U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number 000-32641
JAMES MONROE BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
VIRGINIA 54-1941875
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3033 WILSON BLVD., ARLINGTON, VIRGINIA 22201
(Address of Principal Executive Offices)
703-524-8100
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 2001.
Common stock, $1 par value--960,467 shares outstanding
1
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item. 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001,
December 31, 2000, September 30, 2000 .......................................3
Consolidated Income Statements for the three-months
and nine-months ended September 30, 2001 and 2000 ..........................4
Consolidated Statements of Changes in Stockholders'
Equity for the nine-months ended September 30, 2001 and 2000 ................5
Consolidated Statements of Cash Flows for the nine-months
ended September 30, 2001 and 2000 ...........................................6
Notes to Interim Consolidated Financial Statements ...............................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................10
Part II. Other Information
Item 1. Legal ...........................................................................23
Item 2. Changes in Securities and Use of Proceeds .......................................23
Item 3. Defaults Upon Senior Securities .................................................23
Item 4. Submission of Matters to a Vote of Security Holders .............................23
Item 5. Other Information ...............................................................23
Item 6. Exhibits ........................................................................23
2
PART 1. FINANCIAL INFORMATION
Item. 1. FINANCIAL STATEMENTS
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited) (Audited) (Unaudited)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------------- ------------------ -------------------
ASSETS
Cash and due from banks $ 7,446 $ 6,362 $ 4,903
Interest-bearing deposits in banks 2,033 2,010 - -
Federal funds sold 16,639 9,933 7,844
Securities available-for-sale at fair value 26,394 20,039 19,112
Loans, net of allowance for loan losses of $851 in 2001,
$600 at December 31, 2000, and $546 at September 30, 2000 72,700 49,440 44,676
Bank premises and equipment, net 895 692 698
Accrued interest receivable 686 567 492
Other assets 102 187 384
------------------- ------------------ -------------------
$ 126,895 $ 89,230 $ 78,109
=================== ================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 39,865 $ 22,711 $ 20,429
Interest-bearing deposits 74,622 55,331 49,972
------------------- ------------------ -------------------
Total deposits 114,487 78,042 70,401
Accrued interest payable and other liabilities 530 455 424
------------------- ------------------ -------------------
Total liabilities 115,017 78,497 70,825
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 2,000,000 shares;
issued and outstanding 960,467 at September 30, 2001, 958,767 960 959 744
at December 31, 2000, and 744,290 at September 30, 2000
Capital surplus 9,522 9,506 6,699
Retained earnings 1,032 229 (2)
Accumulated other comprehensive income (loss) 364 39 (157)
------------------- ------------------ -------------------
Total stockholders' equity 11,878 10,733 7,284
------------------- ------------------ -------------------
$ 126,895 $ 89,230 $ 78,109
=================== ================== ===================
See notes to interim consolidated financial statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------- -------------- --------------- ---------------
INTEREST INCOME:
Loans, including fees $ 1,441 $ 1,081 $ 4,079 $ 2,799
Securities, taxable 421 267 1,078 735
Federal funds sold 99 99 327 181
Other interest income 14 -- 55 --
---------------- -------------- --------------- ---------------
Total interest income 1,975 1,447 5,539 3,715
INTEREST EXPENSE:
Deposits 753 622 2,226 1,429
Borrowed funds -- -- -- 3
---------------- -------------- --------------- ---------------
Total interest expense 753 622 2,226 1,432
---------------- -------------- --------------- ---------------
Net interest income 1,222 825 3,313 2,283
PROVISION FOR LOAN LOSSES 109 49 267 183
---------------- -------------- --------------- ---------------
Net interest income after provision for loan losses 1,113 776 3,046 2,100
NONINTEREST INCOME:
Service charges and fees 77 49 179 145
Other 52 28 142 59
Gain on sale of securities 47 2 51 2
---------------- -------------- --------------- ---------------
Total noninterest income 176 79 372 206
NONINTEREST EXPENSES:
Salaries and wages 332 252 925 768
Employee benefits 56 33 149 107
Occupancy expenses 97 66 267 197
Equipment expenses 49 38 132 116
Other operating expenses 233 189 705 517
---------------- -------------- --------------- ---------------
767 578 2,178 1,705
---------------- -------------- --------------- ---------------
Income before income taxes 522 277 1,240 601
PROVISION FOR INCOME TAXES 185 22 437 22
---------------- -------------- --------------- ---------------
Net income $ 337 $ 255 $ 803 $ 579
================ ============== =============== ===============
EARNINGS PER SHARE-BASIC $ 0.35 $ 0.34 $ 0.84 $ 0.78
================ ============== =============== ===============
EARNINGS PER SHARE-DILUTED $ 0.34 $ 0.33 $ 0.81 $ 0.76
================ ============== =============== ===============
See notes to interim consolidated financial statements.
4
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2001 and 2000
($ in thousands)
(Unaudited)
ACCUMULATED
OTHER
RETAINED COMPRE- COMPRE- TOTAL
COMMON CAPITAL EARNINGS HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS (DEFICIT) (LOSS)/INCOME INCOME EQUITY
------ ------- --------- ------------- ----------- -------------
BALANCE, JANUARY 1, 2000 $ 743 $ 6,683 $ (581) $ (245) $ 6,600
Comprehensive income:
Net income 579 $ 579 579
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $45 88 88 88
---------
$ 667
Total comprehensive income =========
Exercise of stock options 1 16 17
------- -------- -------- ------- ---------
BALANCE, SEPTEMBER 30, 2000 $ 744 $ 6,699 $ (2) $ (157) $ 7,284
======= ======== ======== ======= =========
ACCUMULATED
OTHER
RETAINED COMPRE- COMPRE- TOTAL
COMMON CAPITAL EARNINGS HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS (DEFICIT) (LOSS)/INCOME INCOME EQUITY
------ ------- --------- ------------- ----------- -------------
BALANCE, JANUARY 1, 2001 $ 959 $ 9,506 $ 229 $ 39 $ 10,733
Comprehensive income:
Net income 803 $ 803 803
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $167 325 325 325
---------
$ 1,128
Total comprehensive income =========
Exercise of stock options 1 16 17
------- -------- -------- ------- ---------
BALANCE, SEPTEMBER 30, 2001 $ 960 $ 9,522 $ 1,032 $ 364 $ 11,878
======= ======== ======== ======= =========
See notes to interim consolidated financial statements.
5
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2001 2000
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 803 $ 579
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 118 55
Provision for loan losses 267 183
Gain on sale of securities (51) (2)
(Increase)/decrease in accrued interest receivable (119) (146)
Amortization of bond premium 28 17
Accretion of bond discount (36) (2)
(Increase)/decrease in other assets (82) (199)
Increase/(decrease) in accrued interest and other liabilities 75 225
------------------- --------------------
Net cash provided by operating activities $ 1,003 $ 710
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale $ (21,599) $ (6,972)
Proceeds from calls and maturities of securities available for sale 15,775 1,485
Purchases of premises and equipment (321) (70)
(Increase)/decrease in Federal funds sold and interest-bearing deposits (6,729) (6,307)
Net (increase) in loans (23,511) (14,183)
------------------- --------------------
Net cash (used in) investing activities $ (36,385) $ (26,047)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts $ 34,330 $ 13,027
Net increase in time deposits 2,115 14,555
Proceeds from issuance of common stock 17 17
------------------- --------------------
Net cash provided by financing activities $ 36,462 $ 27,599
------------------- --------------------
Increase (decrease)in cash and due from banks $ 1,080 $ 2,262
CASH AND DUE FROM BANKS
Beginning 6,362 2,641
------------------- --------------------
Ending $ 7,442 $ 4,903
=================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
Interest paid on deposits $ 2,244 $ 1,345
=================== ====================
Income taxes paid $ 436 $ --
=================== ====================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain (loss) on securities available for sale $ 491 $ 133
=================== ====================
See notes to interim consolidated financial statements.
6
JAMES MONROE BANCORP, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--
Organization. James Monroe Bancorp, Inc. was incorporated under the laws of the
Commonwealth of Virginia on April 9, 1999 to be the holding company for James
Monroe Bank. James Monroe Bancorp acquired all of the shares of James Monroe
Bank on July 1, 1999 in a mandatory share exchange under which each outstanding
share of common stock of James Monroe Bank was exchanged for one share of James
Monroe Bancorp common stock. James Monroe Bank, a Virginia chartered commercial
bank, which is a member of the Federal Reserve System, is James Monroe Bancorp's
sole subsidiary. James Monroe Bank commenced banking operations on June 8, 1998.
As of September 30, 2001 the Company operated the main office in Arlington,
Virginia, one branch in Annandale, Virginia and one branch in Leesburg,
Virginia, and is in the process of opening its third branch in Fairfax City,
Virginia.
Basis of Presentation. In the opinion of management, the accompanying unaudited
consolidated financial statements of James Monroe Bancorp, Inc. and Subsidiary
(the Company) have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments and reclassifications
necessary for a fair presentation have been included. Operating results for the
three and nine-month periods ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001, or any other period. The unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2000.
NOTE 2--
Earnings Per Share. The following table discloses the calculation of basic and
diluted earnings per share for the three months and nine-months ended September
30, 2001 and 2000.
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------- -------------------------------
2001 2000 2001 2000
-------------------------------- -------------------------------
Net Income $ 337 $ 255 $ 803 $ 579
Weighted average shares outstanding--basic 960,467 744,290 959,976 744,023
Common share equivalents for stock options 34,144 25,917 33,583 22,414
-------------------------------- -------------------------------
Weighted average shares outstanding--diluted 994,611 770,207 993,559 766,437
================================ ===============================
Earnings per share-basic $ 0.35 $ 0.34 $ 0.84 $ 0.78
================================ ===============================
Earnings per share-diluted $ 0.34 $ 0.33 $ 0.81 $ 0.76
================================ ===============================
NOTE 3--
Securities available-for-sale. Securities available-for-sale are reported at
fair value with unrealized gains and losses (net of income taxes) recorded in
shareholders' equity as a component of "accumulated other comprehensive (loss)
income". Actual gains and losses on the sales of these securities, if any, are
computed using the specific identification method and included in "gain on sale
of securities" on the income statement. The amortized cost and carrying value
(estimated market value) of securities available-for-sale at September 30, 2001,
December 31, 2000, and September 30, 2000, are summarized in the tables that
follow. The Company classifies all securities as available-for-sale.
7
September 30, 2001
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
-------------- -------------- -------------- --------------
U.S. Government and federal agency $ 5,106 $ 132 $ - $ 5,238
Mortgage-backed securities 8,882 191 (4) 9,069
Corporate notes 11,485 256 (27) 11,714
Other securities 373 - - 373
-------------- -------------- -------------- --------------
$ 25,846 $ 579 $ (31) $ 26,394
============== ============== ============== ==============
December 31, 2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
-------------- -------------- -------------- --------------
U.S. Government and federal agency $ 12,155 $ 29 $ (49) $ 12,135
Mortgage-backed securities 5,209 50 (3) 5,256
Corporate notes 2,243 32 - 2,275
Other securities 373 - - 373
-------------- -------------- -------------- --------------
$ 19,980 $ 111 $ (52) $ 20,039
============== ============== ============== ==============
September 30, 2000
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
-------------- -------------- -------------- --------------
U.S. Government and federal agency $ 11,655 $ - $ (223) $ 11,432
Mortgage-backed securities 4,333 - (29) 4,304
Corporate notes 3,017 14 - 3,031
Other securities 345 - - 345
-------------- -------------- -------------- --------------
$ 19,350 $ 14 $ (252) $ 19,112
============== ============== ============== ==============
NOTE 4--
Loans. Major classifications of loans at September 30, 2001, December 31, 2000,
and September 30, 2000 are summarized in the following table.
8
September 30, December 31, September 30,
($ in thousands) 2001 2000 2000
----------------- ----------------- ------------------
Commercial loans $ 25,208 $ 21,271 $ 20,435
Real estate-Commercial 38,154 20,783 17,506
Real estate-1-4 family residential 4,025 4,165 3,579
Home equity loans 1,152 546 578
Consumer loans 4,905 3,256 3,073
Overdrafts 107 19 51
----------------- ----------------- ------------------
73,551 50,040 45,222
Less allowance for loan losses (851) (600) (546)
----------------- ----------------- ------------------
Net Loans $ 72,700 $ 49,440 $ 44,676
================= ================= ==================
Changes in the allowance for loan losses are summarized as follows:
($ in thousands) Nine-Months For the Year Nine-Months
Ended Ended Emded
September 30, December 31, September 30,
2001 2000 2000
---------------- ---------------------- ------------------
Balance at beginning of year $ 600 $ 363 $ 363
Charge-offs: - -
Commercial 5 - -
Consumer 11 - -
Recoveries - - -
----------------- ----------------- ------------------
Net charge-offs 16 - -
Provision for loan losses 267 237 183
----------------- ----------------- ------------------
Balance at end of period $ 851 $ 600 $ 546
================= ================= ==================
The following table presents the amounts of nonperforming assets at the dates
indicated.
September 30, December 31, September 30,
($ in thousands) 2001 2000 2000
----------------- ----------------- ------------------
Nonaccrual loans $ - $ 39 $ 55
Loans past-due 90-days or more 266 - -
Restructured loans - - -
Other real estate owned - - -
----------------- ----------------- ------------------
Total nonperforming assets $ 266 $ 39 $ 55
================= ================= ==================
Note 5--
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which will potentially impact the accounting for
goodwill and other intangible assets. Statement 141 eliminates the pooling
method of accounting for business combinations and requires that intangible
assets that meet certain criteria be reported separately from goodwill. The
9
Statement also requires negative goodwill arising from a business combination to
be recorded as an extraordinary gain. Statement 142 eliminates the amortization
of goodwill and other intangibles that are determined to have an indefinite
life. The Statement requires, at a minimum, annual impairment tests for goodwill
and other intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to
re-evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangibles
assets do not meet the criteria for recognition, they should be classified as
goodwill. Similarly, if there are other intangible assets that meet the criteria
for recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill. An organization also must reassess the useful lives
of intangible assets and adjust the remaining amortization periods accordingly.
Any negative goodwill must be written-off.
The standards generally are required to be implemented by the Bank in
its 2002 financial statements. The adoption of these standards will not have a
material impact on the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
This Management's Discussion and Analysis reviews the financial condition and
results of operations of James Monroe Bancorp, Inc. and its subsidiary as of and
for the three and nine-months ended September 30, 2001 and 2000. Some tables
cover more than these periods to comply with Securities and Exchange Commission
disclosure requirements or to illustrate trends over a period of time. When
reading this discussion, reference should be made to the consolidated financial
statements and related notes that appear herein and to our consolidated
financial statements and footnotes thereto for the year ended December 31, 2000.
FORWARD-LOOKING STATEMENTS
This document contains forward looking statements within the meaning of the
Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. These
statements are based upon current and anticipated economic conditions,
nationally and in the Company's market, interest rates and interest rate
policies, competitive factors, government agencies and other third parties,
which by their nature are not susceptible to accurate forecast, and are subject
to significant uncertainty. Because of these uncertainties and the assumptions
on which this discussion and the forward-looking statements are based, actual
future operations and results in the future may differ materially from those
indicated herein. Readers are cautioned against placing undue reliance on any
such forward-looking statement. The Company does not undertake to update any
forward-looking statement to reflect occurrences or events, which may not have
been anticipated as of the date of such statements.
FINANCIAL OVERVIEW
The Company completed its third year of operations in June 2001 and now enters
its fourth year of operations. A number of accomplishments have been achieved
such as:
o assets exceeded $126 million at September 30;
o the Bank's third branch is under development in Fairfax;
o the initial cost to open the Bank and the initial operating losses were
fully recovered by September 2000, resulting in the Company being on a
fully taxable basis for federal income tax purposes beginning in
September 2000, having fully utilized all initial net operating losses;
and
o pre-tax earnings have consistently improved on a quarter to quarter
basis.
o management of the bank focuses on managing the net interest margin so
that in periods of changing interest rates, the negative impact on
earnings is minimized. As such, while the prime interest rate has
dropped 4% since January of this year, the Bank's net interest margin
has declined less than 50 basis points since January.
10
BALANCE SHEET
Total assets increased to $126.9 million at September 30, 2001, an increase of
$37.7 million from December 31, 2000, and an increase of $48.8 million from
September 30, 2000. The increase in assets since December 31, 2000 resulted from
the Company's emphasis on deposit generation as much as loan generation. During
the nine- months ended September 30, 2001, deposits increased $36.4 million over
December 31, 2000, with noninterest-bearing deposits increasing $17.2 million,
and interest-bearing deposits increasing $19.3 million. With the growth in
deposits, the Company was able to fund $23.5 million net increase in loans,
added $5.9 million to the securities portfolio, and increased the Company's
short-term liquidity (Federal funds sold and interest-bearing deposits) position
by $6.7 million.
QUARTERLY RESULTS OF OPERATIONS
2001 2000
-------------------------------------------- -----------------------------
(in thousands except share data) THIRD SECOND FIRST FOURTH THIRD
-------------- -------------- -------------- -------------- --------------
RESULTS OF OPERATIONS:
Net interest income 1,222 1,084 1,007 953 825
Provision for loan losses 109 77 81 54 49
Other income 176 107 89 95 79
Noninterest expense 767 753 658 643 578
Income before taxes 522 361 357 351 277
Net income 337 232 234 231 255
PER SHARE DATA:
Earnings per share, basic $ 0.35 $ 0.24 $ 0.25 $ 0.26 $ 0.34
Earnings per share, diluted $ 0.34 $ 0.23 $ 0.24 $ 0.25 $ 0.33
Weighted average shares
outstanding-basic 960,467 960,467 958,994 884,189 744,290
-diluted 993,467 994,555 991,511 918,367 770,207
AT PERIOD END
Loans $ 73,551 $ 63,471 $ 58,806 $ 50,040 $ 45,222
Earning assets 118,617 106,490 92,481 82,022 63,178
Total assets 126,895 118,104 100,714 89,230 78,109
Deposits 114,487 106,461 89,007 78,042 70,401
Stockholders' equity 11,878 11,238 11,119 10,733 7,284
Book value $ 12.37 $ 11.70 $ 11.58 $ 11.19 $ 9.79
Shares outstanding 960,467 960,467 960,467 958,767 744,290
PERFORMANCE RATIOS:
Return on average assets 1.16% 0.90% 1.04% 1.10% 1.41%
Return on average equity 11.51% 8.21% 8.65% 9.63% 14.21%
Net interest margin 4.50% 4.54% 4.76% 4.77% 4.89%
Efficiency ratio 54.86% 63.22% 60.04% 61.35% 63.94%
OTHER RATIOS:
Allowance for loan losses to total
loans 1.16% 1.18% 1.16% 1.20% 1.21%
Equity to assets 9.36% 9.52% 11.04% 12.03% 9.33%
Nonperforming assets to total
assets 0.21% 0.23% 0.01% 0.04% 0.07%
Net charge-offs to total loans 0.01% 0.02% 0.00% 0.00% 0.00%
Risk-Adjusted Capital Ratios:
Tier 1 12.9% 14.0% 15.8% 18.5% 16.6%
Total 13.9% 14.9% 16.8% 19.6% 17.9%
Leverage Ratio 11.2% 10.8% 12.0% 12.6% 10.4%
Note: The Company was not required to record a tax provision until the third
quarter of 2000, and has been fully taxable for all quarters thereafter. Readers
should take this into account when reviewing the quarterly comparisons provided
in the table and the other information in this report.
11
For the quarter ended September 30, 2001, the Company had net income of
$337,000, or $.34 per share on a fully diluted basis, compared with $255,000, or
$.33 per share, for the comparable quarter of 2000. Annualized return on average
assets was 1.16% for the three-months ended September 30, 2001, compared with
1.41% for the same quarter in 2000, and the return on average equity was 11.51%
for the quarter ended September 30, 2001, compared with 14.21% for the third
quarter of 2000.
For the nine-month period ended September 30, 2001, the Company had net
income of $803,000, or $.81 per share, compared to $579,000, or $.76 per share,
for the comparable nine-month period of 2000, both on a fully diluted basis.
Annualized return on average assets was 1.04% for the nine-months ended
September 30, 2001, compared with 1.24% for the same period in 2000, and the
return on average equity was 9.50% for the nine-months ended September 30, 2001,
compared with 11.28% for the same period of 2000.
The Company's per share earnings and the returns on assets and equity
for the for the three and nine-month periods ended September 30, 2001 are
negatively impacted by the fact that the Company was in a taxable position in
2001, whereas it was not required to make a tax provision during the first eight
months of 2000. In addition, per share earnings and the ratios for the 2001
periods are further negatively impacted as a result of the sale and issuance of
an additional 214,477 shares of common stock in November 2000. As a result of
these factors, the Company does not believe that direct comparisons of results
of operations for the comparable periods in 2001 and 2000 are meaningful.
The Company continues to focus on managing its net interest margin,
especially during periods of changing interest rates. In the first nine months
of 2001, the Federal Reserve reduced interest rates an unprecedented eight times
for an aggregate 350 basis point reduction in rates thru September 30, 2001.
These rate reductions had a direct impact on the rates earned on the Bank's
outstanding floating or adjustable rate loans, as well as new loans, and on the
rates earned on other investments. These dramatic reductions in a relatively
short period resulted in a reduction in the net interest margin, which declined
from 5.23% during the first nine-months of 2000 to 4.59% for the same period of
2001. Despite these reductions, the Company's practice of managing its interest
rate risk process has mitigated the negative effect of such a severe declining
rate environment as reflected in Table 2. The impact on the Company's net
interest income due to changes in rates amounted to a decline of $137,000 for
the first nine-months of 2001 compared with the first nine-months of 2000. The
Company believes this to be a very acceptable exposure given the severity of the
changes in interest rates. Reference should be made to the comments in the
interest rate sensitivity management section contained herein for a discussion
on the Company's management of, and exposure to, changing interest rates.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned
on assets and the interest paid on deposits and borrowings. Net interest income
is one of the major determining factors in the Bank's performance as it is the
principal source of revenue and earnings. Unlike the larger regional or
mega-banks who have significant sources of fee income, community banks, such as
James Monroe Bank, rely on net interest income from traditional banking
activities as the primary revenue source.
For the nine-month period ended September 30, 2001, net interest income
increased $1.0 million, or 45%, to $3.3 million from the $2.3 million during the
same period in 2000, primarily as a result of increases in the volume of earning
assets, partially offset by the effect of the decline in interest rates. Total
average earning assets increased by $38.2 million, or 66%, from the nine-months
ended September 30, 2000 to the same period of 2001. The average yield on
earning assets decreased by 84 basis points reflecting the dramatic reduction in
interest rates during the first half of 2001. Yields on federal funds and the
securities portfolio decreased by 207 and 11 basis points, respectively. Average
loans outstanding grew by $22.3 million, or 57%, during the first nine-months of
2001 compared to the same period in 2000, and the yield on such loans decreased
by 67 basis points. The federal funds rate, which is the short-term liquidity
yield, reflected the most sensitivity to declining rates, while loan yields and
the securities yields declined, but not as significantly. This is due to the
composition of the loan portfolio being comprised of variable, fixed, and
adjustable rates, which are not all subject to immediate rate reductions. In the
case of the securities portfolio, many agency bonds were called in the first
nine-months of 2001 but the Company was able to reinvest the proceeds of the
called securities into new securities at similar yields, which partially
mitigated the call of higher yielding securities.
12
TABLE 1
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
--------------------------------------- -------------------------------------
Average Average Yield/
Balance Interest Yield/Rate Balance Interest Rate
----------- ---------- ------------ ----------- ---------- ----------
ASSETS
Loans:
Commercial $ 24,605 $1,602 8.71% $18,381 $1,305 9.48%
Commercial real estate 27,373 1,859 9.08 16,142 1,123 9.29
Consumer 9,575 618 8.63 4,734 372 10.50
-------- ------ ---- ------- ------ -----
Total Loans 61,553 4,079 8.86 39,257 2,800 9.53
Taxable securities 22,667 1,078 6.36 15,147 734 6.47
Federal funds sold and interest-bearing
deposits 12,279 382 4.16 3,878 181 6.23
-------- ------ ---- ------- ------ -----
TOTAL EARNING ASSETS 96,499 5,539 7.67% 58,282 3,715 8.51%
Less allowance for loan losses (708) (451)
Cash and due from banks 5,941 3,440
Premises and equipment, net 852 719
Other assets 696 617
-------- -------
TOTAL ASSETS $103,280 $62,607
======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 4,931 $ 65 1.76% $ 3,540 $ 56 2.11%
Money market deposit accounts 30,456 888 3.90 19,594 683 4.66
Savings accounts 602 12 2.67 322 7 2.90
Time deposits 28,450 1,261 5.93 15,428 683 5.91
Borrowed funds -- -- -- 60 3 6.68
-------- ------ ---- ------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 64,439 2,226 4.62% 38,944 1,432 4.91%
-------- ------ ---- ------- ------ -----
Net Interest Income and Net Yield on
Interest-Earning Assets $3,313 4.59% $2,283 5.23%
====== ==== ====== =====
Noninterest-bearing demand deposits 27,017 16,550
Other liabilities 517 255
Stockholders' equity 11,307 6,858
-------- ------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $103,280 $62,607
======== =======
Interest expense for the first nine-months of 2001 was $2.2 million
compared with $1.4 million in interest expense for the first nine-months of
2000. This increase is predominately a result of the $25.5 million, or 65%
growth in the volume of interest-bearing liabilities, partially offset by the 29
basis point decrease in the average cost of interest-bearing liabilities.
Although deposit rates in our market peaked during the middle of 2000, the
Company's interest expense for deposits has lagged in repricing and/or resetting
downward to reflect declines in market interest rates. This lag is primarily the
result of the Company's interest-bearing time deposits, most of which have
maturities of one year or less and which will not immediately reprice at lower
rates in a falling rate environment, but which become eligible for repricing at
lower rates during the 12 months following a declining rate environment.
Table 2 shows the composition of the net change in net interest income
for the periods indicated, as allocated between the change in net interest
income due to changes in the volume of average assets and the changes in net
interest income due to changes in interest rates. As the table shows, the
increase in net interest income for the nine-months ended
13
September 30, 2001, as compared to the nine-months ended September 30, 2000, is
almost entirely due to the growth in the volume of earning assets and
interest-bearing liabilities. While the decrease in interest rates has, to date,
affected total interest income, and to a lesser extent, total interest expense,
management has managed its exposure to changes in interest rates such that the
negative effect of the declining rate environment resulted in a negative
$137,000 to net interest income whereas the growth in earning assets and
deposits resulted in an increase of $1.2 million to net interest income.
TABLE 2
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
Nine-Months Ended September 30
2001 vs. 2000
------------------------------------
Increase Due to Change
or in Average
----------------------
(Decrease) Volume Rate
($ in thousands) ------------------------------------
EARNINGS ASSETS:
Loans $ 1,279 $ 1,460 $ (181)
Taxable securities 344 357 (13)
Federal funds sold and
interest-bearing deposits 201 239 (38)
------------------------------------
Total interest income 1,824 2,056 (232)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits 9 18 (9)
Money market deposit
accounts 205 292 (87)
Savings deposits 5 (1)
Time deposits 578 576 2
Borrowed funds (3) (3) -
------------------------------------
Total interest expense 794 889 (95)
------------------------------------
Net Interest Income $ 1,030 $ 1,167 $ (137)
====================================
Third Quarter Rate/Volume Analysis. For the third quarter of 2001, net interest
income was $1.2 million compared to $.8 million for the same quarter of 2000,
which represents a $.4 million increase or 48%. For these comparable quarters,
the yield on earning assets declined from 8.56% for the third quarter of 2000 to
7.27% in the third quarter of 2001 reflecting the significant decline in
interest rates that has occurred in 2001. The overall yield on loans dropped 122
basis points, the securities portfolio declined 15 basis points and the yield on
Federal funds and cash equivalents declined 305 basis points reflecting the
general decline in interest rates from last year to this year.
Interest expense during these comparable quarters, third quarter 2001
versus third quarter 2000, increased $132,000 or 21%, from $62,000 in interest
expense to $753,000 in interest expense primarily due to the $25.7 million
increase in average interest-bearing liabilities. The overall cost of
interest-bearing liabilities decreased 120 basis points from 5.37% in 2000 to
4.17% in 2001.
The resulting effect of the changes in interest rates between the
quarters ended September 30, 2001 and 2000, and the changes in the volume and
mix of earning assets and interest-bearing liabilities resulted in a 4.50% net
interest margin in 2001 versus a 4.89% net interest margin in 2000. The decline
is attributable to the 129 basis point decline in the yield on earning assets
coupled with the 120 basis decrease in the cost of interest-bearing liabilities
reflecting management's process of managing its interest rate risk. The actual
net interest income of $1.2 million for the third quarter of 2001 increased
$397,000, or 48%, over the $825,000 of net interest income for the third quarter
of 2000 as growth in the volume of earning
14
assets and growth in the average balances of noninterest-bearing deposits,
substantially exceeded the modest negative impact of changes in interest rates.
Reference should be made to the section on Liquidity and Interest Rate
Sensitivity Management for discussions on the Company's procedures for managing
the effect of changes in interest rates on the earnings of the Company.
TABLE 3
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ---------- ----------- ---------- ----------
ASSETS
Loans:
Commercial $ 24,700 $ 517 8.30% $20,075 $ 468 9.27%
Commercial real estate 33,481 724 8.58 17,611 457 10.32
Consumer 9,597 200 8.27 6,853 156 9.06
-------- ------ ----- ------- ------ -----
Total Loans 67,778 1,441 8.43 44,539 1,081 9.66
Taxable securities 26,532 421 6.30 16,580 267 6.41
Federal funds sold and cash equivalents 13,397 113 3.35 6,126 99 6.43
-------- ------ ----- ------- ------ -----
TOTAL EARNING ASSETS 107,707 1,975 7.27% 67,245 1,447 8.56%
Less allowance for loan losses (784) (521)
Cash and due from banks 6,712 3,834
Premises and equipment, net 942 710
Other assets 642 764
-------- -------
TOTAL ASSETS $115,219 $72,032
======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing demand deposits $ 5,114 $ 16 1.24% 3,811 $ 20 2.09%
Money market deposit accounts 37,304 337 3.58 20,030 246 4.89
Savings accounts 725 5 2.74 345 3 3.46
Time deposits 28,566 395 5.49 21,807 353 6.44
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 71,709 753 4.17% 45,993 622 5.38%
-------- ------ ----- -------- ------ -----
Net Interest Income and Net Yield on
Interest-Earning Assets $1,222 4.50% $ 825 4.88%
====== ===== ====== =====
Noninterest-bearing demand deposits 31,493 18,545
Other liabilities 401 384
Stockholders' equity 11,616 7,110
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $115,219 $72,032
======== ========
15
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
Three-months Ended September 30
2001 vs. 2000
------------------------------------
Increase Due to Change
or in Average
----------------------
(Decrease) Volume Rate
-----------------------------------
EARNINGS ASSETS:
Loans $ 360 $ 475 $ (115)
Taxable securities 154 160 (6)
Federal funds sold 14 23 (9)
------------------------------------
Total interest income 528 658 (130)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits (4) 8 (12)
Money market deposit
accounts 91 133 (42)
Savings deposits 2 4 (2)
Time deposits 42 82 (40)
------------------------------------
Total interest expense 131 227 (96)
------------------------------------
Net Interest Income $ 397 $ 431 $ (34)
====================================
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's judgement as
to the adequacy of the allowance to absorb probable inherent losses in the
current portfolio. The Company is a relatively young bank with an asset quality
that has been high to date. The Company has charged off only two small loans
totaling $16,000. There have been no restructured loans or other real estate
owned or foreclosed properties. At September 30, 2001, the Company had no loans
on nonaccrual status and one commercial loan, having a current principal balance
of $265,500, or .4% of total loans and .2% percent of total assets, which is
past-due over 90 days as to principal but is fully secured and in the process of
collection and therefore still on accrual status. The Company expects full
recovery on this loan. There were no other loans which were performing but as to
which information known to us caused management to have serious doubts as to the
ability of the borrower to comply with the current loan repayment terms. In
determining the adequacy of the allowance, the value and adequacy of the
collateral is considered as well as the growth and composition of the portfolio
and the loss experience of other banks in our peer group. Consideration is given
to the results of examinations and evaluations of the overall portfolio by
senior management, external auditors, and regulatory examiners.
While the methodology we use for establishing the allowance for loan
losses is reevaluated on a regular basis, the Company's current policy is to
maintain the allowance at approximately 1.15% to 1.20% of total loans. The
Company continues to experience excellent loan growth, despite national and
regional economic trends affecting larger institutions.. While, the local
economy has shown signs of a cut back in certain sectors, the Company has not
lent on speculative real estate development but rather owner-occupied
development financing. Pending the development of a negative trend with respect
to past due loans or charge off trends the Company continues to maintain a
reserve it believes is adequate but not excessive.
As reflected in Table 4 below, the allowance is allocated among the
various categories of loans in rough proportion to the level of loans
outstanding in such categories. Management considers the allowance to be
adequate for the periods presented.
16
TABLE 4
The following table shows the allocation of the allowance for loan
losses at the dates indicated. The allocation of portions of the allowance to
specific categories of loans is not intended to be indicative of future losses,
and does not restrict the use of the allowance to absorb losses in any category
of loans. See Note 4 to the unaudited consolidated financial statements included
in this report for additional information regarding the allowance for loan
losses and nonperforming assets.
September 30, 2001 December 31, 2000 September 30, 2000
------------------------ ------------------------ -------------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
In In In
($ in thousands) Amount Category Amount Category Amount Category
------------------------ ------------------------ -------------------------
Commercial $ 295 35% $ 255 43% $ 250 45%
Commercial real estate 447 52% 250 42% 200 39%
Residential mortgage loans 43 5% 50 8% 61 8%
Home equity loans 9 1% - 1% - 1%
Consumer loans 57 7% 45 6% 35 7%
Overdrafts - 0% - 0% - 0%
------------------------ ------------------------ -------------------------
End Of Period $ 851 100% $ 600 100% $ 546 100%
======================== ======================== =========================
TABLE 5
Table 5 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at September 30, 2001. Maturities are
based on the earlier of contractual maturity or repricing date.
($ in thousands) September 30, 2001
-------------------------------------------------------------
After One
Year
One Year or Through After
Less Five Years Five Years Total
---------------- ------------- ----------- -------------
Commercial $ 21,859 $ 2,207 $ -0- $ 24,066
Government guaranteed loans 261 1,019 75 1,355
Commercial real estate 26,013 12,039 90 38,142
Real estate mortgage 2,462 1,631 -0- 4,093
Home equity loans 1,152 -0- -0- 1,152
Consumer 3,183 1,552 8 4,743
---------------- ------------- ----------- -------------
Total loans $ 54,930 $ 18,448 $ 173 $ 73,551
================ ============= =========== =============
Fixed Rate $ 13,227 $ 8,277 $ 83 $ 21,587
Variable Rate 41,703 10,171 90 51,964
---------------- ------------- ----------- -------------
Total loans $ 54,930 $ 18,448 $ 173 $ 73,551
================ ============= =========== =============
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At September 30,
2001, total loans were $73.6 million, a 47% increase from the $50.0 million of
loans at December 31, 2000 and a 63% increase from $45.2 million of loans at
September 30, 2000. In general, loans are internally generated with the
exception of a small percentage of participation loans purchased from other
local community banks. Lending activity is confined to our market of Northern
Virginia. The Company does not engage in highly leveraged transactions or
foreign lending activities nor does the Company generally make large unsecured
loans.
17
Loans in the commercial category, as well as commercial real estate
mortgages, consist primarily of short-term (five year or less final maturity)
and/or floating rate commercial loans made to small to medium-sized companies.
We do not have any agricultural loans in the portfolio. There are no substantial
loan concentrations to any one industry or to any one borrower, or group of
related borrowers.
Consumer loans consist primarily of secured installment credits to
individuals, residential construction loans secured by a first deed of trust,
home equity loans, or home improvement loans. The consumer portfolio has
consistently approximated 7% of the loan portfolio. See Note 4 to the unaudited
consolidated financial statements included in this report for additional
information regarding the loan portfolio.
INVESTMENT SECURITIES
The carrying value (fair value) of the Company's securities portfolio
increased $6.4 million to $26.4 million at September 30, 2001 from $20.0 million
at December 31, 2000. The Company currently, and for all periods shown,
classifies its entire securities portfolio as Available-for-Sale. Increases in
the portfolio have occurred whenever deposit growth has outpaced loan demand and
the forecast for loan growth is such that the investment of excess liquidity in
investment securities (as opposed to short-term investments such as federal
funds) is warranted. In general, our investment philosophy is to acquire high
quality government agency securities or high-grade corporate bonds, with a
maturity of five to six years or less in the case of fixed rate securities. In
the case of mortgage-backed securities, the policy is to invest only in those
securities whose average expected life is projected to be approximately five to
six years or less. Mortgage-backed securities with a maturity of ten years or
more are generally adjustable rate securities. To the extent possible the
Company attempts to "ladder" the maturities of such securities.
TABLE 6
The following table provides information regarding the composition of
our investment portfolio at the dates indicated.
At September 30, 2001 At September 30, 2000
----------------------------------------------------------
($ in thousands) Percent of Percent of
Balance Total Balance Total
-------------- ------------- ------------ -------------
INVESTMENTS AVAILABLE-FOR-SALE
(AT ESTIMATED MARKET VALUE):
U.S. Government Agency
Obligations $ 5,238 19.8% $ 11,432 59.8%
Mortgage-backed securities 9,069 34.4 4,304 22.5
Corporate debt securities 11,714 44.4 3,031 15.9
-------------- ------------- ------------ -------------
$ 26,021 98.6 $ 18,767 98.2
Other investments 373 1.4 345 1.8
-------------- ------------- ------------ -------------
Total $ 26,394 100.0% $ 19,112 100.0%
============== ============= ============ =============
At September 30, 2001, the market value of the portfolio had
appreciated by $.5 million, or 2.1%, to reflect the increase in the fair market
value of the available for sale securities over the amortized cost of such
securities.
TABLE 7
The following table provides information regarding the maturity
composition of our investment portfolio, at book value, at September 30, 2001.
18
MATURITY OF SECURITIES
Years to Maturity
-----------------------------------------------------------------------------------------------------------
Within Over 1 Year Over 5 Years Over
(in thousands) 1 Year through 5 Years through 10 Years 10 Years Total
---------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------------------------------------------
Investments Available-For-Sale:
U. S. Agency $ - - $ 2,105 6.51% $ 3,001 5.76% $ - - $ 5,106 6.07%
Mortgage-backed securities - - 3,628 6.86% - - 3,261 6.45% 6,889 6.67%
Adjustable Rate Mortgage-backed
securities - - - - - - 1,992 6.07% 1,992 6.07%
Corporate bonds 499 6.99% 4,430 6.30% 3,803 6.42% 2,753 7.35% 11,485 6.62%
Other securities 374 6.29% 374 6.29%
----------- ----------- ------------ ---------- -----------
Total Debt Securities
Available-for-Sale $ 499 6.99% $ 10,163 6.55% $ 6,804 6.13% $ 8,380 6.65% $ 25,846 6.48%
=========== =========== ============ ========== ===========
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset and liability management are to provide
for the safety of depositor and investor funds, assure adequate liquidity, and
maintain an appropriate balance between interest sensitive earning assets and
interest-bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers who may be depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs.
We define liquidity for these purposes as the ability to raise cash
quickly at a reasonable cost without principal loss. The primary liquidity
measurement we utilize is called the Basic Surplus, which captures the adequacy
of our access to reliable sources of cash relative to the stability of our
funding mix of deposits. Accordingly, we have established borrowing facilities
with other banks (Federal funds) and the Federal Home Loan Bank as sources of
liquidity in addition to the deposits.
The Basic Surplus approach enables us to adequately manage liquidity
from both tactical and contingency perspectives. At September 30, 2001, our
Basic Surplus ratios (net access to cash and secured borrowings) as a percentage
of total assets were approximately 16%, compared to the present internal minimum
guideline range of 10% to 12%.
Financial institutions utilize a number of methods to evaluate interest
rate risk. Methods range from the original static gap analysis (the difference
between interest sensitive assets and interest sensitive liabilities repricing
during the same period, measured at a specific point in time), to running
multiple simulations of potential interest rate scenarios, to rate shock
analysis, to highly complicated duration analysis.
One tool that we utilize in managing our interest rate risk is the
matched funding matrix analysis or a modified version of the traditional GAP
analysis. The matrix arrays repricing opportunities along a time line for both
assets and liabilities. The longest term, most fixed rate sources are presented
in the upper left hand corner while the shorter term, most variable rate items,
are at the lower left. Similarly, uses of funds, assets, are arranged across the
top moving from left to right.
The body of the matrix is derived by allocating the longest fixed rate
funding sources to the longest fixed rate assets and shorter term variable
sources to shorter term variable uses. The result is a graphical depiction of
the time periods over which we expect to experience exposure to rising or
falling rates. Since the scales of the liability and assets sides are identical,
all numbers in the matrix would fall within the diagonal lines if we were
perfectly matched across all repricing time frames. Numbers outside the diagonal
lines represent two general types of mismatches: liability sensitive in time
frames when numbers are to the left of the diagonal line and asset sensitive
when numbers are to the right of the diagonal line.
At September 30, 2001, the Company is asset sensitive in the short term
and then becomes slightly liability sensitive. This is primarily caused by the
assumptions used in allocating a repricing term to nonmaturity deposits--demand
deposits, savings accounts, and money market deposit accounts. While the
traditional gap analysis and the matched funding matrix show a general picture
of our potential sensitivity to changes in interest rates, it cannot quantify
the actual impact of
19
interest rate changes. The actual impact due to changes in interest rates is
difficult to quantify in that the administrative ability to change rates on
these products is influenced by competitive market conditions in changing rate
environments, prepayments of loans, customer demands, and many other factors.
Thus, the Company manages its exposure to possible changes in interest
rates by simulation modeling or "what if" scenarios to quantify the potential
financial implications of changes in interest rates. In practice, each quarter
approximately 14 different "what if" scenarios are evaluated which include the
following scenarios: Static Rates, Most Likely Rate Projection, Rising Rate
Environment, Declining Rate Environment, Ramp Up 100bp and 200bp over 12-months,
and Ramp Down 100bp and 200bp over 12-months scenarios. In addition, 8 rate
shock scenarios are modeled at 50 bp up and 50 bp down increments. At September
30, 2001, the following 12-month impact on net interest income is estimated to
range from a positive impact of 5.5% to a negative impact of 5.8% for the
multiple scenarios, which remains within internal policy guidelines. This
process is performed each quarter to ensure the Company is not materially at
risk to possible changes in interest rates.
The following are the projected potential percentage impact on the
Company's net interest income over the next 12 months for the most likely to
occur scenarios, but measured against a static interest rate environment as of
September 30, 2001. Clearly the Company is positioned to substantially improve
earnings if and when rates rise. With respect to further reductions in rates,
Most Likely scenario and the Ramp Down scenarios, the Company would experience
further negative implications on margins and earnings; however, the Company does
not believe that a 200 basis point decline is realistic given the already
extremely low interest rates. The Most Likely Scenario predicts that rates would
decline another 50 basis points before beginning to increase around the middle
of 2002. Thus management believes the exposure to further changes in interest
rates would not have a material negative effect on the results of operations.
Static rates -0-%
Most Likely rates -2.7%
Ramp Up 100bp-12 Mo. +2.0%
Ramp Up 200bp-12 Mo. +3.8%
Ramp Down 100 bp-12 Mo. -1.9%
Ramp Down 200bp-12 Mo. -6.1%
Rising rate scenario +5.3%
Declining rate scenario -5.0%
NONINTEREST INCOME AND EXPENSE
Noninterest income consists primarily of services charges on deposit
accounts and fees and other charges for banking services. Noninterest expense
consists primarily of salary and benefit costs and occupancy and equipment
expense.
The following table shows the detail of noninterest income for the
three and nine-month periods ended September 30, 2001 and 2000.
TABLE 8
Three-Months Ended Sept. 30, Nine-Months Ended Sept. 30,
---------------------------------- ----------------------------------
($ in thousands) 2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
Service charges on deposit accounts $ 77 $ 49 $ 179 $ 145
Cash management fees 29 13 81 27
Other fee income 23 15 61 32
Gain on sale of securities 47 2 51 2
---------------- --------------- ---------------- ---------------
Other Noninterest Income $ 176 $ 79 $ 372 $ 206
================ =============== ================ ===============
The increase in noninterest income for the three and nine-months ended
September 30, 2001 as compared to the same periods in 2000, is the result of the
continued growth of the Company and the expansion of products resulting in fee
income, such as the increase in cash management fee income and service charges
on deposit accounts. These increases are primarily due to the progressively
increasing growth in the number and balances of deposit accounts. In addition,
for the first nine-months of 2001, the Company averaged between $20 to $25
million in off-balance sheet customer sweep accounts for which a fee is earned.
20
TABLE 9
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
Three-Months Ended Sept. 30, Nine-Months Ended Sept. 30,
---------------------------------- ----------------------------------
($ in thousands) 2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
Salaries and benefits $ 388 $ 285 $ 1,074 $ 875
Occupancy cost, net 97 66 267 197
Equipment expense 49 38 132 116
Professional fees 40 20 132 60
Data processing costs 67 61 194 159
Postage and supplies 16 14 67 43
Advertising and public relations 23 11 59 37
Courier amd express services 18 14 51 38
State franchise tax 26 22 74 58
Other 43 47 128 122
---------------- --------------- ---------------- ---------------
Other Noninterest Expense $ 767 $ 578 $ 2,178 $ 1,705
================ =============== ================ ===============
Noninterest expense increased $473,000 or 28% from $1.7 million to $2.2
million for the first nine-months of 2001, as compared to the same period in
2000. The increase in salary and benefit expense of $199,000 is primarily the
result of staff merit increases for 2001 and the additional staff for the second
branch opened in April 2001. In addition, two officers have been added in the
lending area due to the volume of business.
Occupancy cost increased $70,000 for the first nine-months of 2001
compared with a year earlier due to annualized rent increases, the additional
branch in Leesburg, and the Company added an additional 1,700 square feet at the
Main Office to accommodate the staff additions and for future growth. Equipment
costs increased a modest $16,000 for the same comparative periods due to
additional equipment required and software enhancements. Professional fees
increased $72,000 for the comparative years for several reasons. One the Company
began paying director fees in 2001. Second, regulatory assessments have
increased as a direct result of the growth in size of the company. With respect
to the increases in data processing, postage and supplies, and courier and
express services, the increases are due to the increase in the volume of
accounts and business transactions processed in 2001 versus 2000. The increase
in the state franchise tax is due to the increased capital of the Bank and the
downstream of $1 million in additional capital in the fourth quarter of 2000.
The franchise tax is based on approximately 1% of capital with some adjustments.
.
TABLE 10
The following table indicates the amount of certificates of deposit of
less than $100,000 and $100,000 or more, and their remaining maturities.
Remaining Maturity
3 Months 4 to 6 7 to 12 over 12
(Dollars in thousands) or Less Months Months Months Total
----------- ----------- ------------ ---------- ------------
Certificates of deposit less than $ 2,797 $ 3,266 $ 6,073 $ 2,430 $ 14,566
$100,000
Certificates of deposit of $100,000
or more 2,991 4,204 5,939 948 14,082
----------- ----------- ------------ ---------- ------------
$ 5,788 $ 7,470 $ 12,012 $ 3,378 $ 28,648
=========== =========== ============ ========== ============
CAPITAL MANAGEMENT
The Company has reported a steady improvement in earnings since the
Bank opened on June 8, 1998. Positive earnings were reported in the ninth month
of operations and culminated with $125,000 of earnings in 1999 and $810,000 of
earnings for 2000. Earnings for the first nine-months of 2001 were $803,000 on a
fully taxable basis for the entire year 2001, bringing the Company's retained
earnings to a positive $1.03 million. One of the Company's initial strategies
was to restore the initial lost capital from the initial organization costs of
$254,000 and the accumulated earnings loss of $452,000 for 1998.
21
This has been accomplished. The capital management today is to continue to look
at sources of capital and the timing of the availability of additional capital
that will be necessary to support the future growth of the organization.
Capital Requirement. A comparison of Bancorp's and its wholly-owned subsidiary
bank (James Monroe Bank) regulatory capital at September 30, 2001, compared to
minimum regulatory capital guidelines is shown in the table that follows.
TABLE 11
Minimum Minimum To Be
Actual Guidelines "Well Capitalized"
----------------- ------------------ -----------------------
Total Risk-Based Capital
Company 12.9% 8.0% N/A
Bank 10.7% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 13.9% 4.0% N/A
Bank 11.6% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 11.2% 3.0% N/A
Bank 8.4% 3.0% 3.0%
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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 Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
3(a) Articles of Incorporation of James Monroe Bancorp, as amended
(1)
3(b) Bylaws of James Monroe Bancorp, (1)
10(a) Employment contract between James Monroe Bancorp and John R.
Maxwell (1)
10(b) James Monroe Bancorp 1998 Management Incentive Stock Option
Plan (1)
10(c) Monroe Bancorp 1999 Director's Stock Option Plan (1)
10(d) Employment contract between James Monroe Bancorp and Richard
I. Linhart (2)
11 Statement re: Computation of Per Share Earnings
Please refer to Note 2 to the financial statements included in
this report.
-----------------------
(1) Incorporated by reference to the exhibit of the same number in the
Company's registration statement on Form SB-2 no. 333-38098.
(2) Incorporated by reference to the exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2000.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2001.
23
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.
Date: November 2, 2001 BY: /s/ John R. Maxwell
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John R. Maxwell, President &
Chief Executive Officer
Date: November 2, 2001 BY: /s/ Richard I. Linhart
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Richard I. Linhart, Executive Vice
President & Chief Operating and
Financial Officer
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