10-Q 1 vcfc_10q.txt 3RD QUARTER REPORT FOR 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ---------------------------------------- OR [ ] 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 000-22747 --------- Virginia Commonwealth Financial Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1542438 ------------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 102 South Main Street, Culpeper, Virginia 22701 ------------------------------------------------ -------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 540-825-4800 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 31, 2001: Common Stock, $2.50 par value 2,298,510 ----------------------------- -------------------- Class Number of Shares VIRGINIA COMMONWEALTH FINANCIAL CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. -------- ITEM 1 Consolidated Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Income 4-5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7-8 Notes to Financial Statements 9-12 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 15 PART II - OTHER INFORMATION ITEM 1 Legal Proceedings 16 ITEM 2 Change in Securities and Use of Proceeds 16 ITEM 3 Defaults Upon Senior Securities 16 ITEM 4 Submission of Matters to a Vote of Security Holders 16 ITEM 5 Other Information 17 ITEM 6 Exhibits and Reports on Form 8-K 17 SIGNATURES 18 -2- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000 OMITTED)

See accompanying notes to consolidated financial statements. -3- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)

See accompanying notes to consolidated financial statements. -4- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)

See accompanying notes to consolidated financial statements. -5- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (000 OMITTED)

See accompanying notes to consolidated financial statements. -6- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000 OMITTED)

-7- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000 OMITTED)

See accompanying notes to consolidated financial statements. -8- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 1. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2001 and December 31, 2000, and the results of operations and cash flows for the three months and nine months ended September 30, 2001 and 2000. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report for the year ended December 31, 2000. 2. The results of operations for the nine month period ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. 3. The Company's securities portfolio is composed of the following (000 omitted):

-9- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 4. The Company's loan portfolio is composed of the following (000 omitted):

-10- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 6. Short-term Borrowings: Outstanding short-term borrowings consisted of (000's omitted): September 30, December 31, 2001 2000 ----------------- ----------------- (unaudited) Federal Reserve borrowings $ 1,038 $ 769 ================= ================= Second Bank & Trust has an agreement with the Federal Reserve where it can borrow funds deposited by its customers. This agreement calls for variable interest and is payable on demand. U. S. Government securities and U. S. Treasury notes are pledged as collateral. The targeted maximum amount available under this agreement is $1,000,000. The average balance of short-term borrowings outstanding did not exceed 30 percent of stockholders' equity for the nine months ended September 30, 2001 or the year ended December 31, 2000. 7. Federal Home Loan Bank Advances: The Company's fixed-rate, long-term debt of $12,320 at September 30, 2001 matures through 2010. At September 30, 2001, the interest rates on fixed-rate, long-term debt ranged from 5.93% to 7.07%. One advance totaling $320 thousand at September 30, 2001 requires quarterly principal payments totaling $80 thousand annually plus interest. The remainder of the advances requires quarterly interest payments with principal due upon maturity. The contractual maturities of long-term debt are as follows: 2001 $ 20 2002 80 2003 3,080 2004 80 2005 4,060 2010 5,000 --------------- $ 12,320 =============== The advances are collateralized by a blanket lien on first mortgage loans. -11- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 8. 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 for the three-month periods ended September 30, 2001 and 2000.

9. Pending Mergers and Acquisitions On June 12, 2001, VCFC announced plans to merge with Virginia Financial Corporation ("VFNL") of Staunton, Virginia in a merger of equals transaction. VFNL had $507.3 million in assets at June 30, 2001and operates 15 banking offices in central Virginia. Shareholders of VCFC will receive 1.4391 shares of VFNL's common stock (to be renamed Virginia Financial Group, Inc.) in exchange for each share of VCFC common stock held. The transaction, which is to be accounted for as a pooling of interests, is planned for completion in the fourth quarter of 2001. The transaction has received approval from both state and federal banking regulators. -12- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Virginia Commonwealth Financial Corporation ("VCFC" or the "Company"). This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and supplemental financial data. In addition to historical information, statements contained in this report that are not historical facts may be construed as forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. Overview Virginia Commonwealth Financial Corporation's consolidated net income for the quarter ended September 30, 2001 amounted to $1.26 million or $.54 per diluted share, compared to earnings of $1.26 million or $.54 per diluted share for the quarter ended September 30, 2000. Improvements in non-interest income were offset by relatively flat net interest income growth due to net interest margin pressure and nonrecurring merger related expenses. VCFC's earnings for the second quarter produced a return on average assets of 1.04% and a return on average equity of 9.62%, compared to prior year ratios of 1.13% and 10.42%, respectively. For the nine months ended September 30, 2001, VCFC's earnings was $3.80 million, or $1.64 per diluted share, compared to $3.68 million or $1.56 per diluted share in 2000. This earnings growth represents an increase of 3.4% in net income and a 5.1% increase in earnings per share. Excluding after-tax nonrecurring charges of $151 thousand for third quarter 2001 and $57 thousand for third quarter 2000 associated with merger and system conversion related expenses, recurring earnings for the third quarter of 2001 were $1.41 million or $.61 per diluted share, an increase of 6.9% compared to third quarter 2000 recurring earnings of $1.32 million and $.56 per share. For the nine-month period, earnings were $3.95 million, an increase of 2.2% compared to recurring earnings of $3.87 million in 2000. Net Interest Income Tax equivalent net interest income totaled $4.85 million for the three months ended September 30, 2001, an increase of $257 thousand or 5.6% compared to $4.60 million for the second quarter of 2000. The net interest margin for the quarter was 4.30% compared to 4.37% for the third quarter of 2000. The margin compression resulted from interest sensitive assets repricing on a quicker pace than interest sensitive liabilities in a rapidly changing short term interest rate environment. -13- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest Income Noninterest income increased $399 thousand to $1.2 million for the three months ended September 30, 2001, an increase of 47.3% over the comparative period in 2000. VCFC's trust and investment advisory affiliate, Virginia Commonwealth Trust Company, reported an increase in fee income of $162 thousand or 69.2% for the quarter, with gross fees (fiduciary and investment services) of $397 thousand compared to $234 thousand in 2000. Assets under management were valued at $156.9 million at September 30, 2001, an increase of $33.7 million or 27.4% from $123.2 million at December 31, 2000. Mortgage operations also showed growth on the strength of refinance activity, with fee income of $244 thousand for the third quarter of 2001, an increase of $144 thousand or 144.0% compared to $100 thousand in 2000. For the nine month period ended September 30, 2001 Trust Company fees, including investment fee income, amounted to $1.18 million, an increase of $500 thousand or 73.6% over the $679 thousand recorded in 2000. Noninterest Expense Operating expenses increased $511 thousand, or 15.2% to $3.9 million for the three months ended September 30, 2001, compared to $3.4 million for the same period in 2000. VCFC's efficiency ratio (noninterest expenses, excluding the nonrecurring expenses referred to above and costs related to foreclosed assets, as a percentage of FTE net interest income plus noninterest income excluding securities gains and losses) improved to 60.75% for the quarter, compared to 60.94% in the third quarter of 2000. For the nine months ended September 30, 2001, operating expenses increased $1.2 million to $11.2 million, an increase of 11.9% compared to $10.0 million in 2000. Increases in compensation and benefits associated with a new branch and normal annual salary adjustments, higher social security taxes, staff relocation expenses, fringe benefits and 401(k) plan contributions account for much of this increase. Merger expenses increased $94 thousand to $151 thousand for the three months ended September 30, 2001. Asset Quality Non-performing assets amounted to $1.0 million or .20% of total assets at September 30, 2001, compared to $1.2 million or .26% of total assets at September 30, 2000. The Company recorded a provision for loan losses of $204 thousand for the three month period ended September 30, 2001, compared to a provision of $167 thousand for the three month period ended September 30, 2000. For the nine months ended September 30, 2001, the provision for loan losses totaled $612 thousand, an increase of $137 thousand or 28.6% compared to the same period in 2000. The increased provision was not the result of increased charge-offs, but considered necessary to provide an adequate allowance for inherent estimated losses in an increasing loan portfolio. The allowance for loan losses at September 30, 2001 amounted to $3.9 million, compared to $3.5 million at December 31, 2000. The allowance for loan losses represents 388.7% of non-performing loans and 1.19% of gross loans receivable at September 30, 2001, compared to 384.25and 1.14% at December 31, 2000. The increase in the allowance for loan losses as a percentage of loans is attributable to several factors. The increase is partly due to the changing composition of the portfolio, with an increase in higher risk commercial real estate and other commercial loans of $42.9 million or 39.9% since December 31, 2000. The portfolio makeup has added additional risk through the acquisition of loan portfolios of two smaller community banks (Virginia Heartland Bank and Caroline Savings Bank). Despite the fact that net charge-offs decreased recently, we believe that additional risk factors include limited documentation of certain relationships in the acquired entities, and a higher concentration of small business lending which is more sensitive to a recession and a general -14- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS weakness in lending personnel at these banks. While the formal risk rating program in place at Virginia Commonwealth prior to these acquisitions has been put in place at each affiliate, it is management's belief that the current level of allowance as a percentage of the loan portfolio is adequate to cover inherent losses in the portfolio. Liquidity and Capital Resources The Company's capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion. Stockholders' equity as of September 30, 2001 of $53.9 million increased $4.0 million or approximately 8.0% from $49.9 million at December 31, 2000. This increase is primarily attributable to rising values in the Company's available for sale security portfolio and earnings net of dividends paid. The Company's Tier I capital consists primarily of common stockholder's equity. Risk weighted assets are determined by assigning various risk levels to each asset type. The Company's Tier 1 risk based capital ratio was 15.09% at September 30, 2001, compared to 16.08% at December 31, 2000, placing the Company in a well capitalized position as defined by regulators. Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or at other short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, economy of market served, concentrations of business and industry, competition, and the Company's overall financial condition. The Company's primary sources of liquidity are cash, due from banks, fed funds sold and securities in our available for sale portfolio. In addition, the affiliate banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank to support liquidity. The Corporation does not solicit brokered deposits, and is of the belief that predominantly all deposits are from established core depositors. In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs may arise. Effects of Inflation The effect of changing prices on financial institutions is typically different from other industries as the Company's assets and liabilities are monetary in nature. Interest rates and thus the Company's asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes to the quantitative and qualitative market risk disclosures in the Company's Form 10-K for the year ended December 31, 2000. -15- VIRGINIA COMMONWEALTH FINANCIAL CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Registrant or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened. Any legal proceeding presently pending or threatened against Virginia Commonwealth Financial Corporation and its subsidiaries are either not material in respect to the amount in controversy or are fully covered by insurance. 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 SECURITIES HOLDERS. None -16- ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits The following exhibits either are filed as part of this Report or are incorporated herein by reference: Exhibit No. 2 Agreement and Plan of Reorganization between Virginia Financial Corporation and Virginia Commonwealth Financial Corporation, dated as of June 12, 2001 incorporated by reference to Exhibit 2 to the Company's Form 10Q for the quarter ended June 30, 2001. Exhibit No. 3.1 Articles of Incorporation incorporated by reference to Exhibit 3 to the Company's 1998 Form 10-K dated March 30, 1999. Exhibit No. 3.2 Bylaws incorporated by reference to Exhibit 3 to the Company's 1998 Form 10-K, dated March 30, 1999. Exhibit No. 4 Rights Agreement dated September 10, 1998 is incorporated by reference to Exhibits 1 and 2 to the Form 8A Registration Statement filed on September 22, 1998 (File No. 000-22747). Exhibit No. 4.1 Amendment No. 1 to the Rights Agreement dated June 12, 2001 incorporated by reference to Exhibit 4.1 to the Company's Form 10Q for the quarter ended June 30, 2001. Exhibit No. 10 Employment contracts of certain officers are incorporated by reference to Exhibits 10.1-10.3 and 10.6 of the Company's Agreement and Plan of Reorganization on Form S-4 filed on June 23, 1998 (File No. 333-57479). (b) No form 8-K was filed during the three month period ended September 30, 2001. -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. VIRGINIA COMMONWEALTH FINANCIAL CORPORATION /s/ O.R. Barham, Jr. ---------------------------------------------- O.R. Barham, Jr. President and Chief Executive O fficer November 13, 2001 /s/ Jeffrey W. Farrar ---------------------------------------------- Jeffrey W. Farrar, CPA Executive Vice President - Chief Financial Officer November 13, 2001 -18-

VIRGINIA COMMONWEALTH FINANCIAL CORP 10-Q