-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uuif1E0OoRdWeoWtVjhkOguMkAP9lgSDu35P7DfGXXyt+Svk96t3jcH4/pqIxOhW n58jdcwu4VZ7HMh4g8QMig== 0001104659-08-017369.txt : 20080313 0001104659-08-017369.hdr.sgml : 20080313 20080313154212 ACCESSION NUMBER: 0001104659-08-017369 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080313 DATE AS OF CHANGE: 20080313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIRGINIA COMMERCE BANCORP INC CENTRAL INDEX KEY: 0001099305 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541964895 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28635 FILM NUMBER: 08686141 BUSINESS ADDRESS: STREET 1: 5350 LEE HIGHWAY CITY: ARLINGTON STATE: VA ZIP: 22207 BUSINESS PHONE: 7035340700 MAIL ADDRESS: STREET 1: 5350 LEE HIGHWAY CITY: ARLINGTON STATE: VA ZIP: 22207 10-K 1 a08-2927_110k.htm 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2007

 

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
(Address of principal executive offices)

 

22207
(Zip Code)

 

Registrant’s telephone number: 703.534.0700

 

Securities registered under Section 12(b) of the Act:  Common Stock, $1.00 par value

 

Securities registered under Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Section 405 of the Securities Act. 

Yes  o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o  No x

 

Indicate by check mark 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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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 the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No x

 

The registrant’s Common Stock is traded on the Nasdaq Global Select Market under the symbol VCBI. The aggregate market value of the approximately 17,155,250 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2007 was approximately $290.1 million, based on the closing sales price of $16.91 per share on that date. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 10% shareholders of the registrant.

 

As of the close of business on March 1, 2008, 24,118,323 shares of the registrant’s Common Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders, to be held on April 30, 2008, are incorporated by reference in part III hereof.

 

 



 

Form 10-K Cross Reference Sheet

 

The following shows the location in this Annual Report on Form 10-K or the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 30, 2008, of the information required to be disclosed by the United States Securities and Exchange Commission Form 10-K. References to pages only are to pages in this report.

 

PART I

Item 1.

Business. See “Business” at pages 56 through 65.

 

 

 

 

Item 1A.

Risk Factors. See “Risk Factors” at pages 21 through 24.

 

 

 

 

Item 1B.

Unresolved Staff Comments. None.

 

 

 

 

Item 2.

Properties. See “Properties” at page 65.

 

 

 

 

Item 3.

Legal Proceedings. From time to time the Company is a participant in various legal proceedings incidental to its business. In the opinion of management, the liabilities (if any) resulting from such legal proceedings will not have a material effect on the financial position of the Company.

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the security holders of the Company during the fourth quarter of 2007.

 

 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. See “Market Price of Stock and Dividends” at page 66.

 

 

 

 

Item 6.

Selected Financial Data. See “Five Year Financial Summary” at page 3.

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation” at pages 4 through 20.

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk. See “Asset/Liability Management and Quantitative and Qualitative Disclosures About Market Risk” at page 9.

 

 

 

 

Item 8.

Financial Statements and Supplementary Data. See Consolidated Financial Statements at pages 26 through 55.

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.

 

 

 

 

Item 9A.

Controls and Procedures. See “Disclosure Controls and Procedures” at page 24 and “Management Report on Internal Control Over Financial Reporting” at page 25.

 

 

 

 

Item 9B.

Other Information. None

 

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance. The information required by Item 10 is incorporated by reference from the material under the captions “Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement. The Company has adopted a code of ethics that applies to its Chief Executive Officer and Chief Financial Officer. A copy of the code of ethics will be provided to any person, without charge, upon written request directed to Lynda Cornell, Assistant to the Chief Executive Officer, Virginia Commerce Bancorp, Inc., 5350 Lee Highway, Arlington, Virginia 22207.

 

 

 

 

 

There have been no material changes in the procedures previously disclosed by which shareholders may recommend nominees to the Company’s Board of Directors

 

 

 

 

Item 11.

Executive Compensation. The information required by Item 11 is incorporated by reference from the material under the captions “Executive Officer Compensation and Certain Transactions” and “Election of Directors – Director Compensation” and “- Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 12 is incorporated by reference from the material under the caption “Voting Securities and Principal Holders Thereof” in the Proxy Statement, and included under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” at page 66 hereof.

 

 

 

 

Item 13.

Certain Relationships and Related Transactions and Director Independence. The information required by Item 13 is incorporated by reference from the material under the captions “Election of Directors” and “Transactions with Management and Related Parties” in the Proxy Statement.

 

 

 

 

Item 14.

Principal Accountant Fees and Services. The information required by Item 14 is incorporated by reference from the material under the caption “Independent Registered Public Accounting Firm” in the Proxy Statement.

 

 

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules. See “Financial Statements and Exhibits” at page 68.

 

2



 

FIVE YEAR FINANCIAL SUMMARY

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

(Dollars in thousands, except per share amounts)

 

Selected Year-End Balances

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,339,697

 

$

1,949,082

 

$

1,518,425

 

$

1,139,353

 

$

881,694

 

Total stockholders’ equity

 

169,143

 

139,851

 

111,818

 

91,324

 

55,092

 

Total loans (net)

 

1,924,741

 

1,629,827

 

1,270,255

 

925,782

 

654,851

 

Total deposits

 

1,869,165

 

1,605,941

 

1,243,506

 

970,968

 

773,511

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary Results of Operations

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

154,138

 

$

125,292

 

$

86,478

 

$

57,998

 

$

45,968

 

Interest expense

 

78,981

 

56,487

 

29,811

 

16,331

 

13,893

 

Net interest income

 

$

75,157

 

$

68,805

 

$

56,667

 

$

41,667

 

$

32,075

 

Provision for loan losses

 

4,340

 

4,406

 

3,772

 

2,989

 

1,575

 

Net interest income after provision for loan losses

 

$

70,817

 

$

64,399

 

$

52,895

 

$

38,678

 

$

30,500

 

Non-interest income

 

7,883

 

7,323

 

6,676

 

5,759

 

7,746

 

Non-interest expense

 

39,694

 

34,289

 

29,466

 

22,807

 

20,820

 

Income before taxes

 

$

39,006

 

$

37,433

 

$

30,105

 

$

21,630

 

$

17,426

 

Income tax expense

 

13,219

 

12,925

 

10,438

 

7,401

 

5,880

 

Net income

 

$

25,787

 

$

24,508

 

$

19,667

 

$

14,229

 

$

11,546

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data (1)

 

 

 

 

 

 

 

 

 

 

 

Net income, basic

 

$

1.08

 

$

1.04

 

$

0.85

 

$

0.65

 

$

0.57

 

Net income, diluted

 

$

1.04

 

$

0.98

 

$

0.79

 

$

0.60

 

$

0.52

 

Book value

 

$

7.04

 

$

5.90

 

$

4.83

 

$

4.01

 

$

2.72

 

Average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

23,930,220

 

23,600,762

 

23,117,635

 

21,800,825

 

20,075,228

 

Diluted

 

24,890,186

 

24,954,322

 

24,732,085

 

23,644,779

 

21,946,177

 

 

 

 

 

 

 

 

 

 

 

 

 

Growth and Significant Ratios

 

 

 

 

 

 

 

 

 

 

 

% Change in net income

 

5.22

%

24.61

%

38.22

%

23.24

%

50.42

%

% Change in assets

 

20.04

%

28.36

%

33.27

%

29.22

%

32.89

%

% Change in loans (net)

 

18.09

%

28.31

%

37.21

%

41.37

%

26.69

%

% Change in deposits

 

16.39

%

29.15

%

28.07

%

25.53

%

36.42

%

% Change in equity

 

20.95

%

25.07

%

22.44

%

65.77

%

31.64

%

Equity to asset ratio

 

7.23

%

7.18

%

7.36

%

8.02

%

6.25

%

Return on average assets

 

1.21

%

1.40

%

1.45

%

1.39

%

1.47

%

Return on average equity

 

16.75

%

19.51

%

19.44

%

19.28

%

23.71

%

Average equity to average assets

 

7.22

%

7.19

%

7.47

%

7.22

%

6.21

%

Efficiency ratio (2)

 

47.80

%

45.04

%

46.52

%

48.01

%

52.17

%

 


(1)                      Adjusted for all years presented giving retroactive effect to a two-for-one split in the form of a 100% stock dividend in 2003, five-for-four stock splits in the form of 25% stock dividends in 2004 and 2005,  a three-for-two stock split in the form of a 50% stock dividend in 2006, and a 10% stock dividend in 2007.

(2)                      Computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income, net of securities gains or losses.  This is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency.  Comparison of our efficiency ratio with those of other companies may not be possible, because other companies may calculate the efficiency ratio differently.

 

3



 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This management’s discussion and analysis and other portions of this report, contain forward-looking statements within the meaning of the Securities and Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance.

 

Non-GAAP Presentations

 

This management’s discussion and analysis refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income. This is a non-GAAP financial measure that we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio differently. The Company, in referring to its net income, is referring to income under accounting principles generally accepted in the United States, or “GAAP.”

 

General

 

The following presents management’s discussion and analysis of the consolidated financial condition and results of operations of Virginia Commerce Bancorp, Inc. and subsidiaries (the “Company”) as of the dates and for the periods indicated. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto, and other financial data appearing elsewhere in this report. The Company is the parent bank holding company for Virginia Commerce Bank (the “Bank”), a Virginia state-chartered bank that commenced operations in May 1988. The Bank pursues a traditional community banking strategy, offering a full range of business and consumer banking services through twenty-five branch offices, two residential mortgage offices and one investment services office.

 

Headquartered in Arlington, Virginia, Virginia Commerce serves the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, 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 Bank’s customer base includes small-to-medium sized businesses including firms that have contracts with the U.S. government, associations, retailers and industrial businesses, professionals and their firms, business executives, investors and consumers. Additionally, the Bank has strong market niches in commercial real estate and construction lending and operates its residential mortgage lending division as its only business segment. Over the past five years, the Company has experienced significant growth in total assets, loans, deposits and net income.

 

Critical Accounting Policies

 

During the year ended December 31, 2007, there were no changes in the Company’s critical accounting policies as reflected in the Company’s most recent annual or quarterly report.

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP).  The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred.  A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability.  We use historical loss factors as one factor in

 

4



 

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.

 

Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The estimates used in management’s assessment of the adequacy of the allowance for loan losses require that management make assumptions about matters that are uncertain at the time of estimation. Differences in these assumptions and differences between the estimated and actual losses could have a material effect.

 

The allowance for loan losses is an estimate of the losses that are inherent in our loan portfolio.  The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

 

Our allowance for loan losses has three basic components:  the specific allowance, the formula allowance and the unallocated allowance.  Each of these components is determined based upon estimates that can and do change when the actual events occur.  The specific allowance is used to individually allocate an allowance for impaired loans.  Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral.  These factors are combined to estimate the probability and severity of inherent losses based on the Company’s calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. The formula allowance is used to provide additional reserves within a loan category for impaired loans where a specific reserve was not allocated.  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). Each loan type is assigned an allowance factor based on management’s estimate of the associated risk, complexity and size of the individual loans within the particular loan category.  Classified loans are assigned a higher allowance factor than non-rated loans due to management’s concerns regarding collectibility or management’s knowledge of particular elements surrounding the borrower.  Allowance factors grow with the worsening of the internal risk rating. The unallocated formula is used to estimate the loss of non-classified loans. These un-criticized loans are also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, quality of the loan review system and the effect of external factors (i.e. competition and regulatory requirements). The factors assigned differ by loan type.  The unallocated allowance recognizes potential losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor.  For further information regarding the allowance for loan losses see Notes 1 and 4 to the Consolidated Financial Statements and the discussion under the caption “Asset Quality – Provision and Allowance for Loan Losses” at page 12.

 

The Company’s 1998 Stock Option Plan (the “Plan”), which is shareholder-approved, permits the grant of share options to its directors and officers for up to 2.4 million shares of common stock, as adjusted for the ten percent stock dividend paid on May 1, 2007.  Option awards are generally granted with an exercise price equal to the market price of the Company’s 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 Company’s stock based on a 7.5 year expected term, before exercise, for the options granted, and a risk-free interest rate based on the U.S. 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. For 2007,

 

5



 

expected term was calculated using the simplified method identified in Staff Accounting Bulletin No. 107.  In 2008, changes in the expected outstanding term for all awards based on historical exercise behavior could affect the estimated value of future grants. See Notes 1 and 12 to the Consolidated Financial Statements for additional information regarding the Stock Option Plan and related expense.

 

Financial Performance Overview

 

For the year ended December 31, 2007, total assets increased $390.6 million, or 20.0%, from $1.95 billion at December 31, 2006, to $2.34 billion, with loans, net of the allowance for loan losses, increasing $294.9 million, or 18.1%, from $1.63 billion at December 31, 2006, to $1.92 billion at December 31, 2007. This growth in loans and total assets was funded by an increase in total deposits of $263.2 million, or 16.4%, from $1.61 billion at December 31, 2006, to $1.87 billion, a $73.6 million increase in repurchase agreements and federal funds purchased and $25 million in other borrowed funds. Net income for the year ended December 31, 2007, was up $1.3 million, or 5.2%, from $24.5 million in 2006, to $25.8 million with a $6.4 million increase in net interest income, the Company’s primary source of revenue.

 

In 2006, total assets increased $430.7 million, or 28.4%, from $1.52 billion at December 31, 2005, to $1.95 billion, with loans increasing $359.6 million, or 28.3%, from $1.27 billion at December 31, 2005, to $1.63 billion. As in 2007, the majority of the growth in loans and total assets was funded by increases in deposits, with total deposits rising $362.4 million, or 29.2%, from $1.24 billion at December 31, 2005, to $1.60 billion at the end of 2006. Additional funding was provided by a $37.1 million increase in repurchase agreements and federal funds purchased. Net income in 2006 was up $4.8 million, or 24.6%, from $19.7 million in 2005, to $24.5 million with growth in net-interest income again being the primary factor.

 

As noted, the Company achieved significant growth in loans in 2007. Loans are the Company’s major asset and as a result the major contributor to interest income. The majority of loan growth occurred in real estate mortgage loans, which rose $218.6 million, or 23.2%, from $940.3 million at December 31, 2006, to $1.16 billion at December 31, 2007. Commercial loans represented the second largest increase rising $48.2 million, or 25.3%, from $190.5 million at December 31, 2006, to $238.7 million, while construction loans increased $29.3 million, or 5.7%, from $515.0 million at the end of 2006, to $544.3 million. In 2006, real estate mortgage loans rose $161.5 million, real estate construction loans represented the second largest increase at $134.0 million, and commercial loans rose $68.3 million.

 

While loans are the Company’s major asset, deposits are the Company’s major source of funding and as a result the major contributor to interest expense. In 2007, deposits increased by $263.2 million, or 16.4%, with non-interest-bearing demand deposits increasing by $26.9 million, or 14.4%, to $213.8 million, savings and interest-bearing demand deposits increasing $57.7 million, or 12.6%, and time deposits growing $178.7 million, or 18.6%, from $959.5 million at December 31, 2006, to $1.14 billion. For the year ended December 31, 2006, deposit growth included a decline in non-interest-bearing demand deposits by $1.6 million, a $109.9 million increase in savings and interest-bearing demand deposits, and a $254.1 million increase in time deposits. In addition to the strong growth in deposits, repurchase agreements, the majority of which represent sweep funds of significant commercial demand deposit customers, and Federal funds purchased increased $73.6 million, or 49.5%, from $148.9 million at December 31, 2006, to $222.5 million at December 31, 2007, and increased $37.1 million, or 33.2%, in 2006.

 

The Company’s investment securities portfolio represents its second largest asset and contributor to interest income and is generally maintained as a primary source of liquidity. In 2007, the portfolio increased by $92.0 million, or 39.3%, from $234.2 million at December 31, 2006, to $326.2 million at December 31, 2007, with growth concentrated in U.S. Government Agency obligations and obligations of states and political subdivisions. In 2006 the portfolio increased $61.1 million, or 35.3%, from $173.1 million at December 31, 2005, to $234.2 million, with growth concentrated in U.S. Government Agency obligations.

 

For the year ended December 31, 2007, the Company achieved record earnings of $25.8 million, an increase of 5.2% compared to earnings of $24.5 million for the prior fiscal year as net interest income increased $6.4 million, or 9.2%, from $68.8 million in 2006, to $75.2 million in 2007, non-interest income increased $560 thousand, or 7.6%, from $7.3 million in 2006, to $7.9 million, while provisions for loan losses were down $66 thousand, and  non-interest expense rose 15.8%, from $34.3 million in 2006, to $39.7 million. As a result, the Company’s efficiency ratio, as defined, rose from 45.0% for the year ended December 31, 2006, to 47.8% in 2007. In 2006, earnings of $24.5 million increased $4.8 million, or 24.6%, compared to earnings of $19.7 million in 2005, with net interest

 

6



 

income increasing $12.1 million, or 21.4%, non-interest income rising $647 thousand, or 9.7%, provisions for loan losses increasing $634 thousand, while non-interest expense rose $4.8 million, or 16.4%. For the year ended December 31, 2005, earnings of $19.7 million represented an increase of 38.2% compared to earnings of $14.2 million in 2004. On a diluted per share basis earnings were $1.04, $0.98, and $0.79 in 2007, 2006, and 2005, respectively, while the Company’s return on average assets was 1.21% for 2007, as compared to 1.40% in 2006 and 1.45% in 2005. Return on average equity was 16.75% in 2007, 19.51% in 2006, and 19.44% in 2005.

 

Stockholders’ equity increased by $29.2 million in 2007, or 20.9%, from $139.9 million at December 31, 2006, to $169.1 million, with earnings of $25.8 million, a $1.9 million increase in other comprehensive income related to the investment securities portfolio, $1.2 million in proceeds and tax benefits related to the exercise of stock options by Company directors and officers and the purchase of stock by Company employees under an Employee Stock Purchase Plan, and $427 thousand in stock option expense credits.  In 2006, stockholders’ equity increased $28.0 million, or 25.1%, from $111.8 million at December 31, 2005, to $139.8 million, with earnings of $24.5 million, an $853 thousand increase in other comprehensive income related to the investment securities portfolio, $2.4 million in proceeds and tax benefits related to the exercise of stock options by Company directors and officers and the purchase of stock by Company employees under an Employee Stock Purchase Plan, and $257 thousand in stock option expense credits. The total number of common shares outstanding increased in 2007 by 2,462,597, with 2,171,604 shares issued due to a ten percent stock dividend in May 2007, 288,976 shares issued as a result of the exercise of stock options by Company directors and officers and 2,017 shares issued to employees under the Company’s Employee Stock Purchase Plan.

 

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 Company’s 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. In 2007, net interest income increased $6.4 million, or 9.2%, from $68.8 million in 2006, to $75.2 million due to the significant growth in loans as the net interest margin fell from 4.07% in 2006, to 3.65%. In 2006, net interest income increased $12.1 million, or 21.4%, from $56.7 million in 2005, to $68.8 million due again to significant loan growth as the net interest margin fell from 4.30% in 2005, to 4.07%. In 2005, net interest income increased $15.0 million, or 36.0%, from $41.7 million in 2004, to $56.7 million.

 

On June 30, 2004, the Federal Open Market Committee (FOMC) began increasing the fed funds target rate from a historically low level of 1.00%, by 325 basis points to 4.25% by the end of 2005.  As a result, the Company’s yield on interest-earning assets increased from 5.89% in 2004 to 6.57% in 2005, while the cost of interest-bearing liabilities also increased from 2.03% in 2004 to 2.79% in 2005. The result was a decline in the interest rate spread; however, the overall net interest margin increased from 4.23% in 2004 to 4.30% in 2005, as the level of average earning assets to average interest-bearing liabilities rose from 122.6% in 2004 to 123.5% in 2005.

 

In 2006, the FOMC continued increasing the target rate another 100 basis points to 5.25%, and the Company’s yield on interest-earning assets rose from 6.57% in 2005 to 7.41% in 2006. However, as the yield curve eventually inverted with higher short-term than long-term rates, funds began shifting from lower rate to higher rate accounts, and as competition for deposits in the local market intensified, the cost of interest-bearing liabilities increased to a greater extent, from 2.79% in 2005 to 4.00% in 2006. As a result, the net interest margin fell from 4.30% in 2005 to 4.07% in 2006.

 

In 2007, as short term interest rates remained high for most of the year, and strong competition for deposits in the local market continued, the cost of interest-bearing liabilities rose from 4.00% in 2006 to 4.46%, while the yield on interest-earning assets rose by only five basis points from 7.41% in 2006 to 7.46%. While local deposit rates have come down recently, as the FOMC began easing in September 2007, and treasury rates have fallen significantly, competition does remain strong. This factor and expectations of further easing by the FOMC, which drives down the prime rate and immediately reprices twenty-eight percent of the Company’s loan portfolio, will continue to pressure the net interest margin lower, at least in the first half of 2008. Management anticipates the margin to range from 3.30% to 3.55% for the foreseeable future.  Tables 1, 2 and 3 provide further information with regard to yields, costs, the changes in net interest income and associated risk.

 

7



 

TABLE 1: AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES

 

The following table shows the average balance sheets for each of the years ended December 31, 2007, 2006, and 2005. In addition, the amounts of interest earned on interest-earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, are shown.  Loans placed on a non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $5.5 million, $5.4 million and $4.0 million for 2007, 2006, and 2005, respectively.

 

 

 

2007

 

2006

 

2005

 

(Dollars in thousands)

 

Average
Balance

 

Interest
Income-Expense

 

Average
Yields
/Rates

 

Average
Balance

 

Interest
Income-Expense

 

Average
Yields
/Rates

 

Average
Balance

 

Interest
Income-Expense

 

Average
Yields
/Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities (1)

 

$280,852

 

$13,948

 

5.04

%

$199,658

 

$8,746

 

4.42

%

$168,733

 

$6,167

 

3.70

%

Loans, net of unearned income

 

1,766,501

 

138,919

 

7.87

%

1,470,264

 

115,405

 

7.85

%

1,128,801

 

79,614

 

7.05

%

Interest-bearing deposits in other banks

 

2,802

 

140

 

5.01

%

1,055

 

55

 

5.21

%

1,020

 

30

 

2.95

%

Federal funds sold

 

22,372

 

1,131

 

4.98

%

21,972

 

1,086

 

4.94

%

19,599

 

667

 

3.40

%

Total interest-earning assets

 

$2,072,527

 

$154,138

 

7.46

%

$1,692,949

 

$125,292

 

7.41

%

$1,318,153

 

$86,478

 

6.57

%

Other assets

 

61,415

 

 

 

 

 

54,029

 

 

 

 

 

35,800

 

 

 

 

 

Total assets

 

$2,133,942

 

 

 

 

 

$1,746,978

 

 

 

 

 

$1,353,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$155,047

 

$2,499

 

1.61

%

$174,853

 

$2,880

 

1.65

%

$207,053

 

$3,422

 

1.65

%

Money market accounts

 

224,524

 

8,806

 

3.92

%

195,482

 

6,879

 

3.52

%

110,623

 

1,988

 

1.80

%

Savings accounts

 

120,061

 

5,148

 

4.29

%

26,934

 

608

 

2.26

%

20,497

 

112

 

0.55

%

Time deposits

 

1,054,962

 

52,945

 

5.02

%

843,661

 

37,785

 

4.48

%

633,572

 

20,910

 

3.30

%

Total interest-bearing deposits

 

$1,554,594

 

$69,398

 

4.46

%

$1,240,930

 

$48,152

 

3.88

%

$971,745

 

$26,432

 

2.72

%

Securities sold under agreement to repurchase and federal funds purchased

 

165,499

 

6,259

 

3.78

%

118,092

 

4,730

 

4.01

%

63,342

 

1,710

 

2.70

%

Other borrowed funds

 

6,986

 

225

 

3.18

%

9,726

 

506

 

5.20

%

13,759

 

423

 

3.07

%

Trust preferred capital notes

 

42,614

 

3,099

 

7.17

%

43,000

 

3,099

 

7.21

%

18,822

 

1,246

 

6.62

%

Total interest-bearing liabilities

 

$1,769,693

 

$78,981

 

4.46

%

$1,411,748

 

$56,487

 

4.00

%

$1,067,668

 

$29,811

 

2.79

%

Demand deposits and other liabilities

 

210,262

 

 

 

 

 

209,642

 

 

 

 

 

185,134

 

 

 

 

 

Total liabilities

 

$1,979,955

 

 

 

 

 

$1,621,390

 

 

 

 

 

$1,252,802

 

 

 

 

 

Stockholders’ equity

 

153,987

 

 

 

 

 

125,588

 

 

 

 

 

101,151

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$2,133,942

 

 

 

 

 

$1,746,978

 

 

 

 

 

$1,353,953

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.00

%

 

 

 

 

3.41

%

 

 

 

 

3.78

%

Net interest income and margin

 

 

 

$75,157

 

3.65

%

 

 

$68,805

 

4.07

%

 

 

$56,667

 

4.30

%

 


(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 tax-exempt securities are stated on a tax equivalent basis, using a 35% rate for 2007, 2006 and 2005.

 

8



 

TABLE 2: RATE-VOLUME VARIANCE ANALYSIS

 

Interest income and expense are affected by changes in interest rates, by changes in the volumes of earning assets and interest-bearing liabilities, and by changes in the mix of these assets and liabilities.  The following analysis shows the year-to-year changes in the components of net interest income.

 

 

 

2007 compared to 2006

 

2006 compared to 2005

 

 

 

Increase/(Decrease)
Due to

 

Total
Increase/

 

Increase/(Decrease)
Due to

 

Total
Increase/

 

(Dollars in thousands)

 

Volume

 

Rate

 

(Decrease)

 

Volume

 

Rate

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

23,184

 

$

330

 

$

23,514

 

$

26,802

 

$

8,989

 

$

35,791

 

Securities

 

3,953

 

1,249

 

5,202

 

1,368

 

1,211

 

2,579

 

Interest bearing deposits in other banks

 

87

 

(2

)

85

 

2

 

23

 

25

 

Federal funds sold

 

35

 

10

 

45

 

131

 

288

 

419

 

Total interest income

 

$

27,259

 

$

1,587

 

$

28,846

 

$

28,303

 

$

10,511

 

$

38,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

(319

)

$

(62

)

$

(381

)

$

(531

)

$

(11

)

$

(542

)

Money market accounts

 

1,139

 

788

 

1,927

 

2,986

 

1,905

 

4,891

 

Savings accounts

 

3,993

 

547

 

4,540

 

145

 

351

 

496

 

Time deposits

 

10,605

 

4,555

 

15,160

 

9,404

 

7,471

 

16,875

 

Total interest-bearing deposits

 

$

15,418

 

$

5,828

 

$

21,246

 

$

12,004

 

$

9,716

 

$

21,720

 

Securities sold under agreement to repurchase and federal funds purchased

 

1,793

 

(264

)

1,529

 

2,193

 

827

 

3,020

 

Other borrowed funds

 

(88

)

(193

)

(281

)

(204

)

287

 

83

 

Trust preferred capital notes

 

(28

)

28

 

 

1,760

 

93

 

1,853

 

Total interest expense

 

$

17,095

 

$

5,399

 

$

22,494

 

$

15,753

 

$

10,923

 

$

26,676

 

Change in Net Interest Income

 

$

10,164

 

$

(3,812

)

$

6,352

 

$

12,550

 

$

(412

)

$

12,138

 

 

Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk

 

In the normal course of business, the Company is exposed to market risk, or interest rate risk, as its net income is largely dependent on its net interest income. Market risk is managed by the Company’s Asset/Liability Management Committee that formulates and monitors the performance of the Company based on established levels of market risk as dictated by policy. In setting tolerance levels, or limits on market risk, the Committee considers the impact on earnings and capital, the level and general direction of interest rates, liquidity, local economic conditions and other factors. Interest rate risk, or interest sensitivity, can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing of interest-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; however, in general the Company has maintained a fairly balanced sensitivity to changes in interest rates.

 

One of the tools used by the Company to assess interest sensitivity on a monthly basis is the static gap analysis that measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods. It is the Company’s goal to limit the one-year cumulative difference, or gap, in an attempt to limit changes in future net interest income from changes in market interest rates. A static gap analysis is shown in Table 3 below, and reflects the earlier of the maturity or repricing dates for various assets, including prepayment and amortization estimates, and liabilities as of December 31, 2007. At that point in time, the Company had a cumulative net liability sensitive one-year gap position of $313.7 million, or a negative 13.8% of total interest-earning assets.

 

This position would generally indicate that over a period of one-year net interest earnings should decrease in a rising interest rate environment as more liabilities would reprice than assets and should increase in a falling interest rate environment. However, this measurement of interest rate risk sensitivity represents a static position as of a single day and is not necessarily indicative of the Company’s position at any other point in time, does not take into account the differences in sensitivity of yields and costs on specific assets and liabilities to changes in market rates, and it

 

9



 

does not take into account the specific timing of when changes to a specific asset or liability will occur. More accurate measures of interest sensitivity are provided to the Company using earnings simulation models.

 

TABLE 3:  STATIC GAP ANALYSIS

 

 

 

Interest Sensitivity Periods

 

At December 31, 2007

 

Within

 

91 to 365

 

Over 1 to 5

 

Over 5

 

 

 

(Dollars in thousands)

 

90 Days

 

Days

 

Years

 

Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning Assets

 

 

 

 

 

 

 

 

 

 

 

Securities, at amortized cost

 

$

57,243

 

$

102,296

 

$

107,163

 

$

57,674

 

$

324,376

 

Interest bearing deposits in other banks

 

 

1,140

 

 

 

1,140

 

Loans held-for-sale

 

4,339

 

 

 

 

4,339

 

Loans, net of unearned income

 

770,010

 

312,194

 

721,423

 

143,374

 

1,947,001

 

Total interest-earning assets

 

$

831,592

 

$

415,630

 

$

828,586

 

$

201,048

 

$

2,276,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

39,236

 

 

$

117,710

 

 

$

156,946

 

Money market accounts

 

98,148

 

 

98,148

 

 

196,296

 

Savings accounts

 

81,961

 

 

81,962

 

 

163,923

 

Time deposits

 

453,262

 

625,752

 

59,166

 

 

1,138,180

 

Securities sold under agreements to repurchase and federal funds purchased

 

222,534

 

 

 

 

222,534

 

Other borrowed funds

 

25,000

 

 

 

 

25,000

 

Trust preferred capital notes

 

 

15,000

 

25,000

 

 

40,000

 

Total interest-bearing liabilities

 

$

920,141

 

$

640,752

 

$

381,986

 

$

 

$

1,942,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative maturity / interest sensitivity gap

 

$

(88,549

)

$

(313,671

)

$

132,929

 

$

333,977

 

$

333,977

 

As % of total interest-earning assets

 

(3.9

)%

(13.8

)%

5.8

%

14.7

%

 

 

 

In order to more closely measure interest sensitivity, the Company uses earnings simulation models on a quarterly basis. These models utilize the Company’s financial data and various management assumptions as to balance sheet growth, interest rates, operating expenses and other non-interest income sources to forecast a base level of earnings over a one-year period. This base level of earnings is then shocked assuming a 200 basis points higher and lower level of interest rates over the forecasted period.  The most recent earnings simulation model was run based on data as December 31, 2007, and consistent with the Company’s belief from its static gap analysis that its balance sheet structure was liability sensitive at that time, the model projected that forecasted earnings over a one-year period would decrease by 11.2% if interest rates were to be 200 basis points higher than expected, and forecasted earnings would increase by 8.6% if interest rates were to be 200 basis points lower than expected.

 

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. The Company has set a limit on this measurement of interest sensitivity to a maximum decline in earnings of 20%. Since the earnings model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior, the model cannot precisely estimate net income and the effect on net income from sudden changes in interest rates. Actual results will differ from 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.

 

Non-Interest Income

 

The Company’s non-interest income sources include service charges and other fees on deposit accounts, fees and net gains from loans originated and sold through its mortgage lending division, commissions from non-deposit investment sales and increases in the cash surrender value of Bank owned life insurance policies. Non-interest income increased $560 thousand in 2007, or 7.6%, from $7.3 million in 2006 to $7.9 million, and increased $647 thousand, or 9.7%, from $6.7 million in 2005, to $7.3 million in 2006. In 2005, non-interest income increased $917 thousand, or 15.9%, from $5.8 million in 2004, to $6.7 million. Increases have occurred in all categories over the

 

10



 

three year period with the exception of fees and net gains on mortgage loans held-for-sale which were up slightly in 2005, but down $248 thousand and $352 thousand in 2006 and 2007, respectively.

 

The Company’s mortgage lending division began operations in 1999 and reached a record level of $287.8 million in originations in 2003. In 2004, due to lower levels of refinancing activity, originations fell to $175.9 million, while in 2005, that number increased to $202.3 million; however; pricing became more competitive and as noted above, fees and net gains for 2005 were up slightly. In 2006, originations of mortgage loans for sale fell back to $174.9 million and in 2007 fell to $158.0 million as the Bank began to hold more of its originations in portfolio rather than selling them, due to a reduction in demand and available loan products in the secondary market. The Company continues to try to expand the level of loans originated for sale and the resulting fees and net gains thereon, with the hiring of additional commission based loan officers and expanding its base of correspondents to enhance product offerings. Adverse changes in the local real estate market, consumer confidence, and interest rates, as well as increased competition could adversely impact the level of loans originated for sale, and the resulting fees and earnings thereon.

 

Service charges and other fees, which include monthly deposit account maintenance charges, overdraft fees, ATM fees and charges, debit card income, safe deposit box rents, merchant discount fee income, and lock-box service fees, increased $162 thousand, or 5.0%, from $3.2 million in 2006, to $3.4 million in 2007. In 2006, service charges and other fees were up $673 thousand, or 26.4%, from $2.6 million to $3.2 million, while in 2005 they were up $804 thousand, or 46.0%. The increase in 2005 and 2006 included $284 thousand and $767 thousand, respectively, in higher overdraft fees associated with a new overdraft protection program implemented in September 2005 for the majority of the Bank’s retail checking account customers, while in 2005 fees from lock-box operations were up $348 thousand as a result of increased activity in one customer account related to donations for Hurricane Katrina, and were subsequently down $301 thousand in 2006. Management expects service charges and other fees to continue higher, however, the year-over-year increases may be closer to what was experienced in 2007.

 

In an effort to improve non-interest income sources, the Company added non-deposit investment services, through a third party arrangement, in 2002. This new service provided for $456 thousand in additional income in 2005, $621 thousand in 2006 and $770 thousand in 2007. Slight improvement is expected in 2008.

 

Other non-interest income increased $350 thousand in 2007 to $768 thousand, increased $57 thousand in 2006, and was mostly unchanged in 2005. The majority of this income source is related to the purchase of $6 million in Bank owned life insurance policies in May 2003 and another $6.2 million in November 2006, which provided for most of the $350 thousand increase in 2007. These polices, which are recorded on the Company’s balance sheets under other assets, accounted for $608 thousand of the $768 thousand in other income in 2007, and $309 thousand of the $418 thousand in other income in 2006. The Company does not anticipate additional purchases of this insurance in 2008. Income from Bank owned life insurance is non-taxable.

 

In 2007, non-interest income results also include a gain on the sale of OREO of $638 thousand, and a loss of $387 thousand on the sale of securities related to a partial restructuring of the securities portfolio, both in the third quarter.

 

Non-Interest Expense

 

Non-interest expense increased $5.4 million, or 15.8%, from $34.3 million in 2006, to $39.7 million in 2007, increased $4.8 million, or 16.4%, from $29.5 million in 2005 to $34.3 million in 2006, and increased $6.7 million, or 29.2%, from $22.8 million in 2004 to $29.5 million in 2005. Salaries and benefits accounted for $2.6 million, or 48.6%, of the total increase in non-interest expense in 2007, $2.6 million, or 53.7%, in 2006, and $3.8 million, or 57.7% in 2005. Commissions and incentive compensation associated with the significant increases in total loans and the hiring of additional loan officers, together with increased compensation and benefits expense associated with additional employees added due to overall growth and branch expansion were the reasons for the increases. The Company anticipates that salaries and benefits expense will continue to be the largest single factor in increased non-interest expenses in future periods due to branch expansion and overall growth. In addition, the Company expensed $257 thousand in 2006, and $427 thousand in 2007 for incentive stock options granted in 2006 and 2007, and that amount is expected to grow as grants continue in future years.

 

Occupancy expenses, which include rents, depreciation, maintenance on buildings, leaseholds and equipment, increased $1.6 million, or 29.1%, from $5.4 million in 2006, to $7.0 million in 2007, and increased $969 thousand, or 21.6%, in 2006. In 2005, occupancy expense was up $1.2 million, or 38.2%. These year-over-year increases were due to the opening of eleven new branch locations between August 2004 and November 2007 and expanded office

 

11



 

facilities for lending units and other back office support departments. Occupancy expense is expected to increase again in 2008 with three new branch locations to be opened in the first half of the year.

 

Data processing expense decreased by $14 thousand in 2007, increased by $401 thousand, or 25.8%, in 2006, and increased $239 thousand, or 18.2%, in 2005. These increases in 2005 and 2006 are consistent with overall growth in the total number of loan and deposit accounts processed, while the decline in expense in 2007 was due to the signing of a new contract, with the same processor, that resulted in substantially lower per item costs.

 

Other operating expenses, which include advertising and public relations expenses, bank franchise taxes, legal and professional fees, insurance, telecommunications, supplies and postage, increased by $1.2 million, or 17.4%, from $7.0 million in 2006, to $8.2 million in 2007, and increased $863 thousand, or 14.1%, from $6.1 million in 2005, to $7.0 million in 2006. In 2005, other operating expenses increased $1.3 million, or 28.0%. The increases over the years are generally due to branch expansion and overall growth, with year-over-year increases in advertising, public relations and bank franchise tax expenses, while in the second quarter of 2007 the Bank, along with all other depository institutions insured by the FDIC, began to pay deposit insurance premiums for the first time since the mid 1990’s. The Company expects other operating expenses will continue to increase in future periods due to overall growth and as it continues expanding its branch network.

 

Income Taxes

 

The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable interest after applying the U.S. federal income tax rate of 35%. The provision for income taxes totaled $13.2 million, $12.9 million and $10.4 million, for the years ended December 31, 2007, 2006 and 2005, respectively. The effects of non-deductible expenses and non-taxable interest on the Company’s income tax provisions are minimal. For further information regarding the provisions for income taxes see Note 8 to the Consolidated Financial Statements.

 

Asset Quality - Provision and Allowance For Loan Losses

 

The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio.  In 2007, net charge-offs totaled $181 thousand compared to $126 thousand and $353 thousand in 2006 and 2005, respectively.  The provision for loan loss expense in 2007 was $4.3 million compared to $4.4 million in 2006, and $3.8 million in 2005. As a result, the total allowance for loan losses increased $4.2 million, or 23.0%, from $18.1 million at December 31, 2006, to $22.3 million at December 31, 2007, increased $4.3 million, or 31.0%, in 2006, and increased 32.9% in 2005. These increases in the total allowance for loan losses over the past three years are consistent with an 18.1% increase in loans in 2007, 28.3% in 2006, and 37.2% in 2005, as well as increases in the level of non-performing and past due loans from $1.2 million at December 31, 2004, to $2.0 million at December 31, 2005, to $3.9 million at December 31, 2006, and to $4.4 million at December 31, 2007.

 

The allowance has also increased as a percent of total loans from 1.07% at December 31, 2005, to 1.10% as of December 31, 2006, and to 1.14% as of December 31, 2007, due to increases in other identified potential problem loans, which are classified as impaired loans, and although well-secured and currently performing, but requiring higher reserve levels, rose from $4.6 million at December 31, 2005, to $11.6 million at December 31, 2006, and to $15.4 million at December 31, 2007.   See “Risk Elements and Non-Performing Assets” later in this discussion for more information on non-performing loans and past due loans and other impaired loans.

 

Management feels that the allowance for loan losses is adequate at December 31, 2007. However, there can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, on a national basis or in the Company’s market area, or changes in the circumstances of particular borrowers.

 

The Company generates a quarterly analysis of the allowance for loan losses, with the objective of quantifying portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on semi-annual independent external loan reviews and monthly internal reviews.  The determination of the allowance for loan losses is based on applying and summing the results of eight qualitative factors and one quantitative factor to each category of loans along with any specific or additional allowance for impaired 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

 

12



 

allowance for all categories. Factors are different for each loan category. Qualitative factors include: levels and trends in delinquencies and non-accruals, trends in volumes and terms of loans, effects of any changes in lending policies, the experience, ability and depth of management, national and local economic trends and conditions, concentrations of credit, quality of the Company’s loan review system, and regulatory requirements. The total allowance required thus changes as the percentage weight assigned to each factor is increased or decreased due to its particular circumstance, as the various types and categories of loans change as a percentage of total loans and as specific and additional allowances are required due to an increase in impaired loans. For further information regarding the allowance for loan losses see Notes 1 and 4 to the Consolidated Financial Statements.

 

TABLE 4: PROVISION AND ALLOWANCE FOR LOAN LOSSES

 

(Dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance, beginning of period

 

$

18,101

 

$

13,821

 

$

10,402

 

$

7,457

 

$

5,924

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-Offs

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

 

$

 

$

 

$

 

$

 

Commercial loans

 

 

112

 

341

 

 

30

 

Consumer loans

 

212

 

77

 

21

 

62

 

26

 

Total charge-offs

 

$

212

 

$

189

 

$

362

 

$

62

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

 

$

 

$

 

$

 

$

 

Commercial loans

 

 

 

 

12

 

2

 

Consumer loans

 

31

 

63

 

9

 

6

 

12

 

Total recoveries

 

$

31

 

$

63

 

$

9

 

$

18

 

$

14

 

Net charge-offs

 

$

181

 

$

126

 

$

353

 

$

44

 

$

42

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

4,340

 

4,406

 

3,772

 

2,989

 

1,575

 

Allowance, end of period

 

$

22,260

 

$

18,101

 

$

13,821

 

$

10,402

 

$

7,457

 

Ratio of net charges-offs to average total loans outstanding during period

 

0.01

%

0.01

%

0.03

%

0.01

%

0.01

%

 

TABLE 5: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses includes specific and additional allowances for impaired loans and a general allowance applicable to all loan categories; however, management has allocated the allowance to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts, or that the allocation indicates future trends.  The allocation of the allowance at December 31 for the years indicated and the ratio of related outstanding loan balances to total loans are as follows:

 

(Dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Real estate – mortgage

 

$

9,226

 

$

8,654

 

$

7,298

 

$

5,584

 

$

4,188

 

Real estate – construction

 

6,612

 

4,939

 

3,599

 

2,328

 

1,789

 

Commercial

 

6,304

 

4,449

 

2,865

 

2,422

 

1,434

 

Consumer

 

118

 

59

 

59

 

68

 

46

 

Balance, December 31,

 

$

22,260

 

$

18,101

 

$

13,821

 

$

10,402

 

$

7,457

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of loans to total year-end loans:

 

 

 

 

 

 

 

 

 

 

 

Real estate – mortgage

 

59

%

57

%

60

%

65

%

67

%

Real estate – construction

 

28

%

31

%

30

%

25

%

23

%

Commercial

 

12

%

11

%

9

%

9

%

9

%

Consumer

 

1

%

1

%

1

%

1

%

1

%

 

 

100

%

100

%

100

%

100

%

100

%

 

13



 

See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the provision and allowance for loan losses.

 

Risk Elements and Non-Performing Assets

 

Non-performing assets consist of non-accrual loans, restructured loans, and other real estate owned (foreclosed properties). The total non-performing assets and loans that are 90 days or more past due and still accruing interest increased by $485 thousand, or 12.4%, from $3.9 million at year-end 2006 to $4.4 million at year-end 2007, and increased by $1.9 million, or 95.9%, from $2.0 million at year-end 2005. As a result, the level of non-performing assets and past due loans to total assets increased from .13% at December 31, 2005, to .20% at December 31, 2006, and was down slightly to .19% at December 31, 2007.

 

The Company expects its ratio of non-performing assets and past due loans to total assets to remain low relative to its peers, however, the ratio could increase due to an aggregate of $15.4 million in other impaired loans as of December 31, 2007, for which management has identified risk factors that may result in them not being repaid in accordance with their terms although the loans are generally well-secured and are currently performing. At December 31, 2006, other impaired loans were $11.6 million and they were $4.6 million at December 31, 2005.  The $15.4 million as of December 31, 2007, represents eight different borrowing relationships with two relationships representing a significant portion of the total. See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the Company’s non-performing assets.

 

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.

 

Foreclosed real properties include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt.  Such properties, which are held for resale, are carried at the lower of cost or fair value, including a reduction for the estimated selling expenses, or principal balance of the related loan. In July 2007, the Company foreclosed on a $1.8 million non-performing loan and subsequently sold the collateral property in September 2007 for a pre-tax gain of $638 thousand. As of December 31, 2007, the Company held no foreclosed real properties.

 

TABLE 6: NON-PERFORMING ASSETS

 

 

 

December 31,

 

(Dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

Non-accrual loans

 

$

3,826

 

$

3,920

 

$

1,994

 

$

1,210

 

$

462

 

Restructured loans

 

 

 

 

 

875

 

Total non-performing assets

 

$

3,826

 

$

3,920

 

$

1,994

 

$

1,210

 

$

1,337

 

Loans past due 90 days and still accruing

 

579

 

 

7

 

 

84

 

Total non-performing assets and past due loans

 

$

4,405

 

$

3,920

 

$

2,001

 

$

1,210

 

$

1,421

 

Allowance for loan losses to total loans

 

1.14

%

1.10

%

1.07

%

1.11

%

1.13

%

Allowance for loan losses to non-performing loans

 

505.33

%

461.76

%

693.1

%

859.7

%

557.7

%

Non-performing assets and past due loans to total loans

 

0.23

%

0.24

%

0.15

%

0.13

%

0.21

%

Non-performing assets and past due loans to total assets

 

0.19

%

0.20

%

0.13

%

0.11

%

0.16

%

 

Loan Portfolio

 

The Bank’s lending activities are its principal source of income. Real estate loans, including residential permanents and construction, and commercial permanents, represent the major portion of the Bank’s loan portfolio. Loans, net of unearned income and the allowance for loan losses, increased $294.9 million, or 18.1%, from $1.63 billion at December 31, 2006, to $1.92 billion at December 31, 2007, and increased $359.6 million, or 28.3%, from $1.27 billion at December 31, 2005, to $1.63 billion at year-end 2006. The increase in loans in 2007 included an increase

 

14



 

in real estate mortgage loans of $218.6 million, or 23.2%, an increase in commercial loans of $48.2 million, or 25.3%, and an increase in real estate construction loans of $29.3 million, or 5.7%. In 2006, real estate mortgage loans increased $161.5 million, or 20.7%, while real estate construction loans represented the second largest increase rising $134.0 million, or 35.2%, and commercial loans increased $68.3 million, or 55.9%. The majority of the increase in real estate mortgage loans is concentrated in non-farm non-residential properties, which has been a primary focus of the Bank since its organization, while the increase in real estate construction loans in 2007 was attributable to commercial properties, and in 2006 it was split between commercial properties and commercial builders of single-family housing. At December 31, 2007, $302.4 million of total real estate construction loans were to these commercial builders of single-family housing, $23.6 million were to individuals on single-family properties and $218.3 million were related to commercial properties. At December 31, 2006, $347.5 million of real estate construction loans were to commercial builders of single-family housing, $18.3 million were to individuals on single-family properties and $149.2 million were related to commercial properties. The Bank expects that real estate construction loans will continue to grow, but more at a pace somewhere between what was experienced in 2006 and 2007, although there can be no assurance. The Bank has also increased its focus on commercial lending over the past two years with the hiring of several loan officers devoted to developing that lending area.

 

As noted above, the majority of the Bank’s loan portfolio consists of construction and commercial real estate loans.  At December 31, 2007, the Bank had $302.4 million of construction loans to commercial builders of single family housing in the Northern Virginia market, representing 15.5% of total loans, and down from 21.0% at December 31, 2006. These loans are made to a number of unrelated entities and generally have a term of twelve to eighteen months.  Adverse developments in the Northern Virginia real estate market or economy could have an adverse impact on this portfolio of loans and the Company’s income and financial position.  In addition, the Bank had $835.5 million, or 42.8% of the loan portfolio at December 31, 2007, secured by non-farm non-residential properties. These loans represent obligations of a diversified pool of borrowers across numerous businesses and industries in the Northern Virginia market and include some loans that, although secured by commercial real estate, are commercial purpose loans made based on the financial condition of the underlying business. At December 31, 2007, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio.  An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Bank seeks to manage its concentrations of loans through the establishment of limits on the level of its various loan types to total loans and to total capital. For further information regarding concentrations of loans see Note 17 to the Consolidated Financial Statements.

 

Under recent guidance by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans 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.  Excluded from the scope of this guidance are loans secured by non-farm nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property

 

Tables 7 and 8 present information pertaining to the composition of the loan portfolio including unearned income, the allowance for loan losses, and the maturity and repricing characteristics of selected loans.

 

TABLE 7: SUMMARY OF TOTAL LOANS

 

 

 

December 31,

 

(Dollars in thousands)

 

2007

 

2006

 

2005

 

2004

 

2003

 

Real estate - mortgage

 

$

1,158,820

 

$

940,270

 

$

778,788

 

$

605,420

 

$

444,411

 

Real estate - construction

 

544,290

 

515,040

 

380,997

 

240,469

 

153,400

 

Commercial

 

238,670

 

190,527

 

122,243

 

88,725

 

61,178

 

Consumer

 

8,714

 

6,997

 

7,386

 

5,879

 

6,061

 

Farmland

 

1,468

 

 

 

 

 

Total loans

 

$

1,951,962

 

$

1,652,834

 

$

1,289,414

 

$

940,493

 

$

665,050

 

Less unearned income

 

4,961

 

4,906

 

5,338

 

4,309

 

2,742

 

Less allowance for loan losses

 

22,260

 

18,101

 

13,821

 

10,402

 

7,457

 

Loans, net

 

$

1,924,741

 

$

1,629,827

 

$

1,270,255

 

$

925,782

 

$

654,851

 

 

15



 

TABLE 8: MATURITY/REPRICING SCHEDULE OF TOTAL LOANS

 

At December 31, 2007
(Dollars in thousands)

 

Real estate-mortgage

 

Real estate-construction

 

Commercial

 

Consumer

 

Farmland

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable:

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

175,150

 

$

338,364

 

$

114,114

 

$

3,609

 

$

1,468

 

$

632,705

 

1-to-5 years

 

371,303

 

21,352

 

5,532

 

 

 

398,187

 

After 5 years

 

58,295

 

3,875

 

 

 

 

62,170

 

Total

 

$

604,748

 

$

363,591

 

$

119,646

 

$

3,609

 

$

1,468

 

$

1,093,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

50,720

 

$

77,332

 

$

25,384

 

$

850

 

 

$

154,286

 

1-to-5 years

 

142,959

 

70,766

 

46,287

 

3,838

 

 

263,851

 

After 5 years

 

360,393

 

32,601

 

47,353

 

416

 

 

440,763

 

Total

 

$

554,072

 

$

180,699

 

$

119,024

 

$

5,105

 

$

 

$

858,900

 

Total Loans

 

$

1,158,820

 

$

544,290

 

$

238,670

 

$

8,714

 

$

1,468

 

$

1,951,962

 

 

Investment Securities

 

The securities portfolio serves as a primary source of liquidity, is used as needed to meet certain collateral requirements, helps in the management of interest rate risk, and provides additional interest income. The securities portfolio consists of two components, securities held-to-maturity and securities available-for-sale. Securities are classified as held-to-maturity based on management’s intent and the Company’s ability, at the time of purchase, to hold such securities to maturity.  These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in the securities’ prepayment risk, increased loan demand, general liquidity needs, and other similar factors are classified as available-for-sale and are carried at estimated fair value.

 

Total securities increased $92.0 million, or 39.3%, from $234.2 million at December 31, 2006, to $326.2 million at December 31, 2007, and increased $61.1 million, or 35.3%, from $173.1 million at December 31, 2005, to $234.2 million at December 31, 2006. Securities of U.S. Government Agencies represent the majority of the portfolio, with $115.1 million in mortgage-backed securities at December 31, 2007, versus $40.7 million at December 31, 2006.  Table 9 provides information regarding the composition of the securities portfolio and Table 10 details the maturities and weighted average yields (on a tax equivalent basis) at the dates indicated. See Note 2 to the Consolidated Financial Statements for additional information regarding the securities portfolio.

 

At December 31, 2007, there were no single issuers, other than issuers who are U.S. Government Agencies, whose securities owned by the Company had an aggregate book value of more than 10% of total stockholder’s equity of the Company.

 

TABLE 9: SECURITIES PORTFOLIO

 

 

 

December 31,

 

 

 

2007

 

2006

 

2005

 

(Dollars in thousands)

 

Book Value

 

Percent
of total

 

Book Value

 

Percent
of total

 

Book Value

 

Percent
of total

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

242,965

 

74.47

%

$

174,074

 

74.33

%

$

116,624

 

67.39

%

Obligations of states/political subdivisions

 

23,001

 

7.05

%

3,659

 

1.56

%

1,352

 

0.78

%

Domestic corporate debt obligations

 

8,544

 

2.62

%

6,055

 

2.59

%

6,043

 

3.49

%

Federal Reserve Bank stock

 

1,442

 

0.44

%

1,442

 

0.62

%

1,442

 

0.83

%

Federal Home Loan Bank stock

 

4,631

 

1.42

%

3,034

 

1.30

%

2,277

 

1.32

%

Community Bankers’ Bank stock

 

55

 

0.02

%

55

 

0.02

%

55

 

0.03

%

 

 

$

280,638

 

86.02

%

$

188,319

 

80.41

%

$

127,793

 

73.84

%

 

16



 

 

 

December 31,

 

 

 

2007

 

2006

 

2005

 

(Dollars in thousands)

 

Book Value

 

Percent
of total

 

Book Value

 

Percent
of total

 

Book Value

 

Percent
of total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

33,725

 

10.34

%

$

35,520

 

15.17

%

$

35,798

 

20.69

%

Obligations of states/political subdivisions

 

11,874

 

3.64

%

10,364

 

4.43

%

8,963

 

5.18

%

Domestic corporate debt obligations

 

 

0.00

%

 

0.00

%

499

 

0.29

%

 

 

$

45,599

 

13.98

%

$

45,884

 

19.59

%

$

45,260

 

26.16

%

 

 

$

326,237

 

100.00

%

$

234,203

 

100.00

%

$

173,053

 

100.00

%

 

TABLE 10: MATURITY OF SECURITIES

 

 

 

2007

 

2006

 

2005

 

At December 31,
(Dollars in thousands)

 

Book Value

 

Weighted
Average
Yield

 

Book Value

 

Weighted
Average
Yield

 

Book Value

 

Weighted
Average
Yield

 

Maturing within one year

 

$

8,269

 

5.02

%

$

36,246

 

3.49

%

$

25,708

 

2.58

%

Maturing after one through five years

 

165,110

 

5.26

%

132,512

 

4.75

%

92,673

 

3.78

%

Maturing after five through ten years

 

49,555

 

5.19

%

40,328

 

4.95

%

34,741

 

4.73

%

Maturing after ten years

 

103,303

 

5.67

%

25,117

 

5.62

%

19,931

 

5.30

%

 

 

$

326,237

 

5.37

%

$

234,203

 

4.67

%

$

173,053

 

3.97

%

 

Deposits

 

The Company’s principal source of funds is deposit accounts comprised of demand deposits, savings and money market accounts, and time deposits. The majority of the Bank’s deposits are attracted from individuals and businesses in the Northern Virginia and the metropolitan Washington D.C. area, and the interest rates the Bank pays are generally near the top of the local market.

 

Total deposits increased $263.2 million, or 16.4%, from $1.61 billion at December 31, 2006, to $1.87 billion at December 31, 2007, and increased $362.4 million, or 29.1%, from $1.24 billion at December 31, 2005, to $1.61 billion at December 31, 2006. In 2007, growth by deposit category included a 14.4% increase in demand deposits, a 12.6% increase in savings accounts and interest-bearing demand deposits and an 18.6% increase in time deposits. In 2006, growth included a 0.9% decrease in demand deposits, a 31.4% increase in savings accounts and interest-bearing demand deposits and a 36.3% increase in time deposits. The Company attributes its growth in deposits to a strong and affluent local economy, the payment of interest rates at or near the highest in its market, and a strong emphasis on customer service.

 

In early 2004, due to historically low interest rates, many depositors held funds in lower rate savings and interest-bearing demand deposits. As interest rates started to climb in the second half of 2004, large sums started transferring out into higher rate accounts including time deposits, and this trend continued into 2005 and 2006. The growth in time deposits in 2006 was also supported by special advertised rates for maturities ranging from six to thirteen months, while the growth in savings and money market accounts were the result of new product offerings that were also supported by special advertised rates, as strong regional competition for deposits necessitated “paying up” for deposit growth to help fund strong loan demand. In 2007, percentage growth by category was more balanced. Strong local competition, high short-term interest rates, and as noted, the shift of funds from lower rate interest-bearing checking accounts, resulted in the average rate paid on interest-bearing deposits increasing 69 basis points in 2005, from 2.03% in 2004, to 2.72%, rising 116 basis points from 2.72% for the year ended December 31, 2005, to 3.88% in 2006, and increasing another 58 basis points in 2007 to average 4.46%.  Due to lower interest rates in later part of 2007 and a continuing downward trend in early 2008, management expects the average rate paid on interest-bearing deposits will be lower in 2008, although there can be no assurance.

 

Table 11 details maturities of time deposits with balances of $100,000 or more, which represent 50.3% of total time deposits as of December 31, 2007, compared to 51.1% at December 31, 2006. Total time deposits represent 60.9% of total deposits as of December 31, 2007, compared to 59.7% at December 31, 2006. See Note 6 to the

 

17



 

Consolidated Financial Statements and Tables 1 and 3 to this Management’s Discussion and Analysis for additional information regarding the maturities of time deposits and average rates paid on all interest-bearing deposits.

 

TABLE 11: MATURITIES OF TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE

 

 

 

December 31,

 

(Dollars in thousands)

 

2007

 

2006

 

2005

 

3 months or less

 

$

209,165

 

$

151,876

 

$

61,115

 

3-6 months

 

243,880

 

127,637

 

41,648

 

6-12 months

 

99,465

 

182,081

 

165,738

 

Over 12 months

 

19,975

 

29,123

 

69,679

 

Total

 

$

572,485

 

$

490,717

 

$

338,180

 

 

Short-Term Borrowings

 

Short-term borrowings consist of securities sold under agreements to repurchase, of which, as of December 31, 2007, $125 million are secured transactions with customers that mature the business day following the date sold, and the other $75 million are secured transactions with other banks.  The secured transactions with customers are provided to significant commercial demand deposit customers and are considered a core funding source of the Bank. Short-term borrowings also include Federal funds purchased, which are unsecured overnight borrowings from other banks and are generally used to accommodate short-term liquidity needs.  Table 12 provides information on the balances and interest rates on short-term borrowings for the years ended December 31, 2007, 2006 and 2005 (dollars in thousands):

 

TABLE 12: SHORT-TERM BORROWINGS

 

At December 31,

 

2007

 

2006

 

2005

 

Securities sold under agreement to repurchase

 

$

200,534

 

$

108,370

 

$

84,791

 

Federal funds purchased

 

22,000

 

40,501

 

27,003

 

Total

 

$

222,534

 

$

148,871

 

$

111,794

 

Weighted interest rate at year end

 

3.36

%

4.29

%

3.71

%

 

 

 

 

 

 

 

 

Averages for the year ended December 31,

 

 

 

 

 

 

 

Outstanding

 

$

165,499

 

$

118,092

 

$

63,342

 

Interest rate

 

3.78

%

4.01

%

2.70

%

 

 

 

 

 

 

 

 

Maximum month-end outstanding

 

$

222,534

 

$

148,871

 

$

111,794

 

 

Liquidity

 

The Company’s principal sources of liquidity and funding are its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Considerations in managing the Company’s liquidity position include, but are not limited to, scheduled cash flows from existing loans and investment securities, anticipated deposit activity including the maturity of time deposits, and projected needs from anticipated extensions of credit. The Company’s liquidity position is monitored daily by management to maintain a level of liquidity conducive to efficiently meet current needs and is evaluated for both current and longer term needs as part of the asset/liability management process.

 

The Company measures total liquidity through cash and cash equivalents, securities available-for-sale, mortgage loans held-for-sale, other loans and investment securities maturing within one year, less securities pledged as collateral for repurchase agreements, public deposits and other purposes, and less any outstanding federal funds purchased.  These liquidity sources increased $33.2 million, or 6.1%, from $544.3 million at December 31, 2006, to $577.5 million at December 31, 2007, and increased $138.4 million, or 34.1%, from $405.9 million at December 31, 2005, to $544.3 million at December 31, 2006. The increases in both years were generally due to higher levels 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

 

18



 

Bank of Atlanta. See Note 14 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.

 

Capital

 

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces, and the overall level of growth. The adequacy of the Company’s current and future capital is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

 

Both the Company’s and the Bank’s capital levels continue to meet regulatory requirements.  The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios.  Tier 1 capital consists of common and qualifying preferred stockholders’ equity, less goodwill, 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.  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 Bank’s Tier 1 risk-based capital ratio was 7.77% at December 31, 2007, compared to 7.83% at December 31, 2006, and its total risk-based capital ratio was 10.73% at December 31, 2007, compared to 11.34% at December 31, 2006. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 7.12% at December 31, 2007, compared to 7.18% at December 31, 2006. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 9.90%, 10.96%, and 9.09%, respectively, at December 31, 2007, compared to 10.53%, 11.57%, and 9.61% at December 31, 2006. The declines in these capital ratios in 2007, was due to the significant level of growth in assets. Both the Company’s and Bank’s capital positions reflect proceeds of the issuance of $40 million in trust preferred securities and the contribution of an equivalent amount to the Bank as subordinated debt.

 

The ability of the Company to continue to grow is dependent on its earnings and the ability to obtain additional funds for contribution to the Bank’s capital, through borrowing, the sale of additional common stock, or through the issuance of additional trust preferred securities 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 rate of growth of net income may be adversely affected. The Company believes that its current capital and access to sources of additional capital is sufficient to meet anticipated growth over the next year, although there can be no assurance.

 

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 2009, 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 up to 50% of Tier 1 capital.  At December 31, 2007, trust preferred securities represented 19.2% of the Company’s Tier 1 capital and 17.4% of its total risk-based capital. Should future trust preferred issuances to increase holding company capital levels not be available to the same extent as currently, the Company may be required to raise additional equity capital, through the sale of common stock or other means, sooner than it would otherwise do so. See Note 15 to the Consolidated Financial Statements for further information regarding trust preferred securities.

 

19



 

Contractual Obligations

 

The Company has entered into certain contractual obligations including long term debt, operating leases and obligations under service contracts. The following table summarizes the Company’s contractual cash obligations as of December 31, 2007.

 

TABLE 13: CONTRACTUAL OBLIGATIONS

 

 

 

Payments Due-By Period

 

(Dollars in thousands)

 

Total

 

Within One
Year

 

Two To
Three
Years

 

Three To
Five Years

 

After Five
Years

 

Securities sold under agreements to repurchase and federal funds purchased

 

$

222,534

 

$

147,534

 

$

 

$

50,000

 

$

25,000

 

Other borrowed funds

 

25,000

 

 

 

25,000

 

 

Trust preferred securities and related capital notes

 

40,000

 

15,000

 

 

25,000

 

 

Operating leases

 

44,880

 

3,536

 

7,725

 

6,920

 

26,699

 

Data processing services

 

4,430

 

4,430

 

 

 

 

Total contractual cash obligations

 

$

336,844

 

$

170,500

 

$

7,725

 

$

106,920

 

$

51,699

 

 

The obligation for data processing services represents estimates of early termination charges.  Of the $40.0 million of trust preferred securities and related capital notes shown as due after 5 years, $15.0 million is subject to redemption, at par, at the Company’s option, on any semi-annual distribution payment date, the next one being June 30, 2008.  The table does not reflect deposit liabilities entered into in the ordinary course of the Company’s banking business.  At December 31, 2007, the Company had approximately $731.0 million of demand and savings deposits, exclusive of interest, which have no stated maturity or payment date.  The Company also had approximately $1.14 billion of time deposits, exclusive of interest, the maturity distribution of which is set forth in Note 6 to the Consolidated Financial Statements. For additional information about the Company’s deposit obligations, see “Net Interest Income” and “Deposits” above.  The trust preferred securities exclude $1.2 million of capital notes held by the trusts that relate to the common securities of the issuing trusts, all of which are owned by the Company.  See Note 15 to the Consolidated Financial Statements for additional information regarding the trust preferred capital notes.

 

Off-Balance Sheet Arrangements

 

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers.  These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customer’s accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  See Note 16 to the Consolidated Financial Statements for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.  With the exception of these off-balance sheet arrangements, and the Company’s obligations in connection with its trust preferred securities, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.  For further information, see Notes 15 and 16 to the Consolidated Financial Statements.

 

20



 

RISK FACTORS

 

An investment in our common stock involves various risks. The following is a summary of certain risks identified by us as affecting our business. You should carefully consider the risk factors listed below, as well as other cautionary statements made in this Annual Report, and risks and uncertainties which we may identify in our other reports and documents filed with the Securities and Exchange Commission or other public announcements. These risk factors may cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, which relate to the banking and financial services industries in general, or which we do not believe are material, may cause earnings to be lower, or hurt our future financial condition. You should read this section together with the other information in this Annual Report.

 

We may not be able to maintain our historical growth rate, which may adversely impact our results of operations and financial condition.

 

Over the last five years our asset level has increased rapidly, including a 20.0% increase in 2007. Our diluted earnings per share have grown at a compound annual rate of 23.0% from 2003 to 2007. We may not be able to sustain our historical rate of growth, or grow at all. Various factors, such as economic conditions, regulatory considerations and competition, may impede our rate of growth and our branch expansion, or may make future growth or branching less profitable or more expensive. If we experience a significant decrease in our rate of growth as compared to our historic rate of growth, our income, or our rate of income growth, may decline, and we may not be able to maintain or reduce our expense levels and efficiency ratio, which will adversely affect our results of operations and financial condition.

 

Our concentrations of loans could result in higher than normal risk of loan defaults and losses.

 

We have a substantial amount of loans secured by real estate in the Northern Virginia/Washington, D.C. metropolitan area, and substantially all of our loans are to borrowers in that area.  We also have a significant amount of real estate construction loans and land related loans for residential and commercial developments. At December 31, 2007, 87.3% of our total loans were secured by real estate, primarily commercial real estate. Of these loans, $544 million, or 27.9% of total loans, were construction and land loans.  An additional 12.2% of total loans were commercial and industrial loans which are not secured by real estate. These loans have a higher risk of default than other types of loans, such as single family residential mortgage loans. In addition, the repayments of these loans, often depends on the successful operation of a business or the sale or development of the underlying property, and as a result are more likely to be adversely affected by adverse conditions in the real estate market or the economy in general. These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in the Northern Virginia/Washington, D.C. metropolitan area, could increase the levels of non-performing loans and charge-offs, and reduce loan demand. In that event, we would likely experience lower earnings or losses. Additionally, if, for any reason, economic conditions in the area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, our ability to develop our business relationships may be diminished, the quality and collectibility of our loans may be adversely affected, the value of collateral may decline and loan demand may be reduced.  Additionally, under guidance from the banking agencies, we may be required to maintain higher levels of capital than we would otherwise be expected to maintain, and to employ greater risk management efforts, as a result of our real estate concentrations.

 

Commercial and commercial real estate and construction loans also generally have larger balances than single family mortgages loans and other consumer loans. Because the loan portfolio contains a significant number of commercial and commercial real estate and construction loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in: a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

 

Lack of seasoning of our loan portfolio could increase the risk of credit defaults in the future.

 

Due to the rapid growth of the Bank, a large portion of the loans in our loan portfolio and of our lending relationships is of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we

 

21



 

may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

 

Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance for loan losses.

 

We have historically enjoyed a low level of non-performing assets and net charge-offs, both in absolute dollars, as a percentage of loans and as compared to other banking institutions.  As a result of this historical experience, we have incurred lower loan loss provision expense, which has positively impacted our earnings. However, experience in the banking industry indicates that a portion of our loans will become delinquent, that some of our loans may only be partially repaid or may never be repaid and we may experience other losses for reasons beyond our control. Further, despite our underwriting criteria and historical experience, we may be particularly susceptible to losses due to: (1) the geographic concentration of our loans, (2) the concentration of higher risk loans, such as commercial real estate, construction and commercial and industrial loans, and (3) the relative lack of seasoning of certain of our loans.  As a result, there can be no assurance that we will be able to maintain our low levels of non-performing assets and charge-offs. Although we believe that our allowance for loan losses is maintained at a level adequate to absorb any inherent losses in our loan portfolio, these estimates of loan losses are necessarily subjective and their accuracy depends on the outcome of future events. If we need to make significant and unanticipated increases in our loss allowance in the future, our results of operations and financial condition would be materially adversely affected at that time.

 

While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary.

 

We may not be able to successfully manage continued growth.

 

We intend to seek further growth in the level of our assets and deposits and the number of our branches. Our plans for 2008 include the opening of at least three new branches, both within our existing footprint and to expand our footprint in Northern Virginia.  We cannot be certain as to our ability to manage increased levels of assets and liabilities, and an expanded branch system, without increased expenses and higher levels of non-performing assets.  We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances and a larger branch network, which may adversely impact earnings, shareholder returns and our efficiency ratio.  Increases in operating expenses or non-performing assets may have an adverse impact on the value of our common stock.

 

Our continued growth depends on our ability to meet minimum regulatory capital levels. Growth and shareholder returns may be adversely affected if sources of capital are not available to help us meet them.

 

Since we became the holding company for the Bank, we have sought to maximize shareholder returns by leveraging our capital.  If earnings do not meet our current estimates, if we incur unanticipated losses or expenses, or if we grow faster than expected, we may need to obtain additional capital sooner than expected, through borrowing, additional issuances of debt or equity securities, or otherwise.  If we do not have continued access to sufficient capital, we may be required to reduce our level of assets or reduce our rate of growth in order to maintain regulatory compliance. Under those circumstances net income and the rate of growth of net income may be adversely affected. Additional issuances of equity securities could have a dilutive effect on existing shareholders.

 

There is no assurance that we will be able to successfully compete with others for business.

 

The Northern Virginia/Washington, D.C. metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint, and is a highly competitive banking market. We compete for loans, deposits, and investment dollars with numerous regional and national banks, online divisions of out-of-market banks, and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders. Many competitors have substantially greater resources than us, and operate under less stringent regulatory environments. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans

 

22



 

and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.

 

Trading in our common stock has been relatively light. As a result, shareholders may not be able to quickly and easily sell their common stock.

 

Although our common stock is listed on the Nasdaq Global Select Market, and a number of brokers offer to make a market in the common stock on a regular basis, trading volume to date has been relatively light, averaging approximately 104,848 shares per day over the year ended December 31, 2007. There can be no assurance that an active and liquid market for the common stock can be maintained.  Accordingly, shareholders may find it difficult to sell a significant number of shares at the prevailing market price.

 

The number of shares owned by our directors and executive officers could make it more difficult to obtain approval for some matters submitted to shareholder vote, including mergers and acquisitions.

 

Our directors and executive officers and their affiliates own approximately 28.2% of the outstanding common stock. By voting against a proposal submitted to shareholders, the directors and officers, as a group, may be able to make approval more difficult for proposals requiring the vote of shareholders, such as some mergers, share exchanges, asset sales, and amendments to the Articles of Incorporation.  The results of the vote may be contrary to the desires or interests of the public shareholders.

 

Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.

 

Our operating income and net income depend to a great extent on our net interest margin, i.e., the difference between the interest yields we receive on loans, securities and other interest bearing assets and the interest rates we pay on interest bearing deposits and other liabilities. Net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Board of Governors of the Federal Reserve System.

 

We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. The results of our interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that we will be able to successfully manage our interest rate risk.  Increases in market rates and adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for residential mortgage loans, which we make on a pre-sold basis.

 

Adverse changes in the real estate market in our market area could also have an adverse affect on our cost of funds and net interest margin, as we have a large amount of non-interest bearing deposits related to real estate sales and development.  While we expect that we would be able to replace the liquidity provided by these deposits, the replacement funds would likely be more costly, negatively impacting earnings.

 

Additionally, changes in applicable law, if enacted, including those that would permit banks to pay interest on checking and demand deposit accounts established by businesses, could have a significant negative effect on net interest income, net income, net interest margin, return on assets and return on equity. At December 31, 2007, 11.4% of our deposits were non-interest bearing demand deposits.

 

23



 

Substantial regulatory limitations on changes of control and anti-takeover provisions of Virginia law may make it more difficult for you to receive a change in control premium.

 

With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquiror is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. There are comparable prior approval requirements for changes in control under Virginia law. Also, Virginia corporate law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

24



 

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Virginia Commerce Bancorp, Inc. (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.

 

Management is also responsible for establishing and maintaining an effective internal control over financial reporting.  The Company’s internal control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process, summarize and report reliable financial data. The internal control system contains monitoring mechanisms, and appropriate actions are taken to correct identified deficiencies. Management believes that internal controls over financial reporting, which are subject to scrutiny by management and the Company’s internal auditors, support the integrity and reliability of the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. In addition, because of changes in conditions and circumstances, the effectiveness of internal control over financial reporting may vary over time.

 

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2007. This assessment was conducted based on the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control - Integrated Framework”. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2007. Management’s assessment concluded that there were no material weaknesses within the Company’s internal control structure.

 

The 2007 consolidated financial statements have been audited by the independent accounting firm of Yount, Hyde & Barbour, P.C. (“YHB”). Personnel from YHB were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and Committees thereof.  Management believes that all representations made to the independent auditors were valid and appropriate. The resulting report from YHB accompanies the financial statements. Included in YHB’s report is the Firm’s opinion on the Company’s effectiveness of internal control over financial reporting.

 

The Board of Directors of the Company, acting through its Audit Committee (the “Committee”), is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditors and approves decisions regarding the appointment or removal of members of the internal audit function. The Committee meets periodically with management, the independent auditors, and the internal auditors to insure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without the presence of the management of the Company, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

 

/s/ Peter A. Converse

 

/s/ William K. Beauchesne

Chief Executive Officer

 

Chief Financial Officer

 

25



 

Yount, Hyde & Barbour, P.C.

 

Certified Public Accountants

 

and Consultants

 

 

To the Shareholders and Board of Directors

Virginia Commerce Bancorp, Inc.

Arlington, Virginia

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We have audited the accompanying consolidated balance sheets of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2007, 2006 and 2005.  We also have audited Virginia Commerce Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Virginia Commerce Bancorp, Inc. and subsidiaries’ management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable

 

26



 

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, Virginia Commerce Bancorp, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

 

Winchester, Virginia

March 12, 2008

 

27



 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)

 

 

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

34,201

 

$

34,989

 

Interest-bearing deposits with other banks

 

1,140

 

1,079

 

Securities (fair value: 2007, $326,314; 2006, $233,401)

 

326,237

 

234,203

 

Loans held-for-sale

 

4,339

 

7,796

 

Loans, net of allowance for loan losses of $22,260 in 2007 and $18,101 in 2006

 

1,924,741

 

1,629,827

 

Bank premises and equipment, net

 

12,705

 

9,273

 

Accrued interest receivable

 

11,451

 

9,315

 

Other assets

 

24,883

 

22,600

 

Total assets

 

$

2,339,697

 

$

1,949,082

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

Demand deposits

 

$

213,820

 

$

186,939

 

Savings and interest-bearing demand deposits

 

517,165

 

459,495

 

Time deposits

 

1,138,180

 

959,507

 

Total deposits

 

$

1,869,165

 

$

1,605,941

 

Securities sold under agreement to repurchase and federal funds purchased

 

222,534

 

148,871

 

Other borrowed funds

 

25,000

 

 

Trust preferred capital notes

 

41,244

 

44,344

 

Accrued interest payable

 

8,942

 

5,923

 

Other liabilities

 

3,669

 

4,152

 

Commitments and contingent liabilities

 

 

 

Total liabilities

 

$

2,170,554

 

$

1,809,231

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $1.00 par, 1,000,000 shares authorized and unissued

 

$

 

$

 

Common stock, $1.00 par, 50,000,000 shares authorized, issued and outstanding 2007, 24,022,850; 2006, 21,560,253

 

24,023

 

21,560

 

Surplus

 

73,672

 

31,231

 

Retained earnings

 

70,239

 

87,744

 

Accumulated other comprehensive income (loss), net

 

1,209

 

(684

)

Total stockholders’ equity

 

$

169,143

 

$

139,851

 

Total liabilities and stockholders’ equity

 

$

2,339,697

 

$

1,949,082

 

 

See Notes to Consolidated Financial Statements.

 

28



 

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Interest and dividend income:

 

 

 

 

 

 

 

Interest and fees on loans

 

$

138,919

 

$

115,405

 

$

79,614

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable

 

12,888

 

8,225

 

5,726

 

Tax-exempt

 

752

 

245

 

238

 

Dividends

 

308

 

276

 

203

 

Interest on deposits with other banks

 

140

 

55

 

30

 

Interest on federal funds sold

 

1,131

 

1,086

 

667

 

Total interest and dividend income

 

$

154,138

 

$

125,292

 

$

86,478

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

$

69,398

 

$

48,152

 

$

26,432

 

Securities sold under agreement to repurchase and federal funds purchased

 

6,259

 

4,730

 

1,710

 

Other borrowed funds

 

225

 

506

 

423

 

Trust preferred capital notes

 

3,099

 

3,099

 

1,246

 

Total interest expense

 

$

78,981

 

$

56,487

 

$

29,811

 

 

 

 

 

 

 

 

 

Net interest income

 

$

75,157

 

$

68,805

 

$

56,667

 

Provision for loan losses

 

4,340

 

4,406

 

3,772

 

Net interest income after provision for loan losses

 

$

70,817

 

$

64,399

 

$

52,895

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

Service charges and other fees

 

$

3,388

 

$

3,226

 

$

2,553

 

Non-deposit investment services commissions

 

770

 

621

 

456

 

Fees and net gains on loans held-for-sale

 

2,706

 

3,058

 

3,306

 

Gain on sale of OREO

 

638

 

 

 

Loss on sale of securities

 

(387

)

 

 

Other

 

768

 

418

 

361

 

Total non-interest income

 

$

7,883

 

$

7,323

 

$

6,676

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

22,536

 

$

19,911

 

$

17,321

 

Occupancy expense

 

7,031

 

5,448

 

4,479

 

Data processing

 

1,940

 

1,954

 

1,553

 

Other operating expense

 

8,187

 

6,976

 

6,113

 

Total non-interest expense

 

$

39,694

 

$

34,289

 

$

29,466

 

Income before taxes on income

 

$

39,006

 

$

37,433

 

$

30,105

 

Provision for income taxes

 

13,219

 

12,925

 

10,438

 

Net income

 

$

25,787

 

$

24,508

 

$

19,667

 

Earnings per common share, basic

 

$

1.08

 

$

1.04

 

$

0.85

 

Earnings per common share, diluted

 

$

1.04

 

$

0.98

 

$

0.79

 

 

See Notes to Consolidated Financial Statements.

 

29



 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

 

 

 

Preferred
Stock

 

Common
Stock

 

Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Comprehensive
Income

 

Total
Stockholders’
Equity

 

Balance, December 31, 2004

 

$

 

$

11,046

 

$

37,219

 

$

43,578

 

$

(519

)

 

 

$

91,324

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income 2005

 

 

 

 

 

 

 

19,667

 

 

 

$

19,667

 

19,667

 

Other comprehensive loss, unrealized holding losses arising during the period (net of tax of $548)

 

 

 

 

 

 

 

 

 

(1,018

)

(1,018

)

(1,018

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

$

18,649

 

 

 

Five-for-four stock split in form of a 25% stock dividend

 

 

2,797

 

(2,797

)

 

 

 

 

 

Cash paid in lieu of fractional shares

 

 

 

 

(6

)

 

 

 

(6

)

Stock options exercised

 

 

195

 

1,272

 

 

 

 

 

1,467

 

Employee stock purchase plan

 

 

12

 

211

 

 

 

 

 

223

 

Stock option expense

 

 

 

161

 

 

 

 

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

$

 

$

14,050

 

$

36,066

 

$

63,239

 

$

(1,537

)

 

 

$

111,818

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income 2006

 

 

 

 

 

 

 

24,508

 

 

 

$

24,508

 

24,508

 

Other comprehensive income, unrealized holding gains arising during the period (net of tax of $459)

 

 

 

 

 

 

 

 

 

853

 

853

 

853

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

$

25,361

 

 

 

Three-for-two stock split in form of a 50% stock dividend

 

 

7,146

 

(7,146

)

 

 

 

 

 

Cash paid in lieu of fractional shares

 

 

 

 

(3

)

 

 

 

(3

)

Stock options exercised

 

 

351

 

1,823

 

 

 

 

 

2,174

 

Employee stock purchase plan

 

 

13

 

231

 

 

 

 

 

244

 

Stock option expense

 

 

 

257

 

 

 

 

 

257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

$

 

$

21,560

 

$

31,231

 

$

87,744

 

$

(684

)

 

 

$

139,851

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income 2007

 

 

 

 

 

 

 

25,787

 

 

 

$

25,787

 

25,787

 

Other comprehensive income, unrealized holding gains arising during the period (net of tax of $1,019)

 

 

 

 

 

 

 

 

 

1,893

 

1,893

 

1,893

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

$

27,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10% stock dividend

 

 

2,172

 

41,108

 

(43,280

)

 

 

 

 

Cash paid in lieu of fractional shares

 

 

 

 

(12

)

 

 

 

(12

)

Stock options exercised

 

 

289

 

876

 

 

 

 

 

1,165

 

Employee stock purchase plan

 

 

2

 

30

 

 

 

 

 

32

 

Stock option expense

 

 

 

427

 

 

 

 

 

427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

$

 

$

24,023

 

$

73,672

 

$

70,239

 

$

1,209

 

 

 

$

 

169,143

 

 

See Notes to Consolidated Financial Statements.

 

30



 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Interest received

 

$

151,608

 

$

122,132

 

$

83,840

 

Other income received

 

7,246

 

7,324

 

6,676

 

Net change in loans held-for-sale

 

3,456

 

4,753

 

(2,886

)

Interest paid

 

(75,962

)

(53,567

)

(28,363

)

Cash paid to suppliers and employees

 

(37,784

)

(39,195

)

(29,165

)

Income tax benefit of stock options/warrants exercised

 

(440

)

(812

)

(914

)

Income taxes paid

 

(16,055

)

(13,531

)

(10,370

)

Net cash provided by operating activities

 

$

32,069

 

$

27,104

 

$

18,818

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Proceeds from maturities and principal payments on securities held-to-maturity

 

$

4,765

 

$

7,541

 

$

9,519

 

Proceeds from maturities and principal payments on securities available-for-sale

 

51,794

 

32,456

 

24,152

 

Purchases of securities held-to-maturity

 

(4,441

)

(8,100

)

(12,151

)

Purchases of securities available-for-sale

 

(175,844

)

(91,341

)

(32,715

)

Sales of securities available-for-sale

 

35,000

 

 

 

Net increase in loans made to customers

 

(298,615

)

(363,978

)

(348,246

)

Purchase of bank premises and equipment

 

(5,427

)

(3,182

)

(2,110

)

Net cash used in investing activities

 

$

(392,768

)

$

(426,604

)

$

(361,551

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net increase in demand, NOW, money market and savings accounts

 

$

84,551

 

$

108,314

 

$

57,672

 

Net increase in time deposits

 

178,673

 

254,120

 

214,866

 

Net increase in securities sold under agreement to repurchase and federal funds purchased

 

73,663

 

37,077

 

58,587

 

Net increase in other borrowed funds

 

25,000

 

 

 

(Decrease) increase in trust preferred capital notes

 

(3,100

)

 

25,774

 

Proceeds from exercise of stock options and warrants

 

1,197

 

2,418

 

1,690

 

Cash paid in lieu of fractional shares

 

(12

)

(3

)

(6

)

Net cash provided by financing activities

 

$

359,972

 

$

401,926

 

$

358,583

 

(Decrease) increase in cash and cash equivalents

 

$

(727

)

$

2,426

 

$

15,850

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

Beginning

 

36,068

 

33,642

 

17,792

 

Ending

 

$

35,341

 

$

36,068

 

$

33,642

 

 

See Notes to Consolidated Financial Statements.

 

31



 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

25,787

 

$

24,508

 

$

19,667

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,995

 

1,443

 

1,268

 

Provision for loan losses

 

4,340

 

4,406

 

3,772

 

Stock based compensation expense

 

427

 

257

 

161

 

Deferred tax benefit

 

(2,087

)

(1,580

)

(1,196

)

Amortization of security premiums and accretion of discounts, net

 

(394

)

(395

)

(193

)

Origination of loans held-for-sale

 

(158,026

)

(174,856

)

(202,344

)

Sale of loans

 

160,246

 

176,551

 

197,187

 

Gain on sale of loans

 

1,236

 

3,058

 

2,271

 

Gain on the sale of OREO

 

(638

)

 

 

Increase in other assets

 

(1,216

)

(6,636

)

(1,009

)

(Decrease) increase in other liabilities

 

(483

)

193

 

231

 

Increase in accrued interest receivable

 

(2,136

)

(2,765

)

(2,445

)

Increase in accrued interest payable

 

3,018

 

2,920

 

1,448

 

Net cash provided by operating activities

 

$

32,069

 

$

27,104

 

$

18,818

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing Activities:

 

 

 

 

 

 

 

Unrealized gain (loss) on securities

 

$

2,912

 

$

1,312

 

$

(1,566

)

OREO transferred from loans

 

$

1,862

 

$

 

$

 

Loans made on the disposition of OREO

 

$

2,500

 

$

 

$

 

 

See Notes to Consolidated Financial Statements.

 

32



 

Notes to Consolidated Financial Statements

 

Note 1. Nature of Banking Activities and Significant Accounting Policies

 

Business

 

On December 22, 1999, Virginia Commerce Bancorp, Inc. (the “Company”) became the holding company for Virginia Commerce Bank (the “Bank”). The Company acquired the Bank through a share exchange in which the stockholders of the Bank received one share of the Company for each share of the Bank. The exchange was a tax-free transaction for federal income tax purposes. The merger was accounted for on the same basis as a pooling-of-interests.

 

The Company provides loan and deposit products to commercial and retail customers in the Washington Metropolitan Area, with the primary emphasis on Northern Virginia. The loan portfolio is generally collateralized by assets of the customers and is expected to be re-paid from cash flows or proceeds from the sale of selected assets of the borrowers.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank, VCBI Capital Trust I, VCBI Capital Trust II, VCBI Capital Trust III and Northeast Land and Investment Company.  In consolidation, all significant intercompany accounts and transactions have been eliminated. FASB Interpretation No. 46 (R) requires that the Company no longer eliminate through consolidation the equity investments in VCBI Capital Trust I, II and III, by the parent company, Virginia Commerce Bancorp, Inc, which approximated $1.2 million at December 31, 2007. The subordinated debt of the trusts is reflected as a liability of the Company, and the common securities of the trusts as an other asset.

 

Risks and Uncertainties

 

In its normal course of business, the Company encounters two significant types of risk: economic and regulatory.  There are three main components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice more rapidly or on a different basis than its interest-earning assets.  Credit risk is the risk of default on the Company’s loan portfolio that results from the borrowers’ inability or unwillingness to make contractually required payments.  Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

 

The determination of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.  Management believes that, as of December 31, 2007, the allowance for loan losses is adequate based on information currently available.  A worsening or protracted economic decline or substantial increase in interest rates, would increase the likelihood of losses due to credit and market risks and could create the need for substantial increases to the allowance for loan losses.  The Company is subject to the regulations of various regulatory agencies, which can change significantly from year to year.  In addition, the Company undergoes periodic examinations by regulatory agencies, which may subject it to further changes based on the regulators’ judgments about information available to them at the time of their examination.

 

Securities

 

Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost.  Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.  Restricted stocks, such as Federal Reserve Bank stock, Federal Home Bank stock, and Community Bankers Bank stock, are carried at cost.

 

Purchased premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent

 

33



 

and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Loans Held-for-Sale

 

Loans held-for-sale are carried at the lower of cost or market, determined in the aggregate.  Market value considers commitment agreements with investors and prevailing market prices.  Loans originated by the Company’s mortgage banking division and held-for-sale to outside investors, are done on a pre-sold basis and servicing released. Gains and losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

 

Loans

 

The Company grants mortgage, commercial and consumer loans to customers.  A substantial portion of the loan portfolio is represented by real estate loans.  The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions and real estate climate of the Company’s market area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The accrual of interest on real estate and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in the process of collection.  Installment loans are typically charged-off no later than 180 days past due.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Allowance for Loan Losses

 

The allowance for loan losses is established to address potential losses that could occur through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

Our allowance for loan losses has three basic components:  the specific allowance, the formula allowance and the unallocated allowance.  Each of these components is determined based upon estimates that can and do change when the actual events occur.  The specific allowance is used to individually allocate an allowance for loans identified as impaired. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the

 

34



 

principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. These factors are combined to estimate the probability and severity of inherent losses.  When impairment is identified, then a specific reserve may be established based on the Company’s calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. The formula allowance is used to provide additional reserves within a loan category for impaired loans where a specific reserve was not allocated. 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).  Each loan type is assigned an allowance factor based on management’s estimate of the associated risk, complexity and size of the individual loans within the particular loan category.  Classified loans are assigned a higher allowance factor than non-rated loans due to management’s concerns regarding their collectibility or management’s knowledge of particular elements surrounding the borrower.  Allowance factors grow with the worsening of the internal risk rating.  The unallocated formula is used to estimate the loss of non-classified loans. These un-criticized loans are also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, quality of the loan review system and the effect of external factors (i.e. competition and regulatory requirements). The factors assigned differ by loan type.  The unallocated allowance recognizes potential losses whose impact on the portfolio has yet to be recognized in either the formula or specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor. See Note 4 for information regarding the allowance for loan losses.

 

Bank Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation and amortization.  Land is carried at cost. Furniture, fixtures, equipment and computer software are depreciated over their estimated useful lives, generally from three to seven years; leasehold improvements are depreciated over the term of the respective leases or the estimated useful life of the leasehold improvement.  Depreciation and amortization are recorded on the straight-line and declining-balance methods.

 

Costs of maintenance and repairs are charged to expense as incurred.  The costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate.

 

Income Taxes

 

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.

 

35



 

Advertising Cost

 

The Company follows the policy of charging the production costs of advertising to expense as incurred. Total advertising expense was $500 thousand, $596 thousand and $545 thousand in 2007, 2006 and 2005, respectively.

 

Use of Estimates

 

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of deferred tax assets.

 

Rate Lock Commitments

 

The Company enters into commitments to originate mortgage loans whereby the interest rate on the loans is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and the sale of the loan generally ranges from thirty to ninety days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. Because of this high correlation, no gain or loss occurs on the rate lock commitments.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold.  Generally, federal funds are sold and purchased for one-day periods.

 

Earnings Per Share

 

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants, and are determined using the treasury method.

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

Stock Compensation Plan

 

The Company has a stock-based compensation plan which is accounted for in accordance with FAS No. 123 (R). Through 2005, the Company accounted for the plan under the recognition and measurement principles of APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, no stock-based compensation expense relating to the grant of options was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. On December 29, 2005, the Company accelerated the vesting of all outstanding options under the plan in order to avoid a total of approximately $2.3 million in expense in future periods following the adoption of FASB Statement No. 123 (R) effective January 1, 2006, using the modified prospective method.  Due to this modification of vesting terms, the Company recognized $161 thousand in stock based compensation expense in December 2005.  The following table illustrates the effect on net income and earnings per share for the twelve months ended December 31, 2005, had the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” been adopted in 2005.

 

36



 

(Dollars in thousands except per share amounts)

 

2005

 

Net income, as reported

 

$

19,667

 

 

 

 

 

Deduct: total stock-based employee compensation expense determined based on fair value method of awards, net of tax

 

(3,124

)

Pro forma net income

 

$

16,543

 

 

 

 

 

Basic earnings per share:

 

 

 

As reported

 

$

0.85

 

Pro forma

 

$

0.72

 

 

 

 

 

Diluted earning per share:

 

 

 

As reported

 

$

0.79

 

Pro forma

 

$

0.66

 

 

See Note 12 to the Consolidated Financial Statements for further information regarding the Company’s stock-based compensation plan.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years.  The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  The Company does not expect the implementation of SFAS 157 to have a material impact on its consolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances.  The Company does not expect the implementation of SFAS 159 to have a material impact on its consolidated financial statements.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions.  SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008.  The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements.

 

37



 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS 160).  The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements.  SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008, with early adoption prohibited.  The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

 

In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.”  This consensus concludes that for a split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee.  The consensus is effective for fiscal years beginning after December 15, 2007, with early application permitted.  The Company does not expect the implementation of EITF 06-4 to have a material impact on its consolidated financial statements.

 

In November 2006, the EITF issued “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10).  In this Issue, a consensus was reached that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee.  A consensus also was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement.  The consensuses are effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years, with early application permitted.  The Company does not expect the implementation of EITF 06-10 to have a material impact on its consolidated financial statements.

 

In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.  The Company does not expect the implementation of SAB 109 to have a material impact on its consolidated financial statements.

 

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (SAB 110).  SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates.  The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007.  Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  The Company does not expect the implementation of SAB 110 to have a material impact on its consolidated financial statements.

 

Stockholders’ Equity

 

A 10% stock dividend was declared on March 28, 2007. This transaction was recorded by increasing common stock by $2.2 million, increasing surplus by $41.1 million and decreasing retained earnings by $43.3 million.

 

A three-for-two stock split in the form of a 50% stock dividend was declared on May 12, 2006.  This transaction was recorded by increasing common stock by $7.1 million and decreasing surplus by $7.1 million.

 

A five-for-four stock split in the form of a 25% stock dividend was declared on March 23, 2005. This transaction was recorded by increasing common stock by $2.8 million and decreasing surplus by $2.8 million.

 

38



 

Note 2.  Securities

 

Amortized cost and fair value of the securities available-for-sale and held-to-maturity as of December 31, 2007 and 2006, are as follows (dollars in thousands):

 

December 31, 2007

 

Amortized
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized 
(Losses)

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Available–for-sale:

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

240,329

 

$

2,737

 

$

(101

)

$

242,965

 

Domestic corporate debt obligations

 

9,241

 

 

(697

)

8,544

 

Obligations of states and political subdivisions

 

23,079

 

137

 

(215

)

23,001

 

Restricted stock:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank

 

1,442

 

 

 

1,442

 

Federal Home Loan Bank

 

4,631

 

 

 

4,631

 

Community Bankers’ Bank

 

55

 

 

 

55

 

 

 

$

278,777

 

$

2,874

 

$

(1,013

)

$

280,638

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

33,725

 

$

100

 

$

(124

)

$

33,701

 

Obligations of state and political subdivisions

 

11,874

 

111

 

(10

)

11,975

 

 

 

$

45,599

 

$

211

 

$

(134

)

$

45,676

 

 

December 31, 2006

 

Amortized 
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized 
(Losses)

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Available–for-sale:

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

175,234

 

$

329

 

$

(1,489

)

$

174,074

 

Domestic corporate debt obligations

 

6,000

 

55

 

 

6,055

 

Obligations of states and political subdivisions

 

3,607

 

60

 

(8

)

3,659

 

Restricted stock:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank

 

1,442

 

 

 

1,442

 

Federal Home Loan Bank

 

3,034

 

 

 

3,034

 

Community Bankers’ Bank

 

55

 

 

 

55

 

 

 

$

189,372

 

$

444

 

$

(1,497

)

$

188,319

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

35,520

 

$

21

 

$

(705

)

$

34,836

 

Obligations of state and political subdivisions

 

10,364

 

56

 

(174

)

10,246

 

 

 

$

45,884

 

$

77

 

$

(879

)

$

45,082

 

 

39



 

The amortized cost and fair value of the securities, including restricted stock, as of December 31, 2007 by contractual maturity, are shown below (dollars in thousands):

 

December 31, 2007

 

Amortized Cost

 

Fair Value

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

Due within one year

 

$

8,057

 

$

8,114

 

Due after one year through five years

 

139,468

 

140,989

 

Due after five years through ten years

 

36,708

 

37,157

 

Due after ten years

 

88,416

 

88,250

 

Restricted stock

 

6,128

 

6,128

 

 

 

$

278,777

 

$

280,638

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

Due within one year

 

$

155

 

$

156

 

Due after one year through five years

 

24,121

 

24,116

 

Due after five years through ten years

 

12,398

 

12,422

 

Due after ten years

 

8,925

 

8,982

 

 

 

$

45,599

 

$

45,676

 

 

The amortized cost of securities pledged as collateral for repurchase agreements, certain public deposits, and other purposes were $274.0 million and $159.2 million at December 31, 2007 and 2006, respectively.

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Provided below is a summary of securities which were in an unrealized loss position at December 31, 2007 and 2006. Of the total securities in an unrealized loss position at December 31, 2007, 53.2%, or twelve positions, were U.S. Government Agency securities with maturities ranging from two to twenty-eight years, 30.1%, or twenty-five positions were obligations of states and political subdivisions with maturities ranging from two years to twenty years and 16.7%, or four positions, were corporate debt obligations with maturities ranging from five to ten years.   As the Company has the ability and intent to hold these securities until maturity, or until such time as the value recovers, no declines are deemed to be other-than-temporary.  In addition, there has been no deterioration in the ratings for any of the securities.

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

At December 31, 2007
(Dollars in thousands)

 

Fair 
Value

 

Unrealized 
Losses

 

Fair 
Value

 

Unrealized 
Losses

 

Fair 
Value

 

Unrealized 
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

 

$

 

$

10,682

 

$

(101

)

$

10,682

 

$

(101

)

Domestic Corporate Debt obligations

 

8,544

 

(697

)

 

 

8,544

 

(697

)

Obligations of states/political subdivisions

 

12,886

 

(212

)

569

 

(3

)

13,455

 

(215

)

 

 

$

21,430

 

$

(909

)

$

11,251

 

$

(104

)

$

32,681

 

$

(1,013

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

 

$

 

$

16,611

 

$

(124

)

$

16,611

 

$

(124

)

Obligations of states/political subdivisions

 

 

 

1,994

 

(10

)

1,994

 

(10

)

 

 

$

 

$

 

$

18,605

 

$

(134

)

$

18,605

 

$

(134

)

 

40



 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

At December 31, 2006
(Dollars in thousands)

 

Fair 
Value

 

Unrealized 
Losses

 

Fair 
Value

 

Unrealized 
Losses

 

Fair 
Value

 

Unrealized 
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

24,762

 

$

(50

)

$

81,174

 

$

(1,439

)

$

105,936

 

$

(1,489

)

Obligations of states/political subdivisions

 

2,245

 

(8

)

 

 

2,245

 

(8

)

 

 

$

27,007

 

$

(58

)

$

81,174

 

$

(1,439

)

$

108,181

 

$

(1,497

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency obligations

 

$

1,521

 

$

(8

)

$

28,248

 

$

(697

)

$

29,769

 

$

(705

)

Obligations of states/political subdivisions

 

2,128

 

(38

)

4,802

 

(136

)

6,930

 

(174

)

 

 

$

3,649

 

$

(46

)

$

33,050

 

$

(833

)

$

36,699

 

$

(879

)

 

Note 3. Loans

 

Major classifications of loans, excluding loans held-for-sale, are summarized as follows (dollars in thousands):

 

 

 

2007

 

2006

 

Commercial

 

$

238,670

 

$

190,527

 

Real estate - 1-4 family residential

 

266,365

 

193,247

 

Real estate - multifamily residential

 

56,952

 

57,913

 

Real estate - non-farm, nonresidential

 

835,503

 

689,110

 

Real estate - construction

 

544,290

 

515,040

 

Consumer

 

8,714

 

6,997

 

Farmland

 

1,468

 

 

Total Loans

 

$

1,951,962

 

$

1,652,834

 

Less unearned income

 

4,961

 

4,906

 

Less allowance for loan losses

 

22,260

 

18,101

 

Loans, net

 

$

1,924,741

 

$

1,629,827

 

 

As of December 31, 2007 and 2006, there were $238 thousand and $665 thousand, respectively, in checking account overdrafts that were reclassified on the consolidated balance sheets as loans.

 

Note 4.  Allowance for Loan Losses

 

An analysis of the allowance for loan losses for the years ended December 31, 2007, 2006 and 2005 is shown below (dollars in thousands):

 

 

 

2007

 

2006

 

2005

 

Allowance, at beginning of period

 

$

18,101

 

$

13,821

 

$

10,402

 

Provision charged against income

 

4,340

 

4,406

 

3,772

 

Recoveries added to reserve

 

31

 

63

 

9

 

Losses charged to reserve

 

(212

)

(189

)

(362

)

Allowance, at end of period

 

$

22,260

 

$

18,101

 

$

13,821

 

 

41



 

Information about impaired loans as of and for the years ended December 31, 2007, 2006 and 2005, is as follows (dollars in thousands):

 

 

 

2007

 

2006

 

2005

 

Non-accrual loans for which a specific allowance has been provided

 

$

3,826

 

$

3,920

 

$

1,994

 

Non-accrual loans for which no specific allowance has been provided

 

 

 

 

Other impaired loans for which no specific allowance has been provided

 

15,444

 

11,619

 

4,647

 

Total impaired loans

 

$

19,270

 

$

15,539

 

$

6,641

 

Allowance provided for impaired loans, included in the allowance for loan losses

 

1,228

 

507

 

245

 

Average balance in impaired loans

 

$

17,404

 

$

11,090

 

$

4,514

 

Interest income recognized

 

$

934

 

$

871

 

$

318

 

 

If interest on non-accrual loans had been accrued as interest income, such income would have approximated $139 thousand, $5 thousand and $21 thousand for the years ended December 31, 2007, 2006 and 2005, respectively. There were $579 thousand in loans past due 90 days or more, and still accruing interest at December 31, 2007. There were no loans past due 90 days or more, and still accruing interest at December 31, 2006.

 

Note 5. Bank Premises and Equipment, Net

 

Premises and equipment are stated at cost less accumulated depreciation at December 31, 2007 and 2006, as follows (dollars in thousands):

 

 

 

2007

 

2006

 

Land

 

$

1,839

 

$

1,839

 

Buildings

 

2,300

 

2,292

 

Furniture, fixtures and equipment

 

13,118

 

10,593

 

Leasehold improvements

 

6,344

 

3,824

 

Construction in progress

 

875

 

500

 

Total Cost

 

$

24,476

 

$

19,048

 

Less accumulated depreciation and amortization

 

11,771

 

9,775

 

Net premises and equipment

 

$

12,705

 

$

9,273

 

 

Depreciation and amortization expense on premises and equipment amounted to $2.0 million, $1.4 million and $1.3 million in 2007, 2006 and 2005, respectively.

 

Note 6. Time Deposits

 

The aggregate amount of time deposits with a minimum denomination of $100 thousand each, was approximately $572.5 million and $490.7 million at December 31, 2007 and 2006, respectively. Scheduled maturities of all time deposits at December 31, 2007, are as follows (dollars in thousands):

 

2008

 

$

1,078,415

 

2009

 

33,608

 

2010

 

12,539

 

2011

 

4,741

 

2012

 

8,877

 

 

 

$

1,138,180

 

 

Note 7. Securities Sold Under Agreements To Repurchase and Federal Funds Purchased

 

Securities sold under agreements to repurchase, which are classified as secured borrowings, represent both funds of significant commercial demand deposit customers, which mature one day from the transaction date, and secured transactions with other banks. As of December 31, 2007, the Company had $125 million in funds from customers

 

42



 

and $75 million in funds from other banks. Of this $75 million, $50 million matures on November 2, 2012, and $25 million matures on March 22, 2014. Both of these transactions are callable by the other bank on any quarterly interest payment date.  At December 31, 2006, customers funds were $108 million and there were no funds from other banks. Securities sold under agreements to repurchase are reflected at the amount of cash received and are collateralized by securities in the Company’s investment securities portfolio.  As of December 31, 2007 and 2006 there were $22 million  and $40.5 million in Federal funds purchased, respectively.

 

Note 8. Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia.  With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2004.

 

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007 with no impact on the financial statements.

 

Net deferred tax assets consist of the following components at December 31, 2007 and 2006 (dollars in thousands):

 

 

 

2007

 

2006

 

Deferred tax assets:

 

 

 

 

 

Allowance for loan losses

 

$

7,918

 

$

6,336

 

Bank premises and equipment

 

454

 

365

 

Deferred compensation

 

183

 

 

Accrued Rents

 

171

 

 

Non-accrual loans

 

49

 

2

 

Non-qualified incentive stock options

 

21

 

6

 

Securities available-for-sale

 

 

368

 

 

 

$

8,796

 

$

7,077

 

Deferred tax liabilities:

 

 

 

 

 

Securities available-for-sale

 

651

 

 

Federal Home Loan Bank stock

 

2

 

2

 

 

 

653

 

2

 

Net deferred tax assets

 

$

8,143

 

$

7,075

 

 

The provision for income tax and its components for the years ending December 31, 2007, 2006, and 2005 are as follows (dollars in thousands):

 

December 31,

 

2007

 

2006

 

2005

 

Current tax expense

 

$

15,306

 

$

14,505

 

$

11,634

 

Deferred tax benefit

 

(2,087

)

(1,580

)

(1,196

)

 

 

$

13,219

 

$

12,925

 

$

10,438

 

 

The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income from continuing operations for the years ended December 31, 2007, 2006 and 2005, due to the following (dollars in thousands):

 

December 31,

 

2007

 

2006

 

2005

 

Computed “expected” tax expense at 35%

 

$

13,652

 

$

13,101

 

$

10,536

 

Increase (decrease) in income taxes resulting from:

 

 

 

 

 

 

 

Nondeductible expense

 

274

 

53

 

75

 

Nontaxable income

 

(707

)

(229

)

(173

)

 

 

$

13,219

 

$

12,925

 

$

10,438

 

 

43



 

Note 9. Earnings Per Share

 

The following shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of diluted potential common stock. For the years reported, the weighted average number of shares have been adjusted to give effect to stock dividends and splits.  Potential dilutive common stock had no effect on income available to common stockholders.

 

 

 

2007

 

2006

 

2005

 

 

 

Shares

 

Per Share
Amount

 

Shares

 

Per Share
Amount

 

Shares

 

Per Share
Amount

 

Basic earnings per share

 

23,930,220

 

$

1.08

 

23,600,762

 

$

1.04

 

23,117,635

 

$

0.85

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

959,966

 

 

 

1,353,560

 

 

 

1,614,450

 

 

 

Diluted earnings per share

 

24,890,186

 

$

1.04

 

24,954,322

 

$

0.98

 

24,732,085

 

$

0.79

 

 

Stock options for 534,590 and 172,040 shares of common stock were not included in computing diluted earnings per share in 2007 and 2006, respectively, because their effects were anti-dilutive.  There were no anti-dilutive shares in 2005.

 

Note 10. Commitments and Contingencies

 

The Company leases office space for twenty-two of its branch locations, its operations, mortgage lending, and construction lending departments and has entered into leases for 5 additional branch locations to be opened between 2008 and 2009. These non-cancellable agreements, which expire through June 2034, in some instances require payment of certain operating charges. Generally, all leases contain renewal options of one to three additional five-year terms.  The total minimum lease commitment, adjusted for the effect of annual fixed increases or the Consumer Price Index, at December 31, 2007, is $44.9 million, due as follows (dollars in thousands):

 

Due in the year ending December 31,

 

2008

 

$

3,536

 

 

 

2009

 

3,741

 

 

 

2010

 

3,984

 

 

 

2011

 

3,379

 

 

 

2012

 

3,541

 

 

 

Thereafter

 

$

26,699

 

 

The total lease expense was $3.1 million, $2.5 million and $1.9 million in 2007, 2006 and 2005, respectively. In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying financial statements.  The Company does not anticipate any material losses as a result of the commitments and contingent liabilities.

 

Note 11. Loans to Officers and Directors

 

Officers, directors and/or their related business interests are loan customers in the ordinary course of business.  In management’s opinion, these loans are made on substantially the same terms as those prevailing at the time for comparable loans with other persons and do not involve more than normal risk of collectibility or present other unfavorable features.  The aggregate amount outstanding on such loans at December 31, 2007 and 2006, was $20.2 million and $28.2 million, respectively. During 2007, new loans and advances amounted to $429 thousand and repayments of $8.5 million were made.

 

Note 12. Stock Option Plan

 

The Company’s current plan, adopted May 29, 1998, and amended and restated in April 2007, is a qualified Incentive Stock Option Plan, that is shareholder approved, and provides for the granting of options to purchase up to 2,298,072 shares of common stock at a price to be determined by the Board of Directors at the date of grant, but in any event no less than 100% of the fair market value. Options outstanding prior to May 29, 1998 were granted under the Company’s plan adopted in 1988 which was replaced by the current plan. Options are awarded to employees and

 

44



 

the Board of Directors of the Company at the discretion of the Board of Directors, and expire ten years from the grant date. Options granted under the current plan, through December 31, 2002, vested over three years, while options granted since December 31, 2002, vested over five years.

 

Included in salaries and employee benefits expense for the twelve months ended December 31, 2007, is $421 thousand of stock-based compensation expense which is based on the estimated fair value of 305,050 options granted between January 2006 and December 2007, amortized on a straight-line basis over a five year requisite service period. As of December 31, 2007, there was $1.6 million remaining of total unrecognized compensation expense related to these option awards which will be recognized over the remaining requisite service period. There was $217 thousand and $161 thousand in stock option expense in 2006 and 2005, respectively.

 

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model and using the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. During 2006, the Company took into consideration guidance under SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions.  The weighted average expected option term for 2006 and 2007 reflects the application of the simplified method set out in SAB 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. For 2005, expected term was based on the grant expiration date.

 

 

 

2007

 

2006

 

2005

 

Expected volatility

 

23.59%

 

21.91%

 

21.98%

 

Expected dividends

 

.00%

 

.00%

 

.02%

 

Expected term (in years)

 

7.5

 

7.5

 

10.0

 

Risk-free rate

 

3.70% to 4.93%

 

4.42% to 4.75%

 

4.22%

 

 

A summary of option activity under the Plan as of December 31, 2007, and changes during the year then ended is presented below:

 

Options

 

Number
of Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

($000)

 

Outstanding at December 31, 2006

 

1,974,786

 

$

6.30

 

 

 

 

 

Granted

 

160,207

 

$

17.14

 

 

 

 

 

Exercised

 

304,972

 

$

2.37

 

 

 

 

 

Forfeited

 

11,380

 

$

17.46

 

 

 

 

 

Outstanding at December 31, 2007

 

1,818,641

 

$

7.84

 

4.9 years

 

$

7,076

 

Exercisable at December 31, 2007

 

1,532,999

 

$

5.98

 

4.2 years

 

$

8,816

 

 

The weighted-average grant date fair value of options granted during the years 2007, 2006 and 2005 was $6.74, $7.70 and $6.67, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005, was $4.3 million, $8.8 million and $4.8 million, respectively.

 

45



 

A further summary about the options outstanding and exercisable at December 31, 2007 is provided in the following table:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise
Prices

 

Number
Outstanding

 

Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Number
Exercisable

 

Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

$ 1.00 to $ 2.31

 

631,143

 

2.0 years

 

$

1.59

 

631,143

 

2.0 years

 

$

1.59

 

$ 2.80 to $ 5.46

 

409,454

 

4.6 years

 

4.02

 

409,454

 

4.6 years

 

4.02

 

$ 5.47 to $ 7.82

 

5,155

 

5.4 years

 

7.52

 

5,155

 

5.4 years

 

7.52

 

$ 7.83 to $21.59

 

772,889

 

7.5 years

 

14.96

 

487,247

 

6.8 years

 

13.29

 

$ 1.00 to $21.59

 

1,818,641

 

4.9 years

 

$

7.84

 

1,532,999

 

4.2 years

 

$

5.98

 

 

All options granted, available under the current Plan, and exercisable have been adjusted for giving retroactive effect to a 10% stock dividend in May 2007. In January 2008, a total of 209,565 options were granted to sixty-three officers and six outside directors of the Company at an exercise price of $11.74 per share and with a five year vesting period.

 

In September 2003, the Company adopted an Employee Stock Purchase Plan. Under the plan a total of 355,929 shares of common stock, as adjusted for stock dividends and splits, were reserved for issuance to eligible employees at a price equal to at least 85% of the fair market value of the shares of common stock on the date of grant. Grants each year expire at the end of that fiscal year if not exercised by the employee. On September 24, 2003, eligible employees were granted the right to purchase 19,026 shares at a price of $23.18, as adjusted, which was equal to 100% of the fair market value of the shares at that time. Of the total grant, 8,433 were purchased. On January 10, 2004, rights to purchase 27,035 shares of common stock were granted at a price of $21.38, as adjusted, which was equal to 85% of the fair market value of the shares at that time. Of the total grant, 6,058 were purchased. On January 18, 2005, rights to purchase 28,551 shares of common stock were granted at a price of $19.72, as adjusted, which was equal to 85% of the fair market value of the shares at that time. Of the total grant, 11,096 were purchased. On January 11, 2006, rights to purchase 36,278 shares of common stock were granted at a price of $17.24, as adjusted, which was equal to 85% of the fair market value of the shares at that time.  Of the total grant, 13,265 shares were purchased. On January 16, 2007, rights to purchase 54,051 shares of common stock were granted at a price of $14.95, as adjusted, which was equal to 85% of the fair market value of the shares at that time.  Of the total grant, 2,017 shares were purchased.

 

Included in salaries and employee benefits expense for the twelve months ended December 31, 2007 and 2006, is $6 thousand and $40 thousand, respectively of stock-based compensation expense related to the 15% discount on the 2,017 shares purchased by Company employees in 2007, and the 13,265 shares purchased in 2006.  There was no stock-based compensation cost recognized in 2005 for shares purchased under the plan. On February 1, 2008, rights to purchase 100,435 shares of common stock were granted at a price of $10.23, which was equal to 85% of the fair market value of the shares at that time.

 

Note 13. Director Compensation Plan

 

In April 1996, the Company granted an aggregate of 185,286 warrants at an exercise price of $3.56 to the outside Directors.  In January 1998, the Company granted 51,990 warrants at an exercise price of $2.89 to an additional outside Director. All warrants have been restated giving retroactive effect to all stock splits and or stock dividends through their exercise date. Of the total warrants granted in April 1996, 46,321 were exercised in 2002, and 138,965 were exercised in 2003. The 51,990 warrants granted in January 1998 were exercised in January 2005.

 

In addition to the warrants, the outside Directors, have been awarded a total of 264,061, 99,683, 41,679, 70,785, 44,856, 28,875, 19,800 and 16,200 options under the Company’s 1998 Incentive Option Plan in 2000, 2001, 2002, 2003, 2004, 2005, 2006 and 2007 respectively, as adjusted for all stock splits and or stock dividends through 2007. In January 2008, each of the outside Directors were awarded an additional 6,000 options. All director options are included in the tables under Note 12.

 

46



 

Note 14. Other Borrowed Funds and Lines of Credit

 

The Bank maintains a $350.8 million line of credit with the Federal Home Loan Bank of Atlanta.  The interest rate and term of each advance from the line is dependent upon the advance and commitment type.  Advances on the line are secured by all of the Bank’s qualifying first liens and home equity lines-of-credit, on one-to-four unit single-family dwellings.  As of December 31, 2007, the book value of these qualifying loans totaled approximately $124.9 million and the amount of available credit using this collateral was $78 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 December 31, 2007, 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. At December 31, 2006, there were no outstanding advances. The Bank has additional short-term lines of credit totaling $115 million with nonaffiliated banks at December 31, 2007, on which $22 million was outstanding at that date.

 

Note 15. Trust Preferred Capital Notes

 

On November 13, 2002, the Company completed a private placement issuance of $3.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust I) which issued $100 thousand in common equity to the Company. The securities bear a floating rate of interest, adjusted semi-annually, of 340 basis points over six month Libor, with a maximum rate of 12.0% until November 15, 2007. The securities were redeemed in November 2007.  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 8.02%, with a maximum rate of 11.9% until December 30, 2007. These securities are callable at par beginning 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.

 

The principal asset of each trust is a similar amount of the Company’s 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 Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, resulting in a deferral of distribution payments on the related trust preferred securities.

 

The Trust Preferred Securities may be included in Tier 1 capital for regulatory capital adequacy purposes up to 25.0% of Tier 1 capital after its inclusion. The portion of the trust preferred securities not qualifying as Tier 1 capital may be included as part of total qualifying capital in Tier 2 capital.  Commencing March 31, 2009, the aggregate amount of qualifying trust preferred securities which may be included in Tier 2 capital, along with other restricted core capital elements, is limited to 50% of Tier 1 capital, net of goodwill and certain other intangible assets.

 

Note 16. Financial Instruments With Off-Balance-Sheet Risk

 

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual or notional amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

47



 

A summary of the contract or notional amount of the Company’s exposure to off-balance-sheet risk as of December 31, 2007 and 2006, is as follows:

 

(Dollars in thousands)

 

2007

 

2006

 

Financial instruments whose contract amounts represent credit risk:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

104,480

 

$

50,336

 

 

 

 

 

 

 

Standby letters of credit and financial guarantees written

 

$

53,734

 

$

29,378

 

 

 

 

 

 

 

Unfunded lines of credit

 

$

543,714

 

$

450,049

 

 

Commitments to extend credit are 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.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.  Collateral held varies but may include cash, marketable securities, accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

 

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds certificates of deposit, marketable securities, and business assets as collateral supporting those commitments for which collateral is deemed necessary.

 

The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2007, the Company originated $158.0 million and sold $160.2 million to investors, compared to $174.9 million originated and $176.6 million sold in 2006. Most contracts with investors contain certain recourse language that may vary from 90 days up to one year. In general, the company may be required to repurchase a previously sold mortgage loan or indemnify the investor if there is major non-compliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been re-sold as part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor has defaulted early in the loan term. The potential default period is approximately twelve months after sale of the loan to the investor. Mortgages subject to recourse are collateralized by single-family residential properties, have loan-to-value ratios of 80% or less, or have private mortgage insurance or are insured or guaranteed by an agency of the United States government.

 

At December 31, 2007, the Bank had rate lock commitments to originate and sell mortgage loans amounting to $11.9 million which includes $4.3 million of those commitments closed and were held-for-sale. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Bank does not expect any counterparty to fail to meet its obligation.

 

Note 17. Concentrations of Credit Risk

 

The Bank does a general banking business, serving the commercial and personal banking needs of its customers. The Bank’s market area consists of the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, 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 Company’s loans are made within its market area.

 

The ultimate collectibility of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of the market area. The Company’s operating results are therefore closely related to the economic conditions and trends in the Metropolitan Washington, D.C. area.

 

48



 

At December 31, 2007 and 2006, there were $1.44 billion and $1.26 billion, or 73.7% and 76.4%, respectively of total loans concentrated in commercial real estate. Commercial real estate for purposes of this note includes all construction loans, loans secured by 5+ family residential properties and loans secured by non-farm, non-residential properties. At December 31, 2007 and 2006, construction loans represented 27.9% and 31.2% of total loans, loans secured by 5+ family residential properties represented 2.9% and 3.5%, and loans secured by non-farm, non-residential properties represented 42.8% and 41.7%, respectively.  Construction loans at December 31, 2007 and 2006 included $302.4 million and $347.5 million in loans to commercial builders of single family housing in the Northern Virginia market, representing 15.5% and 21.0% of total loans, respectively.

 

The Bank has established formal policies relating to the credit and collateral requirements in loan originations including policies that establish limits on various loan types as a percentage of total loans and total capital.  Loans to purchase real property are generally collateralized by the related property with limitations based on the property’s appraised value. Credit approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower, guarantors and or the individual project. Management considers the concentration of credit risk to be minimal due to the diversification of borrowers over numerous business and industries.

 

Note 18. Fund Restrictions and Reserve Balance

 

The transfer of funds from the Bank to the Company in the form of loans, advances, and cash dividends are restricted by Federal and State regulatory authorities. As of December 31, 2007, the aggregate amount of unrestricted funds that could be transferred in the form of a cash dividend totaled approximately $57.3 million, or 33.9%, of the consolidated net assets of the Company.

 

As members of the Federal Reserve System, the Company is required to maintain certain average reserve balances.  For the final weekly reporting period in the years ended December 31, 2007 and 2006, the aggregate amounts of daily average required balances were approximately $3.5 million and $2.9 million, respectively.

 

Note 19.  Employee Benefits

 

The Company has a 401(k) defined contribution plan covering substantially all full-time employees and provides that an employee becomes eligible to participate at the date he or she has reached the age of 21 and has completed three months of service, whichever occurs last.  Under the plan, a participant may contribute up to 15% of his or her covered compensation for the year, subject to certain limitations.  The Company may also make, but is not required to make, a discretionary contribution for each participant out of its current or accumulated net profits.  The amount of contribution, if any, is determined on an annual basis by the Board of Directors.  Contributions made by the Company totaled $526 thousand, $347 thousand and $294 thousand for the years ended December 31, 2007, 2006 and 2005, respectively.

 

Note 20.  Disclosures About Fair Value of Financial Instruments and Interest Rate Risk

 

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.

 

Securities

 

For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. 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 selling price arranged by arms-length contracts with third parties.

 

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

 

49



 

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 December 31, 2007 and 2006, 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 Company’s financial instruments are as follows:

 

 

 

2007

 

2006

 

(Dollars in thousands)

 

Carrying
Amount

 

Estimated Fair
Value

 

Carrying
Amount

 

Estimated Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

35,341

 

$

35,341

 

$

36,068

 

$

36,068

 

Securities

 

326,237

 

326,314

 

234,203

 

233,401

 

Loans held-for-sale

 

4,339

 

4,339

 

7,796

 

7,796

 

Loans

 

1,924,741

 

2,015,487

 

1,629,827

 

1,674,244

 

Accrued interest receivable

 

11,451

 

11,451

 

9,315

 

9,315

 

 

 

 

2007

 

2006

 

(Dollars in thousands)

 

Carrying
Amount

 

Estimated Fair
Value

 

Carrying
Amount

 

Estimated Fair
Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,869,165

 

$

1,885,014

 

$

1,605,941

 

$

1,593,494

 

Securities sold under agreements to repurchase and federal funds purchased

 

222,534

 

225,530

 

148,871

 

148,030

 

Other borrowed funds

 

25,000

 

24,977

 

 

 

Trust preferred capital notes

 

41,244

 

46,321

 

44,344

 

48,020

 

Accrued interest payable

 

8,942

 

8,942

 

5,923

 

5,923

 

 

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 Company’s 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.

 

50



 

Note 21.  Capital Requirements

 

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total Capital, Tier 1 Capital and Tier 1 Leverage Capital. Total Capital and Tier 1 Capital ratios are in reference to risk-weighted assets (as defined), and the Tier 1 Leverage Capital ratio is in reference to average assets.  Management believes, as of December 31, 2007 and 2006, that the Company and Bank met all capital adequacy requirements to which they are subject.

 

As of December 31, 2007, the Bank is categorized as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since December 31, 2007, that management believes changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and ratios are also presented in the table.

 

 

 

Actual Capital

 

Minimum Capital
Requirement*

 

Minimum To Be Well-
Capitalized Under Prompt
Corrective Action Provisions

 

As of December 31, 2007:

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

230,194

 

10.96

%

$

167,977

 

8.00

%

$

N/A

 

N/A

 

Bank

 

225,211

 

10.73

%

167,876

 

8.00

%

209,845

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

207,934

 

9.90

%

$

83,989

 

4.00

%

$

N/A

 

N/A

 

Bank

 

162,951

 

7.77

%

83,938

 

4.00

%

125,907

 

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

207,934

 

9.09

%

$

91,504

 

4.00

%

$

N/A

 

N/A

 

Bank

 

162,951

 

7.12

%

91,489

 

4.00

%

114,432

 

5.00

%

 

As of December 31, 2006:

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

201,636

 

11.57

%

$

139,425

 

8.00

%

$

N/A

 

N/A

 

Bank

 

197,432

 

11.34

%

139,308

 

8.00

%

174,136

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

183,535

 

10.53

%

$

69,712

 

4.00

%

$

N/A

 

N/A

 

Bank

 

136,331

 

7.83

%

69,654

 

4.00

%

104,481

 

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Leverage Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

183,535

 

9.61

%

$

76,393

 

4.00

%

$

N/A

 

N/A

 

Bank

 

136,331

 

7.18

%

75,950

 

4.00

%

94,938

 

5.00

%

 


* The minimum capital requirement for the Company is a guideline.

 

51



 

Note 22. Condensed Financial Statements of Parent Company

 

Balance Sheets (in thousands)

 

December 31, 2007

 

December 31, 2006

 

Assets:

 

 

 

 

 

Cash and due from banks

 

$

4,826

 

$

4,311

 

Investment in subsidiaries

 

165,405

 

136,990

 

Subordinated debt of subsidiary

 

40,000

 

43,000

 

Other assets

 

336

 

111

 

Total Assets

 

$

210,567

 

$

184,412

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

Trust preferred capital notes

 

$

41,244

 

$

44,344

 

Other liabilities

 

180

 

217

 

Total Liabilities

 

$

41,424

 

$

44,561

 

Stockholders’ Equity

 

169,143

 

139,851

 

Total Liabilities and Stockholders’ Equity

 

$

210,567

 

$

184,412

 

 

 

 

Year Ended December 31,

 

Statements Of Income (in thousands)

 

2007

 

2006

 

2005

 

Income,

 

 

 

 

 

 

 

Interest on subordinated debt

 

$

3,165

 

$

3,097

 

$

1,036

 

Expenses:

 

 

 

 

 

 

 

Interest on trust preferred capital notes

 

$

3,099

 

$

3,099

 

$

1,246

 

Other operating expense

 

1,086

 

888

 

714

 

Total Expenses

 

4,185

 

3,987

 

1,960

 

Loss before income tax (benefit) and equity in undistributed earnings of subsidiary

 

$

(1,020

)

$

(890

)

$

(924

)

Income tax (benefit)

 

(186

)

(221

)

(267

)

 

 

(834

)

(669

)

(657

)

Equity in undistributed net income of Virginia Commerce Bank

 

26,621

 

25,177

 

20,324

 

 Net Income

 

$

25,787

 

$

24,508

 

$

19,667

 

 

52



 

 

 

Year Ended December 31,

 

Statements Of Cash Flows (in thousands)

 

2007

 

2006

 

2005

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net Income

 

$

25,787

 

$

24,508

 

$

19,667

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Equity in undistributed net income of Virginia Commerce Bank

 

(26,621

)

(25,177

)

(20,324

)

Stock option expense

 

427

 

257

 

161

 

(Increase) decrease in other assets

 

(226

)

191

 

50

 

(Decrease) increase in other liabilities

 

(37

)

133

 

60

 

Net cash used in operating activities

 

$

(670

)

$

(88

)

$

(386

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Retirement (purchase) of equity interest in subsidiary

 

100

 

 

(774

)

Retirement (purchase) of debt securities

 

3,000

 

 

(25,000

)

Net cash provided by (used in) investing activities

 

$

3,100

 

$

 

$

(25,774

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net (decrease) increase in junior subordinated capital notes

 

(3,100

)

 

25,774

 

Common stock issued

 

1,197

 

2,418

 

1,690

 

Cash paid in lieu of fractional shares

 

(12

)

(3

)

(6

)

Net cash (used in) provided by financing activities

 

$

(1,915

)

$

2,415

 

$

27,458

 

Change in cash and cash equivalents

 

$

515

 

$

2,327

 

$

1,298

 

Beginning

 

4,311

 

1,984

 

686

 

Ending

 

$

4,826

 

$

4,311

 

$

1,984

 

 

53



 

Note 23. Quarterly Financial Information (Unaudited)

 

Selected financial information for the quarterly periods of 2007 and 2006 is presented below (dollars in thousands except per share data):

 

 

 

2007 Quarters

 

 

 

First

 

Second

 

Third

 

Fourth

 

Interest income

 

$

36,107

 

$

37,779

 

$

39,477

 

$

40,775

 

Interest expense

 

18,218

 

19,123

 

20,602

 

21,038

 

Net interest income

 

$

17,889

 

$

18,656

 

$

18,875

 

$

19,737

 

Provision for loan losses

 

360

 

300

 

910

 

2,770

 

Net interest income after provision for loan losses

 

$

17,529

 

$

18,356

 

$

17,965

 

$

16,967

 

Non-interest income

 

1,862

 

1,975

 

2,226

 

1,820

 

Non-interest expense

 

9,489

 

9,897

 

9,900

 

10,408

 

Income before taxes

 

$

9,902

 

$

10,434

 

$

10,291

 

$

8,379

 

Income tax expense

 

3,428

 

3,555

 

3,463

 

2,773

 

Net income

 

$

6,474

 

$

6,879

 

$

6,828

 

$

5,606

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

$

0.29

 

$

0.28

 

$

0.24

 

Diluted

 

$

0.26

 

$

0.28

 

$

0.27

 

$

0.23

 

 

 

 

2006 Quarters

 

 

 

First

 

Second

 

Third

 

Fourth

 

Interest income

 

$

27,241

 

$

30,594

 

$

32,537

 

$

34,920

 

Interest expense

 

11,089

 

13,246

 

15,086

 

17,066

 

Net interest income

 

$

16,152

 

$

17,348

 

$

17,451

 

$

17,854

 

Provision for loan losses

 

1,005

 

955

 

1,420

 

1,026

 

Net interest income after provision for loan losses

 

$

15,147

 

$

16,393

 

$

16,031

 

$

16,828

 

Non-interest income

 

1,711

 

1,735

 

1,844

 

2,033

 

Non-interest expense

 

8,194

 

8,484

 

8,551

 

9,060

 

Income before taxes

 

$

8,664

 

$

9,644

 

$

9,324

 

$

9,801

 

Income tax expense

 

2,950

 

3,366

 

3,239

 

3,370

 

Net income

 

$

5,714

 

$

6,278

 

$

6,085

 

$

6,431

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.27

 

$

0.25

 

$

0.27

 

Diluted

 

$

0.23

 

$

0.25

 

$

0.25

 

$

0.25

 

 

Note 24: Segment Reporting

 

In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” the Company has two reportable segments, its community banking operations and its mortgage banking division. Community banking operations, the major segment, involves making loans and gathering deposits from individuals and businesses in the Bank’s market area, while the mortgage banking division originates and sells mortgage loans servicing released, on one-to-four family residential properties.  Revenues from mortgage lending consist of interest earned on mortgage loans held-for-sale, loan origination fees, and net gains on the sale of loans in the secondary market. The Bank provides the mortgage division with short term funds to originate loans and charges it interest on the funds based on what the Bank earns on overnight funds. Expenses include both fixed overhead and variable costs on originated loans such as loan officer commissions, document preparation and courier fees. The following table

 

54



 

presents segment information for the years ended December 31, 2007, 2006 and 2005. Eliminations consist of overhead and interest charges by the Bank to the mortgage lending division.

 

 

 

2007

 

(In thousands)

 

Community
Banking

 

Mortgage
Lending

 

Eliminations

 

Total

 

Interest income

 

$

153,708

 

$

430

 

$

 

$

154,138

 

Non-interest income

 

5,177

 

2,706

 

 

7,883

 

Total operating income

 

$

158,885

 

$

3,137

 

$

 

$

162,021

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

78,981

 

$

348

 

$

(348

)

$

78,981

 

Provision for loan losses

 

4,340

 

 

 

4,340

 

Non-interest expense

 

36,891

 

2,861

 

(58

)

39,694

 

Total operating expense

 

$

120,212

 

$

3,209

 

$

(406

)

$

123,015

 

Income (loss) before taxes on income

 

$

38,673

 

$

(73

)

$

406

 

$

39,006

 

Provision for income taxes

 

13,244

 

(25

)

 

13,219

 

Net Income (loss)

 

$

25,429

 

$

(48

)

$

406

 

$

25,787

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,335,176

 

$

4,521

 

$

 

$

2,339,697

 

 

 

 

2006

 

(In thousands)

 

Community
Banking

 

Mortgage
Lending

 

Eliminations

 

Total

 

Interest income

 

$

124,837

 

$

455

 

$

 

$

125,292

 

Non-interest income

 

4,265

 

3,058

 

 

7,323

 

Total operating income

 

$

129,102

 

$

3,513

 

$

 

$

132,615

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

56,487

 

$

357

 

$

(357

)

$

56,487

 

Provision for loan losses

 

4,406

 

 

 

4,406

 

Non-interest expense

 

31,480

 

2,867

 

(58

)

34,289

 

Total operating expense

 

$

92,373

 

$

3,224

 

$

(415

)

$

95,182

 

Income before taxes on income

 

$

36,729

 

$

289

 

$

415

 

$

37,433

 

Provision for income taxes

 

12,824

 

101

 

 

12,925

 

Net Income

 

$

23,905

 

$

188

 

$

415

 

$

24,508

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,941,197

 

$

7,885

 

$

 

$

1,949,082

 

 

 

 

2005

 

(In thousands)

 

Community
Banking

 

Mortgage
Lending

 

Eliminations

 

Total

 

Interest income

 

$

85,879

 

$

599

 

$

 

$

86,478

 

Non-interest income

 

3,370

 

3,306

 

 

6,676

 

Total operating income

 

$

89,249

 

$

3,905

 

$

 

$

93,154

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

29,811

 

$

348

 

$

(348

)

$

29,811

 

Provision for loan losses

 

3,772

 

 

 

3,772

 

Non-interest expense

 

26,538

 

2,977

 

(49

)

29,466

 

Total operating expense

 

$

60,121

 

$

3,325

 

$

(397

)

$

63,049

 

Income before taxes on income

 

$

29,128

 

$

580

 

$

397

 

$

30,105

 

Provision for income taxes

 

10,234

 

204

 

 

10,438

 

Net Income

 

$

18,894

 

$

376

 

$

397

 

$

19,667

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,505,751

 

$

12,674

 

$

 

$

1,518,425

 

 

55



 

BUSINESS

 

General

 

Virginia Commerce Bancorp, Inc. (the “Company”) was organized under Virginia law on November 5, 1999 to become the holding company for Virginia Commerce Bank (the “Bank”).  The Company acquired all of the outstanding shares of the Bank on December 22, 1999, upon the effectiveness of the Agreement and Plan of Share Exchange dated September 22, 1999 between the Company and the Bank.  As a result of the Agreement and Plan of Share Exchange, each share of the Bank’s common stock was automatically exchanged for and converted into one share of the Company’s common stock.

 

The Bank was organized as a national banking association and commenced operations on May 16, 1988. On June 1, 1995, the Bank converted from a national banking association to a Virginia chartered bank which is a member of the Federal Reserve System.  The Company’s and the Bank’s executive offices and main branch are located at 5350 Lee Highway, Arlington, Virginia. The Bank currently has twenty-four additional full service branch offices throughout Northern Virginia, an investment services office in Vienna, Virginia, and residential mortgage lending offices in Chantilly and Warrenton, Virginia. Additionally, the Bank has entered into lease agreements for five additional branch office locations to be opened between 2008 and 2009.

 

The Company engages in a general commercial banking business through the Bank, its sole direct operating subsidiary. The Bank’s customer base includes small-to-medium-sized businesses, including firms that have contracts with the U.S. government, associations, retailers and industrial businesses, professionals and business executives and consumers. The economic base of the Bank’s service area includes Arlington, Fairfax, Fauquier, Loudoun, Prince William, Spotsylvania and Stafford Counties and the City of Alexandria in Northern Virginia, and the metropolitan Washington, D.C. area generally. Northern Virginia has experienced significant population and economic growth during the past decade.  The Bank participated in this growth through its commercial and retail banking activities.

 

The Bank’s primary service area consists of 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.  This area’s banking business is dominated by a small number of large commercial banks with extensive branch networks.  Most are branches of national, state-wide or regional banks.  The Bank’s primary service area is also served by a large number of other financial institutions, including savings banks, credit unions and non-bank financial institutions such as securities brokerage firms, insurance companies and mutual funds. The Bank’s primary service area is oriented toward independently owned small-to-medium-sized businesses, light industry and firms specializing in government contracting. An increasing number of new community banking organizations have been opened in the Bank’s market area, potentially representing an increased competitive threat to the Bank.

 

The banking business in Virginia generally, and in the Bank’s primary service area specifically, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area.  Among the advantages such major banks have over the Bank are their ability to finance wide-ranging advertising campaigns and to allocate their investment assets to regions of highest yield and demand.  Such banks offer certain services such as international banking, which are not offered directly by the Bank (but are offered indirectly through correspondent institutions) and, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank.  The Bank competes for deposits and lendable funds with other commercial banks, savings banks, credit unions and other governmental and corporate entities which raise operating capital through the issuance of debt and equity securities.  The Bank also competes for available investment dollars with non-bank financial institutions, such as brokerage firms, insurance companies and mutual funds.  With respect to loans, the Bank competes with other commercial banks, savings banks, consumer finance companies, mortgage companies, credit unions and other lending institutions. Additionally, as a result of enactment of federal and Virginia interstate banking legislation, additional competitors which are not currently operating in Virginia may enter the Bank’s markets and compete directly with the Bank.  Recent legislation expanding the array of firms that can own banks may also result in increased competition for the Company and the Bank.

 

The majority of the Bank’s deposits are attracted from individuals and business in the metropolitan Washington D.C. area, and as such, no material portion of the Bank’s deposits have been obtained from any single person, single entity, or area outside the metropolitan Washington D.C. area. The loss of any one or more of the Bank’s depositors would not have a materially adverse effect on the business of the Bank.  Although the Bank’s loans are concentrated in its Northern Virginia market area, and a significant portion are secured by real property in that market, the Bank’s loans

 

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are not concentrated within a single industry or group of related industries.  See Note 17 to the Consolidated Financial Statements for more information on concentrations of credit risk.

 

The Bank provides businesses with a full range of deposit accounts, merchant bankcard services, electronic funds transfer services, lock-box services, remote deposit capture, on-line banking, lines of credit for working capital, term loans and commercial real estate loans, and provides consumers with a wide array of deposit products, home equity and revolving lines of credit, installment loans and internet banking services.  The Bank also offers investment services and provides safe deposit boxes as well as other customary banking services. The Bank is not authorized to offer trust services nor does it offer international services but makes these services available to its customers through financial institutions with which the Bank has correspondent banking relationships.

 

The Bank also offers a wide variety of residential mortgage loans through its mortgage lending division.  Prior to mid-2007, substantially all of the Bank’s mortgage loans were originated on a pre-sold basis, servicing released, to numerous secondary market purchasers.  Since mid-2007, and the disruptions in the secondary market for mortgage loans, the Company has been holding a greater portion of mortgage loans in portfolio.  See “Lending Activities — Mortgage Lending” below. Offered types include conventional single family first trusts, FHA and VA mortgages for both purchase and refinance purposes.  In addition, the Bank offers construction loans to both individuals and commercial builders on single family residential properties which are generally for terms of twelve to eighteen months.  Changes in the local real estate market and interest rates could adversely impact the level of loans originated for sale and the level of construction loans originated and outstanding, and the resulting fees and earnings thereon.

 

The Bank does not depend upon seasonal business.  The Bank relies substantially on local promotional activity, personal contact by its officers, directors, employees and stockholders, personalized service and its reputation in the communities served to compete effectively.

 

The Bank has one wholly owned subsidiary, Northeast Land and Investment Company, a Virginia corporation, organized to hold and market foreclosed real estate.

 

On December 31, 2007, the Company had 299 full-time equivalent employees, including seven executive officers. None of the Company’s employees presently is represented by a union or covered under a collective bargaining agreement. Management of the Company believes that its employee relations are satisfactory.  Other than its President, the Company does not have any employees that are not also employees of the Bank.

 

Banking is dependent upon interest rate differentials.  In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate earned by the Bank on loans, securities and other interest-earning assets comprises the major source of the Bank’s earnings, while investment services commissions and fees and net gains on mortgage loans originated for sale have contributed to the Bank’s non-interest earnings. Thus, the earnings and growth of the Bank are subject to the influence of economic conditions generally, both domestic and foreign, and also of the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board.  The Federal Reserve Board implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market activities in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the Federal Reserve System.  The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on the Bank cannot be predicted.  In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting the Bank’s net income.

 

From time to time, new legislation or regulations are adopted which increase the cost of doing business, limit or expand permissible activities, or otherwise affect the competitive balance between banks and other financial institutions. Bills have been introduced in each of the last several Congresses which would permit banks to pay interest on checking and demand deposit accounts established by businesses, a practice which is currently prohibited by regulation. If the legislation effectively permitting the payment of interest on business demand deposits is enacted, of which there can be no assurance, it is likely that we may be required to pay interest on some portion of our demand deposits in order to compete against other banks.  As a significant portion of our deposits are demand deposits established by businesses, payment of interest on these deposits could have a significant negative impact on our net income, net interest income, interest margin, return on assets and equity, and other indices of financial performance.  We expect that other banks would be faced with similar negative impacts.  We also expect that the primary focus of competition would continue to be based on other factors, such as quality of service.

 

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Banks or bank holding companies which are undercapitalized and either have not timely approved a capital plan or have failed to implement the plan become subject to extraordinary powers pursuant to which the bank regulatory agencies may close the bank, restrict its growth, force its sale, restrict interest rates paid on deposits, and dismiss directors or senior executive officers.  Each agency has prescribed standards relating to internal controls and systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and other operational and managerial standards.  The agencies have also adopted standards relating to asset quality, earnings, valuation and compensation.  Banks or bank holding companies which do not meet such standards may be subject to restrictions and consequences comparable to those which apply to undercapitalized banks and bank holding companies.  Bank regulatory authority to appoint a conservator or receiver for a bank is broad, including grounds such as substantial dissipation of assets or earnings due to violations of law or regulation or due to any unsafe or unsound practices, an unsafe or unsound condition, and certain violations of law or regulation likely to weaken the institution’s condition.

 

Regulations promulgated by the Federal Reserve Board prohibit state member banks such as the Bank from paying any dividend on common stock out of capital.  Dividends can be paid only to the extent of net profits then on hand, less losses and bad debts.  Without the prior approval of the Federal Reserve Board, a state member bank cannot pay dividends in any calendar year in excess of the retained net profits for the prior two years and the profits of the current year, less any required transfers to surplus.

 

Lending Activities

 

The Bank offers a wide array of lending services to its customers, including commercial loans, commercial real estate loans, lines of credit, equipment financing, construction loans, letters of credit, residential mortgages, personal loans, auto loans and home equity loans and lines of credit.  Loan terms, including interest rates, loan-to-value ratios, and maturities, are tailored as much as possible to meet the needs of the borrower within prudent lending guidelines in terms of interest rate risk and credit risk.

 

When considering loan requests, the primary factors taken into consideration are the purpose, the cash flow and financial condition of the borrower, primary and secondary repayment sources, the value of the underlying collateral, if applicable, and the character and integrity of the borrower.  These factors are evaluated in a number of ways including an analysis of financial statements, credit history, trade references and visits to the borrower’s place of business.  The Bank has adopted a comprehensive loan policy manual to provide its loan officers with underwriting, term, collateral, loan-to-value and pricing guidelines.

 

The Bank’s goal is to build and maintain a commercial loan portfolio consisting of term loans, lines of credit, commercial real estate and construction loans provided primarily to locally-based borrowers. Additionally, installment loans and personal lines of credit, as well as residential mortgages, are made available to consumer customers.  Commercial loans are generally considered to have a higher degree of risk of default or loss than other types of loans, such as residential real estate loans, because repayment may be affected by general economic conditions, interest rates, the quality of management of the business, and other factors which may cause a borrower to be unable to repay its obligations.  General economic conditions can directly or indirectly affect the quality of a small and mid-sized business loan portfolio. The Bank manages the loan portfolio to avoid high concentrations of similar industry loan types and/or property types in relation to total qualifying capital.  Commercial construction loans will make up 50-100% of total qualifying capital, residential construction loans 125-250%, non-farm non-residential real estate loans 400-600%, residential mortgages and home equity loans 100-200%, commercial loans 100-200% and consumer installment and personal loans 50-100%.  There can however, be no assurance that the Bank will be able to achieve or maintain this distribution of loans.  At December 31, 2007, the loan portfolio’s actual composition compared to total qualifying capital consisted of approximately 97% commercial construction loans, 145% residential construction loans, 396% non-farm non-residential real estate loans, 118% residential mortgages and home equity loans, 106% commercial loans and 4% consumer installment and personal loans.

 

The lending activities in which we engage carry the risk that borrowers will be unable to perform on their obligations.  As such, interest rate policies of the Federal Reserve Board and general economic conditions, nationally and in our primary market area will have a significant impact on our results of operations.  To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations in a timely manner, resulting in decreased earnings or losses to the Bank.  To the extent that loans are secured by real estate, adverse conditions in the real estate market may reduce the ability of the borrower to generate the necessary cash flow for repayment of the loan and reduce our ability to collect the full amount of the loan upon a default.

 

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These same external factors could also negatively impact collateral values.  To the extent that the Bank makes fixed rate loans, general increases in interest rates will tend to reduce our spread as the interest rates we must pay for deposits increase.  Interest rates may also adversely affect the value of property pledged as security for loans.

 

We constantly strive to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of an economic downturn or other negative influences.  Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures, evaluating each borrower’s industry and business plan during the underwriting process, identifying and monitoring primary and alternative sources for repayment, obtaining collateral that is margined to minimize loss in the event of liquidation, ongoing tests of borrower credit worthiness and cash flow, ongoing collateral evaluations and site inspections and monitoring of economic and market trends

 

Loan business is generated primarily through referrals and direct-calling efforts.  Referrals of loan business comes from directors, shareholders, current customers and professionals such as lawyers, accountants and financial intermediaries.

 

At December 31, 2007, the Banks statutory lending limit to any single borrower was $33.8 million subject to certain exceptions provided under applicable law.  As of December 31, 2007, the Bank’s maximum credit exposure to its largest borrower was $19.2 million.

 

Commercial Loans:  Commercial loans are written for any legitimate business purpose including the financing of plant and equipment, interim working capital pending collection of accounts receivable, permanent working capital for growth and the acquisition and construction of real estate projects.  There is a focus in the Bank’s loan portfolio on commercial real estate investment which represents a predominant activity in the Bank’s market area.  The Bank’s commercial loan portfolio reflects a diverse group of borrowers with no significant concentration in any borrower, or group of borrowers.

 

Commercial construction loans, residential construction loans to builders and land acquisition and development loans are made to builders with established track records of quality construction.  Land loans are discouraged unless underwritten in conjunction with a related construction loan or out-sale contract.  Typical advance rates are not greater than 65% of the lesser of cost or appraisal for raw land, 75% of the value of finished lots for land acquisition, and 80% of land cost and 100% of construction costs for construction loans.  In all cases, a minimum 10% equity contribution of total project costs is required.  Financing terms generally do not exceed 24 months.  Construction loans are subject to progress inspections and controlled advances.  Speculative construction loans are maintained to a minimum with a majority of loans requiring pre-sale contracts or specified lease-up thresholds prior to construction commencement.  Personal guarantees by principals of borrowing entities is a standard requirement and loans are typically priced to float at a factor at or above the prime lending rate.

 

Commercial real estate loans will generally represent borrower occupied transactions with a principal reliance on the borrowing businesses’ ability to repay or investor transactions focused on tenant quality, occupancy and expense controls, as well as prudent guidelines for assessing real estate values.  Risks inherent in managing a commercial real estate portfolio relate to either sudden or gradual drops in property values as a result of a general or local economic downturn. A decline in real estate values can cause loan to value margins to increase and diminish the Bank’s equity cushion on both an individual and portfolio basis.  The Bank attempts to mitigate commercial real estate lending risks by carefully underwriting each loan of this type to address the perceived risks in the individual transaction.  Generally, the Bank requires a loan-to-value ratio of 80% of the lesser of cost or appraisal for owner occupied transactions and 75% for investor transactions.  A borrower’s ability to repay is carefully analyzed and policy calls for a minimum ongoing cash flow to debt service requirement of 1.10 to 1 although most loans exceed this minimum.  An approved list of commercial real estate appraisers selected on the basis of a reputation for quality and accuracy has been established.  Each appraisal is scrutinized in an effort to insure compliance with established appraisal guidelines and conformity with current comparable market values.  The Bank generally requires personal guarantees on all loans to closely-held entities as a matter of policy.  Borrowers are required to provide, at a minimum, annual corporate, partnership and personal financial statements to comply with Bank policy.  Interest rate risk to the Bank is mitigated by using either floating interest rates or by fixing rates for an intermediate period of time, generally less than five years.  While loan amortizations may be approved for up to 360 months, loans generally have a call provision (maturity date) of 10 years or less.

 

Commercial term loans are used to provide funds for equipment and general corporate needs.  This loan category is designed to support borrowers who have a proven ability to service debt over a term generally not to exceed 84

 

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months.  The Bank typically requires a first lien position on the collateral financed and other business assets and guarantees from owners having at least a 20% interest in the business.  Interest rates on commercial term loans generally float or are fixed for a term not to exceed five years.  Management carefully monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries and/or similar collateral.  Commercial loans are evaluated for historical and projected cash flow, balance sheet strength and primary and secondary repayment sources.  Commercial term loan documents include certain financial and performance covenants and require borrowers to forward regular financial information on both the business and on personal guarantors at least annually.  In certain cases, this information is required more frequently, depending on the degree to which lenders desire information to monitor a borrower’s financial condition and compliance with loan covenants.  Key person life insurance is required as appropriate and as necessary to mitigate the risk associated with the loss of a primary owner or manager.

 

Commercial lines of credit are used to finance a business borrower’s short-term or seasonal credit needs and advances are often based on a percentage of eligible receivables and inventory.  In addition to the risks inherent in term loan facilities, line of credit borrowers typically require additional monitoring to protect the lender against diminishing collateral values.  Commercial lines of credit are generally revolving in nature and payable on demand.  The Bank generally requires at least an annual rest period (for seasonal borrowers) and regular financial information (monthly or quarterly financial statements, monthly accounts receivable agings, borrowing base certificates, etc.) for borrowers with rapid growth and permanent working capital financing needs.  Advances against collateral are generally margined, limiting advances on eligible receivables to 75-80% of current accounts.  Lines of credit and term loans to the same borrowers are generally cross-defaulted and cross-collateralized.  Industry and collateral concentration disciplines are the same as those used in managing the commercial term loan portfolio.  Interest rate charges on this group of loans generally float at a factor at or above the prime lending rate. Generally, personal guarantees are also required on these loans.

 

Consumer Loans.  Loans are considered for any worthwhile personal purpose on a case-by-case basis, such as financing of tuition, household expenditures, home and automobile financing.  Consumer credit facilities are underwritten to focus on the borrower’s credit record, length and stability of employment, income to service debt and quality of collateral.  Residential real estate loans held in portfolio are limited to advances of 90% of loan to appraised value.  Maximum debt to income ratio established by loan policy is 45% and maximum unsecured revolving debt will not exceed 10% of net worth.  Installment loan terms range out to 72 months and are priced at fixed interest rate.  Home equity loans amortize over 5-15 years and are fixed rate while home equity lines are revolving with 10-year maturities and have floating rates tied to the prime rate.

 

Mortgage Lending.  The Company originates residential mortgage loans, on a pre-sold basis, for sale to secondary market purchasers, on a servicing released basis. This produces benefits primarily in the form of gains on the sale of the loans at a premium.  Activity in the residential mortgage loan market is highly sensitive to changes in interest rates. The loans are sold on a limited recourse basis.  Most contracts with investors contain recourse periods that may vary from 90 days up to one year.  In general, the Company may be required to repurchase a previously sold mortgage loan or indemnify the investor if there is major non-compliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been re-sold as part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor has defaulted early in the loan term.  The potential default period is approximately twelve months after sale of the loan to the investor. Mortgages subject to recourse are collateralized by single-family residential properties, have loan-to-value ratios of 80% or less, or have private mortgage insurance or are insured or guaranteed by an agency of the United States government. On a limited basis, the Company holds some first trust residential mortgages in portfolio which have loan-to-value ratios of 80% or less.  Maximum debt to income ratio is 45%.  ARM products amortize over a 30 year period; fixed rate products amortize over 15-30 years.

 

Loan Administration.  As part of its internal loan administration process, the Bank’s Directors Loan Committee, comprised of directors, reviews all loans 30-days delinquent, loans on the watch list, loans rated special mention, substandard, or doubtful and other loans of concern at least quarterly.  The Committee also reviews new loan production, credit concentrations, loan loss reserves, declined loans, documentation exceptions, loan policy exceptions, new products and pricing.  The Committee commissions periodic documentation and internal control reviews by outside vendors to complement internal audit and credit administration oversight.

 

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Regulation, Supervision, and Governmental Policy

 

The Company.  The Company is a bank holding company registered under Bank Holding Company Act of 1956, as amended, (the “BHCA”) and is subject to supervision by the Federal Reserve Board.  As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the BHCA.  The Federal Reserve Board may also make examinations of the Company and each of its subsidiaries.

 

BHCA - Activities and other Limitations.  The BHCA requires approval of the Federal Reserve Board for, among other things, the acquisition by a proposed bank holding company of control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or consolidation by a bank holding company with another bank holding company.  The BHCA also generally permits the acquisition by a bank holding company of control or substantially all the assets of any bank located in a state other than the home state of the bank holding company, except where the bank has not been in existence for the minimum period of time required by state law, but if the bank is at least 5 years old, the Federal Reserve Board may approve the acquisition.

 

Under current law, with certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or furnishing services to or performing service for its authorized subsidiaries.  A bank holding company may, however, engage in or acquire an interest in, a company that engages in activities which the Federal Reserve Board has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly incident thereto.  In making such a determination, the Federal Reserve Board is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public, such as convenience, increased competition or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.  The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern.  Some of the activities that the Federal Reserve Board has determined by regulation to be closely related to banking include making or servicing loans, performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.

 

Effective on March 11, 2000, the Gramm Leach Bliley Act of 1999 (the “GLB Act”) allows a bank holding company or other company to certify status as a financial holding company, which allows such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions.  It also authorizes the Federal Reserve Board to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.

 

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank company or any of its subsidiaries, or investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower.  Further, a holding company and any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit.  A subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that: (i) the customer obtain or provide some additional credit, property or services from or to such bank other than a loan, discount, deposit or trust service; (ii) the customer obtain or provide some additional credit, property or service from or to company or any other subsidiary of the company; or (iii) the customer not obtain some other credit, property or service from competitors, except for reasonable requirements to assure the soundness of credit extended.

 

Commitments to Subsidiary Banks.  Under Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when it might not do so absent such policy.

 

Limitations of Acquisitions of Common Stock.  The federal Change in Bank Control Act prohibits a person or group from acquiring “control” of a bank holding company unless the Federal Reserve has been given 60 days’ prior written notice of such proposed acquisition and within that time period the Federal Reserve Board has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued.  An acquisition may be made prior to expiration of the disapproval period if the Federal

 

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Reserve issues written notice of its intent not to disapprove the action.  Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act or which would represent the single largest interest in the voting stock would, under the circumstances set forth in the presumption, constitute the acquisition of control.

 

In addition, with limited exceptions, any “company” would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding Common Stock of, or such lesser number of shares as constitute control over, the Company.  Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company.

 

The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of an institution’s capital.  These guidelines are substantially similar to those which are applicable to the Bank, discussed below.

 

The Bank.  The Bank, as a Virginia chartered commercial bank which is a member of the Federal Reserve System (a “state member bank”) and whose accounts are insured by the Deposit Insurance Fund of the FDIC up to the maximum legal limits of the FDIC, is subject to regulation, supervision and regular examination by the State Corporation Commission/Bureau of Financial Institutions and the Federal Reserve Board.  The regulations of these various agencies govern most aspects of the Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowing, dividends and location and number of branch offices.  The laws and regulations governing the Bank generally have been promulgated to protect depositors and the deposit insurance funds, and not for the purpose of protecting stockholders.

 

Competition among commercial banks, savings banks, and credit unions has increased following enactment of legislation which greatly expanded the ability of banks and bank holding companies to engage in interstate banking or acquisition activities.  As a result of federal and state legislation, banks in the Washington D.C./Maryland/Virginia area can, subject to limited restrictions, acquire or merge with a bank in another of the jurisdictions, and can branch de novo in any of the jurisdictions. The GLB Act allows a wider array of companies to own banks, which could result in companies with resources substantially in excess of the Company’s entering into competition with the Company and the Bank.

 

Branching and Interstate Banking.  The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.  Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions.  Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.

 

The Riegle-Neal Act authorizes the federal banking agencies to approve interstate branching de novo by national and state banks in states which specifically allow for such branching.  The District of Columbia, Maryland and Virginia have all enacted laws which permit interstate acquisitions of banks and bank branches and permit out-of-state banks to establish de novo branches.

 

USA Patriot Act.  Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities.  The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum standards specified by the act, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers.  The costs or other effects of the compliance burdens imposed by the Patriot Act or future anti-terrorist, homeland security or anti-money laundering legislation or regulations cannot be predicted with certainty.

 

Capital Adequacy Guidelines.  The Federal Reserve Board and the FDIC have adopted risk based capital adequacy guidelines pursuant to which they assess the adequacy of capital in examining and supervising banks and bank holding

 

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companies and in analyzing bank regulatory applications.  Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.

 

State member banks are expected to meet a minimum ratio of total qualifying capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%.  At least half of this amount (4%) should be in the form of core capital. Tier 1 Capital generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in the market value of securities classified as “available-for-sale” in accordance with FAS 115.  Tier 2 Capital consists of the following: hybrid capital instruments; perpetual preferred stock which is not otherwise eligible to be included as Tier 1 Capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses.  Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no risk-based capital) for assets such as cash and certain U.S. government and agency securities, to 100% for the bulk of assets which are typically held by a bank holding company, including commercial real estate loans, commercial business loans and consumer loans.  Residential first mortgage loans on one-to-four family residential real estate and certain seasoned multi-family residential real estate loans, which are not 90 days or more past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans.  Off-balance sheet items also are adjusted to take into account certain risk characteristics.

 

In addition to the risk-based capital requirements, the Federal Reserve Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirement for the most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all other banks, which effectively increases the minimum Leverage Capital Ratio for such other banks to 4.0% - 5.0% or more.  The highest-rated banks are those that are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, those which are considered a strong banking organization.  A bank having less than the minimum Leverage Capital Ratio requirement shall, within 60 days of the date as of which it fails to comply with such requirement, submit a reasonable plan describing the means and timing by which the bank shall achieve its minimum Leverage Capital Ratio requirement.  A bank which fails to file such plan is deemed to be operating in an unsafe and unsound manner, and could subject a bank to a cease-and-desist order.  Any insured depository institution with a Leverage Capital Ratio that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act (the “FDIA”) and is subject to potential termination of deposit insurance.  However, such an institution will not be subject to an enforcement proceeding solely on account of its capital ratios, if it has entered into and is in compliance with a written agreement to increase its Leverage Capital Ratio and to take such other action as may be necessary for the institution to be operated in a safe and sound manner.  The capital regulations also provide, among other things, for the issuance of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital or to restore its capital to the minimum capital requirement within a specified time period.  Such directive is enforceable in the same manner as a final cease-and-desist order. At December 31, 2007, the Bank’s Tier 1 risk based capital ratio was 7.77%, its Total risk based capital ratio was 10.73% and its Leverage Capital ratio was 7.12%.  At December 31, 2007, the Company’s Tier 1 Capital was 9.90%, its Total Capital was 10.96% and its Leverage Capital ratio was 9.09%.

 

Prompt Corrective Action.  Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates.  The federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA.  Under the regulations, a bank shall be deemed to be: (i) “well capitalized” if it has a Total Risk Based Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized;” (iii) “undercapitalized” if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv) “significantly undercapitalized” if it has a Total Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

 

An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date the institution receives notice or is deemed to have notice

 

63



 

that it is undercapitalized, significantly undercapitalized or critically undercapitalized.  A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution.  Such guaranty shall be limited to the lesser of (i) an amount equal to 5.0% of the institution’s total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized.  Such a guaranty shall expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each of four consecutive calendar quarters.  An institution which fails to submit a written capital restoration plan within the requisite period, including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, shall be subject to the restrictions in Section 38 of the FDIA which are applicable to significantly undercapitalized institutions.  At December 31, 2007, the Company and Bank were considered to be a “well capitalized” institution for purposes of Section 38 of the FDIA.

 

A “critically undercapitalized institution” is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after a bank becomes critically undercapitalized unless extremely good cause is shown and an extension is agreed to by the federal regulators.  In general, good cause is defined as capital which has been raised and is imminently available for infusion into the bank except for certain technical requirements which may delay the infusion for a period of time beyond the 90 day time period.

 

Immediately upon becoming undercapitalized, an institution shall become subject to the provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals.  The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital; restricting transactions with affiliates; requiring divestiture of the institution or the sale of the institution to a willing purchaser; and any other supervisory action that the agency deems appropriate.  These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.

 

Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution where:  (i) an institution’s obligations exceed its assets;  (ii) there is substantial dissipation of the institution’s assets or earnings as a result of any violation of law or any unsafe or unsound practice;  (iii) the institution is in an unsafe or unsound condition;  (iv) there is a willful violation of a cease-and-desist order;  (v) the institution is unable to pay its obligations in the ordinary course of business;  (vi) losses or threatened losses deplete all or substantially all of an institution’s capital, and there is no reasonable prospect of becoming “adequately capitalized” without assistance;  (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution’s condition, or otherwise seriously prejudice the interests of depositors or the insurance fund;  (viii) an institution ceases to be insured;  (ix) the institution is undercapitalized and has no reasonable prospect that it will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital.

 

Regulatory Enforcement Authority.  Federal banking law grants substantial enforcement powers to federal banking regulators.  This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties.  In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.  Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

 

64



 

Deposit Insurance Premiums.  Pursuant to deposit insurance reform legislation, in December 2006, the FDIC adopted a new risk based assessment system for determining deposit insurance premiums.  Under the new requirements, four risk categories (I-IV), each subject to different premium rates, are established, based upon an institution’s status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating.  Under the new rules, all insured depository institutions will pay deposit insurance premiums, currently ranging between 5 and 7 basis points on an institution’s assessment base for institutions in risk category I (well capitalized institutions perceived as posing the least risk to the insurance fund), and 10, 28 and 43 basis points for institutions in risk categories II, III, and IV.  The levels of rates are subject to periodic adjustment by the FDIC.

 

PROPERTIES

 

The Bank offers its services from its main office, located at 5350 Lee Highway in Arlington, Virginia, and twenty-four additional banking offices, two mortgage lending offices, one investment services office and its bank operations center.  The main office consists of two connected red brick buildings, contains an aggregate of approximately 18,000 square feet of space on three levels.  The Bank utilizes one of the buildings, containing approximately 10,000 square feet, as the executive offices and a branch facility.  In August 1995, the Bank sold the connected building which it had previously leased out.  The Bank operates a branch located at 2930 Wilson Boulevard, Arlington, Virginia.  That property, which consists of a stand alone brick building containing approximately 2,400 square feet on a parcel of approximately 18,087 square feet, was purchased by the Bank in April 1997. The Bank also operates a branch location at 5140 Duke Street, Alexandria, Virginia.  That property, which consists of a two story brick building containing approximately 4,800 square feet on a parcel of approximately 16,800 square feet, was also purchased by the Bank in April 1997.

 

The Bank leases twenty-six office locations: the Alexandria Office, located at 1414 Prince Street, Alexandria, Virginia, consists of 2,500 square feet; the McLean Office, located at 1356 Chain Bridge Road, McLean, Virginia, consists of 1,625 square feet; the Williamsburg Boulevard Office, located at 6500 Williamsburg Road, Arlington, Virginia, consists of 1,781 square feet; the Annandale Office, located at 4230 John Marr Drive, Annandale, Virginia, consists of 2,400 square feet; the Fairfax Office, located at 10777 Main Street, Fairfax Virginia, consists of 2,038 square feet; the Vienna Office, located at 374 Maple Avenue, Vienna, Virginia, consists of 5,831 square feet; the King Street Office, located at 506 King Street, Alexandria Virginia, consists of 1,484 square feet; the Chantilly Office, located at 13881 G Metrotech Drive, Chantilly Virginia, consists of 1,950 square feet; the Lake Ridge office, located at 2030 Old Bridge Road, Lake Ridge, Virginia consists of 2,492 square feet; the Reston Office, located at 11820 Spectrum Center, Reston Virginia consists of 3,700 square feet; the Mount Vernon office, located at 7901 Richmond Highway, Alexandria, Virginia, consists of 2,831 square feet; the Walney Road office, located at 4221Walney Road, Chantilly, Virginia, consists of 2,661 square feet; the Del Ray office, located at 2401 Mount Vernon Avenue, Alexandria, Virginia, consists of 1,750 square feet; the Tysons Corner office, located at 8251 Greensboro Drive, McLean, Virginia, consists of 1,801 square feet; the Battlefield office, located at 10830 Balls Ford Road, Manassas, Virginia, consists of 7,409 square feet; the Newington office, located at 7830 Backlick Road, Springfield, Virginia, consists of 2,778 square feet; the Signal Hill office, located at 9161 Liberia Avenue, Manassas, Virginia, consists of 3,613 square feet; the Ryan Park office, located at 21885 Ryan Center Way, Ashburn, Virginia, consists of 2,656 square feet; the Courthouse Road office, located at 10800 A Courthouse Road, Fredericksburg, Virginia, consists of 3,000 square feet; the Centre Lee office, located at 14701 Lee Highway, Centreville, Virginia, consists of 2,870 square feet; the Leesburg office, located at 341 East Market Street, Leesburg, Virginia, consists of 2,705 square feet; the Central Park office, located at 1304 Central Park Blvd., Fredericksburg, Virginia, consists of 3,000 square feet; the Fairfax Lending office, located at 4221 Walney Road, Chantilly, Virginia, consists of 17,273 square feet; the Warrenton Mortgage Lending office, located at 54 East Lee Street, Warrenton, Virginia, consists of 300 square feet; the Leesburg Lending office, located at 50 Catoctin Circle, Leesburg, Virginia, consists of 1,638 square feet; and the Bank’s operations center, located at 14201 Sullyfield Circle, Chantilly, Virginia consists of 25,001 square feet.  Generally the leases contain renewal option clauses for one or two additional five-year terms, and in some instances require payment of certain operating charges. In addition, the Bank has entered into lease agreements for five additional offices to be opened between 2008 and 2009. The total rental expense under the leases was $3.1 million in 2007.  The total minimum rental commitment under the leases, including the five additional offices to be opened between 2008 and 2009, as of December 31, 2007 is as follows: $3.5 million for 2008; $3.7 million for 2009, $4.0 million for 2010, $3.4 million for 2011, $3.5 million for 2012 and $26.7 million for 2013 and beyond.

 

65



 

MARKET PRICE OF STOCK AND DIVIDENDS

 

The Company’s stock is traded on the Nasdaq Global Select Market under the symbol “VCBI”.  Set forth below is the range of high and low sales prices (adjusted for stock dividends and splits), as reported by Nasdaq, for each full quarterly period within the two most recent fiscal years.

 

MARKET PRICE OF STOCK

 

 

 

2007

 

2006

 

Quarter

 

High

 

Low

 

High

 

Low

 

First

 

$

20.01

 

$

17.37

 

$

22.28

 

$

17.90

 

Second

 

$

19.93

 

$

16.73

 

$

23.86

 

$

21.10

 

Third

 

$

17.07

 

$

13.80

 

$

22.24

 

$

19.58

 

Fourth

 

$

15.53

 

$

10.80

 

$

20.21

 

$

17.51

 

 

The Company has not paid cash dividends since 1995, electing to retain earnings for funding the growth of the Company and its business. The Company currently anticipates continuing the policy of retaining earnings to fund growth. The ability of the Company to pay dividends, should it elect to do so, depends largely upon the ability of the Bank to declare and pay dividends to the Company, as the principal source of the Company’s revenue is dividends paid by the Bank. Future dividends will depend primarily upon the Bank’s earnings, financial condition, and need for funds, as well as governmental policies and regulations applicable to the Company and the Bank, which limit the amount that may be paid as dividends without prior approval.

 

At December 31, 2007, the Company had 586 stockholders of record, and an aggregate of approximately 2,650 beneficial owners.  Information regarding stock dividends and splits in 2007, 2006, and 2005 is as follows:

 

1.               A 10% stock dividend was declared on March 28, 2007, for stockholders of record on April 16, 2007, and was paid on May 1, 2007.

 

2.               A three-for-two stock split in the form of a 25% stock dividend was declared on March 16, 2006, for stockholders of record on April 28, 2006, and was paid on May 12, 2006.

 

3.               A five-for-four stock split in the form of a 25% stock dividend was declared on March 23, 2005, for stockholders of record on April 15,2005, and was paid on May 9, 2005.

 

Securities Authorized for Issuance Under Equity Compensation Plans.  The following table sets forth information regarding outstanding options and other rights to purchase common stock granted under the Company’s compensation plans as of December 31, 2007:

 

Equity Compensation Plan Information

 

Plan category

 

Number of securities to be issued
upon exercise of outstanding
options, warrants and rights

 

Weighted average exercise
price of outstanding options,
warrants and rights

 

Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a)

 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders (1)

 

1,818,641

 

$

7.84

 

794,491

(2)

Equity compensation plans not approved by security holders

 

0

 

0

 

0

 

Total

 

1,818,641

 

$

7.84

 

794,491

 

 


(1)   Consists of the Company’s 1989 and 1998 Stock Option Plans and the 2003 Employee Stock Purchase Plan. For additional information, see Notes 12 and 13 to the Consolidated Financial Statements.

(2)   Consists of 479,431 shares available for issuance under the 1998 Stock Option Plan and 315,060 shares available for issuance under the 2003 Employee Stock Purchase Plan.

 

Issuer Repurchases of Common Stock. No shares of the Company’s common stock were repurchased by or on behalf of the Company during the fourth quarter of 2007.

 

66



 

STOCK PERFORMANCE COMPARISON

 

The following table compares the cumulative total return on a hypothetical investment of $100 in Virginia Commerce Bancorp’s common stock at the closing price on December 31, 2002 through December 31, 2007, with the hypothetical cumulative total return on the Nasdaq Stock Market Index (Total U.S.) and the Nasdaq Bank Index for the comparable period.

 

 

 

 

December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Virginia Commerce Bancorp, Inc.

 

$

100.00

 

$

269.01

 

$

299.37

 

$

384.38

 

$

394.03

 

$

255.74

 

Nasdaq Stock Market Index - (Total U.S.)

 

$

100.00

 

$

150.01

 

$

162.89

 

$

165.13

 

$

180.85

 

$

198.60

 

Nasdaq Bank Index

 

$

100.00

 

$

129.93

 

$

144.21

 

$

137.97

 

$

153.15

 

$

119.35

 

 

67



 

Annual Meeting of Stockholders

 

The annual meeting of stockholders of Virginia Commerce Bancorp, Inc. (the “Company”) will be held at 4:00 pm on Wednesday, April 30, 2008 at “The Washington Golf & Country Club,” 3017 North Glebe Road, Arlington, Virginia.

 

Annual Report on Form 10-K

 

A copy of Form 10-K as filed with the Securities and Exchange Commission is available without charge to stockholders upon written request to:

 

Lynda S. Cornell

Assistant to the Chief Executive Officer

Virginia Commerce Bancorp, Inc.

5350 Lee Highway

Arlington, VA 22207

 

Internet Access To Company Documents

 

The Company provides access to its SEC filings through the Bank’s web site at www.vcbonline.com. After accessing  the web site, the filings are available upon selecting “about us/stock information/financial information.” Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed or furnished to the SEC.

 

FINANCIAL STATEMENTS AND EXHIBITS

 

The following financial statements are included in this report:

 

Consolidated Balance Sheets at December 31, 2006 and 2007

Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2006 and 2007

Notes to the Consolidated Financial Statements

Report on Independent Registered Public Accounting Firm

 

All financial statement schedules have been omitted as the required information is either inapplicable or included in the consolidated financial statements or related notes.

 

Exhibits

 

Exhibit No.

 

Description

3.1

 

Articles of Incorporation of Virginia Commerce Bancorp, Inc., as amended (1)

3.2

 

Bylaws of Virginia Commerce Bancorp, Inc. (2)

4.1

 

Junior Subordinated Indenture, dated as of December 19, 2002 between Virginia Commerce Bancorp, Inc. and The Bank of New York, as Indenture Trustee (3)

4.2

 

Amended and Restated Declaration of Trust, dated as of December 19, 2002 among Virginia Commerce Bancorp, Inc., The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee, and Peter A. Converse, William K. Beauchesne and Marcia J. Hopkins as Administrative Trustees (3)

4.3

 

Guarantee Agreement dated as of December 19, 2002, between Virginia Commerce Bancorp, Inc. and The Bank of New York, as Guarantee Trustee (3)

4.4

 

Junior Subordinated Indenture, dated as of December 20, 2005 between Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as Trustee, (3)

4.5

 

Amended and Restated Declaration of Trust, dated as December 20, 2005, between Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as Delaware Trustee and Institutional Trustee, and Peter A. Converse, William K. Beauchesne and Marcia J. Hopkins as Administrative Trustees (3)

 

68



 

Exhibit No.

 

Description

4.6

 

Guarantee Agreement dated as of December 20, 2005, between Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as Guarantee Trustee (3)

10.1

 

Amended and Restated 1998 Stock Option Plan (4)

10.2

 

2003 Employee Stock Purchase Plan (5)

10.3

 

2007 Virginia Commerce Bank Executive and Director Deferred Compensation Plan (6)

11

 

Statement Regarding Computation of Per Share Earnings See Note 9 to the Consolidated Financial Statements

21

 

Subsidiaries of the Registrant

23

 

Consent of Yount, Hyde & Barbour, PC, Independent Registered Public Accounting Firm

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

 


(1)   Incorporated by reference to the same numbered exhibit to the Company’s Quarterly Report on Form 10-K for the quarter ended March 31, 2006.

(2)   Incorporated by reference to the same numbered exhibit to the Company’s Current Report on Form 8-K filed July 27, 2007.

(3)   Not filed in accordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K. Virginia Commerce Bancorp, Inc. agrees to provide a copy of these documents to the Commission upon request.

(4)   Incorporated by reference to exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-142447).

(5)   Incorporated by reference to exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-109079).

(6)   Incorporated by reference to the same numbered exhibit to the Company’s annual Report on Form 10-K for the year ended December 31, 2007.

 

69



 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

 

 

By:

 /s/ Peter A. Converse

 

 

Peter A. Converse, Chief Executive Officer

 

Dated:  March 13, 2008

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name

 

Capacity

 

Date

 

 

 

 

 

/s/ Leonard Adler

 

Director

 

March 13, 2008

Leonard Adler

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Michael G. Anzilotti

 

Director, President

 

March 13, 2008

Michael G. Anzilotti

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Peter A. Converse

 

Director, Chief Executive Officer

 

March 13, 2008

Peter A. Converse

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

/s/ W. Douglas Fisher

 

Chairman of the Board of Directors

 

March 13, 2008

W. Douglas Fisher

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ David M. Guernsey

 

Vice Chairman of the Board of Directors

 

March 13, 2008

David M. Guernsey

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Robert H. L’Hommedieu

 

Director

 

March 13, 2008

Robert H. L’Hommedieu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Norris E. Mitchell

 

Director

 

March 13, 2008

Norris E. Mitchell

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Arthur L. Walters

 

Vice Chairman of the Board of Directors

 

March 13, 2008

Arthur L. Walters

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ William K. Beauchesne

 

Treasurer and Chief Financial Officer

 

March 13, 2008

William K. Beauchesne

 

(Principal Financial and Accounting Officer)

 

 

 

70


EX-21 2 a08-2927_1ex21.htm EX-21

Exhibit 21

 

Subsidiaries of the Registrant

 

Legal Name of Entity

 

Jurisdiction of Organization

 

Ownership Interest

 

Virginia Commerce Bancorp, Inc (registrant)

 

Virginia

 

 

 

Virginia Commerce Bank

 

Virginia

 

100%

 

Northeast Land and Development Corp

 

Virginia

 

100%

 

Virginia Commerce Insurance Agency, L.L.C.

 

Virginia

 

100%

 

VCBI Capital Trust II

 

Delaware

 

100% of voting securities

 

VCBI Capital Trust III

 

Delaware

 

100% of voting securities

 

 


EX-23 3 a08-2927_1ex23.htm EX-23

Exhibit 23

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in this Form 10-K of Virginia Commerce Bancorp, Inc. and in the Registration Statements on Form S-8 (Nos. 333-68576, 333-68578, 333-68580 333-108210, 333-109079 and 333-142447) of our report, dated March 12, 2008, relating to the consolidated balance sheets of Virginia Commerce Bancorp, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2007, 2006 and 2005.

 

 

 /s/ Yount, Hyde & Barbour, PC

 

 

 

 

 

Winchester, Virginia

 

March 13, 2008

 

 


EX-31.1 4 a08-2927_1ex31d1.htm EX-31.1

Exhibit 31.1

 

CERTIFICATION

 

I, Peter A. Converse, certify that:

 

1.               I have reviewed this annual report on Form 10-K of Virginia Commerce Bancorp, Inc.;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:

March 13, 2008

 

 

 

 /s/ Peter A. Converse

 

 

 

 

 

Chief Executive Officer

 


EX-31.2 5 a08-2927_1ex31d2.htm EX-31.2

Exhibit 31.2

 

CERTIFICATION

 

I, William K. Beauchesne, certify that:

 

1.               I have reviewed this annual report on Form 10-K of Virginia Commerce Bancorp, Inc.;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:

March 13, 2008

 

 

 

 /s/ William K. Beauchesne

 

 

 

 

 

Treasurer and Chief Financial Officer

 


EX-32.1 6 a08-2927_1ex32d1.htm EX-32.1

Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

 

In connection with the Form 10-K of  Virginia Commerce Bancorp, Inc. for the year ended December 31, 2007, I, Peter A. Converse , Chief Executive Officer of Virginia Commerce Bancorp, Inc., hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

(1) such Form 10-K for the year ended December 31, 2007, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) the information contained in such Form 10-K for the year ended December 31, 2007, fairly presents, in all material respects, the financial condition and results of operations of Virginia Commerce Bancorp, Inc.

 

 

 /s/ Peter A. Converse

 

Peter A. Converse

 

Chief Executive Officer

 

 


EX-32.2 7 a08-2927_1ex32d2.htm EX-32.2

Exhibit 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

 

In connection with the Form 10-K of Virginia Commerce Bancorp, Inc. for the year ended December 31, 2007, I, William K. Beauchesne, Treasurer and Chief Financial Officer of Virginia Commerce Bancorp, Inc., hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

 

(1) such Form 10-K for the year ended December 31, 2007, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) the information contained in such Form 10-K for the year ended December 31, 2007, fairly presents, in all material respects, the financial condition and results of operations of Virginia Commerce Bancorp, Inc.

 

 

 /s/ William K. Beauchesne

 

William K. Beauchesne

 

Treasurer and Chief Financial Officer

 

 


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