Back to GetFilings.com
UNITED STATES 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, 2004
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-28635
VIRGINIA COMMERCE BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1964895
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207
-------------------------------------------
(Address of Principal Executive Offices)
703-534-0700
------------
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check whether the registrant is an accelerated filer as defined in
Rule12b-2 of the Securities Exchange Act. Yes X . No .
--- ---
As of November 4, 2004 the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 11,041,604
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,
2004 2003
------------------ ----------------
ASSETS
Cash and due from banks $ 17,966 $ 22,434
Interest-bearing deposits with other banks 1,004 --
Securities (fair value: 2004, $173,242; 2003, $149,894) 172,689 149,245
Federal funds sold 28,655 31,622
Loans held-for-sale 7,618 3,513
Loans, net of allowance for loan losses of $9,468 in 2004 and
$7,457 in 2003 857,266 654,851
Bank premises and equipment, net 6,425 6,189
Accrued interest receivable 3,893 3,372
Other assets 11,028 9,898
----------- -----------
Total assets $ 1,106,544 $ 881,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand deposits $ 155,550 $ 119,785
Savings and interest-bearing demand deposits 371,145 340,122
Time deposits 424,978 313,604
----------- -----------
Total deposits $ 951,673 $ 773,511
Securities sold under agreements to repurchase and federal funds
purchased 45,136 30,887
Trust preferred capital notes 18,000 18,000
Accrued interest payable 1,543 1,024
Other liabilities 2,393 2,610
Commitments and contingent liabilities -- --
----------- -----------
Total liabilities $ 1,018,745 $ 826,032
=========== ===========
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par, 1,000,000 shares authorized and
un-issued $ -- $ --
Common stock, $1.00 par, 20,000,000 shares authorized, issued and
outstanding 2004, 11,041,423; 2003, 7,860,291 11,041 7,860
Surplus 37,116 17,891
Retained earnings 39,683 29,354
Accumulated other comprehensive income (loss), net (41) (13)
----------- -----------
Total stockholders' equity $ 87,799 $ 55,092
----------- -----------
Total liabilities and stockholders' equity $ 1,106,544 $ 881,124
=========== ===========
Notes to consolidated financial statements are an integral part of these
statements.
2
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------------- --------------- --------------- ----------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $13,430 $10,458 $36,650 $30,318
Interest and dividends on investment securities:
Taxable 1,527 1,086 4,074 2,719
Tax-exempt 59 71 191 204
Dividends 36 23 85 73
Interest on deposits with other banks 4 -- 4 --
Interest on federal funds sold 96 120 254 325
------- ------- ------- -------
Total interest and dividend income $15,152 $11,758 $41,258 $33,639
INTEREST EXPENSE:
Deposits $ 3,941 $ 3,255 $10,842 $ 9,728
Securities sold under agreements to repurchase
and federal funds purchased 85 31 152 91
Other borrowed funds -- 6 4 18
Trust preferred capital notes 236 204 651 630
------- ------- ------- -------
Total interest expense $ 4,262 $ 3,496 $11,649 $10,467
NET INTEREST INCOME: $10,890 $ 8,262 $29,609 $23,172
Provision for loan losses 698 323 2,005 1,087
------- ------- ------- -------
Net interest income after provision for loan losses $10,192 $ 7,939 $27,604 $22,085
NON-INTEREST INCOME:
Service charges and other fees $ 431 $ 392 $ 1,314 $ 1,191
Non-deposit investment services commissions 133 83 323 98
Fees and net gains on loans held-for-sale 867 1,892 2,419 4,746
Other 87 90 273 154
------- ------- ------- -------
Total non-interest income $ 1,518 $ 2,457 $ 4,329 $ 6,189
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 3,601 $ 3,322 $ 9,505 $ 9,398
Occupancy expense 830 814 2,364 2,380
Data processing expense 336 332 974 923
Other operating expense 1,140 1,013 3,390 2,730
------- ------- ------- -------
Total non-interest expense $ 5,907 $ 5,481 $16,233 $15,431
Income before taxes on income $ 5,803 $ 4,915 $15,700 $12,843
Provision for income taxes 1,992 1,651 5,365 4,324
------- ------- ------- -------
NET INCOME $ 3,811 $ 3,264 $10,335 $ 8,519
Earnings per common share, basic (1) $ 0.34 $ 0.34 $ 0.99 $ 0.88
Earnings per common share, diluted (1) $ 0.32 $ 0.30 $ 0.91 $ 0.80
(1) Adjusted to give effect to a five-for-four stock split in the form of a 25%
stock dividend paid July 15, 2004.
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, 2004 and 2003
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other Total
Preferred Common Retained Comprehensive Comprehensive Stockholders'
Stock Stock Surplus Earnings Income (Loss) Income Equity
---------- ---------- ---------- ---------- --------------- -------------- -------------
Balance, January 1, 2003 $ -- $ 3,739 $ 19,623 $ 17,807 $ 681 $ 41,850
Comprehensive Income:
Net Income 8,519 $ 8,519 8,519
Other comprehensive income (loss), net
of tax, unrealized holding losses arising
during the period (net of tax of $297) (577) (577) (577)
--------------
Total comprehensive income $ 7,942
==============
Issuance of common stock-
Stock options/warrants exercised -- 186 1,895 -- -- 2,081
100% stock split -- 3,894 (3,894) -- -- --
---------- ---------- ---------- ---------- --------------- -------------
Balance, September 30, 2003 $ -- $ 7,819 $ 17,624 $ 26,326 $ 104 $ 51,873
========== ========== ========== ========== =============== =============
Balance, January 1, 2004 $ -- $ 7,860 $ 17,891 $ 29,353 $ (13) $ 55,091
Comprehensive Income:
Net Income 10,335 $10,335 10,335
Other comprehensive income (loss), net
of tax, unrealized holding losses arising
period (net of tax of $15) (28) (28) (28)
--------------
Total comprehensive income $10,307
==============
Issuance of common stock-
Stock options/warrants exercised -- 84 516 -- -- 600
Follow-on offering, net -- 891 20,915 -- -- 21,806
25% stock split paid July 15, 2004 -- 2,206 (2,206) -- -- --
Cash paid in lieu of fractional shares -- -- -- (5) -- (5)
---------- ---------- ---------- ---------- --------------- -------------
Balance, September 30, 2004 $ -- $ 11,041 $ 37,116 $ 39,683 $ (41) $ 87,799
========== ========== ========== ========== =============== =============
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,
----------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,335 $ 8,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 782 758
Provision for loan losses 2,005 1,087
Deferred tax benefit (689) (414)
Amortization of security premiums and (accretion) of discounts (137) (9)
Origination of loans held-for-sale (131,779) (249,307)
Sales of loans 127,675 258,378
Changes in other assets and other liabilities:
Increase in accrued interest receivable (521) (328)
Increase in other assets (425) (6,202)
Increase (decrease) in other liabilities 302 (618)
--------- ---------
Net Cash Provided by Operating Activities $ 7,548 $ 11,864
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans $(204,421) $ (98,589)
Purchase of securities available-for-sale (71,473) (118,501)
Purchase of securities held-to-maturity (2,586) (41,143)
Proceeds from principal payments on securities available-for-sale 3,004 6,713
Proceeds from principal payments on securities held-to-maturity 3,637 4,104
Proceeds from calls and maturities of securities available-for-sale 42,368 48,070
Proceeds from calls and maturities of securities held-to-maturity 1,698 5,000
Purchase of bank premises and equipment (1,018) (617)
--------- ---------
Net Cash (Used In) Investing Activities $(228,791) $(194,963)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 178,162 $ 167,839
Net increase in repurchase agreements 14,249 698
Net proceeds from issuance of capital stock 22,406 2,081
Cash paid in lieu of fractional shares (5) --
--------- ---------
Net Cash Provided by Financing Activities $ 214,812 $170,618
Net (Decrease) In Cash and Cash Equivalents (6,431) (12,481)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 54,056 43,978
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 47,625 $ 31,497
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Unrealized (loss) on available-for-sale securities $ (43) $ (874)
Tax benefits on stock options and warrants exercised 237 1,372
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes Paid $ 5,456 $ 3,918
Interest Paid 11,130 10,483
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, 2004 and
December 31, 2003, the results of operations for the three and nine months
ended September 30, 2004 and 2003, and statements of cash flows and
stockholders' equity for the nine months ended September 30, 2004 and
2003. These statements should be read in conjunction with the Company's
annual report on Form 10-K for the period ended December 31, 2003.
Operating results for the three and nine month periods ended September 30,
2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004.
2. INVESTMENT SECURITIES
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of September 30, 2004 are as follows (dollars in
thousands):
------------------- ----------------- --------------- -------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------- ----------------- --------------- -------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 108,648 $ 347 $ (508) $ 108,487
U.S. Treasuries 9,942 -- (9) 9,933
Domestic corporate debt obligations 6,000 17 -- 6,017
Obligations of states and political subdivisions 1,252 90 -- 1,342
Restricted stock:
Federal Reserve Bank 1,442 -- -- 1,442
Federal Home Loan Bank 1,598 -- -- 1,598
Community Bankers' Bank 55 -- -- 55
--------- --------- --------- ---------
$ 128,937 $ 454 $ (517) $ 128,874
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 34,891 $ 426 $ -- $ 35,317
Obligations of states and political subdivisions 8,432 186 (93) 8,525
Domestic corporate debt obligations 492 34 -- 526
--------- --------- --------- ---------
$ 43,815 $ 646 $ (93) $ 44,368
========= ========= ========= =========
6
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of December 31, 2003 are as follows (dollars in
thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------- ---------------- ---------------- -------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 93,363 $ 466 $ (555) $ 93,274
Domestic corporate debt obligations 6,000 -- (5) 5,995
Obligations of states and political subdivisions 1,220 75 -- 1,295
Restricted stock:
Federal Reserve Bank 758 -- -- 758
Federal Home Loan Bank 1,355 -- -- 1,355
Community Bankers' Bank 55 -- -- 55
--------- --------- --------- ---------
$ 102,751 $ 541 $ (560) $ 102,732
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 38,490 $ 476 $ -- $ 38,966
Obligations of states and political subdivisions 7,535 155 (38) 7,652
Domestic corporate debt obligations 488 56 -- 544
--------- --------- --------- ---------
$ 46,513 $ 687 $ (38) $ 47,162
========= ========= ========= =========
Provided below is a summary of securities which were in an unrealized loss
position at September 30, 2004. Of the total securities in an unrealized loss
position for less than twelve months, 83.1%, or twenty-six positions, were U.S.
Government Agency obligations with maturities ranging one to ten years. The
Company has the ability and intent to hold these securities until such time as
the value recovers or the securities mature. These unrealized losses are
attributable to changes in market interest rates and not the credit quality of
the issuer.
- --------------------------------------------------------------------------------------------------------------------
At September 30, 2004 LESS THAN 12 MONTHS 12 MONTHS OF LONGER TOTAL
- --------------------------------------------------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
(Dollars in thousands) Losses Losses Losses
- --------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 63,479 $ (508) -- -- $ 63,479 $ (508)
U.S. Treasuries 9,933 (9) -- -- 9,933 (9)
- --------------------------------------------------------------------------------------------------------------------
$ 73,412 $ (517) -- -- $ 73,412 $ (517)
- -------------------------------------------------------------------------- -----------------------------------------
HELD-TO-MATURITY:
Obligations of states/political
subdivisions $ 2,987 $ (93) -- -- $ 2,987 $ (93)
- --------------------------------------------------------------------------------------------------------------------
7
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. LOANS
Major classifications of loans are summarized as follows:
September 30, 2004 December 31, 2003
------------------------------------------
(In Thousand of Dollars)
Commercial $ 80,622 $ 61,178
Real estate-one-to-four family residential 112,158 88,789
Real estate-multi-family residential 38,045 29,954
Real estate-non-farm, non-residential 408,538 325,668
Real estate-construction 225,483 153,400
Consumer 6,065 6,061
--------- ---------
Total Loans 870,911 665,050
Less unearned income (4,177) (2,742)
Less allowance for loan losses (9,468) (7,457)
--------- ---------
Loans, net $ 857,266 $ 654,851
========= =========
4. EARNINGS PER SHARE
The following shows the weighted average number of shares used in computing
earnings per share and the effect on the weighted average number of shares of
diluted potential common stock. The weighted average number of shares have been
adjusted to give effect to a five-for-four stock split in the form of a 25%
stock dividend paid in July 2004.
Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Per Per
Share Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic earnings per share 10,412,344 $0.99 9,705,670 $0.88
----- -----
Effect of dilutive securities:
Stock options 838,951 850,130
Warrants 45,736 41,746
---------- ----------
Diluted earnings per share 11,297,031 $0.91 10,597,546 $0.80
========== ===== ========== =====
8
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. STOCK COMPENSATION PLAN
At September 30, 2004, the Company had a stock-based compensation plan. The
Company accounts for the plan under the recognition and measurement principles
of APB Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share for
the nine months ended September 30, 2004, and 2003 had the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, been adopted.
NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts) SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
- ----------------------------------------------------------------------------------------------------
NET INCOME, AS REPORTED $ 10,335 $ 8,519
Deduct: total stock-based employee compensation
expense determined based on fair value
method of awards, net of tax (408) (282)
PRO FORMA NET INCOME $ 9,927 $ 8,237
BASIC EARNINGS PER SHARE:
As reported $0.99 $0.88
Pro forma $0.95 $0.85
DILUTED EARNING PER SHARE:
As reported $0.91 $0.80
Pro Forma $0.88 $0.78
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2004, and 2003, respectively: price volatility of
29.61% and 28.55%, risk-free interest rates of 4.37% and 4.02%, dividend rate of
..03% and .04% and expected lives of 10 years.
9
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
6. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital ratios as of September 30, 2004 with the
minimum regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 12.20% 8.00% --
Bank 12.10% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 11.20% 4.00% --
Bank 9.19% 4.00% 6.00%
Leverage Ratio:
Company 9.80% 4.00% --
Bank 8.10% 4.00% 5.00%
7. TRUST PREFERRED SECURITIES
On November 13, 2002, the Company completed a private placement issuance of $3.0
million of trust preferred securities through a newly formed, wholly-owned,
subsidiary trust (VCBI Capital Trust I). The securities bear a floating rate of
interest, adjusted semi-annually, of 340 basis points over six month Libor,
currently 4.94%, with a maximum rate of 12.0% until November 15, 2007. The
securities have a thirty year term and are callable at par beginning November
15, 2007. On December 19, 2002, the Company completed a separate private
placement issuance of $15.0 million of trust preferred securities through
another newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II).
These securities bear a floating rate of interest, adjusted semi-annually, of
330 basis points over six month Libor, currently 5.17%, with a maximum rate of
11.9% until December 30, 2007. These securities also have a thirty year term and
are callable at par beginning December 30, 2007. The principal asset of each
trust is a similar amount of the Company's junior subordinated debt securities
with like maturities and interest rates to the trust preferred securities. The
obligations of the Company with respect to the issuance of the trust preferred
securities constitute a full and unconditional guarantee by the Company of each
Trust's obligations with respect to the trust preferred securities to the extent
set forth in the related guarantees. Subject to certain exceptions and
limitations, the Company may elect from time to time to defer interest payments
on the junior subordinated debt securities, resulting in a deferral of
distribution payments on the related trust preferred securities.
The Trust Preferred Securities may be included in Tier 1 capital for regulatory
capital adequacy purposes up to 25.0% of Tier 1 capital after its inclusion. The
portion of the trust preferred securities not qualifying as Tier 1 capital may
be included as part of total qualifying capital in Tier 2 capital. All of the
trust preferred securities currently qualify for inclusion in Tier 1 capital.
NOTE 8: SEGMENT REPORTING
In accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" the Company has two reportable segments, its community
banking operations and its mortgage banking division. Community banking
operations, the major segment, involves making loans and gathering deposits from
individuals and businesses in the Bank's market area, while the mortgage banking
division originates and sells mortgage loans, serving released, on one-to-four
family residential properties. Revenues from mortgage lending consist of
interest earned on mortgage loans held-for-sale, loan origination fees, and net
gains on the sale of loans in the secondary market. The Bank provides the
mortgage division with short term funds to originate loans and charges it
interest on the funds based on what the Bank earns on overnight funds. Expenses
include both fixed overhead and variable costs on originated loans such as loan
officer commissions, document preparation and courier fees. The following table
presents segment information for the nine months ended September 30, 2004, and
2003. Eliminations consist of overhead and interest charges by the Bank to the
mortgage lending division.
10
- ---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2004
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) Community Mortgage
Banking Lending Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 40,956 $ 302 $ -- $ 41,258
Non-interest income 1,910 2,419 -- 4,329
- ---------------------------------------------------------------------------------------------------------------------
Total operating income $ 42,866 $ 2,721 $ -- $ 45,587
Interest expense $ 11,649 $ 51 $ (51) $ 11,649
Provision for loan losses 2,005 -- -- 2,005
Non-interest expense 14,377 1,892 (36) 16,233
Total operating expense $ 28,031 $ 1,943 $ (87) $ 29,887
- ---------------------------------------------------------------------------------------------------------------------
Income before taxes on income $ 14,835 $ 778 $ 87 $ 15,700
Provision for income taxes 5,092 273 -- 5,365
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 9,743 $ 505 $ 87 $ 10,335
=====================================================================================================================
Total Assets $1,098,814 $ 7,730 $ -- $1,106,544
=====================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) Community Mortgage
Banking Lending Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 32,970 $ 669 $ -- $ 33,639
Non-interest income 1,443 4,746 -- 6,189
- ---------------------------------------------------------------------------------------------------------------------
Total operating income $ 34,413 $ 5,415 $ -- $ 39,828
Interest expense $ 10,467 $ 108 $ (108) $ 10,467
Provision for loan losses 1,087 -- -- 1,087
Non-interest expense 12,475 2,987 (31) 15,431
Total operating expense $ 24,029 $ 3,095 $ (139) $ 26,985
=====================================================================================================================
Income before taxes on income $ 10,384 $ 2,320 $ 139 $ 12,843
Provision for income taxes 3,535 789 -- 4,324
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 6,849 $ 1,531 $ 139 $ 8,519
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 830,778 $ 10,052 $ -- $ 840,830
- ---------------------------------------------------------------------------------------------------------------------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
This management's discussion and analysis and other portions of this report,
contain forward-looking statements within the meaning of the Securities and
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases,
forward-looking statements can be identified by use of words such as "may,"
"will," "anticipates," "believes," "expects," "plans," "estimates," "potential,"
"continue," "should," and similar words or phrases. These statements are based
upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policy, competitive factors,
and other conditions which by their nature, are not susceptible to accurate
forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the
forward-looking statements are based, actual future operations and results may
differ materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward-looking statements. The Company's
past results are not necessarily indicative of future performance.
Non-GAAP Presentations
This management's discussion and analysis refers to the efficiency ratio, which
is computed by dividing non-interest expense by the sum of net interest income
on a tax equivalent basis and non-interest income. This is a non-GAAP financial
measure which we believe provides investors with important information regarding
our operational efficiency. Comparison of our efficiency ratio with those of
other companies may not be possible because other companies may calculate the
efficiency ratio differently. The Company, in referring to its net income, is
referring to income under accounting principles generally accepted in the United
States, or "GAAP".
General
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Virginia Commerce Bancorp, Inc.
and subsidiaries (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this report. The Company is the parent bank holding company for
Virginia Commerce Bank (the "Bank"), a Virginia state-chartered bank that
commenced operations in May 1988. The Bank pursues a traditional community
banking strategy, offering a full range of business and consumer banking
services through fourteen branch offices, two residential mortgage offices and
one investment services office and has recently signed leases and a letter of
intent for four additional Northern Virginia locations that are tentatively
scheduled to be open between November 2004 and July 2005.
Headquartered in Arlington, Virginia, Virginia Commerce serves the Northern
Virginia suburbs of Washington, D.C., including Arlington, Fairfax and Prince
William Counties and the cities of Alexandria, Falls Church and Manassas. Its
service area also covers, to a lesser extent, Washington, D.C. and the nearby
Maryland counties of Montgomery and Prince Georges. The Bank's customer base
includes small-to-medium size businesses including firms that have contracts
with the U.S. government, associations, retailers and industrial businesses,
professionals and their firms, business executives, investors and consumers.
Additionally, the Bank has strong market niches in commercial real estate and
construction lending.
Critical Accounting Policies
During the quarter ended September 30, 2004 there were no changes in the
Company's critical accounting policies as reflected in the last report.
12
The Company's consolidated 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.
Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance for loans identified as impaired. Impairment testing includes
consideration of the borrower's overall financial condition, resources and
payment record, support available from financial guarantors and the fair market
value of collateral. These factors are combined to estimate the probability and
severity of inherent losses. When impairment is identified, then a specific
reserve is established based on the Company's calculation of the loss embedded
in the individual loan. Large groups of smaller balance, homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for impairment.
The formula allowance is used for estimating the loss on internally risk rated
loans exclusive of those identified as impaired. The loans meeting the criteria
for special mention, substandard, doubtful and loss, as well as, impaired loans
are segregated from performing loans within the portfolio. Internally classified
loans are then grouped by loan type (commercial, commercial real estate,
commercial construction, residential real estate, residential construction or
installment). Each loan type is assigned an allowance factor based on
management's estimate of the associated risk, complexity and size of the
individual loans within the particular loan category. Classified loans are
assigned a higher allowance factor than non-rated loans due to management's
concerns regarding collectibility or management's knowledge of particular
elements surrounding the borrower. Allowance factors grow with the worsening of
the internal risk rating. The unallocated formula is used to estimate the loss
of non-classified loans and loans identified for impairment testing for which no
impairment was identified. These un-criticized loans are also segregated by loan
type and allowance factors are assigned by management based on delinquencies,
loss history, trends in volume and terms of loans, effects of changes in lending
policy, the experience and depth of management, national and local economic
trends, concentrations of credit, quality of the loan review system and the
effect of external factors (i.e. competition and regulatory requirements). The
factors assigned differ by loan type. The unallocated allowance captures losses
whose impact on the portfolio has occurred but has yet to be recognized in
either the formula or specific allowance. Allowance factors and the overall size
of the allowance may change from period to period based on management's
assessment of the above described factors and the relative weights given to each
factor. Further information regarding the allowance for loan losses is provided
under the caption: Allowance for Loan Losses/Provision for Loan Loss Expense,
later in this report.
Results of Operations
For the nine months ended September 30, 2004, the Bank experienced significant
growth in assets, loans and deposits, maintained strong asset quality, increased
its capital levels through a follow-on offering in May 2004 and opened its
fourteenth branch location. Total assets increased $225.4 million, or 25.6%,
from $881.1 million at December 31, 2003, to $1.1 billion at September 30, 2004,
fueled by growth in deposits of $178.2 million, or 23.0%, from $773.5 million at
December 31, 2003, to $951.7 million, growth in repurchase agreements from $30.9
million at December 31, 2003, to $45.1 million, or 46.1%, and $21.8 million in
net proceeds from the follow-on offering.
13
Loans, net of the allowance for loan losses and excluding loans held-for-sale,
increased $202.4 million, or 30.9%, from $654.9 million at December 31, 2003, to
$857.3 million at September 30, 2004, and represented 90.1% of total deposits at
September 30, 2004, compared to 84.7% at December 31, 2003. The majority of the
growth in loans occurred in construction and non-farm, non-residential real
estate loans with construction loans increasing $72.1 million, or 47.0%, from
$153.4 million at December 31, 2003, to $225.5 million at September 30, 2004,
and non-farm, non-residential real estate loans increasing by $82.8 million, or
25.4%, from $325.7 million at December 31, 2003, to $408.5 million. One-to-four
family residential real estate loans represented the next largest increase
rising $23.4 million, or 26.3%, from $88.8 million at December 31, 2003, to
$112.2 million at September 30, 2004, with $12.1 million of the increase and
$54.3 million, or 48.4%, of the total one-to-four family residential real estate
loans represented by home equity lines of credit. Commercial loans increased
$19.4 million, or 31.2%, from $61.2 million at December 31, 2003, to $80.6
million at September 30, 2004, and currently represent 9.3% of total loans. Over
the past year the Bank has hired several commercial loan officers it an attempt
to increase its commercial loan business.
Loans held-for-sale, which represent one-to-four family residential real estate
loans originated on a pre-sold basis to various investors, increased $4.1
million from $3.5 million at December 31, 2003, to $7.6 million at September 30,
2004, with higher levels of originations in September 2004 versus December 2003;
however, over the nine months ended September 30, 2004, total originations were
down $117.5 million, or 47.1%, from $249.3 million during the nine months ended
September 30, 2003, to $131.8 million in the current period due to lower levels
of refinancing activity. Of the $131.8 million in originations year-to-date,
$61.4 million, or 46.6%, represented loans for refinance purposes versus $194.1
million, or 77.8%, of the $249.3 million in originations during the same period
in 2003. The Bank is seeking to expand its commissioned loan officer base to
originate more purchase money loans.
Investment securities, which the Bank maintains as a secondary source of
liquidity, for providing a pool of collateral for public deposits and repurchase
agreements and for helping to manage interest rate risk, increased $23.5
million, or 15.7%, from $149.2 million at December 31, 2003, to $172.7 million
at September 30, 2004. The increases were limited to short-term U.S. Government
Treasuries and Agency obligations in the available-for-sale portfolio as
interest rates have continued to be historically low and the Bank has avoided
the longer end of the yield curve for investment purposes. This strategy is
expected to provide the Bank with greater flexibility and opportunity in the
future as interest rates rise.
Deposit growth occurred in all categories with non-interest bearing demand
deposits increasing $35.8 million, or 29.9%, from $119.8 million at December 31,
2003, to $155.6 million at September 30, 2004, savings and interest-bearing
demand deposits increasing $31.0 million, or 9.1%, and time deposits increasing
$111.4 million, or 35.5%, from $313.6 million at December 31, 2003, to $425.0
million. The majority of the Bank's deposits are attracted from individuals and
businesses in the Northern Virginia and the Metropolitan Washington, D.C. area,
and the interest rates the Bank pays are generally near the top of the local
market. Due to these rates paid, the Bank will also occasionally attract
deposits from out-of-market financial institutions and the funds of public
entities; however, those deposits bear the same interest rates paid by the Bank
on comparable deposits from local consumers and businesses. As of September 30,
2004, approximately $76.9 million, or 8.1%, of total deposits are from these
out-of-market financial institutions and public entities.
For the three months ended September 30, 2004, total assets increased $56.3
million, or 5.4%, from $1.05 billion at June 30, 2004, to $1.11 billion at
September 30, 2004, total deposits rose $50.1 million, or 5.5%, from $901.6
million to $951.7 million, and loans, net of the allowance for loans losses and
excluding loans held-for-sale, grew $77.1 million, or 9.9%, from $780.2 million
to $857.3 million. As loan growth outpaced deposits for the three-month period
the balance in fed funds sold declined $15.7 million from $44.3 million at June
30, 2004, to $28.6 at September 30, 2004, and balances in investment securities
were mostly unchanged.
For the nine months ended September 30, 2004, net income of $10.3 million
reflected an increase of 21.3% compared to $8.5 million for the nine months
ended September 30, 2003, as net interest income increased $6.4 million, or
27.8%, due to overall growth, non-interest income fell $1.9 million, or 30.1%,
due to lower fees and net gains from mortgage lending operations, non-interest
expense increased by $802 thousand, or 5.2%, due also to overall growth, and
provisions for loan losses were up $918 thousand, or 84.5%, from $1.1 million
for the nine months ended September 30, 2003, to $2.0 million for the nine
months ended September 30, 2004, as loans, net of the allowance for loan losses
and excluding loans held-for-sale, increased by $202.4 million over the nine
month period versus growth of $97.5 million in the nine months ended September
30, 2003. Diluted earnings per share, adjusted giving effect to a five-for-four
stock split in the form of a 25% stock dividend paid July 15, 2004, of $0.91
were up $0.11, or 13.8%, from $0.80 for the comparable period in 2003. The
Company's annualized return on average assets and return on average equity were
1.39% and 19.97% for the current nine month period compared to 1.50% and 24.17%
for the nine months ended September 30, 2003.
14
For the three months ended September 30, 2004, net income of $3.8 million
increased $547 thousand, or 16.8%, compared to $3.3 million for the same period
in 2003 as net interest income rose $2.6 million due to growth in earning
assets, non-interest income declined by $939 thousand due to lower levels of
mortgage lending activity and non-interest expenses were up $426 thousand, or
7.8%. Provisions for loan losses were also up during the period, from $323
thousand for the three months ended September 30, 2003, to $698 thousand in the
current period, again due to a higher level of growth in loans in 2004 versus
2003. Diluted earnings per share increased $0.02, or 6.7%, from $0.30 for the
three months ended September 30, 2003, to $0.32 for the three month period ended
September 30, 2004. The return on average assets and return on average equity
were 1.40% and 17.72% for the three months ended September 30, 2004, compared to
1.54% and 25.80% for the same period in 2003.
Overall, while the Company's net interest margin declined for the nine month
period ended September 30, 2004, due to lower yields on loans and investment
securities, net interest income increased due to strong balance sheet growth,
and in particular growth in loans. However, the growth in loans required higher
provisions for loan losses and fees and net gains from mortgage lending
operations were down considerably due to lower refinancing activity.
Non-interest expense was also higher, due to increased levels of incentive
compensation, the opening of the Bank's fourteenth branch location and overall
growth, but the increase in non-interest expense was fairly minimal at 5.2% and
as a result the efficiency ratio improved from 52.33% to 47.67%. For the three
month period ended September 30, 2004, the overall theme was the same with
higher loan loss provisions, lower fees and net gains from mortgage lending
operations and slightly higher non-interest expenses, offset by higher
net-interest income due to growth in loans.
Stockholders' equity increased $32.7 million, or 59.4%, from $55.1 million at
December 31, 2003, to $87.8 million at September 30, 2004, on earnings of $10.3
million, $21.8 million in net proceeds from the issuance of 1.1 million shares
of common stock in a follow-on offering in May 2004, and $600 thousand in
proceeds and tax benefits from the exercise of stock options and warrants by
Company directors and officers. Since September 30, 2003, stockholders' equity
has increased $35.9 million, or 69.3%, with $13.4 million in earnings, $21.8
million in net proceeds from the follow-on offering and $909 thousand in
proceeds and tax benefits from the exercise of stock options and warrants by
Company directors and officers. On July 15, 2004, the Company recorded a
five-for-four stock split in the form of a 25% stock dividend.
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 $6.4 million, or 27.8%, from $23.2 million for the nine months
ended September 30, 2003, to $29.6 million for the nine month period ended
September 30, 2004, and increased $2.6 million, or 31.8%, from $8.3 million for
the three months ended September 30, 2003, to $10.9 million for the three months
ended September 30, 2004. Increases for both periods were due to significant
growth in earning assets as the Company's net interest margin was up slightly
from 4.11% in the third quarter of 2003 to 4.14% for the current three-month
period and fell from 4.32% for the nine months ended September 30, 2003, to
4.16% year-to-date.
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.
However, over the past year yields on earning assets have fallen more than the
costs of interest-bearing liabilities as deposit rates began to bottom out while
yields on investments securities and loans continued to drop as new investments
and loans were added at lower rates. For the nine months ended September 30,
2004, the yield on earning assets fell forty-seven basis points from 6.26% for
the nine months ended September 30, 2003, to 5.79% for the nine months ended
September 30, 2004, while the average rate paid on interest-bearing liabilities
fell forty basis points from 2.39% to 1.99%. As a result the net interest margin
declined for the period. In the third quarter 2004, loans as a percentage of
total earning assets increased and together with increases in the federal funds
target rate and prime lending rates, the net interest margin improved from 4.11%
for the three months ended September 30, 2003, to 4.14%. The Company expects
that with continued increases in rates by the Federal Reserve its net interest
margin will continue to slowly increase; however, there can be no assurance that
interest rates will continue to increase, or that competitive conditions or
other factors will enable the Company to take advantage of increasing rates to
increase net income.
15
The following table shows the average balance sheets for each of the three and
nine month periods ended September 30, 2004, and 2003. In addition, the amounts
of interest earned on earning assets, with related yields on a tax-equivalent
basis, and interest expense on interest-bearing liabilities, with related rates,
are shown. Loans placed on a non-accrual status are included in the average
balances. Net loan fees and late charges included in interest income on loans
totaled $674 thousand and $522 thousand for the three month period ended
September 30, 2004 and 2003, respectively, and totaled $1.8 million and $1.5
million for the nine month periods.
-----------------------------------------------------------------------------------
Three months ended September 30,
-----------------------------------------------------------------------------------
2004 2003
-------------- ---------- ------------- ------------- -------------- -----------
(Dollars in thousands) Interest Average Interest Average
Average Income- Yields Average Income- Yields
Balance Expense /Rates Balance Expense /Rates
-------------- ---------- ------------- ------------- -------------- -----------
ASSETS
Securities (1) $ 180,510 $ 1,622 3.67% $ 131,375 $ 1,180 3.72%
Loans, net of unearned income 838,077 13,430 6.27% 617,821 10,458 6.62%
Interest-bearing deposits in other banks 751 4 2.08% -- -- --
Federal funds sold 28,655 96 1.30% 52,984 120 0.89%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-EARNING ASSETS $1,047,993 $ 15,152 5.75% $ 802,180 $ 11,758 5.84%
Other assets 31,593 35,706
---------- ----------
TOTAL ASSETS $1,079,586 $ 837,886
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 215,763 $ 740 1.36% $ 173,408 $ 646 1.48%
Money market accounts 125,449 440 1.39% 90,940 331 1.44%
Savings accounts 20,869 29 0.56% 32,671 39 0.48%
Time deposits 410,498 2,732 2.64% 307,325 2,239 2.89%
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing deposits $ 772,579 $ 3,941 2.02% $ 604,344 $ 3,255 2.14%
Securities sold under agreements to
repurchase and federal funds purchased 43,953 85 0.77% 33,621 31 0.36%
Other borrowed funds -- -- -- 400 6 5.93%
Trust preferred capital notes 18,000 236 5.13% 18,000 204 4.44%
---------- ---------- ---- ---------- ---------- ----
TOTAL INTEREST-BEARING LIABILITIES $ 834,532 $ 4,262 2.03% $ 656,365 $ 3,496 2.11%
Demand deposits and other liabilities 159,715 131,344
---------- ----------
TOTAL LIABILITIES $ 994,247 $ 787,699
Stockholders' equity 85,339 50,187
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,079,586 $ 837,886
========== ==========
Interest rate spread 3.72% 3.73%
Net interest income and margin $ 10,890 4.14% $ 8,262 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 stockholders' equity. Interest
income includes the effects of taxable-equivalent adjustments, using the
appropriate marginal federal income tax rate of 35.0%, to increase tax-exempt
interest income to a tax-equivalent basis.
16
-----------------------------------------------------------------------------------
Nine months ended September 30,
-----------------------------------------------------------------------------------
2004 2003
------------ ------------ ------------- ------------- -------------- -----------
(Dollars in thousands) Interest Average Interest Average
Average Income- Yields Average Income- Yields
Balance Expense /Rates Balance Expense /Rates
-------------- ---------- ------------- ------------- -------------- -----------
ASSETS
Securities (1) $ 156,907 $ 4,350 3.79% $ 101,012 $ 2,996 4.12%
Loans, net of unearned income 762,055 36,650 6.32% 579,436 30,318 6.90%
Interest-bearing deposits in other banks 259 4 2.13% -- -- --
Federal funds sold 31,989 254 1.04% 40,714 325 1.05%
------------ ------------ ------------- ------------- -------------- -----------
TOTAL INTEREST-EARNING ASSETS $ 951,210 $ 41,258 5.79% $ 721,162 $ 33,639 6.26%
Other assets 39,061 37,089
------------ -------------
TOTAL ASSETS $ 990,271 $ 758,251
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 210,915 $2,107 1.33% $ 143,052 $1,730 1.62%
Money market accounts 118,471 1,229 1.38% 91,707 1,023 1.49%
Savings accounts 19,961 81 0.54% 22,647 151 0.89%
Time deposits 375,225 7,425 2.64% 285,928 6,824 3.08%
------------ ------------ ------------- ------------- -------------- -----------
Total interest-bearing deposits $ 724,572 $ 10,842 1.99% $ 543,334 $9,728 2.39%
Securities sold under agreement to
repurchase and federal funds purchased 36,590 152 0.55% 32,245 91 0.38%
Other borrowed funds 410 4 1.23% 400 18 5.93%
Trust preferred capital notes 18,000 651 4.76% 18,000 630 4.62%
------------ ------------ ------------- ------------- -------------- -----------
TOTAL INTEREST-BEARING LIABILITIES $ 779,572 $11,649 1.99% $ 593,979 $ 10,467 2.35%
Demand deposits and other liabilities 141,767 117,153
------------ -------------
TOTAL LIABILITIES $ 921,339 $ 711,132
Stockholders' equity 68,932 47,119
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 990,271 $ 758,251
============ =============
Interest rate spread 3.80% 3.91%
Net interest income and margin $ 29,609 4.16% $ 23,172 4.32%
(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 35.0%, to increase tax-exempt
interest income to a tax-equivalent basis.
17
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, 2004, the
Bank recorded a net recovery of $6 thousand compared to a net charge-off of $43
thousand for the same period in 2003, while the provision for loan loss expense
for the nine months ended September 30, 2004, was $2.0 million compared to $1.1
million in 2003. This increase in the provision for loan loss expense is
reflective of the significant growth in loans during the period with loans, net
of the allowance for loans losses and excluding loans held-for-sale increasing
$202.4 million for the nine months ended September 30, 2004, as compared to an
increase of $97.5 million for the nine months ended September 30, 2003. As of
September 30, 2004, the allowance for loan losses represented 1.09% of total
loans versus 1.12% at December 31, 2003, and September 30, 2003.
Management feels that the allowance for loan losses is adequate; however, there
can be no assurance that additional provisions for loan losses will not be
required in the future, including as a result of changes in the economic
assumptions underlying management's estimates and judgments, adverse
developments in the economy, on a national basis or in the Company's market
area, or changes in the circumstances of particular borrowers.
The Company generates a quarterly analysis of the allowance for loan losses,
with the objective of quantifying portfolio risk into a dollar figure of
inherent losses, thereby translating the subjective risk value into an objective
number. Emphasis is placed on semi-annual independent external loan reviews and
monthly internal reviews. The determination of the allowance for loan losses is
based on applying and summing the results of eight qualitative factors and one
quantitative factor to each category of loans along with any specific allowance
for impaired and adversely classified loans within the particular category. Each
factor is assigned a percentage weight and that total weight is applied to each
loan category. The resulting sum from each loan category is then combined to
arrive at a total allowance for all categories. Factors are different for each
loan category. Qualitative factors include: levels and trends in delinquencies
and non-accruals, trends in volumes and terms of loans, effects of any changes
in lending policies, the experience, ability and depth of management, national
and local economic trends and conditions, concentrations of credit, quality of
the Company's loan review system, and regulatory requirements. The total
allowance required thus changes as the percentage weight assigned to each factor
is increased or decreased due to its particular circumstance, as the various
types and categories of loans change as a percentage of total loans and as
specific allowances are required due to an increase in impaired and adversely
classified loans.
The following schedule summarizes the changes in the allowance for loan losses:
Nine Months Nine Months Twelve Months
Ended Ended Ended
September 30, 2004 September 30, 2003 December 31, 2003
---------------------- ---------------------- ----------------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 7,457 $ 5,924 $ 5,924
Provision charged against income 2,005 1,087 1,575
Recoveries:
Consumer loans 4 11 12
Commercial loans 12 1 2
Losses charged to reserve:
Consumer loans (10) (25) (26)
Commercial loans -- (30) (30)
------- ------- -------
Net (charge-offs) recoveries 6 (43) (42)
Allowance, at end of period $ 9,468 $ 6,968 $ 7,457
======= ======= =======
Ratio of net charge-offs to average loans
outstanding during period .00% .01% .01%
Allowance for loan losses to total loans 1.09% 1.12% 1.12%
18
Risk Elements and Non-performing Assets
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed real properties). The total
non-performing assets and loans that are ninety days or more past due and still
accruing interest decreased 84.1% from $1.4 million at December 31, 2003, to
$226 thousand at September 30, 2004, and fell $934 thousand, or 80.5%, from $1.2
million at September 30, 2003. The declines in both periods was due to the
payoff of a troubled debt restructuring loan for $875 thousand in June 2004, as
well as payoffs on other smaller non-accrual and/or impaired loans.
Loans are placed in non-accrual status when in the opinion of management the
collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
The ratio of non-performing assets and loans past due ninety days and still
accruing to total loans decreased from 0.21% at December 31, 2003, to 0.03% at
September 30, 2004, and decreased from 0.19% at September 30, 2003. As noted
above, the decrease in the ratio for both periods was due mostly to the payoff
of a troubled debt restructuring loan for $875 thousand. The Company expects its
ratio of non-performing assets to total loans to remain below its peers;
however, there can be no assurance that total non-performing assets will remain
low since there were $2.3 million in potential problem loans not reflected in
total non-performing assets for which management has identified certain 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. In
addition, there may be other loans in the Company's portfolio which may not
ultimately be repaid in accordance with their terms, but for which management
has not detected additional risk factors.
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 September 30, 2004, September 30, 2003, and
December 31, 2003, the Company held no foreclosed real properties.
Total non-performing assets consist of the following:
September 30, 2004 September 30, 2003 December 31, 2003
----------------------- ------------------------ --------------------------
(In Thousands of Dollars)
Non-accrual loans $ 24 $ 247 $ 46
Impaired loans 197 15 416
Restructured Loans -- 875 875
----- ------- -------
Total non-performing assets $ 221 $ 1,137 $ 1,337
Loans past due 90 days and still
Accruing 5 23 84
Total non-performing assets and
loans past due 90 days and
still accruing $ 226 $ 1,160 $ 1,421
===== ======= =======
As a percentage of total loans 0.03% 0.19% 0.21%
As a percentage of total assets 0.02% 0.14% 0.16%
19
Concentrations of Credit Risk
The Bank does a general banking business, serving the commercial and personal
banking needs of its customers. The Bank's primary service area consists of the
Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax,
Fauquier, Loudoun and Prince William counties and the cities of Alexandria,
Fairfax, Falls Church, Manassas and Manassas Park. Our service area also covers,
to a lesser extent, Washington, D.C. and the nearby Maryland counties of
Montgomery and Prince Georges. Substantially all of the Company's loans are made
within its market area.
The ultimate collectibility of the Bank's loan portfolio and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely related to the economic conditions and trends in the
Metropolitan Washington, D.C. area.
At September 30, 2004, the Company had $672.1 million, or 77.2% of total loans,
concentrated in commercial real estate. Commercial real estate for purposes of
this discussion includes all construction loans, loans secured by multi-family
residential properties and loans secured by non-farm, non-residential
properties. At December 31, 2003, commercial real estate loans were $509.0
million, or 76.5%, of total loans. Total construction loans of $225.5 million at
September 30, 2004, represented 25.9% of total loans, loans secured by
multi-family residential properties of $38.0 million represented 4.4% of total
loans, and loans secured by non-farm, non-residential properties of $408.5
million represented 46.9%.
Construction loans at September 30, 2004, included $160.9 million in loans to
commercial builders of single family residential property and $15.4 million to
individuals on single family residential property, representing 18.5% and 1.8%
of total loans, respectively, and together representing 20.3% of total loans.
These loans are made to a number of unrelated entities and generally have a term
of twelve to twenty-four months. In addition the Company had $49.2 million of
construction loans on non-residential commercial property at September 30, 2004,
representing 5.6% of total loans. These total construction loans of $225.5
million include $96.1 million in land acquisition and or development loans on
residential property and $28.3 million in land acquisition and or development
loans on commercial property, together totaling $124.4 million, or 14.3% 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 September 30, 2004, the Company had no other concentrations of
loans in any one industry exceeding 10% of its total loan portfolio. An industry
for this purpose is defined as a group of counterparties that are engaged in
similar activities and have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions.
The Bank has established formal policies relating to the credit and collateral
requirements in loan originations including policies that establish limits on
various loan types as a percentage of total loans and total capital. Loans to
purchase real property are generally collateralized by the related property with
limitations based on the property's appraised value. Credit approval is
primarily a function of collateral and the evaluation of the creditworthiness of
the individual borrower, guarantors and/or the individual project. Management
considers the concentration of credit risk to be minimal due to the
diversification of borrowers over numerous businesses and industries.
Non-Interest Income
Non-interest income decreased $1.9 million, or 30.1%, from $6.2 million for the
nine months ended September 30, 2003, to $4.3 million for the nine months ended
September 30, 2004. Fees and net gains on loans held-for-sale were the main
factor decreasing $2.3 million, or 49.0%, from $4.7 million in 2003, to $2.4
million for the nine months ended September 30, 2004, as originations fell
$117.5 million, or 47.1%, from $249.3 million during the nine months ended
September 30, 2003, to $131.8 million for the current nine month period.
Consequently sales also declined falling $130.7 million from $258.4 million in
2003, to $127.7 million in 2004. These lower levels of originations and
subsequent sales are attributable to significantly lower levels of refinancing
activity.
While fees and net gains on loans held-for-sale declined over the period,
service charges, non-deposit investment services commissions and other
non-interest income increased $467 thousand, or 32.4%, from a total of $1.4
million for the nine months ended September 30, 2003, to $1.9 million in the
current nine month period. Of the total increase, $225 thousand was due to
non-deposit investment services commissions which rose from $98 thousand in
2003, to $323 thousand for the nine months ended September 30, 2004, as the Bank
increased its efforts in generating additional income through the hiring of a
new manager/sales representative for the department in the latter part of 2003.
20
For the three months ended September 30, 2004 non-interest income fell $939
thousand, or 38.2%, from $2.5 million in 2003, to $1.5 million in the current
period. The decline was again due to lower fees and net gains on mortgage loans
held-for-sale which fell $1.0 million, or 54.2%, from $1.9 million in 2003 to
$867 thousand in the current period, while other non-interest income sources,
including service charges and non-deposit investment services commissions,
increased $86 thousand, or 15.2%, from $565 thousand in the three months ended
September 30, 2003, to $651 thousand currently.
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. In 2003, due to record low mortgage rates, the Bank, as with the rest of
the industry, generated significantly higher levels of refinancing loans and as
a result significantly higher levels of fees and net gains upon sale.
Non-Interest Expense
For the nine months ended September 30, 2004, non-interest expense increased
$802 thousand, or 5.2%, compared to the same period in 2003, and increased $426
thousand, or 7.8%, from $5.5 million for the three months ended September 30,
2003, to $5.9 million for the three months ended September 30, 2004. Increases
in both periods were due to higher levels of expense in advertising, public
relations, professional services and franchise tax due to overall growth, the
opening of the Bank's fourteenth branch location in August 2004 and higher
levels of incentive compensation due to loan portfolio growth. Overall, these
increases in non-interest expense were minimal as reflected in improvement in
the Company's efficiency ratio from 52.3% for the nine months ended September
30, 2003, to 47.7% in the current nine month period and improved from 50.9% for
the three months ended September 30, 2003, to 47.5% during the three months
ended September 30, 2004. As the Company expects to increase its branching
efforts over the next year, with at least four new branches to be opened in the
next nine months, non interest expense and the efficiency ratio may increase
from its current level. Increased non interest expense associated with increased
branching activity may have an adverse impact on earnings until such time as the
branches achieve profitability, which we normally expect within twelve months of
opening. However, there can be no assurance that any branch will prove to be
profitable, or that branching activity will result in increased earnings or
increased shareholder value.
Provision for Income Taxes
The Company's income tax provisions are adjusted for non-deductible expenses and
tax exempt interest income after applying the U.S. federal income tax rate of
35%. Provision for income taxes totaled $4.3 million and $5.4 million for the
nine months ended September 30, 2003 and 2004, 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
$73.4 million, or 27.0%, from $271.5 million at December 31, 2003, to $344.9
million at September 30, 2004, as the amount of loans and investment securities
maturing within one-year increased by $57.5 million and available-for-sale
securities increased $25.3 million.
21
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 $187.9 million and $154.1
million at September 30, 2004, and December 31, 2003, respectively. The Bank's
line of credit with the Federal Home Loan Bank of Atlanta, which requires the
pledging of collateral in the form of certain loans and/or securities, is
approximately $165.9 million of the $187.9 million as of September 30, 2004.
Off-Balance Sheet Arrangements
The Company enters into certain financial transactions in the ordinary course of
performing traditional banking services that result in off-balance sheet
arrangements. The off-balance sheet arrangements recognized as of September 30,
2004, and December 31, 2003, were commitments to extend credit, which include
unfunded lines of credit, and standby letter of credit only. Except as disclosed
herein and in the Company's annual report on Form 10-K for the year ended
December 31, 2003, the Company has no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources,
that is material to investors.
Commitments to extend credit, which amounted to $258.9 million at September 30,
2004, and $209.7 million at December 31, 2003, represent legally binding
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At
September 30, 2004, and December 31, 2003, the Company had $18.2 million and
$14.7 million, respectively, in outstanding standby letters of credit.
Contractual Obligations
Since December 31, 2003, there have been no significant changes in the Company's
contractual obligations other than additional leases entered into for new branch
locations.
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
9.19% at September 30, 2004, compared to 7.51% at December 31, 2003. The total
risk-based capital ratio was 12.10% at September 30, 2004, compared to 11.03% at
December 31, 2003. These ratios are in excess of the mandated minimum
requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was
8.10% at September 30, 2004, compared to 6.33% at December 31, 2003, 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 11.20%, 12.20% and 9.80%,
respectively, at September 30, 2004. The improvement in all the Company's and
Bank's capital ratios during the period was due to the issuance of 1,114,062
common shares (post-split) in a follow-on offering in June 2004 which added
$21.8 million in net proceeds to capital.
22
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 or other qualifying securities.
Proposed changes to the Federal Reserve's holding company capital requirements
may in the future limit the Company's ability to utilize significant amounts 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
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105
clarifies existing accounting practices relating to the valuation of issued loan
commitments, including interest rate lock commitments ("IRLC"), subject to SFAS
No. 149 and Derivative Implementation Group Issue C13, "Scope Exceptions: When a
Loan Commitment is included in the Scope of Statement 133." Furthermore, SAB 105
disallows the inclusion of the values of a servicing component and other
internally developed intangible assets in the initial and subsequent IRLC
valuation. The provisions of SAB 105 were effective for loan commitments entered
into after March 31, 2004. The Company has adopted the provisions of SAB 105.
Since the provisions of SAB 105 affect only the timing of the recognition of
mortgage banking income, management does not anticipate that this guidance will
have a material adverse effect on either the Company's consolidated financial
position or consolidated results of operations.
Emerging Issues Task Force Issue No. (EITF) 03-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" was
issued and is effective March 31, 2004. The EITF 03-1 provides guidance for
determining the meaning of "other -than-temporarily impaired" and its
application to certain debt and equity securities within the scope of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115") and investments accounted for under
the cost method. The guidance requires that investments which have declined in
value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Company can assert and
demonstrate its intention to hold the security for a period of time sufficient
to allow for a recovery of fair value up to or beyond the cost of the investment
which might mean maturity. This issue also requires disclosures assessing the
ability and intent to hold investments in instances in which an investor
determines that an investment with a fair value less than cost is not
other-than-temporarily impaired.
On September 30, 2004, the Financial Accounting Standards Board decided
to delay the effective date for the measurement and recognition guidance
contained in Issue 03-1. This delay does not suspend the requirement to
recognize other-than-temporary impairments as required by existing authoritative
literature. The disclosure guidance in Issue 03-1 was not delayed and is
included in this report under Note 2 to the Consolidated Financial Statements.
EITF No. 03-16, "Accounting for Investments in Limited Liability
Companies was ratified by the Board and is effective for reporting periods
beginning after June 15, 2004." APB Opinion No. 18, "The Equity Method of
Accounting Investments in Common Stock," prescribes the accounting for
investments in common stock of corporations that are not consolidated. AICPA
Accounting Interpretation 2, "Investments in Partnerships Ventures," of Opinion
18, indicates that "many of the provisions of the Opinion would be appropriate
in accounting" for partnerships. In EITF Abstracts, Topic No. D-46, "Accounting
for Limited Partnership Investments," the SEC staff clarified its view that
investments of more than 3 to 5 percent are considered to be more than minor
and, therefore, should be accounted for using the equity method. Limited
liability companies (LLCs) have characteristics of both corporations and
partnerships, but are dissimilar from both in certain respects. Due to those
similarities and differences, diversity in practice exists with respect to
accounting for non-controlling investments in LLCs. The consensus reached was
that an LLC should be viewed as similar to a corporation or similar to a
partnership for purposes of determining whether a non-controlling investment
should be accounted for using the cost method or the equity method of
accounting.
23
Internet Access To Company Documents
The Company provides access to its SEC filings through the Bank's Web site at
www.vcbonline.com. After accessing the Web site, the filings are available upon
selecting "about us/stock information/financial information." Reports available
include the annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after the reports are electronically filed or furnished to the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk, or
interest rate risk, as its net income is largely dependent on its net interest
income. Market risk is managed by the Company's Asset/Liability Management
Committee that formulates and monitors the performance of the Company based on
established levels of market risk as dictated by policy. In setting 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
September 30, 2004. At that point in time, the Company had a cumulative net
asset sensitive twelve-month gap position of $25.3 million, or a positive 2.4%
of total earning assets. This position would indicate that over a period of
one-year earnings should increase in a rising interest rate environment as more
assets would re-price than liabilities and should decrease in a falling interest
rate environment. However, this measurement of interest rate risk sensitivity
represents a static position as of a single day and is not necessarily
indicative of the Company's position at any other point in time, does not take
into account the sensitivity of yields and costs of specific assets and
liabilities to changes in market rates, and 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.
24
At September 30, 2004 Interest Sensitivity Periods
-----------------------------------------------------------------------------------
Within 91 to 365 Over 1 to 5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
-----------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Securities, at amortized cost $ 76,204 $ 47,456 $ 21,716 $ 27,376 $ 172,752
Federal funds sold 28,655 -- -- -- 28,655
Interest-bearing deposits in banks -- -- 1,004 -- 1,004
Loans, net of unearned income 392,512 93,804 357,291 30,745 874,352
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $497,371 $141,260 $380,011 $ 58,121 $1,076,763
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
NOW accounts $ 95,147 $ 82,477 $ 41,388 $ -- $ 219,012
Money market accounts 56,923 54,742 18,868 -- 130,533
Savings accounts 1,728 5,400 14,472 -- 21,600
Time deposits 31,079 222,661 170,600 639 424,979
Securities sold under agreement to
repurchase and federal funds 45,136 -- -- -- 45,136
purchased
Trust preferred capital notes 18,000 -- -- -- 18,000
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $248,013 $365,280 $245,328 $ 639 $ 859,260
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative maturity / interest $249,358 $ 25,338 $160,021 $217,503 $ 217,503
sensitivity gap
As % of total earnings assets 23.16% 2.35% 14.86% 20.20%
- ----------------------------------------------------------------------------------------------------------------------------
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 September 30, 2004, and at that
time the model projected earnings would decrease by 3.75% if interest rates
would immediately increase by 200 basis points and would also decrease by 0.30%
if interest rates suddenly fell by 200 basis points. The Company considers these
results to be its worst case scenario should immediate interest rate increases
be equally applied to both interest earning assets and interest bearing
liabilities; however, it is not the Company's practice and general industry
practice to equally apply such sudden increases in rates. As a result the
Company does expect that earnings will improve in a rising rate environment, as
net interest income increases, due to the ability to manage the rate increases
as they apply to both sides of the balance sheet along with the relatively small
decline in projected earnings under the worst case scenario.
The Company has set a limit on its sensitivity to sudden increases in interest
rates 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.
25
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, evaluated, as
of the last day of the period covered by this report, the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter
ended September 30, 2004 that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities.- None
(b) Use of Proceeds.- Not Applicable.
(c) Issuer Purchases of Securities.- None
Item 3. Defaults Upon Senior Securities.- None
Item 4. Submission of Matters to a Vote of Security Holders.- None
Item 5. Other Information. -
(a) Required 8-K Disclosures. None
(b) Changes in Procedures for Director Nominations by Security holders.
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. (2)
4.1 Junior Subordinated Indenture, dated as of November 15,
2002 between Virginia Commerce Bancorp, Inc. and The Bank
of New York, as Trustee (3)
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 (3)
4.3 Guarantee Agreement dated as of November 15, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York,
as Guarantee Trustee (3)
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 (3)
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 (3)
4.6 Guarantee Agreement dated as of December 19, 2002, between
Virginia Commerce Bancorp, Inc. and The Bank of New York, as
Guarantee Trustee (3)
26
Exhibit No. Description
----------- -----------
10.1 1998 Stock Option Plan (2)
10.2 2003 VCBI Employee Stock Purchase Plan (4)
11 Statement Regarding Computation of Per Share Earnings
See Note 4 to the Consolidated Financial Statements
included in this report
21 Subsidiaries of the Registrant:
Virginia Commerce Bank-Virginia
VCBI Capital Trust I-Delaware
VCBI Capital Trust II-Delaware
Subsidiaries of Virginia Commerce Bank:
Northeast Land and Development Corporation-Virginia
Virginia Commerce Insurance Agency, L.L.C.-Virginia
31(a) Certification of Peter A. Converse, President and Chief
Executive Officer
31(b) Certification of William K. Beauchesne, Treasurer and Chief
Financial Officer
32(a) Certification of Peter A. Converse, President and Chief
Executive Officer
32(b) Certification of William K. Beauchesne, Treasurer and Chief
Financial Officer
- ------------------
(1) Incorporated by reference to the same numbered exhibit to the Company'
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2003.
(2) Incorporated by reference to the same numbered exhibit to the
Company's Annual Report on Form10-KSB for the year ended December 31,
1999
(3) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. The Company agrees to provide a copy of these documents
to the Commission upon request.
(4) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 (No. 333-109079)
b) Form 8-K
On July 13, 2004, the Company filed a current report on Form 8-K reflecting the
announcement of earnings for the period ended June 30, 2004.
On August 31, 2004, the Company filed a current report on Form 8-K announcing
the opening of its fourteenth branch location in Alexandria, Virginia.
27
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 4, 2004 BY /s/ Peter A. Converse
----------------------------------------
Peter A. Converse, Chief Executive Officer
Date: November 4, 2004 BY /s/ William K. Beauchesne
----------------------------------------
William K. Beauchesne, Treasurer and Chief
Financial Officer
28