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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, 2003
Commission file number: 000-28635
Virginia Commerce Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Virginia 54-1964895
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5350 Lee Highway, Arlington, Virginia 22207
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(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 (S.S. 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [x] No [ ]
The registrant's Common Stock is traded on the Nasdaq National Market under the
symbol VCBI. The aggregate market value of the approximately 4,681,084 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
June 30, 2003 was approximately $90.3 million, based on the closing sales price
of $19.29 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, 2004, 7,932,285 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 28, 2004 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 28, 2004, 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" at Pages 48 through 57.
ITEM 2. PROPERTIES. See "Properties" at Page 57
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 2003.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES. See
"Market Price of Stock and Dividends" at Page 20.
ITEM 6. SELECTED FINANCIAL DATA. See "Five Year Financial Summary"
at 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" at
Pages 4 through 20.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Asset/Liability Management and Quantitative and
Qualitative Disclosures About Market Risk" at Page 9.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See
Consolidated Financial Statements at Pages 22 through 47.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. None.
ITEM 9A. CONTROLS AND PROCEDURES. See "Controls and Procedures" at
Page 57.
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 at pages 4 through 7, and
under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" at page 18, of the Proxy
Statement. The company has adopted a code of ethics that
applies to its Chief Executive Officer and Chief Financial
Officer. A copy of the code of ethics will be provided to
any person, without charge, upon written request directed to
Lynda Cornell, Assistant to the President, Virginia Commerce
Bancorp, Inc., 5350 Lee Highway, Arlington, Virginia 22207.
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 at pages 8 through 14
of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 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 at Page
3 of the Proxy Statement, and under the caption "Securities
Authorized for Issuance Under Equity Compensation Plans" at
page 11 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 at page
12 of the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information
required by Item 14 is hereby incorporated herein by
reference from the material under the caption "Independent
Certified Public Accountants" contained at page 19 of the
Proxy Statement.
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 58.
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FIVE YEAR FINANCIAL SUMMARY
Year Ended December 31,
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2003 2002 2001 2000 1999
----------- ----------- ----------- ---------- ------------
(Dollars in thousand, except per share amounts)
SELECTED YEAR-END BALANCES
Total assets $ 881,124 $ 662,887 $ 489,511 $ 371,182 $ 282,575
Total stockholders' equity 55,092 41,850 26,220 21,166 17,489
Total loans (net) 658,364 535,848 410,950 305,717 205,171
Total deposits 773,511 566,996 406,922 310,934 243,044
SUMMARY RESULTS OF OPERATIONS
Interest income $ 45,968 $ 38,998 $ 33,897 $ 26,776 $ 18,851
Interest expense 13,893 14,128 15,991 12,861 8,679
Net interest income $ 32,075 $ 24,870 $ 17,906 $ 13,915 $ 10,172
Provision for loan losses 1,575 1,678 1,572 947 480
Net interest income after
provision for loan losses $ 30,500 $ 23,192 $ 16,334 $ 12,968 $ 9,692
Non-interest income 7,746 5,593 4,704 2,599 1,999
Non-interest expense 20,820 17,217 13,982 10,636 8,397
Income before taxes $ 17,426 $ 11,568 $ 7,056 $ 4,931 $ 3,294
Income tax expense 5,880 3,892 2,391 1,681 1,128
Net income $ 11,546 $ 7,676 $ 4,665 $ 3,250 $ 2,166
PER SHARE DATA (1)
Net income, basic $ 1.48 $ 1.08 $ 0.69 $ 0.48 $ 0.32
Net income, diluted $ 1.36 $ 0.96 $ 0.63 $ 0.45 $ 0.30
Book value $ 7.01 $ 5.60 $ 3.86 $ 3.13 $ 2.59
Average number of shares outstanding 7,786,755 7,119,494 6,778,378 6,766,796 6,762,750
GROWTH AND SIGNIFICANT RATIOS
% Change in net income 50.42% 64.54% 43.54% 50.06% 44.04%
% Change in assets 32.92% 35.42% 31.88% 31.36% 27.03%
% Change in loans 22.86% 30.39% 34.42% 49.01% 37.29%
% Change in deposits 36.42% 39.34% 30.87% 27.93% 28.77%
% Change in equity 31.64% 59.61% 23.88% 21.02% 10.47%
Equity to asset ratio 6.25% 6.31% 5.36% 5.70% 6.19%
Return on average assets 1.47% 1.32% 1.05% 1.00% 0.87%
Return on average equity 23.71% 23.06% 19.37% 17.04% 13.03%
Average equity to average assets 6.21% 5.71% 5.44% 5.87% 6.65%
Efficiency ratio (2) 52.17% 56.52% 61.84% 64.41% 68.89%
(1) Adjusted for all years presented giving retroactive effect to a 10% stock
restructuring in 1999, a 10% stock dividend in 2000, five-for-four stock
splits in the form of 25% stock dividends in 2001and 2002, and a
two-for-one split in the form of a 100% stock dividend in 2003.
(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 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 that 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 principals 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 thirteen 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 and Prince
William Counties and the cities of Alexandria, Falls Church and Manassas. Its
service area also covers, to a lesser extent, Washington, D.C. and the nearby
Maryland counties of Montgomery and Prince Georges. The Bank's customer base
includes small-to-medium size businesses including firms that have contracts
with the U.S. government, associations, retailers and industrial businesses,
professionals and their firms, business executives, investors and consumers.
Additionally, the Bank has strong market niches in commercial real estate,
construction and residential mortgage lending.
CRITICAL ACCOUNTING POLICIES
During the year ended December 31, 2003 there were no changes in the Company's
critical accounting policies as reflected in the last report.
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use.
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In addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
The allowance for loan losses is an estimate of the losses that are inherent in
our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance for loans identified as impaired. Impairment testing includes
consideration of the borrower's overall financial condition, resources and
payment record, support available from financial guarantors and the fair market
value of collateral. These factors are combined to estimate the probability and
severity of inherent losses. When impairment is identified, then a specific
reserve is established based on the Company's calculation of the loss embedded
in the individual loan. Large groups of smaller balance, homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for impairment.
The formula allowance is used for estimating the loss on internally risk rated
loans exclusive of those identified as impaired. The loans meeting the criteria
for special mention, substandard, doubtful and loss, as well as impaired loans
are segregated from performing loans within the portfolio. Internally classified
loans are then grouped by loan type (commercial, commercial real estate,
commercial construction, residential real estate, residential construction or
installment). Each loan type is assigned an allowance factor based on
management's estimate of the associated risk, complexity and size of the
individual loans within the particular loan category. Classified loans are
assigned a higher allowance factor than non-rated loans due to management's
concerns regarding collectibility or management's knowledge of particular
elements surrounding the borrower. Allowance factors grow with the worsening of
the internal risk rating. The unallocated formula is used to estimate the loss
of non-classified loans and loans identified for impairment testing for which no
impairment was identified. These un-criticized loans are also segregated by loan
type and allowance factors are assigned by management based on delinquencies,
loss history, trends in volume and terms of loans, effects of changes in lending
policy, the experience and depth of management, national and local economic
trends, concentrations of credit, quality of the loan review system and the
effect of external factors (i.e. competition and regulatory requirements). The
factors assigned differ by loan type. The unallocated allowance captures losses
whose impact on the portfolio has occurred but has yet to be recognized in
either the formula or specific allowance. Allowance factors and the overall size
of the allowance may change from period to period based on management's
assessment of the factors described above 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
12.
OVERVIEW
In 2003, the Company continued to experience significant growth in total assets,
loans, deposits and net income. Total assets increased $218.2 million, or 32.9%,
from $662.9 million at December 31, 2002, to $881.1 million at December 31,
2003. Loans, including loans held-for-sale, net of allowance for loan losses,
increased $122.6 million, or 22.9%, from $535.8 million at December 31, 2002, to
$658.4 million at December 31, 2003. Total deposits increased $206.5 million, or
36.4%, from $567.0 million at December 31, 2002, to $773.5 million and net
income increased $3.8 million, or 50.4%, from $7.7 million for the fiscal year
ended December 31, 2002, to $11.5 million in 2003. In 2002, total assets
increased 35.4% from $489.5 million at December 31, 2001, to $662.9 million at
December 31, 2002, loans increased 30.4% from $410.9 million to $535.8 million
and deposits grew 39.3% from $406.9 million at December 31, 2002, to $567.0
million. Net income in 2002 was up $3.0 million, or 64.5% from $4.7 million in
2001 to $7.7 million.
As noted, the Company achieved significant growth in loans in 2003 with loans,
net of allowance for loan losses, increasing $122.6 million, or 22.9%, from
$535.8 million at December 31, 2002, to an outstanding balance of $658.4 million
at December 31, 2003. The majority of loan growth occurred in real estate
mortgage loans, which rose $66.9 million, or 17.6%, from $381.0 million at
December 31, 2002, to $447.9 million at December 31, 2003. Real estate
construction loans represented the second largest dollar increase rising $42.1
million, or 37.8%, from $111.3 million at December 31, 2002, to $153.4 million,
while a greater emphasis by the Company on commercial lending contributed to a
record level increase in commercial loans with total commercial loans increasing
$16.6 million, or 37.3%, from $44.6
5
million at December 31, 2002, to $61.2 million at December 31, 2003. Loan growth
in 2002 was similar in dollar size to what was achieved in 2003, with loans, net
of the allowance for loan losses, increasing $124.9 million from $410.9 million
at December 31, 2001, to $535.8 million at December 31, 2002. Growth by category
was similar in order with real estate mortgage loans increasing $105.8 million,
real estate construction loans increasing by $16.9 million and commercial loans
rising $5.4 million.
Deposit growth in 2003 of $206.5 million included a $21.2 million, or 21.5%,
increase in non-interest-bearing demand deposits from $98.6 million at December
31, 2002, to $119.8 million at December 31, 2003, a $149.3 million, or 78.3%,
increase in savings and interest-bearing demand deposits from $190.8 million at
December 31, 2002, to $340.1 million and a $36.0 million, or 13.0%, increase in
time deposits from $277.6 million at December 31, 2002, to $313.6 million at
December 31, 2003. In 2002, deposit growth included a $32.1 million increase in
non-interest-bearing demand deposits, a $58.0 million increase in savings and
interest-bearing demand deposits, and a $69.9 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.
While the Bank experienced strong growth in deposits other borrowed money and
repurchase agreements declined. Repurchase agreements, which are provided to
numerous demand deposit customers of the Bank, fell $1.2 million, or 3.7%, from
$32.1 million at December 31, 2002, to $30.9 million at December 31, 2003. Other
borrowed money, which represented an outstanding balance on the Bank's line of
credit with the Federal Home Loan Bank of Atlanta as of December 31, 2002 for
$400 thousand, was paid off in 2003. In 2002, repurchase agreements fell $10.4
million, or 24.4%, from $42.5 million at December 31, 2001, to $32.1 million at
December 31, 2002, and other borrowed money of $11.4 million at December 31,
2001 was reduced in 2002 by $11.0 million as the Company paid off its line of
credit with a correspondent bank that was used to supplement the Bank's capital
position. This pay off of the Company's line of credit was made possible with
the Company's successful completion of a $7.0 million rights offering in July
2002 and its issuance of $18.0 million in trust preferred securities in the
fourth quarter of 2002.
As the growth in loans in 2003 trailed deposit growth by $83.9 million,
investment securities, which are generally maintained as additional liquidity
sources and for various collateral needs, increased $78.0 million, or 109.5%,
from $71.2 million at December 31, 2002, to $149.2 million at December 31, 2003.
Growth was concentrated in short-term U.S. Government Agency obligations and
variable rate domestic corporate debt obligations in the available-for-sale
portfolio; however, at times during the year increases in long-term interest
rates and higher levels of liquidity provided the Company with some opportunity
for higher yields, and as a result approximately $30 million in seven to fifteen
year U.S. Government Agency obligations were added to the held-to-maturity
portfolio. The Bank generally avoided long-term investments in 2003 due to
historically low interest rates and its desire to maintain a low level of
interest rate risk to provide greater flexibility and opportunities when
interest rates rise. In 2002, investment securities increased $18.2 million, or
34.4%, from $53.0 million at December 31, 2001, to $71.2 million at December 31,
2002. The Bank also purchased $6.0 million in single premium bank-owned life
insurance policies in May 2003 through three highly rated carriers in order to
help offset the rising cost of employee health care benefits. These policies
were recorded on the balance sheet under other assets and contributed $178
thousand in non-interest income in 2003, on an after-tax basis.
For the year ended December 31, 2003, the Company achieved record earnings of
$11.5 million, an increase of 50.4% compared to earnings of $7.7 million for the
prior fiscal year as net interest income increased $7.2 million, or 29.0%, from
$24.9 million in 2002, to $32.1 million in 2003, non-interest income rose $2.1
million, or 38.5%, from $5.6 million in 2002, to $7.7 million and non-interest
expense was up 20.9% from $17.2 million in 2002, to $20.8 million in 2003. As a
result, the Company's efficiency ratio, as defined, improved from 56.5% for the
year ended December 31, 2002, to 52.2% in 2003. In 2002, earnings 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 and non-interest expense increased $3.2 million, or
23.1%. In 2001 the Company achieved earnings of $4.7 million, an increase of
43.5% compared to earnings of $3.3 million in 2000. On a diluted per share basis
earnings were $1.35, $0.96, and $0.63 in 2003, 2002, and 2001, respectively. The
Company's return on average assets was 1.47% for 2003, as compared to 1.32% in
2002 and 1.05% in 2001. Return on average equity increased to 23.71% in 2003, as
compared to 23.06% in 2002, and 19.37% in 2001.
Stockholders' equity increased $13.2 million, or 31.6%, from $41.8 million at
December 31, 2002, to $55.1 million at December 31, 2003, on earnings of $11.5
million, $2.4 million in proceeds and tax benefits from both the exercise of
stock options and warrants by Company directors and officers and the purchase of
stock by Company employees under an
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Employee Stock Purchase Plan, and a decline in other comprehensive income of
$694 thousand, net of tax. In 2002, stockholders' equity grew $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 a rights offering in
July 2003, $493 thousand from the exercise of stock options and warrants by
Company directors and officers and a $510 thousand increase in other
comprehensive income, net of tax. The total number of common shares outstanding
increased in 2003 by 4,120,961with 3,893,185 shares issued due to a two-for-one
stock split in the form of a one hundred percent stock dividend in April 2003,
219,343 shares issued as a result of the exercise of stock options and warrants
by Company directors and officers and 8,433 shares issued to employees under the
Company's Employee Stock Purchase Plan adopted in September 2003.
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 $7.2 million, or 29.0%, from $24.9 million in 2002, to $32.1
million in 2003, with an increase of $7.7 million in net interest income due to
growth in earning assets and a decline in net interest income of $462 thousand
due to an eighteen basis point drop in the net interest margin from 4.48% in
2002 to 4.30%. In 2002, 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 attributable to growth in earning assets and $794 thousand due to a
twenty-five basis point increase in the net interest margin from 4.23% in 2001
to 4.48% in 2002. In 2001 net interest income increased $4.0 million, or 28.7%,
from $13.9 million in 2000 to $17.9 million in 2001.
Since January 2001, the Federal Reserve has reduced the fed funds target rate by
over five hundred basis points with its last reduction in June 2003 to a current
level of 1.00%. Along with these reductions came a similar decline in the prime
lending rate, to which the majority of the Company's interest rates on loans are
tied, and significantly lower rates on treasuries, affecting the Bank's
investment securities portfolio. As a result the Company's average yield on
loans has steadily declined from 8.50% in 2001, to 6.89% in 2003, and its yield
on investment securities has fallen from 6.07% in 2001, to 3.98% in 2003.
Consequently the Company's yield on earnings assets fell ninety-nine basis
points in 2002, from 8.01% in 2001, to 7.02%, and it fell eighty-six basis
points in 2003, from 7.02% in 2002, to 6.16% in 2003. On the other side, the
cost of liabilities fell more significantly in 2002, falling one hundred and
forty-one basis points from 4.48% in 2001, to 3.07% in 2002, and slightly less
in 2003, falling eighty-two basis points from 3.07% in 2002, to 2.25% in 2003.
As a result the Company's net interest margin on earning assets increased in
2002 from 4.23% to 4.48% and declined in 2003 from 4.48% to 4.30%. With
expectations that interest rates will remain low, at least in the first half of
2004, the Company expects no significant improvement in its net interest margin
over the near term and may instead be slightly lower in the beginning of 2004
due to a decline in the net interest margin in the fourth quarter of 2003 to
4.21%.
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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, 2003, 2002, and 2001. 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 $2.1million, $1.6 million and $1.1 million for
2003, 2002, and 2001, respectively.
2003 2002 2001
------------------------------ ------------------------------ ------------------------------
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) $115,995 $ 4,526 3.98% $ 61,986 $ 3,152 5.16% $ 58,125 $ 3,527 6.07%
Loans, net of unearned income 595,816 41,065 6.89% 471,924 35,491 7.52% 349,586 29,720 8.50%
Federal funds sold 36,018 377 1.05% 22,165 355 1.60% 15,310 650 4.24%
------------------------------ ------------------------------ ------------------------------
TOTAL INTEREST-EARNING ASSETS $747,829 $45,968 6.16% $556,075 $38,998 7.02% $423,021 $ 33,897 8.01%
------------------------------ ------------------------------ ------------------------------
Other assets 35,754 27,235 19,630
------------------------------ ------------------------------ ------------------------------
TOTAL ASSETS $783,583 $583,310 $442,651
============================== ============================== ==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits
NOW accounts $157,958 $ 2,415 1.53% $ 89,756 $ 1,847 2.06% $ 72,231 $ 2,189 3.03%
Money market accounts 85,418 1,354 1.59% 54,144 1,213 2.24% 37,970 1,253 3.30%
Savings accounts 22,136 180 0.81% 16,131 220 1.36% 13,265 318 2.40%
Time deposits 299,752 8,965 2.99% 255,875 10,061 3.93% 188,968 10,734 5.68%
------------------------------ ------------------------------ ------------------------------
Total interest-bearing deposits $565,264 $12,914 2.28% $415,906 $13,341 3.21% $312,434 $14,494 4.64%
------------------------------ ------------------------------ ------------------------------
Securities sold under agreement
to repurchase and federal
funds purchased 32,963 123 0.37% 33,791 245 0.73% 35,851 976 2.72%
------------------------------ ------------------------------ ------------------------------
Other borrowed funds 351 21 5.98% 10,109 497 4.91% 8,770 521 5.94%
------------------------------ ------------------------------ ------------------------------
Trust preferred capital notes 18,000 835 4.64% 929 45 4.78% -- -- --
------------------------------ ------------------------------ ------------------------------
TOTAL INTEREST-BEARING LIABILITIES $616,578 $13,893 2.25% $460,735 $14,128 3.07% $357,055 $15,991 4.48%
------------------------------ ------------------------------ ------------------------------
Demand deposits and other liabilities 118,313 89,293 61,515
------------------------------ ------------------------------ ------------------------------
TOTAL LIABILITIES $734,891 $550,028 $418,570
------------------------------ ------------------------------ ------------------------------
Stockholders' equity 48,692 33,282 24,081
------------------------------ ------------------------------ ------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $783,583 $583,310 $442,651
============================== ============================== ==============================
Interest rate spread 3.91% 3.95% 3.53%
NET INTEREST INCOME AND MARGIN $32,075 4.30% $24,870 4.48% $17,906 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 34% rate.
8
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.
2003 COMPARED TO 2002 2002 COMPARED TO 2001
--------------------------------- ---------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
--------------------- Increase/ --------------------- Increase/
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
--------------------------------- ---------------------------------
INTEREST INCOME
Loans $ 8,539 $ (2,965) $ 5,574 $ 9,200 $ (3,429) $ 5,771
Securities 2,108 (734) 1,374 196 (571) (375)
Federal funds sold 145 (123) 22 110 (405) (295)
--------------------------------- ---------------------------------
Total interest income $10,792 $ (3,822) $ 6,970 $ 9,506 $ (4,405) $ 5,101
--------------------------------- ---------------------------------
INTEREST EXPENSE
Interest-bearing deposits:
NOW accounts $ 1,043 $ (475) $ 568 $ 361 $ (703) $ (342)
Money market accounts 496 (355) 141 362 (402) (40)
Savings accounts 49 (89) (40) 39 (137) (98)
Time deposits 1,328 (2,424) (1,096) 2,480 (3,153) (673)
--------------------------------- ---------------------------------
Total interest-bearing deposits $ 2,916 $ (3,343) $ (427) $ 3,242 $ (4,395) $ (1,153)
Securities sold under agreement to
repurchase and federal funds
purchased (3) (119) (122) (15) (716) (731)
Other borrowed funds (579) 103 (476) 64 (88) (24)
Trust preferred capital notes 791 (1) 790 45 -- 45
--------------------------------- ---------------------------------
Total interest expense $ 3,125 $ (3,360) $ (235) $ 3,336 $ (5,199) $ (1,863)
--------------------------------- ---------------------------------
CHANGE IN NET INTEREST INCOME $ 7,667 $ (462) $ 7,205 $ 6,170 $ 794 $6,964
================================= =================================
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 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.
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. A gap analysis is shown in Table 3 below, and reflects the
earlier of the maturity or repricing dates for various assets and liabilities as
of December 31, 2003. At that point in time, the Company had a cumulative net
asset sensitive twelve-month gap position of $3.9 million, or a positive 0.46%
of total interest-earning assets.
This position would generally indicate that over a period of one-year earnings
should rise in a rising interest rate environment as more assets would reprice
than liabilities and should decline in a falling interest rate environment.
Importantly, 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
9
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, 2003 INTEREST SENSITIVITY PERIODS
------------------------------------------------------------------
Within 91 to 365 Over 1 to Over 5
(Dollars in thousands) 90 Days Days 5 Years Years Total
------------------------------------------------------------------
INTEREST EARNING ASSETS
Securities, at amortized cost $ 59,969 $ 37,042 $ 26,923 $ 25,331 $149,265
Federal funds sold 31,622 -- -- -- 31,622
Loans, net of unearned income 288,779 95,153 258,264 23,625 665,821
------------------------------------------------------------------
Total interest earning assets $380,370 $132,195 $285,187 $ 48,956 $846,708
------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
NOW accounts $ 92,357 $ 79,218 $ 37,222 $ -- $208,797
Money market accounts 49,946 46,620 15,407 -- 111,973
Savings accounts 1,548 4,838 12,966 -- 19,352
Time deposits 58,507 126,708 128,379 10 313,604
Securities sold under agreement to 30,887 -- -- -- 30,887
repurchase and federal funds purchased
Trust preferred capital notes -- 18,000 -- -- 18,000
------------------------------------------------------------------
Total interest-bearing liabilities $233,245 $275,384 $193,974 $ 10 $702,613
------------------------------------------------------------------
CUMULATIVE MATURITY / INTEREST SENSITIVITY
GAP $147,125 $ 3,936 $ 95,149 $144,095 $144,095
As % of total earnings assets 17.38% 0.46% 11.24% 17.02%
==================================================================
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, 2003, even though
the Company's GAP analysis reflected an asset sensitive position within twelve
months, the earnings model projected that forecasted net income would decrease
by 14.6% if interest rates would immediately rise by 200 basis points. This is
due to $82.5 million in callable U.S. Government Agency securities, slotted on
the above GAP analysis as repricing within one-year, which would not reprice
upward as they would not be called if interest rates suddenly rose 200 basis
points, and projected declines in the level of fees and net gains on loans
originated-for-sale. If rates were to immediately fall by 200 basis points, the
model projected a slight increase in net income of 0.7%. 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.
NON-INTEREST INCOME
Non-interest income increased $2.1 million, or 38.5%, from $5.6 million in 2002,
to $7.7 million in 2003, and increased $889 thousand, or 18.9%, from $4.7
million in 2001, to $5.6 million in 2002. In 2001, non-interest income increased
$2.1 million, or 81.0%, from $2.6 million in 2000 to $4.7 million. Fees and net
gains on mortgage loans held-for-sale have accounted for the majority of the
increases over the years as lower interest rates and a strong local housing
market pushed production levels to new highs. In 2003, fees and net gains on
mortgage loans held-for-sale increased $1.8 million, or 44.6%, from $3.9 million
in 2002, to $5.7 million and in 2002 they increased $541 thousand, or 16.0%,
from $3.4 million in 2001, to $3.9 million. In 2001, fees and net gains on
mortgage loans held-for-sale increased $1.8 million, or 113.1%, from $1.6
million in 2000, to $3.4 million in 2001.
10
The Company's mortgage lending activities began in 1999 and in that first year
of operation originated $73.7 million in mortgages for sale. In 2000, results
were similar with $79.8 million in originations. In 2001 and 2002 as mortgage
rates began to fall, refinancing and home purchases increased significantly with
refinancing activity hitting record levels. As a result, mortgages originated
for sale increased to $180.7 million in 2001, $207.8 million in 2002 and a to an
even higher level of $287.8 million in 2003. 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. The Company anticipates that due to a slow down in refinancing activity
in the fourth quarter of 2003 and the possibility of higher interest rates, its
fees and net gains on mortgage loans originated for sale may be much lower in
2004.
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, lock box service fees, and non-deposit
investment services commissions increased $181 thousand, or 11.1%, from slightly
over $1.6 million in 2002, to just over $1.8 million in 2003. In 2002, service
charges and other fees increased $359 thousand, or 28.3%, from slightly under
$1.3 million in 2001 to $1.6 million and in 2001, they increased $291 thousand,
or 29.7%, from $980 thousand in 2000, to $1.3 million.
The increases in 2001 and 2002 were a result of lower interest rates that pushed
down earnings credits on customer demand deposit accounts and consequently
increased the level of service charges actually charged. As this decline in the
earnings credit stabilized in 2003 the incremental increases in charges slowed.
The Company continues to seek to improve non-interest income having added
non-deposit investment services, through a third party arrangement in 2002.
These activities provided $14 thousand in income in 2002, and $202 thousand in
2003. It is expected that the amount of commissions will continue to increase,
although there can be no assurance.
Other non-interest income increased $221 thousand, or 502.3%, from $44 thousand
in 2002 to $265 thousand in 2003 due to the purchase of $6 million in Bank owned
life insurance policies in May 2003. These polices which are recorded on the
Company's balance sheet under other assets, contributed $178 thousand of the
$221 thousand increase in other non-interest income. The Company does not
anticipate additional purchases of this insurance in 2004.
NON-INTEREST EXPENSE
Non-interest expense increased $3.6 million, or 20.9%, from $17.2 million in
2002, to $20.8 million in 2003, and increased $3.2 million, or 23.1%, from $14.0
million in 2001 to $17.2 million in 2002. In 2001, non-interest expense was up
$3.3 million, or 31.5%, from $10.6 million in 2000 to $14.0 million. Salaries
and benefits accounted for $2.4 million, or 66.7%, of the total increase in
non-interest expense in 2003, $2.0 million, or 62.7%, in 2002, and $2.3 million,
or 69.3% in 2001. 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 and branch expansion. The Company anticipates a
lesser increase in salaries and benefits expense in 2004 with the expectation of
lower levels of commissions on mortgage loans originated-for-sale.
Occupancy expenses, which include rents, depreciation, maintenance on buildings,
leaseholds and equipment, increased $275 thousand, or 9.4%, from $2.9 million in
2002, to $3.2 million in 2003, and increased $578 thousand, or 24.7%, from $2.3
million in 2001 to $2.9 million in 2002. In 2001, occupancy expense was up $391
thousand, or 20.1%. The increases in 2001 and 2002 were due to the opening of
the Bank's twelve and thirteenth branch locations along with additional
facilities for the Company's operations department due to growth. In 2003,
increased expense was due to general maintenance and higher levels of
depreciation associated with computer systems expansion.
Data processing expense increased $160 thousand, or 14.8%, from $1.1 million in
2002 to just over $1.2 million in 2003, and increased $177 thousand, or 19.6%,
in 2002 and $152 thousand, or 20.3% in 2001. Increases were due to growth in
total loans and deposits along with 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 $765 thousand, or 25.0%, from $3.1 million in 2002, to $3.8
million in 2003, and increased $451 thousand, or 17.3%, from $2.6 million in
2001 to $3.1 million in 2002. In 2001, other operating expenses increased $485
thousand, or 22.8%. The increase over the years is due to overall growth and in
2003 due to expanded amounts of advertising and public relations expenses. Other
non-interest expenses to which the
11
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% on
the Company's first $10 million in pre-tax earnings and 35% for amounts in
excess of $10 million. The provision for income taxes totaled $5.9 million, $3.9
million, $2.4 million, for the years ended December 31, 2003, 2002, and 2001,
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. In 2003, net charge-offs totaled $42 thousand
compared to $110 thousand and $19 thousand in 2002 and 2001, respectively. The
provision for loan loss expense in 2003 was $1.6 million compared to $1.7
million in 2002 and $1.6 million in 2001. The total allowance for loan losses of
$7.5 million at December 31, 2003 increased 25.9% from $5.9 million at December
31, 2002, and increased 36.0% from $4.4 million at December 31, 2001 to $5.9
million at December 31, 2002. Slightly lower provisions in 2003 were reflective
of a lower level of net charge-offs and a decrease in non-performing assets from
$2.4 million at December 31, 2002 to $1.4 million at December 31, 2003.
Management feels that the allowance for loan losses is adequate. However, there
can be no assurance that additional provisions for loan losses will not be
required in the future, including as a result of 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.
12
TABLE 4: PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 2003 2002 2001 2000 1999
---------------------------------------------------------------
Allowance, beginning of period $ 5,924 $ 4,356 $ 2,803 $ 1,889 $1,438
---------------------------------------------------------------
CHARGE-OFFS
Real estate loans $ -- $ -- $ -- $ -- $ --
Commercial loans 30 87 -- -- --
Consumer loans 26 68 23 36 40
---------------------------------------------------------------
Total charge-offs $ 56 $ 155 $ 23 $ 36 $ 40
---------------------------------------------------------------
RECOVERIES
Real estate loans $ -- $ -- $ -- $ -- $ --
Commercial loans 2 5 2 1 7
Consumer loans 12 40 2 2 4
---------------------------------------------------------------
Total recoveries $ 14 $ 45 $ 4 $ 3 $ 11
---------------------------------------------------------------
Net charge-offs $ 42 $ 110 $ 19 $ 33 $ 29
---------------------------------------------------------------
PROVISIONS FOR LOAN LOSSES 1,575 1,678 1,572 947 480
---------------------------------------------------------------
Allowance, end of period $ 7,457 $ 5,924 $ 4,356 $ 2,803 $1,889
===============================================================
Ratio of net charges-offs to average total
loans outstanding during period 0.01% 0.02% 0.01% 0.01% 0.02%
===============================================================
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) 2003 2002 2001 2000 1999
------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:
Real estate - mortgage $4,188 $3,159 $1,957 $1,571 $1,206
Real estate - construction 1,789 1,239 863 518 132
Commercial 1,434 1,469 1,482 628 477
Consumer 46 57 54 86 74
------------------------------------------------------
Balance, December 31, $7,457 $5,924 $4,356 $2,803 $1,889
======================================================
RATIO OF LOANS TO TOTAL YEAR-END LOANS:
Real estate - mortgage 67% 70% 66% 64% 76%
Real estate - construction 23% 21% 23% 21% 8%
Commercial 9% 8% 9% 12% 13%
Consumer 1% 1% 2% 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
13
interest decreased $966 thousand, or 40.5% from $2.4 million at year-end 2002 to
$1.4 million at year-end 2003, and increased $1.8 million, or 330.9%, from $554
thousand at year-end 2001, to $2.4 million at December 31, 2002. Both the
increase of $1.8 million in non-performing assets in 2002 and the decline of
$966 thousand in 2003 were attributable to two mortgages on residential
single-family properties. Of the two loans, one for $1.0 million was fully
repaid in 2003, while the other loan for $875 thousand was restructured in April
2003. That loan is well secured and is performing in accordance with its new
terms.
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 decreased
from .44% at December 31, 2002, to .21% at December 31, 2003, and increased from
..13% at December 31, 2001, to .44% at December 31, 2002. The increase in 2002,
and decline in 2003 was due to the two loans on single-family residential
properties noted above. The Company expects its ratio of non-performing assets
to total loans to improve as the restructured loan for $875 thousand is removed
from classification as non-performing in the first half of 2004. However, the
ratio could increase due to $2.2 million in other identified potential problem
loans as of December 31, 2003, 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, 2002, other identified potential problem loans were $1.9 million and they
were $2.6 million at December 31, 2001. See Notes 1 and 4 to the Consolidated
Financial Statements for additional information regarding the Company's
non-performing assets.
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 years presented.
TABLE 6: NON-PERFORMING ASSETS
(Dollars in thousands) 2003 2002 2001 2000 1999
------------------------------------------------------------
Non-accrual loans $ 46 $1,943 $106 $ 117 $ 106
Impaired loans 416 444 119 107 143
Restructured loans 875 -- -- -- --
Foreclosed properties -- -- -- -- --
------------------------------------------------------------
Total non-performing assets $1,337 $2,387 $225 $224 $ 249
------------------------------------------------------------
Loans past due 90 days and still accruing 84 -- 329 318 68
------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS AND PAST DUE
LOANS $1,421 $2,387 $554 $ 542 $ 317
============================================================
Allowance for loan losses to total loans 1.12% 1.09% 1.05% 0.91% 0.91%
Allowance for loan losses to non-performing
loans 524.8% 248.2% 1,936.0% 1,251.3% 758.6%
Non-performing assets and past due loans to
total loans 0.21% 0.44% 0.13% 0.18% 0.15%
NON-PERFORMING ASSETS AND PAST DUE LOANS TO
TOTAL ASSETS 0.16% 0.36% 0.11% 0.15% 0.11%
============================================================
LOAN PORTFOLIO
The Bank'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 Bank's loan portfolio.
Loans, including loans held-for-sale, net of unearned income and the allowance
for loan losses, increased $122.6 million, or 22.9%, from $535.8 million at
December 31, 2002, to $658.4 million at December 31, 2003, and increased $124.9
million, or 30.4%, from $410.9 million at December 31, 2001, to $535.8 million
at year-end 2002. The increase in loans in 2003 included an increase in real
estate mortgage loans of $66.9 million, or 17.6%, an increase in real estate
14
construction loans of $42.1 million, or 37.8%, and an increase in commercial
loans of $16.6 million, or 37.3%. In 2002 growth in loans by category was
similar with real estate mortgage loans increasing $105.8 million, or 38.5%,
real estate construction loans increasing $16.8 million, or 17.9%, and
commercial loans increasing $5.4 million, or 13.8%. The majority of the increase
in real estate mortgage loans is concentrated in non-farm non-residential
properties for which the Bank has had a primary focus for years, while the
increases in real estate construction loans over the past two years are the
direct result of the an increased focus in this area and the hiring of loan
officers specializing in residential construction lending. At December 31, 2003,
$110.5 million of real estate construction loans were to commercial builders of
single-family homes, $13.1 million were to individuals on single-family
properties and $29.8 million were related to commercial properties. In 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 Bank expects that real estate construction
loans will continue to grow, but not at the pace experienced in 2002 and 2003,
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, 2003, the Bank had $110.5 million
of construction loans to commercial builders of single family housing in the
Northern Virginia market, representing 16.5% 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 Company's income and financial position. In addition, the Bank had $325.7
million, or 48.7% of the loan portfolio at December 31, 2003, secured by
non-farm non-residential properties. 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, 2003, the Company had no
other concentrations of loans in any one industry exceeding 10% of its total
loan portfolio. An industry for this purpose is defined as a group of
counterparties that are engaged in similar activities and have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The 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.
Tables 7 and 8 present information pertaining to the composition of the loan
portfolio including loans held-for-sale, unearned income, the allowance for loan
losses, and the maturity/repricing of selected loans.
TABLE 7: SUMMARY OF TOTAL LOANS
DECEMBER 31,
---------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
---------------------------------------------------------------------
Real estate - mortgage $ 447,924 $ 380,972 $ 275,141 $ 198,541 $ 156,998
Real estate - construction 153,400 111,333 94,452 65,460 17,238
Commercial 61,178 44,559 39,153 37,406 26,423
Consumer 6,061 6,941 8,004 7,995 6,968
---------------------------------------------------------------------
Total loans $ 668,563 $ 543,805 $ 416,750 $ 309,403 $ 207,627
Less unearned income 2,742 2,033 1,444 883 567
Less allowance for loan losses 7,457 5,924 4,356 2,803 1,889
---------------------------------------------------------------------
LOANS, NET $ 658,364 $ 535,848 $ 410,950 $ 305,717 $ 205,171
=====================================================================
15
TABLE 8: MATURITY/REPRICING SCHEDULE OF SELECTED LOANS
At December 31, 2003 REAL ESTATE- REAL ESTATE-
(Dollars in thousands) MORTGAGE CONSTRUCTION COMMERCIAL CONSUMER
---------------------------------------------------
VARIABLE:
Within 1 year $ 92,955 $ 23,359 $ 13,333 $ 1,322
1-to-5 years 163,043 197 3,823 --
After 5 years 14,525 -- -- --
FIXED RATE:
Within 1 year 107,844 89,451 21,661 1,602
1-to-5 years 62,032 34,930 20,695 2,788
After 5 years 7,525 5,462 1,666 349
---------------------------------------------------
TOTAL LOANS $ 447,924 $ 153,400 $ 61,178 $ 6,061
===================================================
At December 31, 2003, the aggregate amount of loans due after one year that have
fixed rates was approximately $135.4 million, and the amount with variable or
adjustable rates was approximately $181.6 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 $78.0 million, or 109.5%, from $71.2 million at
December 31, 2002, to $149.2 million at December 31, 2003, and increased $18.2
million, or 34.4%, from $53.0 million at December 31, 2001, to $71.2 million at
December 31, 2002. Securities of U.S. Government Agencies represent the majority
of the portfolio while obligations of states and or political subdivisions, and
domestic corporate debt obligations have increased over the past two years.
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.
At December 31, 2003, there were no single issuers, other than issuers who are
U.S. 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,
------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------
Percent Percent Percent
(Dollars in thousands) Book Value of total Book Value of total Book Value of total
------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Government Agency obligations $ 93,274 62.48% $ 52,661 73.92% $ 40,619 76.62%
Domestic corporate debt obligations 5,995 4.02% -- -- -- --
Obligations of states/political
subdivisions 1,295 .87% 1,229 1.73% 275 .52%
Federal Reserve Bank stock 758 .51% 542 .76% 392 .74%
Federal Home Loan Bank stock 1,355 .91% 1,194 1.68% 732 1.38%
Community Bankers' Bank stock 55 .04% 55 .08% 55 .10%
========================================================================
$102,732 68.83% $ 55,681 78.17% $ 42,073 79.36%
========================================================================
16
DECEMBER 31,
------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------
Percent Percent Percent
(Dollars in thousands) Book Value of total Book Value of total Book Value of total
------------------------------------------------------------------------
HELD-TO-MATURITY:
U.S. Government Agency obligations $ 38,490 25.79% $ 8,534 11.98% $ 6,017 11.35%
Obligations of states/political
subdivisions 7,535 5.05% 6,534 9.17% 3,945 7.44%
Domestic corporate debt obligations 488 .33% 482 .68% 979 1.85%
------------------------------------------------------------------------
$ 46,513 31.17% $ 15,550 21.83% $ 10,941 20.64%
========================================================================
$149,245 100.00% $ 71,231 100.00% $ 53,014 100.00%
========================================================================
TABLE 10: MATURITY OF SECURITIES
At December 31, 2003 2002 2001
----------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
(Dollars in thousands) Book Value Yield Book Value Yield Book Value Yield
----------------------------------------------------------------------------
Maturing within one year $ 2,025 3.74% $ -- -- $ -- --
Maturing after one through five years 62,640 2.79% 38,549 3.77% 16,533 4.71%
Maturing after five through ten years 54,670 4.34% 12,966 4.87% 7,738 6.29%
Maturing after ten years 29,910 4.82% 19,716 5.96% 28,743 6.65%
----------------------------------------------------------------------------
$149,245 3.78% $ 71,231 4.58% $ 53,014 5.99%
============================================================================
DEPOSITS
The Company's principal source of funds is deposit 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 $206.5 million, or 36.4%, from $567.0 million at
December 31, 2002, to $773.5 million at December 31, 2003, and increased $160.1
million, or 39.3%, from $406.9 million at December 31, 2001, to $567.0 million
at December 31, 2002. In 2003, growth by deposit category included a 21.5%
increase in demand deposits, a 78.3% increase in savings accounts and
interest-bearing demand deposits and a 13.0% increase in time deposits. In 2002,
growth included a 48.4% increase in demand deposits, a 43.7% increase in savings
accounts and interest-bearing demand deposits and a 33.7% increase in time
deposits. The Company attributes its growth in deposits to a strong and affluent
local economy, the payment of interest rates at or near the highest in its
market, bank consolidation and recently to some extent to the downturn in the
stock market in 2001 and 2002. The average rate paid on interest-bearing
deposits fell ninety-three basis points in 2003, from 3.21% in 2002, to 2.28%,
and it fell one hundred and forty-three basis points from 4.64% for the year
ended December 31, 2001, to 3.21% in 2002. Since early 2001, interest rates have
declined in all deposit account categories and in some cases have now reached
near floor levels. As a result, the Bank expects that further declines in the
average rates paid on deposits will be more difficult to achieve over the near
term. Table 11 details maturities of time deposits with balances of $100,000,
which represent 44.9% of total time deposits as of December 31, 2003, compared
to 39.9% at 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.
17
TABLE 11: MATURITIES OF TIME DEPOSITS WITH BALANCES $100,000 OR MORE
DECEMBER 31,
--------------------------------------
(Dollars in thousands) 2003 2002 2001
--------------------------------------
3 months or less $ 26,580 $ 18,477 $ 11,900
3-6 months 20,008 10,831 9,029
6-12 months 40,431 44,289 21,075
Over 12 months 53,662 37,104 43,204
--------------------------------------
TOTAL $ 140,681 $ 110,701 $ 85,208
======================================
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase
that are secured transactions with customers and generally mature the business
day following the date sold. These transactions are provided to several of the
Bank's 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, 2003, 2002 and 2001 (dollars in thousands):
TABLE 12: SHORT-TERM BORROWINGS
At December 31, 2003 2002 2001
------------------------------------
Securities sold under agreement to repurchase $30,887 $32,081 $32,931
Federal funds purchased -- -- 9,521
------------------------------------
Total $30,887 $32,081 $42,452
Weighted interest rate at year end 0.36% 0.37% 1.05%
Averages for the year ended December 31,
Outstanding $32,963 $33,791 $35,851
Interest rate 0.37% 0.73% 2.72%
Maximum month-end outstanding $36,657 $40,251 $42,452
====================================
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 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
$52.7 million, or 24.1%, from $218.8 million at December 31, 2002, to $271.5
million at December 31, 2003, and increased $93.5 million, or 74.6%, from $125.3
million at December 31, 2001, to $218.8 million at December 31, 2002. The
increase in 2003 was due to higher levels of loans maturing within one-year and
a substantial increase in the amount of available-for-sale securities as the
Bank continued to structure its balance sheet for possibly higher interest
rates. Additional sources of liquidity available to the Bank include the
capacity to borrow funds
18
through established short-term lines of credit with various correspondent banks
and the Federal Home Loan Bank of Atlanta. 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 Company's current and
future capital needs are 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. The Bank's Tier 1 risk-based capital ratio was 7.51% at December
31, 2003, compared to 6.69% at December 31, 2002, and its total risk-based
capital ratio was 11.03% at December 31, 2003, compared to 10.33% at December
31, 2002. These ratios are in excess of the mandated minimum requirement of
4.00% and 8.00%, respectively. The Bank's leverage ratio was 6.33% at December
31, 2003, compared to 5.72% at December 31, 2002. The Company's Tier 1
risk-based capital ratio, total risk-based capital ratio, and leverage ratio was
10.10%, 11.13% and 8.49%, respectively, at December 31, 2003, compared to
10.03%, 11.89%, and 8.52% at December 31, 2002. The increases in the Bank's
capital ratios in 2003 were primarily due to $4 million in additional capital
contributions from the Company and $6 million in additional subordinated debt
issued to the Company. These funds were obtained by the Company through its $18
million in trust preferred capital notes issued in the fourth quarter of 2002,
and from $2.4 million in proceeds on the exercise of options and warrants by
company directors and officers in 2003. While all the Bank's capital ratios
improved in 2003, the Company's total risk-based capital ratio and leverage
ratio declined due to the significant level of growth in total assets.
During 2002, the Company continued to borrow funds under a line of credit with a
correspondent bank in order to provide capital to fund growth and expansion at
the Bank. At December 31, 2001, the amount outstanding under the line of credit
was $11.0 million and it was reduced to $8.0 million by September 30, 2002. With
continued strong asset growth in 2002, the Company provided additional capital
through a $7.0 million rights offering to existing stockholders in July 2002.
Although the offering was successful, the Company believed that additional
capital would be necessary to fund future growth. In November and December 2002
the Company formed two financing subsidiaries in order to issue $18.0 million in
trust preferred securities through a private placement to unrelated parties. As
the $18.0 million in proceeds were in excess of current needs, the Company
repaid the $8.0 million outstanding on its line of credit, down-streamed $2.0 to
the Bank in the form of additional capital, and down-steamed the remaining $8.0
million to the Bank in January 2003 as capital contributions and subordinated
debt.
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, or there is
a change in the regulatory treatment of trust preferred securities as capital,
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.
The Federal Reserve is currently reviewing 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 of such
review, the capital treatment of trust preferred securities, which can be
counted as Tier 1 capital at the holding company level, up to 25% of total
capital, may be adversely affected. At December 31, trust preferred securities
represented 24.6% of the Company's tier one capital and 22.3% of its total
capital. Future trust preferred issuances to increase holding company capital
levels may not be available. In the event of adverse changes in the capital
treatment for
19
trust preferred securities, 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.
CONTRACTUAL OBLIGATIONS
The Company has entered into certain contractual obligations including long term
debt, operating leases and obligations under service contracts. The following
table summarizes the Company's contractual cash obligations as of December
31,2003.
TABLE 13: CONTRACTUAL OBLIGATIONS
=================================================================================================================
Payments Due-By Period
- -----------------------------------------------------------------------------------------------------------------
TOTAL LESS THAN ONE TO FOUR TO AFTER
ONE YEAR THREE FIVE FIVE
(In thousands) YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------------------
Securities sold under agreement to repurchase $ 30,887 $ 30,887 $ -- $ -- $ --
Trust preferred capital notes 18,000 -- -- -- 18,000
Operating leases 5,603 1,087 1,800 1,265 1,451
Data processing services 1,017 1,017 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 55,507 $ 32,991 $1,800 $1,265 $19,451
=================================================================================================================
The obligation for data processing services represents estimates of early
termination charges. The table does not reflect deposit liabilities entered into
in the ordinary course of the Company's banking business. At December 31, 2004,
the Company had approximately $459.9 million of demand and savings deposits,
exclusive of interest, which have no stated maturity or payment date. The
Company also had approximately $313.6 million of time deposits, exclusive of
interest, the maturity distribution of which is set forth in Note 6 to the
consolidated financial statements. For additional information about the
Company's deposit obligations, see "Net Interest Income" and "Deposits" above.
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.
See Note 15 to the Consolidated Financial Statements for further discussion of
the nature, business purpose and elements of risk involved with these
off-balance sheet arrangements. 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. For further information see Notes 14
and 15 to the consolidated financial statements.
MARKET PRICE OF STOCK AND DIVIDENDS
The Company's stock is traded on the Nasdaq National Market under the symbol
"VCBI". Table 14 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.
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.
20
TABLE 14: MARKET PRICE OF STOCK
2003 2002
--------------------------------------------
Quarter High Low High Low
- ----------------------------------------------------------------------
First $17.63 $11.83 $11.10 $ 8.40
Second 20.75 16.80 13.85 9.64
Third 24.75 18.57 13.22 10.63
Fourth 33.30 22.90 12.53 11.26
At December 31, 2003, the Company had 594 stockholders of record, and
representing approximately 1,300 beneficial owners. Information regarding stock
dividends and splits in 2003, 2002, and 2001 is as follows:
1. A two-for-one stock split in the form of a 100% stock dividend was
declared on April 22, 2003, for stockholders of record on May 5, 2003,
and was paid on May 30, 2003.
2. 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.
3. 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.
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 28, 2004 at "The Tower
Club", 8000 Towers Crescent Drive, Suite 1700, Vienna, 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:
LYNDA S. CORNELL
ASSISTANT TO PRESIDENT
VIRGINIA COMMERCE BANCORP, INC.
5350 LEE HIGHWAY
ARLINGTON, VA 22207
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.
21
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, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 2003, 2002
and 2001. 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,
2003 and 2002, and the results of their operations and their cash flows for the
years ended December 31, 2003, 2002 and 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Yount, Hyde & Barbour, P.C.
Winchester Virginia
February 12, 2004
22
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
DECEMBER 31,
--------------------------
2003 2002
--------------------------
ASSETS
Cash and due from banks $ 22,434 $ 19,907
Securities (fair value: 2003, $149,894;
2002, $71,766) 149,245 71,231
Federal funds sold 31,622 24,071
Loans held-for-sale 3,513 18,948
Loans, net of allowance for loan losses of
$7,457 in 2003 and $5,924 in 2002 654,851 516,900
Bank premises and equipment, net 6,189 6,517
Accrued interest receivable 3,372 2,489
Other assets 9,898 2,824
--------------------------
Total assets $881,124 $662,887
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand deposits $119,785 $ 98,575
Savings and interest-bearing demand deposits 340,122 190,811
Time deposits 313,604 277,610
--------------------------
Total deposits $773,511 $566,996
Securities sold under agreement to repurchase
and federal funds purchased 30,887 32,081
Other borrowed funds -- 400
Trust preferred capital notes 18,000 18,000
Accrued interest payable 1,024 1,271
Other liabilities 2,610 2,289
Commitments and contingent liabilities -- --
--------------------------
Total liabilities $826,032 $621,037
==========================
Stockholders' Equity
Preferred stock, $1.00 par, 1,000,000 shares
authorized and unissued $ -- $ --
Common stock, $1.00 par, 20,000,000 shares
authorized, issued and outstanding 2003,
7,860,291; 2002, 3,739,330 7,860 3,739
Surplus 17,891 19,622
Retained earnings 29,354 17,808
Accumulated other comprehensive income (loss), net (13) 681
--------------------------
Total stockholders' equity $ 55,092 $ 41,850
--------------------------
Total liabilities and stockholders' equity $881,124 $662,887
==========================
See Notes to Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $41,065 $35,491 $29,720
Interest and dividends on investment securities:
Taxable 4,154 2,905 3,406
Tax-exempt 277 162 48
Dividends 95 85 73
Interest on federal funds sold 377 355 650
---------------------------------------------
Total interest and dividend income $45,968 $38,998 $33,897
---------------------------------------------
INTEREST EXPENSE:
Deposits $12,914 $13,341 $14,494
Securities sold under agreement to repurchase and federal
funds purchased 123 245 976
Other borrowed funds 21 497 521
Trust preferred capital notes 835 45 --
---------------------------------------------
Total interest expense $13,893 $14,128 $15,991
---------------------------------------------
NET INTEREST INCOME $32,075 $24,870 $17,906
Provision for loan losses 1,575 1,678 1,572
---------------------------------------------
Net interest income after provision for loan losses $30,500 $23,192 $16,334
---------------------------------------------
NON-INTEREST INCOME:
Service charges and other fees $ 1,609 $ 1,616 $ 1,271
Non-deposit investment services commissions 202 14 --
Fees and net gains on loans held-for-sale 5,670 3,920 3,379
Gain (loss) on sale of securities -- (1) 13
Other 265 44 41
---------------------------------------------
Total non-interest income $ 7,746 $ 5,593 $ 4,704
---------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits $12,562 $10,159 $ 8,130
Occupancy expense 3,190 2,915 2,337
Data processing 1,239 1,079 902
Other operating expense 3,829 3,064 2,613
---------------------------------------------
Total non-interest expense $20,820 $17,217 $13,982
---------------------------------------------
Income before taxes on income $17,426 $11,568 $ 7,056
Provision for income taxes 5,880 3,892 2,391
=============================================
NET INCOME $11,546 $ 7,676 $ 4,665
=============================================
Earnings per common share, basic $ 1.48 $ 1.08 $ 0.69
Earnings per common share, diluted $ 1.36 $ 0.96 $ 0.63
=============================================
See Notes to Consolidated Financial Statements.
24
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, 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 -- -- -- (3)
shares -- (3)
Stock options exercised -- 14 -- 97
83 --
============================================================================================
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 -- 680 (680) -- -- --
of a 25% stock dividend
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
============================================================================================
Comprehensive Income:
Net Income 2003 11,546 $11,546 11,546
Other comprehensive income, net of
tax, unrealized holding losses
arising during the period (net of
tax of $357) (694) (694) (694)
--------------------------------------------------------------------------------------------
Total comprehensive income $10,852
--------------------------------------------------------------------------------------------
Two-for-one stock split in form of -- 3,893 (3,893) -- -- --