Dear Friends, Shareholders and Clients:
The first quarter of 2012 marked The Victory Bank’s sixth consecutive profitable quarter, with the Bank continuing to gather momentum and increase its operating efficiencies. Total assets reached $111 million, loans $89 million, and total deposits averaged between $98 million and $101 million. Despite a very small marketing budget, the Bank has been very successful in attracting new clients to the Bank, partly because of our commitment to small business and professional practice lending, and because our commitment to a superior client experience has attracted a considerable amount of retail banking business. We spend our days “out and about,” and much of our growth comes from good referrals made by satisfied clients and local centers of influence who believe in what we are doing. Another important part of our offerings includes loans through the SBA, helping the Bank lend to borrowers that might not otherwise qualify for conventional bank financing.
Net of taxes, the Bank earned $167,000 for the quarter, and continued to experience excellent credit quality with non-performing assets at .41% of total assets. Loan loss reserves increased slightly to 1.31% of loans, or $1,133,000. Actual capital held at the Bank has increased to slightly over $9.9 million, with $11.1 million in total consolidated capital at the bank holding company level. Over the past several quarters, we have managed expenses judiciously while still hiring a select number of high-performing bankers with considerable experience in order to meet the demands of a growing company. One industry shorthand method of looking at how well a bank is run is called the “efficiency ratio.” This ratio compares the amount of dollars spent in overhead to the revenue generated, and so the lower this ratio falls, the more efficiently the bank is operating. In the case of The Victory Bank, we have been gradually growing into our fixed overhead, which includes things like salaries, computer systems, buildings, and legal and accounting expenses. The Bank’s efficiency ratio fell to 79% for the quarter; a “middle of the road” result that is typical for a start-up bank just four years old, but a number that we expect to improve consistently as the company grows. I am very proud to report that we now have a total of 27 members of our team, who joyfully and energetically work each day to make the Bank great!
The operating environment remains challenging and chaotic. Internally, since January we have completed a full audit, internal audits of many of our processes, systems, and our entire IT function, completed an FDIC compliance review, and completed a full safety and soundness and IT review by the Pennsylvania State Department of Banking.
Externally, the banking industry is doing considerably better than it had during the past few years, but competition is fierce. Bank credit quality is gradually improving and the amount of dollars being used to build loan-loss reserves and to charge-off bad loans has been reduced. The banking industry has now shown a collective profit in four quarters in a row. Revenues are actually showing a slight decline, in part because of the Dodd-Frank legislation. The number of banks on the FDIC’s problem bank list has started to go down, and the industry has amassed considerable amounts of new capital. Very large and TBTF (too big to fail) banks have accessed public capital markets, but smaller companies have had to rely upon retained earnings or expensive private placements. Unfortunately, the reputational damage to the banking industry caused by the reckless behavior and greed of very large financial institutions (including some giant companies that operate on Wall Street and are now technically bank holding companies) continues to create problems for the entire industry, and the regulatory burden upon small banks is at an all-time high.
Locally, many of our clients are reporting modestly improved conditions and are beginning to do some hiring. Our loans-under-consideration “pipeline” has increased from $12 million 16 months ago to nearly $27 million today. So, we are growing but we are experiencing far more competition on loans of all sizes. What we view as a knee-jerk legislative response to the so-called banking crisis (caused mostly by the actions of non-banking companies!) led Congress to enact the Dodd-Frank legislation, which created a massive new regulatory and compliance burden for the smaller banks which didn’t create the problems in the first place.
Likewise, our FDIC assessments have gone up dramatically. These assessments are used to fund losses caused by failed banks, and are paid by the banks left standing, not by the taxpayers. The aftermath of the Enron scandal similarly created monstrous new levels of compliance and expense for public companies and made it more difficult for smaller companies to raise capital in the public markets. These unintended and negative consequences have brought a host of new problems to smaller banks, but from our perspective, complaining about them does not fix the problems, so we are taking action. We’ve been working aggressively to systematize all of our corporate functions and responsibilities, our regulatory and compliance obligations, our loan review process, and other similar corporate and banking responsibilities into a master follow-up system that smoothly flows through our internal office management software and drives timely and effective responses from all of our team. This is allowing the Bank to meet these obligations as efficiently as possible.
As for our team, The Victory Bank was created with one overriding premise in mind: that hiring, retaining, and managing a superior group of people, and asking them to apply themselves to a clearly articulated strategy, would lead to consistent growth and excellent results. We remain unrelentingly committed to this approach, and part of that strategy includes the ongoing development of every member of our team. We are developing individualized training programs for each of our team members with the goal of improving their knowledge, personal efficiency, and client orientation. Our commitment to excellence drives us to make the Bank and the client experience better today than yesterday.
We thank all of you for your support and commitment to the Bank, as investors and clients, and sources of new referrals. Please stop by to visit or call us any time we can be of service to you.
Joseph W. Major
Chairman and CEO, The Victory Bank