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| VCBP.OB > SEC Filings for VCBP.OB > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes appearing in Item 1, Financial Statements ,in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Valley Commerce Bancorp's Annual Report filed on Form 10-K for the year ended December 31, 2008.
Overview
Valley Commerce Bancorp (the Company) is the holding company for Valley Business Bank (the Bank), a California state chartered bank. The Company's principal business is to provide financial services through its banking subsidiary in its primary market areas of Tulare and Fresno Counties in California. The Company derives its income primarily from interest and fees earned on loans, and, to a lesser extent, interest on investment securities, fees for services provided to deposit customers, and fees from the brokerage of loans. The Bank's major operating expenses are interest paid on deposits and borrowings and general operating expenses, consisting primarily of salaries and employee benefits and, to a lesser extent, occupancy and equipment, data processing, FDIC insurance premiums, and operations. The Company does not currently conduct any operations other than through the Bank.
The Company earned net income of $347,000 or $0.10 per diluted share, for the quarter ended March 31, 2009, compared to $418,000, or $0.15 per diluted share, for the quarter ended March 31, 2008. The decrease in earnings resulted from increases in non-interest expense partially offset by increases in net interest income. The accrual of an industry-wide special and other general assessments announced by the FDIC in February 2009 was the primary reason for the increase in non-interest expense. While net interest income increased, the decrease in diluted earnings per share resulted primarily from preferred stock dividends issued to the United States Treasury in the first quarter of 2009. The preferred dividends reduced the amount of net income available to common shareholders in the earnings per share calculation.
The annualized quarterly return on average assets for the 2009 and 2008 periods was 0.45% and 0.60%, respectively. The annualized quarterly return on average shareholders' equity for the 2009 and 2008 periods was 3.92% and 5.76%, respectively.
At March 31, 2009, the Company's total assets were $310.3 million, representing an increase of $20.4 million or 7% compared to March 31, 2008. Total loans, net of the allowance for loan losses, were $230.4 million at March 31, 2009, representing an increase of $19.7 million or 9% compared to March 31, 2008. Total deposits were $260.9 million at March 31, 2009, representing an increase of $31.7 million or 14% compared to March 31, 2008. Comparing March 31, 2009 and December 31, 2008 balances, total assets increased by $4.2 million or 1%, total net loans increased by $3.7 million or 2%, and total deposits increased by $3.6 million or 1%.
At March 31, 2009, the Company's leverage ratio was 13.2% while its tier 1 risk-based capital ratio and total risk-based capital ratio were 15.5% and 16.7%, respectively. At December 31, 2008, the Company's leverage ratio was 10.9% while its tier 1 risk-based capital ratio and total risk-based capital ratio were 12.7% and 14.0%, respectively. The leverage, tier 1 risk-based capital and total risk-based capital ratios at March 31, 2008 were 11.2%, 13.1% and 14.0%, respectively. The Company's capital ratios increased between March 31, 2009 and the prior periods primarily as a result of the issuance of preferred stock to the United States Department of Treasury on January 30, 2009. The Company issued and sold 7,700 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B and a warrant to purchase 385 shares of the Company's Fixed Rate Cumulative Perpetual Preferred stock, Series C stock for a combined price of $7.7 million. The Treasury exercised the warrant immediately upon issuance.
Critical Accounting Policies
There have been no changes to the Company's critical accounting policies from those discussed in the Company's 2008 Annual Report to Shareholders' on Form 10-K.
Results of Operations for the Three Months Ended March 31, 2009 and 2008
Net Interest Income
The following table presents the Company's average balance sheet, including
weighted average yields and rates on a taxable-equivalent basis, for the
three-month periods indicated:
Average balances and weighted average yields and costs
Three months ended March 31,
2009 2008
Interest Average Interest Average
Average income/ Yield/ Average income/ Yield/
(dollars in thousands) Balance Expense Cost Balance Expense cost
ASSETS
Federal funds sold $ 12,990 $ 9 0.28 % $ 94 $ 1 2.54 %
Available-for-sale
investment securities:
Taxable 23,983 306 5.17 % 34,029 405 4.79 %
Exempt from Federal income
taxes (1) 19,512 197 6.20 % 19,306 196 6.19 %
Total securities (1) 43,495 503 5.64 % 53,335 601 5.29 %
Loans (2) (3) 232,393 3,711 6.48 % 207,276 3,847 7.46 %
Total interest-earning
assets (1) 288,878 4,223 6.07 % 260,705 4,449 7.08 %
Noninterest-earning assets,
net of allowance for loan
losses 20,999 19,661
Total assets $ 309,877 $ 280,366
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LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Other interest-bearing $ 99,067 $ 355 1.45 % $ 94,035 $ 521 2.23 % Time deposits less than $100,000 25,375 177 2.83 % 18,027 179 3.99 % Time deposits $100,000 or more 66,117 498 3.05 % 44,788 506 4.54 % Total interest-bearing deposits 190,559 1,030 2.19 % 156,850 1,206 3.09 % Short-term debt 4,244 25 2.39 % 18,282 137 3.01 % Long-term debt 5,152 66 5.20 % 7,859 87 4.45 % Junior subordinated deferrable interest debentures 3,093 36 4.72 % 3,093 60 7.80 % Total interest-bearing liabilities 203,048 1,157 2.31 % 186,084 1,490 3.22 % Noninterest-bearing deposits 68,873 63,057 Other liabilities 2,038 2,050 Total liabilities 273,959 251,191 Shareholders' equity 35,918 29,175 Total liabilities and shareholders' equity $ 309,877 $ 280,366 Net interest income and margin (1) $ 3,066 4.41 % $ 2,959 4.72 % |
(1) Interest income is not presented on a taxable-equivalent
basis; however, the average yield was calculated on a
taxable-equivalent basis by using a marginal tax rate of 34%.
(2) Nonaccrual loans are included in total loans. Interest
income is included on nonaccrual loans only to the extent cash
payments have been received. No interest was received on
nonaccrual loans for the periods presented.
(3) Interest income on loans includes amortized loan fees,
net of costs, of $28 and $60 for 2009 and 2008, respectively.
The following table sets forth a summary of the changes in interest income and interest expense from changes in average earning assets and interest-bearing liabilities (volume) and changes in average interest rates for the three-month periods ended March 31, 2009 and 2008.
Changes in net interest income due to changes in volumes and rates
2009 period vs 2008 period
due to change in:
Average Average
Volume Rate (1) Total
(In thousands)
Increase (decrease) in interest income:
Federal funds sold $ 81 $ (73 ) $ 8
Investment securities
Taxable (119 ) 20 (99 )
Exempt from Federal income taxes 3 (2 ) 1
Total securities (116 ) 18 (98 )
Loans 462 (598 ) (136 )
Total interest income $ 427 $ (653 ) $ (226 )
(Decrease) increase in interest expense:
Other interest bearing deposits 28 (194 ) (166 )
Time deposits less than $100,000 72 (74 ) (2 )
Time deposits $100,000 or more 239 (247 ) (8 )
Total interest-bearing deposits 339 (515 ) (176 )
Short-term debt (104 ) (8 ) (112 )
Long-term debt (30 ) 9 (21 )
Junior subordinated deferrable interest debentures - (24 ) (24 )
Total interest expense 205 (538 ) (333 )
Increase (decrease) in net interest income $ 222 $ (115 ) $ 107
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(1) Factors contributing to both changes in rate and volume have been attributed to changes in rates.
Total interest income for the three-month periods ended March 31, 2009 and 2008 was $4.2 million and $4.5 million, respectively, a decrease $226,000 or 5%. The weighted average taxable-equivalent yield on total interest-earning assets was 6.07% in the 2009 period compared to 7.08% in the 2008 period, a reduction of 101 basis points. The decrease was primarily due to declining yields on loans. Despite a $25.1 million or 12% increase in average loans, the Company's interest income from loans decreased by $136,000 due to the average yield decreasing from 7.46% in the 2008 period to 6.48% in the 2009 period, a change of 98 basis points. This primarily reflected the impact of Fed rate decreases totaling 275 basis points occurring in the period from April 2008 to March 2009 and its impact on the variable priced portion of the Company's loan portfolio. At March 31, 2009, approximately 68% of the Company's loan portfolio was variable rate loans. In addition, there was a decrease in investment securities income as average available-for-sale securities decreased by $9.8 million or 18%, due primarily to called and matured securities.
Total interest expense for the three-month period ended March 31, 2009 was $1.2 million, a decrease of $333,000 or 22% from the same period in 2008. The average rate paid on interest-bearing liabilities was 2.31% in the 2009 period compared to 3.22% in the 2008 period, a reduction of 91 basis points. Average total interest-bearing liabilities in the 2009 period increased by $17.0 million or 9% compared to the 2008 period. This included an increase in average interest bearing deposits of $5.0 million or 5%, an increase of $5.8 million or 9% in average non-interest bearing deposits, and an increase of $28.7 million or 46% in average time deposits due primarily to local deposit growth. These increases were offset by a$16.7 million or 64% decrease in the Company's combined short-term and long-term debt.
Due to the factors described in the preceding paragraphs, net interest income increased to $3.1 million for the 2009 period compared to $3.0 million for the 2008 period. Changes in the volumes of interest earning assets and interest bearing liabilities caused the Company's net interest income to increase by $222,000, while changes in interest rates on these same accounts caused net interest income to decrease by $115,000.
The Company's net interest margin on a taxable equivalent basis decreased 31 bps from 4.72% during the three months ended March 31, 2008 to 4.41% during the three months ended March 31, 2009. The Company maintained a fairly steady net interest margin despite Fed funds rate decreases totaling 275 basis points during the period April 2008 to March 2009. This was attributable both to loan growth and to management's efforts to mitigate the impact of falling interest rates. These efforts included utilizing rate floors on variable priced loans and aggressively lowering deposit rates.
Provision for Loan Losses
The provision for loan losses, which is included in operations to support management's estimate of the required level of the allowance for loan losses, is based on credit experience and management's ongoing evaluation of loan portfolio risk and economic conditions. A $400,000 loan loss provision was recorded during both the first quarter of 2009 and the first quarter of 2008. Management determined the first quarter provision for loan loss after consideration of current economic conditions in the Bank's primary markets. See the sections below titled "Allowance for Loan Losses."
Non-Interest Income
Non-interest income for the three-month periods ended March 31, 2009 and 2008
totaled $317,000 in the first quarter of 2009 compared to $291,000 in the first
quarter of 2008, an increase of $26,000 or 9%. The components of non-interest
income during each period were as follows:
Non-interest income
Quarter ended March 31,
Increase
(in thousands) 2009 2008 (Decrease)
Service charges on deposit
accounts $ 178 $ 170 $ 8
Mortgage loan brokerage fees 13 8 5
Earnings on cash surrender value
of life insurance policies 75 66 9
Other 51 47 4
Total non-interest income $ 317 $ 291 $ 26
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Service charges on deposit accounts increased $8,000 due to a $19,000 increase in account analysis charges offset by a $11,000 decrease in non-sufficient funds and overdraft charges. Mortgage loan brokerage fees increased by $5,000 due to higher volumes of refinance activity in the residential real estate market. Within the other category, the Federal Home Loan Bank ("FHLB") dividend income decreased $11,000 due to the cessation of FHLB dividends in the 2009 period. This was offset by rental income of $14,000 from an office building purchased to house the Company's Visalia branch, and administrative offices at a future date.
Non-Interest Expense
Non-interest expense was $2.5 million in the first quarter of 2009 compared to $2.3 million in the first quarter of 2008, an increase of $244,000 or 11%. Assessment and insurance expense increased by $145,000 or 234% as Federal Deposit Insurance Corporation assessments increased due to higher assessment rates and an industry-wide special assessment. Occupancy and equipment expense increased by $95,000 primarily due to expenses related to the planned relocation of the Visalia offices to a larger facility in the latter part of 2009.
The following table describes the components of non-interest expense for the three-month periods ended March 31, 2009 and 2008:
Non-interest expense
Quarter ended March 31,
Increase
(in thousands) 2009 2008 (Decrease)
Salaries and employee benefits $ 1,287 $ 1,283 $ 4
Occupancy and equipment 381 286 95
Assessments and insurance 207 62 145
Data processing 136 129 7
Operations 121 127 (6 )
Professional and legal 117 128 (11 )
Advertising and business development 56 54 2
Telephone and postal 53 51 2
Supplies 40 36 4
Amortization expense - 8 (8 )
Other expenses 121 111 10
Total noninterest expense $ 2,519 $ 2,275 $ 244
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Provision for Income Taxes
The provision for income taxes for the three-month periods ended March 31, 2009 and 2008 was $116,000 and $157,000, respectively. The effective tax rate for these periods was 25.1%, and 27.3%, respectively. The decrease in effective tax rate was primarily due to lower pretax income in the 2009 period which magnified the impact of permanent tax differences in the computation of the effective tax rate.
Financial Condition
Fair Value
SFAS No. 157, Fair Value Measurements, which requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 12 of the Notes to Condensed Consolidated Financial Statements for additional information about the financial instruments carried at fair value.
Investment Securities
All existing investment securities are classified as available-for-sale securities. In classifying its investments as available-for-sale, the Company reports securities at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income or loss within shareholders' equity.
The following tables set forth the estimated market value of available-for-sale investment securities at the dates indicated:
Market value of securities available for sale
March 31, 2009
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
U.S. Treasury securities $ 247 $ 29 $ - $ 276
U.S. government agencies 7,752 218 - 7,970
Mortgage-backed securities 19,282 637 (1 ) 19,918
Municipal securities 18,684 41 (657 ) 18,068
Total $ 45,965 $ 925 $ (658 ) $ 46,232
December 31, 2008
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gain Loss Value
U.S. Treasury securities $ 247 $ 33 $ - $ 280
U.S. government agencies 6,753 225 - 6,978
Mortgage-backed securities 15,102 554 (2 ) 15,654
Municipal securities 19,753 98 (745 ) 19,106
Total $ 41,855 $ 910 $ (747 ) $ 42,018
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Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and considers declines in the fair value of individual securities to be temporary.
Loans
The Company's lending activities are geographically concentrated in the South San Joaquin Valley, primarily in Tulare and Fresno counties. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets, and deposit accounts, but looks to business and personal cash flows as the primary source of repayment.
The following table sets forth the breakdown of loans outstanding by type at the dates indicated by amount and percentage of the portfolio:
(dollars in thousands) March 31, 2009 December 31, 2008 Commercial $ 61,291 26 % $ 58,325 25 % Real estate - mortgage (1) 131,540 56 129,267 56 Real estate - construction 33,896 15 35,113 15 Agricultural 4,554 2 4,011 2 Consumer and other 3,127 1 3,566 2 Subtotal 234,408 100 % 230,282 100 % Deferred loan fees, net (364 ) (341 ) Allowance for loan losses (3,644 ) (3,244 ) Total loans, net $ 230,400 $ 226,697 |
(1) Consists primarily of commercial mortgage loans.
During the three months ended March 31, 2009, loan growth occurred in the categories of commercial and real estate-mortgage. The growth consisted primarily of loans to local business owners, most of whom have other loan and deposit relationships with the Company, for business expansion purposes.
Nonperforming Assets. There was $3.1 million in nonperforming assets at March 31, 2009 which was comprised of six nonaccrual loans. Of the $3.1 million in nonperforming assets, management has identified $2.7 million for which management has established specific loss reserves of $581,000. There were $4.9 million in nonperforming assets at December 31, 2008 of which management had identified $2.8 million with a related valuation allowance of $425,000.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to provide for estimated credit losses that, as of the balance sheet date, it is probable the Company will incur. Loans determined to be impaired are evaluated individually by management for determination of the specific loss, if any, that exists as of the balance sheet date. In addition, reserve factors are assigned to currently performing loans based on historical loss rates as adjusted for current economic conditions, trends in the level and volume of past due and classified loans, and other qualitative factors.
The allowance for loan losses totaled $3.6 million or 1.56% of total loans at March 31, 2009. This compared to $3.2 million or 1.41% at December 31, 2008. Management determined the allowance for loan losses after consideration of current economic conditions, including a significant decline in real estate values in the Bank's primary markets. There were no charge-offs or recoveries during the first quarter of 2009. The Company recorded $12,000 in net charge-offs during the first quarter of 2008.
Management determined the allowance for loan losses at March 31, 2009 based on its assessment of probable loan losses from declining real estate values and other recessionary conditions. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.
The following table summarizes the changes in the allowance for loan losses for the periods indicated:
Changes in allowance for loan losses
Three months ended March 31,
(dollars in thousands) 2009 2008
Balance, beginning of period $ 3,244 $ 1,758
Provision for loan losses 400 400
Charge-offs (12 )
Recoveries - -
Balance, end of period $ 3,644 $ 2,146
Net charge-offs to average loans
outstanding (0.000 %) (0.006 %)
Average loans outstanding $ 232,393 $ 207,276
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