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, 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
of Incorporation or Organization) Identification No.)
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, 2002.
Common stock, $1 par value--1,839,564 shares outstanding
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002,
December 31, 2001, and September 30, 2001 3
Consolidated Income Statements for the three-months
and nine-months ended September 30, 2002 and 2001 4
Consolidated Statements of Changes in Stockholders'
Equity for the nine-months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine-months
ended September 30, 2002 and 2001 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Controls and Procedures 27
Part II Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
------------- ------------ -------------
ASSETS
Cash and due from banks $ 17,432 $ 5,982 $ 7,446
Interest-bearing deposits in banks 406 2,035 2,033
Federal funds sold 10,853 9,469 16,639
Securities available-for-sale at fair value 58,990 22,119 26,384
Loans, net of allowance for loan losses of $1,414
at September 30, 2002, $1,030 at December 31,
2001, and $851 at September 30, 2001 113,889 85,109 72,700
Bank premises and equipment, net 1,340 1,007 895
Accrued interest receivable 862 631 686
Other assets 316 306 102
-------- -------- --------
$204,088 $126,658 $126,895
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 56,543 $ 35,034 $ 39,865
Interest-bearing deposits 123,795 79,225 74,622
-------- -------- --------
Total deposits 180,338 114,259 114,487
Trust preferred capital notes 5,000 -- --
Accrued interest payable and other liabilities 621 432 530
-------- -------- --------
Total liabilities 185,959 114,691 115,017
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 5,000,000 shares;
issued and outstanding 1,839,564 at September 30, 1,840 960 960
2002, 960,467 at December 31, 2001, and 960,467 at
September 30, 2001
Capital surplus 13,342 9,522 9,522
Retained earnings 2,233 1,341 1,032
Accumulated other comprehensive income 714 144 364
-------- -------- --------
Total stockholders' equity 18,129 11,967 11,878
-------- -------- --------
$204,088 $126,658 $126,895
======== ======== ========
See notes to interim consolidated financial statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
INTEREST INCOME:
Loans, including fees $2,041 $1,441 $5,632 $4,079
Securities, taxable 628 421 1,347 1,078
Federal funds sold 71 99 187 327
Other interest income 1 14 11 55
------ ------ ------ ------
Total interest income 2,741 1,975 7,177 5,539
INTEREST EXPENSE:
Deposits 955 753 2,479 2,226
Borrowed funds 71 -- 148 --
------ ------ ------ ------
Total interest expense 1,026 753 2,627 2,226
------ ------ ------ ------
Net interest income 1,715 1,222 4,550 3,313
PROVISION FOR LOAN LOSSES 134 109 386 267
------ ------ ------ ------
Net interest income after provision
for loan losses 1,581 1,113 4,164 3,046
NONINTEREST INCOME:
Service charges and fees 66 77 200 179
Other 68 52 187 142
Gain on sale of securities -- 47 16 51
------ ------ ------ ------
Total noninterest income 134 176 403 372
NONINTEREST EXPENSES:
Salaries and wages 487 332 1,406 925
Employee benefits 78 56 235 149
Occupancy expenses 143 97 398 267
Equipment expenses 81 49 208 132
Other operating expenses 345 233 959 705
------ ------ ------ ------
1,134 767 3,206 2,178
------ ------ ------ ------
Income before income taxes 581 522 1,361 1,240
PROVISION FOR INCOME TAXES 199 185 469 437
------ ------ ------ ------
Net income $ 382 $ 337 $ 892 $ 803
====== ====== ====== ======
EARNINGS PER SHARE-BASIC $ 0.22 $ 0.23 $ 0.57 $ 0.56
====== ====== ====== ======
EARNINGS PER SHARE-DILUTED $ 0.21 $ 0.23 $ 0.54 $ 0.54
====== ====== ====== ======
See notes to interim consolidated financial statements.
4
<page>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 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 803 $ 803 803
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $167 325 325 325
--------
Total comprehensive income $ 1,128
========
Exercise of stock options 1 16 17
------- -------- ------- ------ --------
BALANCE, SEPTEMBER 30, 2001 $ 960 $ 9,522 $ 1,032 $ 364 $ 11,878
======= ======== ======= ====== ========
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 892 $ 892 892
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $294 570 570 570
--------
Total comprehensive income $ 1,462
========
Exercise of stock options 6 48 54
Proceeds from sale of common stock 261 4385 4,646
Effect of 3 for 2 stock split 613 (613) --
------- --------- ------- ------ --------
BALANCE, SEPTEMBER 30, 2002 $ 1,840 $ 13,342 $ 2,233 $ 714 $ 18,129
======= ========= ======= ====== ========
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,
-------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 892 $ 803
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 180 118
Provision for loan losses 386 267
Gain on sale of securities (16) (51)
(Increase) in accrued interest receivable (231) (119)
Amortization of bond premium 116 28
Accretion of bond discount (32) (36)
(Increase) in other assets (304) (82)
Increase in accrued interest and other liabilities 189 75
-------- --------
Net cash provided by operating activities 1,180 1,003
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (47,816) (21,599)
Proceeds from calls and maturities of securities available for sale 11,741 15,775
Purchases of premises and equipment (513) (321)
(Increase)/decrease in Federal funds sold and interest-bearing deposits 245 (6,729)
Net (increase) in loans (29,166) (23,511)
-------- --------
Net cash (used in) investing activities (65,509) (36,385)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts 56,338 34,330
Net increase in time deposits 9,741 2,115
Proceeds from issuance of common stock 4,700 17
Issuance of trust preferred capital notes 5,000 --
-------- --------
Net cash provided by financing activities 75,779 36,462
-------- --------
Increase in cash and due from banks 11,450 1,080
CASH AND DUE FROM BANKS
Beginning 5,982 6,362
-------- --------
Ending $ 17,432 $ 7,442
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
Interest paid $ 2,627 $ 2,244
======== ========
Income taxes paid $ 562 $ 436
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain on securities available for sale $ 864 $ 491
======== ========
See notes to interim consolidated financial statements.
6
<page>
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 operating subsidiary. James Monroe Bank commenced banking operations on
June 8, 1998. As of September 30, 2002 the Company operated the main office in
Arlington, Virginia, one branch in Annandale, Virginia, one branch and a
drive-up facility in Leesburg, Virginia, and one 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, 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 and nine-months ended September
30, 2002 and 2001 as restated to reflect 3 for 2 stock split as discussed in
Note 6.
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Income $ 382 $ 337 $ 892 $ 803
Weighted average shares outstanding--basic 1,839,564 1,440,701 1,578,274 1,439,964
Common share equivalents for stock options 85,108 51,216 80,638 50,375
---------- ---------- ---------- ----------
Weighted average shares outstanding--diluted 1,924,672 1,491,917 1,658,912 1,490,339
========== ========== ========== ==========
Earnings per share-basic $ 0.22 $ 0.23 $ 0.57 $ 0.56
========== ========== ========== ==========
Earnings per share-diluted $ 0.21 $ 0.23 $ 0.54 $ 0.54
========== ========== ========== ==========
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 September 30, 2002,
December 31, 2001, and September 30, 2001, are summarized in the tables that
follow. For all periods shown the Company classified all securities as
available-for-sale.
September 30, 2002
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and federal agency $ 24,073 $ 230 $ -- 24,303
Mortgage-backed securities 26,064 490 (18) 26,536
Corporate notes 7,142 393 (13) 7,522
Other securities 629 -- -- 629
-------- -------- -------- --------
$ 57,908 $ 1,113 $ (31) $ 58,990
======== ======== ======== ========
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
======== ======== ======== ========
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
======== ======== ======== ========
8
NOTE 4--
Loans. Major classifications of loans at September 30, 2002, December 31, 2001,
and September 30, 2001 are summarized in the following table.
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
------------- ------------ -------------
Commercial Construction $ 8,127 $ 6,545 $ 4,957
Commercial loans 25,702 23,478 20,251
Real estate-Commercial 67,972 44,192 38,154
Real estate-1-4 family residential 2,701 3,363 4,025
Home equity loans 2,879 1,554 1,152
Consumer loans 7,803 6,888 4,905
Overdrafts 119 119 107
--------- --------- ---------
115,303 86,139 73,551
Less allowance for loan losses (1,414) (1,030) (851)
--------- --------- ---------
Net Loans $ 113,889 $ 85,109 $ 72,700
========= ========= =========
Changes in the allowance for loan losses are summarized as follows:
Nine-Months For the Year Nine-Months
Ended Ended Ended
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
------------- ------------ -------------
Balance at beginning of year $ 1,030 $ 600 $ 600
Charge-offs:
Commercial 5 5
Consumer 5 15 11
Recoveries (3) -- --
--------- -------- --------
Net charge-offs 2 20 16
Provision for loan losses 386 450 267
--------- --------- --------
Balance at end of period $ 1,414 $ 1,030 $ 851
========= ========= ========
The following table presents the amounts of nonperforming assets at the dates
indicated.
September 30, December 31, September 30,
($ in thousands) 2002 2001 2001
------------- ------------ -------------
Nonaccrual loans $363 $ -- $ --
Loans past-due 90-days or more 34 266 266
Restructured loans -- -- --
Other real estate owned -- -- --
---- ---- ----
Total nonperforming assets $397 $266 $266
==== ==== ====
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% and the current rate is 3.39%. 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.
At September 30, 2002, all of the trust preferred securities qualified as Tier 1
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.
NOTE 6--
Common Stock Split. On July 25, 2002, the Company issued 613,195 additional
shares necessary to effect a 3 for 2 common stock split to shareholders of
record July 11, 2002. The earnings per common share for all periods prior to
July 2002, have been restated to reflect the stock split.
Private Placement Offering. At June 30, 2002 the Company, through a Private
Placement offering, raised $4.7 million in equity by the sale of 390 thousand
shares, as adjusted, of common stock at a price of $12.00 per share as, adjusted
for the 3 for 2 stock split. These shares have certain restrictions on their
sale for two years.
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 subsidiaries as of
and for the three and nine-months ended September 30, 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
There were no changes to the Company's critical accounting policies in the third
quarter of 2002. 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 practices or policies that require 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, loan credit grades, and loan concentrations. All commercial
and commercial real estate 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, based upon the greater of the Company's or peer
group experience, would be applied to other 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 and
three in the consumer portfolio totaling $20,000 for 2001 and one small net loss
of $2,000 in 2002. 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 and general economic conditions. The Company has no
material delinquencies in these types of loans, and has not, since inception,
had a trend or an indication of a trend that would guide the Company in expected
material losses in these types of homogenous pools of loans.
The Company's allowance for loan losses is determined based upon a methodology
developed by management as described above and is approved by the board of
directors each quarter.
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
11
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
COMPANY HIGHLIGHTS SINCE DECEMBER 31, 2001 ARE:
- -----------------------------------------------
o Assets grew $77.4 million (61%).
o Loans grew $29.2 million (34%).
o Deposits grew $66.1 million (58%).
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 declined to 3.99% for the first nine months of 2002 and to
3.75% for the three months ended September 30, 2002. The sustained
low interest rate environment coupled with the significant
liquidity generated by the Company in 2002 has caused compression
in the net interest margin.
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% and
was 5.39% for the quarterly interest period beginning September
26, 2002
o At the end of the second quarter, the Company completed a Private
Placement offering, raising $4.7 million in capital by the sale of
390 thousand shares of common stock at a price of $12.00 per
share, adjusted for the 3 for 2 stock split. These shares are
generally subject to certain restrictions on resale for two years.
This additional equity along with the $5 million in trust
preferred securities sold in the first quarter enhances a modest
capital base to support further growth.
o Asset quality remains strong with $2,217 of net charge offs in
2002.
o The Company has excellent liquidity and adequate capital to
support further growth.
BALANCE SHEET
Total assets increased to $204.1 million at September 30, 2002, an increase of
$77.4 million from December 31, 2001, and an increase of $77.2 million from
September 30, 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 nine- months ended September 30, 2002, deposits increased $66.1 million over
December 31, 2001, with noninterest-bearing deposits increasing $21.5 million,
and interest-bearing deposits increasing $44.6 million. With the growth in
deposits, the Company was able to fund $28.8 million net increase in loans, add
$36.9 million to the securities portfolio.
12
QUARTERLY RESULTS OF OPERATIONS
2002 2001
-------------------------------------- ------------------------
(IN THOUSANDS EXCEPT SHARE DATA) THIRD SECOND FIRST FOURTH THIRD
----- ------ ----- ------ -----
RESULTS OF OPERATIONS:
Net interest income $ 1,715 $ 1,467 $ 1,368 $ 1,317 $ 1,222
Provision for loan losses 134 70 181 183 109
Other income 134 123 145 182 176
Noninterest expense 1,134 1,066 1,006 855 767
Income before taxes 581 454 326 461 522
Net income 382 296 214 309 337
PER SHARE DATA:
Earnings per share, basic $ 0.22 $ 0.20 $ 0.15 $ 0.21 $ 0.23
Earnings per share, diluted 0.21 0.19 0.14 0.20 0.23
Weighted average shares
outstanding-basic 1,839,564 1,452,646 1,442,612 1,440,701 1,440,701
-diluted 1,924,672 1,536,698 1,515,366 1,507,503 1,490,201
AT PERIOD END
Loans $ 115,303 $ 105,370 $ 97,798 $ 86,139 $ 73,551
Earning assets 185,552 175,864 143,738 119,762 118,617
Total assets 204,088 189,835 154,094 126,658 126,895
Deposits 180,338 166,891 136,462 114,259 114,487
Stockholders' equity 18,129 17,466 12,114 11,967 11,878
Book value $ 9.86 $ 9.49 $ 8.38 $ 8.31 $ 8.24
Shares outstanding 1,839,564 1,839,564 1,446,251 1,440,701 1,440,701
PERFORMANCE RATIOS:
Return on average assets 0.79% 0.73% 0.67% 0.99% 1.16%
Return on average equity 8.49% 9.56% 7.13% 10.08% 11.51%
Net interest margin 3.75% 3.86% 4.58% 4.50% 4.50%
Efficiency ratio 61.33% 67.04% 66.49% 57.04% 54.86%
OTHER RATIOS:
Allowance for loan losses to total
loans 1.23% 1.22% 1.24% 1.20% 1.16%
Equity to assets 8.88% 9.20% 7.86% 9.45% 9.36%
Nonperforming assets to total
assets 0.20% 0.13% 0.17% 0.21% 0.21%
Net charge-offs to total loans 0.00% 0.00% 0.00% 0.01% 0.01%
Risk-Adjusted Capital Ratios:
Tier 1 16.8% 17.9% 14.6% 11.9% 12.9%
Total 17.9% 18.9% 16.6% 13.0% 13.9%
Leverage Ratio 11.7% 13.4% 12.4% 9.5% 11.2%
Note: Share and per share amounts have been adjusted to reflect the 3 for 2
stock split declared June 12, 2002 payable July 25, 2002.
For the quarter ended September 30, 2002, the Company had net income of
$382,000, or $.21 per share on a diluted basis, compared with $337,000, or $.23
per share, for the comparable quarter of 2001. Earnings per share for the
quarter ended September 30, 2001, have been adjusted to reflect the 3 for 2
stock split in June 2002. The quarter ended September 30,2002, was the first
period in which the 390 thousand shares (as adjusted for the 3 for 2 stock
split) issued in the private placement completed in the second quarter were
outstanding. Earnings per share reflect the 3 for 2 stock split in June 2002.
Annualized return on average assets was .79% for the three-months ended
September 30, 2002, compared with 1.16% for the same quarter in 2001, and the
return on average equity was 8.49% for the quarter ended September 30, 2002,
compared with 11.51% for the third quarter of 2001.
For the nine-month period ended September 30, 2002, the Company had net
income of $892,000, or $.54 per share, compared to $803,000, or $.54 per share,
for the comparable nine-month period of 2001, both on a diluted basis, and as
adjusted to reflect the 3 for 2 stock split. Annualized return on average
assets was .73% for the nine-months ended September 30, 2002, compared with
13
<page>
1.04% for the same period in 2001, and the return on average equity was 8.39%
for the nine-months ended September 30, 2002, compared with 8.31% for the same
period of 2001.
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 eleven
times for an aggregate 450 basis point reduction in rates through 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 5.23% during the first nine-months of 2000 to 4.59% for the
same period of 2001, and to 3.99% for the first nine-months of 2002. 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 $949,000 for the first
nine-months of 2002 compared with the first nine-months of 2001. 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, 2002, net interest income
increased $1.2 million, or 37%, to $4.6 million from the $3.3 million during the
same period in 2001, primarily as a result of increases in the volume of earning
assets, but partially offset by the effect of the sustained low interest rate
environment in 2002 compared with 2001. Total average earning assets increased
by $56 million, or 58%, from the nine-months ended September 30, 2001 to the
same period of 2002. The average yield on earning assets decreased by 138 basis
points reflecting the dramatic reduction in interest rates during 2001 compared
to 2002 where rates. Yields on federal funds and the securities portfolio
decreased by 257 and 110 basis points, respectively. Average loans outstanding
grew by $40 million, or 65%, during the first nine-months of 2002 compared to
the same period in 2001. The yield on the loan portfolio decreased 145 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 combination of call of some agency
securities where the proceeds were reinvested in similar securities but at lower
rates and the investment of excess liquidity into securities at current rates
has reduced the overall yield of the portfolio.
14
TABLE 1
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
----------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
ASSETS
Loans:
Commercial $ 30,750 $1,547 6.73% $ 24,605 $1,602 8.71%
Commercial real estate 57,598 3,369 7.82 27,373 1,859 9.08
Consumer 13,289 716 7.20 9,575 618 8.63
-------- ------ ----- -------- ------ -----
Total Loans 101,637 5,632 7.41 61,553 4,079 8.86
Taxable securities 34,223 1,347 5.26 22,667 1,078 6.36
Federal funds sold and interest-bearing
deposits 16,641 198 1.59 12,279 382 4.16
-------- ------ ----- -------- ------ -----
TOTAL EARNING ASSETS 152,501 7,177 6.29% 96,499 5,539 7.67%
Less allowance for loan losses (1,227) (708)
Cash and due from banks 8,744 5,941
Premises and equipment, net 1,275 852
Other assets 1,121 696
-------- --------
TOTAL ASSETS $162,414 $103,280
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 5,410 $ 43 1.06% $ 4,931 $ 65 1.76%
Money market deposit accounts 59,433 1,175 2.64 30,456 888 3.90
Savings accounts 1,219 17 1.86 602 12 2.67
Time deposits 42,548 1,244 3.91 28,450 1,261 5.93
Trust preferred capital notes 3,462 148 5.72 -- -- --
-------- ------ ----- -------- ------ -----
TOTAL INTEREST-BEARING
LIABILITIES 112,072 2,627 3.13% 64,439 2,226 4.62%
-------- ------ ----- -------- ------ -----
Net Interest Income and Net Yield on
Interest-Earning Assets $4,550 3.99% $3,313 4.59%
====== ==== ====== ====
Noninterest-bearing demand
deposits 35,520 27,017
Other liabilities 610 517
Stockholders' equity 14,212 11,307
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $162,414 $103,280
======== ========
Interest expense for the nine-months ended September 30, 2002 was $2.6
million compared with $2.2 million in interest expense for the comparable period
of 2001. This increase is predominately a result of the $47.6 million, or 74%
growth in the volume of interest-bearing liabilities, partially offset by the
149 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
15
<page>
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. In addition, market rates on deposit products have
not adjusted downward in the same proportion as the general level of interest
rates. These market forces prevent the Company from further lowering of deposit
rates resulting in a compression in the net interest margin.
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 September 30, 2002, as
compared to the nine-months ended September 30, 2001, is almost entirely due to
the growth in the volume of earning assets and interest-bearing liabilities.
The growth in earning assets and interest-bearing liabilities contributed a
positive $1.6 million but the lower rate environment and the compression between
the interest rates on earning assets and deposits resulted in a negative $353
thousand effect on net interest income.
16
TABLE 2
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
Nine-Months Ended September 30
2002 vs. 2001
-----------------------------------
Due to Change
Increase in Average:
or --------------------
($ in thousands) (Decrease) Volume Rate
EARNING ASSETS: ---------- ------- -------
Loans $ 1,553 $ 2,310 $ (757)
Taxable securities 269 480 (211)
Federal funds sold and
interest-bearing deposits (184) 104 (288)
------- ------- -------
Total interest income 1,638 2,894 (1,256)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits (22) 5 (27)
Money market deposit
accounts 287 642 (355)
Savings deposits 5 10 (5)
Time deposits (17) 499 (516)
Trust preferred cap notes 148 148 --
------- ------- -------
Total interest expense 401 1,304 (903)
------- ------- -------
Net Interest Income $ 1,237 $ 1,590 $ (353)
======= ======= =======
THIRD QUARTER RATE/VOLUME ANALYSIS. For the third quarter of 2002, net interest
income was $1.7 million compared to $1.2 million for the same quarter of 2001,
which represents a $.5 million increase or 40%. For these comparable quarters,
the yield on earning assets declined from 7.27% for the third quarter of 2001 to
5.99% in the third quarter of 2002 reflecting the significant decline in
interest rates that had occurred in 2001. The overall yield on loans dropped 113
basis points, the securities portfolio declined 155 basis points and the yield
on Federal funds and cash equivalents declined 178 basis points reflecting the
general decline in interest rates from last year to this year.
Interest expense during these comparable quarters, third quarter 2002
versus third quarter 2001, increased $273,000 or 36%, from $753,000 in interest
expense to $1.03 million in interest expense primarily due to the $61.6 million
increase in average interest-bearing liabilities. The overall cost of
interest-bearing liabilities decreased 112 basis points from 4.17% in 2001 to
3.05% in 2002.
The resulting effect of the changes in interest rates between the quarters ended
September 30, 2002 and 2001, and the changes in the volume and mix of earning
assets and interest-bearing liabilities resulted in a 3.75% net interest margin
in 2002 versus a 4.50% net interest margin in 2001. Interest rates in general
are approximately 178 basis points lower in the third quarter of 2002 compared
with third quarter 2001 as can be seen by the difference in the yield on Federal
funds sold and cash equivalents. This yield is the short-term liquidity yield
which demonstrates the level at which rates have changed between the comparative
quarter.
17
TABLE 3
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
-------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Loans:
Commercial $ 30,741 $ 519 6.70% $ 24,700 $ 517 8.30%
Commercial real estate 66,035 1,277 7.67 33,481 724 8.58
Consumer 14,180 245 6.85 9,597 200 8.27
-------- -------- ---- -------- ------ ----
Total Loans 110,956 2,041 7.30 67,778 1,441 8.43
Taxable securities 52,497 628 4.75 26,532 421 6.30
Federal funds sold and cash equivalents 18,202 72 1.57 13,397 113 3.35
-------- -------- ---- -------- ------ ----
TOTAL EARNING ASSETS 181,655 2,741 5.99% 107,707 1,975 7.27%
Less allowance for loan losses (1,337) (784)
Cash and due from banks 9,552 6,712
Premises and equipment, net 1,349 942
Other assets 1,131 642
-------- --------
TOTAL ASSETS $192,350 $115,219
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 5,841 $ 16 1.09% $ 5,114 $ 16 1.24%
Money market deposit accounts 73,842 494 2.65 37,304 337 3.58
Savings accounts 1,415 6 1.68 725 5 2.74
Time deposits 47,182 439 3.69 28,566 395 5.49
Trust preferred capital notes 5,000 71 5.63
-------- -------- ---- -------- ------ ----
TOTAL INTEREST-BEARING
LIABILITIES 133,280 1,026 3.05% 71,709 753 4.17%
-------- -------- ---- -------- ------ ----
Net Interest Income and Net Yield on
Interest-Earning Assets $ 1,715 3.75% $1,222 4.50%
======== ==== ====== ====
Noninterest-bearing demand
deposits 40,655 31,493
Other liabilities 569 401
Stockholders' equity 17,846 11,616
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $192,350 $115,219
======== ========
18
TABLE 4
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
Three-months Ended September 30
2002 vs. 2001
--------------------------------------
Due to Change
Increase in Average:
or ---------------------
(Decrease) Volume Rate
EARNING ASSETS: ---------- ------ ------
Loans $ 600 $ 761 $ (161)
Taxable securities 207 277 (70)
Federal funds sold (41) 82 (123)
------ ------ ------
Total interest income 766 1,120 (354)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits -- -- --
Money market deposit
accounts 157 213 (56)
Savings deposits 1 1 --
Time deposits 44 90 (46)
Trust preferred cap notes 71 71 --
------ ------ ------
Total interest expense 273 375 (102)
------ ------ ------
Net Interest Income $ 493 $ 745 $ (252)
====== ====== ======
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon a methodology that includes
among other factors, a specific evaluation of commercial and commercial real
estate loans that are considered special mention, substandard or doubtful. All
other loans are then categorized in pools of loans with common characteristics.
A loss factor is applied to these loans which considers the greater of the
company or peer group historical charge off history, trends in delinquencies and
loan grading, current economic conditions, and factors that considers the
composition of the Company's loan portfolio.
The methodology established for determining an appropriate allowance
for loan losses was approved by the Audit Committee and the Board of Directors.
The quarterly provision is approved by the Board. The methodology is reevaluated
on a quarterly basis. Pending the development of a negative trend with respect
to past due loans or charge offs or significant changes in economic conditions,
the Company continues to maintain an allowance it believes is adequate but not
excessive.
As reflected in Table 5 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 5
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, 2002 December 31, 2001 September 30, 2001
------------------- ------------------- --------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
In In In
($ in thousands) Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
Construction loans $ 81 7% $ 78 8% $ 58 7%
Commercial 583 22% 281 27% 190 28%
Commercial real estate 522 59% 528 51% 473 52%
Residential mortgage loans 58 2% 40 4% 50 5%
Home equity loans 60 3% 19 2% 14 1%
Consumer loans 110 7% 84 8% 66 7%
------ --- ------ --- ------ ---
$1,414 100% $1,030 100% $ 851 100%
====== === ====== === ====== ===
TABLE 6
Table 6 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at September 30, 2002. Maturities are
based on the earlier of contractual maturity or repricing date.
September 30, 2002
-------------------------------------------------
After One
Year
One Year or Through After Five
Less Five Years Years Total
----------- ---------- ---------- -----
Commercial $25,643 $ 4,949 $ 1,113 $ 31,705
Government guaranteed loans 400 1,243 481 2,124
Commercial real estate 34,168 31,917 1,887 67,972
Real estate mortgage 819 882 -0- 2,701
Home equity loans 2,879 -0- -0- 2,879
Consumer 6,819 1,103 -0- 7,922
------- ------- ------- --------
Total loans $71,728 $40,094 $ 3,481 $115,303
======= ======= ======= ========
Fixed Rate $17,301 $15,090 $ 1,887 $ 34,278
Variable Rate 54,427 25,004 1,594 81,025
------- ------- ------- --------
Total loans $71,728 $40,094 $ 3,481 $115,303
======= ======== ======= ========
20
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At September 30,
2002, total loans were $115.3 million, a 34% increase from the $86.1 million of
loans at December 31, 2001 and a 57% increase from $73.6 million of loans at
September 30, 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 has
consistently approximated 12-14% 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 fair value of the Company's securities portfolio increased $36.9
million to $59 million at September 30, 2002 from $22.1 million at December 31,
2001. The Company currently, and for all periods shown, classifies its entire
securities portfolio as Available-for-Sale. Increases in the portfolio have
occurred whenever deposit growth has outpaced loan demand and the forecast for
loan growth is such that the investment of excess liquidity in investment
securities (as opposed to short-term investments such as federal funds) is
warranted. In general, our investment philosophy is to acquire high quality
government agency securities or high-grade corporate bonds, with a maturity of
five to six years or less in the case of fixed rate securities. In the case of
mortgage-backed securities, the policy is to invest only in those securities
whose average expected life is projected to be approximately five to six years
or less. Mortgage-backed securities with a maturity of ten years or more are
generally adjustable rate securities. To the extent possible the Company
attempts to "ladder" the maturities of such securities.
TABLE 7
The following table provides information regarding the composition of
our investment portfolio at the dates indicated.
At September 30, 2002 At September 30, 2001
----------------------------- ---------------------------
Percent of Percent of
Balance Total Balance Total
($ in thousands) ------- ---------- ------- ----------
INVESTMENTS AVAILABLE-FOR-SALE
(AT ESTIMATED MARKET VALUE):
U.S. Government Agency
Obligations $24,303 41.1% $ 5,238 19.8%
Mortgage-backed securities 26,536 45.0% 9,069 34.4%
Corporate debt securities 7,522 12.8% 11,714 44.4%
------- ----- ------- -----
$58,361 98.9% $26,021 98.6%
Other investments 629 1.1% 373 1.4%
------- ----- ------- -----
Total $58,990 100.0% $26,394 100.0%
======= ===== ======= =====
At September 30, 2002, 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.
21
TABLE 8
The following table provides information regarding the maturity
composition of our investment portfolio, at market value, at September 30, 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 $24,303 3.70% $ -- $ -- $ -- -- $24,303 3.70%
Mortgage-backed securities 150 7.13% 4,134 5.72% 2,039 5.03% 13,612 5.86% 19,935 5.76%
Adjustable Rate Mortgage-backed
securities -- -- -- -- -- -- 6,602 4.65% 6,602 4.65%
Corporate bonds -- 0.00% 4,066 5.53% 1,714 6.62% 1,742 7.55% 7,522 6.25%
Other securities 628 5.42% 628 5.42%
------- ------ ------ ------- -------
Total Debt Securities
Available-for-Sale $24,453 3.72% $8,200 5.63% $3,753 5.76% $22,584 5.63% $58,990 4.85%
======= ====== ====== ======= =======
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, 2002, our
Basic Surplus ratios (net access to cash and secured borrowings) as a percentage
of total assets were approximately 13%, 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.
22
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, 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, they 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
September 30, 2002, the following 12-month impact on net interest income is
estimated to range from a positive impact of 5% to a negative impact of 7% 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, 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 will remain
at the current levels until July 2003 and then increase 100 basis points in the
last half of 2003. Thus management believes the exposure to further downward
changes in interest rates are the least less likely than rates rising next year.
Regardless, the level of exposure to changes in interest rates in either
direction are within the policy guidelines established by the Company.
Static rates -0-%
Most Likely rates -7.2%
Ramp Up 100bp-12 Mo. +1.0%
Ramp Up 200bp-12 Mo. +2.0%
Ramp Down 100 bp-12 Mo. -1.1%
Ramp Down 200bp-12 Mo. -2.3%
Rising rate scenario +5.0%
NONINTEREST INCOME AND EXPENSE
The following table shows the detail of noninterest income for the
three and nine-month periods ended September 30, 2002 and 2001.
23
TABLE 9
Three-Months Ended Sept. 30, Nine-Months Ended Sept. 30,
---------------------------- ---------------------------
($ in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Service charges on deposit
accounts $ 66 $ 77 $ 200 $ 179
Cash management fees 38 29 102 81
Other fee income 30 23 85 61
Gain on sale of securities -- 47 16 51
----- ----- ----- -----
Other Noninterest Income $ 134 $ 176 $ 403 $ 372
===== ===== ===== =====
The increase in noninterest income for the three months ended September
30, 2002 as compared to the same period in 2001, excluding securities gains
amounted to $5 thousand. The major increase was in cash management fees which
amounted to $7 thousand. These fees are a function of the balances invested on
the corporate customers' behalf and are not a function of interest rates. For
the nine-month comparative periods, excluding securities gains, noninterest
income increased $66 thousand. The increases shown are primarily a result of the
increase in number of accounts and the volume of transactions processed.
TABLE 10
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
Three-Months Ended Sept. 30, Nine-Months Ended Sept. 30,
---------------------------- ---------------------------
($ in thousands) 2002 2001 2002 2001
------- ------ ------- -------
Salaries and benefits $ 565 $ 388 $ 1,641 $ 1,074
Occupancy cost, net 143 97 398 267
Equipment expense 81 49 208 132
Professional fees 69 40 184 132
Data processing costs 108 67 311 194
Postage and supplies 29 16 93 67
Advertising and public relations 32 23 112 59
Courier and express services 26 18 73 51
State franchise tax 50 26 110 74
Other 31 43 76 128
------- ------ ------- -------
Other Noninterest Expense $ 1,134 $ 767 $ 3,206 $ 2,178
======= ====== ======= =======
Noninterest expense increased $1 million or 47% from $2.2 million to
$3.2 million for the first nine-months of 2002, as compared to the same period
in 2001. The increase in salary and benefit expense of $567,000 is primarily the
result of staff merit increases for 2002, the additional staff for the third
branch opened in February 2002, and the addition of a drive-up/walk-up facility
added in the third-quarter of 2002. In addition, additional support staff has
been added due to the increase in the volume of business.
Occupancy cost increased $131,000 for the first nine-months of 2002
compared with a year earlier due to annualized rent increases and the additional
facilities as described above. Equipment costs increased $76,000 for the same
comparative periods due to additional equipment and software required
24
for the additional facilities and personnel. Professional fees increased $52,000
for the comparative years due to additional regulatory assessments which are a
function of the size of the Bank, legal fee increase for general corporate
activities, the equity offering, and the trust preferred offering. 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 2002 versus 2001. The increase
in the state franchise tax is due to the increased capital of the Bank and the
downstream of $4 million in additional capital in June 2002 and the retention of
earnings. The franchise tax is based on approximately 1% of capital with some
adjustments.
TABLE 11
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
$100,000 $ 4,835 $ 4,543 $ 4,010 $ 1,740 $ 15,128
Certificates of deposit of $100,000
or more 8,219 7,500 6,944 1,537 24,200
-------- -------- -------- ------- --------
$ 13,054 $ 12,043 $ 10,954 $ 3,277 $ 39,328
======== ======== ======== ======= ========
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 2001 were $1.1 million and earnings for the
first nine-months of 2002 were $892 thousand bringing the Company's retained
earnings to $2.2 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. This has been
accomplished. The capital management today is to continue to look for the lowest
cost of capital while at the same time to raise capital in anticipation of the
growth of the Company. A further goal is to maintain capital ratios above the
minimum regulatory guidelines.
Capital Requirement. A comparison of Bancorp's and its wholly-owned subsidiary
bank (James Monroe Bank) regulatory capital at September 30, 2002, compared to
minimum regulatory capital guidelines is shown in the table that follows.
25
TABLE 12
Minimum Minimum To Be
Actual Guidelines "Well Capitalized"
--------- ------------ ------------------
Total Risk-Based Capital
Company 17.9% 8.0% N/A
Bank 13.0% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 16.8% 4.0% N/A
Bank 11.9% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 11.7% 4.0% N/A
Bank 8.5% 4.0% 5.0%
RECENT ACCOUNTING PRONOUCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement 145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 are effective for transactions occurring after
May 15, 2002, with early application encouraged.
In June 2002, the Financial Accounting Standards Board issued Statement
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31 2002, with early application encouraged.
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this
26
Statement removes acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions with the scope of this Statement. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill.
The transition provisions state that if the transaction that gave rise
to the unidentifiable intangible asset was a business combination, the carrying
amount of that asset shall be reclassified to goodwill as of the later of the
date of acquisition or the date Statement 142 was first applied (fiscal years
beginning after December 15, 2001). Any previously issued interim statements
that reflect amortization of the unidentifiable intangible asset subsequent to
the Statement 142 application date shall be restated to remove that amortization
expense. The carrying amounts of any recognized intangible assets that meet the
recognition criteria of Statement 141 that have been included in the amount
reported as an unidentifiable intangible asset and for which separate accounting
records have been maintained shall be reclassified and accounted for as assets
apart from the unidentifiable intangible asset and shall not be reclassified to
goodwill.
Item 3. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the
Company's management under the supervision and with the participation of the
Chief Executive Officer and Chief Operating/Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-14 under the Securities Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer and Chief
Operating/Financial Officer concluded that the Company's disclosure controls and
procedures were adequate. There were no significant changes (including
corrective actions with regard to significant deficiencies or material
weaknesses) in the Company's internal controls or in other factors subsequent to
the date of the evaluation that could significantly affect those controls.
27
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(i) Articles of Incorporation of James Monroe Bancorp, as amended
filed herewith.
3(ii) Bylaws of James Monroe Bancorp, (1)
10(a) Intentionally omitted
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) Intentionally omitted
11 Statement re: Computation of Per Share Earnings
Please refer to Note 2 to the financial statements included in
this report.
21 Subsidiaries
The sole subsidiaries of the Company are:
James Monroe Bank, organized under Virginia law, of which the
company owns 100% of the outstanding capital stock; and
James Monroe Statutory Trust I, a business trust organized
under Connecticut law, of which the Company owns all of the
outstanding voting securities.
99(a) Certification of John R. Maxwell, President and Chief
Executive Officer
99(b) Certification of Richard I. Linhart, Executive Vice President
and Chief Operating/Financial Officer
- -----------------------
(1) Incorporated by reference to the exhibit of the same number in the
Company's registration statement on Form SB-2 no. 333-38098.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2002.
28
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 5, 2002 BY: /s/John R. Maxwell
-----------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: November 5, 2002 BY: /s/ Richard I. Linhart
-----------------------------------------
Richard I. Linhart, Executive Vice
President & Chief Operating and Financial
Officer
29
SECTION 302 CERTIFICATION
I, John R. Maxwell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of James Monroe Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002 /S/ John R. Maxwell
-------------------------------------
President and Chief Executive Officer
30
SECTION 302 CERTIFICATION
I, Richard I. Linhart, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of James Monroe Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002 /S/ Richard I. Linhart
----------------------------------
Executive Vice President and Chief
Operating/Financial Officer
31