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 March 31, 2002
--------------
[ ] 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 March 31, 2002.
Common stock, $1 par value--964,167 shares outstanding
1
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item. 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002,
December 31, 2001, March 31, 2001 3
Consolidated Income Statements for the three-months
ended March 31, 2002 and 2001 4
Consolidated Statements of Changes in Stockholders'
Equity for the three-months ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows for the three-months
ended March 31, 2002 and 2001 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
2
Item. 1. FINANCIAL STATEMENTS
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
MARCH 31, DECEMBER 31, MARCH 31,
2002 2001 2001
-------- -------- --------
ASSETS
Cash and due from banks $ 9,145 $ 5,982 $ 7,490
Interest-bearing deposits in banks 5,901 2,035 2,055
Federal funds sold 22,670 9,469 10,942
Securities available-for-sale at fair value 17,369 22,119 20,678
Loans, net of allowance for loan losses of $1,212 at March 31, 2002,
$1,030 at December 31, 2001, and $681 at March 31, 2001 96,586 85,109 58,125
Bank premises and equipment, net 1,244 1,007 695
Accrued interest receivable 609 631 566
Other assets 570 306 163
-------- -------- --------
$154,094 $126,658 $100,714
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 39,995 $ 35,034 $ 29,354
Interest-bearing deposits 96,467 79,225 59,653
-------- -------- --------
Total deposits 136,462 114,259 89,007
Trust preferred capital notes 5,000 -- --
Accrued interest payable and other liabilities 518 432 588
-------- -------- --------
Total liabilities 141,980 114,691 89,595
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 2,000,000 shares;
issued and outstanding 964,167 at March 31, 2002, 960,467 964 960 960
at December 31, 2001 and March 31, 2001
Capital surplus 9,555 9,522 9,522
Retained earnings 1,555 1,341 463
Accumulated other comprehensive income 40 144 174
-------- -------- --------
Total stockholders' equity 12,114 11,967 11,119
-------- -------- --------
$154,094 $126,658 $100,714
======== ======== ========
See notes to interim consolidated financial statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2002 2001
--------- ---------
INTEREST INCOME:
Loans, including fees $1,708 $1,286
Securities, taxable 291 353
Federal funds sold 33 105
Other interest income 2 --
------ ------
Total interest income 2,034 1,744
INTEREST EXPENSE:
Deposits 661 737
Long-term debt 5 --
------ ------
Total interest expense 666 737
------ ------
Net interest income 1,368 1,007
PROVISION FOR LOAN LOSSES 181 81
------ ------
Net interest income after provision for loan losses 1,187 926
NONINTEREST INCOME:
Service charges and fees 75 48
Other 54 41
Gain on sale of securities 16 --
------ ------
Total noninterest income 145 89
NONINTEREST EXPENSES:
Salaries and wages 437 289
Employee benefits 76 45
Occupancy expenses 125 76
Equipment expenses 58 37
Other operating expenses 310 211
------ ------
1,006 658
------ ------
Income before income taxes 326 357
PROVISION FOR INCOME TAXES 112 123
------ ------
Net income $ 214 $ 234
====== ======
EARNINGS PER SHARE-BASIC $ 0.22 $ 0.24
====== ======
EARNINGS PER SHARE-DILUTED $ 0.21 $ 0.24
====== ======
See notes to interim consolidated financial statements.
4
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2002 and 2001
($ in thousands)
(Unaudited)
ACCUMULATED
OTHER
COMPRE- COMPRE- TOTAL
COMMON CAPITAL RETAINED HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME INCOME EQUITY
------- ------- -------- ----------- ------- ------------
BALANCE, JANUARY 1, 2001 $ 959 $ 9,506 $ 229 $ 39 $10,733
Comprehensive income:
Net income 234 $ 234 234
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $70 135 135 135
-----
Total comprehensive income $ 369
=====
Exercise of stock options 1 16 17
------- ------- ------- ------- -------
BALANCE, MARCH 31, 2001 $ 960 $ 9,522 $ 463 $ 174 $11,119
======= ======= ======= ======= =======
ACCUMULATED
OTHER
COMPRE- COMPRE- TOTAL
COMMON CAPITAL RETAINED HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME INCOME EQUITY
------- ------- -------- ----------- ------- ------------
BALANCE, JANUARY 1, 2002 $ 960 $ 9,522 $ 1,341 $ 144 $11,967
Comprehensive income:
Net income 214 $ 214 214
Net change in unrealized (loss)
on available for sale securities,
net of deferred taxes of $54 (104) (104) (104)
-----
Total comprehensive income $ 110
=====
Exercise of stock options 4 33 37
------- ------- ------- ------- -------
BALANCE, MARCH 31, 2002 $ 964 $ 9,555 $ 1,555 $ 40 $12,114
======= ======= ======= ======= =======
See notes to interim consolidated financial statements.
5
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 214 $ 234
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 52 34
Provision for loan losses 181 81
Realized gain on sale of securities (16) --
Decrease in accrued interest receivable 22 1
Amortization of bond premium 16 2
Accretion of bond discount (11) (10)
(Increase) in other assets (208) (46)
Increase in accrued interest and other liabilities 86 133
-------- --------
Net cash provided by operating activities $ 336 $ 429
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale $ (75) $ (4,596)
Proceeds from calls and maturities of securities available for sale 4,677 4,170
Purchases of premises and equipment (289) (37)
(Increase) in Federal funds sold and interest-bearing deposits (17,067) (1,054)
Net (increase) in loans (11,659) (8,766)
-------- --------
Net cash (used in) investing activities $(24,413) $(10,283)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts $ 9,745 $ 9,404
Net increase in time deposits 12,458 1,561
Proceeds from issuance of trust preferred capital notes 5,000 --
Proceeds from issuance of common stock 37 17
-------- --------
Net cash provided by financing activities $ 27,240 $ 10,982
-------- --------
Increase in cash and due from banks $ 3,163 $ 1,128
CASH AND DUE FROM BANKS
Beginning 5,982 6,362
-------- --------
Ending $ 9,145 $ 7,490
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
Interest paid on deposits $ 744 $ 747
======== ========
Income taxes paid $ 48 $ 67
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain(loss) on securities available for sale $ (158) $ 204
======== ========
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 March 31, 2002, the Company operated the main office in Arlington,
Virginia, and branches in Annandale, Leesburg, and 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-month period ended March 31, 2002, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002, 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, 2001.
NOTE 2--
Earnings Per Share. The following table discloses the calculation of basic and
diluted earnings per share for the three months ended March 31, 2002 and 2001.
THREE-MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
---------- ----------
Net Income $ 214 $ 234
Weighted average shares outsanding--basic 961,741 958,994
Common share equivalents for stock options 48,503 32,517
---------- ----------
Weighted average shares outsanding--diluted 1,010,244 991,511
========== ==========
Earnings per share-basic $ 0.22 $ 0.24
========== ==========
Earnings per share-diluted $ 0.21 $ 0.24
========== ==========
7
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 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 March 31, 2002,
December 31, 2001, and March 31, 2001, are summarized in the tables that follow.
The Company classifies all securities as available-for-sale.
March 31, 2002
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and federal agency $ 3,501 $ 51 $ -- $ 3,552
Mortgage-backed securities 7,170 115 (6) 7,279
Corporate notes 6,130 49 (150) 6,029
Other securities 509 -- -- 509
-------- -------- -------- --------
$ 17,310 $ 215 $ (156) $ 17,369
======== ======== ======== ========
December 31, 2001
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and federal agency $ 3,501 $ 94 $ (2) $ 3,593
Mortgage-backed securities 8,008 144 (2) 8,150
Corporate notes 9,958 128 (144) 9,942
Other securities 434 -- -- 434
-------- -------- -------- --------
$ 21,901 $ 366 $ (148) $ 22,119
======== ======== ======== ========
March 31, 2001
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and federal agency $ 8,155 $ 62 $ -- $ 8,217
Mortgage-backed securities 6,589 123 (5) 6,707
Corporate notes 5,301 97 (14) 5,384
Other securities 370 -- -- 370
-------- -------- -------- --------
$ 20,415 $ 282 $ (19) $ 20,678
======== ======== ======== ========
8
NOTE 4--
Loans. Major classifications of loans at March 31, 2002, December 31, 2001, and
March 31, 2001 are summarized in the following table.
March 31, December 31, March 31,
($ in thousands) 2002 2001 2001
-------- -------- --------
Commercial construction $ 8,169 $ 6,545 $ 5,253
Commercial loans 24,850 23,478 18,357
Real estate-Commercial 51,967 44,192 25,658
Real estate-1-4 family residential 3,143 3,363 4,188
Home equity loans 1,531 1,554 887
Consumer loans 7,948 6,888 4,416
Overdrafts 190 119 47
-------- -------- --------
97,798 86,139 58,806
Less allowance for loan losses (1,212) (1,030) (681)
-------- -------- --------
Net Loans $ 96,586 $ 85,109 $ 58,125
======== ======== ========
Changes in the allowance for loan losses are summarized as follows:
($ in thousands) First Quarter Year Ended First Quarter
2002 2001 2001
-------- -------- --------
Beginning balance $ 1,030 $ 600 $ 600
Provision for loan losses 181 450 81
Loan charge-offs:
Commercial -- (5) --
Consumer -- (15) --
-------- -------- --------
Total charge-offs -- (20) --
-------- -------- --------
Loan recoveries 1 -- --
-------- -------- --------
Net (charge-offs)/recoveries 1 (20) --
-------- -------- --------
Ending Balance $ 1,212 $ 1,030 $ 681
======== ======== ========
The following table presents the amounts of nonperforming assets at the dates
indicated.
March 31, December 31, March 31,
($ in thousands) 2002 2001 2001
-------- -------- --------
Nonaccrual loans $ 255 $ 39 $ 10
Loans past-due 90-days or more -- -- --
Restructured loans -- -- --
Other real estate owned -- -- --
-------- -------- --------
Total nonperforming assets $ 255 $ 39 $ 10
======== ======== ========
9
NOTE 5--
Trust Preferred Capital Securities. On March 25, 2002, James Monroe Statutory
Trust I, a subsidiary of the Company, was formed for the purpose of issuing
redeemable trust preferred securities and purchasing the Company's junior
subordinated debentures, which are its sole assets. The Company owns all of the
Trust's outstanding common securities. On March 26, 2002, $5 million of the
trust preferred securities were issued in a pooled underwriting totaling
approximately $500 million. The securities have a LIBOR-indexed floating rate of
interest which is set and payable on a quarterly basis. The interest rate for
the initial quarterly term was 5.59%. The securities have a maturity date of
March 25, 2032, and are subject to varying call provisions beginning March 26,
2007.
The Securities may be included in Tier 1 capital for regulatory capital adequacy
determination purposes up to 25% of Tier 1 capital. The portion of the
Securities not considered as Tier 1 capital will be included in Tier 2 capital.
The Company and the Trust believe that, taken together, the Company's
obligations under the junior subordinated debentures, the Indenture, the Trust
declaration and the Guarantee entered into in connection with the issuance of
the trust preferred securities constitute a full and unconditional guarantee by
the Company of the Trust's obligations with respect to the trust preferred
securities.
Subject to certain exceptions and limitations, the Company may elect from time
to time to defer interest payments on the junior subordinated debt securities,
which would result in a deferral of distribution payments on the related trust
preferred securities.
10
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-months ended March 31, 2002 and 2001. 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, 2001.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those applications of accounting principles or
practices that require considerable judgment, estimation, or sensitivity
analysis by management. In the financial service industry, examples, albeit not
an all inclusive list, of disclosures that may fall within this definition are
the determination of the adequacy of the allowance for loan losses, valuation of
mortgage servicing rights, valuation of derivatives or securities without a
readily determinable market value, and the valuation of the fair value of
intangibles and goodwill. Except for the determination of the adequacy of the
allowance for loan losses, the Company does not believe there are other
practices or policies that requires significant sensitivity analysis, judgments,
or estimations.
Allowance for Loan Losses. The Company maintains an allowance to absorb probable
loan losses inherent in the portfolio based on evaluations of the collectibility
of loans and historical loss experience. In addition, other factors considered
are delinquency trends, general economic conditions in the markets where loans
are made, loan mix and loan concentrations. Larger commercial loans that exhibit
probable or observed credit weaknesses are subject to individual review. If
necessary, reserves would be allocated to individual loans based on management's
estimate of the borrower's ability to repay the loan given the availability of
collateral and other sources of cash flow. Any reserves for impaired loans are
measured based on the present rate or fair value of the underlying collateral.
The Company evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual. Historical loss rates would be applied to
other commercial loans not subject to specific reserve allocations. Since the
inception of the Company in June 1998, the Company has experienced one small
loss in the commercial loan portfolio of approximately $5,000. The Company has
not experienced material delinquencies or any other event indicating a trend in
the deterioration of the asset quality of the portfolio.
Homogenous loans, such as consumer installment, residential mortgage loans, home
equity loans, and smaller consumer loans are not individually risk graded.
Reserves would be established for each homogenous pool of loans based on the
expected net charge-offs from a current trend in delinquencies, losses or
historical experience. The Company has charged-off three small consumer loans
sinceinception, each approximating $5,000. The Company has no material
delinquencies in these type of loans and has not, since inception, had a trend
or an indication of a trend that would guide the Company in expected losses in
these type of homogenous pools of loans.
As a result of a lack of charge off experience and as a lack of trends either
current or historical in delinquencies of loans, the Company has elected to
maintain a allowance as a percentage of loans in 2001 that was between 1.15% and
1.20%. In 2002, the Company has a goal of maintaining an allowance as a
percentage of total loans of between 1.20% and 1.25%. This ratio, given the lack
of loss experience and the lack of material loan delinquency experience, is
considered reasonable. The Company has evaluated the ratio maintained by peer
banks, the views of its regulators, the current evaluation of the quality of the
portfolio, and general economic conditions in the surrounding market, and, has
determined that this level of allowance is prudent and adequate.
11
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 continued its pattern of managing both growth and profitability.
Since December 31, 2001:
o Assets grew $27.4 million (22%).
o Loans grew $11.5 million (13%).
o Deposits grew $22.2 million (19%).
o After interest rates dropped 4.75% in 2001, our net interest margin
decreased to 4.50% in the third and fourth quarter of 2001 and rose to
4.58% in the first quarter of 2002.
o Although net income for the first quarter of 2002 was down $20 thousand
from the first quarter of 2001, the Company had $230 thousand of
operating expenses in the first quarter of 2002 that it did not incur
in the same period in 2001 relating to the Leesburg branch opened in
April 2001 and the Fairfax branch opened in February 2002.
o The Company raised $5 million of additional capital through the
issuance of trust preferred securities by a subsidiary. The trust
preferred securities reflect interests in 30-year junior subordinated
debentures of the Company, with interest floating on a quarterly basis
and a cap on the rate in the first five years of 11%. The initial
interest rate in the first quarter was 5.59%. Four million of the $5
million is currently eligible for Tier 1 capital.
o Asset quality remains strong with no charge offs in the first quarter
of 2002 and with two loans over 90-days past due.
o The Company has excellent liquidity and adequate capital to support
further growth.
BALANCE SHEET
Total assets increased to $154.1 million at March 31, 2002, an increase of $27.4
million from December 31, 2001, and an increase of $53.4 million from March 31,
2001. The increase in assets since December 31, 2001 resulted from the Company's
emphasis on deposit generation as much as loan generation. During the three-
months ended March 31, 2001, deposits increased $22.2 million over December 31,
2001, with noninterest-bearing deposits increasing $5.0 million, and
interest-bearing deposits increasing $17.2 million. With the growth in deposits,
the Company was able to fund $11.5 million net increase in loans. Securities
declined $4.8 million due to the call on a number of the callable securities
resulting in the liquidity position of the Company increasing by $20.2 million.
12
QUARTERLY RESULTS OF OPERATIONS
2002 2001
---------- ------------------------------------------------------
(in thousands except share data) FIRST FOURTH THIRD SECOND FIRST
---------- ---------- -------- --------- --------
RESULTS OF OPERATIONS:
Net interest income 1,368 1,317 1,222 1,084 1,007
Provision for loan and lease losses 181 183 109 77 81
Other income 145 182 176 107 89
Noninterest expense 1,006 855 767 753 658
Income before taxes 326 461 522 361 357
Net income 214 309 337 232 234
PER SHARE DATA:
Earnings per share, basic $ 0.22 $ 0.33 $ 0.35 $ 0.24 $ 0.24
Earnings per share, diluted $ 0.21 $ 0.31 $ 0.34 $ 0.23 $ 0.24
Weighted average shares
outstanding-basic 961,741 960,467 960,467 960,467 958,994
-diluted 1,010,244 1,005,002 993,467 994,555 991,511
AT PERIOD END
Loans $ 97,798 $86,139 $ 73,551 $ 63,471 $ 58,806
Earning assets 143,738 119,762 118,617 106,490 92,481
Total assets 154,094 126,658 126,895 118,104 100,714
Deposits 136,462 114,259 114,487 106,461 89,007
Shareholders' equity 12,114 11,967 11,878 11,238 11,119
Book value $ 12.56 $ 12.46 $ 12.37 $ 11.70 $ 11.58
Shares outstanding 964,167 960,467 960,467 960,467 960,467
PERFORMANCE RATIOS:
Return on average assets 0.67% 0.99% 1.16% 0.90% 1.04%
Return on average equity 7.13% 10.08% 11.51% 8.21% 8.65%
Net interest margin 4.58% 4.50% 4.50% 4.54% 4.76%
Efficiency ratio 66.49% 57.04% 54.86% 63.22% 60.04%
OTHER RATIOS:
Allowance for loan losses to total
loans 1.24% 1.20% 1.16% 1.18% 1.16%
Equity to assets 7.86% 9.45% 9.36% 9.52% 11.04%
Nonperforming assets to total
assets 0.17% 0.21% 0.21% 0.23% 0.01%
Net charge-offs to total loans 0.00% 0.01% 0.01% 0.02% 0.00%
Risk-Adjusted Capital Ratios:
Tier 1 14.6% 11.9% 12.9% 14.0% 15.8%
Total 16.6% 13.0% 13.9% 14.9% 16.8%
Leverage Ratio 12.4% 9.5% 11.2% 10.8% 12.0%
Note: The Company has been fully taxable since the fourth quarter of 2000.
For the quarter ended March 31, 2002, the Company had net income of
$214 thousand, or $.21 per share on a fully diluted basis, compared with
$234,000, or $.24 per share, for the comparable quarter of 2001. Annualized
return on average assets was .67% for the three-months ended March 31, 2002,
compared with 1.04% for the same quarter in 2001, and the return on average
equity was 7.13% for the quarter ended March 31, 2001, compared with 8.65% for
the first quarter of 2001.
13
The Company's per share earnings and the returns on assets and equity
for the for the three months ended March 31, 2002 are negatively impacted by the
fact that the Company had two more branches in the first quarter of 2002
compared with the first quarter of 2001. These two branches had operating
expenses of $230 thousand which accounts for two-thirds of the $348 higher
operating expenses in 2002 compared with 2001. Both of these new branches have
grown extremely well and are expected to become positive contributors to
earnings in 2002.
The Company continues to focus on managing its net interest margin,
especially during periods of changing interest rates. During 2001, the Federal
Reserve reduced interest rates an unprecedented eleven times for an aggregate
475 basis point reduction in rates thru December 31, 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 4.77% for the fourth
quarter of 2000 to 4.50% for the third and fourth quarter of 2001. The Company
believes this modest reduction of 27 basis points decline in the margin during a
period when market rates declined 475 basis points to be evidence of the
Company's practice of managing and minimizing its exposure to changes in
interest rates. For the first quarter of 2002, the Company's net interest margin
increased 8 basis points to 4.58% for the quarter. 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 three-month period ended March 31, 2002, net interest income
increased $361 thousand, or 36%, to $2.0 million from the $1.7 million for the
same period in 2001, primarily as a result of increases in the volume of earning
assets, and the reduction in interest expense of $71 thousand due to the lower
interest rate environment. Total average earning assets increased by $35.3
million, or 41%, from the three-months ended March 31, 2001 to the same period
of 2002. The average yield on earning assets decreased by 143 basis points
reflecting the dramatic reduction in interest rates during 2001. However, the
average rate paid on interest-bearing liabilities declined 199 basis points
during this same period. Yields on federal funds and the securities portfolio
decreased by 387 and 127 basis points, respectively. Average loans outstanding
grew by $37.0 million, or 67%, during the first three-months of 2002 compared to
the same period in 2001, but, at the same time, the yield on such loans
decreased by 192 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, the Company was able to reinvest the proceeds
of called securities into new securities at similar yields, which partially
mitigated the call of higher yielding securities.
14
TABLE 1
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $ 33,217 $ 524 6.40% $ 23,131 $ 547 9.59%
Commercial real estate 46,764 941 8.16 23,120 535 9.38
Consumer 12,486 243 7.89 9,172 204 9.02
-------------------------------------- ------------------------------------
Total Loans 92,467 1,708 7.49 55,423 1,286 9.41
Taxable securities 19,065 291 6.19 20,648 329 6.46
Federal funds sold and cash equivalents 9,642 35 1.47 9,800 129 5.34
-------------------------------------- ------------------------------------
TOTAL EARNING ASSETS 121,174 2,034 6.81% 85,871 1,744 8.24%
Less allowance for loan losses (1,107) (631)
Cash and due from banks 7,223 4,687
Premises and equipment, net 1,155 687
Other assets 918 566
--------- ---------
TOTAL ASSETS $ 129,363 $ 91,180
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 5,241 $ 14 1.08% $ 4,646 $ 27 2.36%
Money market deposit accounts 46,362 305 2.67 24,668 267 4.39
Savings accounts 1,058 5 1.92 480 4 3.38
Time deposits 32,567 337 4.20 28,267 439 6.30
Trust preferred capital notes 333 5 6.01 -- -- --
-------------------------------------- ------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 85,561 666 3.16% 58,061 737 5.15%
-------------------------------------- ------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 1,368 4.58% $ 1,007 4.76%
======================= =====================
Noninterest-bearing demand
deposits 31,032 21,630
Other liabilities 605 523
Stockholders' equity 12,165 10,966
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 129,363 $ 91,180
========= =========
Interest expense for the first three-months of 2002 was $666 thousand
compared with $737 thousand in interest expense for the first three-months of
2001. This decrease is predominately a result of the lower interest rate
environment which caused interest expense to be lower by $239 thousand offset by
an increase in interest expense of $168 thousand due to the higher volume of
interest-bearing liabilities most notably in MMDA accounts and Time Deposits.
The growth in MMDA accounts was a result of a promotional product at one of the
15
new branches which repriced to normal rates in late 2001 and the growth in Time
Deposits was a result of the promotional six-month CD offered to new customers
of the new Fairfax City branch which opened in February 2002. The Company
offered a special CD rate on 6-month certificates which was a successful
campaign to attract new customers to the branch. The special promotional rate
will reprice to the normal rate at the end of six months.
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 three-months ended March 31, 2002, as
compared to the three-months ended March 31, 2001, is entirely due to the growth
in the volume of earning assets and interest-bearing liabilities. Growth in the
volume of assets and liabilities resulted in $413 thousand higher net interest
income in the first quarter of 2002 compared with the first quarter of 2001
offset by modest negative $52 thousand due to lower interest rate environment in
2002 compared to 2001.
TABLE 2
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
March 31
2002 vs. 2001
-----------------------------
Due to Change
Increase in Average:
or ----------------
(Decrease) Volume Rate
-----------------------------
EARNING ASSETS:
Loans $ 422 $ 607 $(185)
Taxable securities (38) (25) (13)
Federal funds sold (94) (1) (93)
---------------------------
Total interest income 290 581 (291)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits (13) 4 (17)
Money market deposit
accounts 38 71 (33)
Savings deposits 1 2 (1)
Time deposits (102) 86 (188)
Borrowed funds 5 5 --
---------------------------
Total interest expense (71) 168 (239)
---------------------------
Net Interest Income $ 361 $ 413 $ (52)
===========================
First Quarter 2002 vs. 2001 Rate/Volume Analysis. For the first quarter
of 2002, net interest income was $1.4 million compared to $1.0 million for the
same quarter of 2001, which represents a $361 thousand increase or 36%. For
these comparable quarters, the yield on earning assets declined from 8.24% for
the first quarter of 2000 to 6.81% in the first quarter of 2002 reflecting the
significant decline in interest rates that occurred in 2001. The overall yield
on loans dropped 192 basis points, the securities portfolio declined 27 basis
points and the yield on Federal funds and cash equivalents declined 387 basis
points reflects the amount of decline in interest rates from first quarter last
year to first quarter this year.
16
Interest expense during these comparable quarters, first quarter 2002
versus first quarter 2001, decreased $71,000 or 10%, from $737 thousand in
interest expense in 2001 to $666 thousand in interest expense in 2002. The
overall cost of interest-bearing liabilities decreased 199 basis points from
5.15% in 2001 to 3.16% in 2001. The benefit of the decline in interest rates
exceeded the increase in interest expense resulting from $27.5 million more in
average interest-bearing liabilities.
The resulting effect of the changes in interest rates between the
quarters ended March 31, 2002 and 2001, and the changes in the volume and mix of
earning assets and interest-bearing liabilities resulted in a 4.58 % net
interest margin in 2002 versus a 4.76% net interest margin in 2001. Management
believes that a decline of only 18 basis points in the net interest margin when
the overall rate environment changed by nearly 375 basis points is indicative of
the Company's interest rate risk management process.
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.
17
TABLE 3
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
- -----------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $ 23,131 $ 547 9.59% $ 16,812 $ 361 8.64%
Commercial real estate 23,120 535 9.38 12,676 328 10.41
Consumer 9,172 204 9.02 3,239 68 8.44
------------------------------------- -----------------------------------
Total Loans 55,423 1,286 9.41 32,727 757 9.30
Taxable securities 20,648 329 6.46 13,829 224 6.51
Federal funds sold and cash equivalents 9,800 129 5.34 2,814 40 5.72
------------------------------------- -----------------------------------
TOTAL EARNING ASSETS 85,871 1,744 8.24% 49,370 1,021 8.32%
Less allowance for loan losses (631) (381)
Cash and due from banks 4,687 3,053
Premises and equipment, net 687 722
Other assets 566 524
-------- --------
TOTAL ASSETS $ 91,180 $ 53,288
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearning demand deposits $ 4,646 $ 27 2.36% $ 3,124 $ 16 2.06%
Money market deposit accounts 24,668 267 4.39 18,646 205 4.42
Savings accounts 480 4 3.38 308 2 2.61
Time deposits 28,267 439 6.30 10,799 141 5.25
Borrowed funds -- -- -- -- -- -
------------------------------------- -----------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 58,061 737 5.15% 32,877 364 4.45%
------------------------------------- -----------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 1,007 4.76% $ 657 5.35%
====================== =====================
Noninterest-bearing demand
deposits 21,630 13,541
Other liabilities 523 238
Stockholders' equity 10,966 6,632
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 91,180 $ 53,288
======== ========
You really have your heart set on showing the 2001 vs. 2000 stub comparison,
don't you? OK, but next time, lets show it all together in one table for all
periods.
18
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
MARCH 31
2001 VS. 2000
-------------------------------
DUE TO CHANGE
INCREASE IN AVERAGE:
OR -----------------
(DECREASE) VOLUME RATE
-------------------------------
EARNING ASSETS:
Loans $529 $520 $ 9
Taxable securities 105 107 (2)
Federal funds sold 89 91 (2)
----------------------------
Total interest income 723 718 5
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits 11 9 2
Money market deposit
accounts 62 63 (1)
Savings deposits 2 1 1
Time deposits 298 265 33
Borrowed funds -- -- --
----------------------------
Total interest expense 373 338 35
----------------------------
Net Interest Income $350 $380 $(30)
============================
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 new bank with an asset quality
that has been very good to date. The Company has charged off only three small
loans totaling $20,000 since its opening. There have been no restructured loans
or other real estate owned or foreclosed properties. At March 31, 2002, the
Company had two loans on nonaccrual status having a current principal balance of
$255 thousand, or .26% of total loans and .17% percent of total assets. 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 1.20% to 1.25% of total loans. The
Company continues to experience excellent loan growth despite national and
regional economic trends affecting larger institutions. The local economy in
Northern Virginia continues to remain stronger than other sectors of the
country. The Company generally does not lend 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.
19
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.
March 31, 2002 December 31, 2001 March 31, 2001
---------------------- ---------------------- ----------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
In In In
($ in thousands) Amount Category Amount Category Amount Category
---------------------- ---------------------- ----------------------
Commercial construction $ 101 8% $ 78 8% $ 61 9%
Commercial 310 26% 281 27% 214 31%
Commercial real estate 645 53% 528 51% 297 44%
Real estate 1-4 family residential 39 3% 40 4% 48 7%
Home equity loans 19 2% 19 2% 10 2%
Consumer loans 98 8% 84 8% 51 7%
Overdrafts -- 0% -- 0% -- 0%
------------------- ------------------- -------------------
Total Loans $1,212 100% $1,030 100% $ 681 100%
=================== =================== ===================
TABLE 5
Table 5 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at March 31, 2002. Maturities are based
on the earlier of contractual maturity or repricing date.
($ in thousands) March 31, 2002
-----------------------------------------------------------
After One
Year
One Year or Through After Five
Less Five Years Years Total
----------- ---------- ---------- -----
Commercial construction $ 6,686 $ 200 $ 1,283 $ 8,169
Commercial loans 18,915 3,112 574 22,601
Government guaranteed loans 383 1,867 -0- 2,250
Commercial real estate 31,132 20,258 577 51,967
Real estate mortgage 1,120 2,023 -0- 3,143
Home equity loans 1,531 -0- -0- 1,531
Consumer 6,663 1,284 -0- 7,947
Overdrafts 190 -0- -0- 190
------- ------- ------- -------
Total loans $66,620 $28,744 $ 2,434 $97,798
======= ======= ======= =======
Fixed Rate $16,007 $12,315 $ 577 $28,899
Variable Rate 50,613 16,429 1,857 68,899
------- ------- ------- -------
Total loans $66,620 $28,744 $ 2,434 $97,798
======= ======= ======= =======
20
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At March 31, 2002,
total loans were $97.8 million, a 14% increase from the $86.1 million of loans
at December 31, 2001 and a 66% increase from $58.8 million of loans at March 31,
2001. 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.
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 consisting
of 1-4 family residential loans, home equity loans, and other consumer loans,
approximates 15% of the total loan portfolio. See Note 4 to the unaudited
consolidated financial statements included in this report for additional
information regarding the loan portfolio composition.
INVESTMENT SECURITIES
The carrying value (fair value) of the Company's securities portfolio
declined $4.7 million to $17.4 million at March 31, 2002 from $22.1 million at
December 31, 2001 due to several sales of securities and several callable
securities being called. Given the yields on securities in the first quarter,
the Company has not aggressively reinvested these funds or other liquid funds as
part of its overall interest rate risk strategies. The Company currently, and
for all periods shown, classifies its entire securities portfolio as
Available-for-Sale. Increases in the portfolio have occurred whenever deposit
growth has outpaced loan demand and the forecast for loan growth is such that
the investment of excess liquidity in investment securities (as opposed to
short-term investments such as federal funds) is warranted. In general, our
investment philosophy is to acquire high quality government agency securities or
high-grade corporate bonds, with a maturity of five to six years or less in the
case of fixed rate securities. In the case of mortgage-backed securities, the
policy is to invest only in those securities whose average expected life is
projected to be approximately five to six years or less. Mortgage-backed
securities with a maturity of ten years or more are generally adjustable rate
securities. To the extent possible the Company attempts to "ladder" the
maturities of such securities.
21
TABLE 6
The following table provides information regarding the composition of
our investment portfolio at the dates indicated.
At March 31, 2002 At March 31, 2001
--------------------------- ----------------------------
($ in thousands) Percent of Percent of
Balance Total Balance Total
------- ---------- ------- ----------
INVESTMENTS AVAILABLE-FOR-SALE
(AT ESTIMATED MARKET VALUE):
U.S. Government Agency
Obligations $ 3,552 20.5% $ 8,217 39.7%
Mortgage-backed securities 7,279 41.9 6,707 32.4
Corporate debt securities 6,029 34.7 5,384 26.1
------- ----- ------- -----
$16,860 97.1 $20,308 98.2
Other investments 509 2.9 370 1.8
------- ----- ------- -----
Total $17,369 100.0% $20,678 100.0%
======= ===== ======= =====
TABLE 7
The following table provides information regarding the maturity
composition of our investment portfolio, at book value, at March 31, 2002.
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 $ -- -- $ 3,501 6.07% $ -- $ -- $ -- -- $ 3,501 6.07%
Mortgage-backed securities -- -- 3,931 6.61% -- -- 1,732 6.00% 5,663 6.42%
Adjustable Rate
backed securities -- -- -- -- -- -- 1,507 5.57% 1,507 5.57%
Corporate bonds -- -- 2,907 6.13% 3,223 7.11% -- -- 6,130 6.65%
Other securities 509 5.77% 509 5.77%
------- -------- ------- ------- -------
Total Debt Securities
Available-for-Sale $ -- -- $ 10,339 6.29% $ 3,223 7.11% $ 3,748 5.80% $17,310 6.34%
======= ======== ======= ======= =======
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.
22
The Basic Surplus approach enables us to adequately manage liquidity
from both tactical and contingency perspectives. At March 31, 2002, our Basic
Surplus ratios (net access to cash and secured borrowings) as a percentage of
total assets were approximately 10%, compared to the present internal minimum
guideline range of 5-10%.
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 March 31, 2002, 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 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 March 31,
2002, the following 12-month impact on net interest income is estimated to range
from a positive impact of 2.7% to a negative impact of -3.0% 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
March 31, 2002. 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 will
remain at current levels until mid-year and then increase by approximately 150
basis points by year-end.
23
Thus management believes the exposure to further changes in interest
rates would not have a material negative effect on the results of operations.
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-month periods ended March 31, 2002 and 2001.
TABLE 8
Three-Months Ended March 31,
----------------------------
($ in thousands) 2002 2001
---------- -----------
Service charges on deposit accounts $ 75 $ 51
Cash management fees 32 25
Other fee income 22 13
Gain on sale of securities 16 --
---- ----
Other Noninterest Income $145 $ 89
==== ====
The increase in noninterest income for the three months ended March 31,
2002 as compared to the same period in 2001, 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 three-months of 2002, the Company averaged between $25 to $30
million in off-balance sheet customer sweep accounts for which a fee is earned.
TABLE 9
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
Three-Months Ended March 31,
----------------------------
($ in thousands) 2002 2001
---------- -----------
Salaries and benefits $ 513 $ 334
Occupancy cost, net 125 76
Equipment expense 58 37
Professional fees 22 23
Data processing costs 88 71
Postage and supplies 41 22
Advertising and public relations 38 17
Courier and express services 23 16
State franchise tax 38 24
Other 60 38
------ ------
Other Noninterest Expense $1,006 $ 658
====== ======
24
Noninterest expense increased $348 thousand or 53% from $658 thousand
to $1.0 million for the first quarter of 2002, as compared to the same period in
2001. Approximately two-thirds (66%) of the increase or $230,000 in operating
expenses incurred in the first quarter of 2002 are applicable to two branches
that were not in existence in the first quarter of 2001. The increase in salary
and benefit expense of $179,000 is primarily the result of staffing costs for
the Leesburg branch opened in April 2001 and the Fairfax branch opened in 2002
as well as merit increases for 2002 and several staff additions in the main
office necessary to support the continued growth of the Bank.
Occupancy cost increased $49 thousand for the first three-months of
2002 compared with a year earlier due to annualized rent increases, the
additional branch in Leesburg, and Fairfax, and an additional 1,700 square feet
at the Main Office to accommodate the staff additions and for future growth.
Equipment costs increased a modest $21 thousand for the same comparative periods
due to additional equipment required and software enhancements for the two
additional branches. With respect to the increases in data processing, postage
and supplies, and courier and express services, the increase are due to the
increase in the volume of accounts and business transactions processed in 2002
versus 2001. The increase in the state franchise tax is due to the increased
capital of the Bank from earnings retention. Other expenses are up $22 thousand
quarter to quarter primarily due to the growth of the Bank and increased volume
of banking activities.
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 as of
March 31, 2002.
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 $100,000 $ 3,536 $ 9,613 $ 4,167 $ 1,993 $ 19,309
Certificates of deposit of $100,000 or more 3,717 10,937 7,139 943 22,736
------- -------- -------- ------- --------
$ 7,253 $ 20,550 $ 11,306 $ 2,936 $ 42,045
======= ======== ======== ======= ========
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, and earnings of $1.1 million for 2001. Due to the growth
experienced by the Company, no cash dividends have been declared. This retention
of earnings is necessary to ensure capital adequacy to support not only the
current level of assets but the asset growth expected in the future. In this
respect, the Company was able to participate in a capital market pooled trust
preferred offering that closed on March 26, 2002. Five million of trust
preferred securities were issued by the Company's subsidiary trust. At March 31,
2002, approximately $4 million of the $5 million qualified at Tier 1 capital.
These funds are available to downstream to the capital of the Bank to support
the future growth of the Bank. 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.
As can be seen in the table that follows, both the Bank and the Company are well
capitalized and positioned to support further growth.
Capital Requirement. A comparison of the Company's and the Bank's regulatory
capital at March 31, 2002, compared to minimum regulatory capital guidelines is
shown in the table that follows.
25
TABLE 11
Minimum Minimum To Be
Actual Guidelines "Well Capitalized"
------ ---------- ------------------
Total Risk-Based Capital
Company 16.6% 8.0% N/A
Bank 11.2% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 14.6% 4.0% N/A
Bank 10.1% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 12.4% 3.0% N/A
Bank 8.6% 3.0% 3.0%
26
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 March 31, 2002.
27
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: May 3, 2002 BY: /s/John R. Maxwell
-------------------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: May 3, 2002 BY: /s/ Richard I. Linhart
-------------------------------------------------
Richard I. Linhart, Executive Vice
President & Chief Operating and Financial Officer
28