FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission file number: 000-28635
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) (Zip Code)
Registrant's telephone number: 703.534.0700
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark whether the registrant; (1) 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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained in this form,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The registrant's Common stock is traded on the Nasdaq National Market under the
symbol VCBI. The aggregate market value of the approximately 2,449,902 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
June 30, 2002 was approximately $64.8 million, based on the closing sales price
of $26.45 per share on that date. For purposes of this calculation the term
"affiliate" refers to all directors, executive officers and 10% shareholders of
the registrant.
As of the close of business on March 1, 2003, 3,818,979 shares of the
registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders, to be held on April 30, 2003 are incorporated by reference in
part III hereof.
FORM 10-K CROSS REFERENCE OF MATERIAL INCORPORATED BY REFERENCE
The following shows the location in this Annual Report on Form 10-K or the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 30, 2003, of the information required to be disclosed by the United States
Securities and Exchange Commission Form 10-K. References to pages only are to
pages in this report.
PART I ITEM 1. BUSINESS. See "Business" on Pages 44 through 53.
ITEM 2. PROPERTIES. See "Properties" on Page 53
ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is a
participant in various legal proceedings incidental to its
business. In the opinion of management, the liabilities (if
any) resulting from such legal proceeding will not have a
material effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No
matter was submitted to a vote of the security holders of
the Company during the fourth quarter of 2002.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. See "Market Price of Stock and
Dividends" on Page 18.
ITEM 6. SELECTED FINANCIAL DATA. See "Five Year Financial Summary"
on Page 3.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on
Pages 4 through 18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Asset/Liability Management and Quantitative and
Qualitative Disclosures About Market Risk" on Page 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See
Consolidated Financial Statements at Pages 20 through 43.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. None.
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The
information required by Item 10 is hereby incorporated
herein by reference from the material under the caption
"Election of Directors" contained on pages 4 through 7, and
under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" on page 16, of the
Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 30, 2003.
ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11
is hereby incorporated herein by reference from the material
under the caption "Executive Officer Compensation and
Certain Transactions," contained on pages 7 through 13 of
the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 30, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. The information required by Item 12 is hereby
incorporated herein by reference from the material under the
captions "Voting Securities and Principal Holders Thereof"
contained on pages 3 and 4 of the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on April
30, 2003, and under the caption "Securities Authorized for
Issuance Under Equity Compensation Plans" at page 10 of the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The
information required by Item 13 is hereby incorporated
herein by reference from the material under the caption
"Transactions with Management and Others" contained on page
11 of the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held on April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES. See "Controls and Procedures" at
Page 53.
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K. See "Financial Statements, Exhibits and Reports on Form
8-K" at Page 54.
2
FIVE YEAR FINANCIAL SUMMARY
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------
(Dollars in thousand, except per share amounts)
SELECTED YEAR-END BALANCES
Total assets $ 662,887 $ 489,511 $ 371,182 $ 282,575 $ 222,442
Total stockholders' equity 41,850 26,220 21,166 17,489 15,832
Total loans (net) 535,848 410,950 305,717 205,171 149,440
Total deposits 566,996 406,922 310,934 243,044 188,743
SUMMARY RESULTS OF OPERATIONS
Interest income $ 38,998 $ 33,897 $ 26,776 $ 18,851 $ 15,266
Interest expense 14,128 15,991 12,861 8,679 7,511
Net interest income $ 24,870 $ 17,906 $ 13,915 $ 10,172 $ 7,755
Provision for loan losses 1,678 1,572 947 480 451
Net interest income after
provision for loan losses $ 23,192 $ 16,334 $ 12,968 $ 9,692 $ 7,304
Non-interest income 5,593 4,704 2,599 1,999 632
Non-interest expense 17,217 13,982 10,636 8,397 5,648
Income before taxes $ 11,568 $ 7,056 $ 4,931 $ 3,294 $ 2,288
Income tax expense 3,892 2,391 1,681 1,128 784
Net income $ 7,676 $ 4,665 $ 3,250 $ 2,166 $ 1,504
PER SHARE DATA (1)
Net income, basic $ 2.16 $ 1.38 $ 0.96 $ 0.64 $ 0.45
Net income, diluted $ 1.92 $ 1.26 $ 0.91 $ 0.61 $ 0.43
Book value $ 11.19 $ 7.71 $ 6.26 $ 5.17 $ 4.69
Average number of shares outstanding 3,559,757 3,389,189 3,383,398 3,381,375 3,306,750
GROWTH AND SIGNIFICANT RATIOS
% Change in net income 64.54 % 43.54 % 50.06 % 44.04 % 32.78 %
% Change in assets 35.42 % 31.88 % 31.36 % 27.03 % 34.72 %
% Change in loans 30.39 % 34.42 % 49.01 % 37.29 % 48.08 %
% Change in deposits 39.34 % 30.87 % 27.93 % 28.77 % 32.52 %
% Change in equity 59.61 % 23.88 % 21.02 % 10.47 % 40.44 %
Equity to asset ratio 6.31 % 5.36 % 5.70 % 6.19 % 7.12 %
Return on average assets 1.32 % 1.05 % 1.00 % 0.87 % 0.75 %
Return on average equity 23.06 % 19.37 % 17.04 % 13.03 % 10.37 %
Average equity to average assets 5.71 % 5.44 % 5.87 % 6.65 % 7.25 %
Efficiency ratio (2) 56.52 % 61.84 % 64.41 % 68.89 % 67.35 %
(1) Adjusted for all years presented giving retroactive effect to a 10% stock
dividend in 2000, 10% stock restructurings in 1998 and 1999, and five for
four stock splits in the form of 25% stock dividends in 2001and 2002.
(2) Computed by dividing non-interest expense by the sum of net interest
income on a tax equivalent basis and non-interest income, net of
securities gains or losses. 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.
3
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 in
the future may differ materially from those indicated herein. Readers are
cautioned against placing undue reliance on any such forward-looking statements.
The Company does not undertake to update any forward-looking statements to
reflect occurrences or events that may not have been anticipated as of the date
of such statements.
GENERAL
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Virginia Commerce Bancorp, Inc.
and subsidiaries (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this report. The Company is the parent bank holding company for
Virginia Commerce Bank (the "Bank"), a Virginia state chartered bank that offers
a full range of banking services through thirteen offices, principally to
individuals and small to medium-size businesses in the Metropolitan Washington,
DC area.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance for loans identified for impairment testing. Impairment testing
includes consideration of the borrower's overall financial condition, resources
and payment record, support available from financial guarantors and the fair
market value of collateral. These factors are combined to estimate the
probability and severity of inherent losses. When impairment is identified, then
a specific reserve is established based on the Company's calculation of the loss
embedded in the individual loan. Large groups of smaller balance, homogeneous
loans are collectively evaluated for impairment. Accordingly, the Company does
not separately identify individual consumer and residential loans for
impairment. The formula allowance is used for estimating the loss on internally
risk rated loans exclusive of those identified for impairment testing. The loans
meeting the criteria for special mention, substandard, doubtful and loss, as
well as, impaired loans are segregated from performing loans within the
portfolio. Internally classified loans are then grouped by loan type
(commercial, commercial real estate, commercial construction, residential real
4
estate, residential construction or installment). Each loan type is assigned an
allowance factor based on management's estimate of the associated risk,
complexity and size of the individual loans within the particular loan category.
Classified loans are assigned a higher allowance factor than non-rated loans due
to management's concerns regarding collectibility or management's knowledge of
particular elements surrounding the borrower. Allowance factors grow with the
worsening of the internal risk rating. The unallocated formula is used to
estimate the loss of non-classified loans and loans identified for impairment
testing for which no impairment was identified. These un-criticized loans are
also segregated by loan type and allowance factors are assigned by management
based on delinquencies, loss history, trends in volume and terms of loans,
effects of changes in lending policy, the experience and depth of management,
national and local economic trends, concentrations of credit, quality of the
loan review system and the effect of external factors (i.e. competition and
regulatory requirements). The factors assigned differ by loan type. The
unallocated allowance captures losses whose impact on the portfolio have
occurred but have yet to be recognized in either the formula or specific
allowance. Allowance factors and the overall size of the allowance may change
from period to period based on management's assessment of the above described
factors and the relative weights given to each factor. For further information
regarding the allowance for loan losses see Notes 1 and 4 to the Consolidated
Financial Statements and the discussion under the caption "Asset Quality -
Provision and Allowance for Loan Losses" at page 10.
OVERVIEW
In 2002, the Company experienced record growth in assets, deposits and net
income. Total assets increased 35.4% from $489.5 million at December 31, 2001 to
$662.9 million at December 31, 2002, total deposits increased 39.3% from $406.9
million to $567.0 million over the same period and net income increased $3.0
million, or 64.5%, from $4.7 million in 2001 to $7.7 million in 2002. While the
increase in deposits was the main driver of the record asset growth, the Company
provided additional funding of $7.0 million through a pre-emptive rights
offering to existing stockholders in July 2002, and $18.0 million through the
issuance of trust preferred securities in the fourth quarter. In 2001, total
assets increased 31.9% from $371.2 million at December 31, 2000 to $489.5
million at December 31, 2002, deposits increased 30.9% from $310.9 million to
$406.9 million and net income increased by $1.4 million, or 43.5%, from $3.3
million to $4.7 million.
Loan growth was also strong in 2002 as loans, net of allowance for loan losses,
increased 30.4% from $410.9 million at December 31, 2001 to $535.8 million at
December 31, 2002. Growth occurred in three of the four major classifications of
loans with growth in real estate mortgage loans representing the largest
increase, rising $105.9 million, or 38.5%, from $275.1 million at December 31,
2001 to $381.0 million at December 31, 2002. Real estate construction loans
represented the second largest increase with growth of $16.8 million, or 17.9%,
from $94.5 million at December 31, 2001 to $111.3 million at December 31, 2002
while commercial loans, the third category in which growth occurred, rose $5.4
million, or 13.8%, from $39.2 million at December 31, 2001 to $44.6 million at
December 31, 2002. Loan growth in 2001 was similar to that achieved in 2002,
with loans, net of the allowance for loan losses, increasing 34.4% from $305.7
million at December 31, 2000 to $410.9 million at December 31, 2001. Growth by
category was also similar with real estate mortgage loans increasing $76.6
million, real estate construction loans increasing by $29.0 million and
commercial loans rising $1.7 million.
As the Company experienced record growth in deposits and provided additional
funding through its rights offering and issuance of trust preferred securities
in 2002, other borrowed money and repurchase agreements declined. Repurchase
agreements, which are provided to numerous demand deposit customers of the bank,
fell $10.4 million, or 24.4%, from $42.5 million at December 31, 2001 to $32.1
million at December 31, 2002. Other borrowed money, which includes the Company's
line of credit with a correspondent bank was paid down $11.0 million from $11.4
million at December 31, 2001 to $400 thousand at December 31, 2002. In 2001,
repurchase agreements increased $13.4 million, or 45.9%, from $29.1 million to
$42.5 million and other borrowed funds increased $4.0 million from $7.4 million
at December 31, 2000 to $11.4 million at December 31, 2001. Both the $4.0
million increase in other borrowed funds in 2001 and the $11.0 million decline
in 2002 were associated with the Company's use of its line-of-credit with a
correspondent bank for supplementing the Bank's capital position. With the
Company's successful completion of its $7.0 million rights offering in July 2002
and its issuance of $18.0 million in trust preferred securities in the fourth
quarter of the year, the Company was able to repay the entire outstanding
balance on the line-of-credit of $11.0 million while maintaining strong capital
levels at the Bank.
5
While the growth in loans utilized the majority of the Company's cash from
financing activities, cash and cash equivalents increased $28.8 million, or
190.2%, from $15.2 million at December 31, 2001 to $44.0 million at December 31,
2002 and investment securities, which are maintained as additional liquidity
sources and for various collateral needs, increased $18.2 million, or 34.4% from
$53.0 million at December 31, 2001 to $71.2 million at December 31, 2002. In
2001, cash and cash equivalents increased $4.2 million from $11.0 million at
December 31, 2000 to $15.2 million at December 31, 2001 and investment
securities increased over the same period $7.8 million, or 17.2%, from $45.3
million to $53.0 million.
By category, deposit growth in 2002 included a $32.1 million, or 48.3%, increase
in non-interest-bearing demand deposits from $66.4 million at December 31, 2001
to $98.6 million at December 31, 2002, a $58.0 million, or 43.7%, increase in
savings and interest-bearing demand deposits and a $69.9 million, or 33.7%
increase in time deposits from $207.7 million at December 31, 2001 to $277.6
million at December 31, 2002. In 2001, deposit growth included an $11.5 million
increase in non-interest-bearing demand deposits, a $28.9 million increase in
savings and interest-bearing demand deposits, and a $55.5 million increase in
time deposits. The majority of the Bank's deposits are attracted from
individuals and businesses in the Northern Virginia and the Metropolitan,
Washington DC area.
Earnings for 2002 of $7.7 million increased $3.0 million, or 64.5%, compared to
earnings of $4.7 million in 2001 as net interest income increased $7.0 million,
or 38.9%, non-interest income rose $889 thousand, or 18.9%, while non-interest
expense, as a percentage of total net interest and non-interest income fell from
61.8% in 2001 to 56.5% in 2002. In 2001, earnings of $4.7 million represented an
increase of 43.5% compared to earnings of $3.3 million in 2000 and earnings in
2000 of $3.3 million increased 50.1% compared to earnings of $2.2 million in
1999. On a diluted per share basis earnings were $1.92, $1.26, and $0.91 in
2002, 2001, and 2000, respectively. The Company's return on average assets was
1.32% for 2002, as compared to 1.05% in 2001 and 1.00% in 2000. Return on
average equity increased to 23.06% in 2002, as compared to 19.37% in 2001, and
17.04% in 2000.
Stockholders' equity increased $15.7 million from $26.2 million at December 31,
2001 to $41.9 million at December 31, 2002 with earnings of $7.7 million, $7.0
million in net proceeds from the rights offering, $493 thousand from the
exercise of stock options and warrants, and a $510 thousand increase in other
comprehensive income, net of tax. In 2001, stockholders' equity grew $5.0
million from $21.2 million at December 31, 2000 to $26.2 million at year-end
2001 due to earnings of $4.7 million, $97 thousand from the exercise of stock
options and a $295 thousand increase in other comprehensive income, net of tax.
The total number of common shares outstanding increased in 2002 by 1,018,514
with 679,955 shares issued due to a five for four stock split in the form of a
twenty five percent stock dividend in March 2002, 291,738 shares issued in July
2002 in connection with the rights offering and 46,821 shares issued as a result
of the exercise of stock options and warrants.
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 $7.0 million, or 38.9%, from $17.9 million in 2001 to $24.9
million in 2002 with $6.2 million of the increase due to growth in earning
assets and $794 thousand of the increase due to a twenty-four basis point
increase in the net interest margin. In 2001 net interest income increased $4.0
million, or 28.7%, from $13.9 million in 2000 to $17.9 million in 2001, with
$4.7 million in additional net interest income due to growth in earning assets,
offset by a decline in net interest income of $729 thousand due to a thirty-one
basis point drop in the net interest margin. In 2000, net interest income
increased $3.7 million, or 36.3%, from $10.2 million in 1999 to $13.9 million.
Following Federal Reserve interest rate reductions of 475 basis points during
2001, loans, the majority of which were floating or variable rate, and
investment securities, the majority of which were callable agency issues,
re-priced faster than interest-bearing liabilities, the majority of which were
time deposits with an average maturity of eighteen to twenty-four months. As a
result the average yield on earning assets fell seventy-two basis points from
8.73% in 2000 to 8.01% in 2001, while the average cost of interest bearing
liabilities dropped fifty-two basis points from 5.00% in 2000 to 4.48% in 2001.
This narrowed the margin on earning assets from 4.54% in 2000 to 4.23% in 2001.
In 2002, as the structure of the Bank's loans and investment securities remained
relatively unchanged, they continued to re-price downward with the average yield
on earning assets falling one hundred basis points from 8.01% in 2001 to 7.01%
for 2002; however, the cost of interest bearing liabilities, and time deposits
in particular, fell more significantly, with the cost of interest bearing
liabilities falling one hundred and forty-one basis points from 4.48% in 2001 to
3.07% in 2002. With expectations that interest rates will remain low in 2003,
the majority of time deposits having re-priced in 2002, other interest-bearing
deposits at very low rates, and with growth in the loan and investment
securities portfolio in 2003 at interest rates lower than the portfolio's
current average rates the Company anticipates that its net interest margin may
be slightly lower in 2003.
6
TABLE 1: AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
The following table shows the average balance sheets for each of the years ended
December 31, 2002, 2001, and 2000. In addition, the amounts of interest earned
on earning assets, with related yields, 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 $1.6 million, $1.1 million and $702 thousand,
for 2002, 2001, and 2000, respectively.
2002 2001 2000
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Interest Average Interest Average Interest Average
Average Income- Yields Average Income- Yields Average Income- Yields
(Dollars in thousands) Balance Expense /Rates Balance Expense /Rates Balance Expense /Rates
--------------------------------------------------------------------------------------------
ASSETS
Securities (1) $ 61,986 $ 3,152 5.14% $ 58,125 $ 3,527 6.07% $ 49,348 $ 3,125 6.33%
Loans, before allowance for losses 471,924 35,491 7.52% 349,586 29,720 8.50% 250,289 23,215 9.28%
Interest-bearing deposits in other
banks -- -- -- -- -- -- 601 36 5.99%
Federal funds sold 22,165 355 1.60% 15,310 650 4.24% 6,377 400 6.27%
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TOTAL EARNING ASSETS $556,075 $38,998 7.01% $423,021 $33,897 8.01% $306,615 $26,776 8.73%
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Non-earning assets 27,235 19,630 18,457
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TOTAL ASSETS $583,310 $442,651 $325,072
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LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits
NOW accounts $ 89,756 $ 1,847 2.06% $ 72,231 $ 2,189 3.03% $ 61,010 $ 2,499 4.10%
Money market accounts 54,144 1,213 2.24% 37,970 1,253 3.30% 23,282 900 3.87%
Savings accounts 16,131 220 1.36% 13,265 318 2.40% 12,771 439 3.44%
Time deposits 255,875 10,061 3.93% 188,968 10,734 5.68% 132,263 7,587 5.74%
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Total interest-bearing deposits $415,906 $13,341 3.21% $312,434 $14,494 4.64% $229,326 $11,425 4.98%
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Securities sold under agreement to
repurchase and federal funds
purchased 33,791 245 0.73% 35,851 976 2.72% 23,537 1,076 4.57%
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Other borrowed funds 10,109 497 4.91% 8,770 521 5.94% 4,429 360 8.13%
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Trust preferred capital notes 929 45 4.84% -- -- -- -- -- --
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TOTAL INTEREST-BEARING LIABILITIES $460,735 $14,128 3.07% $357,055 $15,991 4.48% $257,292 $12,861 5.00%
--------------------------------------------------------------------------------------------
Demand deposits and other non-
interest bearing liabilities 89,293 61,515 48,703
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TOTAL LIABILITIES $550,028 $418,570 $305,995
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Stockholders' equity 33,282 24,081 19,077
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $583,310 $442,651 $325,072
--------------------------------------------------------------------------------------------
Interest rate spread 3.94% 3.53% 3.73%
NET INTEREST INCOME AND MARGIN $24,870 4.47% $17,906 4.23% $13,915 4.54%
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(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.
7
TABLE 2: RATE-VOLUME VARIANCE ANALYSIS
Interest income and expense are affected by changes in interest rates, by
changes in the volumes of earning assets and interest-bearing liabilities, and
by changes in the mix of these assets and liabilities. The following analysis
shows the year-to-year changes in the components of net interest income.
2002 COMPARED TO 2001 2001 COMPARED TO 2000
---------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
--------------------- Increase -------------------- Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------------------------------------------
INTEREST INCOME
Loans $ 9,200 $(3,429) $ 5,771 $ 8,495 $(1,990) $ 6,505
Securities 196 (571) (375) 532 (130) 402
Federal funds sold 110 (405) (295) 384 (134) 250
Interest-bearing deposits in other banks -- -- -- (36) -- (36)
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Total interest income $ 9,506 $(4,405) $ 5,101 $ 9,375 $(2,254) $ 7,121
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INTEREST EXPENSE
Interest-bearing deposits:
NOW accounts $ 361 $ (703) $ (342) $ 340 $ (650) $ (310)
Money market accounts 362 (402) (40) 485 (132) 353
Savings accounts 39 (137) (98) 12 (133) (121)
Time deposits 2,480 (3,153) (673) 3,223 (76) 3,147
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Total interest-bearing deposits $ 3,242 $(4,395) $(1,153) $ 4,060 $ (991) $ 3,069
Securities sold under agreement to
repurchase and federal funds
purchased (15) (716) (731) 335 (435) (100)
Other borrowed funds 64 (88) (24) 260 (99) 161
Trust preferred capital notes 45 -- 45 -- -- --
---------------------------------------------------------------------------
Total interest expense $ 3,336 $(5,199) $(1,863) $ 4,655 $(1,525) $ 3,130
---------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $ 6,170 $ 794 $ 6,964 $ 4,720 $ (729) $ 3,991
---------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND 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
re-pricing of interest-bearing assets differs from the maturing or re-pricing 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. A gap analysis is shown in Table 3 below, and reflects the
earlier of the maturity or re-pricing dates for various assets and liabilities
as of December 31, 2002. At that point in time, the Company had a cumulative net
liability sensitive twelve-month gap position of $9.6 million, or a negative
1.5% of total interest-earning assets.
8
This position would generally indicate that earnings should decline in a rising
interest rate environment as more liabilities would re-price than assets;
however, this measurement represents a static position as of a single day and is
not necessarily indicative of the Company's position at any other point in time,
does not take into account the sensitivity of yields and costs of specific
assets and liabilities to changes in market rates, and does not take into
account the specific timing of when changes to a specific asset or liability
will occur. More accurate measures of interest sensitivity are provided to the
Company using earnings simulation models.
TABLE 3: INTEREST SENSITIVITY-GAP ANALYSIS
At December 31, 2002 INTEREST SENSITIVITY PERIODS
------------------------------------------------------------------
Within 91 to 365 Over 1 to 5 Over 5
(Dollars in thousands) 90 Days Days Years Years Total
------------------------------------------------------------------
EARNING ASSETS
Securities, at amortized cost $ 11,710 $ 24,504 $ 17,765 $ 16,220 $ 70,199
Federal funds sold 24,071 -- -- -- 24,071
Loans, net of unearned income 229,995 76,147 217,746 17,884 541,772
------------------------------------------------------------------
Total earning assets $ 265,776 $ 100,651 $ 235,511 $ 34,104 $ 636,042
------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
NOW accounts $ 87,623 $ 6,034 $ 16,170 $ -- $ 109,827
Money market accounts 46,982 9,048 5,972 -- 62,002
Savings accounts 1,519 4,746 12,717 -- 18,982
Time deposits 42,754 126,860 107,983 13 277,610
Securities sold under agreement to
repurchase and federal funds purchased 32,081 -- -- -- 32,081
Other borrowed funds -- 400 -- -- 400
Trust preferred capital notes -- 18,000 -- -- 18,000
------------------------------------------------------------------
Total interest-bearing liabilities $ 210,959 $ 165,088 $ 142,842 $ 13 $ 518,902
------------------------------------------------------------------
CUMULATIVE MATURITY / INTEREST SENSITIVITY
GAP $ 54,817 $ (9,620) $ 83,049 $ 117,140 $ 117,140
As % of total earnings assets 8.6% (1.5)% 13.1% 18.4%
------------------------------------------------------------------
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. At December 31, 2002, even though
the Company's static gap reflected a liability sensitive position within twelve
months, the model projected that forecasted net income would decrease by 5.1% if
interest rates would immediately fall by 200 basis points as a majority of the
Company's interest-bearing liabilities would not re-price similarly to loans and
investment securities due to their already low rates. If rates were to
immediately rise by 200 basis points, the model projected an increase in net
income of 2.5%. 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 re-pricing 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.
NON-INTEREST INCOME
Non-interest income increased $889 thousand, or 18.9%, from $4.7 million in 2001
to $5.6 million in 2002 and increased $2.1 million, or 81.0%, from $2.6 million
in 2000 to $4.7 million in 2001. In 2000, non-interest income increased $600
thousand from $2.0 million in 1999 to $2.6 million in 2000. Fees and net gains
on mortgage loans held-for-sale have accounted for the majority of the increases
over the years with an increase in 2002 of $541 thousand, or 16.0%, from $3.4
million in 2001 to $3.9 million in 2002, and an increase of $1.8 million, or
113.1%, from $1.6 million in 2000 to $3.4 million in 2001. In 2000, fees and net
gains on mortgage loans held-for-sale rose $321 thousand from $1.3 million in
1999 to $1.6 million.
9
The Company's mortgage lending activities began in 1999 and accounted for $1.3
million of the total $2.0 million in non-interest income that year on $73.7
million in mortgages originated for sale. Results in 2000 were similar with fees
and net gains accounting for $1.6 million of the $2.6 million in non-interest
income on $79.8 million in originations. In 2001 and 2002 lower mortgage rates
and a strong local housing market pushed total loans originated for sale to
record levels for the Company with $180.7 million in 2001 and $207.8 million in
2002. Adverse changes in the local real estate market, consumer confidence, and
interest rates could adversely impact the level of loans originated for sale,
and the resulting fees and earnings thereon.
Service charges and other fees, which include monthly deposit account
maintenance charges, overdraft fees, ATM fees and charges, safe deposit box
rents, merchant discount fee income and lock box service fees, increased $359
thousand, or 28.3%, from slightly under $1.3 million in 2001 to $1.6 million in
2002, and increased $291 thousand, or 29.7%, in 2001 from $980 thousand in 2000
to $1.3 million. In 2000, service charges and fees also increased by $291
thousand from $689 thousand in 1999 to $980 thousand. The Company continues to
seek to improve this category of non-interest income having added lock box
services in 2000, insurance services in 2001 and investment services in 2002.
Although these activities have contributed to the increases in service charges
and fees over the past three years, most of the increases in this category of
non-interest income are attributable to growth in total deposit accounts.
NON-INTEREST EXPENSE
Non-interest expense increased $3.2 million, or 23.1%, from $14.0 million in
2001 to $17.2 million in 2002, and increased $3.3 million, or 31.5%, from $10.6
million in 2000 to $14.0 million in 2001, and increased $2.2 million, or 26.7%,
in 2000. Salaries and benefits accounted for $2.0 million, or 62.7%, of the
total increase in non-interest expense in 2002, $2.3 million, or 69.3% in 2001,
and $1.3 million, or 56.6%, in 2000. Commissions and incentive compensation
associated with the significant increases in total loans and loans originated
for sale were the main reason for these increases in salaries and benefits
expense over the past three years. Also contributing to increased compensation
expenses were other staff increases due to overall growth, branch expansion, and
salary increases for existing staff.
Occupancy expenses, which include rents, depreciation, maintenance on buildings,
leaseholds and equipment, increased $578 thousand, or 24.7%, from $2.3 million
in 2001 to $2.9 million in 2002, and increased $391 thousand and $328 thousand,
or 20.1% and 20.3%, in 2001 and 2000, respectively. These increases are due to
additional facilities for the Company's operations department due to growth and
continued branch expansion, as the Company opened four of its thirteen branches
over the last three years. Data processing costs increased $177 thousand, or
19.6%, from $902 thousand in 2001 to $1.1 million in 2002 and increased $152
thousand and $139 thousand, or 20.3% and 22.8%, in 2001 and 2000, respectively,
due to growth in total loans and deposits and added services such as internet
banking.
Other operating expenses, which include advertising and public relations
expenses, bank franchise taxes, legal and professional fees, supplies and
postage, increased $451 thousand, or 17.3%, from $2.6 million in 2001 to $3.1
million in 2002 and increased $485 thousand, or 22.8%, in 2001 compared to an
increase of $504 thousand, or 31.0%, from $1.6 million in 1999 to $2.1 million
in 2000. Other non-interest expenses to which the Company is not currently
subject, such as deposit insurance premiums, which may be incurred in the
future, could have an adverse affect on earnings and results of operations in
future periods.
INCOME TAXES
The Company's income tax provisions are adjusted for non-deductible expenses and
non-taxable interest after applying the U.S. federal income tax rate of 34%.
Provision for income taxes totaled $3.9 million, $2.4 million, and $1.7 million
for the years ended December 31, 2002, 2001, and 2000, respectively. The effects
of non-deductible expenses and non-taxable interest on the Company's income tax
provisions are minimal.
ASSET QUALITY - PROVISION AND ALLOWANCE FOR LOAN LOSSES
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. During 2002, charge-offs totaled $155 thousand
10
compared to $23 thousand and $36 thousand in 2001 and 2000, respectively. The
provision for loan loss expense in 2002 was $1.7 million compared to $1.6
million in 2001 and $947 thousand in 2000. The total allowance for loan losses
of $5.9 million at December 31, 2002 increased 36.0% from $4.4 million at
December 31, 2001, and increased 55.4% from $2.8 million at December 31, 2000 to
$4.4 million at December 31, 2001. Higher provisions in 2002 and 2001, compared
to 2000, reflect significant increases in total loans outstanding, an increase
in non-performing assets from $554 thousand at December 31, 2001 to $2.4 million
at December 31, 2002, and increases in identified other potential problem loans
from $1.2 million at December 31, 2000 to $2.6 million at December 31, 2001 and
$1.9 million at December 31, 2002.
Management feels that the allowance for loan losses is adequate. There can be no
assurance, however, that additional provisions for loan losses will not be
required in the future, including as a result of 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. For further information regarding the allowance for loan
losses see Notes 1 and 4 to the Consolidated Financial Statements.
TABLE 4: PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 2002 2001 2000 1999 1998
----------------------------------------------
Allowance, beginning of period $4,356 $2,803 $1,889 $1,438 $ 990
----------------------------------------------
CHARGE-OFFS
Real estate loans $ -- $ -- $ -- $ -- $ --
Commercial loans 87 -- -- -- --
Consumer loans 68 23 36 40 23
----------------------------------------------
Total charge-offs $ 155 $ 23 $ 36 $ 40 $ 23
----------------------------------------------
RECOVERIES
Real estate loans $ -- $ -- $ -- $ -- $ --
Commercial loans 5 2 1 7 3
Consumer loans 40 2 2 4 17
----------------------------------------------
Total recoveries $ 45 $ 4 $ 3 $ 11 $ 20
----------------------------------------------
Net charge-offs $ 110 $ 19 $ 33 $ 29 $ 3
----------------------------------------------
PROVISIONS FOR LOAN LOSSES 1,678 1,572 947 480 451
----------------------------------------------
Allowance, end of period $5,924 $4,356 $2,803 $1,889 $1,438
----------------------------------------------
Ratio of net charges-offs to average total
loans outstanding during period 0.02% 0.01% 0.01% 0.02% 0.003%
----------------------------------------------
11
TABLE 5: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a general allowance applicable to all loan
categories; however, management has allocated the allowance to provide an
indication of the relative risk characteristics of the loan portfolio. The
allocation is an estimate and should not be interpreted as an indication that
charge-offs will occur in these amounts, or that the allocation indicates future
trends. The allocation of the allowance at December 31 for the years indicated
and the ratio of related outstanding loan balances to total loans are as
follows:
(Dollars in thousands) 2002 2001 2000 1999 1998
----------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:
Real estate - mortgage $3,159 $1,957 $1,571 $1,206 $ 870
Real estate - construction 1,239 863 518 132 101
Commercial 1,469 1,482 628 477 409
Consumer 57 54 86 74 58
----------------------------------------------
Balance, December 31, $5,924 $4,356 $2,803 $1,889 $1,438
----------------------------------------------
RATIO OF LOANS TO TOTAL YEAR-END LOANS:
Real estate - mortgage 70% 66% 64% 76% 73%
Real estate - construction 21% 23% 21% 8% 8%
Commercial 8% 9% 12% 13% 16%
Consumer 1% 2% 3% 3% 3%
----------------------------------------------
100% 100% 100% 100% 100%
----------------------------------------------
See Notes 1 and 4 to the Consolidated Financial Statements for additional
information regarding the provision and allowance for loan losses.
RISK ELEMENTS AND NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed properties). The total
non-performing assets and loans that are 90 days or more past due and still
accruing interest increased 330.9% from $554 thousand at year-end 2001 to $2.4
million at year-end 2002, and increased 2.2% from $542 thousand at year-end 2000
to $554 thousand at year-end 2001. The total increase of $1.9 million in
non-accrual loans in 2002 is attributable to two mortgages on residential
single-family properties. Both loans are well secured and are expected to be
fully re-paid in 2003.
Loans are placed in non-accrual status when in the opinion of management the
collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
The ratio of non-performing assets and past due loans to total loans increased
from .13% at December 31, 2001 to .44% at December 31, 2002 and decreased from
..18% at December 31, 2000 to .13% at December 31, 2001. The increase in 2002 is
due to two loans on single-family residential properties representing $1.9
million of total non-performing assets. The Company expects its ratio of
non-performing assets to total loans to improve, assuming these two loans are
collected as expected in 2003; however, the ratio may increase from its current
level due to other identified potential problem loans on December 31, 2002. As
of December 31, 2002, there were $1.9 million of loans for which management has
identified risk factors that may result in them not being repaid in accordance
with their terms, compared to $2.6 million at December 31, 2001 and $1.2 million
at December 31, 2000. These loans are also primarily well secured and are
currently performing. See Notes 1 and 4 to the Consolidated Financial Statements
for additional information regarding the Company's non-performing assets.
12
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 December 31, 2002 and 2001, the Company held
no foreclosed real properties.
TABLE 6: NON-PERFORMING ASSETS
(Dollars in thousands) 2002 2001 2000 1999 1998
-----------------------------------------------
Non-accrual loans $1,943 $ 106 $ 117 $ 106 $ 121
Impaired loans 444 119 107 143 213
Restructured loans -- -- -- -- --
Foreclosed properties -- -- -- -- --
-----------------------------------------------
Total non-performing assets $2,387 $ 225 $ 224 $ 249 $ 334
-----------------------------------------------
Loans past due 90 days and still accruing -- 329 318 68 --
-----------------------------------------------
TOTAL NON-PERFORMING ASSETS AND PAST DUE LOANS $2,387 $ 554 $ 542 $ 317 $ 334
-----------------------------------------------
Allowance for loan losses to total loans 1.09% 1.05% .91% .91% .95%
Allowance for loan losses to non-performing
loans 248.2% 1,936.0% 1,251.3% 758.6% 430.5%
Non-performing assets and past due loans to
total loans 0.44% 0.13% 0.18% 0.15% 0.22%
NON-PERFORMING ASSETS AND PAST DUE LOANS TO
TOTAL ASSETS 0.36% 0.11% 0.15% 0.11% 0.15%
-----------------------------------------------
LOAN PORTFOLIO
The Company's lending activities are its principal source of income. Real estate
loans, including residential permanents and construction, and commercial
permanents, represent the major portion of the Company's loan portfolio.
At December 31, 2002 loans, including loans held-for-sale, net of unearned
income and allowance for loan losses, totaled $535.8 million and increased 30.4%
from a 2001 year-end total of $410.9 million. In 2001, net loans increased 34.4%
from a year-end 2000 total of $305.7 million. The increase in loans in 2002
included an increase in real estate construction loans of $16.8 million, or
17.9%, and an increase in real estate mortgage loans of $105.8 million, or
38.5%. In 2001 growth in loans was also concentrated in these two categories
with real estate construction loans increasing $29.0 million, or 44.3%, while
real estate mortgage loans increased $76.6 million, or 38.6%. The increases in
real estate construction loans over the past two years are the direct result of
the Company's increased focus in this area and the hiring of loan officers
specializing in residential construction lending. At December 31, 2002, $69.5
million of real estate construction loans were to commercial builders of
single-family homes, $18.8 million were to individuals and $23.1 million were
related to commercial properties. The Company expects that real estate
construction loans will continue to grow, but not at the pace experienced in
2001 and 2002, although there can be no assurance.
The majority of the Bank's loan portfolio consists of construction and
commercial real estate loans. At December 31, 2002, the Bank had $69.5 million
of construction loans to commercial builders of single family housing in the
Northern Virginia market, representing 12.8% of total loans. These loans are
made to a number of unrelated entities and generally have a term of twelve to
eighteen months. Adverse developments in the Northern Virginia real estate
market or economy could have an adverse impact on this portfolio of loans and
the Bank's income and financial position. An additional 48.9% of the loan
portfolio at December 31, 2002 was secured by commercial, non-farm,
nonresidential real estate. These loans represent obligations of a diversified
pool of borrowers across numerous businesses and industries in the Northern
Virginia market and include some loans that, although secured by commercial real
estate, are commercial purpose loans made based on the financial condition of
the underlying business. At December 31, 2002, the Company had no other
concentrations of loans in any one industry exceeding 10% of its total loan
portfolio. An industry for this purpose is defined as a group of counterparties
that are engaged in similar activities and have similar economic characteristics
that would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions. The Bank seeks to manage
its concentrations of loans through the establishment of limits on the level of
its various loan types to total loans and to total capital. For further
information regarding concentrations of loans see Note 16 to the Consolidated
Financial Statements.
13
Tables 7 and 8 present information pertaining to the composition of the loan
portfolio including unearned income, allowance for loan losses, and the
maturity/re-pricing of selected loans.
TABLE 7: SUMMARY OF TOTAL LOANS
DECEMBER 31,
----------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
----------------------------------------------------
Real estate - mortgage $380,972 $275,141 $198,541 $156,998 $109,774
Real estate - construction 111,333 94,452 65,460 17,238 12,794
Commercial 44,559 39,153 37,406 26,423 23,514
Consumer 6,941 8,004 7,995 6,968 4,983
----------------------------------------------------
Total loans $543,805 $416,750 $309,403 $207,627 $151,065
Less unearned income 2,033 1,444 883 567 187
Less allowance for loan losses 5,924 4,356 2,803 1,889 1,438
----------------------------------------------------
LOANS, NET $535,848 $410,950 $305,717 $205,171 $149,440
----------------------------------------------------
TABLE 8: MATURITY/REPRICING SCHEDULE OF SELECTED LOANS
At December 31, 2002 REAL ESTATE- REAL ESTATE-
(Dollars in thousands) MORTGAGE CONSTRUCTION COMMERCIAL CONSUMER
--------------------------------------------------
VARIABLE:
Within 1 year $ 48,151 $ 24,405 $ 13,194 $ 1,338
1-to-5 years 159,595 2,382 561 --
After 5 years 14,404 -- -- --
FIXED RATE:
Within 1 year 40,908 59,463 17,045 2,358
1-to-5 years 42,144 24,721 13,404 2,907
After 5 years 75,770 362 355 338
--------------------------------------------------
TOTAL LOANS $380,972 $111,333 $ 44,559 $ 6,941
--------------------------------------------------
At December 31, 2002, the aggregate amount of loans due after one year that have
fixed rates was approximately $160.0 million, and the amount with variable or
adjustable rates was approximately $176.9 million.
SECURITIES
The securities portfolio plays a primary role in the management of the interest
rate sensitivity of the Company, provides additional interest income, serves as
a source of liquidity, and is used as needed to meet certain collateral
requirements.
The securities portfolio consists of two components, securities held-to-maturity
and securities available-for-sale. Securities are classified as held-to-maturity
based on management's intent and the Company's ability, at the time of purchase,
to hold such securities to maturity. These securities are carried at amortized
cost. Securities which may be sold in response to changes in market interest
rates, changes in the securities' prepayment risk, increased loan demand,
general liquidity needs, and other similar factors are classified as
available-for-sale and are carried at estimated fair value.
Total securities increased $18.2 million, or 34.4%, from $53.0 million at
December 31, 2001 to $71.2 million at December 31, 2002 and increased $7.7
million, or 17.1%, from $45.3 million at year-end 2000 to $53.0 million at
year-end 2001. Securities of U.S. Government Agencies represent the majority of
the portfolio while obligations of states and or political subdivisions have
increased as a percentage of the total portfolio. Table 9 provides information
regarding the composition of the securities portfolio and Table 10 details the
maturities and weighted average yields (on a tax equivalent basis) at the dates
indicated. See Note 2 to the Consolidated Financial Statements for additional
information regarding the securities portfolio.
14
At December 31, 2002, there were no issuers, other than issuers who are
US government agencies, whose securities owned by the Company had an aggregate
book value of more than 10% of total stockholder's equity of the Company.
TABLE 9: SECURITIES PORTFOLIO
DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------
(Dollars in thousands) Percent Percent Percent
Book Value of total Book Value of total Book Value of total
-----------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 52,661 73.92% $ 40,619 76.62% $ 29,406 64.98%
Obligations of states/political
subdivisions 1,229 1.73% 275 .52% 270 .60%
Federal Reserve Bank stock 542 .76% 392 .74% 392 .87%
Federal Home Loan Bank stock 1,194 1.68% 732 1.38% 667 1.47%
Community Bankers' Bank stock 55 .08% 55 .10% 55 .12%
-----------------------------------------------------------------------
$ 55,681 78.17% $ 42,073 79.36% $ 30,790 68.04%
-----------------------------------------------------------------------
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 8,534 11.98% $ 6,017 11.35% $ 13,992 30.92%
Obligations of states/political
subdivisions 6,534 9.17% 3,945 7.44% -- --
Domestic corporate debt obligations 482 .68% 979 1.85% 472 1.04%
-----------------------------------------------------------------------
$ 15,550 21.83% $ 10,941 20.64% $ 14,464 31.96%
-----------------------------------------------------------------------
$ 71,231 100.00% $ 53,014 100.00% $ 45,254 100.00%
-----------------------------------------------------------------------
TABLE 10: MATURITY OF SECURITIES
At December 31, 2002 2001 2000
-----------------------------------------------------------------------
(Dollars in thousands) Weighted Weighted Weighted
Average Average Average
Book Value Yield Book Value Yield Book Value Yield
-----------------------------------------------------------------------
Maturing within one year $ -- -- $ -- -- $ 3,725 6.07%
Maturing after one through five years 38,549 3.77% 16,533 4.71% 22,314 5.87%
Maturing after five through ten years 12,966 4.87% 7,738 6.29% 8,113 6.87%
Maturing after ten years 19,716 5.96% 28,743 6.65% 11,102 6.66%
-----------------------------------------------------------------------
$ 71,231 4.58% $ 53,014 5.99% $ 45,254 6.26%
-----------------------------------------------------------------------
DEPOSITS
The Company's principal source of funds is depository accounts comprised of
demand deposits, savings and money market accounts, and time deposits.
Substantially all deposits are provided by individuals and businesses located
within the communities served.
Total deposits increased $160.1 million, or 39.3%, in 2002 from $406.9 million
at December 31, 2001 to $567.0 million at year-end 2002, and increased $96.0
million, or 30.9%, from $310.9 million at year-end 2000 to $406.9 million at
year-end 2001. In 2002, growth by deposit category included a 48.4% increase in
non-interest bearing deposits, a 43.7% increase in savings accounts and
interest-bearing demand deposits, and a 33.7% increase in time deposits. In 2001
non-interest bearing deposits increased 21.0%, savings and interest-bearing
demand deposits grew 27.9% and time deposits increased 36.5%. The average rate
paid on interest-bearing deposits fell one hundred and forty-three basis points
from 4.64% for the year ended December 31, 2001 to 3.21% for the year ended
December 31, 2002, and decreased thirty-four basis points from 4.98% in 2000 to
4.64% in 2001. Rates declined in all deposit account categories and in some
cases have reached near floor levels; however, the average rate on time deposits
is expected to decline further in 2003 as $169.6 million in time deposits will
mature and re-price at rates lower than the portfolio's current average rate.
15
Table 11 details maturities of time deposits with balances of $100,000 and over
which represent 39.9% of total time deposits as of December 31, 2002. See Note 6
to the Consolidated Financial Statements and Table 3 to this Management's
Discussion and Analysis for additional information regarding the maturities of
time deposit.
TABLE 11: MATURITIES OF TIME DEPOSITS WITH BALANCES $100,000 OR MORE
DECEMBER 31,
------------------------------
(Dollars in thousands) 2002 2001 2000
------------------------------
3 months or less $ 18,477 $ 11,900 $ 2,159
3-6 months 10,831 9,029 3,960
6-12 months 44,289 21,075 22,509
Over 12 months 37,104 43,204 27,730
------------------------------
TOTAL $110,701 $ 85,208 $ 56,358
------------------------------
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase
that are secured transactions with customers and generally mature the day
following the date sold. These transactions are provided to several of the
Bank's non-interest bearing demand deposit customers and are considered a
core-funding source of the Bank. Short-term borrowings also include Federal
funds purchased, which are unsecured overnight borrowings from other financial
institutions and are generally used to accommodate short-term liquidity needs.
Table 12 provides information on the balances and interest rates on short-term
borrowings for the years ended December 31, 2002, 2001 and 2000 (dollars in
thousands):
TABLE 12: SHORT-TERM BORROWINGS
At December 31, 2002 2001 2000
-----------------------------
Securities sold under agreement to repurchase $32,081 $32,931 $28,097
Federal funds purchased -- 9,521 1,000
-----------------------------
Total $32,081 $42,452 $29,097
Weighted interest rate at year end 0.37% 1.05% 5.06%
Averages for the year ended December 31,
Outstanding $33,791 $35,851 $23,537
Interest rate 0.73% 2.72% 4.57%
Maximum month-end outstanding $40,251 $42,452 $30,280
-----------------------------
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.
16
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
$93.5 million, or 74.6%, from $125.3 million at December 31, 2001, to $218.8
million at December 31, 2002, and increased $27.0 million from $98.3 million at
December 31, 2000, to $125.3 million at December 31, 2001. The increase in 2002
was due to higher levels of loans maturing within one-year, an increase in
federal funds sold of $24.1 million, and an increase in available-for-sale
securities. Additional sources of liquidity available to the Bank 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, while
the Company maintains a line of credit with a correspondent bank strictly for
the purpose of providing additional capital to the Bank. See Note 13 to the
Consolidated Financial Statements for further information regarding these
additional liquidity sources.
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 needs 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 Company's wholly-owned subsidiary, Virginia Commerce
Bank (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. The Bank's Tier
1 risk-based capital ratio was 6.69% at December 31, 2002, compared to 6.32% at
December 31, 2001. The total risk-based capital ratio was 10.33% at December 31,
2002, compared to 10.09% at December 31, 2001. These ratios are in excess of the
mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank's
leverage ratio was 5.72% at December 31, 2002 compared to 5.41% at December 31,
2001. The Company's Tier 1 risk-based capital ratio, total risk-based capital
ratio, and leverage ratio was 10.03%, 11.89% and 8.52%, respectively, at
December 31, 2002 compared to 6.35%, 7.41%, and 5.44% at December 31, 2001.
These increases in both the Company's and the Bank's capital ratios were
primarily due to the $7 million in additional capital raised in the rights
offering in July 2002 and the $18 million in trust preferred capital notes
issued in the fourth quarter of the year. As of December 31, 2002 the Company
still held $8.0 million of the proceeds from the trust preferred securities.
Those funds were subsequently down-streamed to the Bank in the form of
additional subordinated debt and common equity in January 2003 and further
increased the Bank's capital ratios.
During 2001, the Company continued to borrow funds under a line of credit with a
correspondent bank in order to provide capital to fund growth and expansion at
the Bank. At December 31, 2001, the amount outstanding under the line of credit
was $11.0 million, as compared to $7.0 million at December 31, 2000. In 2002, as
strong asset growth continued, the Company provided additional capital through a
$7.0 million rights offering to existing stockholders in July 2002. Although the
offering was successful, the Company believed that additional capital would be
necessary to fund future growth. In November and December 2002 the Company
formed two financing subsidiaries in order to issue $18.0 million in trust
preferred securities through a private placement to unrelated parties. As the
$18.0 million in proceeds were in excess of current needs the Company re-paid
the $11.0 million outstanding on its line of credit. The Company continues to
maintain its line of credit; however, it is currently in a re-negotiation
process. Until the process is completed further advances would require the
correspondent's approval.
The ability of the Company to continue to grow is dependent on its earnings and
the ability to obtain additional funds for contribution to the Bank's capital,
through additional borrowing, the sale of additional common stock, or through
the issuance of additional trust preferred securities. In the event that the
Company is unable to obtain additional capital for the Bank on a timely basis,
the growth of the Company and the Bank may be curtailed, and the Company and the
Bank may be required to reduce their level of assets in order to maintain
compliance with regulatory capital requirements. Under those circumstances net
income and the rate of growth of net income may be adversely affected. The
Company believes that its current level of capital is sufficient to meet
anticipated growth, although there can be no assurance.
17
DIVIDENDS
The Company has not paid cash dividends since 1995, electing to retain earnings
for funding the growth of the Company and its business. The Company currently
anticipates continuing the policy of retaining earnings to fund growth. The
ability of the Company to pay dividends, should it elect to do so, depends
largely upon the ability of the Bank to declare and pay dividends to the
Company, as the principal source of the Company's revenue is dividends paid by
the Bank. Future dividends will depend primarily upon the Bank's earnings,
financial condition, and need for funds, as well as governmental policies and
regulations applicable to the Company and the Bank, which limit the amount that
may be paid as dividends without prior approval.
MARKET PRICE OF STOCK AND DIVIDENDS
The Company's stock is traded on the Nasdaq National Market under the symbol
"VCBI". Table 13 sets forth the range of high and low sales prices (adjusted for
stock dividends and splits) known to the Company for each full quarterly period
within the two most recent fiscal years.
TABLE 13: MARKET PRICE OF STOCK AND DIVIDENDS
2002 2001
--------------------------------------
Quarter High Low High Low
- -----------------------------------------------------------
First $22.20 $16.80 $12.12 $ 8.48
Second 27.70 19.28 12.80 11.20
Third 26.44 21.25 16.80 12.44
Fourth 25.07 22.51 16.84 13.32
The approximate number of the Company's stockholders at December 31, 2002, is
750. Information regarding stock dividends and splits in 2002, 2001, and 2000 is
as follows:
1. A five for four stock split in the form of a 25% stock dividend was
declared on February 28, 2002, for stockholders of record on March 15,
2002, and was paid on April 12, 2002.
2. A five for four stock split in the form of a 25% stock dividend was
declared on February 28, 2001, for stockholders of record on April 16,
2001, and was paid on May 11, 2001.
3. A stock dividend of 10% was declared on April 26, 2000, for stockholders
of record on May 12, 2000, and was paid on May 26, 2000.
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of Virginia Commerce Bancorp, Inc. (the
"Company") will be held at 4:00 pm on Wednesday, April 30, 2003 at "The
Washington Golf and Country Club", 3017 North Glebe Road, Arlington, Virginia.
ANNUAL REPORT ON FORM 10-K
A COPY OF FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
AVAILABLE WITHOUT CHARGE TO STOCKHOLDERS UPON WRITTEN REQUEST TO:
WILLIAM K. BEAUCHESNE
TREASURER AND CHIEF FINANCIAL OFFICER
VIRGINIA COMMERCE BANCORP, INC.
14201 SULLYFIELD CIRCLE #500
CHANTILLY, VA 20151
18
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
Virginia Commerce Bancorp, Inc. and subsidiaries
Arlington, Virginia
We have audited the accompanying consolidated balance
sheets of Virginia Commerce Bancorp, Inc. and subsidiaries as of December
31, 2002 and 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for the years ended December
31, 2002, 2001 and 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Virginia Commerce Bancorp, Inc. and subsidiaries as of December
31, 2002 and 2001, and the results of their operations and their cash flows
for the years ended December 31, 2002, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Yount, Hyde & Barbour, P.C.
Winchester Virginia
February 13, 2003
19
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
December 31,
---------------------
2002 2001
---------------------
ASSETS
Cash and due from banks $ 19,907 $ 15,155
Securities (fair value: 2002, $71,766; 2001, $53,143) 71,231 53,014
Federal funds sold 24,071 --
Loans held-for-sale 18,948 15,842
Loans, net of allowance for loan losses of $5,924 in 2002 516,900 395,108
and $4,356 in 2001
Bank premises and equipment, net 6,517 6,238
Accrued interest receivable 2,489 2,211
Other assets 2,824 1,943
---------------------
Total assets $662,887 $489,511
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Non-interest bearing demand deposits $ 98,575 $ 66,448
Savings and interest-bearing demand deposits 190,811 132,811
Time deposits 277,610 207,663
---------------------
Total deposits $566,996 $406,922
Securities sold under agreement to repurchase and federal 32,081 42,452
funds purchased
Other borrowed funds 400 11,400
Trust preferred capital notes 18,000 --
Accrued interest payable 1,271 1,301
Other liabilities 2,289 1,216
Commitments and contingent liabilities -- --
---------------------
Total liabilities $621,037 $463,291
---------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par, 1,000,000 shares $ -- $ --
authorized and un-issued
Common stock, $1.00 par, 5,000,000 shares authorized,
issued and outstanding 2002, 3,739,330; 2001, 2,720,816 3,739 2,721
Surplus 19,622 13,190
Retained earnings 17,808 10,138
Accumulated other comprehensive income 681 171
---------------------
Total stockholders' equity $ 41,850 $ 26,220
---------------------
Total liabilities and stockholders' equity $662,887 $489,511
---------------------
See Notes to Consolidated Financial Statements.
20
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
-----------------------------------
2002 2001 2000
-----------------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 35,491 $ 29,720 $ 23,215
Interest and dividends on investment securities:
U.S. Treasury securities and agency obligations 2,769 3,336 3,035
Other securities 382 190 90
Interest on federal funds sold 355 650 400
Interest on deposits with other banks 1 1 36
-----------------------------------
Total interest and dividend income $ 38,998 $ 33,897 $ 26,776
-----------------------------------
INTEREST EXPENSE:
Deposits $ 13,341 $ 14,494 $ 11,425
Securities sold under agreement to repurchase and 245 976 1,076
federal funds purchased
Other borrowed funds 497 521 360
Trust preferred capital notes 45 -- --
-----------------------------------
Total interest expense $ 14,128 $ 15,991 $ 12,861
-----------------------------------
NET INTEREST INCOME: $ 24,870 $ 17,906 $ 13,915
Provision for loan losses 1,678 1,572 947
-----------------------------------
Net interest income after provision for loan losses $ 23,192 $ 16,334 $ 12,968
-----------------------------------
NON-INTEREST INCOME:
Service charges and other fees $ 1,630 $ 1,271 $ 980
Fees and net gains on loans held-for-sale 3,920 3,379 1,586
Gain (loss) on sale of securities (1) 13 --
Other 44 41 33
-----------------------------------
Total non-interest income $ 5,593 $ 4,704 $ 2,599
-----------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 10,159 $ 8,130 $ 5,812
Occupancy expense 2,915 2,337 1,946
Data processing 1,079 902 750
Other operating expense 3,064 2,613 2,128
-----------------------------------
Total non-interest expense $ 17,217 $ 13,982 $ 10,636
-----------------------------------
Income before taxes on income $ 11,568 $ 7,056 $ 4,931
Provision for income taxes 3,892 2,391 1,681
-----------------------------------
NET INCOME $ 7,676 $ 4,665 $ 3,250
-----------------------------------
Earnings per common share, basic $ 2.16 $ 1.38 $ 0.96
Earnings per common share, diluted $ 1.92 $ 1.26 $ 0.91
-----------------------------------
See Notes to Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Other Total
Preferred Common Retained Comprehensive Comprehensive Stockholders'
Stock Stock Surplus Earnings Income (Loss) Income Equity
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ 1,970 $ 11,090 $ 4,983 $ (554) $ 17,489
----------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 2000 3,250 $ 3,250 3,250
Other comprehensive income, net of
tax, unrealized holding losses
arising during the period (net of
tax of $221) 430 430 430
----------------------------------------------------------------------------------------
Total comprehensive income $ 3,680
----------------------------------------------------------------------------------------
10% stock dividend -- 196 2,558 (2,754) --
Cash paid in lieu of fractional
shares -- -- -- (3) -- (3)
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ -- $ 2,166 $ 13,648 $ 5,476 $ (124) $ 21,166
----------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 2001 4,665 $ 4,665 4,665
Other comprehensive income, net of
tax, unrealized holding gains
arising during the period (net of
tax of $156) 304
Less reclassification adjustment,
(net of tax of $4) (9)
----------------------------------------------------------------------------------------
Total other comprehensive income 295 295 295
----------------------------------------------------------------------------------------
Total comprehensive income $ 4,960
----------------------------------------------------------------------------------------
Five for four stock split in form
of a 25% stock dividend -- 541 (541) -- -- --
Cash paid in lieu of fractional shares -- -- -- (3) -- (3)
Stock options exercised -- 14 83 -- -- 97
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ -- $ 2,721 $ 13,190 $ 10,138 $ 171 $ 26,220
----------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 2002 7,676 $ 7,676 7,676
Other comprehensive income, net of
tax, unrealized holding gains
arising during the period
(net of tax of $263) 510 510 510
----------------------------------------------------------------------------------------
Total comprehensive income $ 8,186
----------------------------------------------------------------------------------------
Five for four stock split in form
of a 25% stock dividend -- 680 (680) -- -- --
Cash paid in lieu of fractional shares -- -- -- (6) -- (6)
Rights offering, net of costs of $45 -- 291 6,666 -- -- 6,957
Stock options/warrants exercised -- 47 446 -- -- 493
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ -- $ 3,739 $ 19,622 $ 17,808 $ 681 $ 41,850
----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 38,709 $ 33,719 $ 26,066
Other income received 5,594 4,691 2,599
Net change in loans held-for-sale (3,106) (10,924) (3,458)
Interest paid (14,159) (15,999) (12,228)
Cash paid to suppliers and employees (16,293) (12,720) (9,709)
Income tax benefit of stock options/warrants exercised (323) -- --
Income taxes paid (3,538) (3,454) (1,519)
----------------------------------------
Net cash provided by (used in) operating activities $ 6,884 $ (4,687) $ 1,751
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments on
securities held-to-maturity $ 3,358 $ 9,009 $ 4,040
Proceeds from maturities and principal payments on
securities available-for-sale 44,531 47,367 5,156
Proceeds from sales of securities available-for-sale 1,350 14,016 --
Purchases of securities held-to-maturity (7,975) (5,446) (743)
Purchases of securities available-for-sale (58,699) (72,238) (6,756)
Net increase in loans made to customers (123,470) (95,880) (98,035)
Purchase of bank premises and equipment (1,303) (1,375) (823)
----------------------------------------
Net cash used in investing activities $(142,208) $(104,547) $ (97,161)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings accounts $ 90,127 $ 40,503 $ 28,819
Net increase in time deposits 69,947 55,485 39,071
Net increase (decrease) in securities sold under
agreement to repurchase and federal funds purchased (10,371) 13,355 11,260
Net increase (decrease) in other borrowed funds (11,000) 4,000 4,500
Proceeds from issuance of trust preferred capital notes 18,000 -- --
Proceeds from issuance of capital stock 7,450 97 --
Cash paid in lieu of fractional shares (6) (3) (3)
----------------------------------------
Net cash provided by financing activities $ 164,147 $ 113,437 $ 83,647
----------------------------------------
Increase (decrease) in cash and cash equivalents $ 28,823 $ 4,203 $ (11,763)
----------------------------------------
CASH AND CASH EQUIVALENTS:
Beginning 15,155 10,952 22,715
Ending $ 43,978 $ 15,155 $ 10,952
----------------------------------------
See Notes to Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES: 2002 2001 2000
---------------------------------------
Net income $ 7,676 $ 4,665 $ 3,250
---------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,024 878 801
Provision for loan losses 1,678 1,572 947
Deferred tax benefit (609) (566) (339)
Amortization of security premiums and accretion of
discounts (11) (9) 25
Origination of loans held-for-sale (207,817) (180,737) (79,831)
Sale of loans 204,711 169,813 76,373
Loss (gain) on sale of securities available-for-sale 1 (13) --
Increase in other assets (534) (54) (18)
(Decrease) increase in other liabilities 1,073 (59) 646
Increase in accrued interest receivable (278) (169) (736)
(Decrease) increase in accrued interest payable (30) (8) 633
---------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 6,884 $ (4,687) $ 1,751
---------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
Unrealized gain (loss) on securities $ 773 $ 447 $ 651
See Notes to Consolidated Financial Statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BANKING ACTIVITIES AND ACCOUNTING POLICIES
BUSINESS
On December 22, 1999, Virginia Commerce Bancorp, Inc. (the "Company") became the
holding company for Virginia Commerce Bank (the "Bank"). The Company acquired
the Bank through a share exchange in which the stockholders of the Bank received
one share of the Company for each share of the Bank. The exchange was a tax-free
transaction for federal income tax purposes. The merger was accounted for on the
same basis as a pooling-of-interests.
The Company provides loan and deposit products to commercial and retail
customers in the Washington Metropolitan Area, with the primary emphasis on
Northern Virginia. The loan portfolio is generally collateralized by assets of
the customers and is expected to be re-paid from cash flows or proceeds from the
sale of selected assets of the borrowers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, the Bank, VCBI Capital Trust I, VCBI Capital
Trust II and Northeast Land and Investment Company. In consolidation, all
significant intercompany accounts and transactions have been eliminated.
RISKS AND UNCERTAINTIES
In its normal course of business, the Company encounters two significant types
of risk: economic and regulatory. There are three main components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
re-price more rapidly or on a different basis than its interest-earning assets.
Credit risk is the risk of default on the Company's loan portfolio that results
from the borrowers' inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral underlying
loans receivable and the valuation of real estate held by the Company.
The determination of the allowance for loan losses is based on estimates that
are particularly susceptible to significant changes in the economic environment
and market conditions. Management believes that, as of December 31, 2002, the
allowance for loan losses is adequate based on information currently available.
A worsening or protracted economic decline or substantial increase in interest
rates, would increase the likelihood of losses due to credit and market risks
and could create the need for substantial increases to the allowance for loan
losses. The Company is subject to the regulations of various regulatory
agencies, which can change significantly from year to year. In addition, the
Company undergoes periodic examinations by regulatory agencies, which may
subject it to further changes based on the regulators' judgments about
information available to them at the time of their examination.
SECURITIES
Debt securities that management has the positive intent and ability to hold to
maturity are classified as held-to-maturity and recorded at amortized cost.
Securities not classified as held-to-maturity, including equity securities with
readily determinable fair values, are classified as available-for-sale and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
Purchased premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
LOANS HELD-FOR-SALE
Loans held-for-sale are carried at the lower of cost or market, determined in
the aggregate. Market value considers commitment agreements with investors and
prevailing market prices. All loans originated by the mortgage banking operation
are pre-sold and held-for-sale to outside investors, servicing released.
25
LOANS
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by real estate loans.
The ability of the Company's debtors to honor their contracts is dependent upon
the real estate and general economic conditions of the Company's market area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid
principal balances adjusted for the allowance for loan losses and any deferred
fees or costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain origination costs, are
deferred and recognized as an adjustment of the related loan yield using the
interest method.
The accrual of interest on real estate and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
the process of collection. Installment loans are typically charged-off no later
than 180 days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and fut