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| VBFC > SEC Filings for VBFC > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
Forward-Looking Statements
Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as "we expect," "we believe" or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:
• interest rate fluctuations;
• risk inherent in making loans such as repayment risks and fluctuating collateral values;
• economic conditions in the Richmond metropolitan area;
• the ability to continue to attract low cost core deposits to fund asset growth;
• changes in general economic and business conditions;
• changes in laws and regulations applicable to us;
• competition within and from outside the banking industry;
• the ability to successfully manage the Company's growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;
• maintaining capital levels adequate to support the Company's growth;
• reliance on the Company's management team, including its ability to attract and retain key personnel;
• new products and services in the banking industry;
• problems with our technology;
• changing trends in customer profiles and behavior;
• negative developments in the financial services industry and U.S. and global credit markets may adversely impact our results of operations and our stock price; and
• soundness of other financial institutions could adversely affect us.
Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
General
The Company was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank. The Bank is engaged in commercial and retail banking. We opened to the public on December 13, 1999. We place special emphasis on serving the financial needs of individuals, small and medium sized businesses, entrepreneurs, and professional concerns.
The Bank has three subsidiaries: Village Bank Mortgage Company, Village Insurance Agency, Inc., and Village Financial Services Company. Through our combined companies, we offer a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and commercial, real estate and consumer loans. We are a community-oriented and locally owned and managed financial institution focusing on providing a high level of responsive and personalized services to our customers, delivered in the context of a strong direct
relationship with the customer. We conduct our operations from our main office/corporate headquarters location and fourteen branch offices.
Net interest income is our primary source of earnings and represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest rates when compared to previous periods of operation. In addition, revenues are generated from fees charged on deposit accounts and gains from sale of mortgage loans to third-party investors.
Our total assets increased to $579,642,000 at March 31, 2009 from $572,408,000 at December 31, 2008, an increase of $7,234,000, or 1.3%. During the first quarter of 2009 liquid assets (cash and due from banks, federal funds sold and investment securities available for sale) decreased by $299,000, loans held for sale increased by $5,206,000, net portfolio loans increased by $1,263,000, premises and equipment decreased by $198,000 and other assets increased by $1,262,000. The net increase in these assets of $7,234,000 was funded by a $16,207,000 increase in deposit accounts offset by a decrease in borrowings of $8,873,000.
The following presents management's discussion and analysis of the financial condition of the Company at March 31, 2009 and December 31, 2008, and results of operations for the Company for the three month periods ended March 31, 2009 and 2008. This discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission as well as the first quarter 2009 financial statements and notes thereto appearing elsewhere in this report.
Results of operations
The Company had a loss totaling $(75,000), or $(0.02) per share on a fully diluted basis, in the first quarter of 2009 compared to net income of $93,000, or $0.04 per share on a fully diluted basis, in the first quarter of 2008. This represents a decrease in profitability of $168,000, or 181%.
The decline in net earnings during the quarter ended March 31, 2009 resulted primarily from an increase in the provision for loan losses of $851,000 offset by an increase in gain on sale of loans of $517,000. The increase in the provision for loan losses is discussed following under Asset Quality and Provision for Loan Losses. The increase in gain on sale of loans is attributable to increased loan production by the mortgage banking subsidiary of the Bank. The mortgage subsidiary closed $49,329,000 in mortgage loans in the first quarter of 2009 compared to $19,287,000 in the first quarter of 2008. Lower interest rates in 2009 have resulted in increased refinancing activity.
On October 1, 2008, River City Bank was merged into Village Bank adding approximately $157.7 million in assets at the time of merger. The financial statements of the Company for the first quarter of 2009 reflect the combined operations of the Company and River City Bank whereas the financial statements for the first quarter of 2008 do not. This merger has a significant affect on the Company's results of operations. A significant, and in certain instances dominant, component of the changes in the Company's results of operations between the first quarter of 2008 and the first quarter of 2009 is attributable to the merger.
Net interest income
Net interest income is our primary source of earnings and represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest rates when compared to previous periods of operation.
Net interest income for the three months ended March 31, 2009 and 2008 was $3,907,000 and $2,786,000, respectively. This increase of $1,121,000 is primarily attributable to the merger with River City Bank.
Our net interest margin (net interest margin is calculated by dividing net interest income by average earning assets) for the first quarter of 2009 was 3.04% compared to 3.09% for the first quarter of 2008. The net interest margin for the first quarters of 2009 and 2008 were negatively affected by a reduction in interest income on loans resulting from the reversal of accrued interest on loans classified as nonaccrual of $171,000 and $107,000, respectively. Adjusting the net interest margins for the affect of such interest reversals would result in a net interest margins of 3.17% and 3.21%, respectively (see discussion of nonaccrual loans under Asset Quality and Provision for Loan Losses). Margin compression from declining interest rates over the last two years has been a significant factor in our decline in profitability over that period. As interest rates were reduced by the Federal Reserve during 2007 and 2008 in reaction to the declining economy, our margin was compressed as our deposits generally do not reprice as quickly as our loans. In addition, the net interest margin starting with the fourth quarter of 2008 was negatively affected by the merger with River City Bank primarily due to lower yields on loans acquired through the merger.
Average interest-earning assets for the first quarter of 2009 increased by $159,357,000, or 44%, compared to the first quarter of 2008. The increase in interest-earning assets was due primarily to the merger with River City Bank. The average yield on interest-earning assets decreased to 6.49% for the first quarter of 2009 compared to 7.50% for the first quarter of 2008. Many of our loans are indexed to short-term rates affected by the Federal Reserve's decisions about short-term interest rates, and, accordingly, as the Federal Reserve increases or decreases short-term rates, the yield on interest-earning assets is affected. As the Federal Reserve decreased interest rates starting in 2007 and into 2008, decreasing short-term interest rates by 5% over twelve months, the average yield on our interest-earning assets decreased. In addition, the yield on loans was negatively affected by the merger with River City Bank.
Our average interest-bearing liabilities increased by $153,696,000, or 45%, for the first quarter of 2009 compared to the first quarter of 2008. The growth in interest-bearing liabilities was primarily due to the merger with River City Bank. The average cost of interest-bearing liabilities decreased to 3.63% for the first three months of 2009 from 4.67% for the first quarter of 2008. The principal reason for the decrease in liability costs was the reduction in short-term interest rates by the Federal Reserve. See our discussion of interest rate sensitivity below for more information.
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances. We had no tax exempt assets for the periods presented.
Average Balance Sheets
(In thousands)
Three Months Ended March 31, 2009 Three Months Ended March 31, 2008
Interest Annualized Interest Annualized
Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
Loans net of deferred fees $ 474,419 $ 7,928 6.78% $ 335,988 $ 6,466 7.74%
Investment securities 25,740 337 5.30% 10,861 143 5.31%
Loans held for sale 6,461 81 5.10% 2,780 42 6.10%
Federal funds and other 15,188 7 0.19% 12,822 107 3.35%
Total interest earning assets 521,808 8,353 6.49% 362,451 6,758 7.50%
Allowance for loan losses (6,221) (3,444)
Cash and due from banks 12,300 6,124
Premises and equipment, net 28,121 18,950
Other assets 24,953 10,905
Total assets $ 580,961 $ 394,986
Interest bearing deposits
Interest checking $ 19,122 $ 67 1.42% $ 10,918 $ 27 0.99%
Money market 30,420 132 1.76% 25,548 169 2.66%
Savings 6,107 18 1.19% 3,361 10 1.20%
Certificates 388,877 3,786 3.95% 277,996 3,489 5.05%
Total deposits 444,526 4,003 3.65% 317,823 3,695 4.68%
Borrowings 51,609 443 3.48% 24,616 278 4.54%
Total interest bearing liabilities 496,135 4,446 3.62% 342,439 3,973 4.67%
Noninterest bearing deposits 36,013 23,329
Other liabilities 2,746 1,991
Total liabilities 534,894 367,759
Equity capital 46,067 27,227
Total liabilities and capital $ 580,961 $ 394,986
Net interest income before
provision for loan losses $ 3,907 $ 2,785
Interest spread - average yield on interest
earning assets, less average rate on
interest bearing liabilities 2.86% 2.83%
Annualized net interest margin (net
interest income expressed as
percentage of average earning assets) 3.04% 3.09%
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Asset Quality and Provision for Loan Losses
Provisions for loan losses amounted to $1,100,000 for the three months ended March 31, 2009 compared to $249,000 for the first quarter of 2008. The increase in the provision for loan losses in 2009 when compared to 2008 reflects a higher level of problem loans, management's concern about the uncertainty in the economy, and the current nationwide credit crisis.
Nonperforming assets consisting of nonaccrual loans and other real estate owned for the indicated periods is as follows (dollars in thousands):
March 31, December 31, %
2009 2008 Increase
Nonaccrual loans
Number 49 36
Amount $ 13,369 $ 8,528 56.77%
Other real estate owned 3,967 2,932 35.30%
$ 17,336 $ 11,460 51.27%
Percentage of total assets 2.99% 2.00%
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The increase in nonperforming assets in the first quarter of 2009 reflects the continued decline in the economy and related stress on our lending relationships. Our approach to troubled lending relationships is to work with the borrower to the extent possible and still adhere to strong credit management guidelines. If the economy continues to be depressed at the levels we have experienced in the latter part of 2008 and into 2009, nonperforming assets could continue to increase. See our discussion of the allowance for loan losses under Allowance for loan losses and Critical accounting policies below.
In addition to the nonperforming assets at March 31, 2009, there were nineteen loans past due 90 days or more and still accruing interest totaling $1,435,000, down significantly from forty-three loans totaling $6,197,000 at December 31, 2008. We believe that these assets are adequately collateralized and are currently recorded at realistically recoverable values. However, economic circumstances related to specific credit relationships are changing, which may impact our assessments of collectability.
The following table reflects details related to asset quality and allowance for loan losses of Village Bank (dollars in thousands):
March 31, Dec. 31, March 31,
2009 2008 2008
Loans 90+ days past due $ 1,435 $ 6,197 $ 1,623
Nonaccrual loans $ 13,369 $ 8,528 $ 6,835
Other real estate owned $ 3,967 $ 2,932 $ 385
Allowance for loan losses
Beginning balance $ 6,059 $ 3,853 $ 3,469
Provision for loan losses 1,100 744 249
River City Bank acquisition - 2,404 -
Charge-offs (314) (1,337) (209)
Recoveries 4 395 -
Ending balance $ 6,849 $ 6,059 $ 3,509
Ratios
Allowance for loan losses to
Loans, net of unearned income 1.45% 1.29% 1.01%
Nonaccrual loans 51.23% 71.05% 51.34%
Nonperforming assets to total assets 2.99% 2.00% 1.85%
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Noninterest income
Noninterest income of $1,456,000 for the first quarter of 2009 is $698,000 higher than noninterest income of $758,000 for the first quarter of 2008. This increase in noninterest income is primarily a result of higher gain on loan sales and fees from increased loan production by our mortgage banking subsidiary attributable to a much higher volume of lending as a result of the refinance market.
Noninterest expense
Noninterest expense increased by $1,224,000 from the first quarter of 2008 to the first quarter of 2009, an increase of 39%. The increase was primarily a result of the merger with River City Bank. The most significant increases from the merger were in salaries and benefits of $618,000 and occupancy expenses of $191,000. Loan underwriting expenses also increased by $112,000 which was attributable to the increased loan volume by our mortgage company discussed previously.
Income taxes
The benefit for income taxes of $(39,000) for the three months ended March 31, 2009 is based upon the results of operations. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Company must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are not likely to be recovered, a valuation allowance must be recognized. We determined that a valuation allowance was not required for deferred tax assets
as of March 31, 2009. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Company's financial statements.
Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded a franchise tax expense of $30,000 and $59,000 for the three months ended March 31, 2009 and 2008, respectively.
Loan portfolio
The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated.
Loan Portfolio, Net
(In thousands)
March 31, 2009 December 31, 2008
Amount % Amount %
Commercial $ 48,952 10.3% $ 52,438 11.1%
Real estate - residential 87,133 18.4% 84,612 18.0%
Real estate - commercial 225,437 47.7% 220,400 46.8%
Real estate - construction 102,595 21.7% 103,161 21.9%
Consumer 8,864 1.9% 10,307 2.2%
Total loans 472,981 100.0% 470,918 100.0%
Less: unearned income, net (206) (196)
Less: Allowance for loan losses (6,849) (6,059)
Total loans, net $ 465,926 $ 464,663
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Allowance for loan losses
The allowance for loan losses at March 31, 2009 was $6,849,000, compared to $6,059,000 at December 31, 2008. The ratio of the allowance for loan losses to gross portfolio loans (net of unearned income and excluding mortgage loans held for sale) at March 31, 2009 and December 31, 2008 was 1.45% and 1.29%, respectively. The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions. See our discussion of the allowance for loan losses under Critical accounting policies below.
The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated.
Analysis of Allowance for Loan Losses
(In thousands)
Three Months Ended
March 31,
2009 2008
Beginning balance $ 6,059 $ 3,469
Provision for loan losses 1,100 249
Charge-offs
Commercial - (89)
Construction (187) (40)
Consumer (127) -
Mortgage - (81)
(314) (210)
Recoveries
Commercial - -
Construction 3 -
Consumer 1 1
4 1
Ending balance $ 6,849 $ 3,509
Loans outstanding at end of year (1) $ 472,775 $ 347,390
Ratio of allowance for loan losses as
a percent of loans outstanding at
end of year 1.45% 1.01%
Average loans outstanding for the period (1) $ 474,420 $ 335,988
Ratio of net charge-offs to average loans
outstanding for the period 0.07% 0.06%
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(1) Loans are net of unearned income.
Investment portfolio
At March 31, 2009 and December 31, 2008, all of our securities were classified as available-for-sale. The following table presents the composition of our investment portfolio at the dates indicated.
Investment Securities Available-for-Sale
(Dollars in thousands)
Unrealized Estimated
Par Amortized Gain Fair Average
Value Cost (Loss) Value Yield
March 31, 2009
US Government Agencies
Within one year $ - $ - $ - $ - -
One to five years - - - - -
More than five years 18,693 18,886 274 19,160 5.42%
Total 18,693 18,886 274 19,160 5.42%
Mortgage-backed securities
One to five years 1,038 1,039 18 1,057 4.39%
More than five years 4,161 4,159 129 4,288 5.50%
Other investments
More than five years 2,000 1,971 (669) 1,302 5.65%
Total investment securities $ 25,892 $ 26,055 $ (248) $ 25,807 5.14%
December 31, 2008
US Government Agencies
Within one year $ 360 $ 360 $ (4) $ 356 4.22%
One to five years - - - - -
More than five years 16,577 16,506 184 16,690 4.64%
Total 16,937 16,866 180 17,046 5.42%
Mortgage-backed securities
One to five years 1,100 1,100 15 1,115 4.39%
More than five years 4,346 4,392 (38) 4,354 5.53%
Other investments
More than five years 2,000 1,970 (184) 1,786 5.65%
Total investment securities $ 24,383 $ 24,328 $ (27) $ 24,301 5.14%
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Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is evaluated at least annually for impairment by comparing its fair value with its recorded amount and is written down when appropriate. Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and, if the estimated net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value.
Goodwill of $7,422,000 at March 31, 2009 was made up of $689,000 related to the Bank's acquisition of Village Bank Mortgage Corporation in 2003, and $6,733,000 related to the merger with River City Bank in 2008. There was no impairment of goodwill at March 31, 2009.
Deposits
Total deposits increased by $16,207,000, or 4%, during the first three months of 2009 as compared to an increase of $5,615,000, or 2%, during the first three months of 2008. For the first three months of 2009, demand deposit accounts, including money market accounts, increased by $9,148,000 and time deposits increased by $5,414,000. We believe these increases reflect our increased branch network as a result of the merger with River City Bank as well as the general movement of cash to federally insured deposits from more risky investments. For the first quarter of 2008, demand deposit accounts, including money market . . .
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