UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended MARCH 31, 2010
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission file number 000-28635
VIRGINIA COMMERCE BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
|
|
|
VIRGINIA
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
54-1964895
(I.R.S. Employer
Identification No.)
|
5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207
(Address of Principal Executive Offices) (Zip Code)
703-534-0700
(Registrants Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).
¨
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
Smaller reporting company
|
|
x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange
Act). Yes
¨
No
x
As of May 17, 2010, the number of outstanding shares of registrants common stock, par value $1.00 per share was: 26,937,505.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1.
|
FINANCIAL STATEMENTS
|
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share data)
|
|
|
|
|
|
|
|
|
Unaudited
March 31,
2010
|
|
Audited
December 31,
2009
|
Assets
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
24,347
|
|
$
|
25,211
|
Federal funds sold
|
|
|
108,645
|
|
|
|
Securities (fair value: 2010, $335,262; 2009, $349,836)
|
|
|
334,160
|
|
|
348,585
|
Restricted Stocks, at cost
|
|
|
11,751
|
|
|
11,751
|
Loans held-for-sale
|
|
|
3,005
|
|
|
6,492
|
Loans, net of allowance for loan losses of $62,407 in 2010 and $65,152 in 2009
|
|
|
2,203,156
|
|
|
2,210,064
|
Bank premises and equipment, net
|
|
|
13,253
|
|
|
13,794
|
Accrued interest receivable
|
|
|
10,013
|
|
|
10,537
|
Other real estate owned, net of valuation allowance of $5,771 in 2010, and $9,067 in 2009
|
|
|
26,269
|
|
|
28,499
|
Other assets
|
|
|
68,405
|
|
|
70,364
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,803,004
|
|
$
|
2,725,297
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
231,726
|
|
$
|
239,604
|
Savings and interest-bearing demand deposits
|
|
|
1,088,254
|
|
|
985,152
|
Time deposits
|
|
|
980,009
|
|
|
1,004,571
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,299,989
|
|
$
|
2,229,327
|
Securities sold under agreement to repurchase and federal funds purchased
|
|
|
179,073
|
|
|
176,729
|
Other borrowed funds
|
|
|
25,000
|
|
|
25,000
|
Trust preferred capital notes
|
|
|
66,121
|
|
|
66,057
|
Accrued interest payable
|
|
|
3,697
|
|
|
4,014
|
Other liabilities
|
|
|
4,865
|
|
|
5,302
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,578,745
|
|
$
|
2,506,429
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
Preferred stock, net of discount, $1.00 par, 1,000,000 shares authorized, Series A; $1,000 stated value; 71,000 issued and
outstanding in 2010 and 2009
|
|
$
|
64,356
|
|
$
|
63,993
|
Common stock, $1.00 par, 50,000,000 shares authorized, issued and outstanding 2010, 26,933,923; 2009, 26,744,545
|
|
|
26,934
|
|
|
26,745
|
Surplus
|
|
|
96,868
|
|
|
96,588
|
Warrants
|
|
|
8,520
|
|
|
8,520
|
Retained earnings
|
|
|
25,890
|
|
|
22,671
|
Accumulated other comprehensive income, net
|
|
|
1,691
|
|
|
351
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
224,259
|
|
$
|
218,868
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,803,004
|
|
$
|
2,725,297
|
|
|
|
|
|
|
|
Notes to consolidated financial statements are an
integral part of these statements.
3
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
32,905
|
|
|
$
|
33,443
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,280
|
|
|
|
3,662
|
|
Tax-exempt
|
|
|
426
|
|
|
|
345
|
|
Dividend on restricted stocks
|
|
|
88
|
|
|
|
84
|
|
Interest on federal funds sold
|
|
|
28
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
$
|
36,727
|
|
|
$
|
37,554
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
9,428
|
|
|
$
|
14,631
|
|
Securities sold under agreement to repurchase and federal funds purchased
|
|
|
989
|
|
|
|
620
|
|
Other borrowed funds
|
|
|
266
|
|
|
|
265
|
|
Trust preferred capital notes
|
|
|
1,228
|
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
11,911
|
|
|
$
|
16,797
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
24,816
|
|
|
$
|
20,757
|
|
Provision for loan losses
|
|
|
4,238
|
|
|
|
13,390
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
$
|
20,578
|
|
|
$
|
7,367
|
|
|
|
|
|
|
|
|
|
|
Non-interest income (charges):
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
876
|
|
|
$
|
887
|
|
Non-deposit investment services commissions
|
|
|
129
|
|
|
|
157
|
|
Fees and net gains on loans held-for-sale
|
|
|
346
|
|
|
|
807
|
|
Loss on other real estate owned
|
|
|
(918
|
)
|
|
|
|
|
Impairment loss on securities (1)
|
|
|
(851
|
)
|
|
|
(30
|
)
|
Other
|
|
|
107
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total non-interest income (charges)
|
|
$
|
(311
|
)
|
|
$
|
1,820
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
5,995
|
|
|
$
|
5,921
|
|
Occupancy expense
|
|
|
2,710
|
|
|
|
2,767
|
|
FDIC insurance
|
|
|
1,309
|
|
|
|
912
|
|
Franchise tax expense
|
|
|
717
|
|
|
|
775
|
|
Data processing
|
|
|
674
|
|
|
|
600
|
|
Other operating expense
|
|
|
2,384
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
13,789
|
|
|
$
|
13,023
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
6,478
|
|
|
$
|
(3,836
|
)
|
Provision (benefit) for income taxes
|
|
|
2,009
|
|
|
|
(1,427
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,469
|
|
|
$
|
(2,409
|
)
|
|
|
|
|
|
|
|
|
|
Effective dividend on preferred stock
|
|
|
1,250
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
3,219
|
|
|
$
|
(3,196
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share, basic
|
|
$
|
0.12
|
|
|
$
|
(0.12
|
)
|
Earnings (loss) per common share, diluted
|
|
$
|
0.11
|
|
|
$
|
(0.12
|
)
|
Notes to consolidated
financial statements are an integral part of these statements.
(1)
|
Loss on securities available-for-sale in 2010, consist of additional impairment losses since December 31, 2009, of $(395) thousand of which $(851) thousand was
recognized as a loss of earnings and $456 thousand was recognized in other comprehensive income. In 2009, $(30) thousand in other-than-temporary impairment was recognized against earnings and $(123) thousand in other comprehensive loss.
|
4
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the three months ended March 31, 2010 and 2009
(In thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Surplus
|
|
Warrants
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Comprehensive
Income (Loss)
|
|
|
Total
Stockholders
Equity
|
|
Balance, January 1, 2009
|
|
$
|
62,541
|
|
$
|
26,575
|
|
$
|
95,840
|
|
$
|
8,520
|
|
$
|
60,535
|
|
|
$
|
(724
|
)
|
|
|
|
|
|
$
|
253,287
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,409
|
)
|
|
|
|
|
|
$
|
(2,409
|
)
|
|
|
(2,409
|
)
|
Other comprehensive loss: reclassification adjustment for impairment loss on securities (net of tax of $11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
19
|
|
unrealized holding losses arising during the period (net of tax of $495)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(917
|
)
|
|
|
(917
|
)
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
113
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
Discount on preferred stock
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009
|
|
$
|
62,904
|
|
$
|
26,688
|
|
$
|
96,039
|
|
$
|
8,520
|
|
$
|
57,339
|
|
|
$
|
(1,622
|
)
|
|
|
|
|
|
$
|
249,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2010
|
|
$
|
63,993
|
|
$
|
26,745
|
|
$
|
96,588
|
|
$
|
8,520
|
|
$
|
22,671
|
|
|
$
|
351
|
|
|
|
|
|
|
$
|
218,868
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,469
|
|
|
|
|
|
|
$
|
4,469
|
|
|
|
4,469
|
|
Other comprehensive income: reclassification adjustment for impairment loss on securities (net of tax of $298)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553
|
|
|
|
553
|
|
|
|
553
|
|
unrealized holding gains arising during the period (net of tax of $424)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787
|
|
|
|
787
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
189
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Discount on preferred stock
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
64,356
|
|
$
|
26,934
|
|
$
|
96,868
|
|
$
|
8,520
|
|
$
|
25,890
|
|
|
$
|
1,691
|
|
|
|
|
|
|
$
|
224,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to consolidated financial statements are an integral part of these statements.
5
VIRGINIA COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,469
|
|
|
$
|
(2,409
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
701
|
|
|
|
685
|
|
Provision for loan losses
|
|
|
4,238
|
|
|
|
13,390
|
|
Stock based compensation expense
|
|
|
162
|
|
|
|
155
|
|
Deferred tax benefit
|
|
|
(1,894
|
)
|
|
|
(502
|
)
|
Accretion of trust preferred securities discount
|
|
|
64
|
|
|
|
64
|
|
Amortization of premiums and accretion of security discounts, net
|
|
|
147
|
|
|
|
139
|
|
Origination of loans held-for-sale
|
|
|
(18,668
|
)
|
|
|
(61,119
|
)
|
Sales of loans
|
|
|
21,909
|
|
|
|
59,218
|
|
Proceeds from gain on sale of loans
Changes in other assets and other liabilities:
|
|
|
246
|
|
|
|
186
|
|
Loss on other real estate owned
|
|
|
918
|
|
|
|
|
|
Impairment loss on securities
|
|
|
851
|
|
|
|
30
|
|
Decrease (increase) in accrued interest receivable
|
|
|
524
|
|
|
|
(3
|
)
|
Decrease (increase) in other assets
|
|
|
4,447
|
|
|
|
(4,823
|
)
|
Decrease in other liabilities
|
|
|
(754
|
)
|
|
|
(3,166
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
$
|
17,360
|
|
|
$
|
1,845
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
2,669
|
|
|
|
15,735
|
|
Purchase of securities available-for-sale
|
|
|
(40,893
|
)
|
|
|
(31,018
|
)
|
Purchase of securities held-to-maturity
|
|
|
|
|
|
|
(11,350
|
)
|
Proceeds from principal payments on securities available-for-sale
|
|
|
13,884
|
|
|
|
9,951
|
|
Proceeds from principal payments on securities held-to-maturity
|
|
|
1,962
|
|
|
|
1,312
|
|
Proceeds from calls and maturities of securities available-for-sale
|
|
|
39,786
|
|
|
|
13,586
|
|
Proceeds from calls and maturities of securities held-to-maturity
|
|
|
747
|
|
|
|
1,297
|
|
Purchase of bank premises and equipment
|
|
|
(160
|
)
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used In) Investing Activities
|
|
$
|
17,995
|
|
|
$
|
(1,266
|
)
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
$
|
70,662
|
|
|
$
|
67,223
|
|
Net increase (decrease) in repurchase agreements and Federal funds purchased
|
|
|
2,344
|
|
|
|
(3,735
|
)
|
Net proceeds from issuance of capital stock
|
|
|
307
|
|
|
|
157
|
|
Dividend paid on preferred stock
|
|
|
(887
|
)
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
$
|
72,426
|
|
|
$
|
63,221
|
|
|
|
|
Net Increase In Cash and Cash Equivalents
|
|
|
107,781
|
|
|
|
63,800
|
|
|
|
|
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD
|
|
|
25,211
|
|
|
|
33,515
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END OF PERIOD
|
|
$
|
132,992
|
|
|
$
|
97,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing Activities:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities
|
|
$
|
2,062
|
|
|
$
|
(1,382
|
)
|
Tax benefits on stock options exercised
|
|
|
32
|
|
|
|
|
|
Other real estate owned transferred from loans
|
|
|
450
|
|
|
|
4,886
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Taxes Paid
|
|
$
|
|
|
|
$
|
|
|
Interest Paid
|
|
|
12,229
|
|
|
|
18,034
|
|
Notes to consolidated
financial statements are an integral part of these statements.
6
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
General
The accompanying unaudited consolidated financial statements of Virginia Commerce Bancorp, Inc. and its subsidiaries (the
Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. All significant intercompany balances and transactions have
been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the
financial positions as of March 31, 2010 and December 31, 2009, the results of operations for the three months ended March 31, 2010 and 2009, and statements of cash flows and stockholders equity for the three months ended
March 31, 2010 and 2009. These statements should be read in conjunction with the Companys annual report on Form 10-K for the period ended December 31, 2009. In preparing these financial statements, management has evaluated subsequent
events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no material subsequent events to be disclosed at this time.
Operating results for the three month period ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year
ending December 31, 2010, or any other period.
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In
accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the fair value of a financial instrument is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted
market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there had been a significant decrease in the volume and level of activity for the asset or liability, a change in
valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the
facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels,
based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities.
Level 2 Valuation is based on inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the asset or liability.
7
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Level 3 Valuation is based on unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial
instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a
recurring basis in the financial statements:
Securities available for sale
: Securities available for sale are recorded at fair value
on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar
securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using
pricing models that considers observable market data (Level 2).
The following describes the valuation techniques used by the Company to
measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements for March 31, 2010 and December 31, 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using
|
(in thousands)
Description
|
|
Balance as of
March 31,
2010
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
279,792
|
|
$
|
|
|
$
|
279,792
|
|
$
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using
|
(in thousands)
Description
|
|
Balance as of
December 31,
2009
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
291,521
|
|
$
|
|
|
$
|
291,521
|
|
$
|
|
Certain assets are
measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following
describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans held for sale
: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family
residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short
duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended March 31,
2010, and December 31, 2009. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Operations.
8
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Impaired Loans
: Loans are designated as impaired when, in the judgment of management based on
current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market
price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts
receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the
Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The
value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable businesss financial statements if not considered significant using observable market data. Likewise, values for
inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans are measured at fair value on a nonrecurring basis through the allowance for loan losses. Any fair value adjustments
are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
Foreclosed Assets:
Assets
acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at the lesser of book value or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in net expenses from
foreclosed assets.
The following table summarizes the Companys assets that were measured at fair value on a nonrecurring basis for
March 31, 2010 and December 31, 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at March 31, 2010
|
(in thousands)
Description
|
|
Balance as of
March 31,
2010
|
|
Quoted Prices
in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
127,346
|
|
$
|
|
|
$
|
110,358
|
|
$
|
16,988
|
Foreclosed Assets
|
|
$
|
26,269
|
|
$
|
|
|
$
|
26,269
|
|
$
|
|
|
|
|
|
|
|
|
Carrying value at December 31, 2009
|
(in thousands)
Description
|
|
Balance as of
December 31,
2009
|
|
Quoted Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
121,109
|
|
$
|
|
|
$
|
96,798
|
|
$
|
24,311
|
Foreclosed Assets
|
|
$
|
28,499
|
|
$
|
|
|
$
|
28,499
|
|
$
|
|
The following methods
and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
9
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Securities
For securities held for investment purposes, fair values are based upon quoted market prices, when available. If quoted market prices are not available,
fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from
various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data. The carrying value of restricted stock approximates fair value based on the redemption provisions of
the issuers.
Loans Held-for-Sale
Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different
than cost due to the short duration between origination and sale.
Loan Receivables
For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the
reporting date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of
stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
At March 31, 2010 and December 31, 2009, the fair value of loan commitments and stand-by letters of credit were deemed immaterial, and
therefore, are not included in the table below.
The carrying amounts and estimated fair values of the Companys financial instruments
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
(Dollars in thousands)
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
132,992
|
|
$
|
132,992
|
|
$
|
25,211
|
|
$
|
25,211
|
Securities
|
|
|
334,160
|
|
|
335,262
|
|
|
348,585
|
|
|
349,836
|
Restricted Stock
|
|
|
11,751
|
|
|
11,751
|
|
|
11,751
|
|
|
11,751
|
Loans held-for-sale
|
|
|
3,005
|
|
|
3,005
|
|
|
6,492
|
|
|
6,492
|
Loans
|
|
|
2,203,156
|
|
|
2,221,572
|
|
|
2,210,064
|
|
|
2,227,593
|
Accrued interest receivable
|
|
|
10,013
|
|
|
10,013
|
|
|
10,537
|
|
|
10,537
|
10
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
(Dollars in thousands)
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,299,989
|
|
$
|
2,267,505
|
|
$
|
2,229,327
|
|
$
|
2,202,714
|
Securities sold under agreements to repurchase and federal funds purchased
|
|
|
179,073
|
|
|
201,534
|
|
|
176,729
|
|
|
200,146
|
Other borrowed funds
|
|
|
25,000
|
|
|
25,639
|
|
|
25,000
|
|
|
25,683
|
Trust preferred capital notes
|
|
|
66,121
|
|
|
82,471
|
|
|
66,057
|
|
|
82,651
|
Accrued interest payable
|
|
|
3,697
|
|
|
3,697
|
|
|
4,014
|
|
|
4,014
|
In the normal course of business, the
Company is subject to market risk which includes interest rate risk (the risk that general interest rate levels will change). As a result, the fair values of the Companys financial instruments will change when interest rate levels change and
that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize this risk.
2. Investment Securities
Amortized cost
and fair value of the securities available-for-sale and held-to-maturity as of March 31, 2010 and December 31, 2009, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair Value
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
229,101
|
|
$
|
6,016
|
|
$
|
(306
|
)
|
|
$
|
234,811
|
Pooled trust preferred securities
|
|
|
6,468
|
|
|
|
|
|
(4,696
|
)
|
|
|
1,772
|
Obligations of states and political subdivisions
|
|
|
41,621
|
|
|
1,607
|
|
|
(19
|
)
|
|
|
43,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
277,190
|
|
$
|
7,623
|
|
$
|
(5,021
|
)
|
|
$
|
279,792
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
10,906
|
|
$
|
295
|
|
$
|
|
|
|
$
|
11,201
|
Obligations of state and political subdivisions
|
|
|
43,462
|
|
|
807
|
|
|
|
|
|
|
44,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,368
|
|
$
|
1,102
|
|
$
|
|
|
|
$
|
55,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair Value
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
242,129
|
|
$
|
6,004
|
|
$
|
(999
|
)
|
|
$
|
247,134
|
Pooled trust preferred securities
|
|
|
7,241
|
|
|
|
|
|
(5,211
|
)
|
|
|
2,030
|
Obligations of states and political subdivisions
|
|
|
41,610
|
|
|
873
|
|
|
(126
|
)
|
|
|
42,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
290,980
|
|
$
|
6,877
|
|
$
|
(6,336
|
)
|
|
$
|
291,521
|
|
|
|
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
12,323
|
|
$
|
430
|
|
$
|
|
|
|
$
|
12,753
|
Obligations of state and political subdivisions
|
|
|
44,741
|
|
|
821
|
|
|
|
|
|
|
45,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,064
|
|
$
|
1,251
|
|
$
|
|
|
|
$
|
58,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of securities pledged as collateral for repurchase
agreements, certain public deposits, and other purposes were $234.0 million and $252.7 million at March 31, 2010 and December 31, 2009, respectively.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. An impairment is considered to be other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does
not expect to recover the securitys entire amortized cost basis.
11
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Provided below is a summary of all securities which were in an unrealized loss position at
March 31, 2010 and December 31, 2009, that were evaluated for other-than-temporary impairment, and deemed to not have an other-than-temporary impairment. Presently, the Company does not intend to sell any of these securities, will not be
required to sell these securities, and expects to recover the entire amortized cost of all the securities. For U.S. Government Agency obligations and obligations of states/political subdivisions, the unrealized losses result from market or interest
rate risk, while the unrealized losses pertaining to the pooled trust preferred securities are due to both performance and credit ratings, as well as interest rate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
30,689
|
|
$
|
(306
|
)
|
|
$
|
|
|
$
|
|
|
|
$
|
30,689
|
|
$
|
(306
|
)
|
Pooled trust preferred securities
|
|
|
|
|
|
|
|
|
|
1,772
|
|
|
(4,696
|
)
|
|
|
1,772
|
|
|
(4,696
|
)
|
Obligations of states/political subdivisions
|
|
|
|
|
|
|
|
|
|
2,718
|
|
|
(19
|
)
|
|
|
2,718
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,689
|
|
$
|
(306
|
)
|
|
$
|
4,490
|
|
$
|
(4,715
|
)
|
|
$
|
35,179
|
|
$
|
(5,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency obligations
|
|
$
|
70,876
|
|
$
|
(999
|
)
|
|
$
|
|
|
$
|
|
|
|
$
|
70,876
|
|
$
|
(999
|
)
|
Pooled trust preferred securities
|
|
|
|
|
|
|
|
|
|
2,030
|
|
|
(5,211
|
)
|
|
|
2,030
|
|
|
(5,211
|
)
|
Obligations of states/political subdivisions
|
|
|
8,182
|
|
|
(57
|
)
|
|
|
2,031
|
|
|
(69
|
)
|
|
|
10,213
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,058
|
|
$
|
(1,056
|
)
|
|
$
|
4,061
|
|
$
|
(5,280
|
)
|
|
$
|
83,119
|
|
$
|
(6,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Company had three pooled trust preferred securities that were deemed to be
other-than-temporarily impaired (OTTI) based on a present value analysis of expected future cash flows. These securities had a fair value of $755 thousand and a cumulative other-than-temporary impairment loss of $5.5 million, of which
$2.9 million has been recognized in other comprehensive loss, and $2.7 million has been recognized in earnings (in current and prior periods). The following table provides further information on these three securities as of March 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Class
|
|
Current
Moodys
Ratings
(Lowest
Assigned
Rating)
|
|
Par
Value
|
|
Book
Value/
Fair
Value
|
|
Unrealized
Loss
|
|
Current
Defaults
and
Deferrals
|
|
% of
Current
Defaults
and
Deferrals
to
Current
Collateral
|
|
|
Excess
Sub (1)
|
|
|
Estimated
Incremental
Defaults
Required to
Break
Yield (2)
|
|
Cumulative
Other
Comprehensive
Loss (3)
|
|
Amount
of
OTTI
Related
to
Credit
Loss (3)
|
PreTSL VI
|
|
Mez
|
|
Caa1
|
|
$
|
522
|
|
$
|
310
|
|
$
|
212
|
|
$
|
33,000
|
|
81
|
%
|
|
-49.7
|
%
|
|
BROKEN
|
|
$
|
56
|
|
$
|
156
|
PreTSL X
|
|
B-1
|
|
Ca
|
|
|
2,028
|
|
|
258
|
|
|
1,770
|
|
|
220,595
|
|
44
|
%
|
|
-100.0
|
%
|
|
BROKEN
|
|
|
617
|
|
|
1,153
|
PreTSL XXVI
|
|
C-2
|
|
Ca
|
|
|
3,737
|
|
|
187
|
|
|
3,550
|
|
|
273,000
|
|
28
|
%
|
|
-23.3
|
%
|
|
BROKEN
|
|
|
2,187
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
6,287
|
|
$
|
755
|
|
$
|
5,532
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,860
|
|
$
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Company had one pooled trust preferred
security that was deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The security had a fair value of $1.0 million. The following table provides further information on this security as of
March 31, 2010 (in thousands):
12
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Class
|
|
Current
Moodys
Ratings
(Lowest
Assigned
Rating)
|
|
Par
Value
|
|
Book
Value/
Fair
Value
|
|
Unrealized
Loss
|
|
Current
Defaults
and
Deferrals
|
|
% of
Current
Defaults
and
Deferrals
to
Current
Collateral
|
|
|
Excess
Sub (1)
|
|
|
Estimated
Incremental
Defaults
Required to
Break
Yield (2)
|
|
Cumulative
Other
Comprehensive
Loss (3)
|
|
Amount
of
OTTI
Related
to
Credit
Loss (3)
|
PreTSL XXVII
|
|
B
|
|
B3
|
|
$
|
2,853
|
|
$
|
1,017
|
|
$
|
1,836
|
|
$
|
81,800
|
|
25
|
%
|
|
-0.7
|
%
|
|
$
|
70,500
|
|
$
|
1,836
|
|
|
(1)
|
Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are pari passu and senior to the class the
Company owns. Negative excess subordination indicates there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to those the Company owns.
|
(2)
|
A break in yield for a given class means that defaults/deferrals have reached such a level that the class would not receive all of its contractual cash flows (principal
and interest) by maturity (so that it is not just a temporary interest shortfall, but an actual loss in yield on the investment). This represents additional defaults beyond those assumed in our cash flow modeling.
|
13
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table presents a roll-forward of the credit loss component amount of OTTI recognized in
earnings:
|
|
|
|
(in thousands)
|
|
|
Amount recognized through December 31, 2009
|
|
$
|
1,821
|
Additions:
|
|
|
|
Initial credit impairments
|
|
|
|
Subsequent credit impairments
|
|
|
851
|
|
|
|
|
Amount recognized through March 31, 2010
|
|
$
|
2,672
|
Management has evaluated each of
these securities for potential impairment under ASC 325 Investments-Other and the most recently issued guidance, and has reviewed each of the issues collateral participants most recent earnings, capital and loan loss reserve levels, and
non-performing loan levels to estimate a future deferral and default rate in basis points for the remaining life of each security. As of March 31, 2010, we used 50 basis points for PreTSL VI and X, 60 basis points for PreTSL XXVI, and 30 basis
points for PreTSL XXVII in expected deferrals and defaults as a percentage of remaining collateral for future periods. In performing a detailed present value cash flow analysis for each security, the deferral and default rate was treated the same.
If this analysis results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, a credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is
considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current 3-month LIBOR spot rate. The analysis also assumed 15% recoveries on
deferrals after two years and prepayments of 1% per year on each security. As of March 31, 2010, there were 2 out of 5 performing banks in PreTSL VI, 36 out of 57 in PreTSL X, 44 out of 64 in PreTSL XXVI, and 27 out of 42 in PreTSL XXVII.
Our investment in Federal Home Loan Bank (FHLB) stock totaled $6.0 million at March 31, 2010. FHLB stock is generally viewed
as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the
ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLBs temporary suspension of repurchases of excess stock in 2010, we do not consider this investment to be other-than-temporarily
impaired at March 31, 2010, and no impairment has been recognized. FHLB stock is shown in restricted securities on the balance sheet and is not part of the available-for-sale securities portfolio.
3. Loans
Major classifications of
loans, excluding loans held-for-sale, are summarized as follows:
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
(Dollars in thousand)
|
Commercial
|
|
$
|
224,498
|
|
$
|
238,327
|
Real estate-one to four family residential:
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
278,708
|
|
|
271,501
|
Home equity lines
|
|
|
134,638
|
|
|
135,233
|
|
|
|
|
|
|
|
Total real estate-one-to-four family residential
|
|
$
|
413,346
|
|
$
|
406,734
|
Real estate-multifamily residential
|
|
|
72,560
|
|
|
66,799
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
Owner Occupied
|
|
|
464,338
|
|
|
452,776
|
Non-owner occupied
|
|
|
659,687
|
|
|
673,169
|
|
|
|
|
|
|
|
Total Real estate-non-farm, non-residential
|
|
$
|
1,124,025
|
|
$
|
1,125,945
|
Real estate-construction:
|
|
|
|
|
|
|
Residential-Owner Occupied
|
|
|
17,707
|
|
|
15,161
|
Residential-Builder
|
|
|
210,600
|
|
|
224,855
|
Commercial
|
|
|
194,019
|
|
|
188,276
|
|
|
|
|
|
|
|
Total Real estate-construction:
|
|
$
|
422,326
|
|
$
|
428,292
|
Farmland
|
|
|
2,673
|
|
|
2,675
|
Consumer
|
|
|
10,014
|
|
|
10,368
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,269,442
|
|
$
|
2,279,140
|
Less unearned income
|
|
|
3,879
|
|
|
3,924
|
Less allowance for loan losses
|
|
|
62,407
|
|
|
65,152
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
2,203,156
|
|
$
|
2,210,064
|
14
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
4. Allowance for Loan Losses
An analysis of the allowance for loan losses for three months ended March 31, 2010, and the year ended December 31, 2009 is shown below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Allowance, at beginning of period
|
|
$
|
65,152
|
|
|
$
|
36,475
|
|
Provision charged against income
|
|
|
4,238
|
|
|
|
81,913
|
|
Recoveries added to reserve
|
|
|
548
|
|
|
|
1,377
|
|
Losses charged to reserve
|
|
|
(7,531
|
)
|
|
|
(54,613
|
)
|
|
|
|
|
|
|
|
|
|
Allowance, at end of period
|
|
$
|
62,407
|
|
|
$
|
65,152
|
|
|
|
|
|
|
|
|
|
|
Information about impaired loans as of and for March 31, 2010 and December 31, 2009, is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
Non-accrual loans for which a specific allowance has been provided
|
|
$
|
48,020
|
|
$
|
34,572
|
Non-accrual loans for which no specific allowance has been provided
|
|
|
34,212
|
|
|
31,237
|
Other impaired loans for which a specific allowance has been provided
|
|
|
109,710
|
|
|
117,384
|
Other impaired loans for which no specific allowance has been provided
|
|
|
51,756
|
|
|
54,438
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
243,698
|
|
$
|
237,631
|
|
|
|
|
|
|
|
Allowance provided for impaired loans, included in the allowance for loan losses
|
|
$
|
30,384
|
|
$
|
30,847
|
|
|
|
|
|
|
|
In performing a specific reserve analysis on all impaired loans as of
March 31, 2010, current third party appraisals were used with respect to approximately 65% of impaired loans to assist with the evaluation of collateral values for the purpose of establishing specific reserves. When a loan is identified as
impaired and collateral dependent, a current evaluation of collateral value via third party appraisal or other valuation methodology is conducted within the calendar quarter of identification when possible but, not less than 90 days after
identification. Charge-offs and specific reserves are established upon determination of collateral value. During the interim between identification of an impaired loan and receipt of a current appraisal of the related collateral, specific reserves
are established based upon interim methodologies including discounted cash flow analysis, tax assessment values and review of market comparables. In general, variances between charge-offs and fair value of collateral is limited to estimates of
projected costs of sale. Costs of sale are estimated at 10% of value. Partially charged-off loans remain non-performing until such time as a viable restructuring plan is developed. Upon execution of a forbearance agreement including modified terms,
an impaired loan will be re-classified from non-performing to a troubled debt restructuring, but will continue to be identified as impaired until the loan performs under the modified terms for the remainder of the calendar year in which it was
restructured, but not less than 90 days. As noted above, in the majority of cases, external appraisals are used to establish fair value of the related collateral. In the interim prior to receipt of a current appraisal or in those situations where a
current appraisal is not deemed practical or necessary, discounted cash flow analysis, tax assessment values, review of market comparables and other methodologies are used to establish fair value. Impaired loans which do not have a specific reserve
are those loans which have been identified to have sufficient collateral coverage, based upon the fair value of collateral, to repay the entire principal balance due from collateral liquidation.
There were $318 thousand and $3.8 million, in loans past due 90 days or more, and still accruing interest at March 31, 2010 and December 31,
2009, respectively, not classified as impaired loans.
15
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
5. Earnings (Loss) Per Common Share
The following shows the weighted average number of shares used in computing (loss) earnings per common share and the effect on the weighted average number
of shares of diluted potential common stock. As of March 31, 2010, and 2009, there were 3,568,224 and 3,359,672 anti-dilutive stock options and warrants outstanding, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
Shares
|
|
Per
Share
Amount
|
|
Shares
|
|
Per
Share
Amount
|
|
Basic earnings (loss) per common share
|
|
26,933,923
|
|
$
|
0.12
|
|
26,688,143
|
|
$
|
(0.12
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
1,076,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
28,010,878
|
|
$
|
0.11
|
|
26,688,143
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Stock Compensation Plan
At March 31, 2010, the Company had two stock-based compensation plans, including the Companys 2010 Equity Plan approved by the Board of
Directors on March 2, 2010. Included in salaries and employee benefits expense for the three months ended March 31, 2010 and 2009, is $162 thousand and $155 thousand, respectively, of stock-based compensation expense which is based on the
estimated fair value of 820,543 options granted between January 2006 and March 2010, as adjusted, amortized on a straight-line basis over a five year requisite service period. As of March 31, 2010, there was $1.4 million remaining of total
unrecognized compensation expense related to these option awards which will be recognized over the remaining requisite service periods.
The
fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2010 and 2009:
|
|
|
|
|
|
|
2010
|
|
2009
|
Expected volatility
|
|
32.21%
|
|
30.59%
|
Expected dividends
|
|
.00%
|
|
.00%
|
Expected term (in years)
|
|
7.2
|
|
7.2
|
Risk-free rate
|
|
3.17%
|
|
2.14% to 3.34%
|
Stock option plan
activity for the three months ended March 31, 2010, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
($000)
|
Outstanding at January 1, 2010
|
|
1,926,859
|
|
|
$
|
7.84
|
|
|
|
|
|
Granted
|
|
53,650
|
|
|
|
5.64
|
|
|
|
|
|
Exercised
|
|
(189,378
|
)
|
|
|
1.46
|
|
|
|
|
|
Forfeited
|
|
(1,089
|
)
|
|
|
16.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
1,790,042
|
|
|
$
|
8.44
|
|
4.5 years
|
|
$
|
|
Exercisable at March 31, 2010
|
|
1,398,615
|
|
|
$
|
8.25
|
|
3.4 years
|
|
$
|
|
The total value of
in-the-money options exercised during the three months ended March 31, 2010, was $485 thousand.
16
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
7. Capital Requirements
A comparison of the Companys and its wholly-owned subsidiarys, Virginia Commerce Bank (the Bank) capital ratios as of
March 31, 2010, with the minimum regulatory guidelines is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Actual
Capital
|
|
|
Minimum
Capital
Requirements
|
|
|
Minimum to
be
Well-Capitalized
Under Prompt
Corrective Action
Provisions
|
|
Total Risk-Based Capital:
|
|
|
|
|
|
|
|
|
|
Company
|
|
13.16
|
%
|
|
8.00
|
%
|
|
|
|
Bank
|
|
13.06
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
|
|
|
|
Tier 1 Risk-Based Capital:
|
|
|
|
|
|
|
|
|
|
Company
|
|
11.91
|
%
|
|
4.00
|
%
|
|
|
|
Bank
|
|
11.81
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
|
|
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
Company
|
|
10.34
|
%
|
|
4.00
|
%
|
|
|
|
Bank
|
|
10.29
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
8. Other Borrowed Funds and
Lines of Credit
The Bank maintains a $408.2 million line of credit with the Federal Home Loan Bank of Atlanta. The interest rate and term
of each advance from the line is dependent upon the advance and commitment type. Advances on the line are secured by all of the Banks qualifying first liens and home equity lines-of-credit on one-to-four unit single-family dwellings. As of
March 31, 2010, the book value of these qualifying loans totaled approximately $217.5 million and the amount of available credit using this collateral was $109.9 million. Advances on the line of credit in excess of this amount require pledging
of additional assets, including other types of loans and investment securities. As of March 31, 2010 and December 31, 2009, the Bank had $25 million in advances outstanding that mature on September 21, 2012, but are callable by the
Federal Home Loan Bank on any quarterly interest payment date. The Bank has additional short-term lines of credit totaling $47 million with nonaffiliated banks at March 31, 2010, on which there were no amounts outstanding.
9. Trust Preferred Capital Notes
On
December 19, 2002, the Company completed a private placement issuance of $15.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II) which issued $470 thousand in common equity to
the Company. These securities bear a floating rate of interest, adjusted semi-annually, of 330 basis points over six month Libor, currently 4.40%. These securities have been callable at par since December 30, 2007, on any semi-annual interest
payment date, but have not been redeemed to date. On December 20, 2005, the Company completed a private placement of $25.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust III)
which issued $774 thousand in common equity to the Company. These securities bear a fixed rate of interest of 6.19% until February 23, 2011, at which time they convert to a floating rate, adjusted quarterly, of 142 basis points over three month
Libor. These securities are callable at par beginning February 23, 2011.
On September 24, 2008, the Company completed a private
placement, to its directors and certain executive officers, of $25.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust IV) which issued $775 thousand in common equity to the Company.
These securities bear a fixed rate of interest of 10.20% and are callable at par beginning September 24, 2013. In connection with the issuance of the trust preferred securities, the Company also issued warrants to purchase an aggregate of
1.5 million shares of common stock to the purchasers. The warrants have a five year term and an exercise price of $6.83 per share.
The
principal asset of each trust is a similar amount of the Companys junior subordinated debt securities with an approximately 30 year term from issuance and like interest rates to the trust preferred securities. The obligations of the Company
with respect to the trust preferred securities constitute a full and unconditional guarantee by the Company of each Trusts obligations with respect to the trust preferred securities to the extent set forth in the related guarantees. Subject to
certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, resulting in a deferral of distribution payments on the related
17
VIRGINIA COMMERCE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
trust preferred securities. If the Company defers interest payments on the junior subordinated debt securities, or otherwise is in default of the obligations in respect to the trust preferred
securities, the Company would be prohibited from making dividend payments to its shareholders, and from most purchases, redemptions or acquisitions of the Companys common stock.
The Trust Preferred Securities may be included in Tier 1 capital for regulatory capital adequacy purposes up to 25.0% of Tier 1 capital after its
inclusion. The portion of the trust preferred securities not qualifying as Tier 1 capital may be included as part of total qualifying capital in Tier 2 capital, subject to limitation.
10. Preferred Stock and Warrant
On
December 12, 2008, the Company entered into a Letter Agreement (Agreement) with the United States Department of the Treasury (Treasury) under the Troubled Asset Relief Program (TARP) Capital Purchase Program
(CPP), whereby the Company issued and sold to the Treasury 71,000 shares of fixed rate cumulative perpetual preferred stock with a par value of $1.00 and a liquidation amount of $1,000 per share, for a total price of $71.0 million. In
addition, the Treasury received a warrant to purchase 2,696,203 shares of the Companys common stock at an exercise price of $3.95 per share. Subject to certain restrictions, the preferred stock and the warrant are transferable by the Treasury.
The allocated carrying values of the preferred stock and the warrant, based on their relative fair values, were $62.5 million and $8.5 million respectively.
The preferred stock pays dividends quarterly, beginning February 2009, at a rate of 5% per year for the first five years, then increases to 9%
thereafter. The Company may redeem the preferred stock at any time, subject to consultation with the Federal Reserve, at the liquidation amount of $1,000 per share plus any accrued and unpaid dividends. Approval from the Treasury is required to pay
common stock dividends or to repurchase shares of the Companys common stock prior to December 12, 2011, unless the preferred stock has been fully redeemed.
The warrant has a ten year term and is immediately exercisable. Pursuant to the terms of the Agreement, the Treasury will not exercise voting rights with
respect to any shares of common stock it acquires upon exercise of the warrant; voting rights may be exercised by any other holder.
18
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward-Looking Statements
This managements 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 (the Exchange Act), 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 Companys 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 Companys past
results are not necessarily indicative of future performance. Virginia Commerce Bancorp, Inc. disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future
circumstances.
Non-GAAP Presentations
This managements discussion and analysis refers to the efficiency ratio, as adjusted, which is computed by dividing non-interest expense by the sum
of net interest income on a tax equivalent basis and non-interest income before losses on other real estate owned (OREO) and core operating earnings, which is net income excluding taxes, loan loss provisions and losses on OREO and
securities. These are non-GAAP financial measures that we believe provides investors with important information regarding our operational efficiency and earnings performance. Comparison of our efficiency ratio, as adjusted, with those of other
companies may not be possible because other companies may calculate these financial measures differently. The Company, in referring to its net income, is referring to income under accounting principles generally accepted in the United States, or
GAAP.
General
The following presents managements 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 Companys 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 twenty-eight branch offices, one residential mortgage office and one investment services office.
Headquartered in Arlington, Virginia, the Bank serves the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun,
Prince William, Spotsylvania and Stafford Counties and the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park. Its service area also covers, to a lesser extent, Washington, D.C. and the nearby Maryland counties
of Montgomery and Prince Georges. The Banks customer base includes small-to-medium sized businesses including firms that have contracts with the U.S. government, associations, retailers and industrial businesses, professionals and their firms,
business executives, investors and consumers.
Critical Accounting Policies
For the period ended March 31, 2010, there were no changes in the Companys critical accounting policies as reflected in the Companys most
recent annual report.
19
The Companys financial statements are prepared in accordance with GAAP. The financial information
contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could
differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
The allowance for loan losses is an estimate of the losses that are inherent in our loan portfolio. The
allowance is based on two basic principles of accounting: (i) Accounting for Contingencies (ASC 450 Contingencies), which requires that losses be accrued when they are probable of occurring and estimable and (ii) Accounting by Creditors
for Impairment of a Loan (ASC 310 Receivables), 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 two basic components: the specific allowance and the general 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 impaired loans. Impairment testing includes consideration of the borrowers 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 based on the
Companys calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans, representing 1-4 family residential first and second trusts, including home equity lines-of-credit, are collectively
evaluated for impairment based upon factors such as levels and trends in delinquencies, trends in loss and problem loan identification, trends in volumes and concentrations, local and national economic trends and conditions including estimated
levels of housing price depreciation/homeowners loss of equity, competitive factors and other considerations. These factors are converted into reserve percentages and applied against the homogenous loan pool balances. Impaired loans which meet
the criteria for substandard, doubtful and loss 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). The general formula is used to estimate the loss of non-classified loans. 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 general allowance recognizes potential losses whose impact on the portfolio has yet to be recognized by a specific allowance.
Allowance factors and the overall size of the allowance may change from period to period based on managements assessment of the above described factors and the relative weights given to each factor. Further information regarding the allowance
for loan losses is provided under the caption Allowance for Loan Losses/Provision for Loan Loss Expense later in this report and in Note 4 to the Consolidated Financial Statements.
The Companys 1998 Stock Option Plan (the 1998 Plan), which is shareholder-approved, permitted the grant of share options to its
directors and officers for up to 2.3 million shares of common stock. The Companys 2010 Equity Plan, which is also shareholder-approved and replaces the 1998 Plan, permits the grant of share options and other awards for up to
1.5 million shares of common stock to directors and officers. Option awards are generally granted with an exercise price equal to the market price of the Companys stock at the date of grant, generally vest based on 5 years of continuous
service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that currently uses historical volatility of the Companys stock based on a 7.2 year
expected term, before exercise, for the options granted, and a risk-free interest rate based on the U.S. Treasury Department (the Treasury) curve in effect at the time of the grant to estimate total stock-based compensation expense. This
amount is then amortized on a straight-line basis over the requisite service period, currently 5 years, to salaries and benefits expense. See Note 6 to the Consolidated Financial Statements for additional information regarding the plans and related
expense.
On a quarterly basis the Company reviews any securities which are considered to be impaired as defined by accounting guidance, to
determine if the impairment is deemed to be other-than-temporary. If it is determined that the impairment is other-than-temporary, i.e. impaired because of credit issues rather than interest rate, the investment is written down through the Statement
of Operations in accordance with accounting guidance.
20
Results of Operations
For the three months ended March 31, 2010, the Company recorded net income of $4.5 million. After an effective dividend of $1.3 million to the
Treasury on preferred stock, the Company reported net income to common stockholders of $3.2 million, or $0.11 per diluted common share, compared to a loss of $3.2 million, or $0.12 per diluted common share in the first quarter of 2009. The
year-over-year earnings improvement was largely attributable to a 68% decrease in loan loss provisions from $13.4 million to $4.2 million, and a $4.1 million increase in net interest income. Earnings for the quarter were also impacted by a $918
thousand loss on OREO and an impairment loss on securities of $851 thousand. Excluding taxes, loan loss provisions and the losses on OREO owned and securities, core operating earnings for the three months ended March 31, 2010, of $12.5 million
were up $2.9 million, or 30.3%, compared to $9.6 million for the same period in 2009.
Total assets increased $77.7 million, or 2.8%, from
$2.73 billion at December 31, 2009, to $2.80 billion at March 31, 2010, as total deposits grew $70.7 million, or 3.2%, from $2.23 billion to $2.30 billion. Loans, net of allowance for loan losses, were down $6.9 million, or 0.3%, with
non-farm, non-residential real estate loans down $1.9 million, construction loans down $6.0 million, one-to-four family residential real estate loans up $6.6 million, and commercial loans down $14.2 million. Loan production for the quarter was
negatively impacted by lower economic activity and demand in both the business and consumer sectors, a reallocation of lending personnel to problem loan identification and resolution and a strategic decision to moderate overall loan growth, restrict
acquisition, development and construction lending and focus on deposit generation and non-credit products. Lending efforts are being focused on building greater market share in commercial and industrial lending, especially in sectors forecast for
growth, such as government contract lending and select service industries, with strategic hiring, marketing campaigns and calling efforts.
Total deposit growth of $70.7 million included a slight decrease in demand deposits of $7.9 million, or 3.3%, from $239.6 million at December 31,
2009, to $231.7 million at March 31, 2010, an increase in interest-bearing demand deposits of $103.1 million, or 10.5%, and a decrease in time deposits of $24.6 million, or 2.4%. The majority of the Banks deposits are attracted from
individuals and businesses in the Northern Virginia and the Metropolitan Washington, D.C. area. The increases in interest-bearing demand deposits were due primarily to success with the Companys MEGA Savings and MEGA Checking account products
as well as its Premier Interest Checking for non-profits. The declines in time deposits are reflective of lower loan volume, requiring lower levels of funding, and strategic pricing of certificates of deposits relative to both the competitive market
and the Companys pricing on interest-bearing transaction accounts. The proportionate share of time deposits to total deposits has declined from 67.2% at year-end 2008, to 45.1% at December 31, 2009, and to 42.6% as of March 31, 2010.
Time deposits are expected to decrease below 40% by the end of 2010. Brokered certificates of deposit represent $80.1 million of total time deposits, or 3.5% of total deposits, at March 31, 2010.
As noted, for the three months ended March 31, 2010, the Company recorded net income to common stockholders of $3.2 million compared to a loss of
$3.2 million for the three months ended March 31, 2009, as net interest income increased $4.1 million, or 19.6%, non-interest income decreased $2.1 million with a $918 thousand loss on OREO and an $851 thousand impairment loss on securities,
while non-interest expense rose $766 thousand, or 5.9% and provisions for loan losses were down $9.2 million. The Companys return on average assets and return on average equity were 0.65% and 8.16% for the three months ended March 31,
2010, compared to a negative 0.35% and 3.86% for the same period in 2009.
Stockholders equity increased $5.4 million, or 2.5%, from
$218.9 million at December 31, 2009, to $224.3 million at March 31, 2010, with net income to common stockholders of $3.2 million and an $1.3 million increase in other comprehensive income related to the investment securities portfolio, and
$469 thousand in proceeds and tax benefits related to the exercise of options by company directors and officers, and stock option expense credits. As a result of these changes and a lower level of risk-weighted assets, the Companys Tier 1
Capital ratio increased from 11.48% at December 31, 2009, to 11.91% at March 31, 2010, and its total qualifying capital ratio increased from 12.73% to 13.16%. The Banks ratios increased by similar levels.
21
Net Interest Income
Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings and is the Companys
primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. Net interest income for the first quarter of $24.8
million was up $4.0 million, or 19.6%, over the same quarter last year, as the net interest margin increased from 3.15% in the first quarter of 2009 to 3.79% for the current three-month period. On a sequential basis, the margin was up one basis
point. The year-over-year increase in the net interest margin was driven by lower deposit costs due to significant reductions in the level of time deposits, and increased levels of demand deposits and lower rate interest-bearing transaction
accounts. As a result, the average cost of interest-bearing deposits fell from 2.96% in the first quarter of 2009, to 1.88% in the current period, while the yield on interest-earning assets declined only nine basis points from 5.68% to 5.59%.
The following table shows the average balance sheets for each of the three months ended March 31, 2010 and 2009. In addition, the
amounts of interest earned on interest-earning assets, with related yields on a tax-equivalent basis, and interest expense on interest-bearing liabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the
average balances. Net loan fees and late charges included in interest income on loans totaled $747 thousand and $829 thousand for the three months ended March 31, 2010 and 2009, respectively.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
Interest
Income-
Expense
|
|
Average
Yields /
Rates
|
|
|
Average
Balance
|
|
Interest
Income-
Expense
|
|
Average
Yields /
Rates
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(1)
|
|
$
|
338,138
|
|
$
|
3,706
|
|
4.55
|
%
|
|
$
|
327,597
|
|
$
|
4,007
|
|
5.02
|
%
|
Restricted Stock
|
|
|
11,752
|
|
|
88
|
|
3.00
|
%
|
|
|
11,091
|
|
|
84
|
|
3.03
|
%
|
Loans, net of unearned income
|
|
|
2,280,980
|
|
|
32,905
|
|
5.86
|
%
|
|
|
2,312,936
|
|
|
33,443
|
|
5.87
|
%
|
Interest-bearing deposits in other banks
|
|
|
98
|
|
|
|
|
0.04
|
%
|
|
|
102
|
|
|
|
|
0.12
|
%
|
Federal funds sold
|
|
|
48,732
|
|
|
28
|
|
0.23
|
%
|
|
|
41,386
|
|
|
20
|
|
0.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
2,679,700
|
|
$
|
36,727
|
|
5.59
|
%
|
|
$
|
2,693,112
|
|
$
|
37,554
|
|
5.68
|
%
|
Other assets
|
|
|
93,712
|
|
|
|
|
|
|
|
|
61,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,773,412
|
|
|
|
|
|
|
|
$
|
2,754,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
281,142
|
|
$
|
812
|
|
1.17
|
%
|
|
$
|
190,817
|
|
$
|
610
|
|
1.30
|
%
|
Money market accounts
|
|
|
146,609
|
|
|
492
|
|
1.36
|
%
|
|
|
149,739
|
|
|
577
|
|
1.56
|
%
|
Savings accounts
|
|
|
603,703
|
|
|
2,497
|
|
1.68
|
%
|
|
|
241,424
|
|
|
1,439
|
|
2.42
|
%
|
Time deposits
|
|
|
1,002,008
|
|
|
5,627
|
|
2.28
|
%
|
|
|
1,424,332
|
|
|
12,005
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
2,033,462
|
|
$
|
9,428
|
|
1.88
|
%
|
|
$
|
2,006,312
|
|
$
|
14,631
|
|
2.96
|
%
|
Securities sold under agreement to repurchase and federal funds purchased
|
|
|
181,955
|
|
|
989
|
|
2.20
|
%
|
|
|
185,210
|
|
|
620
|
|
1.36
|
%
|
Other borrowed funds
|
|
|
25,000
|
|
|
266
|
|
4.25
|
%
|
|
|
25,000
|
|
|
265
|
|
4.25
|
%
|
Trust preferred capital notes
|
|
|
66,090
|
|
|
1,228
|
|
7.43
|
%
|
|
|
65,832
|
|
|
1,281
|
|
7.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
2,306,507
|
|
$
|
11,911
|
|
2.09
|
%
|
|
$
|
2,282,354
|
|
$
|
16,797
|
|
2.98
|
%
|
Demand deposits
|
|
|
224,280
|
|
|
|
|
|
|
|
|
201,931
|
|
|
|
|
|
|
Other liabilities
|
|
|
20,556
|
|
|
|
|
|
|
|
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,551,343
|
|
|
|
|
|
|
|
$
|
2,501,698
|
|
|
|
|
|
|
Stockholders equity
|
|
|
222,069
|
|
|
|
|
|
|
|
|
253,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,773,412
|
|
|
|
|
|
|
|
$
|
2,754,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
2.70
|
%
|
Net interest income and margin
|
|
|
|
|
$
|
24,816
|
|
3.79
|
%
|
|
|
|
|
$
|
20,757
|
|
3.15
|
%
|
(1)
|
Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities,
which are reflected as a component of stockholders equity. Average yields on securities are stated on a tax equivalent basis, using a 35% rate.
|
23
Allowance for Loan Losses / Provision for Loan Loss Expense
Provisions for loan losses were $4.2 million for the three months ended March 31, 2010, compared to $13.4 million in the same period in 2009, with
net charge-offs of $7.0 million in the first quarter versus $12.4 million for the three months ended March 31, 2009. Despite a sequential increase in non-performing assets of $10.7 million and an increase in troubled debt restructurings of $9.1
million, the total allowance for loan losses declined by $2.7 million from 2.86% of total loans at December 31, 2009, to 2.75% at March 31, 2010. This decline of $2.7 million in the allowance reflected the charge-off of $5.8 million in
specific reserves that were part of the allowance as of December 31, 2009, the recovery of $548 thousand in prior period charge-offs, specific reserves added for additions to impaired loans of $5.4 million, and a decline of $2.3 million in
general reserves. The decline in the general reserves was due to a 20 basis point decrease in our qualitative factors on commercial real estate loans and commercial construction loans with improvement in local economic conditions and delinquency
levels in those portfolios, as reflected in the decline in commercial real estate loans 30 to 89 days past due from $22.2 million at September 30, 2009, to $7.5 million at March 31, 2010, and no delinquencies in our commercial construction
loan portfolio. See Risk Elements and Non-Performing Assets later in this discussion for more information on non-performing assets and loans 90 + days past due and other impaired loans.
Management feels that the allowance for loan losses is adequate at March 31, 2010. 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 managements estimates and judgments, adverse developments in the economy, and the residential real estate market
in particular, on a national basis or in the Companys 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 a historical loss 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 Companys 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 historical loss factors are updated, as the various types and categories of loans change as a
percentage of total loans and as specific allowances are required on impaired loans and charge-offs occur. The decision to specifically reserve for or to charge-off or partially charge-off an impaired loan balance is based upon an evaluation of that
loans potential to improve, based upon near term change in financial or market conditions, which would enable collection of the portion of the loan determined to be impaired. If these conditions are determined to be favorable, a specific
reserve would be established as opposed to a charge-off. For further information regarding the allowance for loan losses see Note 4 to the Consolidated Financial Statements.
24
The following schedule summarizes the changes in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
2010
|
|
|
Three Months
Ended
March 31,
2009
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Allowance, at beginning of period
|
|
$
|
65,152
|
|
|
$
|
36,475
|
|
|
$
|
36,475
|
|
Provision charged against income
|
|
|
4,238
|
|
|
|
13,390
|
|
|
|
81,913
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
4
|
|
|
|
46
|
|
|
|
67
|
|
Commercial
|
|
|
10
|
|
|
|
5
|
|
|
|
739
|
|
Real estate one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
6
|
|
|
|
|
|
|
|
42
|
|
Home equity loans and liens
|
|
|
274
|
|
|
|
|
|
|
|
51
|
|
Real estate-nonfarm, nonresidential
|
|
|
51
|
|
|
|
|
|
|
|
149
|
|
Real estate-construction
|
|
|
203
|
|
|
|
146
|
|
|
|
329
|
|
Losses charged to reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
(654
|
)
|
|
|
(77
|
)
|
|
|
(416
|
)
|
Commercial loans
|
|
|
(2,501
|
)
|
|
|
(2,102
|
)
|
|
|
(16,317
|
)
|
Real Estate one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent first and second
|
|
|
(1,970
|
)
|
|
|
(115
|
)
|
|
|
(1,867
|
)
|
Home equity loans and liens
|
|
|
(260
|
)
|
|
|
(826
|
)
|
|
|
(1,516
|
)
|
Real estate-multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-nonfarm, nonresidential
|
|
|
(999
|
)
|
|
|
(211
|
)
|
|
|
(2,108
|
)
|
Real estate-construction
|
|
|
(1,147
|
)
|
|
|
(9,237
|
)
|
|
|
(32,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(6,983
|
)
|
|
|
(12,371
|
)
|
|
|
(53,236
|
)
|
|
|
|
|
Allowance, at end of period
|
|
$
|
62,407
|
|
|
$
|
37,494
|
|
|
$
|
65,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average total loans outstanding during period
|
|
|
0.31
|
%
|
|
|
0.53
|
%
|
|
|
2.34
|
%
|
Allowance for loan losses to total loans
|
|
|
2.75
|
%
|
|
|
1.64
|
%
|
|
|
2.86
|
%
|
The following schedule provides a
breakdown of general reserves and specific reserves for impaired loans by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
December 31,
2009
|
|
|
(Dollars in thousands)
|
|
|
|
|
Allocation of the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Real estate mortgage-general
|
|
$
|
13,083
|
|
$
|
8,919
|
|
$
|
14,669
|
Real estate mortgage-specific
|
|
|
11,469
|
|
|
1,107
|
|
|
11,845
|
Real estate construction-general
|
|
|
12,475
|
|
|
5,574
|
|
|
13,616
|
Real estate construction-specific
|
|
|
14,170
|
|
|
13,559
|
|
|
13,341
|
Commercial-general
|
|
|
6,158
|
|
|
3,504
|
|
|
5,700
|
Commercial-specific
|
|
|
4,629
|
|
|
4,680
|
|
|
5,541
|
Consumer-general
|
|
|
307
|
|
|
101
|
|
|
320
|
Consumer-specific
|
|
|
116
|
|
|
50
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,407
|
|
$
|
37,494
|
|
$
|
65,152
|
Risk Elements
and Non-Performing Assets
Non-performing assets consist of non-accrual loans and OREO (foreclosed properties). For the three months
ended March 31, 2010, total non-performing assets and loans 90+ days past due and still accruing interest increased by
25
$10.7 million, from $98.1 million at December 31, 2009, to $108.8 million at March 31, 2010, and have declined $53.2 million from $162.0 million at March 31, 2009. As a result, the
ratio of non-performing assets and loans 90+ days past due and still accruing to total assets decreased from 5.84% at March 31, 2009, to 3.88% at March 31, 2010, and increased from 3.60% of total assets at December 31, 2009. 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.
Our underwriting for new acquisition, development, and construction loans always includes the interest cost for the loan whether an interest reserve is
approved or not. In other words, the equity requirement in the new loan is established reflecting the amount of interest required to serve the project. We continually monitor the adequacy of reserve requirements, including interest reserves,
during the draw process to ensure the project is being completed on time and within budget. We have restructured loans due to the slow market, re-underwriting each loan based on time and cost to complete. We do not continue funding
interest reserves just to keep the loan from becoming non-performing. We consider whether the loan to value will support current and future advances and whether the project is meeting certain completion criteria necessary to successfully complete
the project. Once a loan becomes non-performing, we do not allow draws on interest reserves.
Other impaired loans, that are currently
performing, and troubled debt restructurings, performing in accordance with their modified terms, decreased from $171.8 million at December 31, 2009, to $161.5 million at March 31, 2010. These loans have been identified by the Company as
having certain weaknesses as a result of the Companys specific knowledge about the customer or recent credit events, and are classified as substandard and subject to impairment testing at each balance sheet date.
Troubled debt restructurings which represented $81.0 million of other impaired loans as of March 31, 2010, were up from $71.9 million at
December 31, 2009. These loans which have been provided concessions such as rate reductions, payment deferrals, and in some cases forgiveness of principal are all on accrual status. If the loan was on non-accrual at the time of the concession
it is the Companys policy that it remain on non-accrual and perform in accordance with the modified terms for a period of six months. As of March 31, 2010, all troubled debt restructurings were accruing interest. If a troubled debt
restructuring is on non-accrual status it is reported as a non-accrual asset. Since early 2008, the Company has had only one troubled debt restructuring, for $649 thousand, that was subsequently placed on non-accrual status.
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 book value or fair value, including a reduction for the estimated selling expenses, or principal balance of the related loan. Reviews and discussions with regard to value and
disposition of each foreclosed property are conducted monthly by the Companys Special Asset Committee. The carrying value of a foreclosed asset is immediately adjusted down when new information is obtained, including a potentially acceptable
offer, the sale of a similar property in the vicinity of one of the Companys assets, and/or a change in the price the property is being listed for. The Company also uses the advice of outside consultants and real estate agents with knowledge
of the markets the properties are located in. Appraisals are ordered when the property is foreclosed on, but are not routinely updated at each balance sheet date. The Company confirms that it performed the above noted procedures and made the proper
impairment adjustments, if any, at the balance sheet date.
26
Total non-performing assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
|
December 31,
2009
|
|
|
(In Thousands of Dollars)
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
9,931
|
|
$
|
10,433
|
|
|
$
|
6,929
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
4,610
|
|
|
735
|
|
|
|
5,769
|
Home equity lines
|
|
|
693
|
|
|
319
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-one-to-four family residential
|
|
$
|
5,303
|
|
$
|
1,054
|
|
|
$
|
6,189
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
Owner Occupied
|
|
|
9,019
|
|
|
6,319
|
|
|
|
8,600
|
Non-owner occupied
|
|
|
14,871
|
|
|
792
|
|
|
|
6,506
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-non-farm, non-residential
|
|
$
|
23,890
|
|
$
|
7,111
|
|
|
$
|
15,106
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
Residential-Owner Occupied
|
|
|
|
|
|
5,115
|
|
|
|
517
|
Residential-Builder
|
|
|
36,078
|
|
|
67,274
|
|
|
|
30,110
|
Commercial
|
|
|
6,911
|
|
|
34,829
|
|
|
|
6,911
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-construction:
|
|
$
|
42,989
|
|
$
|
107,218
|
|
|
$
|
37,538
|
Consumer
|
|
|
119
|
|
|
(2
|
)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-accrual loans
|
|
$
|
82,232
|
|
$
|
125,814
|
|
|
$
|
65,809
|
OREO
|
|
|
26,269
|
|
|
12,455
|
|
|
|
28,499
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
108,501
|
|
$
|
138,269
|
|
|
$
|
94,308
|
|
|
|
|
Loans 90+ days past due and still accruing:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
45
|
|
$
|
1,810
|
|
|
$
|
3,797
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
238
|
|
|
4,032
|
|
|
|
|
Home equity lines
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-one-to-four family residential
|
|
$
|
238
|
|
$
|
4,216
|
|
|
$
|
|
Real estate multi-family residential
|
|
|
|
|
|
|
|
|
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
Owner Occupied
|
|
|
|
|
|
363
|
|
|
|
|
Non-owner occupied
|
|
|
|
|
|
8,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-non-farm, non-residential
|
|
$
|
|
|
$
|
9,170
|
|
|
$
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
Residential-Owner Occupied
|
|
|
|
|
|
|
|
|
|
|
Residential-Builder
|
|
|
26
|
|
|
8,594
|
|
|
|
26
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-construction:
|
|
$
|
26
|
|
$
|
8,594
|
|
|
$
|
26
|
Consumer
|
|
|
9
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans past due 90 days and still accruing
|
|
$
|
318
|
|
$
|
23,790
|
|
|
$
|
3,826
|
|
|
|
|
Total non-performing assets and past due loans
|
|
$
|
108,819
|
|
$
|
162,059
|
|
|
$
|
98,134
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
December 31,
2009
|
|
|
|
(In Thousands of Dollars)
|
|
|
|
|
|
Non-performing assets
|
|
|
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
4.78
|
%
|
|
|
6.05
|
%
|
|
|
4.14
|
%
|
to total assets:
|
|
|
3.87
|
%
|
|
|
4.99
|
%
|
|
|
3.46
|
%
|
Non-performing assets and 90+ days past due loans
|
|
|
|
|
|
|
|
|
|
|
|
|
to total loans:
|
|
|
4.79
|
%
|
|
|
7.09
|
%
|
|
|
4.31
|
%
|
to total assets:
|
|
|
3.88
|
%
|
|
|
5.84
|
%
|
|
|
3.60
|
%
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
8,550
|
|
|
$
|
|
|
|
$
|
8,963
|
|
Real estate-one-to-four family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed end first and seconds
|
|
|
5,464
|
|
|
|
|
|
|
|
5,465
|
|
Home equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-one-to-four family residential
|
|
$
|
5,464
|
|
|
$
|
|
|
|
$
|
5,465
|
|
Real estate multi-family residential
|
|
|
|
|
|
|
|
|
|
|
1,598
|
|
Real estate-non-farm, non-residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner Occupied
|
|
|
3,804
|
|
|
|
|
|
|
|
3,730
|
|
Non-owner occupied
|
|
|
13,178
|
|
|
|
|
|
|
|
20,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-non-farm, non-residential
|
|
$
|
16,982
|
|
|
$
|
|
|
|
$
|
24,035
|
|
Real estate-construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-Owner Occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-Builder
|
|
|
13,598
|
|
|
|
|
|
|
|
12,894
|
|
Commercial
|
|
|
36,383
|
|
|
|
|
|
|
|
18,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real estate-construction:
|
|
$
|
49,981
|
|
|
$
|
|
|
|
$
|
31,749
|
|
Consumer
|
|
|
16
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
80,993
|
|
|
$
|
|
|
|
$
|
71,885
|
|
Non-performing loans continue to be
concentrated in residential and commercial construction and land development loans in outer sub-markets hardest hit by the residential downturn and commercial and consumer credits experiencing the after shocks in sub-contracting businesses and
workforce employment. Overall, as of March 31, 2010, $43.0 million, or 52.3%, of non-performing loans represented acquisition, development and construction loans, $23.9 million, or 29.0%, represented non-farm, non-residential loans, $9.9
million, or 12.0%, represented commercial and industrial loans and $5.3 million, or 6.4%, represented loans on one-to-four family residential properties. The Company would have recorded additional gross interest income of approximately $1.1 million
for the quarter ended March 31, 2010 and $1.8 million for the quarter ended March 31, 2009, if non-accrual loans had been current throughout these periods. Interest actually received on non-accrual loans was $305 thousand in 2010 and $650
thousand in 2009. See Note 4 to the Consolidated Financial Statements for additional information regarding the Companys non-performing assets.
28
The following provides a breakdown of the construction and non-farm/non-residential loan portfolios by
location, including loans on non-accrual status, with dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
Residential, Acquisition, Development and Construction
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
District of Columbia
|
|
$
|
14,743
|
|
6.5
|
%
|
|
$
|
|
|
|
|
|
|
|
Montgomery, MD
|
|
|
8,316
|
|
3.6
|
%
|
|
|
6,283
|
|
2.8
|
%
|
|
0.5
|
%
|
Prince Georges, MD
|
|
|
22,552
|
|
9.9
|
%
|
|
|
1,000
|
|
0.4
|
%
|
|
|
|
Other Counties in MD
|
|
|
4,909
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
Arlington/Alexandria, VA
|
|
|
43,315
|
|
19.0
|
%
|
|
|
4,334
|
|
1.9
|
%
|
|
|
|
Fairfax, VA
|
|
|
52,110
|
|
22.7
|
%
|
|
|
6,493
|
|
2.8
|
%
|
|
|
|
Culpeper/Fauquier, VA
|
|
|
6,054
|
|
2.7
|
%
|
|
|
4,968
|
|
2.2
|
%
|
|
|
|
Fredericksburg, VA
|
|
|
6,281
|
|
2.8
|
%
|
|
|
6,250
|
|
2.7
|
%
|
|
|
|
Loudoun, VA
|
|
|
28,432
|
|
12.5
|
%
|
|
|
770
|
|
0.3
|
%
|
|
|
|
Prince William, VA
|
|
|
11,708
|
|
5.1
|
%
|
|
|
1,082
|
|
0.5
|
%
|
|
|
|
Spotsylvania, VA
|
|
|
660
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
Stafford, VA
|
|
|
22,696
|
|
9.9
|
%
|
|
|
4,898
|
|
2.1
|
%
|
|
|
|
Other Counties in VA
|
|
|
5,967
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
Outside VA, MD & DC
|
|
|
564
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
228,307
|
|
100.0
|
%
|
|
$
|
36,078
|
|
15.8
|
%
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
Commercial, Acquisition, Development and Construction
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
District of Columbia
|
|
$
|
16,083
|
|
8.3
|
%
|
|
$
|
|
|
|
|
|
|
|
Montgomery, MD
|
|
|
1,394
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
Prince Georges, MD
|
|
|
11,885
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
Other Counties in MD
|
|
|
9,774
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
Arlington/Alexandria, VA
|
|
|
9,309
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
Fairfax, VA
|
|
|
19,043
|
|
9.8
|
%
|
|
|
|
|
|
|
|
-0.1
|
%
|
Henrico, VA
|
|
|
824
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
Loudoun, VA
|
|
|
32,646
|
|
16.8
|
%
|
|
|
4,797
|
|
2.5
|
%
|
|
|
|
Prince William, VA
|
|
|
53,530
|
|
27.7
|
%
|
|
|
2,114
|
|
1.1
|
%
|
|
|
|
Spotsylvania, VA
|
|
|
2,693
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
Stafford, VA
|
|
|
29,638
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
Other Counties in VA
|
|
|
7,200
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194,019
|
|
100.0
|
%
|
|
$
|
6,911
|
|
3.6
|
%
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
Non-Farm/Non-Residential
By County/Jurisdiction of Origination:
|
|
Total
Outstandings
|
|
Percentage
of Total
|
|
|
Non-accrual
Loans
|
|
Non-accruals
as a % of
Outstandings
|
|
|
Net charge-
offs as a % of
Outstandings
|
|
District of Columbia
|
|
$
|
76,014
|
|
6.8
|
%
|
|
$
|
|
|
|
|
|
|
|
Montgomery, MD
|
|
|
33,340
|
|
3.0
|
%
|
|
|
8,616
|
|
0.8
|
%
|
|
0.1
|
%
|
Prince Georges, MD
|
|
|
60,076
|
|
5.3
|
%
|
|
|
1,140
|
|
0.1
|
%
|
|
|
|
Other Counties in MD
|
|
|
47,784
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
Arlington/Alexandria, VA
|
|
|
180,250
|
|
16.0
|
%
|
|
|
4,005
|
|
0.4
|
%
|
|
|
|
Fairfax, VA
|
|
|
272,341
|
|
24.1
|
%
|
|
|
1,242
|
|
0.1
|
%
|
|
|
|
Culpeper/Fauquier, VA
|
|
|
1,286
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Henrico, VA
|
|
|
31,267
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
Loudoun, VA
|
|
|
110,233
|
|
9.8
|
%
|
|
|
1,459
|
|
0.1
|
%
|
|
|
|
Prince William, VA
|
|
|
185,167
|
|
16.5
|
%
|
|
|
1,341
|
|
0.1
|
%
|
|
|
|
Spotsylvania, VA
|
|
|
20,190
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
Stafford, VA
|
|
|
22,068
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
Other Counties in VA
|
|
|
73,810
|
|
6.6
|
%
|
|
|
6,087
|
|
0.5
|
%
|
|
|
|
Outside VA, MD & DC
|
|
|
10,199
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,124,025
|
|
100.0
|
%
|
|
$
|
23,890
|
|
2.1
|
%
|
|
0.1
|
%
|
29
Of this total of $1.1 billion in non-farm/non-residential real estate loans, approximately $48.5 million
will mature in 2010, and $42.2 million in 2011and $72.8 million in 2012.
Concentrations of Credit Risk
The Bank does a general banking business, serving the commercial and personal banking needs of its customers. The Banks market
area consists of the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, Prince William, Spotsylvania and Stafford Counties, the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and
Manassas Park, and to some extent the Maryland suburbs and the city of Washington D.C. Substantially all of the Companys loans are made within its market area.
The ultimate collectibility of the Banks loan portfolio and the ability to realize the value of any underlying collateral, if needed, are
influenced by the economic conditions of the market area. The Companys operating results are therefore closely related to the economic conditions and trends in the Metropolitan Washington, D.C. area.
At March 31, 2010, the Company had $1.62 billion, or 71.3%, of total loans concentrated in commercial real estate. Commercial real estate for
purposes of this discussion includes all construction loans, loans secured by multi-family residential properties and loans secured by non-farm, non-residential properties. At December 31, 2009, commercial real estate loans were $1.62 billion,
or 71.1%, of total loans. Total construction loans of $422.3 million at March 31, 2010, represented 18.6% of total loans, loans secured by multi-family residential properties of $72.6 million represented 3.2% of total loans, and loans secured
by non-farm, non-residential properties of $1.1 billion represented 49.5%.
Construction loans at March 31, 2010, included $210.6 million
in loans to commercial builders of single family residential property and $17.7 million to individuals on single family residential property, together representing 10.1% of total loans. These loans are made to a number of unrelated entities and
generally have a term of twelve to eighteen months. In addition, the Company had $194.0 million of construction loans on non-residential commercial property at March 31, 2010, representing 8.5% of total loans. Total construction loans of $422.3
million include $147.9 million in land acquisition and or development loans on residential property and $105.3 million in land acquisition and or development loans on commercial property, together totaling $253.2 million, or 11.2% of total loans.
Potential adverse developments in the Northern Virginia real estate market or economy, including substantial increases in mortgage interest rates, slower housing sales, and increased commercial property vacancy rates, could have an adverse impact on
these groups of loans and the Banks income and financial position. At March 31, 2010, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined
as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.
The Bank has established formal policies relating to the credit and collateral requirements in loan originations including policies that
establish limits on various loan types as a percentage of total loans and total capital. Loans to purchase real property are generally collateralized by the related property with limitations based on the propertys appraised value. Credit
approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower, guarantors and or the individual project. Management considers the concentration of credit risk to be minimal due to the
diversification of borrowers over numerous businesses and industries.
The federal banking regulators have issued guidance for those
institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk,
institutions which have (1) total reported loans for construction, land development, and other land which represent in total 100% or more of an institutions total risk-based capital; or (2) total commercial real estate loans representing
300% or more of the institutions total risk-based capital and the institutions commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration
risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher
levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened portfolio
monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate
30
portfolio. The Company is well-capitalized. Nevertheless, it is possible that the Company could be required to maintain higher levels of capital as a result of our commercial real estate
concentration, which could require us to obtain additional capital, and may adversely affect stockholder returns.
Non-Interest Income (Charges)
Non-interest income for the first quarter reflects a loss of $311 thousand compared to $1.8 million of income for the same period in 2009 due to $918
thousand in losses on OREO and an $851 thousand impairment loss on securities. However, excluding this total of $1.8 million in losses, adjusted non-interest income was down $362 thousand year-over-year due mostly to lower fees and net gains on
mortgage loans originated and sold, as more production was kept in the Banks portfolio. The losses on OREO are consistent with managements commitment to aggressive disposition of these assets, rather than retaining OREO with uncertain
future upside potential. The further impairment loss on securities was due to additional deferrals and defaults by the underlying issuers of three pooled trust preferred securities.
Non-Interest Expense
Non-interest expense increased $766 thousand, or 5.9%, from $13.0 million in the first quarter of 2009, to $13.8 million in the current period. Excluding
a $3.0 million provision contingency in the fourth quarter of 2009, non-interest expense was down sequentially by $548 thousand. The majority of the year-over-year increase was due to higher FDIC insurance premiums and legal and professional
services expenses associated with the resolution of non-performing loans and OREO. However, due to the $4.0 million increase in net interest income year-over-year, the efficiency ratio improved from 57.7% in the first quarter of 2009, to 54.2% in
the current period.
Provision for Income Taxes
The Companys income tax provisions are adjusted for non-deductible expenses and non-taxable income after applying the U.S. federal income tax rate
of 35%. For the three months ended March 31, 2010, the Company recorded an income tax provision of $2.0 million as compared to a benefit of $1.4 million for the same period in 2009. The effects of non-deductible expenses and non-taxable income
on the Companys income tax provisions are minimal.
Liquidity
The Companys principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Companys lending
and investment activities is determined through monitoring loan demand. Considerations in managing the Companys 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 Companys liquidity position is monitored daily by management to maintain a level of liquidity that can 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 $120.7 million, or 3.5%, from $615.2 million at December 31, 2009, to $735.9 million at March 31, 2010, due to a $108.6
million increased in Fed funds sold and a higher balance of loans maturing within one year. Additional sources of liquidity available to the Bank include the capacity to borrow funds through established short-term lines of credit with various
correspondent banks and the Federal Home Loan Bank of Atlanta. See Note 8 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.
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 Companys liquidity and capital resources
31
to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheet. With the exception of these off-balance sheet arrangements, and the Companys 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 Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.
Commitments to extend credit, which amounted to $490.8 million at March 31, 2010, and $453.3 million at December 31, 2009, represent legally
binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. At March 31, 2010, and December 31, 2009, the Company had $29.3 million and $48.1 million, respectively, in outstanding standby letters of credit.
Contractual Obligations
Since December 31, 2009, there have been no significant changes in the Companys contractual obligations.
Capital
The
assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces, and the overall level of growth. The adequacy of the Companys current
and future capital is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.
Both the Companys and the Banks 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, and for the Company includes
certain minority interests relating to bank subsidiary issued shares, and a limited amount of restricted core capital elements. Restricted core capital elements include qualifying cumulative preferred stock interests, certain minority interests in
subsidiaries and qualifying trust preferred securities. All of the $71 million in preferred stock interests issued to the Treasury under the Capital Purchase Program qualify as Tier 1 capital. Total risk-based capital consists of Tier 1 capital,
qualifying subordinated debt, and a portion of the allowance for loan losses, and for the Company, a limited amount of excess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets. The
leverage ratio compares Tier 1 capital to total average assets. The Banks Tier 1 risk-based capital ratio was 11.81% at March 31, 2010, compared to 11.41% at December 31, 2009, and its total risk-based capital ratio was 13.06% at
March 31, 2010, compared to 12.66% at December 31, 2009. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Banks leverage ratio was 10.29% at March 31, 2010, compared to 10.32%
at December 31, 2009. The Companys Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 11.91%, 13.16%, and 10.34%, respectively, at March 31, 2010, compared to 11.48%, 12.73%, and 10.23% at
December 31, 2009. The increases in these capital ratios in 2010, are due to lower levels of risk-weighted assets.
The ability of the
Company to continue to maintain its overall asset size, or to grow, is dependent on its earnings and the ability to obtain additional funds for contribution to the Banks capital, through earnings, borrowing, the sale of additional common
stock, or through the issuance of additional trust preferred securities or other qualifying securities. In the event that the Company is unable to obtain additional capital for the Bank on a timely basis, the growth of the Company and the Bank may
be curtailed, and the Company and the Bank may be required to reduce their level of assets in order to maintain compliance with regulatory capital requirements. Under those circumstances net income and the stockholders equity may be adversely
affected.
32
Guidance by the federal banking regulators provides that banks which have concentrations in construction,
land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that we may be
required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital.
The Federal Reserve has revised the capital treatment of trust preferred securities. As a result, the capital treatment of trust preferred
securities has been revised to provide that beginning in 2011, such securities can be counted as Tier 1 capital at the holding company level, together with other restricted core capital elements, up to 25% of total capital (net of goodwill), and any
excess as Tier 2 capital, subject to limitation. At March 31, 2010, trust preferred securities represented 22.4% of the Companys Tier 1 capital and 20.2% of its total risk-based capital. See Note 9 to the Consolidated Financial Statements
for further information regarding trust preferred securities.
Capital Issuances.
As noted above, during 2008, the Company accepted an
investment by Treasury under the Capital Purchase Program. In connection with that investment, the Company entered into and consummated a Securities Purchase Agreement with the Treasury, pursuant to which the Company issued 71,000 shares of the
Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A (Series A Preferred Stock), having a liquidation amount per share equal to $1,000, for a total purchase price of $71 million. The Series A Preferred Stock pays
cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Subject to consultation with the Companys and Banks federal regulators, the Company may, at its option, redeem the
Series A Preferred Stock at the liquidation amount plus accrued and unpaid dividends. The Series A Preferred Stock is non-voting, except in limited circumstances. Prior to the third anniversary of issuance, unless the Company has redeemed all of the
Series A Preferred Stock or the Treasury has transferred all of the Series A Preferred Stock to a third party, the consent of the Treasury will be required for the Company to commence paying a cash common stock dividend or repurchase its common
stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement.
In connection with the purchase of the Series A Preferred Stock, the Treasury was issued a warrant (the Warrant) to purchase 2,696,203 shares
of the Companys common stock at an initial exercise price of $3.95 per share. The Warrant provides for the adjustment of the exercise price and the number of shares of the common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other assets to holders of the common stock, and upon certain issuances of the common stock (or securities exercisable or exchangeable for, or convertible into, common stock) at
or below 90% of the market price of the common stock on the trading day prior to the date of the agreement on pricing such securities. The Warrant expires ten years from the date of issuance. If the Company redeems the Series A Preferred Stock in
full prior to exercise of the Warrant, the Warrant will be liquidated based upon the then current fair market value of the common stock. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon
exercise of the Warrant.
Please refer to Note 9 to the Consolidated Financial Statements for additional information regarding the issuance of
$25 million of trust preferred securities and warrants to purchase 1.5 million shares to certain directors and executive officers of the Company.
Recent Accounting Pronouncements
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS
No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Updated (ASU) 2009-16. The new
standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. The adoption of the new guidance did not have a material effect on the Companys consolidated
financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was
issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009 as ASC No. 810-10. The objective of the guidance is to improve financial reporting by enterprises
33
involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. ASC No. 810-10 is effective as of January 1, 2010. The
adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.
In October 2009, the
FASB issued ASU No. 2009-15 (ASU 2009-15), Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting
guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements
outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statement.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics Technical Corrections to Securities and Exchange Commission
(SEC) Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial
statementssubsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit
obligation. The adoption of the new guidance did not have a material impact the Companys consolidated financial statements.
In January
2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new
disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded
derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SECs reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that
is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Companys consolidated
financial statements.
Internet Access To Company Documents
The Company provides access to its SEC filings through the Banks web site at www.vcbonline.com. After accessing the web site, the filings are
available upon selecting About VCB/Investor Relations/SEC Filings. Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after the reports are electronically filed or furnished to the SEC.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, the Company is exposed to market risk, or interest rate risk, as its net income is largely dependent on its net interest
income. Market risk is managed by the Companys 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,
34
arises when the maturity or repricing of interest-earning assets differs from the maturing or repricing of interest-bearing liabilities and as a result of the difference between total
interest-earning 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. In order to closely monitor and measure
interest sensitivity, the Company uses earnings simulation models on a quarterly basis.
We use a duration gap of equity approach to manage
our long term interest rate risk. This approach uses a model which generates estimates of the change in our market value of portfolio equity (MVPE) over a range of interest rate scenarios. MVPE is the present value of expected cash flows
from assets and liabilities using various assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.
Our
short term interest rate sensitivity is managed through the use of a model that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The model assumes that the composition of interest sensitive assets and liabilities existing at March 31, 2010, remains constant over a two
year period (base case) and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.
The following table provides an analysis of our interest rate risk as measured by the estimated change in MVPE and net interest income from the base
case, resulting from instantaneous and sustained parallel shifts in interest rates as of March 31, 2010, (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sensitivity of Market Value of Portfolio
Equity
March 31, 2010
|
|
|
Sensitivity of Net Interest
Income
March 31, 2010
|
|
|
|
Market Value of Portfolio Equity
|
|
|
Net Interest Income
|
|
|
Net Interest Margin
|
|
Interest
Rate Scenario
|
|
Amount
|
|
$ Change
from Base
|
|
|
Percent
|
|
|
% of Total
Assets
|
|
|
Amount
|
|
$ Change
from
Base
|
|
|
Percent
|
|
|
% Change
from Base
|
|
Up 300 bps
|
|
$
|
183,450
|
|
$
|
(57,541
|
)
|
|
-23.88
|
%
|
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6.84
|
%
|
|
$
|
188,688
|
|
$
|
(20
|
)
|
|
3.44
|
%
|
|
-0.01
|
%
|
Up 200 bps
|
|
|
203,910
|
|
|
(37,081
|
)
|
|
-15.39
|
%
|
|
7.47
|
%
|
|
|
189,115
|
|
|
407
|
|
|
3.44
|
%
|
|
0.22
|
%
|
Base Case
|
|
|
240,991
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|
|
|
|
|
0.00
|
%
|
|
8.52
|
%
|
|
|
188,708
|
|
|
|
|
|
3.44
|
%
|
|
0.00
|
%
|
Down 100 bps
|
|
|
246,286
|
|
|
5,295
|
|
|
2.20
|
%
|
|
8.59
|
%
|
|
|
184,173
|
|
|
(4,535
|
)
|
|
3.35
|
%
|
|
-2.40
|
%
|
Management believes the
modeled results are consistent with the short duration of its balance sheet and given the many variables that affect the actual timing of when assets and liabilities will reprice and the extent of that repricing. In shocking the current two year
projection upward, interest-bearing liabilities are repricing slightly higher than interest-earnings assets, however, that decline in interest income is being offset by a higher level of interest-earning assets relative to interest-bearing
liabilities. 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 the simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management
strategies, among other factors.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
The
Companys management, with the participation of the Companys Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective
as of March 31, 2010, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms and that such information is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Companys disclosure controls and procedures will detect or uncover every situation involving the failure
of persons within the Company or its subsidiary to disclose material information required to be set forth in the Companys periodic reports.
35
The Companys management is also responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There was no change in the Companys internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
|
Legal Proceedings None
|
There have been no material
changes to the risk factors as previously disclosed in the Companys Form 10-K for the year ended December 31, 2009, except for the increase in the level of non-performing assets and loan loss provisions discussed under Risk
Elements and Non-performing assets.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
(a)
|
Sales of Unregistered Securities.
- None
|
|
(b)
|
Use of Proceeds.-
Not Applicable.
|
|
(c)
|
Issuer Purchases of Securities.
- None
|
Item 3.
|
Defaults Upon Senior Securities.- None
|
Item 4.
|
Removed and Reserved
|
Item 5.
|
Other Information.
|
|
(a)
|
Required 8-K Disclosures.
None
|
|
(b)
|
Changes in Procedures for Director Nominations by Securityholders.
None
|
36
|
|
|
Exhibit
No.
|
|
Description
|
|
|
3.1
|
|
Articles of Incorporation of Virginia Commerce Bancorp, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006)
|
|
|
3.2
|
|
Articles of Amendment to the Articles of Incorporation relating to the Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed on December 15, 2008)
|
|
|
3.3
|
|
Amended and Restated Bylaws of Virginia Commerce Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K filed on July 27,
2007)
|
|
|
10.5
|
|
Virginia Commerce Bancorp, Inc. 2010 Equity Plan (incorporated by reference to Appendix A to the Companys proxy statement for the 2010 Annual Meeting of Stockholders filed on
March 19, 2010)
|
|
|
31.1
|
|
Certification of Peter A. Converse, Chief Executive Officer
|
|
|
31.2
|
|
Certification of William K. Beauchesne, Treasurer and Chief Financial Officer
|
|
|
32.1
|
|
Certification of Peter A. Converse, Chief Executive Officer
|
|
|
32.2
|
|
Certification of William K. Beauchesne, Treasurer and Chief Financial Officer
|
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Virginia Commerce Bancorp, Inc
|
|
|
(Registrant)
|
|
|
|
Date: May 17, 2010
|
|
BY
|
|
/
S
/ P
ETER
A. C
ONVERSE
|
|
|
|
|
Peter A. Converse,
Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
Date: May 17, 2010
|
|
BY
|
|
/
S
/ W
ILLIAM
K.
B
EAUCHESNE
|
|
|
|
|
William K. Beauchesne,
Treasurer and Chief Financial Officer
|
|
|
|
|
(Principal Financial Officer)
|
38
Virginia Commerce Bancorp (MM) (NASDAQ:VCBI)
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