
Comprehensive Income:
Net Income -- -- -- 1,363 $ 1,363 1,363
Other comprehensive income (loss), net of tax
Unrealized holding losses on securities
available-for-sale arising during the
period (net of tax of $152) (295)
--------
Other comprehensive income (loss), net of tax -- -- -- -- (295) (295) (295)
--------
Total comprehensive income -- -- -- -- -- $ 1,068
------------------------------------------------------- ========= --------
Balance, March 31, 2002 $ -- $ 2,721 $ 13,190 $ 11,501 $ (124) $ 27,288
======== ======== ======== ======== ======== ========
Balance, January 1, 2003 $ -- $ 3,739 $ 19,622 $ 17,807 $ 682 $ 41,850
Comprehensive Income:
Net Income -- -- -- 2,418 $ 2,418 2,418
Other comprehensive income (loss), net of tax
Unrealized holding losses on securities
available-for-sale arising during the
period (net of tax of $85) (165)
--------
Other comprehensive income (loss), net of tax -- -- -- -- (165) (165) (165)
--------
Total comprehensive income -- -- -- -- -- $ 2,253 --
========
Issuance of common stock-
Stock options/warrants exercised -- 153 1,771 -- -- 1,924
------------------------------------------------------- --------
Balance, March 31, 2003 $ -- $ 3,892 $ 21,393 $ 20,225 $ 517 $ 46,027
======== ======== ======== ======== ======== ========
Notes to consolidated financial statements are an integral
part of these statements.
4
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
----------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,418 $ 1,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 239 225
Provision for loan losses 356 521
Deferred tax benefit (142) (193)
Amortization of security premiums and (accretion) of discounts (7) 9
Loss on sale of securities available-for-sale -- 1
Origination of loans held-for-sale (69,823) (44,682)
Sales of loans 73,532 51,942
Changes in other assets and other liabilities:
Increase in accrued interest receivable (104) --
Decrease in other assets 16 61
(Decrease) increase in other liabilities (1,504) 243
-----------------------
Net Cash Provided by Operating Activities $ 4,981 $ 9,490
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (31,451) (26,524)
Purchase of securities available-for-sale (35,915) (16,425)
Purchase of securities held-to-maturity (5,000) (3,971)
Proceeds from sales of securities available-for-sale -- 1,350
Proceeds from principal payments on securities available-for-sale 2,209 1,868
Proceeds from principal payments on securities held-to-maturity 1,170 621
Proceeds from calls and maturities of securities available-for-sale 11,000 9,000
Proceeds from calls and maturities of securities held-to-maturity -- 502
Purchase of bank premises and equipment (238) (529)
-----------------------
Net Cash (Used In) Investing Activities $(58,225) $(34,108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 58,895 $ 57,747
Net decrease in repurchase agreements (3,552) (2,201)
Net increase in other borrowed funds -- 1,000
Net proceeds from issuance of capital stock 1,924 --
-----------------------
Net Cash Provided by Financing Activities $ 57,267 $ 56,546
Net Increase In Cash and Cash Equivalents 4,023 31,928
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 43,978 15,155
-----------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 48,001 $ 47,083
=======================
Notes to consolidated financial statements are an integral
part of these statements.
5
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements of Virginia
Commerce Bancorp, Inc. and its subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. All significant intercompany balances
and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
and reclassifications consisting of a normal and recurring nature considered
necessary to present fairly the financial positions as of March 31, 2003 and
December 31, 2002, the results of operations for the three months ended March
31, 2003 and 2002, and statements of cash flows and stockholders' equity for the
three months ended March 31, 2003 and 2002.
Operating results for the three month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
2. INVESTMENT SECURITIES
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of March 31, 2003 are as follows (dollars in thousands):
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 70,045 $ 748 $ -- $ 70,793
Domestic corporate debt obligations 4,000 -- (20) 3,980
Obligations of states and political subdivisions 1,189 55 -- 1,244
Restricted stock:
Federal Reserve Bank 722 -- -- 722
Federal Home Loan Bank 1,355 -- -- 1,355
Community Bankers' Bank 55 -- -- 55
----------------------------------------------------
$ 77,366 $ 803 $ (20) $ 78,149
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 12,357 $ 287 $ -- $ 12,644
Obligations of states and political subdivisions 6,534 148 (3) 6,679
Domestic corporate debt obligations 484 64 -- 548
----------------------------------------------------
$ 19,375 $ 499 $ (3) $ 19,871
====================================================
6
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of December 31, 2002 are as follows (dollars in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $51,679 $ 982 $ -- $52,661
Obligations of states and political subdivisions 1,179 50 -- 1,229
Restricted stock:
Federal Reserve Bank 542 -- -- 542
Federal Home Loan Bank 1,194 -- -- 1,194
Community Bankers' Bank 55 -- -- 55
--------------------------------------------------------------
$54,649 $ 1,032 $ -- $55,681
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 8,534 $ 341 $ -- $ 8,875
Obligations of states and political subdivisions 6,534 130 -- 6,664
Domestic corporate debt obligations 482 64 -- 546
--------------------------------------------------------------
$15,550 $ 535 $ -- $16,085
==============================================================
3. LOANS
Major classifications of loans are summarized as follows:
March 31, 2003 December 31, 2002
-------------------------------------
(In Thousand of Dollars)
Commercial $ 50,873 $ 44,559
Real estate-one-to-four family residential 70,378 67,061
Real estate-multi-family residential 26,077 29,269
Real estate-non-farm, non-residential 274,355 265,694
Real estate-construction 128,439 111,333
Consumer 6,371 6,941
-------------------------------
Total Loans 556,493 524,857
Less unearned income (2,223) (2,033)
Less allowance for loan losses (6,274) (5,924)
-------------------------------
Loans, net $ 547,996 $ 516,900
==============================
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 have been
restated giving effect to a five-for-four stock split in the form of a 25% stock
dividend in April 2002, and a two-for-one stock split in the form of a 100%
stock dividend to shareholders of record on May 5, 2003 and payable May 30,
2003.
March 31, 2003 March 31, 2002
-------------- --------------
Per Per
Share Share
Shares Amount Shares Amount
--------- ------ --------- ------
Basic earnings per share 7,686,528 $0.32 6,801,542 $0.20
----- -----
Effect of dilutive securities:
Stock options 636,088 508,748
Warrants 31,456 163,982
--------- ---------
Diluted earnings per share 8,354,072 $0.29 7,638,254 $0.18
========= ===== ========= =====
5. STOCK COMPENSATION PLAN
At March 31, 2003, the Company has a stock-based compensation plan. The Company
accounts for the plan under the recognition and measurement principles of APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant. The
following illustrates the effect on net income and earnings per share for the
three months ended March 31, 2003, and 2002 had the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
been adopted.
(Dollars in thousands except per share amounts) MARCH 31, 2003 MARCH 31, 2002
- -----------------------------------------------------------------------------------
NET INCOME, AS REPORTED $ 2,418 $ 1,363
Deduct: total stock-based employee compensation
expense determined based on fair value
method of awards, net of tax (89) (105)
PRO FORMA NET INCOME $ 2,329 $ 1,258
BASIC EARNINGS PER SHARE:
As reported $ 0.32 $ 0.20
Pro forma $ 0.30 $ 0.17
DILUTED EARNING PER SHARE:
As reported $ 0.29 $ 0.18
Pro Forma $ 0.27 $ 0.16
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2003, and 2002, respectively: price volatility of
28.78% and 21.48%, risk-free interest rates of 4.02% and 5.43%, dividend rate of
..02% and expected lives of 10 years.
8
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital as of March 31, 2003 with the minimum
regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 11.76% 8.00% --
Bank 11.36% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 10.23% 4.00% --
Bank 7.26% 4.00% 6.00%
Leverage Ratio:
Company 8.89% 4.00% --
Bank 6.39% 4.00% 5.00%
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This management's discussion and analysis and other portions of this report,
contain forward-looking statements within the meaning of the Securities and
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases,
forward-looking statements can be identified by use of words such as "may,"
"will," "anticipates," "believes," "expects," "plans," "estimates," "potential,"
"continue," "should," and similar words or phrases. These statements are based
upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policy, competitive factors,
and other conditions which by their nature, are not susceptible to accurate
forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the
forward-looking statements are based, actual future operations and results may
differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward-looking statements. The Company's
past results are not necessarily indicative of future performance.
Non-GAAP Presentations
- ----------------------
This management's discussion and analysis refers to the efficiency ratio, which
is computed by dividing non-interest expense by the sum of net interest income
on a tax equivalent basis and non-interest income. This is a non-GAAP financial
measure which we believe provides investors with important information regarding
our operational efficiency. Comparison of our efficiency ratio with those of
other companies may not be possible because other companies may calculate the
efficiency ratio differently. The Company, in referring to its net income, is
referring to income under generally accepted accounting principals, or "GAAP".
General
- -------
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Virginia Commerce Bancorp, Inc.
and subsidiaries (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this report. The Company is the parent bank holding company for
Virginia Commerce Bank (the "Bank"), a Virginia state chartered bank that offers
a full range of banking services through thirteen branch offices and two
residential mortgage offices, principally to individuals and small to
medium-size businesses in the Metropolitan Washington, D.C. area.
Critical Accounting Policies
- ----------------------------
During the quarter ended March 31, 2003 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 are inherent in
our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
10
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 guarantors and the fair
market value of collateral. These factors are combined to estimate the
probability and severity of inherent losses. When impairment is identified, then
a specific reserve is established based on the Company's calculation of the loss
embedded in the individual loan. Large groups of smaller balance, homogeneous
loans are collectively evaluated for impairment. Accordingly, the Company does
not separately identify individual consumer and residential loans for
impairment. The formula allowance is used for estimating the loss on internally
risk rated loans exclusive of those identified as impaired. The loans meeting
the criteria for special mention, substandard, doubtful and loss, as well as,
impaired loans are segregated from performing loans within the portfolio.
Internally classified loans are then grouped by loan type (commercial,
commercial real estate, commercial construction, residential real estate,
residential construction or installment). Each loan type is assigned an
allowance factor based on management's estimate of the associated risk,
complexity and size of the individual loans within the particular loan category.
Classified loans are assigned a higher allowance factor than non-rated loans due
to management's concerns regarding collectibility or management's knowledge of
particular elements surrounding the borrower. Allowance factors grow with the
worsening of the internal risk rating. The unallocated formula is used to
estimate the loss of non-classified loans and loans identified for impairment
testing for which no impairment was identified. These un-criticized loans are
also segregated by loan type and allowance factors are assigned by management
based on delinquencies, loss history, trends in volume and terms of loans,
effects of changes in lending policy, the experience and depth of management,
national and local economic trends, concentrations of credit, quality of the
loan review system and the effect of external factors (i.e. competition and
regulatory requirements). The factors assigned differ by loan type. The
unallocated allowance captures losses whose impact on the portfolio 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 $58.0 million, or 8.8%, from $662.9 million at December
31, 2002, to $720.9 million at March 31, 2003, as total deposits grew $58.9
million, or 10.4%, from $567.0 million to $625.9 million. Other funding sources
declined during the three month period ended March 31, 2003, with securities
sold under agreement to repurchase and federal funds purchased decreasing $3.6
million, or 11.1%, from $32.1 million at December 31, 2002, to $28.5 million.
Loans, net of allowance for loan losses, increased $31.1 million, or 6.0%, from
$516.9 million at December 31, 2002, to $548.0 million at March 31, 2003, and
represented 87.6% of total deposits at March 31, 2003, compared to 91.2% at
December 31, 2002. The majority of loan growth occurred in real estate
construction loans which increased $17.1 million, or 15.4%, from $111.3 million
at December 31, 2002, to $128.4 million at March 31, 2003. Non-farm
non-residential real estate loans represented the second largest dollar increase
rising $8.7 million, or 3.3%, from $265.7 million at December 31, 2002, to
$274.4 million at March 31, 2003. One-to-four family residential real estate
loans increased $3.3 million, or 5.0%, from $67.1 million at December 31, 2002,
to $70.4 million at March 31, 2003, while multi-family residential loans fell
$3.2 million during the three month period. Commercial loans rose $6.3 million,
or 14.2%, from $44.6 million at December 31, 2002, to $50.9 million at March 31,
2003.
Loans held-for-sale, which represent one-to-four family residential real estate
loans originated on a pre-sold basis to various investors, decreased $3.7
million from $18.9 million at December 31, 2002, to $15.2 million at March 31,
2003. Originations were up $25.1 million, or 56.3%, from $44.7 million during
the three months ended March 31, 2002, to $69.8 million during the current three
month period due to a higher level of refinancing activity.
11
With the increase in loans trailing deposit growth during the three month
period, investment securities increased $26.3 million, or 36.9%, from $71.2
million at December 31, 2002, to $97.5 million at March 31, 2003. Growth in
investment securities was concentrated in short-term U.S. Government Agency
obligations and obligations of states and political subdivisions.
Deposit growth occurred in all categories with non-interest bearing demand
deposits increasing $10.1 million, or 10.2%, from $98.6 million at December 31,
2002, to $108.7 million at March 31, 2003. Savings and interest-bearing demand
deposits increased $28.3 million, or 14.8%, and time deposits grew by $20.5
million, or 7.4%, from $277.6 million at December 31, 2002, to $298.1 million at
March 31, 2003. Although the majority of the Bank's deposits are attracted from
individuals and businesses in the Northern Virginia and the Metropolitan
Washington, D.C. area, $15.8 million of the $20.5 million in time deposit growth
was attracted from out-of-market financial institutions. All deposits from
out-of-market financial institutions bear the same interest rates paid by the
Bank on comparable deposits from local consumers and businesses.
For the three months ended March 31, 2003, net income of $2.4 million reflected
an increase of 77.4% compared to $1.4 million for the three months ended March
31, 2002, as net interest income increased $1.8 million, or 34.1%, non-interest
income rose $477 thousand, or 37.7%, and non-interest expense was up $854
thousand, or 21.0%. Provisions for loan losses decreased $165 thousand from $521
thousand for the three months ended March 31, 2002, to $356 thousand for the
three months ended March 31, 2003. Diluted earnings per share, adjusted giving
effect to a two-for-one stock split in the form of a 100% stock dividend payable
May 30, 2003, of $0.29 were up $0.11, or 61.1% from $0.18 for the comparable
period in 2002. The Company's annualized return on average assets and return on
average equity were 1.41% and 22.04% for the current three month period compared
to 1.05% and 20.29% for the three months ended March 31, 2002. Overall, while
revenue sources continued to increase due to strong balance sheet growth, an
increase in the net interest margin, and higher fees and net gains from mortgage
lending operations, the Company continued its efforts to control its
non-interest expenses. As a result, its efficiency ratio improved to 55.0%
during the first quarter 2003 as compared to 61.2% for the same period in 2002.
Stockholders' equity increased $4.2 million, or 10.0%, from $41.8 million at
December 31, 2002, to $46.0 million at March 31, 2003 on earnings of $2.4
million and $1.9 million in proceeds from the exercise of stock options and
warrants by Company directors and officers.
Net Interest Income
- -------------------
Net interest income is the excess of interest earned on loans and investments
over the interest paid on deposits and borrowings. The Company's net interest
income increased $1.8 million, or 34.1%, from $5.4 million for the three months
ended March 31, 2002, to $7.2 million for the three month period ended March 31,
2003, due to growth in earning assets and an eleven basis points increase in the
net interest margin from 4.33% in the first quarter of 2002 to 4.42% for the
current three month period.
The Company's yields on earning assets and costs of interest-bearing liabilities
have continued to fall along with market interest rates since early 2001. The
yield on earning assets dropped fifty-nine basis points from 7.12% for the three
months ended March 31, 2002, to 6.53% for the three months ended March 31, 2003,
while the average rate paid on interest-bearing liabilities fell seventy-seven
basis points from 3.33% to 2.56%. As a result, the net interest spread grew
eighteen basis points. This higher interest rate spread was mostly due to a one
hundred and twelve basis point drop in the average rate paid on time deposits
from 4.38% during the three months ended March 31, 2002, to 3.26% for the
current three month period.
The following table shows the average balance sheets for each of the three
months ended March 31, 2003, and 2002. In addition, the amounts of interest
earned on earning assets, with related yields on a tax-equivalent basis, and
interest expense on interest-bearing liabilities, with related rates, are shown.
Loans placed on a non-accrual status are included in the average balances. Net
loan fees included in interest income on loans totaled $383 thousand and $363
thousand for 2003 and 2002, respectively.
12
-----------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------------------------------------------------------
2003 2002
-------------------------------------- ----------------------------------------
Interest Average Interest Average
Average Income- Yields Average Income- Yields
(Dollars in thousands) Balance Expense /Rates Balance Expense /Rates
ASSETS
Securities(1) $ 74,258 $ 807 4.56% $ 53,599 $ 736 5.49%
Loans, net of unearned income 546,097 9,692 7.10% 415,563 7,920 7.62%
Federal funds sold 30,831 89 1.15% 22,234 92 1.66%
--------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS $ 651,186 $ 10,588 6.53% $491,396 $ 8,748 7.12%
Non-earning assets 33,500 25,749
--------- --------
TOTAL ASSETS $ 684,686 $517,145
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 117,276 $ 495 1.71% $ 82,462 $ 432 2.12%
Money market accounts 69,511 322 1.88% 40,728 229 2.28%
Savings accounts 19,249 49 1.02% 14,638 51 1.43%
Time deposits 283,074 2,274 3.26% 227,279 2,455 4.38%
--------- -------- -------- -------- -------- --------
Total interest-bearing deposits $ 489,110 $ 3,140 2.60% $365,107 $ 3,167 3.52%
Securities sold under agreement to
repurchase and federal funds purchased 29,509 28 0.38% 35,404 74 0.85%
Other borrowed funds 400 6 5.93% 11,241 136 4.84%
Trust preferred capital notes 18,000 213 4.74% -- -- --
--------- -------- -------- -------- -------- --------
TOTAL INTEREST-BEARING LIABILITIES $ 537,019 $ 3,387 2.56% $411,752 $ 3,377 3.33%
Demand deposits and other non-interest
bearing liabilities 103,790 78,520
--------- --------
TOTAL LIABILITIES $ 640,809 $490,272
Stockholders' equity 43,877 26,873
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 684,686 $517,145
========= ========
Interest rate spread 3.97% 3.79%
Net interest income and margin $ 7,200 4.42% $ 5,371 4.33%
(1) Yields on securities available-for-sale have been calculated on the basis of
historical cost and do not give effect to changes in the fair value of those
securities, which are reflected as a component of stockholders' equity. Interest
income includes the effects of taxable-equivalent adjustments, using the
appropriate marginal federal income tax rate of 34.0%, to increase tax-exempt
interest income to a tax-equivalent basis.
13
Allowance for Loan Losses / Provision for Loan Loss Expense
- -----------------------------------------------------------
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses reflective of the
risks in the loan portfolio. For the three months ended March 31, 2003 net
charge-offs totaled $6 thousand, or 0.001% of average loans compared to $83
thousand, or 0.02% for the same period in 2002, while the provision for loan
loss expense in the first three months of 2003 was $356 thousand compared to
$521 thousand in 2002. As a result, the total allowance for loan losses
increased $350 thousand, or 5.9%, from $5.9 million at December 31, 2002, to
$6.3 million at March 31, 2003. This decrease in the provision for loan loss
expense is reflective of the decline in net charge-offs and a decrease in
identified other potential problem loans from $2.6 million at March 31, 2002, to
$1.5 million at March 31, 2003. 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:
Three Months Three Months Twelve Months
Ended Ended Ended
March 31, 2003 March 31, 2002 December 31, 2002
--------------------------------------------------------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 5,924 $ 4,356 $ 4,356
Provision charged against income 356 521 1,678
Recoveries:
Consumer loans 2 5 40
Commercial loans -- 1 5
Losses charged to reserve:
Consumer loans (8) (39) 68
Commercial loans -- (50) 87
------- ------- -------
Net (charge-offs) recoveries (6) (83) (110)
Allowance, at end of period $ 6,274 $ 4,794 $ 5,924
======= ======= =======
Ratio of net charge-offs to average loans net of
unearned income: .001% .02% .02%
14
Risk Elements and Non-performing Assets
- ---------------------------------------
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed real properties). The total
non-performing assets and loans that are ninety days or more past due and still
accruing interest decreased 47.1% from $2.4 million at December 31, 2002 to $1.3
million at March 31, 2003, and increased $790 thousand, or 167.0%, from $473
thousand at March 31, 2002. The decrease during the three months ended March 31,
2003, was due to the payoff of a $1.0 million loan on a single-family
residential property, while the increase of $790 thousand from March 31, 2002
was due to one loan for $875 thousand on a single-family residential property.
Both loans were placed on non-accrual status in the fourth quarter of 2002 and
the remaining loan of $875 thousand was subsequently paid in full on April 30,
2003.
Loans are placed in non-accrual status when in the opinion of management the
collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
The ratio of non-performing assets and loans past due ninety days and still
accruing to total loans decreased from 0.44% at December 31, 2002 to 0.23% at
March 31, 2003, and increased from 0.11% at March 31, 2002. As noted above, the
decrease in the ratio from December 31, 2002, to March 31, 2003, was due to the
payoff of a $1.0 million loan on a single-family residential property, while the
increase in the ratio since March 31, 2002 was due to another loan on a
single-family residential property for $875 thousand. The Company expects its
ratio of non-performing assets to total loans to improve, assuming the loan for
$875 thousand is collected as expected in 2003; however, there can be no
assurance. As of March 31, 2003, there were $1.5 million of loans for which
management has identified risk factors that may result in them not being repaid
in accordance with their terms. These loans are primarily well secured and are
currently performing.
Foreclosed real properties include properties that have been substantively
repossessed or acquired in complete or partial satisfaction of debt. Such
properties, which are held for resale, are carried at the lower of cost or fair
value, including a reduction for the estimated selling expenses, or principal
balance of the related loan. As of March 31, 2003, March 31, 2002, and December
31, 2002, the Company held no foreclosed real properties.
Total non-performing assets consist of the following:
March 31, 2003 March 31, 2002 December 31, 2002
------------------------------------------------------------------------
(In Thousands of Dollars)
Non-accrual loans $1,121 $ 103 $1,943
Impaired loans 141 295 444
------ ------ ------
Total non-performing assets 1,262 398 2,387
Loans past due 90 days and still
accruing 1 75 --
Total non-performing assets and
loans past due 90 days and
still accruing $1,263 $ 473 $2,387
====== ====== ======
As a percentage of total loans 0.23% 0.11% 0.44%
As a percentage of total assets 0.18% 0.09% 0.36%
15
Concentrations of Credit Risk
- -----------------------------
At March 31, 2003, the Company had $428.9 million, or 77.1%, of total loans
concentrated in commercial real estate. Commercial real estate for purposes of
this discussion includes all construction loans, loans secured by multi-family
residential properties and loans secured by non-farm, non-residential
properties. At December 31, 2002 commercial real estate loans were $406.3
million, or 77.4%, of total loans. Total construction loans of $128.4 million at
March 31, 2003, represented 23.1% of total loans, loans secured by multi-family
residential properties of $26.1 million represented 4.7% of total loans, and
loans secured by non-farm, non-residential properties of $274.4 million
represented 49.3%.
Construction loans at March 31, 2003, included $86.0 million in loans to
commercial builders on single family residential property and $16.5 million to
individuals on single family residential property in the Northern Virginia
market, representing 15.5% and 3.0% of total loans, respectively, and together
representing 18.4% of total loans. These loans are made to a number of unrelated
entities and generally have a term of twelve to eighteen months. In addition the
Company had $25.9 million of construction loans on non-residential commercial
property at March 31, 2003, representing 4.7% of total loans. Total construction
loans of $128.4 million include $44.1 million in land acquisition and or
development loans on residential property and $19.6 million in land acquisition
and or development loans on commercial property, together totaling $63.8
million, or 11.5% of total loans. Adverse developments in the Northern Virginia
real estate market or economy including substantial increases in mortgage
interest rates, slower housing sales, and increased commercial property vacancy
rates could have an adverse impact on these groups of loans and the Bank's
income and financial position. At March 31, 2003, the Company had no other
concentrations of loans in any one industry exceeding 10% of its total loan
portfolio. An industry for this purpose is defined as a group of counterparties
that are engaged in similar activities and have similar economic characteristics
that would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
The ultimate collectibility of the Company's loan portfolio and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely related to the economic conditions and trends in the
Metropolitan Washington, D.C. area.
Non-Interest Income
- -------------------
Non-interest income increased $477 thousand, or 37.7%, from $1.3 million for the
three months ended March 31, 2002, to $1.8 million for the same period ended
March 31, 2003. Fees and net gains on loans held-for-sale were the contributing
factor increasing $445 thousand, or 52.1%, from $854 thousand in 2002 to $1.3
million for the three months ended March 31, 2003, as originations increased
$25.1 million, or 56.3%, from $44.7 million during the first three months of
2002 to $69.8 million for the comparable period in 2003. Sales also increased
rising $21.6 million from $51.9 million in 2002 to $73.5 million for the first
three months of 2003. These higher levels of originations and subsequent sales
are attributable to both low interest rates and a strong local housing market.
Loans classified as held-for-sale represent loans on one-to-four family
residential real estate, originated on a pre-sold and servicing released basis
to various investors, and carried on the balance sheet at the lower of cost or
market. Adverse changes in the local real estate market, consumer confidence,
and interest rates could adversely impact the level of loans originated and
sold, and the resulting fees and earnings thereon.
Non-Interest Expense
- --------------------
For the three months ended March 31, 2003, non-interest expense increased $854
thousand, or 21.0%, compared to the same period in 2002. Salaries and benefits
increased $594 thousand, or 24.7%, from $2.4 million in 2002 to $3.0 for the
three months ended March 31, 2003, and accounted for 69.6% of the total increase
in non-interest expense. Incentive compensation associated with increases in
total loans and loans originated for sale, and staff increases due to overall
growth and branch expansion, were the main reason for the increase in salaries
and benefits expense.
16
Occupancy expense, which includes rents, depreciation, and equipment/systems
costs, increased $118 thousand, or 17.7%, from $667 thousand for the three
months ended March 31, 2002, to $785 thousand for the current three month period
due mostly to the opening of the Bank's thirteenth branch office in May 2002.
Other operating expense increased $106 thousand, or 14.2%, due to higher
marketing, legal and professional services expenses. As a percentage of total
revenue sources (net interest and non-interest income) non-interest expense fell
from 61.2% for the three months ended March 31, 2002, to 55.0% for same period
in 2003. This reduction is a result of both increases in total revenue and
on-going cost containment efforts.
Provision for Income Taxes
- --------------------------
The Company's income tax provisions are adjusted for non-deductible expenses and
non-taxable interest after applying the U.S. federal income tax rate of 34%.
Provision for income taxes totaled $689 thousand and $1.3 million for the three
months ended March 31, 2002 and 2003, respectively.
Liquidity
- ---------
The Company's principal sources of liquidity and funding are its deposit base.
The level of deposits necessary to support the Company's lending and investment
activities is determined through monitoring loan demand. Considerations in
managing the Company's liquidity position include, but are not limited to,
scheduled cash flows from existing loans and investment securities, anticipated
deposit activity including the maturity of time deposits, and projected needs
from anticipated extensions of credit. The Company's liquidity position is
monitored daily by management to maintain a level of liquidity conducive to
efficiently meet current needs and is evaluated for both current and longer term
needs as part of the asset/liability management process.
The Company measures total liquidity through cash and cash equivalents,
securities available-for-sale, mortgage loans held-for-sale, other loans and
investment securities maturing within one year, less securities pledged as
collateral for repurchase agreements, public deposits and other purposes, and
less any outstanding federal funds purchased. These liquidity sources increased
$34.7 million, or 15.9%, from $218.8 million at December 31, 2002, to $253.5
million at March 31, 2003, as net loans, as a percentage of total deposits,
declined from 91.2% at December 31, 2002, to 87.6% at March 31, 2003.
Additional sources of liquidity available to the Company include the capacity to
borrow funds through established short-term lines of credit with various
correspondent banks, and the Federal Home Loan Bank of Atlanta. Available funds
from these liquidity sources were approximately $129.7 million and $118.8
million at March 31, 2003, and December 31, 2002, respectively. The Bank's line
of credit with the Federal Home Loan Bank of Atlanta, which requires the
pledging of collateral in the form of certain loans and or securities, is
approximately $108 million of the $129.7 million as of March 31, 2003.
Capital
- -------
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, changing competitive conditions and
economic forces, and the overall level of growth. The adequacy of the Company's
current and future capital is monitored by management on an ongoing basis.
Management seeks to maintain a capital structure that will assure an adequate
level of capital to support anticipated asset growth and to absorb potential
losses.
The capital position of the Bank continues to meet regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier 1 risk-based capital, total risk-based capital, and
leverage ratios. Tier 1 capital consists of common and qualifying preferred
stockholders' equity less goodwill. Total risk-based capital consists of Tier 1
capital, qualifying subordinated debt, and a portion of the allowance for loan
losses. Risk-based capital ratios are calculated with reference to risk-weighted
assets. The leverage ratio compares Tier 1 capital to total average assets for
the most recent quarter end. The Bank's Tier 1 risk-based capital ratio was
7.26% at March 31, 2003, compared to 6.69% at December 31, 2002. The total
risk-based capital ratio was 11.36% at March 31, 2003, compared to 10.33% at
December 31, 2002. These ratios are in excess of the mandated minimum
requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was
6.39% at March 31, 2003, compared to 5.72% at December 31, 2002 and is also in
excess of the mandated minimum requirement of 4.00%. Based on these ratios, the
Bank is considered "well capitalized" under regulatory prompt corrective action
guidelines. The Company's Tier 1 risk-based capital ratio, total risk-based
capital ratio, and leverage ratio was 10.23%, 11.36% and 8.89%, respectively, at
March 31, 2003.
17
During 2002, the Company continued to borrow funds under a 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
$12.0 million. As strong asset growth continued, the Company provided additional
capital through a $7.0 million rights offering to existing stockholders in July
2002. Although the offering was successful, the Company believed that additional
capital would be necessary to fund future growth. In November and December 2002
the Company formed two financing subsidiaries in order to issue $18.0 million in
trust preferred securities through a private placement to unrelated parties. As
the $18.0 million in proceeds were in excess of current needs, the Company
repaid the total amount outstanding on its line of credit. The Company continues
to maintain its line of credit; however, it is currently in a renegotiation
process. Until the process is completed further advances would require the
correspondent's approval.
The ability of the Company to continue to grow is dependent on its earnings and
the ability to obtain additional funds for contribution to the Bank's capital,
through borrowing, the sale of additional common stock, or through the issuance
of additional trust preferred securities. In the event that the Company is
unable to obtain additional capital for the Bank on a timely basis, 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. The Company believes
that its current level of capital is sufficient to meet anticipated growth,
although there can be no assurance.
Recent Accounting Pronouncements
- --------------------------------
During the three months ended March 31, 2003 there were no new accounting
pronouncements requiring the Company's review and adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk, or
interest rate risk, as its net income is largely dependent on its net interest
income. Market risk is managed by the Company's Asset/Liability Management
Committee that formulates and monitors the performance of the Company based on
established levels of market risk as dictated by policy. In setting 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
repricing 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 rate sensitivity while enhancing net interest income by
periodically adjusting this asset/liability position.
One of the tools used by the Company to assess interest sensitivity on a monthly
basis is the static gap analysis that measures the cumulative differences
between the amounts of assets and liabilities maturing or re-pricing 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 re-pricing dates for various assets and liabilities as of
March 31, 2003. At that point in time, the Company had a cumulative net asset
sensitive twelve-month gap position of $2.3 million, or a positive 0.33% of
total earning assets. This 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 re-price than liabilities and should
decline slightly in a falling interest rate environment. 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
At March 31, 2003 Interest Sensitivity Periods
-------------------------------------------------------------------
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 $ 30,117 $ 34,232 $ 17,469 $ 14,923 $ 96,741
Federal funds sold 27,070 -- -- -- 27,070
Loans, held-for-sale 15,239 -- -- -- 15,239
Loans, net of unearned income 233,660 75,866 226,149 18,595 554,270
- ------------------------------------------------------------------------------------------------------------
Total earning assets $306,086 $110,098 $243,618 $ 33,518 $693,320
- ------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
NOW accounts $ 97,356 $ 6,791 $ 18,203 $ -- $122,350
Money market accounts 61,058 9,549 6,303 -- 76,910
Savings accounts 1,585 4,952 13,271 -- 19,808
Time deposits 27,185 158,493 112,380 91 298,149
Securities sold under agreement to
repurchase and federal funds 28,529 -- -- -- 28,529
purchased
Other borrowed funds -- 400 -- -- 400
Trust preferred capital notes 18,000 -- -- -- 18,000
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $233,713 $180,185 $150,157 $ 91 $564,146
- ------------------------------------------------------------------------------------------------------------
Cumulative maturity / interest $ 72,373 $ 2,286 $ 95,747 $129,174 $129,174
sensitivity gap
As % of total earnings assets 10.44% 0.33% 13.81% 18.63%
- ------------------------------------------------------------------------------------------------------------
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 December 31, 2002 and at that time
the model projected earnings would decrease by 5.1% if interest rates would
immediately fall by 200 basis points and would increase by 2.5% if interest
rates suddenly rose by 200 basis points. It is expected that projections for
changes in earnings, when the simulation model is run using data as of March 31,
2003, would be similar in result due to the slightly asset sensitive position
indicated in the gap analysis. Although there can be no assurance.
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
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.
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)
4.1 Junior Subordinated Indenture, dated as of November 15, 2002
between Virginia Commerce Bancorp, Inc. and The Bank of New York,
as Trustee (2)
4.2 Amended and Restated Declaration of Trust, dated as of November
15, 2002 among Virginia Commerce Bancorp, Inc., The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and Peter A. Converse, William K. Beauchesne
and Marcia J. Hopkins as Administrative Trustees (2)
4.3 Guarantee Agreement dated as of November 15, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York, as
Guarantee Trustee (2)
4.4 Junior Subordinated Indenture, dated as of December 19, 2002
between Virginia Commerce Bancorp, Inc. and The Bank of New York,
as Indenture Trustee (2)
4.5 Amended and Restated Declaration of Trust, dated as of December
19, 2002 among Virginia Commerce Bancorp, Inc., The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and Peter A. Converse, William K. Beauchesne
and Marcia J. Hopkins as Administrative Trustees (2)
4.6 Guarantee Agreement dated as of December 19, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York, as
Guarantee Trustee (2)
10.1 1998 Stock Option Plan (1)
11 Statement Regarding Computation of Per Share Earnings See Note 4
to the Consolidated Financial Statements included in this report
21 Subsidiaries of the Registrant:
Virginia Commerce Bank-Virginia
VCBI Capital Trust I-Delaware
VCBI Capital Trust II-Delaware
Subsidiaries of Virginia Commerce Bank:
Northeast Land and Development Corporation-Virginia
Virginia Commerce Insurance Agency, L.L.C.-Virginia
20
Exhibit No. Description
----------- -----------
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 January 17, 2003, the Company filed a current report on Form 8-K, under item
5 thereof, reflecting the announcement of earnings for the period ended December
31, 2002.
On April 14, 2003, 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,
2003.
On April 22, 2003, the Company filed a current report on Form 8-K, under item 5
thereof, reflecting the announcement of the declaration of a two for one stock
split in the form of a 100% stock dividend, payable May 30, 2003, to holders of
record on May 5, 2003.
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: May 5, 2003 BY /s/ Peter A. Converse
------------------------------------
Peter A. Converse, President and
Chief Executive Officer
Date: May 5, 2003 BY /s/ William K. Beauchesne
------------------------------------
William K. Beauchesne, Treasurer and
Chief Financial Officer
22
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: May 5, 2003 /s/ Peter A. Converse
---------------------
President and Chief Executive Officer
23
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: May 5, 2003 /s/ William K. Beauchesne
-------------------------
Treasurer and Chief Financial Officer
24