S-2/A 1 forms2a.txt FORM S-2/A Registration No. 333-86084 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Virginia Commerce Bancorp, Inc. (Exact name of registrant as specified in its charter) Virginia 54-1964895 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 5350 Lee Highway Arlington, Virginia 22207 (703) 534-0700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Peter A. Converse Copies to: President and Chief Executive Officer Noel M. Gruber, Esquire Virginia Commerce Bancorp, Inc. David H. Baris, Esquire 5350 Lee Highway Kennedy, Baris & Lundy, L.L.P. Arlington, Virginia 22207 4701 Sangamore Road, Suite P-15 (703) 534-0700 Bethesda, Maryland 20816 (Name, address, including zip code, and telephone number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |_| If the registrant elects to deliver a copy of its latest annual report to securityholders or a complete and legible facsimile thereof, pursuant to item 11(a)(1) of this form, check the following box. |X| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| CALCULATION OF REGISTRATION FEE
==================================================================================================================== Title of Shares to be Registered Proposed Maximum Proposed Maximum Amount of Registration Fee (1) Offering Price Per Unit Aggregate Offering Price -------------------------------------------------------------------------------------------------------------------- Common stock $21.50 $7,050,000 $648.60 -------------------------------------------------------------------------------------------------------------------- Subscription rights to N/A N/A $0 purchase common stock ====================================================================================================================
(1) Registration fee, calculated in accordance with Rule 457(o), previously paid. No consideration is allocated to the subscription rights or will be received in connection with the distribution of the rights. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PROSPECTUS _________ Shares of Common Stock VIRGINIA COMMERCE BANCORP, INC. Virginia Commerce Bancorp is the holding company for Virginia Commerce Bank. Virginia Commerce Bancorp's common stock is traded on the Nasdaq National Market System under the symbol "VCBI". The closing price of the common stock on ___________, 2002 was $___ per share. Virginia Commerce Bancorp is offering to sell up to _______ newly issued shares of its common stock, representing approximately ___% of the outstanding shares, at a price of _____ per share, to holders of record of the common stock as of the close of business on _______, 2002. Each current shareholder has been granted a nontransferable right to purchase 0._____ additional shares of common stock for each whole share of common stock owned at the record date, subject to adjustment to the nearest whole share. Current shareholders are entitled to subscribe for all, or any portion, of the shares of common stock underlying their basic subscription rights. Current shareholders who purchase all of the shares to which their subscription right entitles them will also have the right to subscribe for additional shares of common stock that are not purchased by other current shareholders. Once made, subscriptions may not be revoked by subscribers. There is no minimum number of shares that must be sold in the offering. The offering is being made only through the efforts of our directors and executive officers. Until your subscription is accepted, all funds will be placed in an escrow account at Virginia Commerce Bank. If the offering is not completed, or if any part of your subscription is not accepted, your funds will be returned, without interest. This offering will continue until ______, 2002, unless extended in the discretion of the Board of Directors to a date not later than __________, 2002. Our directors and executive officers and their related parties have indicated that they intend to subscribe for approximately ______ shares of common stock through the exercise of their subscription rights and oversubscription privilege, representing approximately ___% of the offered shares. These intentions are not commitments and could change based upon individual circumstances. These persons currently own approximately 28% of the outstanding shares of common stock, and would own approximately the same percentage following the offering, assuming the sale of all offered shares and without giving effect to any oversubscriptions. ----------------- SHARES OF OUR COMMON STOCK ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. INVESTING IN COMMON STOCK INVOLVES INVESTMENT RISKS. ----------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMON STOCK OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS. Per share Total --------- ---------- Price to public $___ $7,000,000 Underwriting discounts and commissions None None Net proceeds of the offering (before expenses) $____ $7,000,000 The date of this prospectus is ________, 2002. The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. TABLE OF CONTENTS
PAGE Summary...........................................................................................................1 Selected Consolidated Financial Data..............................................................................4 Risk Factors......................................................................................................5 Caution About Forward Looking Statements..........................................................................8 The Offering..........................................................................................................9 Use of Proceeds..................................................................................................14 Dilution.........................................................................................................14 Virginia Commerce Bancorp, Inc...................................................................................15 Share Ownership of Directors, Officers and Certain Beneficial Owners.............................................17 Market for Common Stock and Dividends............................................................................18 Description of Our Capital Stock.................................................................................18 Legal Matters....................................................................................................21 Experts..........................................................................................................21 Where You Can Find Additional Information About Virginia Commerce Bancorp And Documents Included With This Prospectus...............................................................21 Annual Report to Shareholders for the Year Ended December 31, 2001.......................................Appendix 1 Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2002..................................Appendix 2
SUMMARY This summary presents selected information from this prospectus. You should carefully read this entire document in order to understand this offering. This summary includes page references that direct you to more complete discussions elsewhere in this document. THE OFFERING Shares offered ____________ shares of common stock. The common stock is traded on the Nasdaq National Market under the symbol "VCBI". Offering price $______ per share. The offering price was established by the Board of Directors after consideration of a number of factors. See "The Offering - Determination of Offering Price" at page 12. Basic subscription right Holders of record of the common stock at the close of business on _____, 2002 have been granted nontransferable subscription rights to purchase ______ shares of common stock at the offering price for each whole share of common stock owned on the record date. As a current shareholder you are entitled to subscribe for all, or any part of, the shares of common stock underlying your basic subscription rights. See "The Offering - Basic Subscription Rights" at page 9. Oversubscription privilege If you subscribe for all of the shares of common stock to which you are entitled under your basic subscription right, then you will be able to subscribe for shares of common stock that are not subscribed for by other current shareholders pursuant to their basic subscription rights. You must exercise your oversubscription privilege at the same time you exercise your basic subscription right. If there are not enough shares available to satisfy all requests to purchase shares pursuant to the oversubscription privilege, the available shares will be allocated pro rata among all current shareholders exercising their oversubscription privilege, based on the number of shares held of record on the record date. We cannot be certain that there will be any shares available to satisfy any ___ requests ___ to ___ subscribe ___ for shares ___ pursuant to the oversubscription privilege. See "The Offering - Oversubscription Privilege" at page 9. Expiration time The offering will expire at 5:00 p.m., Eastern Time, on ______, 2002, unless the expiration time is extended in the discretion of the Board of Directors to a date not later than ________, 2002. See "The Offering - Expiration Time" at page 9. No minimum offering There is no minimum number of shares that must be purchased in the offering. The offering will be completed if any valid subscriptions are received before the expiration date, or any extension thereof, unless the Board of Directors terminates the offering. See "The Offering - No Minimum Offering" at page 9. How to subscribe for shares If you want to exercise your subscription in the offering rights, you must complete the Order Form which accompanies this prospectus and send the competed form, with payment of the aggregate offering price for the shares you want to purchase under your basic subscription right and the oversubscription privilege, to the Subscription Agent. Your Order Form and payment must be received before the expiration time. If you use the mail to submit your Order Form, we recommend that you use registered mail, return receipt requested. Once your completed Order Form is received by the Subscription Agent, you may not revoke your subscription. See "The Offering - Procedure for Subscribing for Common Stock in the Offering" at page 10. Your subscription funds will not be released to us or for our use or commingled with our funds 1 unless your subscription is accepted and shares are to be issued to you with respect to your funds. The name and address of the Subscription Agent are: Lynda S. Cornell Virginia Commerce Bancorp, Inc. 5350 Lee Highway Arlington, Virginia 22207 How to subscribe if your shares If you hold your shares of common stock are held through a bank, broker thorough a bank, broker or other third or other third party party or nominee, you can participate in the offering to purchase your pro rata share and to purchase additional shares under the oversubscription privilege, but you must do so through your recordholder. You should contact your bank, broker or other nominee and request it to effect the transactions for you. See "The Offering - Procedure for Subscribing for Common Stock in the Offering" at page 10. Use of proceeds The net proceeds of the offering will be approximately $6,935,000, depending on the number of shares of common stock sold in the offering and the amount of the actual expenses incurred. A portion of the proceeds of the offering, up to $6,000,000 if the offering is fully subscribed, will be used to reduce the outstanding balance on Virginia Commerce Bancorp's line of credit. The remaining proceeds will be contributed to the capital of Virginia Commerce Bank, where together with future advances on the line of credit, they will be used in the bank's lending and investment activities and for general corporate purposes. Repayment of the line of credit and contribution of capital to Virginia Commerce Bank will strengthen our capital base, enable Virginia Commerce Bank to continue as a "well-capitalized" ___ institution under federal banking regulations, and allow us to pursue future growth opportunities through further expansion of our existing lending and investment activities and possible further branching. While we are always looking for additional branching opportunities, there are no definitive plans for any additional branches. See "Use of Proceeds" at page 14. Regulatory limitation We will not issue common stock in the offering to any person who, in our opinion, would be required to obtain prior clearance or approval from any state or federal bank regulatory authority to own or control such shares if, at the expiration time, clearance or approval has not been obtained or any required waiting period has not expired. See "The Offering - Regulatory Limitation" at page 13. Intentions of directors, executive Directors and executive officers of officers and others Virginia Commerce Bancorp and their related parties have indicated that they intend to subscribe for approximately ____ shares through the exercise of basic subscription rights, and that they intend to subscribe to purchase up to ___ additional shares under the oversubscription privilege. See "The Offering - Intentions of Directors and Executive Officers" at page 12. Our directors and executive officers currently beneficially own approximately __% of the outstanding shares, and we expect them to own at least that percentage of the shares following completion of the offering, assuming all shares offered are sold and without giving effect to their oversubscription requests. Material federal tax consequences For federal income tax purposes, receipt of the subscription rights will be treated as a nontaxable distribution with respect to the common stock. See "The Offering - Material Federal Income Tax Considerations" at page 12. 2 VIRGINIA COMMERCE BANCORP, INC. 5350 Lee Highway Arlington, Virginia 22207 703.534.0700 Virginia Commerce Bancorp is a one-bank holding company headquartered in Arlington, Virginia. We provide general commercial and consumer banking services through our wholly owned banking subsidiary, Virginia Commerce Bank, Arlington, Virginia. Virginia Commerce Bancorp was organized in December 1999 to be the holding company for Virginia Commerce Bank. Virginia Commerce Bank was organized and opened for business in 1988, and became a wholly owned subsidiary of Virginia Commerce Bancorp on December 23, 1999. At December 31, 2001, we had consolidated assets of $489.5 million, deposits of $406.9 million, and shareholders' equity of $26.2 million. See "Selected Consolidated Financial Data" at page 4, and the Consolidated Financial Statements included as a part of this prospectus. Virginia Commerce Bank, our primary subsidiary, is an independent, community-oriented, full-service financial institution. It conducts a general commercial and consumer banking business. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans and cash management services. Virginia Commerce Bank is a Virginia chartered bank which is a member of the Federal Reserve System, and its deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. Virginia Commerce Bank focuses on the Northern Virginia/suburban Washington DC markets of Arlington County, the City of Alexandria, Fairfax County and Prince William County, operating a total of thirteen banking offices and two mortgage banking offices. Virginia Commerce Bank's primary service area is oriented toward independently owned small- to-medium sized businesses, professionals and their firms, non-profits, and investors. Although Virginia Commerce Bank serves both commercial and consumer customers, its primary business focus is on lending to small and medium sized businesses in its market area. Recent Developments. For the quarter ended March 31, 2002, we had earnings of $1,363 thousand, or $0.40 per basic share, or $0.36 per diluted share, each as adjusted for the five for four stock split in the form of a 25% stock dividend paid on April 12, 2002. At March 31, 2002, we had consolidated assets of $547.4 million, including total loans of $429.7 million, deposits of $464.7 million, and shareholders' equity of $27.3 million. At March 31, 2002, our tier 1, total and leverage capital ratios were as follows: Virginia Commerce Bancorp Tier 1 risk weighted 6.24% Total risk weighted 7.34% Leverage 5.34% Virginia Commerce Bank Tier 1 risk weighted 6.22% Total risk weighted 10.05% Leverage 5.32% We will be required to reduce the outstanding balance under our revolving line of credit from $12 million to $8 million by June 30, 2002, which may cause Virginia Commerce Bank to cease to be well capitalized. While we do not anticipate any difficulty in making this payment, or any adverse impact on our ability to meet our obligations on a liquidity basis, the payment, which will be funded by a dividend from, or reduction in capital of, Virginia Commerce Bank, will reduce the Bank's available capital, adversely impacting its ability to support additional growth in loan and asset volume, and potentially adversely affecting earnings and shareholder returns. See, "Virginia Commerce Bancorp, Inc. - Borrowings" at page 15. 3 SELECTED FINANCIAL DATA The following table shows selected historical consolidated financial data for Virginia Commerce Bancorp. You should read it in connection with the historical consolidated financial information contained in the consolidated financial statements for the year ended December 31, 2001 and for the three months ended March 31, 2002 included in this prospectus included with and incorporated by reference in this prospectus and with the other information provided in this prospectus. Information for the three month periods ended March 31, 2002 and 2001 is derived from unaudited interim financial statements and includes, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the data for such period. The results of operations for the three-month period ended March 31, 2002 do not necessarily indicate the results which may be expected for any period or for the full year.
Three Months Ended March 31, Year Ended December 31, ---------------------- ---------------------------------------------------------- --- 2002 2001 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except per share data) SELECTED YEAR-END BALANCES Total assets $ 547,368 $ 410,476 $ 489,511 $ 371,182 $ 282,575 $ 222,442 $ 165,119 Total stockholders' equity 27,288 22,353 26,220 21,166 17,489 15,832 11,273 Total loans (net) 429,693 314,870 410,950 305,717 205,171 149,440 100,917 Total deposits 464,669 343,448 406,922 310,934 243,044 188,743 142,428 SUMMARY RESULTS OF OPERATIONS Interest income $ 8,748 $ 8,047 $ 33,897 $ 26,776 $ 18,851 $ 15,266 $ 11,135 Interest expense 3,377 4,047 15,991 12,861 8,679 7,511 5,168 Net interest income 5,371 4,000 17,906 13,915 10,172 7,755 5,967 Provision for loan losses 521 270 1,572 947 480 451 262 Net interest income after provision for loan losses $ 4,850 $ 3,730 $ 16,334 $ 12,968 $ 9,692 $ 7,304 $ 5,705 Non-interest income 1,266 880 4,704 2,599 1,999 632 478 Non-interest expense 4,064 3,188 13,982 10,636 8,397 5,648 4,465 Income before taxes 2,052 1,422 7,056 4,931 3,294 2,288 1,718 Income tax expense 689 484 2,391 1,681 1,128 784 586 Net income 1,363 938 4,665 3,250 2,166 1,504 1,132 PER SHARE DATA (1) Net income, basic $ 0.40 $ 0.28 $ 1.38 $ 0.96 $ 0.64 $ 0.45 $ 0.38 Net income, diluted 0.36 0.26 1.26 0.90 0.60 0.42 0.36 Book value 8.02 6.61 7.71 6.26 5.17 4.69 3.81 Average number of shares outstanding 3,400,771 3,383,398 3,389,189 3,383,398 3,381,375 3,306,750 2,960,013 GROWTH AND SIGNIFICANT RATIOS % Change in net income 45.31% 50.56% 43.54% 50.06% 44.04% 32.78% 7.25% % Change in assets 11.82% 10.05% 31.88% 31.36% 27.03% 34.72% 34.55% % Change in loans 4.56% 2.99% 34.42% 49.01% 37.29% 48.08% 32.24% % Change in deposits 14.11% 10.46% 30.87% 27.93% 28.77% 32.52% 37.32% % Change in equity 4.07% 5.61% 23.88% 21.02% 10.47% 40.44% 12.12% Equity to asset ratio 4.99% 5.45% 5.36% 5.70% 6.19% 7.12% 6.83% Return on average assets 1.10% 0.98% 1.05% 1.00% 0.87% 0.75% 0.81% Return on average equity 20.60% 17.40% 19.37% 17.04% 13.03% 10.37% 10.53% Average equity to average assets 5.20% 5.54% 5.44% 5.87% 6.65% 7.25% 7.74% Efficiency ratio (2) 61.23% 65.33% 61.84% 64.41% 68.99% 67.35% 69.28%
(1) Adjusted for all years presented giving retroactive effect to 10% stock dividends paid in 1997 and 2000, a 35% stock split in the form of a dividend in 1997, a change in par value in 1998, a 10% stock restructuring in 1998 and 1999, and five for four stock splits in the form of 25% stock dividends in 2001 and 2002. (2) Computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income, net of securities gains or losses. 4 RISK FACTORS An investment in the common stock involves various risks. You should carefully consider the risk factors listed below. 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, or which we do not believe are material, may cause our earnings to be lower, or hurt our future financial condition. You should read this section together with the other information in this prospectus. ALTHOUGH THE COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET, TRADING IN THE COMMON STOCK HAS BEEN SPORADIC AND VOLUME HAS BEEN LIGHT. AS A RESULT, SHAREHOLDERS MAY NOT BE ABLE TO QUICKLY AND EASILY SELL THEIR COMMON STOCK. Although our common stock is listed for trading on the Nasdaq National 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 limited, averaging only approximately 1,000 shares per day over the past year, and there can be no assurance that an active and liquid market for the common stock will develop. As a result, shareholders may find it difficult to sell a significant number of shares at the prevailing market price. NO BROKER HAS AGREED TO PURCHASE ANY OF THE COMMON STOCK AND WE MAY NOT BE ABLE TO SELL ALL OF THE SHARES WE ARE ATTEMPTING TO SELL IN THE OFFERING. OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED IF LESS THAN ALL OF THE OFFERED SHARES ARE SOLD. The common stock is being sold directly, through the efforts of our directors and executive officers. No broker-dealer or other person has any obligation to purchase, or find purchasers for, any shares of common stock. See "The Offering - Manner of Distribution" at page 11. Because the offering is not underwritten, there can be no assurance that any particular number of shares will be sold. If less than all of the shares offered are subscribed for, we will have less capital to fund operations and growth, which could result in restricted or slower growth, reduced asset size and slower expansion of activities, and lower shareholder returns. See "The Offering" at page 9. OUR CONTINUED GROWTH DEPENDS ON OUR ABILITY TO MEET MINIMUM REGULATORY CAPITAL LEVELS. GROWTH AND SHAREHOLDER RETURNS MAY BE ADVERSELY AFFECTED IF BORROWED FUNDS OR OTHER SOURCES OF CAPITAL ARE NOT AVAILABLE TO HELP US MEET THEM. Since Virginia Commerce Bancorp became the holding company for Virginia Commerce Bank in 1999, we have borrowed funds under revolving lines of credit in order to provide capital to finance the growth of Virginia Commerce Bank. We believe that borrowing results in enhanced results of operations and returns for existing shareholders. We intend to continue this strategy, and the size of this offering contemplates the continued availability of borrowed funds to provide additional capital for growth. If we do not have continued access to sufficient borrowed funds, we may be required to reduce our level of assets, reduce our rate of growth, or issue additional common stock or other equity securities in order to maintain regulatory compliance and fund growth. Under those circumstances net income and the rate of growth of net income may be adversely affected. WE MUST REDUCE THE OUTSTANDING BALANCE ON OUR REVOLVING LINE OF CREDIT BY $4 MILLION ON OR BEFORE JUNE 30, 2002, WHICH MAY CAUSE VIRGINIA COMMERCE BANK TO CEASE TO BE "WELL CAPITALIZED" FOR REGULATORY PURPOSES. AS A RESULT, OUR RATE OF GROWTH, EARNINGS AND SHAREHOLDER RETURNS MAY BE ADVERSELY AFFECTED. As our lender did not obtain a participant in our line of credit by April 30, 2002, we are required to reduce the outstanding balance on our line of credit by $4.0 million by June 30, 2002. As a result of this payment prior to receipt of the proceeds of this offering, Virginia Commerce Bank may cease to be "well capitalized" and may become subject to paying deposit insurance premiums, may find certain areas of business or customer relationships less available to it, may find sources of liquidity, such as federal funds lines with correspondent banks, reduced or cancelled, may be required to restrict growth or reduce asset size, and could default on our line of credit if we fail to take steps to react to the decline in capital, which would adversely impact earnings and shareholder value and returns. See "Virginia Commerce Bancorp, Inc. - Borrowings" at page 15. DIRECTORS AND OFFICERS OF VIRGINIA COMMERCE BANCORP WILL OWN AT LEAST 27.96% OF THE OUTSTANDING COMMON STOCK AFTER THE OFFERING. AS A RESULT OF THEIR OWNERSHIP, THEY COULD MAKE IT MORE DIFFICULT TO OBTAIN APPROVAL FOR CERTAIN MATTERS SUBMITTED TO SHAREHOLDER VOTE, INCLUDING CERTAIN ACQUISITIONS. THE RESULTS OF THE VOTE MAY BE 5 CONTRARY TO THE DESIRES OR INTERESTS OF THE PUBLIC SHAREHOLDERS. Following completion of the offering, our directors and executive officers and their affiliates will own at least 27.96% of the outstanding common stock, assuming that they purchase their pro rata share of the offering as expected, without giving effect to any oversubscription requests, and assuming the sale of all shares offered. These persons may purchase a greater or lesser number of shares in the offering. 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 certain mergers, share exchanges, certain asset sales, and certain amendments to the Articles of Incorporation). See "Share Ownership of Directors, Officers and Certain Beneficial Owners" at page 17, and "Description of Capital Stock - Certain Provisions of the Articles of Incorporation and Virginia Law" at page 19. CONSUMMATION OF THE OFFERING IS NOT SUBJECT TO THE RECEIPT OF SUBSCRIPTIONS FOR A MINIMUM NUMBER OF SHARES. SUBSCRIBERS WILL BE REQUIRED TO PURCHASE SHARES EVEN IF LESS THAN ALL OF THE SHARES OFFERED ARE SOLD. There is no minimum number of shares that must be sold in the offering, and subscriptions, once received, are irrevocable. The offering may be completed even if substantially less than the total number of shares offered is sold. If this happens, our capital would not be increased to the extent it would be if all of the shares being offered were sold. Once made, subscriptions will not be revocable by subscribers, and we intend to accept subscriptions even if the offering has not been fully subscribed. See "The Offering" at page 9. THE BOOK VALUE OF A SHARE OF COMMON STOCK AFTER THE OFFERING WILL BE LOWER THAN THE PRICE PAID FOR SHARES IN THE OFFERING. If all of the shares being offered are sold, the book value per share at December 31, 2001, after giving effect to completion of the offering, would be $___ per share. The post-offering book value would be less than the offering price of $____ per share, and accordingly, investors in the offering would experience dilution of $___, or ____%, per share, calculated on the basis of the difference between the offering price and book value. See "Dilution" page 14. OUR LEVEL OF ASSETS AND EARNINGS MAY NOT CONTINUE TO GROW AS RAPIDLY AS THEY HAVE IN THE PAST FEW YEARS. Over the past five years, our asset level has increased at an average annual rate of 31.9%, including a 31.9% increase in 2001, our earnings have increased at an average annual rate of 35.5%, including a 43.5% increase in 2001, and our efficiency ratio, which is a measure of operating expenses compared to income, has improved from 69.3% to 61.8%. We can not assure you that we will continue to achieve comparable results in future years. As our asset size and earnings increase, it may become more difficult to achieve high rates of increase in assets and earnings. Additionally, it may become more difficult to achieve continued improvements in our expense levels and efficiency ratio. Further, we may not be able to maintain the relatively low levels of nonperforming assets that we have experienced. Declines in the rate of growth of income or assets, and increases in operating expenses or nonperforming assets may have an adverse impact on the value of the common stock. See, "Virginia Commerce Bancorp, Inc. - Borrowings" at page 15. WE HAVE NO CURRENT PLANS TO COMMENCE PAYING CASH DIVIDENDS. Virginia Commerce Bank is our principal revenue producing operation. As a result, the ability to pay cash dividends to shareholders largely depends on receiving dividends from Virginia Commerce Bank. The amount of dividends that Virginia Commerce Bank may pay is limited by state and federal laws and regulations. Even if we have earnings in an amount sufficient to pay cash dividends, the Board currently intends to retain earnings for the purpose of financing growth. See "Market for Common Stock and Dividends" at page 18. CHANGES IN LOCAL ECONOMIC CONDITIONS COULD REDUCE OUR INCOME AND GROWTH, AND COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS. We make loans, and most of our assets are located, in the Northern Virginia and suburban Washington DC markets. Adverse changes in economic conditions in these areas could hurt our ability to collect loans, could reduce the demand for loans, and otherwise could negatively affect our performance and financial condition. A SUBSTANTIAL PORTION OF OUR LOANS ARE REAL ESTATE RELATED LOANS IN THE NORTHERN VIRGINIA AND 6 WASHINGTON DC METROPOLITAN AREA. ADVERSE CHANGES IN THE REAL ESTATE MARKET IN THIS AREA COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS, AND ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION. We have a substantial amount of loans secured by real estate as collateral. At March 31, 2002, 22.9% of our loans were construction and land development loans, 14.0% were 1-4 family residential real estate loans, 5.3% were multi-family residential loans and 47.7% were commercial real estate loans. Additionally, 8.7% were commercial and industrial loans which are not secured by real estate. 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 and suburban Washington DC market, could increase the levels of nonperforming loans and charge-offs, and reduce loan demand and deposit growth. In that event, we would likely experience lower earnings or losses. THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO SUCCESSFULLY COMPETE WITH OTHERS FOR BUSINESS. We compete for loans, deposits, and investment dollars with other banks and other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources. Recent legislation expanding the array of firms that can own banks may result in increased competition for us. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings. OUR PROFITABILITY DEPENDS ON ECONOMIC POLICIES AND FACTORS BEYOND OUR CONTROL. Our operating income and net income depend to a great extent on "rate differentials," 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. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities, including the Board of Governors of the Federal Reserve System. Proposed 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. A significant portion of our deposits, 16.3% at December 31, 2001, are noninterest bearing business demand deposits. Additionally, government policy relating to the deposit insurance funds may adversely affect our results of operations. Under current law and regulation, if the reserve ratio of the Bank Insurance Fund falls below 1.25%, as certain recent forecasts predict may happen in 2002, all insured banks will be required to pay deposit insurance premiums at a rate of 23 basis points (0.23%) of assessable deposits. We do not currently pay any deposit insurance premiums. Payment of deposit insurance premiums will have an adverse effect on our earnings. These changes or other legislative or regulatory developments could have a significant negative effect on our net interest income, net income, net interest margin, return on assets and return on equity. 7 CAUTION ABOUT FORWARD LOOKING STATEMENTS We make forward looking statements in this prospectus that are subject to risks and uncertainties. These forward looking statements include: o Statements of goals, intentions, and expectations as to future trends, plans, events, or results of operations and policies and regarding general economic conditions. o Estimates of risks and of future costs and benefits; and o Statements of the ability to achieve financial and other goals. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "anticipates," "believes," "expects," "plans," "estimates," "potential," "continue," "could," "should," and similar words or phrases. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by: o Management's estimates and projections of interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast future interest rates and other economic conditions; o Future laws and regulations; and o A variety of other matters. Because of these uncertainties and the assumptions on which the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. We do not undertake to update any forward-looking statements to reflect occurrences or events that may not have been anticipated as of the date of such statements. In addition, our past results of operations do not necessarily indicate future results. 8 THE OFFERING Securities Offered. We are offering to sell up to _______ newly issued shares of our common stock at a price of _____ per share, to holders of record of the common stock as of the close of business on _______, 2002. Each current shareholder has been granted a nontransferable right to purchase, at the offering price, 0._____ additional shares of common stock for each whole share of common stock owned at the record date, subject to adjustment to the nearest whole share. The shares being offered represent approximately ___% of the number of shares currently outstanding. Current shareholders are entitled to subscribe for all, or any portion, of the shares of common stock underlying their basic subscription rights. Current shareholders who purchase all of the shares to which their subscription right entitles them will also have the right to subscribe for additional shares of common stock that are not purchased by other current shareholders. ___ See "Basic Subscription Rights" and "Oversubscription Privilege" below. No Minimum Offering. There is no minimum number of shares that must be sold in the offering. The offering will be completed if any valid subscriptions are received, unless the Board of Directors has terminated the offering in its entirety. While our directors and executive officers intend to purchase shares in the offering, they are not obligated to purchase any minimum number of shares. See "The Offering - Intentions of Directors, Executive Officers and Others" at page 12. Expiration Time. Subscriptions to purchase shares must be received no later than 5:00 p.m., Eastern time, on ________, _________, 2002, unless we terminate the offering earlier or extend it. We may terminate the offering at any time prior to ___________, 2002, or to extend the termination date without notice. Under no circumstances will we extend the offering beyond ____________, 2002. See "The Offering - Procedure for Subscribing to Common Stock in the Offering" at page 10. After the expiration of the offering, unexercised subscription rights will be null and void. We will not be obligated to honor any Order Form received by the Subscription Agent after the expiration time, regardless of when the form or the payment were sent. Basic Subscription Rights. The basic subscription right entitles each current shareholder to purchase, at the offering price, 0._____ additional shares of common stock for every whole share of common stock held on the record date, rounded to the nearest whole share. Current shareholders are entitled to subscribe for all, or any portion of, the shares of common stock underlying their basic subscription rights. No fractional shares will be issued. You may not transfer your subscription rights or exercise them in the name of another person or entity. We reserve the right to accept any or all subscriptions for shares under the basic subscription rights at any time prior to the expiration time, and to issue certificates for those shares, while continuing to hold in escrow funds relating to other subscriptions under the basic subscription rights and oversubscription privilege subscriptions until the expiration time and determination of the number of available shares and appropriate prorations and allocations. Oversubscription Privilege. Each current shareholder who subscribes for all of the shares of common stock to which the shareholder is entitled under the basic subscription right will have the right to exercise the oversubscription privilege and to subscribe for additional shares of common stock that are not purchased by other current shareholders pursuant to their basic subscription rights. Current shareholders will be entitled to purchase additional shares to the extent available as a result of other shareholders electing not to subscribe, or subscribing for fewer shares than the maximum to which they are otherwise entitled, pursuant to their basic subscription rights. If, after all subscriptions under the basic subscription rights are satisfied, the number of unsold shares is not sufficient to satisfy all requests to purchase additional shares under the oversubscription privilege, then the available ___ shares will be allocated pro rata among ___ shareholders ___ exercising ___ the oversubscription privilege based on the number of shares held of record on the record date. If the allocation of the available ___ shares results in a person ___ receiving fewer shares than they subscribed for under the oversubscription privilege, any excess funds will be returned without interest or deduction as soon as practicable following the expiration time. We cannot be certain whether there will be any shares available to satisfy, in whole or in part, requests to subscribe for shares under the oversubscription privilege. 9 To exercise the oversubscription privilege, the appropriate section on the Order Form must be completed, and payment in full of the aggregate offering price for the additional shares of common stock must accompany the Order Form. If there are unsold shares remaining after all requests to purchase shares pursuant to the oversubscription privilege have been satisfied, we may offer current shareholders who have purchased all of the shares underlying their basic subscription right, on a selective basis, the opportunity to purchase all or part of the remaining shares, at the offering price. We will identify the shareholders to whom this opportunity is offered in our discretion, and have no obligation to make this offer to any particular shareholder. PROCEDURE FOR SUBSCRIBING FOR COMMON STOCK IN THE OFFERING If you wish to exercise your subscription rights and participate in the offering you must do so by delivering properly completed and executed Order Forms to the Subscription Agent, prior to the expiration time, together with payment in full of the offering price for all shares of common stock for which you wish to subscribe under the basic subscription rights and the oversubscription privilege. Payment in full must be by: (a) check or bank draft drawn upon a U.S. bank; or (b) postal, telegraphic or express money order, in either case, payable to "Virginia Commerce Bancorp, Inc. Escrow Account"; or (c) by wire transfer to an account designated by us. If you wish to make payment by wire transfer, please contact the Subscription Agent for instructions. Payment of the offering price will be deemed to have been received only upon: (a) clearance of any uncertified check; (b) receipt of any certified check or bank draft drawn upon a U.S. bank or of any postal, telegraphic or express money order; or (c) receipt of good funds in the Virginia Commerce Bancorp, Inc. Escrow Account. If you are paying by uncertified personal check, please note that the check may take at least five business days to clear. If you wish to pay the offering price by means of uncertified personal check, we urge you to make payment sufficiently before the end of the offering to ensure that such payment is received and clears before the end of the offering. All funds received in payment of the subscription price will be deposited in the Virginia Commerce Bancorp, Inc. Escrow Account and, until closing of the offering, will be invested at the direction of Virginia Commerce Bancorp. The address to which subscription agreements and payment of the offering price should be delivered is: Lynda S. Cornell, Subscription Agent Virginia Commerce Bancorp, Inc. 5350 Lee Highway Arlington, Virginia 22207 703.534.0700 DELIVERY TO AN ADDRESS OR IN A MANNER OTHER THAN THOSE INDICATED ABOVE DOES NOT CONSTITUTE GOOD DELIVERY TO THE SUBSCRIPTION AGENT. If the amount you send with your subscription is insufficient to purchase the number of shares that you indicate are being subscribed for, or if you do not specify the number of shares to be purchased, then we will treat your subscription as one to purchase shares to the full extent of the payment sent. If the amount you send with your subscription exceeds the amount necessary to purchase the number of shares that you indicate are being subscribed for, then we will treat your subscription as one to purchase shares to the full extent of the excess payment sent. 10 FAILURE TO INCLUDE THE FULL OFFERING PRICE WITH YOUR ORDER FORM MAY CAUSE US TO REJECT YOUR SUBSCRIPTION. The method of delivery of subscription agreements and payment of the offering price will be at your election and risk. If you send your subscription by mail, we recommend that you use registered mail, return receipt requested, and that you allow a sufficient number of days to ensure delivery and clearance of payment prior to the termination date. You will be required to pay the additional postage costs relating to registered mail. We will decide all questions concerning the timeliness, validity, form and eligibility of Order Forms received or any exercise of subscription rights, and our decisions will be final and binding. We may, in our sole discretion, waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as we may determine, or reject the purported subscription. Order Forms will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as we determine in our sole discretion. Neither Virginia Commerce Bancorp, Virginia Commerce Bank nor the Subscription Agent will be under any duty to give a subscriber notice of any defect or irregularity in the submission of Order Forms or incur any liability for failure to give such notification. SUBSCRIPTIONS FOR COMMON STOCK MAY NOT BE REVOKED BY SUBSCRIBERS. Exercise of Subscription Rights if Your Shares are Held in Street Name. If you are a shareholder who has your shares of common stock registered in the name of your broker, bank or other third party nominee, you may participate in the offering and exercise both the basic subscription right and the oversubscription privilege, but you must do so through your recordholder. You should contact your bank, broker or other nominee and request it to effect the transactions for you. Recordholders who hold shares of common stock for the account of others, such as brokers, trustees or depositories for securities, should notify the beneficial owners as soon as possible to ascertain their intentions and to obtain instructions with respect to subscription rights. If a beneficial owner instructs, the recordholder of such subscription rights should complete Order Forms and submit them to the Subscription Agent with the proper payment. ESCROW ACCOUNT; RELEASE OF FUNDS; NO INTEREST ON SUBSCRIPTION FUNDS All funds received in payment of the offering price will be promptly deposited into an escrow account at Virginia Commerce Bank subject to the control of the President and Chief Financial Officer of Virginia Commerce Bancorp, until acceptance of the subscriptions to which funds relate, rejection of a subscription, or termination of the offering. Funds in the escrow account will be invested in short-term obligations of the United States government, repurchase agreements secured by government securities or other investments permitted under SEC rules. Subscription funds will be released from the escrow account only upon receipt by the escrow agent of the certification that subscriptions relating to such funds have been accepted and that shares of common stock will be issued to subscribers in respect of such subscriptions. We will keep earnings on funds in the escrow account whether or not the offering is consummated. Subscriptions for common stock that are received by the Subscription Agent may not be revoked. No interest will be paid to subscribers on subscription funds, even if the offering is terminated in its entirety or an individual subscription is rejected. By submitting a subscription, you will forego interest you otherwise could have earned on the funds for the period during which your funds are held in escrow. We will, however, pay interest to the extent that law, regulation or administrative policy of an investor's state of residence specifically requires in the event that the offering is not completed. Prior to the time the offering is completed or terminated, we will be entitled to request, from time to time, that the escrow agent distribute accrued earnings on the escrowed funds to us for general corporate purposes. MANNER OF DISTRIBUTION Certain of our directors and executive officers will assist us in the offering. None of the directors and executive officers will receive special compensation for their services in connection with the offering. No person is authorized to make statements about Virginia Commerce Bancorp unless the information is set forth in this prospectus or the documents included or incorporated in it, or to render investment advice. None of our directors and executive 11 officers is registered as a securities broker or dealer under the federal or applicable state securities laws, nor are any of such persons affiliated with any broker or dealer. Because such persons are not in the business of either effecting securities transactions for others or buying and selling securities for their own account, they are not required to register as brokers or dealers under the federal securities laws. In addition, the proposed activities of such directors and executive officers are exempted from registration pursuant to a specific safe-harbor provision under Rule 3a4-1 under the Securities Exchange Act of 1934. Substantially similar exemptions from registration are available under applicable state securities laws. DETERMINATION OF OFFERING PRICE The offering price has been determined by the Board of Directors. No investment bank has advised us in setting the price, and we have not obtained any independent evaluation of the common stock. In establishing the offering price, the Board of Directors considered various factors that it deemed relevant including among other things: o our current financial condition and operating performance as presented in our financial statements, o our regulatory status o the market value of the common stock o the number of shares sought to be issued, o the amount sought to be raised, and o the anticipated impact of the offering on the market price of the common stock. NEITHER THE BOARD OF DIRECTORS NOR MANAGEMENT HAS EXPRESSED AN OPINION OR HAS MADE ANY RECOMMENDATION AS TO WHETHER ANY CURRENT SHAREHOLDER SHOULD PURCHASE SHARES IN THE OFFERING. ANY DECISION TO INVEST IN THE COMMON STOCK MUST BE MADE BY EACH INVESTOR BASED UPON HIS OR HER OWN EVALUATION OF THE OFFERING IN THE CONTEXT OF HIS OR HER BEST INTERESTS. INTENTIONS OF DIRECTORS, EXECUTIVE OFFICERS AND OTHERS Our directors and executive officers and their related parties have indicated that they intend to subscribe for approximately ______ shares of common stock through the exercise of their subscription rights, including ______ shares under the oversubscription privilege, representing approximately ___% of the shares offered, and that they are purchasing such shares with the intent to hold the shares as an investment. These intentions are not commitments and could change based upon individual circumstances, and the number of shares to be purchased by such persons pursuant to oversubscription privilege may be reduced if demand for shares exceeds the maximum number of shares offered. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following describes, in summary, the anticipated material federal income tax consequences applicable to current shareholders who are residents of the United States relating to the receipt, exercise and lapse of subscription rights received in connection with the offering, as described in the opinion of Kevin P. Kennedy, Esquire, special tax counsel to Virginia Commerce Bancorp, which we have obtained. The opinion of Mr. Kennedy is not binding on the Internal Revenue Service, and the IRS could disagree with the conclusions reached. In the event of such disagreement, there is no assurance that the IRS would not prevail in a judicial or administrative proceeding. No ruling has or will be requested from the IRS. We cannot assure you that the IRS will not take a position with respect to federal income tax consequences that is contrary to those described below, or that the consequences described below will be upheld by the courts if challenged by the IRS. For federal income tax purposes, a current shareholder will not recognize taxable income upon the receipt of the subscription rights. As a general rule, if the subscription rights are exercised or sold, the basis of the underlying shares on which the subscription rights were distributed and the basis in the subscription rights will be determined by an allocation of the shareholder's existing basis in the underlying shares between the underlying shares and the rights, pro rata according to their respective fair market values. We note that the subscription rights we are issuing are nontransferable, and cannot be sold. 12 Section 307(b) of the Internal Revenue Code provides an exception to the general rule which requires allocation of basis when subscription rights are exercised, where the fair market value of the rights at the time of the distribution is less than 15% of the fair market value of the underlying shares at the time of distribution. In such cases no allocation is required and the tax basis of the rights is zero, unless the shareholder elects to make the allocation. Based on the current market price of the common stock, we do not believe that a current shareholder will be required to allocate any tax basis of the underlying shares to the subscription rights. However, since this determination can be affected by the market price of the common stock on the date of distribution of the rights, shareholders should consult with their own tax advisors with resect to this issue. Shareholders who allow the rights to lapse will not recognize any gain or loss, and any basis previously allocated to the rights will revert to the underlying shares. Upon exercise of subscription rights, a shareholder will not recognize taxable income. The basis of each share acquired upon exercise of a subscription right will equal the sum of the offering price and the basis, if any, in the subscription right exercised. The holding period for shares acquired upon the exercise of a subscription right will begin on the date the subscription right is exercised. This discussion of certain federal income tax consequences relates only to current shareholders who are residents of the United States and does not take into consideration their particular facts and circumstances. It does not purport to describe all of the tax consequences relating to the subscription rights and the offering. The tax treatment of shareholders having special status under the Internal Revenue Code may differ from those set forth above. In particular, the foregoing discussion may not be applicable with respect to certain specific categories of shareholders, including but not limited to: corporations, trusts, dealers in securities, financial institutions, insurance companies or tax exempt organizations; persons who are not United States citizens or resident aliens or domestic entities (partnerships or trusts); persons who are subject to alternative minimum tax. The federal income tax laws are complex, and a shareholder's individual circumstances may affect the tax consequences to the shareholder. CONSEQUENTLY, EACH CURRENT SHAREHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR BOTH AS TO THE EFFECT OF THEIR PARTICULAR FACTS AND CIRCUMSTANCES ON THE SPECIFIC FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES WHICH COULD RESULT FROM TRANSACTIONS INVOLVING THEIR SUBSCRIPTION RIGHTS OR THE COMMON STOCK. REGULATORY LIMITATION We will not be required to issue shares of common stock in the offering to any person who, in our judgment, would be required to obtain prior clearance or approval from any state or federal bank regulatory authority to own or control such shares if, at the expiration time, such clearance or approval has not been obtained or any required waiting period has not expired. Our determination as to whether clearance or approval is required will be final and binding. NONQUALIFIED STATES OR FOREIGN COUNTRIES We have made a reasonable effort to comply with the securities laws of all states in the United States in which current shareholders reside. We will not provide subscription materials to any person who resides in any foreign country or in any state of the United States if we determine that compliance with the securities laws of such country or state would be impracticable, and we will not accept any subscriptions from subscribers located in those states or countries. No payments will be made to any ineligible shareholder in lieu of the grant of the subscription rights. RIGHT TO AMEND OR TERMINATE THE OFFERING We expressly reserve the right to amend the terms and conditions of the offering. In the event of a material change to the terms of the offering, we will file an amendment to the registration statement, of which this prospectus is a part, and may resolicit subscribers. In the event of such a resolicitation, all proceeds received will be returned promptly to any subscriber who does not provide the Subscription Agent with an affirmative reconfirmation of the subscription. We expressly reserve the right, at any time prior to delivery of shares of common stock offered hereby, to terminate the offering if the offering is prohibited by law or regulation or if the Board of Directors concludes, in its sole judgment, that it is not in the best interests of Virginia Commerce Bancorp to complete the offering under the circumstances. We may terminate the offering by giving oral or written notice to the Subscription Agent and making a public announcement. If the offering is terminated, all funds received will be promptly refunded, without interest, 13 except that if the offering is not completed we will pay interest to the extent that law, regulation or administrative policy of an investor's state of residence specifically requires. ISSUANCE OF COMMON STOCK Certificates representing shares of common stock purchased in the offering will be delivered to purchasers as soon as practicable after the expiration time and after all prorations and adjustments contemplated by the offering have been effected. No fractional shares will be issued in the offering. All shares purchased in the offering will be registered in the name of the current shareholder whose share ownership gave rise to the subscription rights. We reserve the right to accept subscriptions under the basic subscription rights at any time prior to the expiration time. If we accept your subscription for shares under the basic subscription right prior to the expiration time we will send you certificates for your shares as soon as practicable thereafter, and we will continue to hold funds relating to your subscription for shares under the oversubscription privilege until the completion of the offering and proration of shares, if any, available for sale under the oversubscription privilege. REQUESTS FOR ADDITIONAL INFORMATION If you have questions or require additional information concerning the offering contact William K. Beauchesne, Chief Financial Officer, at (703) 633-6120. USE OF PROCEEDS If all of the shares offered are sold, then the first $6,000,000 will be used to reduce the outstanding principal amount owed on Virginia Commerce Bancorp's line of credit with a correspondent bank. The outstanding balance on the line of credit was $12,000,000 at March 31, 2002, which must be reduced by $4,000,000 by June 30, 2002. The current interest rate on the line of credit is 4.85%, and it has a final maturity of December 26, 2004. For additional information regarding the line of credit, see "Virginia Commerce Bancorp, Inc. - Borrowings" at page 15, and Note 13 to the Consolidated Financial Statements for the year ended December 31, 2001. The remaining proceeds of the offering, approximately $1,000,000 if all offered shares are sold, will be contributed to the capital of Virginia Commerce Bank, where it will strengthen the Bank's capital base and, together with further draws on the line of credit, enable it to exceed regulatory capital levels required for well capitalized status, and where it will permit continued growth in levels of assets and loans through expansion of its existing lending and investment business and possible further branching. While we are always looking for additional branching opportunities, and expect to continue our historic rate of branch expansion at one to two branches per year, there are no definitive plans for any additional branches, and there can be no assurance that we will establish additional branches or that they will be successful. We have no current plans to use any part of the proceeds, or any future advances on the line of credit which the proceeds of the offering replace, to engage in any activities which are not consistent with our current lending and investment activities. We expect that the proceeds of this offering, together with current earnings and additional advances under the line of credit or a successor line of credit, will support our anticipated growth for at least two to three years, although the exact period is dependent on our actual level of growth and earnings, opportunities for growth of assets, loan activity and branch expansion, and additional business opportunities which may develop, and economic conditions in general and the Northern Virginia and metropolitan Washington DC area in particular. DILUTION Dilution represents the difference between the amount per share paid by purchasers of common stock in this offering and the net tangible book value per share of common stock immediately after the offering. The tangible book value of Virginia Commerce Bancorp was $26.2 million at December 31, 2001, or $7.71 per share, as adjusted for the five for four stock split in the form of a stock dividend paid on April 12, 2002. After adjusting for the receipt of the net proceeds of the sale of ______ shares of common stock in the offering, the pro forma book value would be 14 $____ million, or $____ per share. As the table below shows, this represents an immediate dilution of $____ per share to investors, based on the difference between pro forma book value and the offering price. Offering price per share $ Net tangible book value per share before the offering $ 7.71 Increase in net tangible book value per share attributable to the offering $ Pro forma net tangible book value per share after the offering $ ------- Dilution to investors in the offering, per share $ ======= VIRGINIA COMMERCE BANCORP, INC. Virginia Commerce Bancorp was organized under Virginia law on November 5, 1999 to become the holding company for Virginia Commerce Bank. Virginia Commerce Bancorp acquired all of the outstanding shares of Virginia Commerce Bank on December 22, 1999 upon the effectiveness of the Agreement and Plan of Share Exchange dated September 22, 1999. As a result of the Agreement and Plan of Share Exchange, each share of Virginia Commerce Bank common stock was automatically exchanged for and converted into one share of Virginia Commerce Bancorp common stock. Virginia Commerce 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. While we from time to time receive expressions of interest from other institutions regarding the merger or acquisition of Virginia Commerce Bancorp, to date we have determined that the interests of the shareholders, our employees and the communities which we serve are best served by continued independence and growth of Virginia Commerce Bancorp and Virginia Commerce Bank. Virginia Commerce Bank engages in a general commercial banking business. The 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 our service area is Arlington and Fairfax Counties and the City of Alexandria in Northern Virginia, and the metropolitan Washington, DC area generally. Northern Virginia has experienced significant population and economic growth during the past decade. We have participated in this growth through our commercial and retail banking activities. Our primary service area consists of the Northern Virginia suburbs of Washington DC, including Arlington County, the City of Alexandria, Fairfax County and Prince William County. 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 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 primary service area is oriented toward independently owned small to medium sized businesses, light industry and firms specializing in government contracting. Over the past five years, our asset level has increased at an average annual rate of 31.9%, including a 31.9% increase in 2001, our earnings have increased at an average annual rate of 35.5%, including a 43.5% increase in 2001, and our efficiency ratio, which is a measure of operating expenses compared to income, has improved from 69.3% to 61.8%. At December 31, 2001, we had total assets of $489.5 million, an increase of 31.9% over December 31, 2000, total deposits of $406.9 million, total loans of $410.9 million and shareholder's equity of $26.2 million. For the year ended December 31, 2001, we had net income of $4.7 million, a 43.5% increase over earnings for 2000. Nonperforming assets at December 31, 2001 were $554 thousand, or 0.11% of total assets. BORROWINGS Since Virginia Commerce Bancorp became the holding company for Virginia Commerce Bank in 1999, we have borrowed funds from third party institutions under revolving lines of credit in order to provide capital to fund 15 the growth and expansion of Virginia Commerce Bank. We believe that borrowing under the line of credit results in enhanced results of operations and returns for existing shareholders. At March 31, 2002, the amount outstanding under the line of credit was $12.0 million, the full amount of the line, as our lender agreed to waive provisions that limited advances under the line to $10.5 million until a participant for a one third interest in the line had been obtained. As a participant was not obtained by April 30, 2002, we will be required to reduce the outstanding balance under line of credit to $8.0 million by June 30, 2002. The reduction of the outstanding balance on our line of credit to $8.0 million, before receipt of the proceeds of this offering, will be funded through the distribution of funds from Virginia Commerce Bank. This distribution, whether in the form of a dividend or a reduction in capital, may cause Virginia Commerce Bank to fall below the capital levels required for well capitalized status under Section 38 of the Federal Deposit Insurance Act and to become adequately capitalized. If it ceases to continue to be well capitalized and becomes adequately capitalized, Virginia Commerce Bank will continue to be able to conduct its lending and banking operations in substantially the same manner as it currently does, but it could become subject to certain adverse affects, including the following: o It could be required to pay deposit insurance premiums, or to pay premiums at a rate higher than well capitalized banks. o Certain areas of business or customer relationships may become less available to it, such as certain fiduciary deposit accounts which may be permitted to maintain uninsured deposits only in well capitalized institutions. o Our legal lending limit, which is directly related to our capital level, would be reduced. A reduced lending limit may cause us to be unable to satisfy the borrowing needs of customers, resulting in reduced business with those customers, or the incurrence of additional costs to meet the needs of those customers, such as expenses involved in establishing loan participations or syndications, and consequently, reduced profits. o Virginia Commerce Bank and Virginia Commerce Bancorp may become subject to a higher level of regulatory scrutiny, including more frequent examinations. o Virginia Commerce Bank's sources of liquidity, such as federal funds lines with correspondent banks, may be reduced or eliminated, which could limit the ability to fund loans at as high a loan to deposit level as it currently maintains. o We will be able to support only a lower level of assets, which may require that our growth be limited or the our level of assets be reduced. o If we do not take steps to cause Virginia Commerce Bank to become well capitalized, or repay the loan in full, by September 30, 2002, we would be in default under our revolving loan agreement, which would entitle the lender to call the loan due. If the loan is called and not paid in full, a possibility which we consider to be remote, the lender would be entitled to take any available remedies under the loan agreement, including foreclosing on and selling the stock of Virginia Commerce Bank, which stands as collateral security for the line of credit. These effects, or others of which we are not currently aware or which we do not believe to be material, could have an adverse impact on our earnings, our rate of growth, shareholder returns, as measured by return on assets and return on equity, on the price at which the common stock trades and the value of our banking franchise. While we anticipate that Virginia Commerce Bank may become less than well capitalized as of June 30, 2002, and before the receipt of proceeds of this offering, we do not anticipate that it will become less than adequately capitalized. We anticipate that the proceeds of this offering, together with current earnings and future advances on the line of credit will enable us to achieve or maintain well capitalized status for Virginia Commerce Bank and continue its growth in assets, and that the failure to be well capitalized at June 30, 2002 will not have a long term material adverse effect on our financial condition or results of operations, although there can be no assurance of this. We further believe that we can readily take actions to mitigate the effects of less than well capitalized status, and to avoid the occurrence of an event of default under our revolving loan agreement. 16 ADDITIONAL INFORMATION For additional information regarding our business and finances, please refer to the Management's Discussion and Analysis and Consolidated Financial Statements included in the Annual Report to Shareholders for the year ended December 31, 2001 and Quarterly Report on Form 10-Q for the three months ended March 31, 2002 included as a part of this prospectus, and to the documents listed in "Where You Can Find Additional Information About Virginia Commerce Bancorp and Documents Included with this Prospectus" which are incorporated by reference in this prospectus. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth certain information as of April 15, 2002 concerning the number and percentage of shares of the common stock beneficially owned by our directors and executive officers, and by all of our directors and executive officers as a group, as well as information regarding each other person known by us to own in excess of 5% of the outstanding common stock. Except as otherwise indicated, all shares are owned directly, and the named person possesses sole voting and sole investment power with respect to all such shares. Except as set forth below, we are not aware of any other person or persons who beneficially own in excess of five percent of the common stock. We are not aware of any arrangement which at a subsequent date may result in a change of control of Virginia Commerce Bancorp.
Number of Shares Percentage of Class Name and Position Beneficially Owned Beneficially Owned(1) ---------------------------------------------------------- ------------------ --------------------- Directors Leonard Adler, Director 69,246(2) 2.02% Peter A. Converse, President, CEO and Director 160,031(3) 4.53% Frank L. Cowles, Jr., Director 69,908(4) 2.03% W. Douglas Fisher, Chairman of the Board of Directors 131,904(4)(5) 3.84% David M. Guernsey, Vice Chairman of the Board of Directors 48,409(4)(6) 1.41% Robert H. L'Hommedieu, Director and Secretary 139,048(4) 4.04% Norris E. Mitchell, Director 159,982(4) 4.65% Arthur L. Walters, Vice Chairman of the Board of Directors 554,498(4)(7) 16.13% Executive Officers R.B. Anderson, Jr. 33,212(8) 0.97% William K. Beauchesne 18,540(9) 0.54% All directors and executive officers as a group (11 persons) 1,388,633(10) 36.18% Other 5% Shareholders Julian and Dorothy S. Davidson 230,840 6.79% 1240 Deborah Drive, SE Huntsville, Alabama 35801
(1) Based on 3,400,771 shares outstanding as of April 15, 2002, except with respect to individuals holding options or warrants to acquire common stock exercisable within sixty days of April 15, 2002, in which event represents percentage of shares issued and outstanding as of April 15, 2002 plus the number of such options or warrants held by such person, and all directors and officers as a group, which represents percentage of shares outstanding as of April 15, 2002 plus the number of such options or warrants held by all such persons as a group. (2) Includes presently exercisable options and warrants to acquire 27,565 shares of common stock. (3) Includes presently exercisable options to acquire 134,161 shares of common stock. (4) Includes presently exercisable options and warrants to acquire 37,651 shares of common stock. (5) Includes 91,506 shares held jointly by Mr. Fisher and his wife over which they share voting and investment power. (6) Includes 10,508 shares held by Guernsey Office Products, Inc., of which Mr. Guernsey is Chief Executive Officer and principal shareowner. (7) Includes 457,943 shares held jointly by Mr. Walters and his wife over which they share voting and investment power, and 56,377 shares held by C.W. Cobb and Associates, of which Mr. Walters is President. (8) Includes presently exercisable options and warrants to acquire 27,527 shares of common stock. (9) Includes presently exercisable options to acquire 18,540 shares of common stock. (10) Includes presently exercisable options and warrants to acquire 437,554 shares of common stock. 17 MARKET FOR COMMON STOCK AND DIVIDENDS Market for Common Stock. The common stock is listed for trading on the National Market System of the Nasdaq Stock Market under the symbol "VCBI". Trading in the common stock has been relatively light, with average daily volume of approximately 1,000 shares. As of March 31, 2002, there were 3,400,771 shares of common stock outstanding, as adjusted for the five for four stock split in the form of a 25% stock dividend paid on April 12, 2002, held by approximately 750 shareholders of record. As of March 31, 2002, there were options to purchase 438,377 shares of common stock outstanding pursuant to our stock option plans, of which 296,056 are exercisable, each as adjusted for the five for four stock split in the form of a 25% stock dividend paid on April 12, 2002. The following table sets forth the range of high and low sales prices (adjusted for stock dividends and splits) for each full quarterly period since January 1, 2000. 2002 2001 2000 ------------------ ----------------- ---------------- Quarter High Low High Low High Low ------ ------ ----- ------ ----- ---- First $22.20 $16.80 $12.12 $8.48 $8.64 $7.56 Second $12.80 $11.20 $8.96 $8.16 Third $16.80 $12.44 $8.96 $8.40 Fourth $16.84 $13.32 $8.96 $8.48 Dividends. Virginia Commerce Bancorp has not paid cash dividends since 1995, electing to retain earnings for funding the growth of the Company and its business. We currently anticipate continuing the policy of retaining earnings to fund growth. Our ability to pay dividends, should we elect to do so, depends largely upon the ability of Virginia Commerce Bank to declare and pay dividends, as the principal source of our 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 Virginia Commerce Bancorp and Virginia Commerce Bank, which limit the amount that may be paid as dividends without prior approval. Information regarding stock dividends and splits since January 1, 2000 is as follows: 1. A 25% stock split in the form of a dividend was declared in February 2002, for stockholders of record on March 15, 2002, and was paid on April 12, 2002. 2. A 25% stock split in the form of a dividend was declared in February 2001, for stockholders of record on April 16, 2001, and was paid on May 11, 2001. 3. A stock dividend of 10% was declared in April 2000, for stockholders of record on May 12, 2000, and was paid on May 26, 2000. DESCRIPTION OF OUR CAPITAL STOCK Virginia Commerce Bancorp's authorized capital consists of 5,000,000 shares of common stock, $1.00 par value, and 1,000,000 shares of undesignated preferred stock, $1.00 par value. As of April 15, 2002, there were 3,400,771 shares of common stock outstanding and no shares of preferred stock outstanding. Common Stock. Holders of common stock are entitled to cast one vote for each share held of record, to receive such dividends as may be declared by the Board of Directors out of legally available funds, and, subject to the rights of any class of stock having preference to the common stock, to share ratably in any distribution of Virginia Commerce Bancorp's assets after payment of all debts and other liabilities, upon liquidation, dissolution or winding up. Shareholders do not have cumulative voting rights or preemptive rights or other rights to subscribe for additional 18 shares, and the common stock is not subject to conversion or redemption. The shares of common stock to be issued in this offering will be, when issued, fully paid and non-assessable. Preferred Stock. The Board of Directors may, from time to time, by action of a majority, issue shares of the authorized, undesignated preferred stock, in one or more classes or series. In connection with any such issuance, the Board may by resolution determine the designation, voting rights, preferences as to dividends, in liquidation or otherwise, participation, redemption, sinking fund, conversion, dividend or other special rights or powers, and the limitations, qualifications and restrictions of such shares of preferred stock. As of the date hereof, no shares of preferred stock are outstanding. The existence of shares of authorized undesignated preferred stock enables us to meet possible contingencies or opportunities in which the issuance of shares of preferred stock may be advisable, such as in the case of acquisition or financing transactions. Having shares of preferred stock available for issuance gives us flexibility in that it would allow us to avoid the expense and delay of calling a meeting of shareholders at the time the contingency or opportunity arises. Any issuance of preferred stock with voting rights or which is convertible into voting shares could adversely affect the voting power of the holders of common stock. The existence of authorized shares of preferred stock could have the effect of rendering more difficult or discouraging hostile takeover attempts or of facilitating a negotiated acquisition. Such shares, which may be convertible into shares of common stock, could be issued to shareholders or to a third party in an attempt to frustrate or render a hostile acquisition more expensive. Limitations on Payment of Dividends. The payment of dividends by Virginia Commerce Bancorp will depend largely upon the ability of Virginia Commerce Bank to declare and pay dividends to Virginia Commerce Bancorp, as the principal source of Virginia Commerce Bancorp's revenue will be from dividends or interest payments on capital debt securities paid by Virginia Commerce Bank. Dividends will depend primarily upon the bank's earnings, financial condition, and need for funds, as well as applicable governmental policies and regulations. Even where we have earnings in an amount sufficient to pay dividends, the Board of Directors may determine to retain earnings for the purpose of funding growth. Regulations of the Federal Reserve and Virginia law place limits on the amount of dividends Virginia Commerce Bank may pay without prior approval. Prior regulatory approval is required to pay dividends which exceed the bank's net profits for the current year plus its retained net profits for the preceding two calendar years, less required transfers to surplus. Federal bank regulatory agencies also have authority to prohibit a bank from paying dividends if such payment is deemed to be an unsafe or unsound practice, and the Federal Reserve Board has the same authority over bank holding companies. The Federal Reserve Board has established guidelines with respect to the maintenance of appropriate levels of capital by registered bank holding companies. Compliance with such standards, as currently in effect, or as they may be amended from time to time, could possibly limit the amount of dividends that we may pay in the future. In 1985, the Federal Reserve Board issued a policy statement on the payment of cash dividends by bank holding companies. In the statement, the Federal Reserve Board expressed its view that a holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income, or which could only be funded in ways that weaken the holding company's financial health, such as by borrowing. As a depository institution, the deposits of which are insured by the FDIC, Virginia Commerce Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due the FDIC. See "Market for Common Stock and Dividends" at page 18. CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND VIRGINIA LAW Our Articles of Incorporation require the vote of 50.1% of the outstanding shares of common stock to approve any merger or consolidation with or into any other corporation; any exchange in which a corporation, person, or entity acquires the issued or outstanding shares of capital stock pursuant to a vote of shareholders, any issuance of shares that results in the acquisition of control of Virginia Commerce Bancorp by any corporation, person, or entity or group of one or more thereof that previously did not have control, any sale, lease, exchange, mortgage, pledge, or other transfer in one transaction or a series of transactions of all or substantially all of Virginia Commerce Bancorp's assets, the adoption of a plan for the liquidation or dissolution, any proposal in the nature of a reclassification or reorganization that would 19 increase the proportionate voting rights of any other corporation, person, or entity, any transaction similar to, or having similar effect as, any of the above listed transactions, or any amendment to the Articles of Incorporation. This 50.1% vote requirement is less than the two-thirds requirement which would otherwise apply under Virginia law, Our Articles of Incorporation also contain a provision which requires the Board of Directors, when evaluating any offer of another party to (a) make a tender or exchange offer for Virginia Commerce Bancorp's equity securities, (b) merge or consolidate with another corporation, (c) purchase or otherwise acquire all or substantially all of the properties and assets of Virginia Commerce Bancorp, or (d) engage in any transaction similar to, or having similar effects as, any of the foregoing transactions to give due consideration to all relevant factors, including, without limitation, the social and economic effects of the proposed transaction on the depositors, employees, customers, and other constituents of Virginia Commerce Bancorp and its subsidiaries and of the communities in which they operate or are located, the business reputation of the other party, and the Board of Directors' evaluation of the then value of Virginia Commerce Bancorp in a freely negotiated sale and of our future prospects as an independent entity. This provision, which requires the Board to consider noneconomic factors, could be deemed to have an antitakeover effect. The Virginia Stock Corporation Act (the "VSCA") contains provisions which could be deemed to have an antitakeover effect. The discussion of the following provisions is not exhaustive, and is not intended to imply that all material provisions of either the Articles of Incorporation or the VSCA are enumerated herein. Affiliated Transactions. The VSCA contains provisions governing "affiliated transactions." These include various transactions such as mergers, share exchanges, sales, leases, or other material dispositions of assets, issuances of securities, dissolutions, and similar transactions with an "interested shareholder." An interested shareholder is generally the beneficial owner of more than 10% of any class of a corporation's outstanding voting shares. During the three years following the date a shareholder becomes an interested shareholder, any affiliated transaction with the interested shareholder must be approved by both a majority of the "disinterested directors" (those directors who were directors before the interested shareholder became an interested shareholder or who were recommended for election by a majority of disinterested directors) and by the affirmative vote of the holders of two-thirds of the corporation's voting shares other than shares beneficially owned by the interested shareholder. These requirements do not apply to affiliated transactions if, among other things, a majority of the disinterested directors approve the interested shareholder's acquisition of voting shares making such a person an interested shareholder before such acquisition. Beginning three years after the shareholder becomes an interested shareholder, the corporation may engage in an affiliated transaction with the interested shareholder if: o the transaction is approved by the holders of two-thirds of the corporation's voting shares, other than shares beneficially owned by the interested shareholder, o the affiliated transaction has been approved by a majority of the disinterested directors, or o subject to certain additional requirements, in the affiliated transaction the holders of each class or series of voting shares will receive consideration meeting specified fair price and other requirements designed to ensure that all shareholders receive fair and equivalent consideration, regardless of when they tendered their shares. Control Share Acquisitions. Under the VSCA's control share acquisitions law, voting rights of shares of stock of a Virginia corporation acquired by an acquiring person or other entity at ownership levels of 20%, 33 1/3%, and 50% of the outstanding shares may, under certain circumstances, be denied. The voting rights may be denied: o unless conferred by a special shareholder vote of a majority of the outstanding shares entitled to vote for directors, other than shares held by the acquiring person and officers and directors of the corporation, or o among other exceptions, such acquisition of shares is made pursuant to a affiliation agreement with the corporation or the corporation's articles of incorporation or bylaws permit the acquisition of such shares before the acquiring person's acquisition thereof. If authorized in the corporation's articles of incorporation or bylaws, the statute also permits the corporation to redeem the acquired shares at the average per share price paid for them if the voting rights are not approved or if the acquiring person does not file a "control share acquisition statement" with the corporation within sixty days of the last acquisition of such shares. If voting rights are approved for control shares comprising more than 50% of the corporation's outstanding stock, objecting shareholders may have the right to have their shares repurchased by the corporation for "fair value." The provisions of the Affiliated Transactions Statute and the Control 20 Share Acquisition Statute are only applicable to public corporations that have more than 300 shareholders. Corporations may provide in their articles of incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but we have not done so. LEGAL MATTERS The validity of the shares offered hereby and certain other legal matters will be passed upon for Virginia Commerce Bancorp by the law firm of Kennedy, Baris & Lundy, L.L.P., Bethesda, Maryland. Attorneys at Kennedy, Baris and Lundy, L.L.P. own an aggregate of approximately 22,488 shares of common stock. EXPERTS The consolidated financial statements at December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 incorporated by reference in this prospectus have been audited by Yount, Hyde & Barbour, P.C., independent auditors, as stated in their reports, incorporated by reference herein, and have been incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT VIRGINIA COMMERCE BANCORP AND DOCUMENTS INCLUDED WITH THIS PROSPECTUS This prospectus includes and is being delivered with copies of Virginia Commerce Bancorp's Annual Report to Shareholders for the year ended December 31, 2001. Virginia Commerce Bancorp files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that we file with the SEC at the SEC's public reference room at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a World Wide Web site on the Internet at "http://www.sec.gov" that contains reports, proxy and information statements, and other information regarding companies, including Virginia Commerce Bancorp, that file electronically with the SEC. We have filed a Registration Statement on Form S-2 to register the common stock to be sold in the offering. This prospectus is a part of that Registration Statement. As allowed by SEC rules, this prospectus does not contain all the information you can find in the Registration Statement or the exhibits to that Registration Statement. SEC regulations allow us to "incorporate by reference" information into this prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered part of this prospectus. Information incorporated by reference from earlier documents is superceded by information that has been incorporated by reference from more recent documents. This prospectus incorporates by reference the documents listed below that we have previously filed with the SEC (file no. 0-28635). (1) Annual Report on Form 10-K for the year ended December 31, 2001, including the information appearing under the following captions in our Proxy Statement for the Annual Meeting of Stockholders held on April 24, 2002: "Election of Directors" at pages 3 through 6, "Compliance with Section 16(a) of the Securities Exchange Act of 1934" at page 12; "Executive Officer Compensation and Certain Transactions," at pages 7 through 12 "Voting Securities and Principal Holders Thereof" at pages 2 and 3 "Transactions with Management and Others" at page 10; (2) Annual Report to Shareholders for the year ended December 31, 2001; (3) Quarterly Report on Form 10-Q for the three months ended March 31, 2002; and (4) Current Reports on Form 8-K filed January 17, 2002, February 18, 2002, March 26, 2002 and April 11, 2002. 21 Also incorporated by reference are additional documents that we may file with the SEC after the date of this prospectus and before the termination of the offering. These additional documents will be deemed to be incorporated by reference, and to be a part of, this prospectus from the date of their filing. These documents include proxy statements and periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Information contained in later filed documents will supersede information in earlier filed documents, to the extent that they are inconsistent. You can obtain any of the documents incorporated by reference from us, the SEC or the SEC's Internet web site as described above. Documents incorporated by reference are available from Virginia Commerce Bancorp without charge, including any exhibits specifically incorporated by reference therein. You may obtain documents incorporated by reference in this prospectus by requesting them in writing or by telephone from: William K. Beauchesne, Chief Financial Officer Virginia Commerce Bancorp, Inc. Suite 500 14201 Sullyfield Circle Chantilly, Virginia 20151 Telephone (703) 633-6120 You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information that is different from what is contained in this prospectus. This prospectus is dated __________, 2002. You should not assume that the information contained in this prospectus is accurate as of any date other than that date. 22 Appendix 1 Virginia Commerce Bancorp, Inc. Annual Report to Shareholders for the year ended December 31, 2001 Annual Report to Stockholders for the year ended December 31, 2001 [Photo Omitted] Committed to Community Dedicated to Growth Virginia Commerce Bancorp, Inc. 2001 Annual Report [Internal pagination of Edgar version of Annual Report does not match pagination of printed document] Virginia Commerce Bancorp, Inc. Contents Five Year Financial Summary - inside front cover Letter to Stockholders, Customers and Friends 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Independent Auditor's Report 26 Consolidated Financial Statements 27 Notes to Consolidated Financial Statements 32 Board of Directors, Executive Officers, and Officers - inside back cover
Bank Services ---------------------------------------------------------------------------------------------------------------------- Checking Accounts Mortgage Loans- Residential and Bank-by-Mail NOW Accounts Commercial/Investment Merchant Bankcard Services Money Market Accounts Construction Loans - Credit Cards Savings Accounts Residential and Commercial Telephone Banking Certificates of Deposit Equipment leasing VISA Debit Cards IRAs Overdraft Lines of Credit Lockbox Services Repurchase Agreements Letters of Credit Internet Banking Cash Management Services Safe Deposit Boxes PC-Based Banking for Business Personal and Commercial Loans and Automated Teller Machines and ATM ACH Lines of Credit Cards (Star and Cirrus) Commercial Insurance Home Equity Loans and Lines of Credit Cashier's Checks Money Orders Traveler's Checks ----------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------- About Our Bank Virginia Commerce Bank, a wholly-owned subsidiary of Virginia Commerce Bancorp, Inc., is a full-service community bank headquartered in Northern Virginia. With our wide array of business and consumer products, we continue to be one of the fastest growing banks in our market, and for good reason. From 1988, when we opened our first branch in Clarendon, until today, with twelve branches, two mortgage loan offices and nearly $500 million in assets, we have maintained a clear focus of providing "community banking at its best" while delivering. . . Exceptional Service. Every Customer. Every Time. 2 [Map of Northern Virginia and office locations omitted]
1414 Prince Street 13881G Metrotech Drive Residential Alexandria, Virginia Chantilly, Virginia 20151 Mortgage Lending 703-739-3242 703-378-9556 5140 Duke Street 10777 Main Street 374 Maple Avenue East Alexandria, Virginia 22304 Fairfax, Virginia 22030 Vienna, Virginia 22180 703-751-4400 703-273-9111 703-319-4001 506 King Street 2030 Old Bridge Road 54 E. Lee Street, Suite 120 Alexandria, Virginia 22314 Lake Ridge, Virginia 22192 Warrenton, Virginia 20186 703-684-4390 703-492-7440 540-341-3001 4230 John Marr Drive 1356 Chain Bridge Road Annandale, Virginia 22003 McLean, Virginia 22101 703-256-8889 703-448-9800 MAIN OFFICE/ EXECUTIVE OFFICE 11820 Spectrum Center 5350 Lee Highway Reston, Virginia 20171 Arlington, Virginia 22207 (Opening Spring 2002) 703-534-1382 (Branch) 703-564-0700 (Switchboard) 374 Maple Avenue East Vienna, Virginia 22180 2930 Wilson Boulevard 703-319-4150 Arlington, Virginia 22201 703-525-4601 6500 Williamsburg Boulevard Arlington, Virginia 22213 703-237-8050
3 FIVE YEAR FINANCIAL SUMMARY (Dollars in thousands except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------------------ SELECTED YEAR-END BALANCES Total assets $ 489,511 $ 371,182 $ 282,575 $ 222,442 $ 165,119 Total stockholders' equity 26,220 21,166 17,489 15,832 11,273 Total loans (net) 410,950 305,717 205,171 149,440 100,917 Total deposits 406,922 310,934 243,044 188,743 142,428 ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY RESULTS OF OPERATIONS Interest income $ 33,897 $ 26,776 $ 18,851 $ 15,266 $ 11,135 Interest expense 15,991 12,861 8,679 7,511 5,168 Net interest income $ 17,906 $ 13,915 $ 10,172 $ 7,755 $ 5,967 Provision for loan losses 1,572 947 480 451 262 Net interest income after provision for loan losses $ 16,334 $ 12,968 $ 9,692 $ 7,304 $ 5,705 Non-interest income 4,704 2,599 1,999 632 478 Non-interest expense 13,982 10,636 8,397 5,648 4,465 Income before taxes $ 7,056 $ 4,931 $ 3,294 $ 2,288 $ 1,718 Income tax expense 2,391 1,681 1,128 784 586 Net income $ 4,665 $ 3,250 $ 2,166 $ 1,504 $ 1,132 ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA (1) Net income, basic $ 1.72 $ 1.20 $ 0.80 $ 0.57 $ 0.48 Net income, diluted $ 1.57 $ 1.13 $ 0.75 $ 0.53 $ 0.45 Book value $ 9.64 $ 7.82 $ 6.46 $ 5.86 $ 4.76 Average number of shares outstanding 2,711,550 2,706,917 2,705,299 2,645,598 2,368,207 ------------------------------------------------------------------------------------------------------------------------------------ GROWTH AND SIGNIFICANT RATIOS % Change in net income 43.54% 50.06% 44.04% 32.78% 7.25% % Change in assets 31.88% 31.36% 27.03% 34.72% 34.55% % Change in loans 34.42% 49.01% 37.29% 48.08% 32.24% % Change in deposits 30.87% 27.93% 28.77% 32.52% 37.32% % Change in equity 23.88% 21.02% 10.47% 40.44% 12.12% Equity to asset ratio 5.36% 5.70% 6.19% 7.12% 6.83% Return on average assets 1.05% 1.00% 0.87% 0.75% 0.81% Return on average equity 19.37% 17.04% 13.03% 10.37% 10.53% Average equity to average assets 5.44% 5.87% 6.65% 7.25% 7.74% Efficiency ratio (2) 61.84% 64.41% 68.99% 67.35% 69.28% ------------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for all years presented giving retroactive effect to10% stock dividends paid in 1997 and 2000, a 35% stock split in the form of a dividend in 1997, a change in par value in 1998, a 10% stock restructuring in 1998 and 1999, and a 25% stock split in the form of a dividend in 2001. (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. Graphic presentation of following data omitted:
------------------------------------------------------------------------------------------------------------------- Net Income Total Assets Net Loans Total Deposits (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) 2001 4,665 2001 489,511 2001 410,950 2001 406,922 2000 3,250 2000 371,182 2000 305,717 2000 310,934 1999 2,166 1999 282,575 1999 205,171 1999 243,044 1998 1,504 1998 222,442 1998 149,440 1998 188,743 1997 1,132 1997 165,119 1997 100,917 1997 142,428 -------------------------------------------------------------------------------------------------------------------
4 TO OUR STOCKHOLDERS, CUSTOMERS, AND FRIENDS As the cover of this year's Annual Report proudly proclaims, Virginia Commerce Bancorp, Inc. (the "Company") is "committed to community, dedicated to growth". Our consistent focus on these pursuits explains to a large extent why the Company continues to enjoy significant 703-319-4001 progress as we serve the needs of our local market. I am pleased to report that the year ending December 31, 2001 was noteworthy for outstanding financial performance. It was our seventh consecutive year of record earnings and solid balance sheet growth. Net income for 2001 was $4.7 million, an increase of 43.5% over the $3.2 million earned the prior year. As a result, basic and diluted earnings per share were $1.72 and $1.57 respectively, up 43.3% and 38.9% over the comparable period in 2000. For the year, return on average assets (ROA) rose to 1.05% while return on average equity (ROE) increased by over 2% to 19.37%. Net interest income for 2001 was $17.9 million, an increase of 28.8% over 2000, as strong loan volume more than offset a decrease in the net interest margin from 4.54% in 2000 to 4.23% this past year-end. Non-interest income for the year rose 80.8% to $4.7 million, primarily due to increased fees and net gains on home mortgage loans sold. Our residential mortgage production, like the rest of the industry, benefited considerably from the low-rate environment this past year. Mortgage originations increased from $80 million in 2000 to over $180 million last year, resulting in a 113% increase in fees and net gains to $3.4 million. Non-interest expense for the year totalled $14 million, rising 31.5% over the prior year. This increase primarily reflects overhead associated with the Company's eleventh (Chantilly - opened November 2000) and twelfth (Lake Ridge - opened April 2001) branches and higher levels of incentive compensation. Nonetheless, our efficiency ratio, which measures how well we control non-interest expense in generating income, improved to 61.8% in 2001 from 64.4% the previous year. In 2001, assets, loans, and deposits each grew by over 30%. Total assets as of December 31, 2001 were $489.5 million, an increase of 31.9% from a year earlier and funded primarily by growth in deposits of 30.9% to $406.9 million. Loans, net of allowance for loan losses, rose to $410.9 million, a 34.4% increase over the $305.7 million reported for the prior year-end. This past year was a difficult one. Early in the year, our local economy slipped into a recession which was compounded by the tragic events of September 11. Notwithstanding these challenges, the Company again achieved strong financial results, an affirmation of the solid foundation upon which our Bank has been built. In addition to the financial results, other highlights of the year include: o In mid-April, our twelfth branch office was opened in Lake Ridge at 2030 Old Bridge Road. It is our first branch in Prince William County and has already exceeded $10 million in deposits in less than a year. o A 5-for-4 split of the Company's stock was distributed to stockholders on May 11, 2001, in the form of a 25% stock dividend. (On February 28, 2002, we announced another 25% stock dividend for stockholders of record on March 15, 2002, payable April 12, 2002.) o On July 1, Kerry Donley was promoted to Executive Vice President, Retail Banking, with responsibility for all of our branches, marketing, and security. Kerry succeeded Laurie Barnwell, who held the position for seven years and was a major contributor to the Bank's success. Laurie moved out of the area last summer and will certainly be missed. Prior to assuming his new position, Kerry was the regional manager for our three Alexandria branches. We were fortunate to have an excellent internal candidate of his caliber to fill this key management position and contribute to the future success of the Bank. o In December, the Company concluded a refinance of its line of credit with a new $12 million facility from a correspondent bank. Borrowings under the line are used to downstream capital to the Bank to fund growth. o Over the course of the year, the Company's stock (traded on the National Nasdaq under the symbol, "VCBI" appreciated over 95%, adjusted for the 25% stock split in May.) We believe our success continues to be attributable to our delivery of "community banking at its best" through excellence in People, Product, Pricing, and Personal Service. It may sound redundant to emphasize those four Ps time and again, but they are the essence of our banking philosophy and evident in the customer stories that follow. In the end, we are committed to providing value to our stockholders, customers, employees, and the communities that we serve. That's our bottom line. We are proud of our accomplishments and contributions this past year. However, they would not have been possible without the dedication and hard work of our employees, the counsel and involvement of our Directors, and the support of our stockholders, customers, and friends. Thank you. /s/ Peter A. Converse Peter A. Converse President and Chief executive Officer March 28, 2002 5 Virginia Commerce Bank provides a competitive array of banking services to meet your personal and business needs. The delivery of these services is made convenient through our twelve branch locations in Northern Virginia, ATMs, drive through windows, and banking via Internet, PC and telephone. Branch Banking Services Earning trust one customer at a time. David Sattler, Esq., a local attorney, has been a checking account customer since 1992. While visiting our McLean branch, Mr. Sattler noticed a banner advertising our home equity lines of credit, and decided to apply. Ricardo Balcells, Regional Manager for our Fairfax County branches, assisted him with the application process, impressing Mr. Sattler with his personal attention and quick turnaround. Over time, Mr. Sattler's law partners, as well as his father (also an attorney), experienced our service firsthand. Today, Brooks, Suiters, and Sattler, P.C. maintains business and personal banking relationships with VCB. Furthermore, Mr. Sattler's father opened several accounts with the Bank. And Mr. Sattler? He's now one of our Bank's most enthusiastic shareholders. [Photo Omitted] [Caption -Attorney David Sattler (left) with regional Manager Ricardo Balcells (center) and Branch Manager Stacey Sim at the McLean branch.] 6 [Photo Omitted[ [Caption - Commercial Lender Greg Motheral (right) with pastor Lee earl (center) and Church Treasurer Clarence Johnson (left) at Shiloh Baptist Church. Providing growth opportunities to our growing communities. Shiloh Baptist Church was chartered in 1865, and has been at its 1401 Duke Street location since 1891. Always a dynamic congregation, the church has grown dramatically since 1998, expanding from 442 to almost 1,200 members. Its members wanted to stay in the community, but they needed more space. Financial Services for Businesses, Professionals, and Nonprofits Virginia Commerce Bank provided a commercial mortgage to enable the church to purchase a nearby four-story building. Once renovated, the space will house church offices, a conference room, an adult and children's Sunday school, and a fellowship and meeting hall for special events. Shiloh Baptist also maintains its deposit relationship with VCB, and Pastor Lee Earl and other church members are personal customers as well. VCB is highly experienced in meeting the diversified and unique financial requirements of small-to-medium size businesses, professionals and their firms, and nonprofit organizations, by offering a wealth of specialized financial products,
Term loans Commercial mortgage, development, Equipment financing and leasing and construction loans Lines of credit Cash management SBA loans Accounts receivable financing Merchant bankcard services Letters of credit Government contract financing
7 From a first-time purchase to the refinance of a current mortgage, our loan officers will work to find the best loan for each customer. To meet home financing needs, Virginia Commerce Bank offers a complete and competitive array of mortgage programs, including:
10, 15, 20, 25, and 30-year fixed-rate products FHA & VA financing Low and no documentation loans Adjustable rate mortgages (ARMs) of all types Mortgages for first-time buyers. Mortgage financing for residences, and self-employed individuals second homes, and rental houses No point, no closing cost programs
[Photos Omitted] GIVING HOMEOWNERS A GREAT DEAL TO COME HOME TO. For first-time homebuyers Rigoberto Salgado and Maria Berrios, the dream of homeownership came true after six long months of house hunting. Their mortgage loan process, however, was quick and comfortable, thanks to Loan Officer Patty Foster and VCB's hassle-free application process. Residential Mortgages For Lynda and Edwin Kuhn, Jr., owning their dream home meant building it themselves. VCB provided construction financing, and then converted it to a permanent mortgage when the house was completed, all with our convenient, one-time closing. Then another dream: last year's record-low interest rates. The Kuhns refinanced with VCB and lowered their monthly payments significantly. Ken O'Shea, Manager of the Residential Mortgage Department, assisted the Kuhns with both mortgages. [Caption - Ken O'Shea with Lynda and Edwin Kuhn, Jr. in front of their new home (main). Patty Foster with first-time homebuyers Rigoberto Salgado and Maria Berrios (inset). 8 Whether it's building your dream home, developing a neighborhood, or constructing your business headquarters, Virginia Commerce Bank offers the construction financing expertise and programs you need to complete a successful project. Our programs include: Construction-to-permanent loans Builder construction loans Commercial construction loans Land development loans Construction Financing DEVELOPING RELATIONSHIPS THAT BUILD NORTHERN VIRGINIA COMMUNITIES. Petra Builders is a local, woman-owned residential builder with an impressive 22-year history constructing homes in the Lake Manassas area of Gainesville, Virginia. During those years, company president Sandra Bittner has turned to VCB and Jamie Nalls, our Senior Vice President/Construction Lending, for financing. Our support of Petra Builders keeps them on a firm foundation and has resulted in expanded use of our services. Petra Builders maintains a full banking relationship with VCB, including the personal accounts of Ms. Bittner and her husband, Barry. [Photo Omitted [Caption - Sandra Bittner, of Petra Builders, with Construction Lenders Tom Williams (center) and Jamie Nalls (right). 9 [Photo Omitted] [Caption - Department head Michele Parker (left) and Lead Processor Jessica Yamoah (right)in lockbox area (main). Vice Presidents Jose Castillo (left) and Lynn Gonzalez of Electronic Banking Services reviewing Bank web site (inset). Cash Management and e-Banking Services INVESTING YOUR TIME AS WISELY AS YOUR MONEY. Whether you are a small business seeking to improve your cash management capabilities, or a large company looking for a reasonably-priced solution to your sophisticated funds management, Virginia Commerce Bank has the right product to meet your needs. Our cash management services are designed to reduce the amount of time spent on administrative tasks and improve your cash flow and yield on idle funds. Through personal service and up-to-date technology, we can tailor a cash management solution to meet any business demands. VCB cash management and e-banking services include:
Lockbox Services e-Banking Cash Management - Remittance processing - Online banking - Sweep/repurchase agreements - PC-based information reporting - Fedwire transfers - ZBA (zero balance accounting) - CD-ROM records storage - ACH (automated clearinghouse) payments - Merchant bankcard services
10 [Photos Omitted] [Caption - Volunteer Margie Reeder, Operations Manager of the Main Office branch, tutoring children at the Claremont Campbell School (main). Chief lending Officer Randy Anderson addressing the Arlington Chamber of Commerce as current Chairman (inset). Community Involvement REACHING OUT TO OUR NEIGHBORS...AS AN ORGANIZATION AND AS INDIVIDUALS. Throughout our history, Virginia Commerce Bank has committed itself to giving something back to the communities where we do business. For us, this represents more than just a financial commitment. Our employees also invest their time and talents. They determine ways that their contributions can be the most effective. Often, their efforts are visible in leadership roles in Chambers of Commerce and service organizations in Northern Virginia. Other times, they're working behind the scenes. Individual visibility does not motivate us. Making a visible difference in our community does. ------------------------------------------------------------------------------- VCB is proud of its involvement with these organizations:
Ten Chambers of Commerce. INOVA Alexandria Arlington Host Lions Club in Northern Virginia Hospital Foundation Potomac West Business Association CrisisLink Leadership Arlington Virginia Asset Finance Corporation Make a Difference Foundation Washington Area Housing Partnership McLean Symphony Alexandria United Way McLean Rotary Hopkins House Arlington Free Clinic Virginia Hospital Center Alexandria Economic Kiwanis Club Arlington County Schools: Development Partnership YMCA Claremont-Campbell School Arlington Optimist Club
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This management's discussion and analysis and other portions of this report, contain forward-looking statements within the meaning of the Securities and Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "anticipates," "believes," "expects," "plans," "estimates," "potential," "continue," "should," and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company does undertake to update any forward-looking statements to reflect occurrences or events that may not have been anticipated as of the date of such statements. The following discussion provides information about the results of operations and financial condition, liquidity, and capital resources of Virginia Commerce Bancorp, Inc. and subsidiaries (the "Company"). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto, appearing elsewhere in the report. GENERAL On December 22, 1999, Virginia Commerce Bancorp, Inc. (the "Company") became a bank holding company when it acquired all of the shares of Virginia Commerce Bank (the "Bank") in a mandatory share exchange. The Bank received its charter as a national banking association on May 16, 1988 from the Comptroller of the Currency and opened for business at 3033 Wilson Boulevard, Arlington, Virginia. On June 1, 1995, the Bank converted from a national banking association to a Virginia state chartered bank as a member of the Federal Reserve System. The main office of the Company is located at 5350 Lee Highway in Arlington, Virginia. The Company also operates eleven branch locations in McLean, Arlington (two branches), Alexandria (three branches), Annandale, Fairfax, Vienna, Chantilly and Lake Ridge, Virginia and two mortgage loan offices in Vienna and Warrenton, Virginia. The Company's common stock is traded on the Nasdaq National Market under the symbol "VCBI". The Company provides a full range of banking services (other than trust, securities, brokerage, and international services) to businesses, professionals and their firms, trade associations, investors and individuals in Northern Virginia and increasingly to some extent throughout the Metropolitan Washington, D.C. area. For businesses, the Company offers a complete selection of deposit accounts, merchant bankcard services, electronic funds transfer, lock box services, PC banking, lines of credit for working capital purposes, term loans for expansion and capital expenditures, and commercial real estate and construction loans, generally on income-producing properties. Services for individuals include a wide array of deposit account products, home equity loans and lines of credit, internet banking and bill payment services, telephone banking, consumer installment loans for the purchase of automobiles and other personal uses, overdraft and revolving lines of credit, and residential mortgage and construction loans. The Company also provides cashier's checks, traveler's checks, wire transfers, bank-by-mail services, safe deposit box facilities, ATM cards, Visa debit cards and ATM machines at eleven of its branch locations. RESULTS OF OPERATIONS During 2001, the Company continued to experience significant growth as total assets increased 31.9% from $371.2 million to $489.5 million over the prior year-end. Growth was driven by a 30.9% increase in deposits from $310.9 million to $406.9 million, a 45.9% increase in repurchase agreements and federal funds purchased from $29.1 million to $42.5 million and a $4 million increase in other borrowed funds from $7.4 million to $11.4 million. Total assets at December 31, 2000 of $371.2 million represented an increase of 31.4% from $282.6 million at December 31, 1999. In 2000 growth was driven similarly to that of 2001 with deposits increasing 27.9% from $243.0 million to $310.9 million, an $11.3 million increase in repurchase agreements and federal funds purchased from $17.8 million to $29.1 million and a $4.5 million increase in other borrowed funds from $2.9 million to $7.4 million. Earnings for 2001 were $4.7 million, an increase of 43.5%, compared to earnings of $3.3 million in 2000. In 2000, earnings of $3.3 million represented an increase of 50.1% compared to earnings of $2.2 million in 1999 and earnings in 1999 of $2.2 million increased 44.0% compared to earnings of $1.5 million in 1998. Diluted earnings per share were $1.57, $1.13, and $0.75 in 2001, 2000, and 1999, respectively. Return on average assets was 1.05% for 2001, as compared to 1.00% in 2000 and .87% in 1999. Return on average equity increased to 19.37% in 2001, as compared to 17.04% in 2000, and 13.03% in 1999. 12 Loan demand continued strong in 2001as total loans, net of allowance for loan losses, increased 34.4% from $305.7 million at December 31, 2000 to $410.9 million at December 31, 2001. In 2000 total loans grew 49.0% from $205.2 million at December 31, 1999 to $305.7 million at year-end. At December 31, 2001 loans represented 101.0% of total deposits compared to 98.3% at December 31, 2000 and 84.4% at December 31, 1999. While loan growth occurred in all major classifications of loans, growth in real estate construction loans has represented the largest increase, rising $29.0 million, or 44.3% from $65.5 million at December 31, 2000 to $94.5 million at December 31, 2001 and increasing 280.8% in 2000 from $17.2 million at December 31, 1999 to $65.5 million. Real estate mortgage loans increased $76.6 million, or 38.6% in 2001 from $198.5 million at December 31, 2000 to $275.1 million and rose $41.5 million, or 26.4% in 2000 from $157.0 million at December 31, 1999. The growth in loans utilized the majority of deposit and repurchase agreement funding sources as cash and cash equivalents increased $4.2 million in 2001 from $11.0 million at December 31, 2000 to $15.2 million at December 31, 2001 and declined by $11.7 million in 2000 from $22.7 million at December 31, 1999. Investment securities, which are maintained as additional liquidity sources and for various collateral needs, increased $7.7 million, or 17.0% from $45.3 million at December 31, 2000 to $53.0 million at December 31, 2001 and decreased $1 million, or 2.2% from $46.3 million at December 31, 1999 to $45.3 million at December 31, 2000. Deposit growth, the Company's main funding source, included an $11.5 million increase in non-interest-bearing demand deposits in 2001, a $28.9 million increase in savings and interest-bearing demand deposits and a $55.5 million, or 36.5% increase in time deposits from $152.2 million at December 31, 2000 to $207.7 million at December 31, 2001. In 2000, deposit growth included a $12.7 million increase in non-interest-bearing demand deposits, a $16.1 million increase in savings and interest-bearing demand deposits, and a $39.l million increase in time deposits. Stockholders' equity increased $5.0 million from $21.2 million at December 31, 2000 to $26.2 at December 31, 2001 with earnings of $4.7 million and a $295 thousand increase in other comprehensive income, net of tax. In 2000, stockholders' equity grew $3.7 million from $17.5 million at December 31, 1999 to $21.2 million at year-end due to earnings of $3.3 million and a $430 thousand increase in other comprehensive income, net of tax. The total number of common shares outstanding increased in 2001 by 555,129 with 541,230 shares issued due to a twenty-five percent stock split in the form of a dividend in May 2001 and the issuance of 13,899 shares in September 2001 as a result of exercised options. NET INTEREST INCOME Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings. The Company's net interest income increased $4.0 million, or 28.8%, from $13.9 million in 2000 to $17.9 million in 2001 and increased $3.7 million, or 36.3%, from $10.2 million in 1999 to $13.9 million in 2000. In 1999, net interest income increased $2.4 million, or 30.8%, from $7.8 million in 1998 to $10.2 million. For 2001, the average yield on earning assets fell seventy-two basis points from 8.73% in 2000 to 8.01% while the average cost of interest bearing liabilities dropped fifty-two basis points from 5.00% in 2000 to 4.48% in 2001. As a result, the net interest margin on earning assets fell thirty-one basis points from 4.54% to 4.23%. The narrowed margin is indicative of the Company's short term asset sensitive position. Following Federal Reserve interest rate reductions of 475 basis points during 2001, loans, the majority of which are floating or variable rate, and investment securities repriced faster than interest-bearing liabilities, the majority of which are one-year and eighteen-month certificates of deposit. With expectations of no further rate reductions in the beginning of 2002, the Company expects improvement in the margin as approximately $30.7 million in certificates of deposit bearing rates from 200 to 275 basis points over offered rates as of December 31, 2001 will reprice. In 2000, the net interest margin increased nineteen basis points from 4.35% in 1999 to 4.54% and increased twenty-three basis points in 1999 from 4.12% in 1998 to 4.35%. 13 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, 2001, 2000, and 1999. In addition, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $1.1 million, $702 thousand and $378 thousand, for 2001, 2000, and 1999, respectively.
2001 2000 ---- ---- Interest Average Interest Average Average Income- Yields Average Income- Yields (Dollars in thousands) Balance Expense /Rates Balance Expense /Rates ---------------------------------------------------------------------------------------------------------- ASSETS Securities (1) $ 58,125 $ 3,527 6.07% $ 49,348 $ 3,125 6.33% Loans, before allowance for losses 349,586 29,720 8.50% 250,289 23,215 9.28% Interest-bearing deposits with other banks -- -- -- 601 36 5.99% Federal funds sold 15,310 650 4.24% 6,377 400 6.27% ---------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS $423,021 $ 33,897 8.01% $306,615 $ 26,776 8.73% ---------------------------------------------------------------------------------------------------------- Non-earning assets 19,630 18,457 ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $442,651 $325,072 ---------------------------------------------------------------------------------------------------------- LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing deposits NOW accounts $ 72,231 $ 2,189 3.03% $ 61,010 $ 2,499 4.10% Money market accounts 37,970 1,253 3.30% 23,282 900 3.87% Savings accounts 13,265 318 2.40% 12,771 439 3.44% Certificates of deposit 188,968 10,734 5.68% 132,263 7,588 5.74% ---------------------------------------------------------------------------------------------------------- Total interest-bearing deposits $312,434 $ 14,494 4.64% $229,326 $ 11,426 4.98% ---------------------------------------------------------------------------------------------------------- Fed Funds purchased, securities sold U/A to repurchase and other borrowed funds 44,621 1,497 3.35% 27,966 1,435 5.13% ---------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $357,055 $ 15,991 4.48% $257,292 $ 12,861 5.00% ---------------------------------------------------------------------------------------------------------- Demand deposits and other non-interest bearing liabilities 61,515 48,703 ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $418,570 $305,995 ---------------------------------------------------------------------------------------------------------- Stockholders' equity 24,081 19,077 ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $442,651 $325,072 ---------------------------------------------------------------------------------------------------------- Interest rate spread 3.53% 3.73% Net interest income and margin $ 17,906 4.23% $ 13,915 4.54% ----------------------------------------------------------------------------------------------------------
1999 ---- Interest Average Average Income- Yields (Dollars in thousands) Balance Expense /Rates ----------------------------------------------------------------------- ASSETS Securities (1) $ 46,682 $ 2,855 6.12% Loans, before allowance for losses 176,676 15,447 8.74% Interest-bearing deposits with other banks 795 46 5.97% Federal funds sold 9,930 503 5.07% ----------------------------------------------------------------------- TOTAL EARNING ASSETS $234,083 $ 18,851 8.05% ----------------------------------------------------------------------- Non-earning assets 15,796 ----------------------------------------------------------------------- TOTAL ASSETS $249,879 ----------------------------------------------------------------------- LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing deposits NOW accounts $ 49,673 $ 1,933 3.89% Money market accounts 17,275 534 3.09% Savings accounts 11,526 409 3.55% Certificates of deposit 102,140 5,177 5.07% ----------------------------------------------------------------------- Total interest-bearing deposits $180,614 $ 8,053 4.46% ----------------------------------------------------------------------- Fed Funds purchased, securities sold U/A to repurchase and other borrowed funds 15,429 626 4.06% ----------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES $196,043 $ 8,679 4.43% ----------------------------------------------------------------------- Demand deposits and other non-interest bearing liabilitie 37,219 ----------------------------------------------------------------------- TOTAL LIABILITIES $233,262 ----------------------------------------------------------------------- Stockholders' equity 16,617 ----------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $249,879 ----------------------------------------------------------------------- Interest rate spread 3.62% Net interest income and margin $ 10,172 4.35% ----------------------------------------------------------------------- (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 stockholder's equity. Average yields on securities are stated on a tax equivalent basis. 14 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.
2001 compared to 2000 2000 compared to 1999 --------------------- --------------------- Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase (Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease) -------------------------------------- -------------------------------------------------------------------------- INTEREST INCOME Loans $ 8,495 $(1,990) $ 6,505 $ 6,828 $ 940 $ 7,768 Securities 532 (130) 402 167 103 270 Federal funds sold 384 (134) 250 (223) 120 (103) Interest-bearing deposits in other banks (36) -- (36) (10) -- (10) -------------------------------------- -------------------------------------------------------------------------- Total interest income $ 9,375 $(2,254) $ 7,121 $ 6,762 $ 1,163 $ 7,925 -------------------------------------- -------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits NOW accounts $ 340 $ (650) $ (310) $ 462 $ 104 $ 566 Money market accounts 485 (132) 353 231 135 366 Savings accounts 12 (133) (121) 43 (13) 30 Certificates of deposit 3,222 (76) 3,146 2,691 720 2,411 -------------------------------------- -------------------------------------------------------------------------- Total interest-bearing deposits $ 4,059 $ (991) $ 3,068 $ 2,427 $ 946 $ 3,373 Other borrowings 595 (533) 62 717 92 809 -------------------------------------- -------------------------------------------------------------------------- Total interest expense $ 4,654 $(1,524) $ 3,130 $ 3,144 $ 1,038 $ 4,182 -------------------------------------- -------------------------------------------------------------------------- Change in Net Interest Income $ 4,721 $ (730) $ 3,991 $ 3,618 $ 125 $ 3,743 -------------------------------------- --------------------------------------------------------------------------
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 which formulates and monitors the performance of the Company based on established levels of market risk as dictated by policy. In setting certain tolerance levels, or limits on market risk, the Committee considers the impact on earnings and capital, the level and general direction of interest rates, liquidity, local economic conditions and other factors. Interest rate risk, or interest sensitivity, can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing of interest-bearing assets differs from the maturing or repricing of interest-bearing liabilities and as a result of the difference between total interest-bearing assets and interest-bearing liabilities. The Company seeks to manage interest sensitivity while enhancing net interest income by periodically adjusting this asset/liability position. One of the tools used by the Company to assess interest sensitivity on a monthly basis is the static gap analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods. It is the Company's goal to limit the one-year cumulative difference to plus or minus 10% of total interest-earning assets in an attempt to limit changes in future net interest income from sudden changes in market interest rates. A gap analysis is shown in Table 3 below, and reflects the earlier of the maturity or repricing dates for various assets and liabilities as of December 31, 2001. At that point in time, the Company had a cumulative net liability sensitive twelve-month gap position of $19.5 million, or a negative 4.2% of total interest-earning assets. This position would generally indicate that earnings should decline in a rising interest rate environment as more liabilities would reprice than assets; however, this measurement represents a static position as of a single day and is not necessarily indicative of the Company's position at any other point in time, does not take into account the sensitivity of yields and costs of specific assets and liabilities to changes in market rates, and does not take into account the specific timing of when changes to a specific asset or liability will occur. More accurate measures of interest sensitivity are provided to the Company using earnings simulation models. 15 TABLE 3: INTEREST SENSITIVITY-GAP ANALYSIS
Interest Sensitivity Periods --------------------------------------------------------------------------------------------------------------------- December 31, 2001 Within 91 to 365 1 to 5 Over (Dollars in thousands) 90 Days Days Years 5 Years Total --------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Securities $ 17,889 $ 6,025 $ 13,579 $ 15,262 $ 52,755 Loans, net of unearned income 172,850 53,026 167,321 22,109 415,306 --------------------------------------------------------------------------------------------------------------------- Total earning assets $190,739 $ 59,051 $180,900 $ 37,371 $468,061 --------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES NOW accounts $ 61,324 $ 4,799 $ 12,860 -- $ 78,983 Money market accounts 27,241 7,406 4,887 -- 39,534 Savings accounts 1,143 3,573 9,578 -- 14,294 Certificates of deposit 30,721 79,567 97,368 7 207,663 Other borrowings 53,452 -- 400 -- 53,852 --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $173,881 $ 95,345 $125,093 $ 7 $394,326 --------------------------------------------------------------------------------------------------------------------- Cumulative maturity / interest sensitivity gap $ 16,858 $(19,436) $ 36,371 $ 73,735 $ 73,735 As % of total earnings assets 3.6% (4.2)% 7.8% 15.7% ---------------------------------------------------------------------------------------------------------------------
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 growth and earnings to forecast a base level of net interest income and earnings over a one-year period. This base level of earnings is then shocked assuming a sudden 200 basis points increase or decrease in interest rates. At December 31, 2001, the model projected net income would decrease by 5.6% if interest rates would immediately rise by 200 basis points and decrease by 0.4% if interest rates suddenly fell by 200 basis points, as a majority of the Company's interest-bearing liabilities would not reprice similarly to loans and investment securities due to their already low rates. The Company has set a limit on this measurement of interest sensitivity to a maximum decline in earnings of 20%. Since the earnings model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior, the model cannot precisely estimate net income and the effect on net income from sudden changes in interest rates. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. NON-INTEREST INCOME Non-interest income increased $2.1 million, or 80.8%, from $2.6 million in 2000 to $4.7 million in 2001 and increased $600 thousand, or 30.1%, from $2 million in 1999 to $2.6 million in 2000. In 1999, non-interest income increased $1.4 million from $632 thousand in 1998 to $2.0 million. Fees and net gains on mortgage loans held-for-sale increased significantly in 2001, rising $1.8 million, or 113.1%, from $1.6 million in 2000 to $3.4 million in 2001, as lower interest rates and a strong local housing market helped push total loans originated for sale from $79.8 million in 2000 to $180.7 million in 2001. In 2000, fees and net gains on mortgage loans held-for-sale increased $321 thousand, or 25.4%, from $1.3 million in 1999 to $1.6 million. Adverse changes in the local real estate market, consumer confidence, and interest rates could adversely impact the level of loans originated for sale, and the resulting fees and earnings thereon. Deposit account service charges and fees, which include monthly account maintenance charges, overdraft fees, ATM surcharges, safe deposit box rents and merchant discount fee income, increased $291 thousand, or 29.7%, from $980 thousand in 2000 to $1.3 million in 2001, and increased $291 thousand, or 42.2%, in 2000 from $689 thousand in 1999 to $980 thousand. In 1999, deposit account service charges and fees increased $99 thousand from $590 thousand in 1998 to $689 thousand. Growth in this category of non-interest income is directly attributed to growth in total deposits. 16 NON-INTEREST EXPENSE Non-interest expense increased $3.4 million, or 31.5%, from $10.6 million in 2000 to $14 million in 2001, and increased $2.2 million, or 26.7%, in 2000 from $8.4 million in 1999 to $10.6 million, and increased $2.7 million, or 47.4%, in 1999. Salaries and benefits accounted for $2.3 million, or 69.3%, of the total increase in non-interest expense in 2001, $1.3 million, or 56.6% in 2000, and $1.6 million, or 59.3%, in 1999. Commissions associated with the significant increases in total loans and loans originated for sale were the main reason for these increases in salaries and benefits expense over the past three years as well as other staff increases due to overall growth and branch expansion. Occupancy expenses, which include rents, depreciation, and maintenance on buildings, leaseholds and equipment, increased $391 thousand, or 20.1%, from $1.9 million in 2000 to $2.3 million in 2001, and increased $328 thousand and $492 thousand, or 20.3% and 43.7%, in 2000 and 1999, respectively. These increases are due to additional facilities for the Company's mortgage lending division that began operation in early 1999, its operations department due to staff growth, and continued branch expansion. Data processing costs increased $152 thousand, or 20.3%, from $750 thousand in 2000 to $902 thousand in 2001 and increased $139 thousand and $149 thousand, or 22.8% and 32.3%, in 2000 and 1999, respectively, due to growth in total loans and deposits. Other operating expenses, which include advertising and public relations expenses, bank franchise taxes, legal and professional fees, supplies and postage, increased $485 thousand, or 22.8%, from $2.1 million in 2000 to $2.6 million in 2001 and increased $504, or 31.0%, in 2000 compared to an increase of $467 thousand, or 40.4%, from $1.1 million in 1998 to $1.6 million in 1999. Other non-interest expenses to which the Company is not currently subject, such as deposit insurance premiums, which may be incurred in the future, could have an adverse affect on earnings and results of operations in future periods. INCOME TAXES The Company's income tax provisions are adjusted for non-deductible expenses and non-taxable interest after applying the U.S. federal income tax rate of 34%. Provision for income taxes totaled $2.4 million, $1.7 million, and $1.1 million for the years ended December 31, 2001, 2000, and 1999, respectively. ASSET QUALITY- PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is based upon management's estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. During 2001, charge-offs totaled $23 thousand compared to $36 thousand and $40 thousand in 2000 and 1999, respectively. The provision for loan loss expense in 2001 was $1.6 million compared to $947 thousand in 2000, and $480 thousand in 1999. The total allowance for loan losses of $4.4 million at December 31, 2001, increased 55.4% from $2.8 million at December 31, 2000, and increased 48.4% from $1.9 million at December 31, 1999 to $2.8 million at December 31, 2000. Higher provisions in 2001 are reflective of an increase in identified problem loans from $1.2 million at December 31, 2000 to $2.6 million as of December 31, 2001 and an increasing concentration of loans in real estate mortgage and construction. Management feels that the allowance for loan losses is adequate. There can be no assurance, however, that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management's estimates and judgments, adverse developments in the economy, on a national basis or in the Company's market area, or changes in the circumstances of particular borrowers. The Company generates a monthly 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 independent external loan reviews and monthly internal reviews. The determination of the allowance for loan losses is based on eight qualitative factors, applying appropriate weight to separate types or categories of loans. These 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. 17 TABLE 4: PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------------------------------- Allowance, beginning of period $2,803 $1,889 $1,438 $ 990 $ 748 --------------------------------------------------------------------------------------------------------- CHARGE-OFFS Real estate loans $ -- $ -- $ -- $ -- $ -- Commercial loans -- -- -- -- 23 Consumer loans 23 36 40 23 -- --------------------------------------------------------------------------------------------------------- Total charge-offs $ 23 $ 36 $ 40 $ 23 $ 23 --------------------------------------------------------------------------------------------------------- RECOVERIES Real estate loans $ -- $ -- $ -- $ -- $ -- Commercial loans 2 1 7 3 3 Consumer loans 2 2 4 17 -- --------------------------------------------------------------------------------------------------------- Total recoveries $ 4 $ 3 $ 11 $ 20 $ 3 --------------------------------------------------------------------------------------------------------- Net charge-offs $ 19 $ 33 $ 29 $ 3 $ 20 --------------------------------------------------------------------------------------------------------- Provisions for loan losses 1,572 947 480 451 262 --------------------------------------------------------------------------------------------------------- Allowance, end of period $4,356 $2,803 $1,889 $1,438 $ 990 --------------------------------------------------------------------------------------------------------- Ratio of net charges-offs to average total loans outstanding during period 0.01% 0.01% 0.02% 0.003% 0.02% ---------------------------------------------------------------------------------------------------------
TABLE 5: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a general allowance applicable to all loan categories; however, management has allocated the allowance to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts, or that the allocation indicates future trends. The allocation of the allowance at December 31 for the years indicated and the ratio of related outstanding loan balances to total loans are as follows:
(Dollars in thousands) 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------------------------------- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES: Real estate - mortgage $1,957 $1,571 $1,206 $ 870 $ 683 Real estate - construction 863 518 132 101 33 Commercial 1,482 628 477 409 262 Consumer 54 86 74 58 12 --------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, $4,356 $2,803 $1,889 $1,438 $ 990 --------------------------------------------------------------------------------------------------------- RATIO OF LOANS TO TOTAL YEAR-END LOANS: Real estate - mortgage 66% 64% 76% 73% 75% Real estate - construction 23% 21% 8% 8% 4% Commercial 9% 12% 13% 16% 19% Consumer 2% 3% 3% 3% 2% --------------------------------------------------------------------------------------------------------- 100% 100% 100% 100% 100% ---------------------------------------------------------------------------------------------------------
See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the provision and allowance for loan losses. 18 RISK ELEMENTS AND NON-PERFORMING ASSETS The Company seeks to minimize its risk and enhance its profitability by focusing on providing community-based financing and maintaining policies and procedures ensuring safe and sound banking practices. Non-performing assets consist of non-accrual loans, impaired loans, restructured loans, and other real estate owned (foreclosed properties). The total non-performing assets and loans that are 90 days or more past due and still accruing interest increased 2.2% from $542 thousand at year-end 2000 to $554 thousand at year-end 2001, and increased 70.9% from $317 thousand at year-end 1999 to $542 thousand at year-end 2000. 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. At December 31, 2001, the Bank has $45.8 million of construction loans to commercial builders of single family housing in the Northern Virginia market, representing 11.0% of total loans. These loans are made to a number of unrelated entities and generally have a term of less than one year. Adverse developments in the Northern Virginia real estate market or economy could have an adverse impact on this portfolio of loans and the Bank's income and financial position. At December 31, 2001, 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 counterparts 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. Loans secured by nonfarm nonresidential real estate totaled $179.5 million at December 31, 2001 and represent 43.2% of total loans. Foreclosed real properties include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. Such properties, which are held for resale, are carried at the lower of cost or fair value, including a reduction for the estimated selling expenses, or principal balance of the related loan. As of December 31, 2001 and 2000, the Company held no foreclosed real properties. The ratio of non-performing assets and past due loans to total loans decreased from .18% at December 31, 2000 to .13% at December 31, 2001 and increased from ..15% at December 31, 1999 to .18% at December 31, 2000. This ratio is expected to remain at its low level relative to the Company's peers; however, it may increase from its current level. This expectation is based on identified problem loans on December 31, 2001. As of December 31, 2001, there were $2.6 million of loans for which management has identified risk factors which could impair repayment in accordance with their terms, compared to $1.2 million at December 31, 2000. These loans are primarily well-secured and currently performing. See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the Company's non-performing assets. TABLE 6: NON-PERFORMING ASSETS
(Dollars in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------ Non-accrual loans $ 106 $ 117 $ 106 $ 121 $ 111 Impaired loans 119 107 143 213 140 Restructured loans -- -- -- -- -- Foreclosed properties -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------ Total non-performing assets $ 225 $ 224 $ 249 $ 334 $ 251 ------------------------------------------------------------------------------------------------------------------ Loans past due 90 days and still accruing 329 318 68 -- -- ------------------------------------------------------------------------------------------------------------------ TOTAL NON-PERFORMING ASSETS AND PAST DUE LOANS $ 554 $ 542 $ 317 $ 334 $ 251 ------------------------------------------------------------------------------------------------------------------ Allowance for loan losses to total loans 1.05% .91% .91% .95% .97% Allowance for loan losses to non-performing loans 1,936.0 1,251.3 758.6 430.5 394.4 Non-performing assets and past due loans to total loans 0.13 0.18 0.15 0.22 0.25 Non-performing assets and past due loans to total assets 0.11 0.15 0.11 0.15 0.15 ------------------------------------------------------------------------------------------------------------------
19 LOAN PORTFOLIO At December 31, 2001, loans including loans held-for-sale, net of unearned income and allowance for loan losses, totaled $410.9 million an increase of 34.4% over the 2000 year-end total of $305.7 million. In 2000, net loans increased 49.0% from a year-end 1999 total of $205.2 million. The increase in loans in 2001 included an increase in real estate construction loans of $29.0 million, or 44.3%, and an increase in real estate mortgage loans of $76.6 million, or 38.6%. In 2000, real estate construction loans increased $48.2 million, or 279.7%, while real estate mortgage loans increased $41.5 million, or 26.2%. The increases in real estate construction loans are the direct result of the Company's increased focus in this area and the hiring of loan officers specializing in residential construction lending. At December 31, 2001, $45.8 million of real estate construction loans were to commercial builders of single-family homes, $22.9 million to individuals and $25.8 million related to construction of commercial properties. The Company does not expect that the level of real estate construction loans will continue to grow at the rate experienced in 2000 and 2001, although there can be no assurance. The Company's lending activities are its principal source of income. Real estate loans, including residential permanents and construction, and commercial permanents, represent the major portion of the Company's loan portfolio. Tables 7 and 8 present information pertaining to the composition of the loan portfolio including unearned income, allowance for loan losses, and the maturity/ repricing of selected loans. TABLE 7: SUMMARY OF TOTAL LOANS
Year-end December 31, (Dollars in thousands) 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------- Real estate - mortgage $275,141 $198,541 $156,998 $109,774 $ 76,458 Real estate -construction 94,452 65,460 17,238 12,794 4,081 Commercial 39,153 37,406 26,423 23,514 19,076 Consumer 8,004 7,995 6,968 4,983 2,588 ---------------------------------------------------------------------------------------------------- Total loans $416,750 $309,403 $207,627 $151,065 $102,203 Less unearned income 1,444 883 567 187 296 Less allowance for loan losses 4,356 2,803 1,889 1,438 990 ---------------------------------------------------------------------------------------------------- Loans, net $410,950 $305,717 $205,171 $149,440 $100,917 ----------------------------------------------------------------------------------------------------
TABLE 8: MATURITY/REPRICING SCHEDULE OF SELECTED LOANS
As of December 31, 2001 (Dollars in thousands) Real estate-mortgage Real estate-construction Commercial Consumer -------------------------------------------------------------------------------------------------------------------------- VARIABLE: Within 1 year $ 71,174 $ 52,016 $ 22,739 $ 2,317 1-to-5 years 115,847 16,585 558 -- After 5 years 9,284 -- -- -- FIXED RATE: Within 1 year 9,916 17,834 4,807 1,937 1-to-5 years 31,523 8,017 8,932 3,593 After 5 years 37,397 -- 2,117 157 -------------------------------------------------------------------------------------------------------------------------- TOTAL LOANS $275,141 $ 94,452 $ 39,153 $ 8,004 --------------------------------------------------------------------------------------------------------------------------
At December 31, 2001, the aggregate amount of loans due after one year which have fixed rates was approximately $142.3 million, and the amount with variable or adjustable rates was approximately $91.7 million. 20 SECURITIES The securities portfolio plays a primary role in the management of the interest rate sensitivity of the Company, provides additional interest income, serves as a source of liquidity, and is used as needed to meet certain collateral requirements. The securities portfolio consists of two components, securities held-to-maturity and securities available-for-sale. Securities are classified as held-to-maturity based on management's intent and the Company's ability, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in the securities' prepayment risk, increased loan demand, general liquidity needs, and other similar factors are classified as available-for-sale and are carried at estimated fair value. In 2001, total securities increased $7.7 million, or 17.1%, to $53.0 million from $45.3 million and decreased $1 million, or 2.3%, from $46.3 million at year-end 1999 to $45.3 million at year-end 2000. Securities of U.S. Government Agencies represent the majority of the portfolio while obligations of states/political subdivisions have increased. 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. TABLE 9: SECURITIES PORTFOLIO
Year-end December 31, 2001 2000 1999 ---- ---- ---- Book Percent Book Percent Book Percent (Dollars in thousands) Value of total Value of total Value of total ----------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: U.S. Government Agency obligations $40,619 76.62% $29,406 64.98% $27,440 59.24% Obligations of states/political subdivisions 275 .52% 270 .60% -- -- Federal Reserve Bank stock 392 .74% 392 .87% 391 .84% Federal Home Loan Bank stock 732 1.38% 667 1.47% 667 1.44% Community Bankers' Bank stock 55 .10% 55 .12% 55 .12% ----------------------------------------------------------------------------------------------------------------------- $42,073 79.36% $30,790 68.04% $28,553 61.64% ----------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY: ----------------------------------------------------------------------------------------------------------------------- U.S. Government Agency obligations $ 6,017 11.35% $13,992 30.92% $17,772 38.36% Obligations of states/political subdivisions 3,945 7.44% -- -- -- -- Domestic corporate debt obligations 979 1.85% 472 1.04% -- -- ----------------------------------------------------------------------------------------------------------------------- $10,941 20.64% $14,464 31.96% $17,772 38.36% ----------------------------------------------------------------------------------------------------------------------- $53,014 100.00% $45,254 100.00% $46,325 100.00% -----------------------------------------------------------------------------------------------------------------------
21 TABLE 10: MATURITY OF SECURITIES
Year-end December 31, 2001 2000 1999 ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Book Average Book Average Booke Average Value Yield Value Yield Value Yield (Dollars in thousands) Maturing within one year $ -- -- $ 3,725 6.07% $ -- -- Maturing after one through five years 16,533 4.71% 22,314 5.87% 19,226 5.79% Maturing after five through ten years 7,738 6.29% 8,113 6.87% 11,858 6.43% Maturing after ten years 28,743 6.65% 11,102 6.66% 15,241 6.87% ----------------------------------------------------------------------------------------------------------------------------- $53,014 5.99% $45,254 6.26% $46,325 6.31% -----------------------------------------------------------------------------------------------------------------------------
DEPOSITS The Company's principal source of funds is depository accounts comprised of demand deposits, savings and money market accounts, and time deposits. Deposits are provided by individuals and businesses located within the communities served. Total deposits increased $96.0 million, or 30.9%, in 2001 to $406.9 million at year-end from $310.9 million at year-end 2000, and increased $67.9 million, or 27.9%, from $243.0 million at year-end 1999 to $310.9 million at year-end 2000. In 2001, growth by deposit category included a 21.0% increase in non-interest bearing deposits, a 27.9% increase in savings accounts and interest-bearing demand deposits, and a 36.5% increase in time deposits. The average rate paid on interest-bearing deposits declined thirty-four basis points from 4.98% for the year ended December 31, 2000, to 4.64% for the year ended December 31, 2001, and increased fifty-two basis points from 4.46% in 1999 to 4.98% in 2000. The average rate on interest-bearing deposits is expected to decline further in the first quarter of 2002 as $30.7 million in certificates of deposit bearing rates ranging from 200 to 275 basis points over rates offered as of December 31, 2001, will reprice. Table 11 details maturities of certificates of deposit with balances of $100,000 and over. See Note 6 to the Consolidated Financial Statements for additional information regarding the maturities of certificates of deposit. TABLE 11: MATURITIES OF CERTIFICATES OF DEPOSIT WITH BALANCES $100,000 OR MORE (Dollars in thousands) 2001 2000 1999 ------------------------------------------------------------------------ 3 months or less $ 11,900 $ 2,159 $ 2,470 3-6 months 9,029 3,960 3,904 6-12 months 21,075 22,509 7,390 Over 12 months 43,204 27,730 27,109 ------------------------------------------------------------------------ Total $ 85,208 $ 56,358 $ 40,873 ------------------------------------------------------------------------ SHORT-TERM BORROWINGS Short-term borrowings consist of securities sold under agreements to repurchase which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings also include Federal funds purchased, which are unsecured overnight borrowings from other financial institutions. Table 12 provides information as to the balances and interest rates on short-term borrowings for the years ended December 31, 2001 and 2000 (dollars in thousands): 22 TABLE 12: SHORT-TERM BORROWINGS ----------------------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------------------- Securities sold under agreement to repurchase $32,931 $28,097 Federal funds purchased 9,521 1,000 ----------------------------------------------------------------------------- Total $42,452 $29,097 Weighted interest rate 1.05% 5.06% Averages for the year ended December 31: Outstanding $35,851 $23,537 Interest rate 2.72% 4.57% Maximum month-end outstanding $42,452 $30,280 ------------------------------------------------------------------------------ LIQUIDITY The Company's principal sources of liquidity and funding are its deposit base. The level and maturity 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, 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 $27 million, or 27.5%, from $98.3 million at December 31, 2000, to $125.3 million at December 31, 2001, and increased $53 million from $45.3 million at December 31, 1999, to $98.3 million at December 31, 2000. Additional sources of liquidity available to the Company include the capacity to borrow funds through established lines of credit with various correspondent banks, and the Federal Home Loan Bank of Atlanta, although the Company's ability to utilize FHLB borrowings is restricted under the terms of its line of credit agreement with a correspondent bank. See Note 13 to the Consolidated Financial Statements for further information regarding these additional liquidity sources. CAPITAL The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company's capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The capital position of the Company's wholly-owned subsidiary, Virginia Commerce Bank (the "Bank), continues to meet regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios. Tier 1 capital consists of common and qualifying preferred stockholders' equity less goodwill. Total risk-based capital consists of Tier 1 capital, qualifying subordinated debt, and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio compares Tier 1 capital to total average assets. The Bank's Tier 1 risk-based capital ratio was 6.32% at December 31, 2001, compared to 6.90% at December 31, 2000. The total risk-based capital ratio was 10.09% at December 31, 2001, compared to 10.07% at December 31, 2000. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was 5.41% at December 31, 2001 compared to 5.82% at December 31, 2000. The Company's Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 6.35%, 7.41% and 5.44%, respectively, at December 31, 2001. During 2001, the Company continued to borrow funds under a $12 million line of credit with a correspondent bank in order to provide capital to fund growth and expansion at the Bank. At December 31, 2001, the amount outstanding under the line of credit was $11.0 million, as compared to $7.0 million at December 31, 2000. The Company believes that borrowing under the line of credit results in enhanced results of operations and returns for existing shareholders as compared to those that would result from the sale of additional common stock. The Company was required to repay $500 thousand of the outstanding amount by January 31, 2002, and is restricted beyond that date to a total outstanding amount of $10.5 million until such time as a participating lender has agreed to purchase a one 23 third interest in existing and future advances under the line of credit. If a participating lender has not agreed to purchase an interest by April 30, 2002, then the Company must pay down the amount outstanding to an amount no greater than $8 million on or before June 30, 2002. While the Company is confident that a participating lender or alternative sources of financing will be available, there can be no assurance that the Company will be able to fund growth with borrowed funds, that funds will continue to be available on attractive terms, or that the Company's financing costs will not increase. The ability of the Company to continue growth is dependent on its ability to obtain additional funds for contribution to the Bank's capital, through additional borrowing, the sale of additional common stock, or otherwise. In the event that the Company is unable to obtain additional capital for the Bank on a timely basis, including obtaining a participating or alternative lender for its existing line of credit used to supplement the Bank's capital, the growth of the Company and the Bank may be curtailed, and the Company and the Bank may be required to reduce their level of assets in order to maintain compliance with regulatory capital requirements. Under those circumstances net income and the rate of growth of net income may be adversely affected. DIVIDENDS The Company has not paid cash dividends since 1995, electing to retain earnings for funding the growth of the Company and its business. The Company currently anticipates continuing the policy of retaining earnings to fund growth. The ability of the Company to pay dividends, should it elect to do so, depends largely upon the ability of the Bank to declare and pay dividends to the Company, as the principal source of the Company's revenue is dividends paid by the Bank. Future dividends will depend primarily upon the Bank's earnings, financial condition, and need for funds, as well as governmental policies and regulations applicable to the Company and the Bank, which limit the amount that may be paid as dividends without prior approval. MARKET PRICE OF STOCK AND DIVIDENDS The Company's stock is traded on the NASDAQ National Market under the symbol "VCBI". The following table sets forth the range of high and low sales prices (adjusted for stock dividends and splits) known to the Company for each full quarterly period within the two most recent fiscal years. MARKET PRICE OF STOCK AND DIVIDENDS 2001 2000 Quarter High Low High Low ------------------------------------------------------------------- First $15.15 $10.60 $10.80 $ 9.45 Second 16.00 14.00 11.20 10.20 Third 21.00 15.55 11.20 10.50 Fourth 21.05 16.65 11.20 10.60 The approximate number of the Company's stockholders at December 31, 2001, is 750. Information regarding stock dividends and splits in 2001, 2000, and 1999 is as follows: 1. A 25% stock split in the form of a dividend was declared on February 28, 2001, for stockholders of record on April 16, 2001, and was paid on May 11, 2001. 2. A stock dividend of 10% was declared on April 26, 2000, for stockholders of record on May 12, 2000, and was paid on May 26, 2000. 3. On April 28, 1999, stockholders approved a change to the Articles of Incorporation to subdivide each share of common stock into one and one- tenth shares of common stock. 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 24, 2002 at "The Washington Golf and Country Club", 3017 North Glebe Road, Arlington, Virginia. 24 ANNUAL REPORT ON FORM 10-K A copy of Form 10-K as filed with the Securities and Exchange Commission is available without charge to stockholders upon written request to: William K. Beauchesne, Treasurer and Chief Financial Officer, Virginia Commerce Bancorp, Inc., 14201 Sullyfield Circle #500, Chantilly, VA 20151 25 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Directors Virginia Commerce Bancorp, Inc. and subsidiaries Arlington, Virginia We have audited the accompanying consolidated balance sheets of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholder's equity and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ Yount, Hyde & Barbour, P.C. Winchester Virginia February 21, 2002 26 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) December 31, 2001 2000 -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 15,155 $ 10,952 Securities (fair value: 2001, $53,143; 2000, $45,265) 53,014 45,254 Loans held-for-sale 15,842 4,918 Loans, net of allowance for loan losses of $4,356 in 2001 and $2,803 in 2000 395,108 300,799 Bank premises and equipment, net 6,238 5,741 Accrued interest receivable 2,211 2,042 Other assets 1,943 1,476 -------------------------------------------------------------------------------- Total assets $ 489,511 $ 371,182 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS Non-interest bearing demand deposits $ 66,448 $ 54,899 Savings and interest-bearing demand deposits 132,811 103,857 Time deposits 207,663 152,178 -------------------------------------------------------------------------------- Total deposits $ 406,922 $ 310,934 Securities sold under agreement to repurchase and federal funds purchased 42,452 29,097 Other borrowed funds 11,400 7,400 Accrued interest payable 1,301 1,309 Other liabilities 1,216 1,276 Commitments and contingent liabilities -- -- -------------------------------------------------------------------------------- Total liabilities $ 463,291 $ 350,016 -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, $5.00 par, 1,000,000 shares authorized of which no shares have been issued $ -- $ -- Common stock, $1.00 par, 5,000,000 shares authorized, issued and outstanding 2001, 2,720,816; 2000, 2,165,687 2,721 2,166 Surplus 13,190 13,648 Retained Earnings 10,138 5,476 Accumulated other comprehensive income (loss) 171 (124) -------------------------------------------------------------------------------- Total stockholders' equity $ 26,220 $ 21,166 -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 489,511 $ 371,182 -------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 27 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME: Interest and fees on loans $29,720 $23,215 $15,447 Interest and dividends on investment securities: U.S. Treasury securities and agency obligations 3,336 3,035 2,783 Other securities 190 90 72 Interest on federal funds sold 650 400 503 Interest on deposits with other banks 1 36 46 ---------------------------------------------------------------------------------------------- Total interest and dividend income $33,897 $26,776 $18,851 ---------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits $14,494 $11,425 $ 8,053 Securities sold under agreement to repurchase and federal funds purchased 976 1,076 571 Other borrowed funds 521 360 55 ---------------------------------------------------------------------------------------------- Total interest expense $15,991 $12,861 $ 8,679 ---------------------------------------------------------------------------------------------- Net interest income $17,906 $13,915 $10,172 Provision for loan losses 1,572 947 480 ---------------------------------------------------------------------------------------------- Net interest income after provision for loan losses $16,334 $12,968 $ 9,692 ---------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges and other fees $ 1,271 $ 980 $ 689 Fees and net gains on loans held-for-sale 3,379 1,586 1,265 Gains on sale of securities 13 -- -- Other 41 33 45 ---------------------------------------------------------------------------------------------- Total non-interest income $ 4,704 $ 2,599 $ 1,999 ---------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits $ 8,130 $ 5,812 $ 4,544 Occupancy expense 2,337 1,946 1,618 Data processing 902 750 611 Other operating expense 2,613 2,128 1,624 ---------------------------------------------------------------------------------------------- Total non-interest expense $13,982 $10,636 $ 8,397 ---------------------------------------------------------------------------------------------- Income before taxes on income $ 7,056 $ 4,931 $ 3,294 Provision for income taxes 2,391 1,681 1,128 ---------------------------------------------------------------------------------------------- NET INCOME $ 4,665 $ 3,250 $ 2,166 ---------------------------------------------------------------------------------------------- Earnings per common share, basic $ 1.72 $ 1.20 $ 0.80 ---------------------------------------------------------------------------------------------- Earnings per common share, diluted $ 1.57 $ 1.13 $ 0.75 ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 28 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Accumulated Other Total Preferred Common Retained Comprehensive Comprehensive Stockholders' Stock Stock Surplus Earnings Income (Loss) Income Equity ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31,1998 $ -- $ 1,787 $11,240 $ 2,820 $ (15) $15,832 ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 1999 2,166 $ 2,166 2,166 Other comprehensive income, net of tax, unrealized holding losses arising during the period (net of tax of $277) (539) (539) (539) ------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 1,627 ------------------------------------------------------------------------------------------------------------------------------- Capital restructure -- 179 (179) -- -- -- Cash paid in lieu of fractional shares -- -- -- (3) -- (3) Stock options exercised -- 4 29 -- -- 33 ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ -- $ 1,970 $11,090 $ 4,983 $ (554) $17,489 ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 2000 3,250 $ 3,250 3,250 Other comprehensive income, net of tax, unrealized holding gains arising during the period (net of tax of $221) 430 430 430 ------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 3,680 ------------------------------------------------------------------------------------------------------------------------------- 10% stock dividend -- 196 2,558 (2,754) -- -- Cash paid in lieu of fractional shares -- -- -- (3) -- (3) ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ -- $ 2,166 $13,648 $ 5,476 $ (124) $21,166 ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 2001 4,665 $4,665 4,665 Other comprehensive income, net of tax, unrealized holding gains arising during the period (net of tax of $156) 304 Less reclassification adjustment, (net of tax of $4) (9) Total other comprehensive income 295 295 295 ------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 4,960 ------------------------------------------------------------------------------------------------------------------------------- 25% stock split in form of a dividend -- 541 (541) -- -- -- Cash paid in lieu of fractional shares -- -- -- (3) -- (3) Stock options exercised -- 14 83 -- -- 97 ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ -- $ 2,721 $13,190 $10,138 $ 171 $26,220 -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 29 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
2001 2000 1999 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 33,719 $ 26,066 $ 18,763 Other income received 4,691 2,599 1,999 Net change in loans held-for-sale (10,924) (3,458) (658) Interest paid (15,999) (12,228) (8,631) Cash paid to suppliers and employees (12,720) (9,709) (7,747) Income taxes paid (3,454) (1,519) (1,262) ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities $ (4,687) $ 1,751 $ 2,464 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and principal payments on securities held-to-maturity $ 9,009 $ 4,040 $ 12,434 Proceeds from maturities and principal payments on securities available-for-sale 47,367 5,156 1,268 Proceeds from sales of securities available-for-sale 14,016 -- -- Purchases of securities held-to-maturity (5,446) (743) (4,933) Purchases of securities available-for-sale (72,238) (6,756) (1,171) Net increase in loans made to customers (95,880) (98,035) (55,553) Purchase of bank premises and equipment (1,375) (823) (1,388) ------------------------------------------------------------------------------------------------------ Net cash used in investing activities $(104,547) $ (97,161) $ (49,343) ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, NOW, money market and savings accounts $ 40,503 $ 28,819 $ 35,746 Net increase in time deposits 55,485 39,071 18,556 Net increase in securities sold under agreement to repurchase and federal funds purchased 13,355 11,260 2,110 Net increase in other borrowed funds 4,000 4,500 1,900 Net proceeds from issuance of capital stock 97 -- 33 Cash paid in lieu of fractional shares (3) (3) (3) ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities $ 113,437 $ 83,647 $ 58,342 ------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents $ 4,203 $ (11,763) $ 11,463 ------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS: Beginning 10,952 22,715 11,252 Ending $ 15,155 $ 10,952 $ 22,715 ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 30 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------- Net income $ 4,665 $ 3,250 $ 2,166 --------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 878 801 646 Provision for loan losses 1,572 947 480 Deferred tax benefit (566) (339) (192) Amortization of security premiums and accretion of discounts (9) 25 67 Origination of loans held-for-sale (180,737) (79,831) (73,738) Sale of loans 169,813 76,373 73,080 Gain on sale of securities available-for-sale (13) -- -- Increase in other assets (54) (18) (50) (Decrease) increase in other liabilities (59) 646 113 Increase in accrued interest receivable (169) (736) (156) (Decrease) increase in accrued interest payable (8) 633 48 --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (4,687) $ 1,751 $ 2,464 --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Unrealized gain (loss) on securities $ 447 $ 651 $ (816)
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BANKING ACTIVITIES AND ACCOUNTING POLICIES BUSINESS On December 22, 1999, Virginia Commerce Bancorp, Inc. (the "Company") became the holding company for Virginia Commerce Bank (the "Bank"). The Company acquired the Bank through a share exchange in which the stockholders of the Bank received one share of the Company for each share of the Bank. The exchange was a tax-free transaction for federal income tax purposes. The merger was accounted for on the same basis as a pooling-of-interests. The Company provides loan and deposit products to commercial and retail customers in the Washington Metropolitan Area, with the primary emphasis on Northern Virginia. The loan portfolio is generally collateralized by assets of the customers and is expected to be repaid 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 and Northeast Land and Investment Company. In consolidation, all significant intercompany accounts and transactions have been eliminated. RISKS AND UNCERTAINTIES In its normal course of business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or 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, 2001, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline or substantial increase in interest rates, would increase the likelihood of losses due to credit and market risks and could create the need for substantial increases to the allowance for loan losses. The Company is subject to the regulations of various regulatory agencies, which can change significantly from year to year. In addition, the Company undergoes periodic examinations by regulatory agencies, which may subject it to further changes based on the regulators' judgments about information available to them at the time of their examination. SECURITIES Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchased premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. LOANS HELD-FOR-SALE Loans held-for-sale are carried at the lower of cost or market, determined in the aggregate. Market value considers commitment agreements with investors and prevailing market prices. All loans originated by the mortgage banking operation are pre-sold and held-for-sale to outside investors. 32 LOANS The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions of the Company's market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally 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 as losses are estimated to have occurred 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. 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 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. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. Bank Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment are depreciated over their estimated useful lives; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. 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 expended 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. 33 LEASE ACQUISITION COSTS Lease acquisition costs are being amortized over ten years using the straight-line method. ADVERTISING COST The Company follows the policy of charging the production costs of advertising to expense as incurred. 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 foreclosed real estate and deferred tax assets. 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 represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects 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. RECENT ACCOUNTING PRONOUNCEMENTS In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which will potentially impact the accounting for goodwill and other intangible assets. Statement 141 eliminates the pooling method of accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangibles assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Bank in its 2002 financial statements. The adoption of these standards will not have a material impact on the financial statements. In June 2001, the Financial Accounting Standards Board issued Statement 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Statement is not expected to have a material effect on the Company's financial statements. 34 In August 2001, the Financial Accounting Standards Board issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also establishes a single accounting model for long-lived assets to be disposed of by sale, which includes long-lived assets that are part of a discontinued operation. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2001. The Statement is not expected to have a material effect on the Company's financial statements. STOCKHOLDERS' EQUITY A five-for-four stock split in the form of a 25% stock dividend was declared on February 28, 2001. This transaction was recorded by increasing common stock by $541 thousand and decreasing surplus by $541 thousand. A stock dividend of 10% was declared on April 26, 2000. This transaction was recorded by increasing common stock by $196 thousand, increasing surplus by $2.5 million and decreasing retained earnings by $2.7 million. On April 28, 1999, the stockholders approved an amendment to the Articles of Incorporation to subdivide each share of the common stock outstanding into one and one-tenth shares. This transaction was recorded by increasing common stock by $179 thousand and decreasing surplus by $179 thousand. NOTE 2. SECURITIES Amortized cost and fair value of the securities available-for-sale and held-to-maturity as of December 31, 2001 and 2000, are as follows (dollars in thousands):
------------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED DECEMBER 31, 2001 COST GAINS (LOSSES) FAIR VALUE ------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: U.S. Government Agency obligations $ 40,365 $ 256 $ (2) $ 40,619 Obligations of states and political subdivisions 270 5 -- 275 Federal Reserve Bank stock 392 -- -- 392 Federal Home Loan Bank stock 732 -- -- 732 Community Bankers' Bank stock 55 -- -- 55 ------------------------------------------------------------------------------------------------------------- $ 41,814 $ 261 $ (2) $ 42,073 HELD-TO-MATURITY: U.S. Government Agency obligations $ 6,017 $ 127 $ -- $ 6,144 Obligations of state and political subdivisions 3,945 16 (43) 3,918 Domestic corporate debt obligations 979 32 (3) 1,008 ------------------------------------------------------------------------------------------------------------- $ 10,941 $ 175 $ (46) $ 11,070 -------------------------------------------------------------------------------------------------------------
35
DECEMBER 31, 2000 ------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: U.S. Government Agency obligations $ 29,594 $ 28 $ (216) $ 29,406 Obligations of states and political subdivisions 270 -- -- 270 Federal Reserve Bank stock 392 -- -- 392 Federal Home Loan Bank stock 667 -- -- 667 Community Bankers' Bank stock 55 -- -- 55 ------------------------------------------------------------------------------------------------------------- $ 30,978 $ 28 $ (216) $ 30,790 HELD-TO-MATURITY: U.S. Government Agency obligations $ 13,992 $ 59 $ (62) $ 13,989 Domestic corporate debt obligations 472 14 -- 486 ------------------------------------------------------------------------------------------------------------- $ 14,464 $ 73 $ (62) $ 14,475 -------------------------------------------------------------------------------------------------------------
Amortized cost and fair value of the securities as of December 31, 2001, by contractual maturity, are shown below (dollars in thousands): ----------------------------------------------------------------------------- DECEMBER 31, 2001 AMORTIZED COST FAIR VALUE ----------------------------------------------------------------------------- AVAILABLE-FOR-SALE: Due after one year through five years $16,014 $16,056 Due after five years through ten years 6,669 6,767 Due after ten years 17,952 18,071 Federal Reserve Bank stock 392 392 Federal Home Loan Bank stock 732 732 Community Bankers' Bank stock 55 55 ----------------------------------------------------------------------------- $41,814 $42,073 HELD-TO-MATURITY: Due after one year through five years $ 477 $ 510 Due after five years through ten years 971 959 Due after ten years 9,493 9,601 ----------------------------------------------------------------------------- $10,941 $11,070 ----------------------------------------------------------------------------- The amortized cost of securities pledged as collateral for repurchase agreements, certain public deposits, and other purposes were $40.6 million and $33.6 million at December 31, 2001 and 2000, respectively. 36 NOTE 3. LOANS Major classifications of loans are summarized as follows (dollars in thousands): ----------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------- Commercial $ 39,153 $ 37,406 Real estate - 1-4 family residential 60,493 36,532 Real estate - multifamily residential 19,323 18,565 Real estate - nonfarm, nonresidential 179,483 138,527 Real estate - construction 94,452 65,460 Consumer 8,004 7,995 ----------------------------------------------------------------- Total Loans $400,908 $304,485 ----------------------------------------------------------------- Less unearned income 1,444 883 Less allowance for loan losses 4,356 2,803 ----------------------------------------------------------------- Loans, net $395,108 $300,799 ----------------------------------------------------------------- NOTE 4. ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses is shown below for the years ended December 31, (dollars in thousands): --------------------------------------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------------- Allowance, at beginning of period $ 2,803 $ 1,889 $ 1,438 Provision charged against income 1,572 947 480 Recoveries added to reserve 4 3 11 Losses charged to reserve (23) (36) (40) --------------------------------------------------------------------------- Allowance, at end of period $ 4,356 $ 2,803 $ 1,889 --------------------------------------------------------------------------- Information about impaired loans as of and for the years ended December 31, 2001, 2000 and 1999, is as follows (dollars in thousands):
------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------------------------- Impaired loans for which an allowance has been provided $119 $107 $143 Impaired loans for which no allowance has been provided -- -- -- ------------------------------------------------------------------------------------------------------------- Total impaired loans $119 $107 $143 ------------------------------------------------------------------------------------------------------------- Allowance provided for impaired loans, included in the allowance for loan losses 16 17 13 Average balance in impaired loans $113 $125 $178 ------------------------------------------------------------------------------------------------------------- Interest income recognized -- -- -- -------------------------------------------------------------------------------------------------------------
Non-accrual loans excluded from impaired loan disclosure under FASB 114 amounted to $106 thousand, $117 thousand and $107 thousand at December 31, 2001, 2000 and 1999, respectively. If interest on these loans had been accrued as interest income, such income would have approximated $17 thousand, $13 thousand and $10 thousand for the years ended December 31, 2001, 2000 and 1999, respectively. 37 NOTE 5. BANK PREMISES AND EQUIPMENT, NET Premises and equipment are stated at cost less accumulated depreciation at December 31, 2001 and 2000, as follows (dollars in thousands): ------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------ Land $ 1,839 $ 1,839 Buildings 2,361 2,117 Furniture, fixtures and equipment 4,713 3,832 Leasehold improvements 1,257 1,007 ------------------------------------------------------------------------ Total Cost $10,170 $ 8,795 Less accumulated depreciation and amortization 3,932 3,054 ------------------------------------------------------------------------ Net premises and equipment $ 6,238 $ 5,741 ------------------------------------------------------------------------ Depreciation and amortization expense on premises and equipment amounted to $878 thousand, $801 thousand and $646 thousand in 2001, 2000 and 1999, respectively. NOTE 6. TIME DEPOSITS The aggregate amount of time deposits with a minimum denomination of $100,000 each, was approximately $85,208 and $56,358 at December 31, 2001 and 2000, respectively. Scheduled maturities of all time deposits at December 31, 2001, are as follows (dollars in thousands): ------------------------------------------------ 2002 $110,288 2003 88,278 2004 2,341 2005 5,004 2006 and thereafter 1,752 ------------------------------------------------ $207,663 ------------------------------------------------ NOTE 7. INCOME TAXES Net deferred tax assets consist of the following components at December 31, 2001 and 2000 (dollars in thousands): ----------------------------------------------------- 2001 2000 ----------------------------------------------------- DEFERRED TAX ASSETS: Allowance for loan losses $1,458 $ 923 Non-accrual loans 32 27 Organization costs 6 8 Deferred loan fees 83 83 Bank premises and equipment 94 66 Securities available-for-sale -- 64 ----------------------------------------------------- $1,673 $1,171 ----------------------------------------------------- DEFERRED TAX LIABILITIES: Securities available-for-sale 88 -- Federal Home Loan Bank stock 2 2 $ 90 $ 2 ----------------------------------------------------- NET DEFERRED TAX ASSETS $1,583 $1,169 ----------------------------------------------------- 38 The provision for income tax and its components for the years ending December 31, 2001, 2000, and 1999 are as follows (dollars in thousands): --------------------------------------------------------------- DECEMBER 31, 2001 2000 1999 --------------------------------------------------------------- Current tax expense $ 2,957 $ 2,020 $ 1,320 Deferred tax benefit (566) (339) (192) --------------------------------------------------------------- $ 2,391 $ 1,681 $ 1,128 --------------------------------------------------------------- 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, 2001, 2000, and 1999, due to the following (dollars in thousands):
------------------------------------------------------------------------------------------- DECEMBER 31, 2001 2000 1999 ------------------------------------------------------------------------------------------- Computed "expected" tax expense $ 2,399 $ 1,676 $ 1,120 Increase (decrease) in income taxes resulting from: Nondeductible expense 6 5 8 Nontaxable income (14) -- -- ------------------------------------------------------------------------------------------- $ 2,391 $ 1,681 $ 1,128 -------------------------------------------------------------------------------------------
NOTE 8. 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. The weighted average number of shares, for all years reported, have been adjusted to give effect to stock dividends and splits. Potential dilutive common stock had no effect on income available to common stockholders.
---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ---------------------------------------------------------------------------------------------------------------- Basic earnings per share 2,711,550 $ 1.72 2,706,917 $ 1.20 2,705,299 $ 0.80 Effect of dilutive securities: Stock options 147,935 80,096 78,713 Warrants 113,728 91,830 95,037 ---------------------------------------------------------------------------------------------------------------- Diluted earnings per share 2,973,213 $ 1.57 2,878,843 $ 1.13 2,879,049 $ 0.75 ----------------------------------------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENCIES The Company leases office space for nine of its branch locations, its operations, mortgage lending, and construction lending departments. In addition, the Company has entered into a non-cancellable lease for another branch tentatively scheduled to open in April 2002. These non-cancellable agreements, which expire through April 2017, in some instances require payment of certain operating charges. Generally, all leases contain renewal options of one to two additional five-year terms. The Company also leases seven pieces of equipment under noncancellable agreements that expire through February 2004. All seven leases contain purchase options that are available at the end of the lease term. 39 The total minimum lease commitment, adjusted for the effect of annual fixed increases or the Consumer Price Index, at December 31, 2001, is $6.3 million, due as follows (dollars in thousands): ------------------------------------------------------------------ Due in the year ending December 31, 2002 $ 953 2003 851 2004 802 2005 800 2006 484 Thereafter 2,405 ------------------------------------------------------------------ The total lease expense was $948 thousand, $651 thousand and $547 thousand in 2001, 2000, and 1999, 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 10: 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, 2001and 2000, was $3.4 million and $1.8 million, respectively. During 2001, new loans and advances amounted to $2.5 million and repayments of $948 thousand were made. NOTE 11. STOCK-BASED COMPENSATION PLAN The Company has a stock-based compensation plan that is described below. Grants under this plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the stock option plan. Had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), reported net income and earnings per common share would have been reduced to the pro forma amounts shown below: ------------------------------------------------------------------------------- (Dollars in thousands except per share amounts) 2001 2000 1999 ------------------------------------------------------------ ------------------ NET INCOME: As reported $ 4,665 $ 3,250 $ 2,166 Pro forma $ 4,263 $ 2,951 $ 2,081 BASIC EARNINGS PER SHARE: As reported $ 1.72 $ 1.20 $ 0.80 Pro forma $ 1.57 $ 1.09 $ 0.77 DILUTED EARNING PER SHARE: As reported $ 1.57 $ 1.13 $ 0.75 Pro forma $ 1.43 $ 1.03 $ 0.72 ------------------------------------------------------------------------------- The current plan, adopted May 29, 1998, and amended in May 2001, is a qualified Incentive Stock Option Plan which provides for the granting of options to purchase up to 276,250 shares of common stock at a price to be determined by the Board at the date of grant, but in any event, no less than 100% of the fair market value. Options outstanding at the beginning of 1998, were granted under the Company's plan adopted in 1988 which was replaced by the current plan. As of December 31, 2001, 180,518 options had been granted under the current plan. Options are awarded to employees and the Board of Directors of the Company at the discretion of the Board of Directors. All options expire ten years from the grant date. All options which have been granted under the current plan vest over three years. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2001, 2000, and 1999, respectively: price volatility of 27.74%, 27.80% and 29.76%, risk-free interest rates of 5.04%, 6.95% and 6.50%, dividend rate of .02% and expected lives of 10 years. 40 A summary of the status of the plan at December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is as follows:
---------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 268,584 $ 7.78 174,528 $ 6.38 145,055 $ 5.64 Granted 56,600 $10.90 94,056 $10.39 34,342 $ 9.91 Exercised 13,899 $ 7.03 -- -- 3,659 $ 9.02 Forfeited 7,051 $10.59 -- -- 1,210 $ 9.84 Outstanding at end of year 304,234 $ 8.37 268,584 $ 7.78 174,528 $ 6.38 Exercisable at end of year 180,923 152,441 143,468 Pro forma weighted-average fair value per option of options granted during the year $5.52 $6.83 $7.38 ----------------------------------------------------------------------------------------------------------------------
A further summary about the options outstanding and exercisable at December 31, 2001 is as follows:
Options Outstanding Options Exercisable -------------------------------------- -------------------------- Number Weighted Number Weighted Outstanding Remaining Average Exercisable at Average at December Contractual Exercise December 31, Exercise Range of Exercise Prices 31, 2001 Life Price 2001 Price ------------------------------------------------------------------------------------------------ $3.62 to $4.87 98,187 4.2 years $ 4.31 98,187 $ 4.31 $9.02 to $10.25 65,328 6.6 years 9.48 52,998 9.39 $10.41 to $11.09 139,119 8.4 years 10.60 29,738 10.44 $17.25 to $20.00 1,600 9.8 years 18.19 -- -- ------------------------------------------------------------------------------------------------ $3.62 to $20.00 304,234 6.6 years $ 8.37 180,923 $ 6.81
All options granted, available under the current Plan, and exercisable have been adjusted for all three years giving retroactive effect to the 10% stock restructuring in 1999, the 10% stock dividend in 2000 and the 25% stock split in the form of a dividend in 2001. NOTE 12. DIRECTOR COMPENSATION PLAN In April 1996, the Company granted 148,230 warrants at an exercise price of $4.45 to six outside Directors. In January 1998, the Company granted 16,637 warrants at an exercise price of $9.02 to an additional outside Director. All warrants have been restated for both years giving retroactive effect to the 10% stock restructuring in 1998 and 1999, the 10% stock dividend in 2000 and the 25% stock split in the form of a dividend in 2001. In addition, the seven outside Directors were each awarded 6,875 options in January 2000, as adjusted for the 10% stock dividend in 2000 and the 25% stock split in the form of a dividend in 2001, under the Company's Incentive Option Plan. NOTE 13. OTHER BORROWED MONEY AND LINES OF CREDIT The Bank maintains a $73 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 lien loans on one-to-four unit single-family dwellings. As of December 31, 2001, the book value of these loans totaled approximately $8.7 million. The amount of available credit is limited to seventy-five percent of the qualifying loans. Advances on the line of credit, in excess of total qualifying loans, require pledging of additional assets. Under terms of a line of credit agreement from a nonaffiliated bank (described below) the Bank is limited to $10 million in total outstanding advances from the Federal Home Loan Bank at any time. The Company maintains a $12,000,000 line of credit from a nonaffiliated bank generally for the purpose of providing additional capital to the Bank. Under terms of the agreement, outstanding advances are currently limited to $11 million through January 31, 2002 and $10.5 million from February 1, 2002 through June 30, 2002. The agreement requires a participating lender to purchase a one third interest in existing and future advances under the line. Once a participating lender is obtained the limitations on outstanding advance amounts would be lifted, if a participating lender has not been obtained by April 30, 2002, advances will be limited to $8 million as of June 30, 2002 and the Company would be required to repay by that date any advances in excess of $8 million. Advances under the line of credit are secured by all of the shares of common stock of the Bank. 41 As of December 31, 2001, the Company had the following advances outstanding:
-------------------------------------------------------------------------------------- Creditor Advance Date Interest Rate Maturity Outstanding Principal -------------------------------------------------------------------------------------- FHLB 11-16-93 5.93% 11-16-03 $ 400 -------------------------------------------------------------------------------------- Non Affiliated Bank 12-26-01 4.85% 12-31-04 $ 8,000 Non Affiliated Bank 12-26-01 4.85% 06-30-02 2,500 Non Affiliated Bank 12-31-01 4.85% 01-31-02 500 -------------------------------------------------------------------------------------- $11,000 -------------------------------------------------------------------------------------- $11,400 --------------------------------------------------------------------------------------
The Bank has additional short term unused lines of credit totaling $9.2 million with nonaffiliated banks at December 31, 2001. NOTE 14. 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. Those 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. A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 2001 and 2000, is as follows:
------------------------------------------------------------------------------------------- (Dollars in thousands) 2001 2000 ------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 14,165 $ 9,005 Standby letters of credit and financial guarantees written $ 8,328 $ 3,256 Unfunded lines of credit $ 84,764 $ 60,635 ------------------------------------------------------------------------------------------
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. NOTE 15. 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, 2001, the aggregate amount of unrestricted funds that could be transferred totaled approximately $6.7 million, or 25.75%, of the consolidated net assets of the Company. 42 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, 2001 and 2000, the aggregate amounts of daily average required balances were approximately $798 thousand and $489 thousand, respectively. NOTE 16. 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 $141 thousand, $107 thousand and $74 thousand for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 17. 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. 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 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, 2001 and 2000, the carrying amounts of loan commitments and stand-by letters of credit approximate fair values. 43 The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
-------------------------------------------------------------------------------------------------- 2001 2000 Carrying Estimated Carrying Estimated (Dollars in thousands) Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and short-term investments $ 15,155 $ 15,155 $ 10,952 $ 10,952 Securities 53,014 53,143 45,254 45,265 Loans held-for-sale 15,842 15,842 4,918 4,918 Loans 395,108 410,923 300,799 307,798 Accrued interest receivable 2,211 2,211 2,042 2,042 -------------------------------------------------------------------------------------------------- Total Financial assets $481,330 $497,274 $363,965 $370,975 -------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Deposits $406,922 $412,783 $310,934 $312,608 Securities sold under agreement to 42,452 42,445 29,097 29,097 repurchase and federal funds purchased Other borrowed funds 11,400 11,441 7,400 8,075 Accrued interest payable 1,301 1,301 1,309 1,309 -------------------------------------------------------------------------------------------------- Total Financial liabilities $462,075 $467,970 $348,740 $351,089 --------------------------------------------------------------------------------------------------
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. NOTE 18. CAPITAL REQUIREMENTS The Company 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 and Tier 1 capital to risk-weighted assets (as defined), and of Tier 1 capital to average assets. Management believes, as of December 31, 2001 and 2000, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2001, 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, 2001 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. 44
----------------------------------------------------------------------------------------------------------- (Dollars in thousands) MINIMUM TO BE MINIMUM CAPITAL WELL-CAPITALIZED UNDER PROMPT ACTUAL CAPITAL REQUIREMENT* CORRECTIVE ACTION PROVISIONS ----------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2001: Amount Ratio >Amount >Ratio >Amount >Ratio - - - - ----------------------------------------------------------------------------------------------------------- Total Capital (to Risk-Weighted Assets) Company $30,381 7.41% $32,801 8.00% $ N/A N/A% Bank 41,357 10.09% 32,800 8.00% 41,000 10.00% Tier 1 Capital (to Risk-Weighted Assets) Company $26,026 6.35% $16,401 4.00% $ N/A N/A% Bank 25,902 6.32% 16,400 4.00% 24,600 6.00% Tier 1 Capital (to Average Assets) Company $26,026 5.44% $19,152 4.00% $ N/A N/A% Bank 25,902 5.41% 19,151 4.00% 23,939 5.00% ----------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2000: ----------------------------------------------------------------------------------------------------------- Total Capital (to Risk-Weighted Assets) Company $24,059 7.79% $24,701 8.00% $ N/A N/A% Bank 31,099 10.07% 24,705 8.00% 30,881 10.00% Tier 1 Capital (to Risk-Weighted Assets) Company $21,256 6.88% $12,350 4.00% $ N/A N/A% Bank 21,296 6.90% 12,352 4.00% 18,528 6.00% Tier 1 Capital (to Average Assets) Company $21,256 5.81% $14,634 4.00% $ N/A N/A% Bank 21,296 5.82% 14,636 4.00% 18,296 5.00% -----------------------------------------------------------------------------------------------------------
* The minimum capital requirement for the Company is a guideline. (1) 45 NOTE 19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
-------------------------------------------------------------------------------------- BALANCE SHEETS (in thousands) DECEMBER 31, 2001 DECEMBER 31, 2000 Assets: Cash and due from banks $ 1 $ 3 Investment in Virginia Commerce Bank 26,096 21,205 Subordinated Debt in Virginia Commerce Bank 11,100 7,000 Other Assets 31 143 -------------------------------------------------------------------------------------- Total Assets $37,228 $28,351 -------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Long Term Debt $11,000 $ 7,000 Other Liabilities 8 185 -------------------------------------------------------------------------------------- Total Liabilities $11,008 $ 7,185 -------------------------------------------------------------------------------------- Stockholders' Equity 26,220 21,166 -------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $37,228 $28,351 -------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, STATEMENTS OF INCOME (in thousands) 2001 2000 1999 Income: Interest on subordinated debt $ 479 $ 333 $ 1 Dividend from subsidiary 98 -- -- ------------------------------------------------------------------------------------------ Total Income 577 333 1 ------------------------------------------------------------------------------------------ Expenses: Interest on long term debt 491 336 1 Organizational expense -- -- 29 Other operating expense 32 20 3 ------------------------------------------------------------------------------------------ Total Expenses 523 356 33 ------------------------------------------------------------------------------------------ Gain (loss) before income taxes (benefit) and equity in undistributed earnings of Virginia Commerce Bank $ 54 $ (23) $ (32) Income Tax (Benefit) (15) (8) (11) ------------------------------------------------------------------------------------------ 69 (15) (21) Equity in undistributed net income of Virginia Commerce Bank 4,596 3,265 2,187 ------------------------------------------------------------------------------------------ Net Income $ 4,665 $ 3,250 $ 2,166 ------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, STATEMENTS OF CASH FLOWS (in thousands) 2001 2000 1999 Cash Flows from Operating Activities Net Income $ 4,665 $ 3,250 $ 2,166 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of Virginia Commerce Bank (4,596) (3,265) (2,187) Decrease (increase) in other assets 112 (131) (12) (Decrease) increase in other liabilities (177) 152 33 ----------------------------------------------------------------------------------------- Net cash provided by operating activities $ 4 $ 6 $ 0 ----------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchase of debt securities (4,100) (4,500) (2,500) ----------------------------------------------------------------------------------------- Net cash (used in) investing activities $(4,100) $(4,500) $(2,500) ----------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net increase in long term debt 4,000 4,500 2,500 Common stock issued 97 -- -- Cash paid in lieu of fractional shares (3) (3) -- ----------------------------------------------------------------------------------------- Net cash provided by financing activities $ 4,094 $ 4,497 $ 2,500 ----------------------------------------------------------------------------------------- Change in cash and cash equivalents $ (2) $ 3 $ 0 Beginning 3 0 0 Ending $ 1 $ 3 $ 0 -----------------------------------------------------------------------------------------
46 NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Selected financial information for the quarterly periods of 2001 and 2000 is presented below (dollars in thousands except per share data): 2001 QUARTERS ------------------------------------------ FIRST SECOND THIRD FOURTH ------------------------------------------ Interest income $8,048 $8,436 $8,827 $8,586 Interest expense 4,048 4,154 4,159 3,630 ------------------------------------------------------------------------------ Net interest income $4,000 $4,282 $4,668 $4,956 Provision for loan losses 270 180 225 897 Net interest income after provision for loan losses $3,730 $4,102 $4,443 $4,059 Non-interest income 880 1,135 1,237 1,452 Non-interest expense 3,188 3,455 3,530 3,809 ------------------------------------------------------------------------------ Income before taxes $1,422 $1,782 $2,150 $1,702 Income tax expense 484 605 729 573 ------------------------------------------------------------------------------ Net income $ 938 $1,177 $1,421 $1,129 ------------------------------------------------------------------------------ Net income per common share: Basic $ 0.35 $ 0.43 $ 0.52 $ 0.42 Diluted $ 0.33 $ 0.40 $ 0.47 $ 0.37 2000 QUARTERS ------------------------------------------ FIRST SECOND THIRD FOURTH ------------------------------------------ Interest income $5,637 $6,228 $7,083 $7,828 Interest expense 2,578 2,891 3,500 3,892 ------------------------------------------------------------------------------ Net interest income $3,059 $3,337 $3,583 $3,936 Provision for loan losses 165 165 290 327 Net interest income after provision for loan losses $2,894 $3,172 $3,293 $3,609 Non-interest income 487 661 709 742 Non-interest expense 2,435 2,563 2,529 3,109 ------------------------------------------------------------------------------ Income before taxes $ 946 $1,270 $1,473 $1,242 Income tax expense 323 432 502 424 ------------------------------------------------------------------------------ Net income $ 623 $ 838 $ 971 $ 818 ------------------------------------------------------------------------------ Net income per common share: Basic $ 0.23 $ 0.31 $ 0.36 $ 0.30 Diluted $ 0.22 $ 0.29 $ 0.34 $ 0.28 47
Board of Directors [photo omitted] First Row (left to right) Peter A. Converse, President and Chief Executive Officer; W. Douglas Fisher; Chairman, David M. Guernsey, Vice Chairman Second Row (left to right) Arthur L. Walters, Vice Chairman; Leonard Adler; Norris E, Mitchell; Frank L. Cowles, Jr.; Robert H. L'Hommedieu Executive Officers [photo omitted] Left to right: William K. Beauchesne, Executive Vice President and Chief Financial Officer, Kerry J. Donley, Executive Vice President, Retail Banking, Peter A. Converse, President and Chief Executive Officer Richard B. Anderson, Jr., Executive Vice President and Chief Lending Officer Timothy M. Aldinger Lisa K. Bluntzer Susan T. Johnson Deborah A. Jones Senior Vice President Vice President Vice President Assistant Vice President Commercial Lending Loan Servicing Facilities Manager Residential Mortgage Lending Ricardo Balcells J. Larry Caison Edward W. Lull, Jr. Tamara M. Mitchell Vice President General Auditor Vice President Assistant Vice President Regional Manager Commercial Lending King Street Branch Matthew F. Cammarota George L. Greco Vice President Pamela D. McConnell Stacey L. Sim Senior Vice President Senior Credit Officer Consumer Lending Vice President Assistant Vice President Community Banking McLean Branch Gregory A. Motheral Jose A. Castillo Senior Vice President Commercial Lending Vice President Robert L. McCoy Karen B. Daniels Electronic Banking Services Vice President Branch Officer James R. Nalls Regional Manager Williamsburg Blvd. Branch Senior Vice President Construction Lending Leslie E. Cerino Vice President Suzie G. Spannuth Barry L. Huitema Kenneth L. O'Shea Regional Manager Vice President Branch Officer Senior Vice President Deposit Operations Chantilly Branch Residential Mortgage Lending Wendy M. Clark Vice President Karen M. Clinton Shin Y. Koo Patricia M. Ostrander Consumer Lending Assistant Vice President Branch Officer Senior Vice President Consumer Lending Annandale Branch Director of Human Resources Robin P. Coracci Vice President Glenn S. Cummings Allison M. Leimbach Richard M. Owen Branch Coordinator Assistant Vice President Consumer Lending Officer Senior Vice President Security Officer Commercial Lending Nancy K. Dishner Kelly J. Perrault Vice President Jacqueline A. Freeman Branch Officer Michele K. Parker Credit Administration Assistant Vice President Cameron Station Branch Senior Vice President Training Officer Cash Management Services James C. Elliot Linda L. Trout Vice President James D. Holter Loan Servicing Officer Thomas E. Williams Commercial Lending Assistant Vice President Senior Vice President Information Services Real Estate Lending Lynn B. Gonzalez Vice President Nancy Hong Jo Ann Bell Electronic Banking Services Assistant Vice President Vice President Clarendon Branch Regional Manager Marcia J. Hopkins Vice President Sharon L. Jackson Accounting Assistant Vice President Fairfax Branch
48 VCBI www.vcbonline.com [FDIC Insurance Logo Omitted] ---- NASDAQ LISTED Appendix 2 Virginia Commerce Bancorp, Inc. Quarterly Report on Form 10-Q for the three months ended March 31, 2002 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2002 -------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ---------------- Commission file number 0-28635 ------- VIRGINIA COMMERCE BANCORP, INC. ------------------------------- (Exact Name of Registrant as Specified in its Charter) VIRGINIA 54-1964895 --------------------------------- ----------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207 ------------------------------------------- (Address of Principal Executive Offices) 703-534-0700 ------------ (Registrant's Telephone Number, Including Area Code) N/A --------------- (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- As of May 10, 2002, the number of outstanding shares of registrant's common stock, par value $1.00 per share was: 3,400,771 1 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS VIRGINIA COMMERCE BANCORP, INC. CONSOLIDATED BALANCE SHEETS (In thousands of dollars except per share data)
(Unaudited) (Audited) March 31, December 31, ASSETS: 2002 2001 --------- --------- Cash and due from banks $ 47,083 $ 15,155 Securities available-for-sale (at market value) 45,828 42,073 Securities held-to-maturity (market value of $13,881 and $11,070) 13,784 10,941 Loans held-for-sale 8,582 15,842 Loans, net of allowance for loan losses of $4,794 and $4,356 421,111 395,108 Bank premises and equipment, net 6,542 6,238 Accrued interest receivable 2,211 2,211 Other assets 2,227 1,943 --------- --------- TOTAL ASSETS $ 547,368 $ 489,511 ========= ========= LIABILITIES: Deposits Non-interest bearing $ 82,202 $ 66,448 Interest-bearing 382,467 340,474 --------- --------- TOTAL DEPOSITS 464,669 406,922 Securities sold under agreement to repurchase and federal funds purchased 40,251 42,452 Other borrowed funds 12,400 11,400 Other liabilities 2,760 2,517 --------- --------- TOTAL LIABILITIES 520,080 463,291 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock; $1 par, 1,000,000 shares authorized of which none have been issued $ -- $ -- Common stock; $1 par, 5,000,000 shares authorized; 2,720,816 issued and outstanding 2,721 2,721 Surplus 13,190 13,190 Retained earnings 11,501 10,138 Accumulated other comprehensive income (loss), net of tax (124) 171 --------- --------- TOTAL STOCKHOLDERS' EQUITY 27,288 26,220 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 547,368 $ 489,511 ========= =========
Notes to consolidated financial statements are an integral part of these statements. 2 VIRGINIA COMMERCE BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands of dollars except per share data) (Unaudited) Three Months Ended March 31, 2002 2001 ------- ------- INTEREST AND DIVIDEND INCOME: Interest and fees on loans $ 7,920 $ 7,039 Interest and dividends on investment securities 736 794 Interest on federal funds sold 92 214 ------- ------- Total Interest and Dividend Income 8,748 8,047 INTEREST EXPENSE: Deposits 3,167 3,571 Repurchase agreements and federal funds purchased 74 334 Other borrowed funds 136 142 ------- ------- Total Interest Expense 3,377 4,047 ------- ------- Net Interest Income 5,371 4,000 PROVISION FOR LOAN LOSSES 521 270 ------- ------- Net Interest Income After Provision for Loan Losses 4,850 3,730 NON-INTEREST INCOME: Service charges and other fees 406 305 Fees and net gains on loans held-for-sale 854 564 Gain (loss) on securities sales (1) -- Other 7 11 ------- ------- Total Non-Interest Income 1,266 880 NON-INTEREST EXPENSE: Salaries and employee benefits 2,404 1,820 Occupancy expense 667 535 Data processing 248 221 Other operating expense 745 612 ------- ------- Total Non-Interest Expense 4,064 3,188 ------- ------- Income before taxes on income 2,052 1,422 Provision for income taxes 689 484 ------- ------- NET INCOME $ 1,363 $ 938 ======= ======= EARNINGS PER COMMON SHARE, BASIC .50 .35 ======= ======= EARNINGS PER COMMON SHARE, DILUTED .45 .32 ======= ======= Notes to consolidated financial statements are an integral part of these statements. 3 VIRGINIA COMMERCE BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2002 and 2001 (In Thousands of Dollars) (Unaudited)
Accumulated Other Preferred Common Retained Comprehensive Comprehensive Stock Stock Surplus Earnings Income (Loss) Income Total ----- ----- ------- -------- ------------- ------ ----- Balance, January 1, 2001 $-- $ 2,166 $13,648 $ 5,476 $ (124) $21,166 Comprehensive Income: Net Income -- -- -- 938 $ 938 938 Other comprehensive income, net of tax Unrealized holding gains on securities available-for-sale arising during the period (net of tax of $128) 249 -- ------ Other comprehensive income, net of tax -- -- -- -- 249 249 249 ------ Total comprehensive income -- -- -- -- -- $1,187 ====== Balance, March 31, 2001 $-- $ 2,166 $13,648 $ 6,414 $ 125 $22,353 === ======= ======= ======= ====== ======= Accumulated Other Preferred Common Retained Comprehensive Comprehensive Stock Stock Surplus Earnings Income (Loss) Income Total ----- ----- ------- -------- ------------- ------ ----- Balance, January 1, 2002 $-- $ 2,721 $13,190 $10,138 $ 171 $26,220 Comprehensive Income: Net Income -- -- -- 1,363 $1,363 1,363 Other comprehensive income (loss), net of tax Unrealized holding losses on securities available-for-sale arising during the period (net of tax of $152) (295) -- ------- Other comprehensive income (loss), net of tax -- -- -- -- (295) (295) (295) ------- Total comprehensive income -- -- -- -- -- $1,068 ====== Balance, March 31, 2002 $-- $ 2,721 $13,190 $11,501 $ (124) $27,288 === ======= ======= ======= ====== =======
Notes to consolidated financial statements are an integral part of these statements. 4 VIRGINIA COMMERCE BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) (Unaudited)
Three Months Ended March 31, ---------------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,363 $ 938 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 225 197 Provision for loan losses 521 270 Deferred tax benefit (193) (105) Amortization of security premiums and (accretion) of discounts 9 (53) Loss on sale of securities available-for-sale 1 -- Origination of loans held-for-sale (44,682) (32,214) Sales of loans 51,942 30,167 Changes in other assets and other liabilities: Decrease in accrued interest receivable -- 47 Decrease (Increase) in other assets 61 (21) Increase (Decrease) in other liabilities 243 (180) -------- -------- Net Cash Provided (Used In ) Operating Activities $ 9,490 $ (954) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in loans (26,524) (7,375) Purchase of securities available-for-sale (16,425) (31,458) Purchase of securities held-to-maturity (3,971) -- Proceeds from sales of securities available-for-sale 1,350 -- Proceeds from principal payments on securities available-for-sale 1,868 484 Proceeds from principal payments on securities held-to-maturity 621 302 Proceeds from calls and maturities of securities available-for-sale 9,000 14,665 Proceeds from calls and maturities of securities held to maturity 502 6,020 Purchase of bank premises and equipment (529) (297) -------- -------- Net Cash (Used In) Investing Activities $(34,108) $(17,659) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $ 57,747 $ 32,514 Net (decrease) increase in repurchase agreements (2,201) 5,274 Net increase in other borrowed funds 1,000 500 -------- -------- Net Cash Provided by Financing Activities $ 56,546 $ 38,288 -------- -------- Net Increase In Cash and Cash Equivalents 31,928 19,675 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 15,155 10,952 -------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 47,083 $ 30,627 ======== ========
Notes to consolidated financial statements are an integral part of these statements. 5 VIRGINIA COMMERCE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements of Virginia Commerce Bancorp, Inc. and its subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the financial positions as of March 31, 2002 and December 31, 2001, and the results of operations, statements of cash flows and stockholders' equity for the three months ended March 31, 2002 and 2001. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 2. INVESTMENT SECURITIES Amortized cost and carrying amount (estimated market value) of securities available-for-sale are summarized as follows:
March 31, 2002 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------------------------------------------------------- (In Thousands of Dollars) Obligations of U.S. government corporations and agencies 44,105 104 (299) 43,910 Obligations of states/political subdivisions 270 7 -- 277 Federal Reserve Bank stock 392 -- -- 392 Federal Home Loan Bank stock 1,194 -- -- 1,194 Community Bankers' Bank stock 55 -- -- 55 -------- -------- -------- -------- $ 46,016 $ 111 $ (299) $ 45,828 ======== ======== ======== ========
Amortized cost and estimated market value of securities held-to-maturity are summarized as follows:
March 31, 2002 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------------------------------------------------------- (In Thousands of Dollars) Obligations of U.S. government corporations and agencies 9,360 128 (26) 9,462 Obligations of states/political subdivisions 3,945 10 (42) 3,913 Domestic corporate debt obligations 479 27 -- 506 -------- -------- -------- -------- $ 13,784 $ 165 $ (68) $ 13,881 ======== ======== ======== ========
6 VIRGINIA COMMERCE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) Securities available-for-sale at December 31, 2001 consist of the following:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------- (In Thousands of Dollars) Obligations of U.S. government corporations and agencies 40,365 256 (2) 40,619 Obligations of states/political subdivisions 270 5 -- 275 Federal Reserve Bank stock 392 -- -- 392 Federal Home Loan Bank stock 732 -- -- 732 Community Bankers' Bank stock 55 -- -- 55 -------- -------- -------- -------- $ 41,814 $ 261 $ (2) $ 42,073 ======== ======== ======== ========
Securities held-to-maturity at December 31, 2001 consist of the following:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------- (In Thousands of Dollars) Obligations of U.S. government corporations and agencies 6,017 127 -- 6,144 Obligations of states/political subdivisions 3,945 16 (43) 3,918 Domestic corporate debt obligations 979 32 (3) 1,008 -------- -------- -------- -------- $ 10,941 $ 175 $ (46) $ 11,070 ======== ======== ======== ========
3. LOANS Major classifications of loans are summarized as follows: March 31, December 31, 2002 2001 --------- ------------ (In Thousands of Dollars) Commercial 37,552 39,153 Real estate -1-4 family residential 52,363 60,493 Real estate -multifamily residential 22,949 19,323 Real estate -nonfarm, nonresidential 208,055 179,483 Real estate -construction 99,845 94,452 Consumer 6,745 8,004 --------- --------- Total Loans 427,509 400,908 Less unearned income (1,604) (1,444) Less allowance for loan losses (4,794) (4,356) --------- --------- Loans, net $ 421,111 $ 395,108 ========= ========= 7 VIRGINIA COMMERCE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 4. EARNINGS PER SHARE The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. The weighted average number of shares for the period ending March 31, 2001 have been restated giving effect to a five for four stock split in the form of a dividend in May 2001.
March 31, 2002 March 31, 2001 -------------- -------------- Per Share Per Share Shares Amount Shares Amount ------ ------ ------ ------ Basic earnings per share 2,720,816 $ .50 2,706,917 $ .35 Effect of dilutive securities: Stock options 203,562 107,821 Warrants 131,194 99,937 --------- --------- Diluted earnings per share 3,055,572 $ .45 2,914,675 $ .32 ========= =========
5. CAPITAL REQUIREMENTS A comparison of the Company's and its wholly-owned subsidiary's, Virginia Commerce Bank (the "Bank") capital as of March 31, 2002 with the minimum regulatory guidelines is as follows: Minimum Minimum to be Actual Guidelines "Well-Capitalized" ------ ---------- ------------------ Total Risk-Based Capital: Company 7.34% 8.00% -- Bank 10.05% 8.00% 10.00% Tier 1 Risk-Based Capital: Company 6.24% 4.00% -- Bank 6.22% 4.00% 6.00% Leverage Ratio: Company 5.34% 4.00% -- Bank 5.32% 4.00% 5.00% 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-Looking Statements -------------------------- This management's discussion and analysis and other portions of this report, contain forward-looking statements within the meaning of the Securities and Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "anticipates," "believes," "expects," "plans," "estimates," "potential," "continue," "should," and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company does undertake to update any forward-looking statements to reflect occurrences or events that may not have been anticipated as of the date of such statements. General ------ The following presents management's discussion and analysis of the consolidated financial condition and results of operations of Virginia Commerce Bancorp, Inc. and subsidiaries (the "Company") as of the dates and for the periods indicated. This discussion should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, and other financial data appearing elsewhere in this report. The Company is the parent bank holding company for Virginia Commerce Bank (the "Bank"), a Virginia state chartered bank that offers a full range of banking services through twelve branch offices, principally to individuals and small to medium-size businesses in the Metropolitan Washington, D.C. area. Critical Accounting Policies ---------------------------- The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the specific allowance, the formula allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for loans identified for impairment testing. Impairment testing includes consideration of the borrower's overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability 9 and severity of inherent losses. When impairment is identified, then a specific reserve is established based on the Company's calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment. The formula allowance is used for estimating the loss on internally risk rated loans exclusive of those identified for impairment testing. The loans meeting the criteria for special mention, substandard, doubtful and loss, as well as, impaired loans are segregated from performing loans within the portfolio. Internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). Each loan type is assigned an allowance factor based on management's estimate of the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than non-rated loans due to management's concerns regarding collectibility or management's knowledge of particular elements surrounding the borrower. Allowance factors grow with the worsening of the internal risk rating. The unallocated formula is used to estimate the loss of non-classified loans and loans identified for impairment testing for which no impairment was identified. These un-criticized loans are also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors (i.e. competition and regulatory requirements). The factors assigned differ by loan type. The unallocated allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. Results of Operations --------------------- Total assets increased $57.9 million, or 11.8%, from $489.5 million at December 31, 2001 to $547.4 million at March 31, 2002, as total deposits grew $57.8 million, or 14.2%, from $406.9 million to $464.7 million, repurchase agreements decreased $2.2 million, or 5.2%, and other borrowed funds increased $1 million from $11.4 million to $12.4 million. Loans, net of allowance for loan losses, increased $26 million, or 6.6%, from $395.1 million at December 31, 2001 to $421.1 million at March 31, 2002, and represented 90.6% of total deposits at March 31, 2002 compared to 97.1% at December 31, 2001. The bulk of loan growth was provided by non-farm nonresidential real estate loans which increased $28.6 million, or 15.9%, from $179.5 million to $208.1 million during the three months ended March 31, 2002. Real estate construction loans represented the second largest dollar increase rising $5.3 million, or 5.7%, from $94.5 million to $99.8 million during the period, while multifamily residential real estate loans increased $3.6 million, or 18.8%, from $19.3 million at December 31, 2001 to $22.9 million at March 31, 2002. All other loan categories declined with commercial purpose loans falling $1.6 million, 1-4 family residential mortgages decreasing by $8.1 million and consumer purpose loans falling $1.3 million, or 15.7%. Loans held-for-sale fell $7.2 million from $15.8 million at December 31, 2001 to $8.6 million at March 31, 2002 with $44.7 million in originations and $51.9 million in sales. Sales exceeded originations due to the high level of outstandings at December 31, 2001. Originations for the three month period ended March 31, 2001 were $32.2 million. With the increase in loans trailing deposit growth during the three month period, cash and cash equivalents grew $31.9 million, or 210.7%, from $15.2 million at December 31, 2001 to $47.1 million at March 31, 2002, and investment securities increased $6.6 million, or 12.5%, during the same period. Deposit growth included a $42 million increase in interest bearing deposits from $340.5 million at December 31, 2001 to $382.5 million at March 31, 2002 and a $15.7 million, or 23.7%, increase in non-interest bearing demand deposits. Deposit growth has continued to be strong due to the Bank's increasing market visibility and branch expansion. Stockholders' equity increased $1.1 million from $26.2 million at December 31, 2001 to $27.3 million at March 31, 2002 on earnings of $1.4 million and a decline in accumulated other comprehensive income of $295 thousand, net of tax. Subsequent to March 31, 2002, a five for four stock split was paid on April 12, 2002 increasing the number of outstanding shares from 2,720,816 to 3,400,771. 10 Net income of $1.4 million for the first quarter ended March 31, 2002, increased $425 thousand, or 45.3% compared to $938 thousand for the same period in 2001, as net interest income increased $1.4 million, or 34.3%, and non-interest income increased $386 thousand, or 43.9%, from $880 thousand to $1.3 million. Diluted earnings per share were $0.45 compared to $0.32, an increase of 40.6%. Return on average assets and return on average equity for the first quarter were 1.1% and 20.6% respectively versus 1.0% and 17.4% for the same period in 2001. Net Interest Income ------------------- Net interest income grew $1.4 million, or 34.3% from $4.0 million for the three months ended March 31, 2001 to $5.4 million for the three month period ended March 31, 2002. Growth in total average earning assets from $371.2 million to $491.4 million was the main reason for the increase while an increase in the net interest margin of seven basis points from 4.26% during the first three months of 2001 to 4.33% for the three months ended March 31, 2002 also contributed. Due to lower interest rates, the yield on earning assets decreased one hundred and fifty-five basis points from 8.67% for the quarter ended March 31, 2001 to 7.12% for the quarter ended March 31, 2002; however, the average rate paid on interest bearing liabilities dropped one hundred and ninety basis points from 5.23% to 3.33%. The Company expects its net interest margin to remain at its current to possibly a higher level, although there can be no assurance. This expectation is based on a number of factors including the anticipation that market interest rates will begin to slowly move upward in 2002, a high level of certificates of deposits expected to reprice at lower rates, and the high level of non-interest bearing cash and cash equivalents which are available for deployment into interest bearing loans and securities. The following table shows the average balance sheets for each of the three months ended March 31, 2002 and 2001. In addition, the amounts of interest earned on earning assets, with related yields on a tax-equivalent basis, and interest expense on interest-bearing liabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the average balances. Net loans fees included in interest income on loans totaled $363 thousand and $253 thousand for 2002 and 2001, respectively. 11
Three Months Ended March 31, ----------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------- Interest Average Interest Average Average Income- Yields Average Income- Yields (Dollars in thousands) Balance Expense /Rates Balance Expense /Rates ----------------------------------------------------------------- ASSETS Securities (1) $ 53,599 $ 736 5.49% $ 47,408 $ 794 6.70% Loans, before allowance for losses 415,563 7,920 7.62% 307,912 7,039 9.14% Federal funds sold 22,234 92 1.66% 15,894 214 5.39% ----------------------------------------------------------------- Total Earning Assets $491,396 $8,748 7.12% $371,214 $8,047 8.67% Non-earning assets 25,749 15,914 -------- -------- TOTAL ASSETS $517,145 $387,128 ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY Interest-bearing deposits $365,107 $3,167 3.52% $275,445 $3,571 5.26% Fed Funds purchased and securities sold U/A to repurchase 35,404 74 .85% 30,558 334 4.43% Other borrowed funds 11,241 136 4.84% 7,411 142 7.66% ----------------------------------------------------------------- TOTAL INTEREST-BEARING $411,752 $3,377 3.33% $313,414 $4,047 5.23% LIABILITIES Demand deposits and other non-interest bearing liabilities 78,520 51,855 -------- -------- TOTAL LIABILITIES $490,272 $365,269 Stockholders' equity 26,873 21,859 -------- -------- TOTAL LIABILITIES AND $517,145 $387,128 STOCKHOLDERS' EQUITY ======== ======== Interest rate spread 3.79% 3.44% Net interest income and $5,371 4.33% $4,000 4.26% margin
(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 stockholder's equity. Average yields on securities are stated on a tax equivalent basis. Allowance for Loan Losses / Provision for Loan Loss Expense ----------------------------------------------------------- The provision for loan losses is based upon management's estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. For the three months ended March 31, 2002 there were $89 thousand in charge-offs compared to no charge-offs for the same period ended March 31, 2001. The provision for loan loss expense in the first three months of 2002 was $521 thousand compared to $270 thousand in 2001. The total allowance for loan losses of $4.8 million at March 31, 2002 increased 10.1% from $4.4 million at December 31, 2001, and increased $1.7 million, or 56.0%, from $3.1 million at March 31, 2001. Increases in the provisions and the total allowance for loan losses are due to two reasons. First, an increase in total loans outstanding of $26.6 million from $400.9 million at December 31, 2001 to $427.5 million at March 31, 2002, as compared to an increase of $7.4 million in the 12 first three months of 2001, and an increase of $115.6 million, or 37.1%, from $311.9 million at March 31, 2001 to $427.5 million at March 31, 2002. Second, an increase in real estate construction and non-farm non-residential real estate loans as a percentage of total loans from 68.3% at March 31, 2001 to 72.0% at March 31, 2002. Management feels that the allowance for loan losses is adequate. There can be no assurance, however, that additional provisions for loan losses will not be required in the future, including as a result of 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 monthly 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 independent external loan reviews and monthly internal reviews. The determination of the allowance for loan losses is based on eight qualitative factors and one quantitative factor for each category and type of loan along with any specific allowance for adversely classified loans within each category. Each factor is assigned a percentage weight and that total weight is applied to each loan category. Factors are different for each 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 allowance is required due to an increase in adversely classified loans. The following schedule summarizes the changes in the allowance for loan losses:
Three Months Three Months Twelve Months Ended Ended Ended March 31, 2002 March 31, 2002 December 31, 2001 -------------- -------------- ----------------- Allowance, at beginning of period 4,356 2,803 2,803 Provision charged against income 521 270 1,572 Recoveries: Consumer loans 5 1 2 Commercial loans 1 -- 2 Losses charged to reserve: Consumer loans (39) -- (23) Commercial loans (50) -- -- ------- ------- ------- Net (charge-offs) recoveries (83) 1 (19) Allowance, at end of period $ 4,794 $ 3,074 $ 4,356 ======= ======= ======= Ratio of net charge-offs during the period to average loans outstanding for the period: .02% -- .01%
Risk Elements and Non-performing Assets --------------------------------------- Non-performing assets consist of non-accrual loans, impaired loans, restructured loans, and other real estate owned (foreclosed properties). The total non-performing assets and loans that are 90 days or more past due and still accruing interest decreased 14.6% from $554 thousand at December 31, 2001 to $473 thousand at March 31, 2002. 13 Loans are placed in non-accrual status when in the opinion of management the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities. No interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest or the borrower demonstrates the ability to pay and remain current, or both. The ratio of non-performing assets and past due loans to total loans decreased from .13% at December 31, 2001 to .11% at March 31, 2002. This ratio is expected to remain at its low level relative to the Company's peers; however, it may increase from its current level. This expectation is based on identified problem loans on March 31, 2002. As of March 31, 2002, there were $2.6 million of loans for which management has identified risk factors which could impair repayment in accordance with their terms, including compared to $2.6 million at December 31, 2001. These loans are mostly for commercial business purpose, are currently performing and generally are well-secured. Non-performing assets consist of the following: March 31, December 31, 2002 2001 ---- ---- (In Thousands of Dollars) Non-accrual loans $103 $106 Impaired loans 295 119 ---- ---- Total non-performing assets 398 225 Loans past due 90 days and still accruing 75 329 Total non-performing assets and loans past due 90 days and still accruing $473 $554 ==== ==== Total non-performing assets and loans past due 90 days and still accruing: As a percentage of total loans 0.11% 0.13% As a percentage of total assets 0.09% 0.11% At March 31, 2002, the Bank has $50.5 million of construction loans to commercial builders of single family housing in the Northern Virginia market, representing 11.8% of total loans. These loans are made to a number of unrelated entities and generally have a term of less than one year. Adverse developments in the Northern Virginia real estate market or economy could have an adverse impact on this portfolio of loans and the Bank's income and financial position. At March 31, 2002, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of counterparts 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. Loans secured by non-farm nonresidential real estate in the Northern Virginia market totaled $208.1 million at March 31, 2002 and represent 48.7% of total loans. Non-Interest Income ------------------- Non-interest income increased $386 thousand, or 43.9% from $880 for the three months ending March 31, 2001 to $1.3 million for the same period ended March 31, 2002. Service charges and other fees grew $101 thousand, or 33.1%, due to growth in deposit accounts. Fees and net gains on loans held-for-sale increased $290 thousand, or 51.4%, from $564 thousand during the first three months of 2001 to $854 thousand for the three months ended March 31, 2002 as total originations of loans held-for-sale increased 14 from $32.2 million to $44.7 million. Loans classified as held-for-sale are originated on a pre-sold, servicing released basis, and carried on the balance sheet at the lower of cost or market. Adverse changes in the local real estate market, consumer confidence, and interest rates could adversely impact the level of loans originated and held-for-sale, and the resulting fees and earnings thereon. Non-Interest Expense -------------------- For the three months ended March 31, 2002, non-interest expense increased $876 thousand, or 27.5% compared to the same period in 2001. Salaries and benefits accounted for $584 thousand of the total increase, with commissions associated with the increase in loans rising $155 thousand and staff increases due to overall growth and branch expansion accounting for the difference. Occupancy expense increased $132 thousand due to the addition of the Bank's twelfth branch location in April 2001 and additional facilities for the Company's Operations Department. Other operating expenses increased $133 thousand, or 21.7% with advertising costs higher by $46 thousand. Provision for Income Taxes -------------------------- The Company's income tax provisions are adjusted for non-deductible expenses and non-taxable interest after applying the U.S. federal income tax rate of 34%. Provision for income taxes totaled $484 thousand and $689 thousand for the three months ending March 31, 2001 and 2002, respectively. Liquidity --------- The Company's principal sources of liquidity and funding are its deposit base. The level and maturity 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, 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 $40.6 million, or 32.4%, from $125.3 million at December 31, 2001 to $165.9 million at March 31, 2002 Additional sources of liquidity available to the Company include the capacity to borrow funds through established lines of credit with various correspondent banks, and the Federal Home Loan Bank of Atlanta. Available funds from these liquidity sources were approximately $29.2 million and $18.8 million at March 31, 2002 and December 31, 2001, respectively. Capital ------- The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company's capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The capital position of the Bank continues to meet regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios. Tier 1 capital consists of common and qualifying preferred stockholders' equity less goodwill. Total risk-based capital consists of Tier 1 capital, qualifying subordinated debt, and a 15 portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio compares Tier 1 capital to total average assets. The Bank's Tier 1 risk-based capital ratio was 6.22% at March 31, 2002, compared to 6.32% at December 31, 2001. The total risk-based capital ratio was 10.05% at March 31, 2002, compared to 10.09% at December 31, 2001. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank's leverage ratio was 5.32% at March 31, 2002 compared to 5.41% at December 31, 2001. The Company's Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 6.24%, 7.34% and 5.34%, respectively, at March 31, 2002. During the first three months of 2002, the Company continued to borrow funds under a $12 million line of credit with a correspondent bank in order to provide capital to fund growth and expansion at the Bank. At March 31, 2002, the amount outstanding under the line of credit was $12 million, as compared to $11 million at December 31, 2001. Under terms of the agreement the Company was required to find a participating lender for a one-third interest in the line of credit by April 30, 2002. As a participating lender had not agreed to purchase a one-third interest by April 30, 2002, the Company will pay down the amount outstanding to an amount no greater than $8 million on or before June 30, 2002. Although the reduction of the outstanding balance of the loan may cause the Bank to become less than well capitalized for regulatory purposes at June 30, 2002, the Company does not anticipate any long term adverse effects from the reduction. One March 26, 2002 the Company announced a proposed public offering, on a preemptive rights basis to existing shareholders only, of newly issued shares of its common stock, $1.00 par value for a total offering price of up to approximately $7 million. Proceeds of the offering by the Company will be used to pay down borrowings under the Company's line of credit, to increase the capital position of the Company and the Bank, including restoring the Bank to a well capitalized position, and to support future growth. The ability of the Company to continue growth is dependent on its ability to obtain additional funds for contribution to the Bank's capital, through additional borrowing, the sale of additional common stock, or otherwise. 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. Recent Accounting Pronouncements -------------------------------- There have been on new accounting pronouncements to disclose since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Based on information available to the Company, there are no additional disclosures necessary to asses changes in information about market risk that have occurred since December 31, 2001. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds- None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and reports on Form 8-K a) Exhibits
Exhibit No. Description ----------- ---------------------------------------------------------------------- 3.1 Articles of Incorporation of Virginia Commerce Bancorp, Inc. (1) 3.2 Bylaws of Virginia Commerce Bancorp, Inc. (1) 10.1 1998 Stock Option Plan (1) 10.2 Loan Agreement, dated December 26, 2001 between Virginia Commerce Bancorp, Inc. and Provident Bank, as Lender, and related Promissory Note (2) 10.3 Pledge and Assignment Agreement, dated December 31, 2001 between Virginia Commerce Bancorp, Inc. and Provident Bank (2) 11 Statement Regarding Computation of Per Share Earnings- See Note 4 to the Consolidated Financial Statements included in this report. 21 Subsidiaries of the Registrant. o Virginia Commerce Bank -Virginia Subsidiaries of Virginia Commerce Bank o Northeast Land and Development Corporation - Virginia o Virginia Commerce Insurance Agency, L.L.C. - Virginia
(1) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. (2) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. b) Form 8-K On January 17, 2002, the Company filed a Current Report on Form 8-K, under Item 5 thereof, reflecting the announcement of earnings for the year ended December 31, 2001. On February 27, 2002, the Company filed a Current Report on Form 8-K, under Item 5 thereof, reflecting the announcement of the declaration of a 5 for 4 stock split in the form of a 25% stock dividend, payable on April 12, 2002, to holders of record on March 15, 2002. On March 26, 2002, the Company filed a Current Report on Form 8-K, under Item 5 thereof, reflecting the announcement of its intent to file a registration statement with the Securities and Exchange Commission for a proposed public offering, on a preemptive rights basis to existing shareholders only, of newly issued shares of its common stock, $1.00 par value, for a total offering price of up to approximately $7 million. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 10, 2002 BY /s/ Peter A. Converse ------------------------------------------- Peter A. Converse, President & CEO Date: May 10, 2002 BY /s/ William K. Beauchesne ------------------------------------------- William K. Beauchesne , Treasurer & Chief Financial Officer 18 VIRGINIA COMMERCE BANCORP, INC. ___________ SHARES COMMON STOCK Prospectus __________, 2002 VIRGINIA COMMERCE BANCORP HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ABOUT THE OFFERING THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION IN THIS PROSPECTUS OR IN ITS DOCUMENTS THAT ARE PUBLICLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE DOES GIVE YOU DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. THE DELIVERY OF THIS PROSPECTUS AND/OR THE SALE OF SHARES OF COMMON STOCK DO NOT MEAN THAT THERE HAVE NOT BEEN ANY CHANGES IN VIRGINIA COMMERCE BANCORP'S CONDITION SINCE THE DATE OF THIS PROSPECTUS. IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO SELL, OR TO ASK FOR OFFERS TO BUY, THE SECURITIES OFFERED BY THIS PROSPECTUS, OR IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THIS PROSPECTUS SPEAKS ONLY AS OF ITS DATE EXCEPT WHERE IT INDICATES THAT ANOTHER DATE APPLIES. PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses payable by the Company in connection with the Offering described in this Registration Statement are as follows: Registration Fee...................................................$649 *Blue Sky Filing Fees and Expenses (Including counsel fees).......3,500 *Legal Fees......................................................30,000 *Printing, Engraving and Edgar...................................13,000 *Accounting Fees and Expenses....................................10,000 *Other Expenses...................................................7,851 ------- Total.........................................$65,000 =======
--------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Virginia Commerce Bancorp's Articles of Incorporation provide that the Company shall, to the full extent required or permitted by the Virginia Stock Corporation Act or other applicable law, indemnify an officer or director of the company who is or was a party to any proceeding by reason of the fact of service as an officer or director, or service at Virginia Commerce Bancorp's request as an officer, director, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. The Virginia Stock Corporation Act provides in relevant part as follows: ss. 13.1-696 Definitions In this article: "Corporation" includes any domestic or foreign predecessor entity of a corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. "Director" means an individual who is or was a director of a corporation or an individual who, while a director of a corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A director is considered to be serving an employee benefit plan at the corporation's request if his duties to the corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a director. "Expenses" includes counsel fees. "Liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding. "Official capacity" means, (i) when used with respect to a director, the office of director in a corporation; or (ii) when used with respect to an individual other than a director, as contemplated in ss.13.1-702, the office in a corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise. "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. ss. 13.1-697 Authority to indemnify A. Except as provided in subsection D of this section, a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if: II-1 1. He conducted himself in good faith; and 2. He believed: a. In the case of conduct in his official capacity with the corporation, that his conduct was in its best interests; and b. In all other cases, that his conduct was at least not opposed to its best interests; and 3. In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. B. A director's conduct with respect to an employee benefit plan for a purpose he believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subdivision 2 b of subsection A of this section. C. The termination of a proceeding by judgment, order, settlement or conviction is not, of itself, determinative that the director did not meet the standard of conduct described in this section. D. A corporation may not indemnify a director under this section: 1. In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or 2. In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. E. Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. ss. 13.1-698 Mandatory indemnification Unless limited by its articles of incorporation, a corporation shall indemnify a director who entirely prevails in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding. ss. 13.1-699 Advance for expenses A. A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if: 1. The director furnishes the corporation a written statement of his good faith belief that he has met the standard of conduct described in ss. 13.1-697; 2. The director furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct; and 3. A determination is made that the facts then known to those making the determination would not preclude indemnification under this article. B. The undertaking required by subdivision 2 of subsection A of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. C. Determinations and authorizations of payments under this section shall be made in the manner specified in ss.13.1-701. ss. 13.1-700.1 Court orders for advances, reimbursement or indemnification A. An individual who is made a party to a proceeding because he is or was a director of a corporation may apply to a court for an order directing the corporation to make advances or reimbursement for expenses or to provide indemnification. Such application may be made to the court conducting the proceeding or to another court of competent jurisdiction. B. The court shall order the corporation to make advances and/or reimbursement for expenses or to provide indemnification if it determines that the director is entitled to such advances, reimbursement or indemnification and shall also order the corporation to pay the director's reasonable expenses incurred to obtain the order. C. With respect to a proceeding by or in the right of the corporation, the court may (i) order indemnification of the director to the extent of his reasonable expenses if it determines that, considering all the relevant circumstances, the director is entitled to indemnification even though he was adjudged liable to the corporation and (ii) also order the corporation to pay the director's reasonable expenses incurred to obtain the order of indemnification. D. Neither (i) the failure of the corporation, including its board of directors, its independent legal counsel and its shareholders, to have made an independent determination prior to the commencement of any action permitted by this II-2 section that the applying director is entitled to receive advances and/or reimbursement nor (ii) the determination by the corporation, including its board of directors, its independent legal counsel and its shareholders, that the applying director is not entitled to receive advances and/or reimbursement or indemnification shall create a presumption to that effect or otherwise of itself be a defense to that director's application for advances for expenses, reimbursement or indemnification. ss. 13.1-701 Determination and authorization of indemnification A. A corporation may not indemnify a director under ss.13.1-697 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because he has met the standard of conduct set forth in ss.13.1-697. B. The determination shall be made: 1. By the board of directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; 2. If a quorum cannot be obtained under subdivision 1 of this subsection, by majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; 3. By special legal counsel: a. Selected by the board of directors or its committee in the manner prescribed in subdivisions 1 and 2 of this subsection; or b. If a quorum of the board of directors cannot be obtained under subdivision 1 of this subsection and a committee cannot be designated under subdivision 2 of this subsection, selected by majority vote of the full board of directors, in which selection directors who are parties may participate; or 4. By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. C. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subdivision 3 of subsection B of this section to select counsel. ss. 13.1-702 Indemnification of officers, employees and agents Unless limited by a corporation's articles of incorporation, 1. An officer of the corporation is entitled to mandatory indemnification under ss.13.1-698 and is entitled to apply for court-ordered indemnification under ss.13.1-700.1, in each case to the same extent as a director; and 2. The corporation may indemnify and advance expenses under this article to an officer, employee, or agent of the corporation to the same extent as to a director. ss. 13.1-703 Insurance A corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify him against the same liability under ss.13.1-697 or ss.13.1-698. ss. 13.1-704 Application of article A. Unless the articles of incorporation or bylaws expressly provide otherwise, any authorization of indemnification in the articles of incorporation or bylaws shall not be deemed to prevent the corporation from providing the indemnity permitted or mandated by this article. B. Any corporation shall have power to make any further indemnity, including indemnity with respect to a proceeding by or in the right of the corporation, and to make additional provision for advances and reimbursement of expenses, to any director, officer, employee or agent that may be authorized by the articles of incorporation or II-3 any bylaw made by the shareholders or any resolution adopted, before or after the event, by the shareholders, except an indemnity against (i) his willful misconduct, or (ii) a knowing violation of the criminal law. Unless the articles of incorporation, or any such bylaw or resolution expressly provide otherwise, any determination as to the right to any further indemnity shall be made in accordance with ss.13.1-701 B. Each such indemnity may continue as to a person who has ceased to have the capacity referred to above and may inure to the benefit of the heirs, executors and administrators of such a person. C. No right provided to any person pursuant to this section may be reduced or eliminated by any amendment of the articles of incorporation or bylaws with respect to any act or omission occurring before such amendment. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The exhibits filed as part of this registration statement are as follows: (a) LIST OF EXHIBITS Number Description ------ ----------- 5 Form of Opinion of Kennedy, Baris & Lundy, L.L.P. (previously filed) 8 Form of Tax Opinion of Kevin P. Kennedy, Esquire 10.1 1998 Stock Option Plan (1) 10.2 Loan Agreement, dated December 26, 2001 between Virginia Commerce Bancorp, Inc. and Provident Bank, as Lender, and related Promissory Note(2) 10.3 Pledge and Assignment Agreement, dated December 26, 2001 between Virginia Commerce Bancorp, Inc. and Provident Bank (2) 13 Annual Report to Shareholders for the year ended December 31, 2001 Included as Appendix 1 to the prospectus. 13.1 Quarterly Report on Form 10-Q for the three months ended March 31, 2002 Included as Appendix 2 to the prospectus 23.1 Consent of Yount Hyde & Barbour, P.C. & Company, Independent Auditors 23.2 Consent of Kennedy, Baris & Lundy, L.L.P. (included in Exhibit 5) 23.3 Consent of Kevin P. Kennedy, Esquire (included in Exhibit 8) 99 Form of Order Form (previously filed) ---------- (1) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. (2) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 17. UNDERTAKINGS The registrant hereby undertakes that it will: (1) file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the "Act"); (ii) reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement; and (iii) include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) for the purpose of determining liability under the Act, treat each post-effective amendment as a new registration statement relating to the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II-4 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933 (the "Act"), each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Arlington, Virginia, on May 15, 2002. Virginia Commerce Bancorp, INC. By: /s/ Peter A. Converse ---------------------------- Peter A. Converse, President and Chief Executive Officer 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 May 15, 2002 ---------------------------- Leonard Adler /s/ Peter A. Converse Director, President and Chief Executive May 15, 2002 ---------------------------- Officer (Principal Executive Officer) Peter A. Converse /s/ Frank L. Cowles, Jr. Director May 15, 2002 ---------------------------- Frank L. Cowles, Jr. /s/ W. Douglas Fisher Chairman of the Board of Directors May 15, 2002 ---------------------------- W. Douglas Fisher /s/ David M. Guernsey Vice Chairman of the Board of Directors May 15, 2002 ---------------------------- David M. Guernsey /s/ Robert H. L'Hommedieu Director May 15, 2002 ---------------------------- Robert H. L'Hommedieu /s/ Norris E. Mitchell Director May 15, 2002 ---------------------------- Norris E. Mitchell /s/ Arthur L. Walters Director May 15, 2002 ---------------------------- Arthur L. Walters /s/ William K. Beauchesne Treasurer and Chief Financial Officer May 15, 2002 ---------------------------- (Principal Financial and Accounting Officer) William K. Beauchesne (over)
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