Virginia Commerce Bancorp, Inc, parent company of Virginia Commerce Bank, reported a net loss of $6.4 million, or $0.24 per diluted common share, for the second quarter of 2009. Last year the company earned $4.9 million, or $0.18 per diluted common share, for the same period.
For the three months ending on June 30, 2009, the company recorded a net operating loss of $5.2 million. After an effective dividend of $1.2 million to the U.S. Treasury on preferred stock, the Company reported a net loss to common stockholders of $6.4 million, or $0.24 per diluted common share. For the six months ending on June 30, 2009, the Company reported a net loss to common stockholders of $9.6 million compared to earnings of $9.1 million for the same period in 2008. Earnings for the three and six month periods were significantly impacted by loan loss provisions of $18.4 million and $31.8 million, respectively, due to the year-over-year increase in the level of non-performing assets and $29.3 million in net charge-offs in 2009.
According to Peter A. Converse, VCB Chief Executive Officer: “In the second quarter, we made progress in reducing our overall level of non-performing assets by $22.5 million. That progress included meaningful reductions of $19.7 million in non-accrual loans and $18.6 million in loans 90-plus days past due, as $16.9 million in charge-offs were taken and other real estate owned increased $15.7 million through foreclosures. To achieve the reductions, the Company incurred an operating loss, primarily due to increased loan loss reserve provisions in the quarter. That is in keeping with our commitment to fully utilize operating earnings and, if necessary, our capital cushion, to aggressively address our problem loans. Along with the reduction in problem loans, the Company is pleased to report that loans 30 to 89 days past due declined significantly from $55.7 million at the end of the first quarter to $19.2 million as of June 30.”
Converse said he believes that the company’s bottom line will continue to be challenged. “At least through the end of this year, we believe that our capital is sufficient to absorb loan-related losses and still be maintained at well-capitalized levels. We will continue to pursue all appropriate measures to significantly decrease non-performing assets with the goal of reducing them from the high point of $162.1 million at the end of the first quarter to $100 million or less by year-end. A case in point is the recent introduction of our Stimulus Mortgage Program to assist our home-builder and lot developer loan customers with selling inventory by providing special mortgage financing to purchasers. We are already experiencing positive results from this program, especially in paydowns on problem construction and development loans from property sales enabled through these special mortgage terms.”
“Aggressive problem loan resolution” is VCB’s top priority this year, Converse said. “We continue to be an active, responsive lender as we reposition our loan portfolio by pursuing alternative lending strategies, including ramping up our government contract lending. Efforts to reduce our acquisition, development and construction lending concentration have resulted in that portfolio category declining by $78.8 million year-to-date. We are making good progress in improving our deposit mix with second quarter growth of $21.1 million in demand deposits and $111.6 million in savings and interest-bearing checking accounts, while time deposits, or CDs, decreased by $180.6 million. The decline in CDs has lowered that deposit concentration from 67.2% of total deposits at year-end 2008 to 54.4% at the end of the second quarter, and is expected to reach the 45 – 50% level by the end of 2009. These improvements in our deposit mix have contributed nicely to a lowering of our cost of funds and a sequential improvement of 20 basis points in our net interest margin from 3.15% in the first quarter of 2009 to 3.35% this quarter.”
Total non-performing assets and loans 90-plus days past due declined by $22.5 million during the quarter from $162.1 million, or 5.84% of total assets, to $139.6 million, or 5.17% of total assets. Non-accrual loans decreased by $19.7 million, loans 90+ days past due decreased by $18.6 million and other real estate owned (foreclosed properties) increased by $15.7 million. In addition to the quarterly decline in non-accruals and loans 90+ days past due, loans past due 30 to 89 days were reduced significantly from $55.7 million at March 31, 2009, to $19.2 million.
Non-performing loans continue to be concentrated in residential and commercial construction and land development loans in outer sub-markets hardest hit by the residential downturn and commercial and consumer credits experiencing the after shocks in sub-contracting businesses and workforce employment. Additions to non-performing loans in the second quarter included $3.3 million in one-to-four family residential loans and $7.7 million in non-owner occupied, non-farm, non-residential loans which were predominantly located in outer sub-markets and negatively impacted by higher vacancy and delinquent rents. Additionally, a $2.4 million commercial and industrial loan impacted by fraud and embezzlement was added. Overall, as of June 30, 2009, $74.6 million, or 67.0%, of non-performing loans represented acquisition, development and construction loans, $14.9 million, or 13.4%, represented non-farm, nonresidential loans, $12.3 million, or 11.0%, represented commercial and industrial loans and $4.3 million, or 3.9%, represented loans on one-to-four family residential properties.
Year-over-year, yields on loans are down 106 basis points due to reductions in the prime rate and increases in the level of non-performing loans, while the cost of interest-bearing liabilities are down 96 basis points due to the changes noted above in the funding mix. With market rates expected to remain mostly unchanged through the remainder of 2009, Management anticipates the margin to average from 3.30% to 3.40%.
Non-interest income for the second quarter was up $220 thousand, or 12.7%, from $1.7 million in 2008, to $1.9 million, with a $537 thousand increase in fees and net gains on mortgage loans held-for-sale more than offsetting declines in other non-interest income categories, including a $108 thousand impairment loss on securities. For the six months ended June 30, 2009, non-interest income was up $409 thousand, or 12.2%, due again to higher levels of fees and net gains on mortgage loans held-for-sale. Sequentially, non-interest income was up $129 thousand.
Non-interest expense increased $2.4 million, or 21.2%, from $11.2 million in the second quarter of 2008, to $13.6 million, and was up $4.6 million, or 21.0%, for the six months ended June 30, 2009, to $26.6 million. Compared to the first quarter of 2009, non-interest expense is up $563,000. The majority of the year-over-year increases were due to significantly higher FDIC insurance premiums, including a special one-time assessment of $1.2 million in the second quarter, as well as higher legal and professional services expenses associated with the collection of non-performing loans and OREO. As a result of these increases in expenses, the efficiency ratio rose from 49.9% in the second quarter of 2008 to 56.7% in the current period. Sequentially, the ratio improved slightly from 57.7%.
Loans
Over the past year, loans and net of allowance for loan losses increased $33.6 million, or 1.5%, to $2.2 billion. Non-farm, non-residential real estate loans increased $60.1 million, or 6.1%. One-to-four family residential loans increased $64.8 million, or 21.3%, while real estate construction loans fell by $95.9 million, or 15.9%. Commercial and industrial loans remained unchanged.
Since December 31, 2008, net loans are down $55.1 million, or 2.4%, with non-farm non-residential loans up $30.9 million, construction loans down $78.8 million, one-to-four family residential loans for portfolio up $12.4 million. In addition, one-to-four family residential loans originated for sale totaled $64.8 million for the quarter ended June 30, 2009, and $125.9 million year-to-date, compared to $22.5 million and $44.2 million for the same periods in 2008.
Year-to-date loan production has been negatively impacted by declining economic activity and demand in both the business and consumer sectors, a reallocation of personnel resources to problem loan identification and resolution and a strategic decision to moderate loan growth in the face of an uncertain economy and heightened risk factors. Going forward, lending efforts will be focused on building greater market share in commercial and industrial lending, especially in sectors forecast for growth, such as government contract lending and select service industries with strategic hiring, marketing campaigns and calling efforts.
Deposits
Year-over-year, deposits increased $92.2 million, or 4.4%, from $2.1 billion to $2.2 billion, with demand deposits increasing $36.3 million, or 17.8%, savings and interest-bearing demand deposits increasing by $192.1 million, or 33.8%, and time deposits falling $136.2 million, or 10.3%. Sequentially, deposits were down $47.9 million, or 2.1%, with demand deposits increasing by $21.1 million, savings and interest bearing demand accounts growing $111.6 million, and time deposits decreasing by $180.6 million. The declines in time deposits are reflective of lower loan volume and a strategy to reduce the Bank’s historically heavy reliance on certificates of deposit as a funding source with deposit gathering efforts increasingly focused on demand deposits as well as cross-selling activities tied to the acquisition of savings and interest-bearing demand accounts. The proportionate share of time deposits relative to total deposits has declined from 67.2% at year-end 2008 to 54.4% as of June 30, 2009, and is expected to be in the 45-50% range by the end of this year.
Repurchase Agreements and Fed Funds Purchased
Repurchase agreements, the majority of which represent sweep funds of significant commercial demand deposit customers, and Fed funds purchased decreased $113.2 million, or 40.6%, year-over-year, to $165.7 million at June 30, 2009, with a $63.0 million decline in Fed funds purchased. Since December 31, 2008, this funding source is down $22.2 million, with $12 million of the decline in Fed funds purchased.
Investment Securities
Investment securities decreased $25.6 million, or 7.4%, from $346.4 million at June 30, 2008, to $320.8 million at June 30, 2009, and were down $30.6 million sequentially from the first quarter. The majority of the current period and year-over-year decline in securities were due to calls and maturities in U.S. Government agency debt obligations as well as higher levels of prepayments on mortgage-backed securities.
The portfolio also contains four pooled trust preferred collateralized debt obligations totaling $8.9 million, for which the Bank performs a quarterly analysis for other than temporary impairment due to significantly depressed current market quotes. The analysis includes stress tests on the underlying collateral and cash flow estimates based on the current and projected future levels of deferrals and defaults within each pool. Based on the most recent analysis, the Bank recorded a $108 thousand impairment loss for the second quarter on one of the four pools.
Capital and Stockholders’ Equity Stockholders’ equity increased $67.7 million, or 38.6%, from $175.4 million at June 30, 2008, to $243 million at June 30, 2009, with a net loss to common stockholders of $5.9 million over the twelve-month period, and $71 million in preferred stock issued to the U.S. Treasury under the Treasury’s Capital Purchase Program. In connection with the issuance of the preferred stock, the Company also issued warrants to purchase an aggregate of 2.7 million shares of common stock to the Treasury. Additionally, in September 2008, the Company raised $25 million in qualifying capital through the sale of trust-preferred securities to the Company’s directors and certain of its executive officers. The issuance of the trust-preferred securities also included warrants to purchase an aggregate of 1.5 million shares of common stock. As a result of this issuance, and the issuance of the preferred shares, the Company’s Tier 1 Capital ratio increased from 9.31% at June 30, 2008, to 12.72% as of June 30, 2009, and its total qualifying capital ratio increased from 10.42% to 13.97%.
VCB, Inc. is the parent bank holding company for Virginia Commerce Bank, a Virginia state chartered bank that commenced operations in May 1988. The Bank pursues a traditional community banking strategy, offering a full range of business and consumer banking services through twenty-seven branch offices, one residential mortgage office and one investment services office, principally to individuals and small-to-medium size businesses in Northern Virginia and the Metropolitan Washington, D.C. area.
