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 June 30, 2003 _________________
[ ] 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 July 31, 2003.
Common stock, $1 par value--2,333,654 shares outstanding
Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ]
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item. 1. Financial Statements
Consolidated Balance Sheets at June 30, 2003,
December 31, 2002, and June 30, 2002 3
Consolidated Income Statements for the three-months
and six-months ended June 30, 2003 and 2002 4
Consolidated Statements of Changes in Stockholders'
Equity for the six-months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the six-months
ended June 30, 2003 and 2002 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 13
Item 3. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
2
PART 1. FINANCIAL INFORMATION
Item. 1. FINANCIAL STATEMENTS
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
2003 2002 2002
----------- ------------ -----------
ASSETS
Cash and due from banks $ 22,182 $ 11,051 $ 12,703
Interest-bearing deposits in banks 547 655 2,910
Federal funds sold 42,424 28,826 21,080
Securities available-for-sale at fair value 81,580 76,063 46,505
Mortgage loans held-for-sale 3,484 -- --
Loans, net of allowance for loan losses of $1,669 at June 30,
2003, $1,390 at December 31, 2002, and $1,283 at June 30, 2002 144,018 119,657 104,087
Bank premises and equipment, net 1,416 1,333 1,346
Accrued interest receivable 1,084 916 803
Other assets 319 292 401
--------- --------- ---------
$ 297,054 $ 238,793 $ 189,835
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 106,861 $ 66,729 $ 44,520
Interest-bearing deposits 164,238 147,141 122,371
--------- --------- ---------
Total deposits 271,099 213,870 166,891
Trust preferred capital notes 5,000 5,000 5,000
Accrued interest payable and other liabilities 741 728 478
--------- --------- ---------
Total liabilities 276,840 219,598 172,369
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 5,000,000 shares;
Issued and outstanding 2,303,275 at June 30, 2003, 1,840,677
at December 31, 2002, and 1,839,585 at June 30, 2002 2,303 1,841 1,840
Capital surplus 12,946 13,354 13,342
Retained earnings 3,963 2,894 1,851
Accumulated other comprehensive income 1,002 1,106 433
--------- --------- ---------
Total stockholders' equity 20,214 19,195 17,466
--------- --------- ---------
$ 297,054 $ 238,793 $ 189,835
========= ========= =========
See notes to interim consolidated financial statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME:
Loans, including fees $2,383 $1,885 $4,573 $3,590
Mortgage loans held for sale 25 -- 25 --
Securities, taxable 692 428 1,390 720
Federal funds sold 62 83 99 116
Other interest income -- 7 1 9
------ ------ ------ ------
Total interest income 3,162 2,403 6,088 4,435
INTEREST EXPENSE:
Deposits 838 863 1,650 1,524
Borrowed funds 63 74 127 77
------ ------ ------ ------
Total interest expense 901 937 1,777 1,601
------ ------ ------ ------
Net interest income 2,261 1,466 4,311 2,834
PROVISION FOR LOAN LOSSES 171 70 349 251
------ ------ ------ ------
Net interest income after provision for loan losses 2,090 1,396 3,962 2,583
NONINTEREST INCOME:
Service charges and fees 80 60 155 134
Other 74 63 133 118
Gain on sale of securities 41 -- 56 16
Gain on sale of mortgages held-for-sale 85 -- 85 --
------ ------ ------ ------
Total noninterest income 280 123 429 268
NONINTEREST EXPENSES:
Salaries and wages 642 481 1,228 918
Employee benefits 105 82 209 158
Occupancy expenses 148 130 303 256
Equipment expenses 104 70 200 127
Other operating expenses 449 303 848 613
------ ------ ------ ------
Total noninterest expense 1,448 1,066 2,788 2,072
------ ------ ------ ------
Income before income taxes 922 453 1,603 779
PROVISION FOR INCOME TAXES 312 157 529 269
------ ------ ------ ------
Net income $ 610 $ 296 $1,074 $ 510
====== ====== ====== ======
EARNINGS PER SHARE-BASIC $ 0.26 $ 0.16 $ 0.47 $ 0.28
====== ====== ====== ======
EARNINGS PER SHARE-DILUTED $ 0.25 $ 0.15 $ 0.44 $ 0.27
====== ====== ====== ======
See notes to interim consolidated financial statements
4
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2003 and 2002
($ in thousands)
(Unaudited)
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 510 $ 510 510
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $149 289 289 289
--------
Total comprehensive income $ 799
========
Exercise of stock options 6 48 54
Proceeds from sale of common stock 261 4,385 4,646
Effect of 3 for 2 stock split 613 (613) --
------- -------- -------- -------- --------
BALANCE, JUNE 30, 2002 $ 1,840 $ 13,342 $ 1,851 $ 433 $ 17,466
======= ======== ======== ======== ========
ACCUMULATED
OTHER
COMPRE- COMPRE- TOTAL
COMMON CAPITAL RETAINED HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME INCOME EQUITY
------- -------- -------- -------- -------- --------
BALANCE, JANUARY 1, 2003 $ 1,841 $ 13,354 $ 2,894 $ 1,106 $ 19,195
Comprehensive income:
Net income 1,074 $ 1,074 1,074
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $54 (104) (104) (104)
--------
Total comprehensive income $ 970
========
Proceeds from sale of common stock 2 52 54
Effect of 5-for-4 stock split 460 (460) --
Cash paid in lieu of fractional shares (5) (5)
------- -------- -------- -------- --------
BALANCE, JUNE 30, 2003 $ 2,303 $ 12,946 $ 3,963 $ 1,002 $ 20,214
======= ======== ======== ======== ========
See notes to interim consolidated financial statements.
5
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
---------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,074 $ 510
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 151 112
Provision for loan losses 349 251
Gain on sale of securities (56) (16)
Gain on sale of mortgage loans held-for-sale (85) --
Origination of mortgage loans held-for-sale (17,039) --
Proceeds from sale of mortgages held-for sale 13,640 --
(Increase) in accrued interest receivable (168) (172)
Amortization of bond premium 234 46
Accretion of bond discount (40) (19)
Decrease in other assets 27 49
Increase in accrued interest and other liabilities 13 46
-------- --------
Net cash provided by operating activities $ (1,900) $ 807
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale $(59,932) $(31,610)
Proceeds from calls and maturities of securities available for sale 12,391 7,359
Proceeds from sales of securities available for sale 41,728 --
Purchases of premises and equipment (234) (451)
(Increase) in Federal funds sold and interest-bearing deposits (13,490) (12,486)
Net (increase) in loans (24,710) (19,231)
-------- --------
Net cash (used in) investing activities $(44,247) $(56,419)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts $ 55,414 $ 32,345
Net increase in time deposits 1,815 20,288
Issuance of common stock 54 4,700
Issuance of trust preferred capital notes -- 5,000
Cash paid in lieu of fractional shares (5) --
-------- --------
Net cash provided by financing activities $ 57,278 $ 62,333
-------- --------
Increase in cash and due from banks $ 11,131 $ 6,721
CASH AND DUE FROM BANKS
Beginning 11,051 5,982
-------- --------
Ending $ 22,182 $ 12,703
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
Interest paid $ 1,816 $ 1,328
======== ========
Income taxes paid $ 443 $ 346
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
Unrealized gain (loss) on securities available for sale $ (158) $ 438
======== ========
See notes to interim consolidated financial statements.
6
JAMES MONROE BANCORP, INC. AND SUBSIDIARIES
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 June 30, 2003 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 Subsidiaries
(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 six-month periods ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2003, 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, 2002.
Stock Compensation Plans. At June 30, 2003, the Company had a stock-based
compensation plan. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
THREE-MONTHS ENDED JUNE 30, SIX-MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- --------- --------
Net income, as reported $ 610 $ 296 $ 1,074 $ 510
Deduct:Total stock-based employee
compensation expense determined under fair
value based method for all awards (9) (19) (18) (37)
-------- -------- --------- -------
Pro forma net income $ 601 $ 277 $ 1,056 $ 473
======== ======== ========= =======
Earnings per share:
Basic- as reported 0.26 0.16 0.47 0.28
======== ======== ========= =======
Basic- pro forma 0.26 0.15 0.46 0.26
======== ======== ========= =======
Diluted- as reported 0.25 0.15 0.44 0.27
======== ======== ========= =======
Diluted- pro forma 0.24 0.14 0.43 0.25
======== ======== ========= =======
7
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002
--------
Dividend yield 0.00%
Expected life 10 years
Expected volatility 0.50%
Risk-free interest rate 5.05%
No options have been granted in 2003.
NOTE 2--
Earnings Per Share. The following table discloses the calculation of basic and
diluted earnings per share for the three months and six-months ended June 30,
2003 and 2002. The amounts for all periods presented have been restated to
reflect a 5-for4 stock split in the form of a 25% stock dividend for
shareholders of record on April 25, 2003, and paid May 16, 2003.
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income $ 610 $ 296 $ 1,074 $ 510
Weighted average shares outstanding--basic 2,301,946 1,815,808 2,301,295 1,809,536
Common share equivalents for stock options 175,301 105,063 163,140 98,004
------------------------ ------------------------
Weighted average shares outstanding--diluted 2,477,247 1,920,871 2,464,435 1,907,540
======================== ========================
Earnings per share-basic $ 0.26 $ 0.16 $ 0.47 $ 0.28
======================== ========================
Earnings per share-diluted $ 0.25 $ 0.15 $ 0.44 $ 0.27
======================== ========================
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
stockholders' 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 June 30, 2003,
December 31, 2002, and June 30, 2002, are summarized in the tables that follow.
The Company classifies all securities as available-for-sale.
8
June 30, 2003
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ----------- ----------
U.S. Government and federal agency $ 47,550 $ 392 $ (20) $ 47,922
Mortgage-backed securities 19,045 411 (6) 19,450
Corporate notes 12,626 757 (16) 13,367
Restricted stock 841 -- -- 841
-------- -------- -------- --------
$ 80,062 $ 1,560 $ (42) $ 81,580
======== ======== ======== ========
December 31, 2002
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ----------- ----------
U.S. Government and federal agency $ 35,013 $ 285 $ -- $ 35,298
Mortgage-backed securities 26,606 571 (64) 27,113
Corporate notes 12,139 884 -- 13,023
Restricted stock 629 -- -- 629
-------- -------- -------- --------
$ 74,387 $ 1,740 $ (64) $ 76,063
======== ======== ======== ========
June 30, 2002
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
($ in thousands) Cost Gains Losses Value
--------- ---------- ----------- ----------
U.S. Government and federal agency $ 14,096 $ 119 $ (6) $ 14,209
Mortgage-backed securities 24,091 333 (1) 24,423
Corporate notes 7,153 212 (1) 7,364
Restricted stock 509 -- -- 509
-------- -------- -------- --------
$ 45,849 $ 664 $ (8) $ 46,505
======== ======== ======== ========
NOTE 4--
Loans. Major classifications of loans at June 30, 2003, December 31, 2002 and
June 30, 2002 are summarized in the following table.
9
June 30, December 31, June 30,
($ in thousands) 2003 2002 2002
----------- ----------- -----------
Construction loans $ 17,342 $ 12,160 $ 8,535
Commercial loans 23,430 27,862 24,005
Real estate-Commercial 93,952 70,318 62,187
Real estate-1-4 family residential 1,251 2,069 2,741
Home equity loans 2,935 2,390 1,718
Consumer loans 6,709 6,088 5,991
Deposit overdrafts 68 160 193
--------- --------- ---------
145,687 121,047 105,370
Less allowance for loan losses (1,669) (1,390) (1,283)
--------- --------- ---------
Net Loans $ 144,018 $ 119,657 $ 104,087
========= ========= =========
Changes in the allowance for loan losses are summarized as follows:
($ in thousands) For the Year
Six-Months Ended Six-Months
Ended June 30, December 31, Ended June 30,
2003 2002 2002
-------------- -------------- --------------
Balance at beginning of year $ 1,390 $ 1,030 $ 1,030
Charge-offs:
Commercial (34) (122) --
Consumer (36) (4) --
------- ------- -------
Total charge-offs (70) (126) --
Recoveries:
Consumer -- 3 2
------- ------- -------
Net charge-offs (70) (123) 2
Provision for loan losses 349 483 251
------- ------- -------
Balance at end of period $ 1,669 $ 1,390 $ 1,283
======= ======= =======
The following table presents the amounts of nonperforming assets at the dates
indicated.
June 30, December 31, June 30,
($ in thousands) 2003 2002 2002
----------- ----------- -----------
Nonaccrual loans excluded from
impaired loans:
Commercial $ 188 $ 22 $ 250
Consumer -- 34 --
Accruing loans past due 90-days
or more:
Commericial -- -- 5
Impaired loans:
Commercial 228 240 --
------- ------- -------
Total nonperforming assets $ 416 $ 296 $ 255
======= ======= =======
10
NOTE 5--
Deposits. Interest-bearing deposits consist of the following:
June 30, December 31, June 30,
-------------------------------------
($ in thousands) 2003 2002 2002
------------ ----------- ------------
NOW accounts $ 11,716 $ 7,490 $ 5,787
Savings accounts 1,809 1,290 1,273
Money market accounts 110,577 100,040 65,435
Certificates of deposit under $100,000 13,291 12,272 18,365
Certificates of deposit $100,000 and over 25,130 24,315 29,552
Individual retirement accounts 1,715 1,734 1,959
-------- -------- --------
$164,238 $147,141 $122,371
======== ======== ========
NOTE 6--
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. During 2002, the
interest rates ranged from 5.79% to 5.00%. The rate for the quarterly period
beginning June 26, 2003, was 4.61%. 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 June 30, 2003, 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 7--
Common Stock Split. The Company authorized a 5-for-4 stock split in the form of
a 25% stock dividend for shareholders of record of record on April 25, 2003,
payable May 16, 2003. The earnings per common share for all periods presented
have been restated to reflect the stock split as has the Stockholders' Equity
section of the balance sheet as of March 31, 2003.
Note 8--
Subsequent Event. On July 16, 2003, James Monroe Statutory Trust II, a newly
formed subsidiary of the Company, was formed for the purpose of issuing
redeemable trust preferred securities and purchasing the Company's junior
subordinated debentures, due 2033, which are its sole assets. The Company owns
all of the Trust's outstanding common securities. On July 31, 2003, $4 million
of the Trust's preferred securities were issued in a private placement
transaction. The securities bear interest at a rate equal to three-month Libor
plus 310 basis points, initially 4.21%, subject to a cap of 12% prior to July
31, 2003. The securities have a maturity date of July 31, 2033, and are subject
to optional call provisions beginning July 31, 2008.
11
Note 9-
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts(collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003 and is not expected to have an
impact on the Corporation's consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. Adoption of the Statement did not
result in an impact on the Corporation's consolidated financial statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 six-months ended June 30, 2003 and
2002. 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, 2002.
CRITICAL ACCOUNTING POLICIES
There were no changes to the Company's critical accounting policies in
the second quarter of 2003. The critical accounting policy with respect to
determining the quarterly allowance for loan losses has been consistently
applied since its adoption. 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 relating to its financial
statements that require significant sensitivity analysis, judgments, or
estimations.
Allowance for Loan Losses. The Company has developed a methodology to determine,
on a quarterly basis, an allowance to absorb probable loan losses inherent in
the portfolio based on evaluations of the collectibility of loans, historical
loss experience, peer bank loss experience, delinquency trends, economic
conditions, portfolio composition, and specific loss estimates for loans
considered substandard or doubtful. 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 loan interest 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. A
composite allowance factor that considers the Company's and other peer banks'
loss experience ratios, delinquency trends, economic conditions, and portfolio
composition is applied to the total of commercial and commercial real estate
loans not specifically evaluated. A percentage of this composite allowance
factor is also applied to the aggregate of unused commercial lines of credit
which the Company has an obligation to honor but where the borrower has not
elected to draw on their lines of credit.
Homogenous loans, such as consumer installment, residential mortgage
loans, home equity loans, and smaller consumer loans are not individually risk
graded. Reserves are established for each homogenous pool of loans based on the
expected net charge-offs from a current trend in delinquencies, peer group
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 Management's Discussion and Analysis and other portions of this
report contain 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. In some cases, forward
looking statements can be identified by use of such words as "may," "will,"
"anticipate," "believes," "expects,"
13
"plans," "estimates," "potential," "continue," "should," and similar words or
phases. 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.
FINANCIAL OVERVIEW
COMPANY HIGHLIGHTS SINCE DECEMBER 31, 2002 ARE:
- -----------------------------------------------
o Assets grew $58.3 million (24%).
o Loans grew $24.6 million (20%).
o Deposits grew $57.2 million (27%).
o After interest rates dropped 50 basis points in November 2002,
and another 25 basis points in May 2003, our net interest margin
has decreased to 3.71% by the end of the fourth quarter of 2002
and rose slightly to 3.77% for the first half of 2003. The
sustained low interest rate environment coupled with the
significant liquidity generated by the Company in 2003 has
caused compression in the net interest margin from the 3.82% for
the second quarter, 2002.
o Asset quality remains strong with $70 thousand in charge offs in
the first half of 2003, $416 thousand on nonaccrual status and
no loans over 90-days past-due and not accruing interest.
The following discussion provides information about the results of
operations and financial condition, liquidity, and capital resources of James
Monroe Bancorp, Inc. and should be read in conjunction with our consolidated
financial statements and footnotes thereto for the year ended December 31, 2002.
BALANCE SHEETS
Total assets increased to $297.1 million at June 30, 2003, an increase
of $58.3 million from December 31, 2002, and an increase of $107.2 million from
June 30, 2002. The increase in assets since December 31, 2002 resulted from the
Company's emphasis on deposit generation as much as loan generation. During the
six-months ended June 30, 2003, deposits increased $57.2 million over December
31, 2002, with noninterest-bearing deposits increasing $40.1 million, and
interest-bearing deposits increasing $17.1 million. With the growth in deposits,
the Company was able to fund $24.6 million net increase in loans, including $13
million in the second quarter. Securities increased $5.5 million and the
liquidity position of the Company increased by $22 million.
14
TABLE 1
QUARTERLY RESULTS OF OPERATIONS
2003 2002
---------------------------- --------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) SECOND FIRST FOURTH THIRD SECOND
---------- ------------- ------------- ------------- -------------
RESULTS OF OPERATIONS:
- ----------------------
Net interest income $ 2,261 $ 2,050 $ 1,932 $ 1,715 $ 1,467
Provision for loan and lease losses 171 178 98 134 70
Other income 280 149 358 134 123
Noninterest expense 1,448 1,340 1,188 1,134 1,066
Income before taxes 922 681 1,004 581 454
Net income 610 464 661 382 296
PER SHARE DATA:
- ---------------
Earnings per share, basic $ 0.26 $ 0.20 $ 0.32 $ 0.17 $ 0.16
Earnings per share, diluted $ 0.25 $ 0.19 $ 0.31 $ 0.16 $ 0.15
Weighted average shares
outstanding-basic 2,301,946 2,300,846 2,054,844 2,299,455 1,815,808
-diluted 2,477,247 2,451,825 2,160,539 2,405,840 1,920,873
AT PERIOD END
- -------------
Loans $ 145,687 $ 133,480 $ 121,047 $ 115,303 $ 105,370
Earning assets 273,722 222,279 226,591 185,552 175,864
Total assets 297,054 248,349 238,793 204,088 189,835
Deposits 271,099 223,318 213,870 180,338 166,891
Stockholders' equity 20,214 19,357 19,195 18,129 17,466
Book value* $ 8.78 $ 8.41 $ 8.34 $ 7.88 $ 7.60
Shares outstanding* 2,303,275 2,300,633 2,300,846 2,299,455 2,299,455
PERFORMANCE RATIOS:
- -------------------
Return on average assets 0.96% 0.83% 0.88% 0.79% 0.73%
Return on average equity 12.00% 15.47% 10.15% 8.49% 9.56%
Net interest margin 3.77% 3.90% 3.90% 3.75% 3.86%
Efficiency ratio** 56.99% 60.94% 60.67% 61.33% 67.04%
OTHER RATIOS:
- -------------
Allowance for loan losses to total
loans 1.15% 1.13% 1.15% 1.23% 1.22%
Equity to assets 6.80% 7.79% 8.04% 8.88% 9.20%
Nonperforming loans to total loans 0.29% 0.26% 0.24% 0.20% 0.24%
Net charge-offs to average loans 0.01% 0.04% 0.12% 0.00% 0.00%
Risk-Adjusted Capital Ratios:
Tier 1 13.5% 14.7% 15.4% 16.8% 17.9%
Total 14.4% 15.6% 16.4% 17.9% 18.9%
Leverage Ratio 9.5% 10.4% 10.5% 11.7% 13.4%
* Information has been adjusted to reflect the 5-for-4 stock split in the form
of a 25% stock dividend paid on May 16, 2003 to shareholders of record
April 25, 2003 and for all preceding stock splits.
** The Company computes the Efficiency Ratio including all categories of
noninterest income and noninterest expense.
COMPARISON OF OPERATING RESULTS - SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS
ENDED JUNE 30, 2002
For the six months ended June 30, 2003, the Company had net income of
$1,074,000, or $.44 per share on a fully diluted basis, compared to $510,000, or
$.27 per share, for the comparable six month period of 2002.
15
Annualized return on average assets was .90% for the six months ended June 30,
2003, compared to .70% for the same six month period in 2002, and the return on
average equity was 10.93% for the first six months of 2003, compared with 8.32%
for the same period a year ago.
During 2003, the Company continued to focus on managing its net
interest margin, especially in light of the rapidly changing interest rate
environment in 2001 and then the sustained extremely low rate environment in
2002. In 2001, the Federal Reserve reduced interest rates 11 times, for a total
reduction of 475 basis points, an unprecedented reduction both in terms of the
number of, and amount of, rate changes in a 12-month period. The Federal Reserve
reduced interest rates an additional 50 basis points in November 2002 and an
additional 25 basis points in May 2003. These rate reductions had a direct
impact in 2001 and 2002 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 continued to
impact the loan and investment portfolios in 2002, as loans repriced on a
delayed basis or renewed at lower interest rates, and as investment securities
matured or were called, and were reinvested at lower rates. This was partially
offset by continued repricing upon renewal of certificates of deposit. These
rate reductions resulted in a reduction in the net interest margin, which
declined from 4.56% in 2001 to 3.90% in 2002 to 3.83% in 2003. Despite these
reductions, the Company's practice of managing its interest rate risk process
has mitigated the negative effect of such a severely declining rate environment.
Although the Company continued to grow in asset size since its inception in
1998, and added its third and fourth branches in 2002, it has been able to
control its operating efficiency. The Company's Efficiency Ratio decreased from
67.09% in the second quarter of 2002 to 56.99% in the second quarter of 2003.
The Efficiency Ratio is a non-GAAP financial measure, which we believe provides
investors with important information regarding our operational efficiency. We
compute our Efficiency Ratio by dividing noninterest expense by the sum of net
interest income on a tax equivalent basis and noninterest income, net of
securities gains or losses. Comparison of our efficiency ratio with those of
other companies may not be possible, because other companies may calculate the
efficiency ratio differently.
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 that 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. Table 2 presents average balance
sheets and a net interest income analysis for the six months ended June 30, 2003
and June 30, 2002. The Company did not have any tax-exempt income during any of
the periods presented in Table 2.
For the six-month period ended June 30, 2003, net interest income
increased $1.5 million, or 52%, to $4.3 million from the $2.8 million for the
same period in 2002, primarily as a result of increases in the volume of earning
assets. Total average earning assets increased by $89.4 million, or 65%, from
the six-months ended June 30, 2002 to the same period of 2003. Average loans
outstanding grew by $37.6 million, or 39%, during the first half of 2003
compared to the same period in 2002, but, at the same time, the yield on such
loans decreased by 62 basis points. The federal funds rate, which is the
short-term liquidity yield, saw a similar decrease of 52 basis points, while the
securities portfolio saw the greatest decline of 196 basis points. Many
securities were called in 2002 and reinvested in lower yielding securities.
Additional securities were purchased from the liquidity generated in 2003 and
invested in securities at yields greater than that of the federal funds but less
than the yields generated by loans.
16
TABLE 2
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
- -------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $ 39,109 $ 1,243 6.41% $ 30,754 $ 1,028 6.74%
Commercial real estate 81,955 2,889 7.11 53,310 2,091 7.91
Consumer 13,472 441 6.60 12,836 471 7.40
------------------------------ -----------------------------
Total Loans 134,536 4,573 6.85 96,900 3,590 7.47
Mortgage loans held for sale 1,092 25 4.62 -- -- --
Taxable securities 72,645 1,390 3.86 24,935 720 5.82
Federal funds sold and cash equivalents 18,852 100 1.07 15,848 125 1.59
------------------------------ -----------------------------
TOTAL EARNING ASSETS 227,125 6,088 5.41% 137,683 4,435 6.50%
Less allowance for loan losses (1,508) (1,171)
Cash and due from banks 12,296 8,334
Premises and equipment, net 1,386 1,237
Other assets 1,585 1,114
--------- ---------
TOTAL ASSETS $ 240,884 $ 147,197
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 8,933 $ 39 0.88% $ 5,190 $ 28 1.09%
Money market deposit accounts 105,321 1,029 1.97 52,109 681 2.64
Savings accounts 1,465 11 1.51 1,119 10 1.80
Time deposits 40,916 571 2.81 40,192 805 4.04
Trust preferred capital notes 5,000 127 5.12 2,680 77 5.79
------------------------------ -----------------------------
TOTAL INTEREST-BEARING
LIABILITIES 161,635 1,777 2.22% 101,290 1,601 3.19%
------------------------------ -----------------------------
Net Interest Income and Net Yield
on Interest-Earning Assets $ 4,311 3.83% $ 2,834 4.15%
================= =================
Noninterest-bearing demand
deposits 58,619 32,911
Other liabilities 819 631
Stockholders' equity 19,811 12,365
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 240,884 $ 147,197
========= =========
Interest expense for the first six-months of 2003 was $1.8 million
compared with $1.6 million in interest expense for the first six-months of 2002.
This increase is predominately a result of the growth in the volume of
interest-bearing liabilities of $60.3 million. Most of the Company's
interest-bearing time deposits have maturities of one year or less and
therefore, when rates fall, these deposits will not immediately reprice at lower
rates, becoming eligible for repricing at lower rates during the 12 months
following a declining rate environment. As a result of competitive conditions in
the Company's market and the sustained low rate environment the Company has not
been able to reduce deposit rates at the same rate that asset yields have
dropped, and as a result the net interest margin was compressed, dropping from
4.15% in 2002 to 3.83% in 2003.
17
Table 3 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
interest rates. As previously discussed, the table shows the increase in net
interest income for the six-months ended June 30, 2003, as compared to the
six-months ended June 30, 2002. Net interest income grew by $1.6 million from
the increase in the volume of earning assets and interest-bearing liabilities
offset by the negative effect of changes in interest rates of $95 thousand.
TABLE 3
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
SIX-MONTHS ENDED JUNE 30
2003 VS. 2002
-------------------------------------
DUE TO CHANGE
INCREASE IN AVERAGE:
OR ------------------------
($ in thousands) (DECREASE) VOLUME RATE
-------------------------------------
EARNING ASSETS:
Loans $ 983 $ 1,248 $ (265)
Mortgage loans 25 25 --
Taxable securities 670 814 (144)
Federal funds sold (25) 34 (59)
------------------------------
Total interest income 1,653 2,121 (468)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits 11 16 (5)
Money market deposit
accounts 348 462 (114)
Savings deposits 1 2 (1)
Time deposits (234) 15 (249)
Trust preferred capital notes 50 54 (4)
------------------------------
Total interest expense 176 549 (373)
------------------------------
Net Interest Income $ 494 $ 1,572 $ (95)
==============================
18
TABLE 4
AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $ 40,066 $ 632 6.33% $ 31,752 $ 554 7.00%
Commercial real estate 87,049 1,531 7.05 57,984 1,103 7.63
Consumer 13,632 220 6.47 11,547 228 7.92
-------------------------------- ---------------------------------
Total Loans 140,747 2,383 6.79 101,283 1,885 7.46
Mortgage loans 2,170 25 4.62 -- -- --
Taxable securities 75,366 692 3.68 30,741 428 5.58
Federal funds sold and cash equivalents 22,491 62 1.11 21,986 90 1.64
-------------------------------- ---------------------------------
TOTAL EARNING ASSETS 240,774 3,162 5.27% 154,010 2,403 6.26%
Less allowance for loan losses (1,586) (1,236)
Cash and due from banks 13,091 9,432
Premises and equipment, net 1,408 1,319
Other assets 1,813 1,310
--------- ---------
TOTAL ASSETS $ 255,500 $ 164,835
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 9,689 $ 21 0.87% $ 5,140 $ 13 1.01%
Money market deposit accounts 109,087 528 1.94 57,792 376 2.61
Savings accounts 1,607 6 1.50 1,179 5 1.70
Time deposits 41,434 283 2.74 47,733 469 3.94
Trust preferred capital notes 5,000 63 5.05 5,000 74 5.94
-------------------------------- ---------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 166,817 901 2.17% 116,844 937 3.22%
-------------------------------- ---------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 2,261 3.77% $ 1,466 3.82%
==================== ====================
Noninterest-bearing demand
deposits 67,480 34,771
Other liabilities 807 658
Stockholders' equity 20,396 12,562
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 255,500 $ 164,835
========= =========
19
TABLE 5
EFFECT OF VOLUME RATE CHANGES ON NET INTEREST INCOME
THREE-MONTHS ENDED JUNE 30
2002 VS. 2001
--------------------------------
DUE TO CHANGE
INCREASE IN AVERAGE:
OR -------------------
($ in thousands) (DECREASE) VOLUME RATE
--------------------------------
EARNING ASSETS:
Loans $ 498 $ 649 $ (151)
Mortgage loans 25 25 --
Taxable securities 264 346 (82)
Federal funds sold (28) 2 (30)
--------------------------------
Total interest income 759 1,022 (263)
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits 8 9 (1)
Money market deposit
accounts 152 215 (63)
Savings deposits 1 2 (1)
Time deposits (186) (57) (129)
Trust preferred capital notes (11) -- (11)
--------------------------------
Total interest expense (36) 169 (205)
--------------------------------
Net Interest Income $ 795 $ 853 $ (58)
================================
SECOND QUARTER RATE/VOLUME ANALYSIS. For the second quarter of 2003, net
interest income was $2.3 million compared to $1.5 million for the same quarter
of 2002, which represents a $795 thousand increase or 54%. For these comparable
quarters, the yield on earning assets declined from 6.26% for the second quarter
of 2002 to 5.27% in the second quarter of 2003 reflecting the significant
decline in interest rates that had occurred in 2002. The overall yield on loans
dropped 67 basis points, the securities portfolio declined 190 basis points and
the yield on Federal funds and cash equivalents declined 53 basis points
reflecting the general decline in interest rates from last year to this year.
Interest expense during these comparable quarters, second quarter 2003
versus second quarter 2002, decreased $36 thousand or 4.0%, from $937 thousand
in interest expense to $901 thousand in interest expense primarily due to the
decrease in interest rates on interest-bearing liabilities. The overall cost of
interest-bearing liabilities decreased 105 basis points from 3.22% in 2002 to
2.17% in 2003.
The resulting effect of the changes in interest rates between the
quarters ended June 30, 2003 and 2002, and the changes in the volume and mix of
earning assets and interest-bearing liabilities resulted in a 3.77% net interest
margin for the second quarter of 2003 versus a 3.82% net interest margin in
2002. Market interest rates in general are approximately 54 basis points lower
in the second quarter of 2003 compared with second quarter 2002 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 quarters.
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 potential loss factor is applied to these loans which considers the company
and peer group historical charge off history, trends in delinquencies and loan
grading, current economic conditions, and factors that include the composition
of the Company's loan portfolio.
20
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 each quarter. The methodology
is reevaluated on a quarterly basis. Subject to the possible development of a
negative trend with respect to past due loans or charge offs or significant
changes in economic conditions, the Company believes that it maintains an
allowance that is adequate but not excessive.
As reflected in Table 6 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.
TABLE 6
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.
June 30, 2003 December 31, 2002 June 30, 2002
------------------------- ------------------------ ------------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
In In In
($ in thousands) Amount Category Amount Category Amount Category
------------------------- ------------------------- ------------------------
Construction loans $ 45 12% $ 35 10% $ 73 6%
Commercial loans 678 16% 765 23% 547 23%
Commercial real estate 841 64% 504 58% 507 59%
Real estate 1-4 family residential
loans 4 1% 6 2% 28 2%
Home equity loans 9 2% 8 2% 21 2%
Consumer loans 92 5% 72 5% 107 8%
--------------------- --------------------- ------------------
Total Loans $1,669 100% $1,390 100% $1,283 100%
===================== ===================== ==================
LOANS
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At June 30, 2003,
total loans were $146 million, a 38.3% increase from the $105 million in loans
outstanding at June 30, 2002. Total loans at June 30, 2003, represented a 20.4%
increase from the $121 million of loans at December 31, 2002. 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 largely confined to our market of Northern Virginia. We do not engage in
highly leveraged transactions or foreign lending activities.
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 or adjustable 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.
Virtually all of the Company's commercial real estate mortgage and
development loans, which account for approximately 60.4% of the Company's total
loans, relate to property in the Northern Virginia market. As such, they are
subject to risks relating to the general economic conditions in that market, and
the market for real estate in particular. While the region experienced some
decline in economic activity during 2002, the local real estate market remains
generally strong, and the Company attempts to mitigate risk though careful
underwriting, including primary reliance on the borrower's financial capacity
and ability to repay without resorting to the property, and lends primarily with
respect to owner occupied or managed properties.
21
The Company's 1-4 family residential real estate loans are generally
not the typical purchase money first mortgage loan or refinancing, but are loans
made for other purposes and the collateral obtained is a first deed of trust on
the residential property of the borrower. The underlying loan would have a final
maturity much shorter than the typical first mortgage and may be a variable or
fixed rate loan. As reflected in Table 7, twenty-six percent of the Company's
loans are fixed rate loans. Ninety-eight percent of the Company's loans reprice
or have a maturity date that falls within five-years.
Consumer loans consist primarily of secured installment credits to
individuals. The consumer portfolio, which includes consumer loans, home equity
loans, and 1-4 family residential loans, represents 8% of the loan portfolio at
June 30, 2003, as compared to 12% at June 30, 2002.
TABLE 7
Table 7 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at June 30, 2003. Maturities are based on
the earlier of contractual maturity or repricing date. Demand loans, loans with
no contractual maturity and overdrafts are represented in one year or less.
JUNE 30, 2003
---------------------------------------------------------
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
---------------------------------------------------------
($ in thousands)
Construction loans $ 17,342 $ -- $ -- $ 17,342
Commercial loans 20,702 2,728 -- 23,430
Commercial real estate loans 43,667 47,650 2,703 94,020
Real estate 1-4 family residential 1,189 62 -- 1,251
Home equity loans 2,935 -- -- 2,935
Consumer loans 4,938 1,578 68 6,584
Overdrafts 125 -- -- $ 125
--------------------------------------------------------
$ 90,898 $ 52,018 $ 2,771 $145,687
========================================================
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
---------------------------------------------------------
($ in thousands)
Fixed Rate $ 17,285 $ 17,342 $ 2,771 $ 37,398
Variable/Adjustable Rate 73,613 34,676 -- 108,289
---------------------------------------------------------
Total $ 90,898 $ 52,018 $ 2,771 $ 145,687
=========================================================
INVESTMENT SECURITIES
The carrying value (fair value) of the Company's securities portfolio
increased $5.5 million to $81.6 million at June 30, 2003 from $76.1 million at
December 31, 2002. The Company currently, and for all periods shown, classifies
its entire securities portfolio as Available-for-Sale. Increases in the
portfolio have occurred whenever deposit growth has outpaced loan demand and the
forecast for loan growth is such that the investment of excess liquidity in
investment securities (as opposed to short-term investments such as federal
funds) is warranted. In general, our investment philosophy is to acquire high
quality government agency securities or high-grade corporate bonds, with a
maturity of five to six years or less in the case of fixed rate securities. In
the case of mortgage-backed securities, the policy is to invest only in those
securities whose average expected life is projected to be approximately five to
six years or less. Mortgage-backed securities with a maturity of ten years or
more are either adjustable rate securities or the expected life of the mortgage
pool is generally no more than five or six years. To the extent possible the
Company attempts to "ladder" the one time call dates for all its securities.
22
TABLE 8
The following table provides information regarding the composition of our
investment portfolio at the dates indicated.
AT JUNE 30, 2003 AT JUNE 30, 2002
----------------------- -----------------------
($ in thousands) Percent of Percent of
Balance Portfolio Balance Portfolio
------- ----------- ------- ----------
AVAILABLE-FOR-SALE
(AT ESTIMATED MARKET VALUE):
U.S. Agency $47,922 58.7% $14,209 30.6%
Mortgage-backed securities 14,598 18.0 22,494 48.4
Adjustable rate mortgage- 4,852 5.9 1,929 4.2
backed securities
Corporate bonds 13,367 16.4 7,364 15.8
Restricted stock 841 1.0 509 1.0
------- ----- ------- -----
TOTAL $81,580 100.0% $46,505 100.0%
======= ===== ======= =====
TABLE 9
The following table provides information regarding the composition of our
investment portfolio at market value at June 30, 2003.
MATURITY OF SECURITIES AT JUNE 30, 2003
YEARS TO MARTURITY
WITHIN OVER 1 YEAR OVER 5 YEARS OVER
($ 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 $ -- -- $ 44,352 2.74% $ 3,570 3.73% $ -- -- $ 47,922 2.82%
Mortgage-backed securities 35 8.77% 1,612 4.27% 1,255 4.38% 11,696 5.34% $ 14,598 5.15%
Adjustable Rate Mortgage-backed
securities -- -- -- -- -- -- 4,852 4.70% $ 4,852 4.70%
Corporate bonds -- -- 9,201 2.95% 2,342 3.23% 1,824 6.87% $ 13,387 3.54%
Restricted stock -- -- -- -- 841 2.58% 841 2.58%
-------- -------- -------- -------- --------
TOTAL DEBT SECURITIES
AVAILABLE-FOR-SALE $ 35 8.77% $ 55,165 2.82% $ 7,167 3.68% $ 19,213 5.20% $ 81,580 3.46%
======== ======== ======== ======== ========
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 June 30, 2003, our Basic
Surplus ratios (net access to cash and secured borrowings) as a percentage of
total assets were approximately 15%, compared to the present internal minimum
guideline range of 5-10%.
23
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 a
matched funding matrix 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 June 30, 2003, 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, but not below
zero. At June 30, 2003, the following 12-month impact on net interest income is
estimated to range from a positive impact of 7.2% to a negative impact of (5.5)%
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.
Since the inception of the Company in 1998, it has generated more
deposit growth than it has been able to deploy into loans. The excess liquidity
has been invested in various types of securities the selection of which has been
determined by expected loan growth and the results of the quarterly interest
rate risk management process. Significant liquidity has been generated
especially in 2003 as a result of achieving growth in a number of niche deposit
generating types of customers. Given the lowest rate environment in nearly 50
years, the Company expects further declines to be either minimal or no greater
than 50 basis points. As a result, the investment strategy has been to invest
the liquidity into securities that have short maturities or one-time call dates
of 18 months or less and to ladder such investments to the extent possible in
expectation that rates are far more likely to rise in the future than to
decline.
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
June 30, 2003. Clearly the Company is positioned to substantially improve
earnings if and when rates rise. With respect to further reductions in rates
(Declining Rate and 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. Thus management believes the exposure to future changes in
interest rates would not have a material negative effect on the results of
operations.
24
Static Rates -0-%
Most Likely Rates .5%
Ramp Up 100bp- 12 months 4.8%
Ramp Up 200bp- 12 months 7.1%
Ramp Down 100bp- 12 months (2.1)%
Ramp Down 200bp- 12 months (5.5)%
Rising Rate Scenario 7.2%
Declining Rate Scenario (2.6)%
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
six-month periods ended June 30, 2003 and 2002.
TABLE 10
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------ ----------------
($ in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Service charges on deposit accounts $ 80 $ 60 $155 $134
Cash management fees 27 33 53 64
Other fee income 47 30 80 54
Gain on sale of mortgage loans 85 -- 85 --
Gain on sale of securities 41 -- 56 16
---- ---- ---- ----
Noninterest Income $280 $123 $429 $268
==== ==== ==== ====
The increase in noninterest income for the three and six months ended
June 30, 2003 as compared to the same periods in 2002, is the result of the
continued growth of the Company and the expansion of products and services
resulting in fee income, such as the increase in service charges on deposit
accounts. Cash management fees have declined primarily due to commercial
customers not utilizing the product during this sustained extremely low interest
rate environment.
TABLE 11
The categories of noninterest expense that exceed 1% of operating revenue are
as follows:
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------ ----------------
($ in thousands) 2003 2002 2003 2002
------ ------ ------ ------
Salaries and benefits $ 747 $ 563 $1,437 $1,076
Occupancy cost, net 148 130 303 256
Equipment expense 104 70 200 127
Professional fees 124 31 204 60
Data processing costs 98 85 197 173
Postage and supplies 29 23 65 69
Advertising and public relations 15 31 46 69
Courier and express services 30 25 59 48
State franchise tax 50 30 93 60
Other 103 78 184 134
------ ------ ------ ------
Noninterest Expense $1,448 $1,066 $2,788 $2,072
====== ====== ====== ======
25
Noninterest expense increased $716 thousand or 35% from $2.1 million to
$2.8 million for the first six-months of 2003, compared to the same period in
2002. The increase in salary and benefit expense of $361 thousand is primarily
the result of staff merit increases for 2003 and the additional staff for the
mortgage office opened in early 2003. The growth in the size of the Company also
required adding additional personnel in the main office to support the volume of
business.
The occupancy cost increase of $47 thousand for the first half of 2003
compared with the previous year was due to annualized rent increases and the
additional branches, including the mortgage office. Equipment costs increased a
modest $73 thousand for the same comparative periods due to additional equipment
required and software enhancements plus equipment for the additional branches.
With respect to the increases in data processing, the increase is due to the
increase in the volume of accounts and business transactions processed in 2003
versus 2002. The increase in the state franchise tax is due to the increased
capital of the Bank from earnings retention and the capital infusion to the bank
in 2003. Other expenses are up $50 thousand quarter to quarter primarily due to
the growth of the Bank and increased volume of banking activities
DEPOSITS AND OTHER BORROWINGS
The principal sources of funds for the Bank are core deposits (demand
deposits, NOW accounts, money market accounts, savings accounts and certificates
of deposit) from the local market areas surrounding the Bank's offices. The
Bank's deposit base includes transaction accounts, time and savings accounts and
accounts which customers use for cash management and which provide the Bank with
a source of fee income and cross-marketing opportunities as well as a low-cost
source of funds. Time and savings accounts, including money market deposit
accounts, also provide a relatively stable and low-cost source of funding.
TABLE 12
The following table reflects deposits by category for the periods indicated.
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2003 2002
-------------------------------------------
($ in thousands) Average Average Average Average
Balance Rate Balance Rate
------------------------ -----------------
Deposits
Noninterest-bearing demand $ 67,480 --% $ 34,771 --%
Interest-bearing demand 9,689 0.87 5,140 1.01
Money Market 109,087 1.94 57,792 2.61
Savings 1,607 1.50 1,179 1.70
Certificates of deposit of $100,000 or more 26,962 2.75 27,317 3.91
Other time 14,472 2.72 20,416 3.99
----------------- ------------------
Total Deposits $229,297 1.47% $146,615 2.36%
================= ==================
26
TABLE 13
The following table indicates the amount of certificates of deposit of
less than $100,000 and $100,000 or more, and their remaining maturities as of
June 30, 2003.
3 MONTHS 4 TO 6 7 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
----------- ----------- ----------- ----------- -----------
($ in thousands)
Certificates of deposit less than $100,000 $ 3,968 $ 3,141 $ 5,257 $ 2,356 $14,722
Certificates of deposit of $100,000 or more $ 6,565 $ 5,786 $ 9,021 $ 4,042 $25,414
------- ------- ------- ------- -------
$10,533 $ 8,927 $14,278 $ 6,398 $40,136
======= ======= ======= ======= =======
CAPITAL MANAGEMENT
Management monitors historical and projected earnings, asset growth, as
well as its liquidity and various balance sheet risks in order to determine
appropriate capital levels. At June 30, 2003, stockholders' equity increased
$2.7 million from the $17.5 million in equity at June 30, 2002 primarily as a
result of the $2.1 million increase in retained earnings and the $1 million
increase in unrealized gains on securities available for sale, and offset by a
decrease in capital surplus.
Capital Requirement. A comparison of the Company's and the Bank's regulatory
capital at June 30, 2003, compared to minimum regulatory capital guidelines is
shown in the table that follows.
TABLE 14
Minimum Minimum To Be
Actual Guidelines "Well Capitalized"
----------------- ----------------- -----------------------
Total Risk-Based Capital
Company 14.4% 8.0% N/A
Bank 11.8% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 13.5% 4.0% N/A
Bank 13.4% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 9.5% 4.0% N/A
Bank 7.8% 4.0% 5.0%
ITEM. 3 CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Operating and
Financial Officer, evaluated, as of the last day of the period covered by this
report, the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer and Chief Operating and Financial Officer concluded that the Company's
disclosure controls and procedures were adequate. There were no changes in the
Company's internal control over financial reporting (as defined in Rule 13a-15
under the Securities Act of 1934) during the quarter ended June 30, 2003 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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
On April 30, 2003, the annual meeting of shareholders of the Company
was held for the purpose of electing twelve (12) directors to serve until the
next annual meeting and until their successors are duly elected and qualified.
The name of each director elected at the meeting, who constitute the entire
Board of Directors in office upon completion of the meeting, and the votes cast
for such persons are set forth below.
- ------------------------------------------------------------------------------------------------------------
Name For Against/Withheld Abstentions Broker Non-votes
- ------------------------------------------------------------------------------------------------------------
Fred A. Burroughs, III 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Dr. Terry L. Collins 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Norman P. Horn 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Dr. David C. Karlgaard 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Richard I. Linhart 1,228,854 2,550 -- --
- ------------------------------------------------------------------------------------------------------------
Richard C. Litman 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
John R. Maxwell 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Dr. Alvin E. Nashman 1,230,167 1,237 -- --
- ------------------------------------------------------------------------------------------------------------
Helen L. Newman 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Thomas L. Patterson 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
David W. Pijor 1,230,354 1,050 -- --
- ------------------------------------------------------------------------------------------------------------
Russell E. Sherman 1,191,420 8,737 -- --
- ------------------------------------------------------------------------------------------------------------
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
28
Number Description
- ------ -----------
3(a) Articles of Incorporation of James Monroe Bancorp, as amended (1)
3(b) Bylaws of James Monroe Bancorp (2)
4(a) Indenture, dated as of March 26, 2002 between James Monroe Bancorp,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, as trustee (3)
4(b) Amended and Restated Declaration of Trust, dated as of March 26, 2002
among James Monroe Bancorp, Inc., State Street Bank and Trust Company
of Connecticut, National Association, as Institutional Trustee, and
John R. Maxwell, David W. Pijor and Richard I. Linhart as
Administrators (3)
4(c) Guarantee Agreement dated as of March 26, 2002, between James Monroe
Bancorp, Inc. and State Street Bank and Trust Company of Connecticut,
National Association, as trustee (3)
4(d) Indenture, dated as of July 31, 2003 between James Monroe Bancorp,
Inc. and U.S. Bank, National Association, as trustee (3)
4(e) Amended and Restated Declaration of Trust, dated as of July 31, 2003
among James Monroe Bancorp, Inc., U.S. Bank, National Association, as
Institutional Trustee, and John R. Maxwell, David W. Pijor and
Richard I. Linhart as Administrators (3)
4(f) Guarantee Agreement dated as of July 31, 2003, between James Monroe
Bancorp, Inc. and U.S. Bank, National Association, as trustee (3)
10(a) Employment contract between James Monroe Bancorp and John R.
Maxwell(4)
10(b) Employment contract between James Monroe Bancorp and Richard I.
Linhart(4)
10(c) James Monroe Bancorp1998 Management Incentive Stock Option Plan (5)
10(d) James Monroe Bancorp 2000 Director's Stock Option Plan (6)
10(e) James Monroe Bancorp, Inc. 2003 Equity Compensation Plan (7)
11 Statement re: Computation of Per Share Earnings
Please refer to Note 2 to the financial statements included in this report.
21 Subsidiaries of the Registrant
31(a) Certification of Chief Executive Officer
31(b) Certification of Chief Financial Officer
32(c) Certification of Chief Executive Officer
32(d) Certification of Chief Financial Officer
- --------------------------
(1) Incorporated by reference to exhibit 3(a) to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2002.
(2) Incorporated by reference to exhibit 3(b) to the Company's registration
statement on Form SB-2 (No. 333-38098).
(3) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. The Company agrees to provide a copy of these documents
to the Commission upon request.
(4) Incorporated by reference to exhibit of same number to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002.
(5) Incorporated by reference to exhibit 10(b) to the Company's
registration statement on Form SB-2 (No. 333-38098).
(6) Incorporated by reference to exhibit 10(c) to the Company's
registration statement on Form SB-2 (No. 333-38098).
(7) Incorporated by reference to Exhibit 10(e) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 2003.
(b) Reports on Form 8-K
On April 11, 2003, James Monroe Bancorp, Inc. filed a Current Report on Form
8-K, under Items, 5, 9 and 12 thereof, announcing earnings for the first quarter
of 2003, and a five for four stock split in respect of its common stock in the
form of a 25% stock dividend.
29
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: August 6, 2003 BY: /s/John R. Maxwell
-------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: August 6, 2003 BY: /s/ Richard I. Linhart
-----------------------------------
Richard I. Linhart, Executive Vice
President & Chief Operating and
Financial Officer
30