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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 MARCH 31, 2005
--------------
[ ] 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 |X|. No |_|.
As of May 9, 2005, the number of outstanding shares of registrant's common
stock, par value $1.00 per share was: 11,190,437
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,
2005 2004
----------- -----------
ASSETS
Cash and due from banks $ 21,136 $ 16,783
Interest-bearing deposits with other banks 1,015 1,009
Securities (fair value: 2005, $162,010; 2004, $163,477) 162,341 163,232
Loans held-for-sale 5,323 9,662
Loans, net of allowance for loan losses of $11,234 in 2005 and
$10,402 in 2004 1,030,060 925,782
Bank premises and equipment, net 7,165 6,692
Accrued interest receivable 4,376 4,105
Other assets 13,043 12,088
----------- -----------
Total assets $ 1,244,459 $ 1,139,353
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand deposits $ 169,189 $ 148,063
Savings and interest-bearing demand deposits 322,963 332,385
Time deposits 553,608 490,520
----------- -----------
Total deposits $ 1,045,760 $ 970,968
Securities sold under agreement to repurchase and federal funds
purchased 47,898 53,207
Other borrowed funds 31,000 --
Trust preferred capital notes 18,570 18,570
Accrued interest payable 2,259 1,555
Other liabilities 3,296 3,729
Commitments and contingent liabilities -- --
----------- -----------
Total liabilities $ 1,148,783 $ 1,048,029
=========== ===========
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 2005, 11,189,129; 2004, 11,046,422 11,189 11,046
Surplus 37,971 37,219
Retained earnings 47,898 43,578
Accumulated other comprehensive income (loss), net (1,382) (519)
----------- -----------
Total stockholders' equity $ 95,676 $ 91,324
----------- -----------
Total liabilities and stockholders' equity $ 1,244,459 $ 1,139,353
=========== ===========
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,
----------------------------
2005 2004
--------- ----------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $16,808 $11,130
Interest and dividends on investment securities:
Taxable 1,358 1,259
Tax-exempt 59 73
Dividends 55 24
Interest on deposits with other banks 6 --
Interest on federal funds sold 14 47
------- -------
Total interest and dividend income $18,300 $12,533
------- -------
INTEREST EXPENSE:
Deposits $ 4,835 $ 3,292
Securities sold under agreement to repurchase and federal
funds purchased 269 31
Other borrowed funds 211 4
Trust preferred capital notes 272 207
------- -------
Total interest expense $ 5,587 $ 3,534
------- -------
NET INTEREST INCOME: $12,713 $ 8,999
Provision for loan losses 831 487
------- -------
Net interest income after provision for loan losses $11,882 $ 8,512
------- -------
NON-INTEREST INCOME:
Service charges and other fees $ 447 $ 447
Non-deposit investment services commissions 80 82
Fees and net gains on loans held-for-sale 605 591
Other 87 89
------- -------
Total non-interest income $ 1,219 $ 1,209
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 3,790 $ 2,848
Occupancy expense 947 781
Data processing 370 313
Other operating expense 1,407 1,105
------- -------
Total non-interest expense $ 6,514 $ 5,047
------- -------
Income before taxes on income $ 6,587 $ 4,674
Provision for income taxes 2,266 1,588
------- -------
NET INCOME $ 4,321 $ 3,086
------- -------
Earnings per common share, basic (1) $ 0.31 $ 0.25
Earnings per common share, diluted (1) $ 0.29 $ 0.23
(1) Adjusted to give effect to a five-for-four stock split in the form of a 25%
stock dividend in July 2004 and a five-for-four stock split in the form of
a 25% stock dividend to be paid May 9, 2005.
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, 2005 and 2004
(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, 2004 $ -- $ 7,860 $ 17,891 $ 29,353 $ (13) $ 55,091
Comprehensive Income:
Net Income 3,086 $ 3,086 3,086
Other comprehensive income, net of tax,
unrealized holding gains arising
during the period (net of tax of $260) 483 483 483
Total comprehensive income $ 3,569
=======
Stock options/warrants exercised -- 72 453 -- -- 525
------ ------- -------- -------- ------- --------
Balance, March 31, 2004 $ -- $ 7,932 $ 18,344 $ 32,439 $ 470 $ 59,185
====== ======= ======== ======== ======= ========
Balance, January 1, 2005 $ -- $11,046 $ 37,220 $ 43,577 $ (519) $ 91,324
Comprehensive Income:
Net Income 4,321 $ 4,321 4,321
Other comprehensive income (loss), net
of tax, unrealized holding losses
arising during the period (net of tax
of $465) (863) (863) (863)
Total comprehensive income $ 3,458
=======
Stock options/warrants exercised -- 143 751 -- -- 894
------ -- ------- -------- -------- ------- --------
Balance, March 31, 2005 $ -- $11,189 $ 37,971 $ 47,898 $(1,382) $ 95,676
====== ======= ======== ======== ======= ========
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,
-----------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,321 $ 3,086
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 286 249
Provision for loan losses 831 487
Deferred tax benefit (262) (127)
Amortization of security premiums and (accretion) of discounts, net (53) (40)
Origination of loans held-for-sale (35,307) (31,620)
Sales of loans 39,646 22,679
Changes in other assets and other liabilities:
(Increase) decrease in accrued interest receivable (271) 313
(Increase) in other assets (228) (82)
Increase (decrease) in other liabilities 272 (148)
--------- ---------
Net Cash Provided by (Used In) Operating Activities $ 9,235 $ (5,203)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (105,109) (68,375)
Purchase of securities available-for-sale (1,911) (18,767)
Proceeds from principal payments on securities available-for-sale 622 909
Proceeds from principal payments on securities held-to-maturity 904 927
Proceeds from calls and maturities of securities available-for-sale -- 29,705
Purchase of bank premises and equipment (759) (323)
--------- ---------
Net Cash (Used In) Investing Activities $(106,253) $ (55,924)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 74,792 $ 71,687
Net decrease in repurchase agreements (5,309) (313)
Net increase in other borrowed funds 31,000 --
Net proceeds from issuance of capital stock 894 525
--------- ---------
Net Cash Provided by Financing Activities $ 101,377 $ 71,899
Net Increase In Cash and Cash Equivalents 4,359 10,772
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,792 54,056
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 22,151 $ 64,828
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Unrealized gain (loss) on available-for-sale securities $ (1,328) $ 743
Tax benefits on stock options and warrants exercised 529 230
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes Paid $ 1,148 $ 427
Interest Paid 4,883 3,265
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, 2005 and December
31, 2004, the results of operations for the three months ended March 31,
2005 and 2004, and statements of cash flows and stockholders' equity for
the three months ended March 31, 2005 and 2004. These statements should be
read in conjunction with the Company's annual report on Form 10-K for the
period ended December 31, 2004.
Operating results for the three month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
2. INVESTMENT SECURITIES
Amortized cost and fair value of securities available-for-sale and
held-to-maturity as of March 31, 2005 are as follows (dollars in
thousands):
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 100,342 $ 70 $ (2,264) $ 98,148
U.S. Treasuries 9,980 -- (27) 9,953
Domestic corporate debt obligations 6,000 35 -- 6,035
Obligations of states and political subdivisions 1,274 59 -- 1,333
Restricted stock:
Federal Reserve Bank 1,442 -- -- 1,442
Federal Home Loan Bank 3,672 -- -- 3,672
Community Bankers' Bank 55 -- -- 55
--------- --------- --------- ---------
$ 122,765 $ 164 $ (2,291) $ 120,638
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 32,774 $ 55 $ (388) $ 32,441
Obligations of states and political subdivisions 8,434 102 (117) 8,419
Domestic corporate debt obligations 495 17 -- 512
--------- --------- --------- ---------
$ 41,703 $ 174 $ (505) $ 41,372
========= ========= ========= =========
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, 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 $ 100,955 $ 207 $ (1,069) $ 100,093
U.S. Treasuries 9,962 -- (32) 9,930
Domestic corporate debt obligations 6,000 20 -- 6,020
Obligations of states and political subdivisions 1,263 75 -- 1,338
Restricted stock:
Federal Reserve Bank 1,442 -- -- 1,442
Federal Home Loan Bank 1,761 -- -- 1,761
Community Bankers' Bank 55 -- -- 55
--------- --------- --------- ---------
$ 121,438 $ 302 $ (1,101) $ 120,639
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 33,667 $ 226 $ (23) $ 33,870
Obligations of states and political subdivisions 8,433 141 (124) 8,450
Domestic corporate debt obligations 493 25 -- 518
--------- --------- --------- ---------
$ 42,593 $ 392 $ (147) $ 42,838
========= ========= ========= =========
The amortized cost of securities pledged as collateral for repurchase
agreements, certain public deposits, and other purposes were $73.9 million and
$66.4 million at March 31, 2005, and December 31, 2004, respectively.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Provided below is a summary of securities which were in an unrealized loss
position at March 31, 2005, and December 31, 2004. Of the total securities in an
unrealized loss position for less than twelve months at March 31, 2005, 83.1%,
or forty-six positions, were U.S. Government Agency and Treasury obligations
with maturities ranging from three months to fourteen years. As the Company has
the ability and intent to hold these securities until maturity, or until such
time as the value recovers, no declines are deemed to be other-than-temporary.
- --------------------------------------- ------------------------ -------------------------- ----------------------------
At March 31, 2005 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 $ 96,152 $ (2,264) -- -- $ 96,152 $ (2,264)
U.S. Treasuries 9,953 (27) -- -- 9,953 (27)
- --------------------------------------- ----------- ------------ ------------ ------------- ------------ ---------------
$ 106,105 $ (2,291) -- -- $ 106,105 $ (2,291)
- --------------------------------------- ----------- ------------ ------------ ------------- ------------ ---------------
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 30,575 $ (388) -- -- $ 30,575 $ (388)
Obligations of states/political
subdivisions 3,464 (117) -- -- 3,464 (117)
- --------------------------------------- ----------- ------------ ------------ ------------- ------------ ---------------
$ 34,039 $ (505) -- -- $ 34,039 $ (505)
- --------------------------------------- ----------- ------------ ------------ ------------- ------------ ---------------
7
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
- --------------------------------------- ------------------------- ------------------------- -------------------------
At December 31, 2004 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
Fair Unrealized Fair Unrealized Fair Unrealized
(Dollars in thousands) Value Losses Value Losses Value Losses
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $81,350 $(1,069) -- -- $81,350 $(1,069)
U.S. Treasuries 9,930 (32) -- -- 9,930 (32)
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
$91,280 $(1,101) -- -- $91,280 $(1,101)
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 4,977 $ (23) -- -- $ 4,977 $ (23)
Obligations of states/political
subdivisions 3,457 (124) -- -- 3,457 (124)
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
$ 8,434 $ (147) -- -- $ 8,434 $ (147)
- --------------------------------------- ------------ ------------ ----------- ------------- ------------ ------------
3. LOANS
Major classifications of loans, excluding loans held-for-sale, are
summarized as follows:
March 31, December 31,
2005 2004
--------------------------
(In Thousand of Dollars)
Commercial $ 106,053 $ 88,725
Real estate-one-to-four family residential 127,497 125,089
Real estate-multi-family residential 48,502 43,798
Real estate-non-farm, non-residential 491,043 436,533
Real estate-construction 266,432 240,469
Consumer 6,511 5,879
---------- ----------
Total Loans $1,046,038 $ 940,493
Less unearned income 4,744 4,309
Less allowance for loan losses 11,234 10,402
---------- ----------
Loans, net $1,030,060 $ 925,782
========== ==========
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. As of March 31, 2005, there were 130,938
anti-dilutive stock options outstanding. The weighted average number of shares
for both period presented, have been adjusted to give effect to a five-for-four
stock split in the form of a 25% stock dividend in July 2004, and a
five-for-four stock split in the form of a 25% stock dividend to be paid May 9,
2005. Potential dilutive common stock had no effect on income available to
common stockholders.
March 31, 2005 March 31, 2004
---------------------- -----------------------
Per Per
Share Share
Shares Amount Shares Amount
---------- ------ ---------- ------
Basic earnings per share 13,983,982 $0.31 12,391,642 $0.25
----- -----
Effect of dilutive securities:
Stock options 956,971 1,058,036
Warrants -- 57,362
----------- ----- ---------- -----
Diluted earnings per share 14,940,954 $0.29 13,507,040 $0.23
========== ===== ========== =====
8
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. STOCK COMPENSATION PLAN
At March 31, 2005, 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 table illustrates the effect on net income and earnings per share for
the three months ended March 31, 2005, and 2004 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, 2005 MARCH 31, 2004
- -------------------------------------------------------- --------------------- -------------------
NET INCOME, AS REPORTED $ 4,321 $ 3,086
Deduct: total stock-based employee compensation
expense determined based on fair value (145) (120)
method of awards, net of tax
PRO FORMA NET INCOME $ 4,176 $ 2,966
BASIC EARNINGS PER SHARE:
As reported $ 0.31 $ 0.25
Pro forma $ 0.30 $ 0.24
DILUTED EARNING PER SHARE:
As reported $ 0.29 $ 0.23
Pro Forma $ 0.28 $ 0.22
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 2005, and 2004, respectively: price volatility of
21.98% and 29.67%, risk-free interest rates of 4.22% and 4.37%, dividend rate of
..02% and expected lives of 10 years.
6. CAPITAL REQUIREMENTS
A comparison of the Company's and its wholly-owned subsidiary's, Virginia
Commerce Bank (the "Bank") capital ratios as of March 31, 2005 with the minimum
regulatory guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 11.35% 8.00% --
Bank 11.20% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 10.34% 4.00% --
Bank 8.57% 4.00% 6.00%
Leverage Ratio:
Company 9.54% 4.00% --
Bank 7.90% 4.00% 5.00%
NOTE 7. OTHER BORROWED MONEY AND LINES OF CREDIT
The Bank maintains a $186.5 million line of credit with the Federal Home Loan
Bank of Atlanta. The interest rate and term of each advance from the line is
dependent upon the advance and commitment type. Advances on the line are secured
by all of the Bank's qualifying first liens, second liens and home equity
lines-of-credit on one-to-four
9
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
unit single-family dwellings. As of March 31, 2005, the book value of these
qualifying loans totaled approximately $94.4 million and the amount of available
credit using this collateral was $56.9 million. Advances on the line of credit,
in excess of this amount, require pledging of additional assets including other
types of loans and investment securities. As of March 31, 2005, the Bank had $31
million in advances outstanding on an overnight basis, at an interest rate of
3.13%. The Bank has additional short-term lines of credit totaling $62 million
with nonaffiliated banks at March 31, 2005, on which no amount was outstanding
at that date.
8. TRUST PREFERRED CAPITAL NOTES
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) which issued $100,000 in common equity
to the Company. The securities bear a floating rate of interest, adjusted
semi-annually, of 340 basis points over six month Libor, currently 5.89%, 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) which issued $470,000 in common equity
to the Company. These securities bear a floating rate of interest, adjusted
semi-annually, of 330 basis points over six month Libor, currently 6.07%, 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.
9. 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, servicing 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 three months ended March 31, 2005, and
2004. Eliminations consist of overhead and interest charges by the Bank to the
mortgage lending division.
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2005
- -------------------------------------------------------------------------------------------------------------
Community Mortgage
(In thousands) Banking Lending Eliminations Total
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Interest income $ 18,211 $ 89 $ -- $ 18,300
Non-interest income 614 605 -- 1,219
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Total operating income $ 18,825 $ 694 $ -- $ 19,519
Interest expense $ 5,587 $ 34 $ (34) $ 5,587
Provision for loan losses 831 -- -- 831
Non-interest expense 5,902 624 (12) 6,514
Total operating expense $ 12,320 $ 658 $ (46) $ 12,932
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Income before taxes on income $ 6,505 $ 36 $ 46 $ 6,587
Provision for income taxes 2,254 12 -- 2,266
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Net Income $ 4,251 $ 24 $ 46 $ 4,321
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Total Assets $1,239,041 $ 5,418 $ -- $1,244,459
- ------------------------------------------------- --------------- ----------- --------------- ----------------
- ------------------------------------------------- ------------------------------------------------------------
10
THREE MONTHS ENDED MARCH 31, 2004
- ------------------------------------------------- -------------------------------------------------------------------
Community Mortgage
(In thousands) Banking Lending Eliminations Total
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Interest income $ 12,466 $ 67 $ -- $ 12,533
Non-interest income 618 591 -- 1,209
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Total operating income $ 13,084 $ 658 $ -- $ 13,742
Interest expense $ 3,534 $ 10 $ (10) $ 3,534
Provision for loan losses 487 -- -- 487
Non-interest expense 4,563 496 (12) 5,047
Total operating expense $ 8,584 $ 506 $ (22) $ 9,068
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Income before taxes on income $ 4,500 $ 152 $ 22 $ 4,674
Provision for income taxes 1,535 53 -- 1,588
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Net Income $ 2,965 $ 99 $ 22 $ 3,086
- ------------------------------------------------- --------------- ----------- --------------- ----------------
Total Assets $944,421 $12,592 $ -- $ 957,013
- ------------------------------------------------- --------------- ----------- --------------- ----------------
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 seventeen branch offices, two residential mortgage offices and
one investment services office.
Headquartered in Arlington, Virginia, Virginia Commerce serves 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. 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 sized
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 and
operates its residential mortgage lending division as its only other business
segment.
Critical Accounting Policies
During the quarter ended March 31, 2005 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.
12
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 three months ended March 31, 2005, the Bank experienced significant
growth in assets, loans and deposits, opened its sixteenth and seventeenth
branch locations, and increased earnings by $1.2 million, or 40.0%, over the
first quarter of 2004. Total assets increased $105.1 million, or 9.2%, from
$1.139 billion at December 31, 2004, to $1.244 billion at March 31, 2005, as
total deposits grew $74.8 million, or 7.7%, from $971.0 million to $1.046
billion. On a diluted per share basis, first quarter 2005 earnings were $0.29
compared to $0.23 for the first quarter of 2004, an increase of 26.1%. The
year-over-year increase was due to a 41.3% increase in net interest income that
more than offset higher loan loss provisions and increases in non-interest
expense. As a result, the Company's efficiency ratio fell from 49.33% to 46.69%.
Loans, net of allowance for loan losses, increased $104.3 million, or 11.3%, and
represented 98.5% of total deposits at March 31, 2005, versus 95.4% at December
31, 2004. The majority of loan growth occurred in non-farm non-residential real
estate loans which increased $54.5 million, or 12.5%, from $436.5 million at
December 31, 2004, to $491.0 million at March 31, 2005. Construction loans
represented the second largest dollar increase rising $25.9 million, or 10.8%,
from $240.5 million at December 31, 2004, to $266.4 million at March 31, 2005,
while commercial loans also experienced significant growth rising $17.3 million,
or 19.5%
13
With loan growth outpacing deposits in the first quarter, investment securities
were mostly unchanged and the Bank relied upon $31 million in overnight advances
from the Federal Home Loan Bank of Atlanta to help fund the loan demand.
Total deposit growth of $74.8 million included an increase in demand deposits of
$21.1 million, or 14.3%, from $148.1 million at December 31, 2004, to $169.2
million at March 31, 2005, and an increase in time deposits of $63.1 million, or
12.9%. Savings and interest-bearing demand deposits fell $9.4 million during the
quarter from $332.4 million at December 31, 2004, to $323.0 million at March 31,
2005. 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. As short term interest rates climbed in the first quarter, depositors in
savings and interest-bearing transaction accounts took advantage of higher time
deposit rates while loan demand necessitated special time deposit promotions
with maturities ranging from nine months to two years. In addition, repurchase
agreements, which represent funds of numerous demand deposit customers of the
Bank, declined by $5.3 million, or 10.0%, from $53.2 million at December 31,
2004, to $47.9 million.
As noted, for the three months ended March 31, 2005, net income increased $1.2
million, or 40.0%, from $3.1 million for the three months ended March 31, 2004,
to $4.3 million as net interest income increased $3.7 million, or 41.3%, on both
growth and a higher net-interest margin. Non-interest income for the first
quarter was mostly unchanged at $1.2 million while provisions for loan losses
were up $344 thousand, or 70.6%, due to the growth in loans outstanding.
Non-interest expense increased $1.5 million, or 29.1%, due to the opening of
four new branch locations since March 31, 2004, the hiring of additional loan
officers and support staff and higher advertising and public relations expenses.
Diluted earnings per share of $0.29 were up $0.06, or 26.1%, compared to $0.23
for the same period in 2004, as adjusted to give effect to a five-for-four stock
split in the form of a 25% stock dividend in July 2004, and a similar 25% stock
dividend to be paid on May 9, 2005. Overall, while non-interest income was
mostly unchanged, total revenue increased as net interest income rose due to
strong loan growth and that increase more than offset the rise in non-interest
expense due to branch expansion. As a result, the Company's efficiency ratio
improved from 49.3% during the first quarter 2004 to 46.7% for the current three
month period.
Stockholders' equity increased $4.3 million, or 4.8%, from $91.3 million at
December 31, 2004, to $95.7 million at March 31, 2005, on earnings of $4.3
million, $894 thousand in proceeds and tax benefits received from the exercise
of stock options by Company directors and officers and a decrease of $863
thousand in other comprehensive income, net of tax.
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 $3.7 million, or 41.3%, from $9.0 million for the three months
ended March 31, 2004, to $12.7 million for the current three month period due to
both growth in interest-earning assets and the net interest margin.
The Company's yields on earning assets and costs of interest-bearing liabilities
have increased since March 31, 2004, with the yield on earning assets increasing
forty-six basis points from 5.88% for the three months ended March 31, 2004, to
6.34% for the three months ended March 31, 2005, while the average rate paid on
interest-bearing liabilities rose forty basis points from 1.98% to 2.38%. As a
result of this spread increase and an increase in the percentage of
interest-earning assets to interest-bearing liabilities from 119.7% to 123.1%,
the net interest margin increased seventeen basis points from 4.23% for the
three months ended March 31, 2004, to 4.40% for the current period. The Company
expects that the net interest margin may decline in the next quarter as a result
of competitive pressure on the rates paid on time deposits and other
interest-bearing deposits in the Company's market area. However, the amount of
change in the margin will also be influenced by the rate at which the Federal
Open Market Committee raises short term rates and the level of fees earned on
loans.
The following table shows the average balance sheets for each of the three
months ended March 31, 2005, and 2004. 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 $992
thousand and $513 thousand for 2005 and 2004, respectively.
14
------------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------------------------------------------------
2005 2004
---------------------------------------- ----------------------------------
Interest Average Interest Average
Average Income- Yields Average Income- Yields
(Dollars in thousands) Balance Expense /Rates Balance Expense /Rates
----------- -------- ------- -------- ---------- -------
ASSETS
Securities(1) $ 164,739 $ 1,472 3.62% $140,599 $ 1,356 3.92%
Loans, net of unearned income 1,004,383 16,808 6.69% 695,931 11,130 6.33%
Interest-bearing deposits in other banks 1,013 6 2.37% -- -- --
Federal funds sold 2,256 14 2.46% 19,950 47 0.94%
----------- ------- ----- -------- -------- ----
TOTAL INTEREST-EARNING ASSETS $ 1,172,391 $18,300 6.34% $856,480 $ 12,533 5.88%
Other assets 30,665 44,009
----------- --------
TOTAL ASSETS $ 1,203,056 $900,489
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 203,320 $ 761 1.52% $206,254 $ 687 1.34%
Money market accounts 103,117 372 1.46% 110,851 384 1.39%
Savings accounts 20,284 27 0.55% 19,043 26 0.54%
Time deposits 521,395 3,675 2.86% 328,683 2,195 2.68%
----------- ------- ------ -------- -------- ----
Total interest-bearing deposits $ 848,116 $ 4,835 2.31% $664,831 $ 3,292 1.99%
Securities sold under agreement to
repurchase and federal funds purchased 56,140 269 1.94% 31,172 31 0.41%
Other borrowed funds 30,467 211 2.77% 1,235 4 1.23%
Trust preferred capital notes 18,000 272 6.04% 18,000 207 4.55%
----------- ------- ------ -------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES $ 952,723 $ 5,587 2.38% $715,238 $ 3,534 1.98%
Demand deposits and other liabilities 156,505 128,046
----------- ---------
TOTAL LIABILITIES $ 1,109,228 $843,284
Stockholders' equity 93,828 57,205
----------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,203,056 $900,489
=========== ========
Interest rate spread 3.96% 3.90%
Net interest income and margin $12,713 4.40% $ 8,999 4.23%
(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. Average
yields on securities are stated on a tax equivalent basis, using a 35% rate.
15
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, 2005, the Bank
realized a net recovery of $1 thousand compared to a net recovery of $4 thousand
for the same period in 2004, while provisions for loan loss expense increased
$344 thousand, or 70.6%, from $487 thousand for the first three months of 2004
compared to $831 thousand in 2005. As a result, the total allowance for loan
losses increased $832 thousand, or 8.0%, from $10.4 million at December 31,
2004, to $11.2 million at March 31, 2005. This increase for the quarter in the
allowance for loan losses was due to an 11.2% increase in total loans
outstanding and as a result the total allowance to total loans was 1.07% at
March 31, 2005, versus 1.08% at December 31, 2004.
Management feels that the allowance for loan losses is adequate at March 31,
2005. However, there can be no assurance that additional provisions for loan
losses will not be required in the future, including as a result of possible
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, 2005 March 31, 2004 December 31, 2004
---------------- -------------- -----------------
(In Thousands of Dollars)
Allowance, at beginning of period $ 10,402 $ 7,457 $ 7,457
Provision charged against income 831 487 2,989
Recoveries:
Consumer loans 1 2 6
Commercial loans -- 11 12
Losses charged to reserve:
Consumer loans -- (9) (62)
-------- -------- --------
Net recoveries (charge-offs) 1 4 (44)
Allowance, at end of period $ 11,234 $ 7,948 $ 10,402
======== ======== ========
Ratio of net charge-offs to average total loans
outstanding during period N/A N/A .01%
Allowance for loan losses to total loans 1.07% 1.08% 1.11%
16
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). For the three
months ended March 31, 2005, the total non-performing assets and loans that are
ninety days or more past due and still accruing interest was mostly unchanged
from December 31, 2004, at $1.2 million, while declining $98 thousand, or 7.5%,
from $1.3 million at March 31, 2004.
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 0.13% at December 31, 2004, to 0.12% at
March 31, 2005, and decreased from 0.18% at March 31, 2004, as the level of
non-performing assets was mostly unchanged while total loans outstanding
increased significantly. The Company expects its ratio of non-performing assets
to total loans to remain low relative to its peers; however, it could increase
due to an aggregate of $2.8 million in other identified potential problem loans,
to six borrowers, as of March 31, 2005, for which management has identified risk
factors that may result in them not being repaid in accordance with their terms
although the loans are generally well secured and are currently performing. At
December 31, 2004, other identified potential problem loans were $1.7 million.
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. The Company held no foreclosed real properties for
any of the periods presented.
Total non-performing assets consist of the following:
March 31, 2005 March 31, 2004 December 31, 2004
-------------- -------------- -----------------
(In Thousands of Dollars)
Non-accrual loans $ 17 $ 46 $ 18
Impaired loans 1,197 391 1,192
Restructured loans -- 875 --
------ ------ ------
Total non-performing assets $1,214 $1,312 $1,210
Loans past due 90 days and still
accruing -- -- --
Total non-performing assets and
loans past due 90 days and
still accruing $1,214 $1,312 $1,210
====== ====== ======
As a percentage of total loans 0.12% 0.18% 0.13%
As a percentage of total assets 0.10% 0.14% 0.11%
17
Concentrations of Credit Risk
The Bank does a general banking business, serving the commercial and personal
banking needs of its customers. The Bank's market area consists of the Northern
Virginia suburbs of Washington, D.C., including Arlington Fairfax, Fauquier,
Loudoun and Prince William Counties, the cities of Alexandria, Fairfax, Falls
Church, Manassas and Manassas Park, and to some extent the Maryland suburbs and
the city of Washington D.C.. 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 March 31, 2005, the Company had $805.9 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, 2004, commercial real estate loans were $720.8
million, or 76.6%, of total loans. Total construction loans of $266.4 million at
March 31, 2005, represented 25.5% of total loans, loans secured by multi-family
residential properties of $48.5 million represented 4.6% of total loans, and
loans secured by non-farm, non-residential properties of $491.0 million
represented 46.9%.
Construction loans at March 31, 2005, included $181.4 million in loans to
commercial builders of single family residential property and $16.3 million to
individuals on single family residential property, representing 17.3% and 1.6%
of total loans, respectively, and together representing 18.9% 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 $68.7 million of
construction loans on non-residential commercial property at March 31, 2005,
representing 6.6% of total loans. These total construction loans of $266.4
million include $118.8 million in land acquisition and or development loans on
residential property and $38.4 million in land acquisition and or development
loans on commercial property, together totaling $157.2 million, or 15.0% 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, 2005, 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 business and industries.
Non-Interest Income
Non-interest income was mostly unchanged for the first quarter at $1.2 million
with fees and net gains on loans held-for-sale increasing from $591 thousand for
the three months ended March 31, 2004, to $605 thousand for the current three
month period and virtually no change in all other non-interest income
categories. For the three months ended March 31, 2005, originations of loans
held-for-sale were $35.3 million as compared to $31.6 million for the same
period in 2004.
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.
18
Non-Interest Expense
For the three months ended March 31, 2005, non-interest expense increased $1.5
million, or 29.1%, compared to the same period in 2004. Salaries and benefits
were up $942 thousand, or 33.1%, from $2.8 million in 2004 to $3.8 for the three
months ended March 31, 2005, due to the addition of four new branches,
additional loan officers and support staff and higher commissions as a result of
the 11.2% increase in total loans outstanding. Occupancy expenses were up $166
thousand, or 21.2%, from $781 thousand for the three months ended March 31,
2004, to $947 thousand for the current period due mostly to the additional
branch locations, while other operating expense rose $302 thousand with the
additional branches, higher franchise taxes, advertising and public relations
expenses.
As a percentage of total revenue sources (net interest and non-interest income,
on a tax equivalent basis) non-interest expense fell from 49.3% for the three
months ended March 31, 2004, to 46.7% for same period in 2005. Non-interest
expenses are expected to increase further with the opening of the Bank's
eighteenth location in May 2005 and other staffing and facilities expansion
necessary to support further growth; however, the Company expects the efficiency
ratio to remain in a high forty percent range for the remainder of the year,
although there can be no assurance.
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 35%. The
provision for income taxes totaled $2.3 million and $1.6 million for the three
months ended March 31, 2005 and 2004, respectively. The effects of
non-deductible expenses and non-taxable interest on the Company's income tax
provisions are minimal.
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
$19.7 million, or 6.2%, from $320.8 million at December 31, 2004, to $340.5
million at March 31, 2005, due to an increase in the amount of loans and
investment securities maturing within one-year.
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 $217.5 million and $192.8
million at March 31, 2005, and December 31, 2004, respectively. The Bank's
available 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 $155.5 million of the $217.5 million as of March 31, 2005.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal
course of business to meet the financing needs of its customers. These
off-balance sheet arrangements include commitments to extend credit, standby
letters of credit and financial guarantees which would impact the Company's
liquidity and capital resources to the extent customer's accept and or use these
commitments. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet.
With the exception of these off-balance sheet arrangements, and the Company's
obligations in connection with its trust preferred securities, 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.
19
Commitments to extend credit which amounted to $390.7 million at March 31, 2005,
and $361.3 million at December 31, 2004, 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
March 31, 2005, and December 31, 2004, the Company had $21.0 million and $18.3
million, respectively, in outstanding standby letters of credit.
Contractual Obligations
Since December 31, 2004, there have been no significant changes in the Company's
contractual obligations other than additional leases entered into for new branch
locations and other office space for expansion of operations.
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.
Both the Company's and the Bank's capital levels continue 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 8.57% at March 31, 2005, compared to 9.01% at December 31,
2004. The total risk-based capital ratio was 11.20% at March 31, 2005, compared
to 11.82% at December 31, 2004. These ratios are in excess of the mandated
minimum requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio
was 7.90% at March 31, 2005, compared to 8.09% at December 31, 2004, 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 10.34%, 11.35% and 9.54%,
respectively, at March 31, 2005. The declines in capital ratios for the three
months ended March 31, 2005, was due to the significant level of growth in
assets.
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 capital and access to sources of additional capital is
sufficient to meet anticipated growth over the next year, although there can be
no assurance.
The Federal Reserve has revised the capital treatment of trust preferred
securities in light of recent accounting pronouncements and interpretations
regarding variable interest entities, which have been read to encompass the
subsidiary trusts established to issue trust preferred securities, and to which
the Company issued subordinated debentures. As a result, the capital treatment
of trust preferred securities has been revised to provide that in the future,
such securities can be counted as Tier 1 capital at the holding company level,
together with certain other restricted core capital elements, up to 25% of total
capital (net of goodwill), and any excess as Tier 2 capital up to 50% of Tier 1
capital. At March 31, 2005, trust preferred securities represented 15.6% of the
Company's tier one capital and 14.3% of its total qualifying capital. Future
trust preferred issuances to increase holding company capital levels may not be
available to the same extent as currently used. The Company may be required to
raise additional equity capital, through the sale of common stock or otherwise,
sooner than it would otherwise do so.
20
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board issued Statement
No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. FAS 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic method and requires that such transactions be accounted for
using a fair-value-based method and recognized as expense in the consolidated
statement of income. The effective date of FAS 123R (as amended by the SEC) is
for annual periods beginning after June 15, 2005. The provisions of FAS 123R do
not have an impact on the Corporation's results of operations at the present
time.
In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB
107 expresses the views of the SEC staff regarding the interaction of FAS 123R
and certain SEC rules and regulations and provides the SEC staff's view
regarding the valuation of share-based payment arrangements for public
companies. SAB 107 does not impact the Corporation's results of operations at
the present time.
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 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 maturing 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; however in general the
Company has maintained a fairly balanced sensitivity to changes in interest
rates.
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 repricing within
various time periods. It is the Company's goal to limit the one-year cumulative
difference to plus or minus 10% of total interest-earning assets in an attempt
to limit changes in future net interest income from sudden changes in market
interest rates. The following table shows a gap analysis reflecting the earlier
of the maturity or repricing dates for various assets and liabilities as of
March 31, 2005. At that point in time, the Company had a cumulative net
liability sensitive twelve-month gap position of $10.9 million, or a negative
0.90% of total interest-earning assets.
This position would generally indicate that over a period of one-year net
interest earnings should decline slightly in a rising interest rate environment
as more liabilities would reprice than assets and should rise slightly 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 it 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.
21
At March 31, 2005 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 $ 76,369 $ 37,887 $ 24,701 $ 25,511 $ 164,468
Interest bearing deposits in other banks -- 1,015 -- -- 1,015
Loans, net of unearned income 495,498 98,079 411,586 41,454 1,046,617
- -------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 571,867 $ 136,981 $ 436,287 $ 66,965 $1,212,100
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
NOW accounts $ 85,851 $ 75,336 $ 40,573 $ -- $ 201,760
Money market accounts 42,419 42,440 15,397 -- 100,256
Savings accounts 1,676 5,237 14,034 -- 20,947
Time deposits 97,344 272,552 183,588 124 553,608
Securities sold under agreement to
repurchase and federal funds
purchased 47,898 -- -- -- 47,898
Other borrowed funds 31,000 -- -- -- 31,000
Trust preferred capital notes 18,000 -- -- -- 18,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 324,188 $ 395,565 $ 253,592 $ 124 $ 973,469
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative maturity / interest $ 247,679 $ (10,905) $ 171,790 $ 238,631 $ 238,631
sensitivity gap
As % of total earnings assets 20.43% -0.90% 14.17% 19.69%
===============================================================================================================================
In order to more closely measure interest sensitivity, the Company uses earnings
simulation models on a quarterly basis. These models utilize the Company's
financial data and various management assumptions as to growth and earnings to
forecast a base level of net interest income and earnings over a one-year
period. This base level of earnings is then shocked assuming a sudden 200 basis
points increase or decrease in interest rates. The most recent earnings
simulation model was run based on data as of March 31, 2005, and given a
slightly liability sensitive position within twelve months, the model projected
that forecasted net income would decrease by 3.75% if interest rates would
immediately rise by 200 basis points, and if rates were to immediately drop by
200 basis points, the model projected a slight decrease in net income of 0.28%.
Management believes the modeled results are consistent with the short duration
of its balance sheet and given the many variables that effect the actual timing
of when assets and liabilities will reprice. 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.
22
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 March 31, 2005, 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 Securityholders. None
Item 6. Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of Virginia Commerce Bancorp, Inc.
(3)
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)
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
23
Exhibit No. Description
- ----------- -----------
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's
Annual Report on Form 10-KSB for the year ended December 31, 1999
(2) 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.
(3) 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.
(4) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 (No. 333-109079)
24
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 9, 2005 BY /s/ Peter A. Converse
----------------------------------
Peter A. Converse,
Chief Executive Officer
Date: May 9, 2005 BY /s/ William K. Beauchesne
----------------------------------
William K. Beauchesne, Treasurer and
Chief Financial Officer
25