PROSPECTUS Filed pursuant to Rule 424(b)(1)
333-108864
333-110379
521,739 Shares
[James Monroe Bancorp, Inc. Logo Omitted]
Common Stock
James Monroe Bancorp is the holding company for James Monroe Bank, a
$290 million commercial bank headquartered in Arlington, Virginia.
We are offering 521,739 shares of our common stock.
Our common stock is quoted on the Nasdaq SmallCap Market under the
symbol "JMBI". The last reported sale price of the common stock on November 10,
2003 was $25.80.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 6 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR
COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMON STOCK OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF OUR COMMON STOCK ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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PER SHARE TOTAL
--------- -----
Price to public $23.00 $11,999,997
Underwriting discount (1) $ 1.61 $772,783
Proceeds, before expenses, to James Monroe Bancorp (1) $21.39 $11,227,214
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(1) The underwriter has agreed that the underwriting discount will be $0.837 per
share for up to 86,956 shares, which may be purchased by our directors,
executive officers and founding directors. The total underwriting proceeds
and total proceeds of the offering assumes the purchase of 86,956 shares by
such persons.
This is a firm commitment underwriting. The underwriter may also
purchase up to 78,261 additional shares from us at the public offering price,
less the underwriting discount, to cover over-allotments.
The underwriter expects to deliver the shares to purchasers on November 14,
2003.
SCOTT & STRINGFELLOW, INC.
The date of this prospectus is November 10, 2003
[MAP OF MARKET AREA]
A. Main Banking Office 3033 Wilson Boulevard, Arlington, Virginia
B. Full Service Branch 7023 Little River Turnpike, Annandale, Virginia
C. Full Service Branch 10509 Judicial Drive, Fairfax, Virginia
D. Full Service Branch 606 South King Street, Leesburg, Virginia
E. Drive/Walk Through 10 W. Market St., Leesburg, Virginia
F. Coming 2nd Qt. 2004 3914 Centreville Road, Chantilly, Virginia
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT, OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE EXIST IN THE OPEN MARKET. IF THE
UNDERWRITER COMMENCES STABILIZING ACTIVITIES, IT MAY DISCONTINUE THEM AT ANY
TIME.
SUMMARY
This summary highlights selected information about us and the offering
that is contained elsewhere in this prospectus. The summary does not contain all
the information that you should consider before investing in our common stock.
You should read this summary together with the entire prospectus. Except as
otherwise indicated by the context, references in this prospectus to "we," "our"
or "us" are to the combined business of James Monroe Bancorp, Inc. and its
wholly owned subsidiary, James Monroe Bank.
JAMES MONROE BANCORP
James Monroe Bancorp is a bank holding company headquartered in
Arlington, Virginia. Our wholly owned subsidiary, James Monroe Bank, commenced
operations as a Virginia chartered bank in June 1998 and engages in a general
commercial banking business with a particular focus on the needs of small to
medium-sized businesses, their principals and professionals.
We currently operate five banking offices in Northern Virginia - in
Arlington, Annandale, Fairfax City and two offices in Leesburg. To position
ourselves to take advantage of future growth in our market area, we expect to
open a sixth banking office in Chantilly, near the intersection of Routes 50 and
28, during the second quarter of 2004. This location will also eventually house
certain administrative and operations functions, as well as our mortgage
division.
We have experienced significant growth in both assets and profitability
during our five years of operation. As of September 30, 2003, we had assets of
$288.9 million, representing a 50.0% increase from September 30, 2002. Total
loans outstanding as of September 30, 2003 amounted to $154.0 million, an
increase of 35.2% from September 30, 2002. For the nine months ended September
30, 2003, our net income was $1.8 million, an increase of 102.8% compared to our
net income for the nine months ended September 30, 2002. Earnings per basic
share for the same period increased 73.3% from $0.45 to $0.78. During the period
from December 31, 1998 to September 30, 2003, we have enjoyed compound annual
growth rates of 55.3% in assets, 49.2% in loans and 56.8% in deposits, based on
monthly average balances.
THE NORTHERN VIRGINIA MARKET
We believe that a key factor in our ability to achieve our business
strategy goal and to create shareholder value is the attractiveness of the
Northern Virginia market. The market in which we operate and where we are
establishing our branches has seen considerable population and economic growth
in the past several decades, and we expect such favorable growth to continue.
Our primary service area includes Arlington, Fairfax and Loudoun counties,
markets that we believe have the most profitable banking opportunities in
Northern Virginia.
Collectively, the markets in which we operate are some of the largest
in Virginia. From 1990 to 2000, Fairfax County's population increased 18.5% to
969,749, the highest in the state. During the same period, the populations of
Arlington and Loudoun counties increased 10.8% and 96.9% to 189,453 and 169,599,
respectively. Loudoun County's growth during 1990 to 2000 placed it as the sixth
highest county in the United States in terms of percentage change in population
during that period, and it is expected to increase by 77.1% from 2000 to 2010.
Arlington and Fairfax counties, two of the more densely populated counties in
Virginia, are projected to grow 6.9% and 15.1%, respectively, during the 2000 to
2010 period. If Fairfax County were a city, it would rank 10th in population in
the United States.
In addition to the compelling population growth, these areas continue
to rank among the top counties in the nation in terms of median household
income, a solid indicator of an affluent market. Fairfax County's median
household income is the second highest in the United States at $81,050, which is
nearly double the national median. Loudoun County is second highest in Virginia,
and ranks third in the country, with median household income of $80,648.
1
BUSINESS STRATEGY
Our goal is to enhance our franchise value by continuing our strong
growth trend in assets and profitability while maintaining asset quality and
individualized customer service. Our strategic plan has the following four
primary components:
o CONTINUE TO EXPAND AND PENETRATE HIGH GROWTH MARKETS. We believe we
are well positioned to take full advantage of the favorable
demographic and economic characteristics in our expanding Northern
Virginia market. The areas in which we operate are characterized by
high concentrations of small to medium-sized businesses and
professionals, our target customers. We will look for opportunities
to expand our franchise in these high growth markets on a selective
and opportunistic basis. We are continuously seeking additional
branching opportunities, centered around experienced lending
officers with a significant portfolio of commercial customers. We
will increase our market share by branching selectively, by
continuing to capitalize on niche products to service our small and
medium-sized business customers, and by enhancing our marketing
efforts to build brand identification.
o HIRE EXPERIENCED LENDING OFFICERS. Our branching strategy has
revolved around the hiring of highly experienced local banking
professionals with successful track records and established
customer relationships with small to medium-sized businesses and
affluent households. These officers have been able to attract
customers with which they have built relationships over the years,
enhancing our loan production. We typically hire one or more
officers for a specific location, and then establish a branch
office to support business generation.
We currently have seven loan officers that have an average of over
25 years of experience in the financial services industry. Our
lenders have operated in our market area for many years, and have
experienced a wide range of economic cycles and lending market
conditions. We will continue to grow and build our franchise by
having seasoned, local lenders and other bankers join our
organization. Our lending officers are supported by members of our
executive management team and our Board of Directors, who have
broad experience during a variety of economic cycles in loan
production, credit administration, investments, asset liability
management and compliance - key strengths in building and growing
our company.
o TARGET SMALL TO MEDIUM-SIZED BUSINESSES IN OUR COMMUNITIES. The
Northern Virginia banking market has been characterized by
significant consolidation among financial institutions. Over the
past five years, a number of independent community banks in our
market area have been acquired by large regional or national banks,
most of which are headquartered out of our market area. While many
of the large banks operating in our market are now targeting the
small and medium-sized business market, our customers have told us
that the corporate service culture and operational infrastructure
at large banks often do not provide satisfactory customer
experiences. Automation and 800 numbers take the place of
personalized and time-sensitive service. Personnel turnover
prevents the development of a banking relationship that adds value
to a customer's business. This atmosphere provides an excellent
opportunity for James Monroe Bank, a community-oriented bank
delivering a wide array of personalized products through an
integrated and responsive sales and service approach. We believe
that our experienced team of banking professionals focused on
relationship banking, who have a history of serving Northern
Virginia's small to medium-sized businesses with annual sales
generally up to $10 million, gives us a distinct competitive
advantage in attracting and keeping this customer base.
o PERSONALIZE CUSTOMER SERVICE, OFTEN BY LEVERAGING OUR TECHNOLOGY
CAPABILITIES. We are able to compete effectively in our market by
offering products comparable to a larger financial institution,
while maintaining the high level of customer service, quick
response time and personalized attention of a locally headquartered
bank. We are able to solidify this competitive advantage with the
use of technology to tailor products and services to specific
segments of our targeted banking customer market. Our ability to
optimize the capacities of our technology systems, in creating,
marketing and delivering defined products to serve the different
needs of our customers, will allow us to realize economies of scale
as we further execute our expansion strategy.
2
RECENT DEVELOPMENTS
We achieved record earnings for the three and nine months ended
September 30, 2003. Net income for the three month period was $735 thousand or
$0.31 per basic share and $0.29 per diluted share, compared to net income of
$382 thousand, or $0.17 per basic share and $0.16 per diluted share, for the
third quarter of 2002, an increase of 92.4% in net income. For the nine months
ended September 30, 2003, net income was $1,808,000 or $0.73 per share compared
to $892,000, or $0.43 per share for the first nine months of 2002, both on a
diluted basis. For the comparative nine month period this represents a 102.7%
increase in net income.
Total assets at September 30, 2003, were $288.9 million, a 21.0%
increase over assets of $238.8 million at December 31, 2002, and a 41.6%
increase over the assets at the same period a year ago. Total deposits at the
end of September 2003 were $258.5 million an increase of 20.9% from December 31,
2002 and 43.4% from September 30, 2002. Loans outstanding at September 30, 2003
were $154.0 million, an increase of 27.2% from December 31, 2002 and 33.6% from
September 30, 2002.
The following table sets forth selected unaudited consolidated
financial data for the nine months September 30, 2003 and 2002.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(Dollars in thousands, except per share data) 2003 2002
------------- --------------
(Unaudited)
PERIOD-ENDING BALANCES:
Total assets............................................. $ 288,914 $ 204,088
Total loans.............................................. 154,012 115,303
Total deposits........................................... 258,527 180,338
Stockholders' equity .................................... 20,695 18,129
Shares outstanding....................................... 2,333,642 2,299,455
RESULTS OF OPERATIONS:
Total interest income.................................... $ 9,459 $ 7,177
Total interest expense................................... 2,653 2,627
Net interest income...................................... 6,806 4,550
Provision for loan losses................................ 472 386
Net interest income after provision for loan losses...... 6,334 4,164
Noninterest income....................................... 787 403
Noninterest expense...................................... 4,396 3,206
Income (loss) before income taxes........................ 2,725 1,361
Net income (loss)........................................ 1,809 892
PER SHARE DATA:
Net income (loss), basic................................. $ 0.78 $ 0.45
Net income (loss), diluted............................... 0.73 0.43
Book value............................................... 8.87 7.88
ASSET QUALITY RATIOS:
Allowance for loan losses to loans....................... 1.15% 1.23%
Nonperforming loans to loans............................. 0.27% 0.34%
Allowance for loan losses to nonperforming loans......... 4.34x 3.50x
Nonperforming assets to loans and other real estate...... 0.27% 0.34%
Net loan charge offs to average loans.................... 0.07% 0.00%
SELECTED RATIOS:
Tier 1 risk-based capital ratio.......................... 14.69% 16.80%
Total risk-based capital ratio........................... 16.87 17.86
Leverage ratio........................................... 9.35 11.65
Efficiency ratio......................................... 57.90 64.73
Equity to assets......................................... 7.16 8.88
Return on average total assets........................... 0.94 0.73
Return on average stockholders' equity................... 12.15 8.39
Net interest margin...................................... 3.76 3.99
THE OFFERING
Shares Offered 521,739 shares of common stock.
Offering Price $23.00 per share.
Shares outstanding after the offering 2,855,381 shares.
Use of Proceeds We intend to use the proceeds of the
offering for general corporate
purposes, including for contribution
to James Monroe Bank's capital, which
will enable it to continue as a "well
capitalized" institution as our assets
increase, allow us to pursue future
growth opportunities through further
expansion of our existing lending and
investment activities, and possible
branch expansion. Except for the
proposed Chantilly branch, we have no
definitive plans for any additional
branches or for any acquisitions. See
"Use of Proceeds" at page 10.
Dividend policy To date, we have not paid any cash
dividends on our common stock,
electing to retain earnings to fund
growth. We do not expect that we will
elect to pay cash dividends in the
foreseeable future. See " Market for
Common Stock and Dividends" at page
10.
Nasdaq SmallCap Market symbol JMBI
Risk Factors Investing in our common stock involves
investment risks. You should carefully
review the information contained under
"Risk Factors" beginning at page 6
before deciding to purchase shares of
our common stock.
The number of shares of our common stock outstanding after this
offering is based on the number of shares outstanding on September 30, 2003, and
excludes 256,518 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans on September 30, 2003, of which 229,328
were exercisable. Options to purchase an aggregate of 30,000 shares will be
issued under a three year employment agreement to be entered into with Richard
I. Linhart, our Executive Vice President and Chief Operating Officer.
The number of shares of our common stock outstanding after this
offering is based on the number of shares outstanding on August 31, 2003, and
excludes 251,518 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans on August 31, 2003, of which 227,661
were exercisable. Additional options to purchase 3,000 shares of common stock
were issued subsequent to August 31, and options to purchase 4,000 shares were
allocated for issuance to prospective employees.
Except as otherwise indicated, all information in this prospectus
assumes no exercise of the underwriter's over-allotment option.
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We were organized as a Virginia corporation in April 1999 for the sole
purpose of becoming a holding company for James Monroe Bank. James Monroe Bank
began operating as a Virginia commercial bank in June 1998 and became a wholly
owned subsidiary of James Monroe Bancorp in July 1999.
Our principal executive offices are located at 3033 Wilson Boulevard,
Arlington, Virginia 22201. Our telephone number is (703) 524-8100.
3
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table shows a summary of historical consolidated
financial data for James Monroe Bancorp. You should read it together with the
historical consolidated financial information contained in the consolidated
financial statements for the year ended December 31, 2002 and for the six months
ended June 30, 2003 included with this prospectus and with the other information
provided in this prospectus. Information for the six month periods ended June
30, 2003 and 2002 is derived from unaudited interim financial statements and
includes, in the opinion of management, all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the data for such
period. Information for the period from inception to December 31, 1998
represents results of James Monroe Bank. The results of operations for the six
month period ended June 30, 2003 do not necessarily indicate the results which
may be expected for any future period or for the full year.
FROM
INCEPTION
SIX MONTHS ENDED (JUNE 8, 1998)
JUNE 30, YEAR ENDED DECEMBER 31, THROUGH
----------------------- ---------------------------------------------------- DECEMBER 31
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- .--------- ---------- ---------- ----------
(Dollars in thousands, except share and per share data)
PERIOD-ENDING BALANCES:
Total assets........................ $ 297,054 $ 189,835 $ 238,793 $ 126,658 $ 89,230 $ 49,618 $ 23,509
Total loans......................... 145,687 105,370 121,047 86,139 50,040 31,039 12,769
Total deposits...................... 271,099 166,891 213,870 114,259 78,042 42,819 16,781
Stockholders' equity ............... 20,214 17,466 19,195 11,967 10,733 6,600 6,659
Average weighted shares
outstanding at period end (1):
Basic.......................... 2,301,295 1,809,536 2,054,844 1,800,186 1,461,105 1,391,302 1,382,981
Diluted........................ 2,464,435 1,907,540 2,160,539 1,886,413 1,508,239 1,408,035 1,382,981
RESULTS OF OPERATIONS:
Total interest income............... $ 6,088 $ 4,435 $ 10,091 $ 7,548 $ 5,413 $ 2,845 $ 630
Total interest expense.............. 1,777 1,601 3,609 2,918 2,177 921 147
Net interest income................. 4,311 2,834 6,482 4,630 3,236 1,924 482
Provision for loan losses........... 349 251 483 450 237 231 132
Net interest income after
provision for loan losses......... 3,962 2,583 5,999 4,180 2,999 1,693 350
Noninterest income.................. 429 268 760 554 302 159 14
Noninterest expense................. 2,788 2,072 4,394 3,033 2,348 1,727 817
Income (loss) before income taxes... 1,603 779 2,365 1,701 953 125 (452)
Net income (loss)................... 1,074 510 1,553 1,112 810 125 (452)
PER SHARE DATA (1):
Net income (loss), basic............ $ 0.47 $ 0.28 $ 0.75 $ 0.62 $ 0.55 $ 0.09 $ (0.33)
Net income (loss), diluted.......... 0.44 0.27 0.72 0.59 0.54 0.09 (0.33)
Book value.......................... 8.78 7.60 8.34 6.65 5.97 4.73 4.81
ASSET QUALITY RATIOS:
Allowance for loan losses to loans.. 1.15% 1.22% 1.15% 1.20% 1.19% 1.17% 1.03%
Nonperforming loans to loans........ 0.29% 0.28% 0.24% 0.31% 0.08% 0.00% 0.00%
Allowance for loan losses to
nonperforming loans............... 4.01x 5.03x 4.70x 3.87x 15.38x n/a(3) n/a(3)
Nonperforming assets to loans and
other real estate................. 0.29% 0.28% 0.24% 0.31% 0.08% 0.00% 0.00%
Net loan charge offs to average
loans............................. 0.05% 0.00% 0.12% 0.03% 0.00% 0.00% 0.00%
SELECTED RATIOS:
Tier 1 risk-based capital ratio..... 13.48% 17.87% 15.49% 11.94% 18.50% 20.30% 43.80%
Total risk-based capital ratio...... 14.41 18.91 16.43 12.98 19.60 21.40 44.70
Leverage ratio...................... 9.48 13.36 10.53 9.53 12.60 14.00 30.60
Efficiency ratio (2)................ 58.82 66.80 60.67 58.51 66.40 82.91 164.72
Equity to assets.................... 6.80 9.20 8.04 9.45 12.03 13.30 28.32
Return on average total assets...... 0.90 0.70 0.88 1.02 1.19 0.32 (4.54)
Return on average stockholders'
equity............................ 10.93 8.32 10.15 9.65 10.75 1.89 (11.14)
Net interest margin................. 3.83 4.15 3.90 4.56 5.09 5.25 5.27
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(1) Per share data and share information have been adjusted to reflect a
three-for-two stock split in the form of a 50% stock dividend paid on
July 25, 2002 and a five-for-four stock split in the form of a 25% stock
dividend paid on May 16, 2003.
(2) We compute our efficiency ratio by dividing noninterest expense by the sum
of net interest income on a tax equivalent basis and noninterest income.
Comparison of our efficiency ratio with those of other companies may not be
possible, because other companies may calculate the efficiency ratio
differently.
(3) Not applicable as there were no nonperforming loans at period end.
4
RISK FACTORS
An investment in our common stock involves various risks. You should
carefully consider the risk factors listed below. These risk factors may cause
our future earnings to be lower or our financial condition to be less favorable
than we expect. In addition, other risks of which we are not aware, which relate
to the banking and financial services industries in general, or which we do not
believe are material, may cause earnings to be lower, or hurt our future
financial condition. You should read this section together with the other
information in this prospectus.
OUR LEVEL OF ASSETS AND EARNINGS MAY NOT CONTINUE TO GROW AS RAPIDLY AS
THEY HAVE IN THE PAST FEW YEARS.
Since opening for business in 1998, our asset level has increased
rapidly, including an 88.5% increase in 2002, and a 21.0% increase in the first
nine months of 2003. Since 1999, the first full year for which we achieved
profitability, our earnings have increased at least 37% annually. We cannot
assure you that we will continue to achieve comparable results in future years.
As our asset size and earnings increase, it may become more difficult to achieve
high rates of increase in assets and earnings. Additionally, it may become more
difficult to achieve continued improvements in our expense levels and efficiency
ratio.
We may not be able to immediately invest all of the capital provided by
the offering in loans. Investing the offering proceeds in securities until we
are able to deploy the proceeds in loans will provide lower margins than we
generally earn on loans, potentially adversely impacting shareholder returns.
Declines in the rate of growth of income or assets, and increases in operating
expenses or nonperforming assets may have an adverse impact on the value of our
common stock.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE CONTINUED GROWTH.
We intend to use the proceeds of the offering to support further growth
in the level of our assets and deposits. As our capital base grows, so does our
legal lending limit. We cannot be certain as to our ability to manage increased
levels of assets and liabilities, or to successfully make and supervise higher
balance loans. Further, we may not be able to maintain the relatively low levels
of nonperforming loans that we have experienced. We may be required to make
additional investments in equipment and personnel to manage higher asset levels
and loan balances, which may adversely impact earnings, shareholder returns and
our efficiency ratio. Increases in operating expenses or nonperforming assets
may have an adverse impact on the value of our common stock.
TRADING IN OUR COMMON STOCK HAS BEEN SPORADIC AND VOLUME HAS BEEN
LIGHT. AS A RESULT, SHAREHOLDERS MAY NOT BE ABLE TO QUICKLY AND EASILY SELL
THEIR COMMON STOCK.
Although our common stock is listed for trading on the Nasdaq SmallCap
Market, and a number of brokers offer to make a market in the common stock on a
regular basis, trading volume to date has been limited, averaging only
approximately 1,400 shares per day over the past year, and there can be no
assurance that an active and liquid market for the common stock will develop.
Accordingly, even though there is no holding period required for shares
purchased in the offering, shareholders may find it difficult to sell a
significant number of shares at the prevailing market price.
WE HAVE NO CURRENT PLANS TO PAY CASH DIVIDENDS.
James Monroe Bank is our principal revenue producing operation. As a
result, the ability to pay cash dividends to shareholders largely depends on
receiving dividends from James Monroe Bank. The amount of dividends that a bank
may pay is limited by state and federal laws and regulations. Even if we have
earnings in an amount sufficient to pay cash dividends, our Board of Directors
currently intends to retain earnings for the purpose of financing growth. See
"Market for Common Stock and Dividends" at page 10.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN ALLOCATING THE PROCEEDS OF
THE OFFERING.
Subject to requirements of safe and sound banking practices and federal
law and regulations limiting the activities in which banks and bank holding
companies may engage, our management and Board of Directors will have
substantial discretion in determining the use of offering proceeds. The
discretion of the Board of Directors and management to allocate the proceeds of
the offering may result in the use of the proceeds for non-banking activities
5
permitted for bank holding companies or financial holding companies which are
not specifically identified in this prospectus.
OUR DIRECTORS AND EXECUTIVE OFFICERS ARE EXPECTED TO OWN AT LEAST 19.3%
OF THE OUTSTANDING COMMON STOCK AFTER THE OFFERING, ASSUMING THE EXERCISE OF THE
OVER-ALLOTMENT OPTION, AND THEY MAY PURCHASE ADDITIONAL SHARES IN THE OFFERING.
AS A RESULT OF THEIR COMBINED OWNERSHIP, THEY COULD MAKE IT MORE DIFFICULT TO
OBTAIN APPROVAL FOR SOME MATTERS SUBMITTED TO SHAREHOLDER VOTE, INCLUDING
MERGERS AND ACQUISITIONS. THE RESULTS OF THE VOTE MAY BE CONTRARY TO THE DESIRES
OR INTERESTS OF THE PUBLIC SHAREHOLDERS.
Following completion of the offering, our directors and executive
officers and their affiliates will own at least 19.3% of the outstanding common
stock, assuming that they purchase shares in the offering as currently expected
and the over-allotment option is exercised. These persons may purchase a greater
or lesser number of shares than expected in the offering.
By voting against a proposal submitted to shareholders, the directors
and officers, as a group, may be able to make approval more difficult for
proposals requiring the vote of shareholders, such as some mergers, share
exchanges, asset sales, and amendments to the Articles of Incorporation. See
"Share Ownership of Management and Five Percent Beneficial Owners" at page 41,
and "Description of Our Capital Stock - Selected Provisions of the Articles of
Incorporation and Virginia Law" at page 46.
THE LOSS OF THE SERVICES OF ANY KEY EMPLOYEES COULD ADVERSELY AFFECT
INVESTOR RETURNS.
Our business is service oriented, and our success depends to a large
extent upon the services of John R. Maxwell, our President and Chief Executive
Officer, and other senior officers. The loss of the services of Mr. Maxwell or
other senior officers could adversely affect our business. Although we have $1
million in key man insurance on Mr. Maxwell, the proceeds of this policy are not
intended to fully compensate us for the loss of Mr. Maxwell's services.
A SUBSTANTIAL PORTION OF OUR LOANS ARE REAL ESTATE RELATED LOANS IN THE
NORTHERN VIRGINIA/WASHINGTON DC METROPOLITAN AREA, AND SUBSTANTIALLY ALL OF OUR
LOANS ARE MADE TO BORROWERS IN THAT AREA. ADVERSE CHANGES IN THE REAL ESTATE
MARKET OR ECONOMY IN THIS AREA COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND
CHARGE OFFS, AND ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
We have a substantial amount of loans secured by real estate in the
Northern Virginia/Washington DC metropolitan area as collateral, and
substantially all of our loans are to borrowers in that area. At June 30, 2003,
64% of our loans were commercial real estate loans and 12% were construction and
land development loans. An additional 16% were commercial and industrial loans
which are not secured by real estate. These concentrations expose us to the risk
that adverse developments in the real estate market, or in the general economic
conditions in the Northern Virginia/Washington DC metropolitan area, could
increase the levels of nonperforming loans and charge offs, and reduce loan
demand and deposit growth. In that event, we would likely experience lower
earnings or losses. Additionally, if economic conditions in the area
deteriorate, or there is significant volatility or weakness in the economy or
any significant sector of the area's economy, our ability to develop our
business relationships may be diminished, the quality and collectibility of our
loans may be adversely affected, the value of collateral may decline and loan
demand may be reduced.
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY
AFFECTED IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO ABSORB ACTUAL
LOSSES OR IF WE ARE REQUIRED TO INCREASE OUR ALLOWANCE FOR LOAN LOSSES.
Experience in the banking industry indicates that a portion of our
loans will become delinquent, and that some may only be partially repaid or may
never be repaid at all. Despite our underwriting criteria, we may experience
losses for reasons beyond our control, such as general economic conditions.
Although we believe that our allowance for loan losses is maintained at a level
adequate to absorb any inherent losses in our loan portfolio, these estimates of
loan losses are necessarily subjective and their accuracy depends on the outcome
of future events. If we need to make significant and unanticipated increases in
our loss allowance in the future, our results of operations would be materially
adversely affected at that time.
6
OUR BANK REGULATORS MAY REQUIRE US TO INCREASE OUR ALLOWANCE FOR LOAN
LOSSES, WHICH COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Federal and state regulators, as an integral part of their supervisory
function, periodically review our allowance for loan losses. These regulatory
agencies may require us to increase our provision for loan losses or to
recognize further loan charge offs based upon their judgments, which may be
different from ours. Any increase in the allowance for loan losses required by
these regulatory agencies could have a negative effect on our financial
condition and results of operations.
LACK OF SEASONING OF OUR LOAN PORTFOLIO MAY INCREASE THE RISK OF CREDIT
DEFAULTS IN THE FUTURE.
Most of the loans in our loan portfolio were originated within the past
four years, and approximately 42% were originated within the past 18 months. In
general, loans do not begin to show signs of credit deterioration or default
until they have been outstanding for some period of time, a process referred to
as "seasoning." As a result, a portfolio of older loans will usually behave more
predictably than a newer portfolio. Because our loan portfolio is relatively
new, the current level of delinquencies and defaults may not be representative
of the level that will prevail when the portfolio becomes more seasoned, which
may be somewhat higher than current levels.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO SUCCESSFULLY COMPETE WITH
OTHERS FOR BUSINESS.
The Northern Virginia/Washington DC metropolitan area in which we
operate is considered highly attractive from an economic and demographic
viewpoint, and is therefore a highly competitive banking market. We compete for
loans, deposits, and investment dollars with numerous large, regional and
national banks and other community banking institutions, as well as other kinds
of financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders. Many competitors have substantially greater resources than us, and
operate under less stringent regulatory regimens. The differences in resources
and regulations may make it harder for us to compete profitably, reduce the
rates that we can earn on loans and investments, increase the rates we must
offer on deposits and other funds, and adversely affect our overall financial
condition and earnings.
CHANGES IN INTEREST RATES AND OTHER FACTORS BEYOND OUR CONTROL COULD
HAVE AN ADVERSE IMPACT ON OUR EARNINGS.
Our operating income and net income depend to a great extent on our net
interest margin i.e., the difference between the interest yields we receive on
loans, securities and other interest bearing assets and the interest rates we
pay on interest bearing deposits and other liabilities. These rates are highly
sensitive to many factors which are beyond our control, including competition,
general economic conditions and monetary and fiscal policies of various
governmental and regulatory authorities, including the Board of Governors of the
Federal Reserve System. At June 30, 2003, we would expect that continued
declines in market interest rates could reduce net interest income between 2 and
6 percent. Increases in market rates would likely have an adverse impact on our
noninterest income, as a result of reduced demand for mortgage loans, which we
make on a pre-sold basis. See "Management's Discussion and Analysis" at page 13.
Adverse changes in the real estate market in our market area could also
have an adverse affect on our cost of funds and net interest margin, as we have
a large amount of noninterest bearing deposits related to real estate sales and
development. While we expect that we would be able to replace the liquidity
provided by these deposits, the replacement funds would likely be more costly,
negatively impacting earnings.
Additionally, changes in applicable law, if enacted, including those
that would permit banks to pay interest on checking and demand deposit accounts
established by businesses, could have a significant negative effect on net
interest income, net income, net interest margin, return on assets and return on
equity. A significant portion of our deposits, 39.42% at June 30, 2003, are
noninterest bearing demand deposits.
Government policy relating to the deposit insurance funds may also
adversely affect our results of operations. Under current law and regulation, if
the reserve ratio of the Bank Insurance Fund falls below 1.25%, all insured
banks will be required to pay deposit insurance premiums. We do not currently
pay any deposit insurance premiums.
7
Payment of deposit insurance premiums will have an adverse effect on our
earnings. These changes or other legislative or regulatory developments could
have a significant negative effect on our net interest income, net income, net
interest margin, return on assets and return on equity.
SUBSTANTIAL REGULATORY LIMITATIONS ON CHANGES OF CONTROL AND
ANTI-TAKEOVER PROVISIONS OF VIRGINIA LAW MAY MAKE IT MORE DIFFICULT FOR YOU TO
RECEIVE A CHANGE IN CONTROL PREMIUM.
With certain limited exceptions, federal regulations prohibit a person
or company or a group of persons deemed to be "acting in concert" from, directly
or indirectly, acquiring more than 10% (5% if the acquiror is a bank holding
company) of any class of our voting stock or obtaining the ability to control in
any manner the election of a majority of our directors or otherwise direct the
management or policies of our company without prior notice or application to and
the approval of the Federal Reserve. There are comparable prior approval
requirements for changes in control under Virginia law. Also, Virginia corporate
law contains several provisions that may make it more difficult for a third
party to acquire control of us without the approval of our Board of Directors,
and may make it more difficult or expensive for a third party to acquire a
majority of our outstanding common stock. See "Description of Our Capital Stock
- - Certain Provisions of the Articles of Incorporation and Virginia Law" at page
46.
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject
to risks and uncertainties. These forward looking statements include:
o Statements of goals, intentions and expectations as to future
trends, plans, events or results of operations and policies and
regarding general economic conditions;
o Estimates of risks and of future costs and benefits; and
o Statements of the ability to achieve financial and other goals.
In some cases, forward looking statements can be identified by use of
words such as "may," "will," "anticipates," "believes," "expects," "intends,"
"plans," "estimates," "potential," "continue," "could," "should" and similar
words or phrases. These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by:
o Management's estimates and projections of interest rates and
interest rate policy, competitive factors and other conditions
which, by their nature, are not susceptible to accurate forecast
future interest rates and other economic conditions;
o Future laws and regulations; and
o A variety of other matters.
Because of these uncertainties and the assumptions on which 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 statements. We may not update
forward looking statements to reflect occurrences or events that may not have
been anticipated as of the date of such statements. In addition, our past
results of operations do not necessarily indicate future results.
8
USE OF PROCEEDS
If all of the shares offered are sold, other than the shares subject to
the underwriter's over-allotment option, the net proceeds of the offering are
expected to be approximately $11.1 million, after deducting the underwriting
discount and estimated expenses of the offering of $175,000. The proceeds of the
offering will be available for contribution to the capital of James Monroe Bank,
for use in our lending and investment activities, for branch expansion and for
our general corporate purposes. We may also use a portion of the proceeds in
connection with acquisitions of other institutions or for investment in
activities which are permitted for bank holding companies. Other than the
proposed Chantilly branch, there are no definitive plans or commitments for any
additional branches or for any acquisitions. There can be no assurance that we
will establish additional branches, as to how much it will cost to develop and
build out any new branch, that we will acquire another institution in whole or
in part, or that any new branch or acquisition will be successful or contribute
to shareholder value. We have no definitive plans or commitments for any
particular investments or the use of any particular amount of the proceeds of
the offering. Pending allocation to specific uses, we intend to invest the
proceeds in short term investment grade securities.
CAPITALIZATION
The following table shows (a) our capitalization at June 30, 2003, and
(b) our capitalization at June 30, 2003, as adjusted to reflect the receipt of
$11.1 million in net proceeds from the sale of 521,739 shares of our common
stock in this offering, after giving effect to the underwriting discount and our
estimated offering expenses.
JUNE 30, 2003
-----------------------------------
ACTUAL AS ADJUSTED
--------------- ----------------
(in thousands)
Stockholders' Equity
Common Stock, $1.00 par value, 5,000,000 authorized;
2,303,275 issued and outstanding actual; 2,825,014, as adjusted $ 2,303 $ 2,825
Additional paid in capital 12,946 23,476
Retained earnings 3,963 3,963
Accumulated other comprehensive income 1,002 1,002
--------------- ----------------
Total Stockholders' Equity $20,214 $31,266
=============== ================
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock. Since August 27, 2002, our common stock has
been trading on the Nasdaq SmallCap Market under the symbol "JMBI." Prior to
that date and since January 19, 2001, the common stock was traded on the OTC
Bulletin Board. Prior to January 19, 2001, private trades were conducted without
brokers and there may have been other trades of which we are either not aware of
the price or of the transaction. Such trades and transactions did not
necessarily reflect the intrinsic or market values of the common stock. As of
September 30, 2003, there were 2,333,642 shares of common stock outstanding,
held by approximately 510 shareholders of record. At that date, there were also
outstanding options to purchase 256,518 shares of common stock, 229,328 of which
were exercisable. Subsequent to September 30, 2003, James Monroe Bancorp and Mr.
Linhart agreed in principle to a new three year employment agreement under which
he would be entitled to receive options to purchase an aggregate of 30,000
shares of common stock.
Set forth below is our share price history for the each quarter since
January 1, 2001 through November 10, 2003. For 2002 and 2001, information
provided represents high and low bid prices, which reflect inter-dealer prices
without retail mark-up, mark-down or commission, and may not represent actual
trades. To date, trading in the common stock has been sporadic and volume has
been light. No assurance can be given that an active trading market will develop
in the foreseeable future. Information has been adjusted to reflect the
three-for-two stock split in the form of a 50% stock dividend paid on July 25,
2002, and the five-for-four stock split in the form of a 25% stock dividend paid
on May 16, 2003.
9
2003 2002 2001
--------------------- --------------------- ----------------------
PERIOD ENDED HIGH LOW HIGH LOW HIGH LOW
--------- ---------- --------- --------- ---------- ----------
March 31 $17.63 $13.33 $10.14 $9.07 $8.27 $7.20
June 30 $23.00 $17.00 $12.81 $9.40 $7.74 $6.40
September 30 $26.17 $21.80 $12.41 $8.88 $9.07 $7.34
December 31
(through November 10, 2003) $26.91 $22.20 $13.61 $10.44 $10.14 $7.47
Dividends. Holders of our common stock are entitled to receive
dividends as and when declared by our Board of Directors. On July 25 2002, we
paid a three-for-two stock split in the form of a 50% stock dividend. On May 16,
2003, we paid a five-for-four stock split in the form of a 25% stock dividend.
We have not paid cash dividends since becoming the holding company for James
Monroe Bank, and prior to that time James Monroe Bank did not pay any cash
dividends, each electing to retain earnings to support growth. We currently
intend to continue the policy of retaining earnings to support growth for the
immediate future. Future dividends will depend primarily upon James Monroe
Bank's earnings, financial condition, and need for funds and capital, as well as
applicable governmental policies and regulations. There can be no assurance that
we will have earnings at a level sufficient to support the payment of dividends,
or that we will elect to pay dividends in the future.
Regulations of the Federal Reserve and Virginia law place a limit on
the amount of dividends James Monroe Bank may pay without prior approval. Prior
regulatory approval is required to pay dividends which exceed James Monroe
Bank's net profits for the current year plus its retained net profits for the
preceding two calendar years, less required transfers to surplus. At June 30,
2003, approximately $3.2 million was available for the payment of dividends by
James Monroe Bank without prior approval. State and federal regulatory
authorities also have authority to prohibit a bank from paying dividends if they
deem payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as currently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that we may pay in the future. The Federal Reserve has issued a policy statement
on the payment of cash dividends by bank holding companies. In the statement,
the Federal Reserve expressed its view that a holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income, or
which could only be funded in ways that weakened the holding company's financial
health, such as by borrowing.
As a depository institution the deposits of which are insured by the
Federal Deposit Insurance Corporation, James Monroe Bank may not pay dividends
or distribute any of its capital assets while it remains in default on any
assessment due the FDIC. James Monroe Bank is not currently in default under any
of its obligations to the FDIC.
10
SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial
data for James Monroe Bancorp. You should read it together with the historical
consolidated financial information contained in the consolidated financial
statements for the year ended December 31, 2002 and for the six months ended
June 30, 2003 included with this prospectus and with the other information
provided in this prospectus. Information for the six month periods ended June
30, 2003 and 2002 is derived from unaudited interim financial statements and
includes, in the opinion of management, all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the data for such
period. Information for the period from inception to December 31, 1998
represents results of James Monroe Bank. The results of operations for the six
month period ended June 30, 2003 do not necessarily indicate the results which
may be expected for any future period or for the full year.
FROM
INCEPTION
SIX MONTHS ENDED (JUNE 8, 1998)
JUNE 30, YEAR ENDED DECEMBER 31, THROUGH
----------------------- ------------------------------------------------- DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except share and per share data)
PERIOD-ENDING BALANCES:
Total assets.......................... $ 297,054 $ 189,835 $ 238,793 $ 126,658 $ 89,230 $ 49,618 $ 23,509
Total loans........................... 145,687 105,370 121,047 86,139 50,040 31,039 12,769
Total deposits........................ 271,099 166,891 213,870 114,259 78,042 42,819 16,781
Stockholders' equity ................. 20,214 17,466 19,195 11,967 10,733 6,600 6,659
Average weighted shares
outstanding at period end (1):
Basic............................ 2,301,295 1,809,536 2,054,844 1,800,186 1,461,105 1,391,302 1,382,981
Diluted.......................... 2,464,435 1,907,540 2,160,539 1,886,413 1,508,239 1,408,035 1,382,981
RESULTS OF OPERATIONS:
Total interest income................. $ 6,088 $ 4,435 $ 10,091 $ 7,548 $ 5,413 $ 2,845 $ 630
Total interest expense................ 1,777 1,601 3,609 2,918 2,177 921 147
Net interest income................... 4,311 2,834 6,482 4,630 3,236 1,924 482
Provision for loan losses............. 349 251 483 450 237 231 132
Net interest income after
provision for loan losses........... 3,962 2,583 5,999 4,180 2,999 1,693 350
Noninterest income.................... 429 268 760 554 302 159 14
Noninterest expense................... 2,788 2,072 4,394 3,033 2,348 1,727 817
Income (loss) before income taxes..... 1,603 779 2,365 1,701 953 125 (452)
Net income (loss)..................... 1,074 510 1,553 1,112 810 125 (452)
PER SHARE DATA (1):
Net income (loss), basic.............. $ 0.47 $ 0.28 $ 0.75 $ 0.62 $ 0.55 $ 0.09 $ (0.33)
Net income (loss), diluted............ 0.44 0.27 0.72 0.59 0.54 0.09 (0.33)
Book value............................ 8.78 7.60 8.34 6.65 5.97 4.73 4.81
ASSET QUALITY RATIOS:
Allowance for loan losses to loans.... 1.15% 1.22% 1.15% 1.20% 1.19% 1.17% 1.03%
Nonperforming loans to loans.......... 0.29% 0.28% 0.24% 0.31% 0.08% 0.00% 0.00%
Allowance for loan losses to
nonperforming loans................. 4.01x 5.03x 4.70x 3.87x 15.38x n/a(3) n/a(3)
Nonperforming assets to loans and
other real estate................... 0.29% 0.28% 0.24% 0.31% 0.08% 0.00% 0.00%
Net loan charge offs to average
loans............................... 0.05% 0.00% 0.12% 0.03% 0.00% 0.00% 0.00%
SELECTED RATIOS:
Tier 1 risk-based capital ratio....... 13.48% 17.87% 15.49% 11.94% 18.50% 20.30% 43.80%
Total risk-based capital ratio........ 14.41 18.91 16.43 12.98 19.60 21.40 44.70
Leverage ratio........................ 9.48 13.36 10.53 9.53 12.60 14.00 30.60
Efficiency ratio (2).................. 58.82 66.80 60.67 58.51 66.40 82.91 164.72
Equity to assets...................... 6.80 9.20 8.04 9.45 12.03 13.30 28.32
Return on average total assets........ 0.90 0.70 0.88 1.02 1.19 0.32 (4.54)
Return on average stockholders'
equity.............................. 10.93 8.32 10.15 9.65 10.75 1.89 (11.14)
Net interest margin................... 3.83 4.15 3.90 4.56 5.09 5.25 5.27
- -------------------------------
(1) Per share data and share information have been adjusted to reflect a
three-for-two stock split in the form of a 50% stock dividend paid on July
25, 2002 and a five-for-four stock split in the form of a 25% stock dividend
paid on May 16, 2003.
(2) We compute our efficiency ratio by dividing noninterest expense by the sum
of net interest income on a tax equivalent basis and noninterest income.
Comparison of our efficiency ratio with those of other companies may not be
possible, because other companies may calculate the efficiency ratio
differently.
(3) Not applicable as there were no nonperforming loans at period end.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
This section reviews our financial condition and results of operations
as of and for the years ended December 31, 2002, 2001 and 2000 and the 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
are provided in this prospectus.
All per share information and share amounts in this discussion have
been adjusted to reflect the three-for-two stock split in the form of a 50%
stock dividend paid on July 25, 2002 and the five-for-four stock split in the
form of a 25% stock dividend paid on May 16, 2003.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those applications of accounting
principles or practices that require considerable judgment, estimation or
sensitivity analysis by management. In the financial service industry, examples,
albeit not an all inclusive list, of disclosures that may fall within this
definition are the determination of the adequacy of the allowance for loan
losses, valuation of mortgage servicing rights, valuation of derivatives or
securities without a readily determinable market value and the valuation of the
fair value of intangibles and goodwill. Except for the determination of the
adequacy of the allowance for loan losses, we do not believe there are other
practices or policies relating to our financial statements that require
significant sensitivity analysis, judgments, or estimations.
Allowance for Loan Losses. We have 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 current loan interest rate, or fair
value of the underlying collateral. We evaluate the collectibility of both
principal and interest when assessing the need for a loss accrual. A composite
allowance factor that considers our own and 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 we have 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. We have no
material delinquencies in these types of loans, and have not, since inception,
had a trend or an indication of a trend that would guide us in expected material
losses in these types of homogenous pools of loans.
Our allowance for loan losses is determined based upon a methodology
developed by management as described above and is approved by our Board of
Directors each quarter.
PERFORMANCE HIGHLIGHTS
o Assets grew $170.4 million (134.5%) from December 31, 2001, including
growth of $58.3 million (24.4%) since December 31, 2002.
o Net loans grew $58.9 million (69.2%) from December 31, 2001, including
growth of $24.4 million (20.4%) since December 31, 2002.
12
o Deposits grew $156.8 million (137.3%) from December 31, 2001, including
growth of $57.2 million (26.3%) since December 31, 2002.
o The sustained low interest rate environment coupled with the
significant liquidity generated in 2002 and the first six months of
2003 has caused compression in the net interest margin, from 4.56% for
2001 to 3.90% for 2002 to 3.83% for the first six months of 2003.
o We raised $9 million of additional capital through two private
placement issuances of trust preferred securities.
o We raised $4.7 million in equity by the private placement of
approximately 487,500 shares of common stock in June 2002 at $9.60 per
share.
o Asset quality remains strong with $123 thousand of net charge offs in
2002, or 0.12% of average loans for 2002, and $70 thousand in charge
offs in the first half of 2003, or 0.10% (annualized) of average loans
for the six months ended June 30, 2003. At June 30, 2003, we had only
$416 thousand of loans, or 0.29% of total loans, on nonaccrual status,
and no loans over 90 days past due and not accruing interest.
o During 2002, we opened our fourth banking office, a full service branch
in Fairfax City, and our fifth banking office, a drive through/walk
through limited service branch in Leesburg.
BALANCE SHEET
June 30, 2003 vs. June 30, 2002. 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
resulted from our emphasis on deposit generation as much as loan generation.
During the six months ended June 30, 2003, deposits increased $57.2 million over
deposits at December 31, 2002, with noninterest bearing deposits increasing
$40.1 million, and interest bearing deposits increasing $17.1 million. With the
growth in deposits, we were able to fund a $24.6 million net increase in loans,
including $12.2 million in the second quarter. Securities increased $5.5 million
and our liquidity position (cash and due from banks, federal funds sold and
interest bearing deposits) increased by $28.5 million.
December 31, 2002 vs. December 31, 2001. Total assets increased by
$112.1 million from December 31, 2001 to December 31, 2002, ending the period at
$238.8 million. Deposits increased $99.6 million, with noninterest bearing
deposits increasing $31.7 million and interest bearing deposits increasing $67.9
million. With the growth in deposits and the proceeds from the trust preferred
capital notes and common stock private placements, we were able to fund a $35.9
million net increase in loans, add $52.5 million to the securities portfolio,
and increase our short term liquidity position by $23.0 million. Stockholders'
equity increased $7.2 million as a result of the $1.6 million of earnings
retention for the year 2002, $4.7 million from the sale of common stock in the
private placement, $67 thousand from the exercise of options and $962 thousand
increase in the unrealized gains on securities available for sale.
December 31, 2001 vs. December 31, 2000. Total assets increased by
$37.4 million from December 31, 2000 to December 31, 2001, ending the period at
$126.7 million. During this period we opened our third office, in Leesburg,
Virginia. The increase in assets occurred as a result of a $36.2 million
increase in deposits, with noninterest bearing deposits increasing $12.3 million
and interest bearing deposits increasing $23.9 million. Stockholders' equity
increased $1.3 million, primarily as a result of the $1.1 million of earnings
for the year 2001 and a $105 thousand increase in the unrealized gains on
securities available for sale. With this growth in deposits and capital, we were
able to fund a $36.1 million increase in loans and added $2.1 million to the
securities portfolio. Our liquidity position decreased by $819 thousand.
RESULTS OF OPERATIONS
Six Months 2003 vs. Six Months 2002. For the six months ended June 30,
2003, we had net income of $1.1 million, or $0.47 per basic share and $0.44 per
diluted share, compared to $510 thousand, or $0.28 per basic share and $0.27 per
diluted share, for the comparable six month period of 2002. Annualized return on
average assets was 0.90% for the six months ended June 30, 2003, compared to
0.70% 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.
13
2002 vs. 2001. For the year ended December 31, 2002, we earned $1.6
million, or $0.75 per basic share and $0.72 per diluted share, compared with
$1.1 million, or $0.62 per basic share and $0.59 per diluted share, for the year
ended December 31, 2001. Return on average assets was 0.88% and return on
average equity was 10.15% for the year ended December 31, 2002 compared to a
1.02% return on average assets and a 9.65% return on average equity for the year
ended December 31, 2001.
Per share earnings and the ratios for 2002 were negatively impacted as
a result of the sale and issuance of approximately 487,500 additional shares of
common stock in June 2002.
2001 vs. 2000. For the year ended December 31, 2001, we earned $1.1
million, or $0.62 per basic share and $0.59 per diluted share, compared with
$810 thousand, or $0.55 per basic share and $0.54 per diluted share, for the
year ended December 31, 2000. Our 2001 earnings resulted in a return on average
assets of 1.02% and a return on average equity of 9.65% compared to a 1.19%
return on average assets and a 10.75% return on average equity for 2000. Per
share earnings and the returns on assets and equity for the year ended December
31, 2001 were negatively impacted by the fact that we were in a taxable position
in 2001, whereas we were not required to make a tax provision during the first
eight months of 2000. In addition, per share earnings and ratios for 2001 are
further negatively impacted as a result of the sale and issuance of an
additional 402,144 shares of common stock in our prior public offering, which
was completed in November 2000. As a result of these factors, we do not believe
that direct comparison of results for 2001 and 2000 are meaningful.
During 2002 and 2003, we continued to focus on managing our 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 and 2003. 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 on the rates earned on our 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 and 2003, 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 5.09% in 2000 to 4.56% in 2001 to 3.90% in 2002 and 3.83% for the first six
months of 2003.
Despite these reductions, our practice of managing our interest rate
risk process has mitigated the negative effect of such a severely declining rate
environment. Additionally, although we continued to grow in asset size since
inception in 1998, and added our fourth and fifth banking offices in 2002, we
have been able to control our operating efficiency. Our efficiency ratio
increased only slightly from 58.51% in 2001 to 60.67% in 2002, and has declined
to 58.82% for the first six months of 2003 and 56.99% for the three months ended
June 30, 2002. The efficiency ratio is a financial measure which is not
recognized under generally accepted accounting principles, but 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.
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 a financial institution'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 primarily on net interest income from
traditional banking activities as their primary revenue source. The average
balance table, at pages to below, presents average balance sheets and a net
interest income analysis for the three years ended December 31, 2002, 2001 and
2000 and for the six months ended June 30, 2003 and 2002.
Six Months Ended June 30, 2003 vs. Six Months Ended June 30, 2002. For
the six month period ended June 30, 2003, net interest income increased $1.5
million, or 52.1%, to $4.3 million from the $2.8 million earned for
14
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
65.0%, from the six months ended June 30, 2002 to the same period of 2003.
Average loans outstanding grew by $37.6 million, or 38.8%, 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 earlier in
2003 and invested in securities at yields greater than that of the federal funds
but less than the yields generated by loans.
Year Ended December 31, 2002 vs. Year Ended December 31, 2001. For the
year ended December 31, 2002, net interest income increased $1.9 million, or
40.0%, to $6.5 million from the $4.6 million earned for the year ended December
31, 2001. This was primarily a result of the increase in the volume of interest
earning assets, and partially offset by the effect of declining interest rates,
loan repricing and investment of the liquidity generated in lower yielding
securities and short term investments rather than loans. Total average earning
assets increased by $64.7 million, or 63.8%, from 2001 to 2002. The yield on
earning assets decreased by 136 basis points from 2001, reflecting the continued
impact of the dramatic reductions in interest rates in 2001. Yields on federal
funds and the securities portfolio decreased by 216 and 136 basis points,
respectively. Average loans outstanding grew by $40.2 million, or 60.9%, during
2002. The yield on such loans decreased by 125 basis points. The federal funds
rate reflected the most sensitivity to declining rates, while loan yields and
the securities yields declined, but not as significantly. This is due to the
composition of the loan portfolio being comprised of variable, fixed and
adjustable rates, which are not all subject to immediate rate reductions. In the
case of the securities portfolio, many agency bonds were called in 2002 and
2001.
Interest expense for 2002 was $3.6 million compared with $2.9 million
in interest expense for 2001. This increase is predominately a result of the
$53.5 million, or 79.1% growth in the volume of interest bearing liabilities.
Year Ended December 31, 2001 vs. Year Ended December 31, 2000. For the
year ended December 31, 2001, net interest income increased $1.4 million, or
43.1%, to $4.6 million from the $3.2 million earned for the year ended December
31, 2000, primarily as a result of the increase in the volume of interest
earning assets, and partially offset by the effect of declining interest rates.
Total average earning assets increased by $37.8 million, or 59.4%, from 2000 to
2001. The yield on earning assets decreased by 107 basis points from 2000,
reflecting the dramatic reductions in interest rates in 2001. Yields on federal
funds and the securities portfolio decreased by 281 and 22 basis points,
respectively. Average loans outstanding grew by $24.4 million, or 58.8%, during
2001 compared to 2000, and the yield on such loans decreased by 102 basis
points. The federal funds rate reflected the most sensitivity to declining
rates, while loan yields and the securities yields declined, but not as
significantly. This is due to the composition of the loan portfolio being
comprised of variable, fixed and adjustable rates, which are not all subject to
immediate rate reductions. In the case of the securities portfolio, many agency
bonds were called in 2001, but we were able to reinvest the proceeds of the
called securities into new securities at similar yields, which partially
mitigated the call of higher yielding securities.
Interest expense for 2001 was $2.9 million compared with $2.2 million
in interest expense for 2000. This increase is predominately a result of the
$24.7 million, or 58.2% growth in the volume of interest bearing liabilities,
partially offset by the 78 basis point decrease in the average cost of interest
bearing liabilities. Although deposit rates in our market peaked during the
middle of 2000, our interest expense for deposits lagged in repricing and/or
resetting downward to reflect declines in market interest rates. This lag is
primarily the result of our 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.
Repricing of these liabilities accelerated in the fourth quarter of 2001 and
continued into 2002.
The following table provides certain information relating to our
average consolidated statements of financial condition and reflects the interest
income on earning assets and interest expense of interest bearing liabilities
for the periods indicated and the average yields earned and rates paid for 2002
and 2001. These yields and costs are derived by dividing income or expense by
the average daily balance of the related asset or liability for the periods
presented. Yields on loans and securities have been calculated on a tax
equivalent basis. Nonaccrual loans
15
have been included in the average balances of
loans receivable. We did not have any tax-exempt income during any of the
periods presented.
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
SIX MONTHS ENDED
----------------------------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------------------------- -------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) 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 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
Other borrowed funds -- -- -- -- -- --
-------- -------- -------- --------
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
======== ========
16
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------- ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- -------- ---------- --------- -------- ---------- --------- -------
ASSETS
Loans:
Commercial $ 32,732 $ 2,251 6.88% $ 25,521 $ 2,110 8.27% $ 19,224 $ 1,749 9.10%
Commercial real estate 60,735 4,543 7.48 30,401 2,689 8.84 16,729 1,670 9.98
Consumer 12,639 963 7.62 10,009 844 8.43 5,567 558 10.02
-------- -------- -------- -------- -------- --------
Total Loans 106,106 7,757 7.31 65,931 5,643 8.56 41,520 3,977 9.58
Mortgage loans held for sale -- -- -- -- -- -- -- -- --
Taxable securities 41,924 2,062 4.92 23,218 1,464 6.31 16,338 1,067 6.53
Federal funds sold 18,071 272 1.51 12,282 441 3.60 5,759 369 6.41
-------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 166,101 10,091 6.08% 101,431 7,548 7.44% 63,617 5,413 8.51%
Less allowance for loan losses (1,257) (756) (481)
Cash and due from banks 9,441 6,167 3,678
Premises and equipment, net 1,289 871 712
Other assets 994 822 680
-------- -------- --------
TOTAL ASSETS $176,568 $108,535 $ 68,206
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing demand deposits $ 5,739 $ 61 1.06% $ 4,851 $ 78 1.61% $ 3,667 $ 77 2.10%
Money market deposit accounts 69,037 1,750 2.53 33,516 1,203 3.59 20,826 986 4.73
Savings accounts 1,240 22 1.77 687 17 2.47 337 10 2.97
Time deposits 41,381 1,558 3.77 28,646 1,620 5.66 17,908 1,101 6.15
Trust preferred capital notes 3,849 218 5.66 -- -- -- -- -- --
Other borrowed funds -- -- -- -- -- -- 45 3 6.67
-------- -------- -------- -------- -------- ---------
TOTAL INTEREST BEARING
LIABILITIES 121,246 3,609 2.98% 67,700 2,918 4.31% 42,783 2,177 5.09%
Net interest income and net yield
on interest earning assets $ 6,482 3.90% $ 4,630 4.56% $ 3,236 5.09%
======== ======== =========
Noninterest bearing demand deposits 39,554 28,786 17,570
Other liabilities 474 527 319
Stockholders' equity 15,294 11,522 7,534
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $176,568 $108,535 $ 68,206
======== ======== ========
17
The rate/volume table below 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 earning assets
and interest bearing liabilities, and the changes in net interest income due to
changes in interest rates. As the table shows, from the six months ended June
30, 2002 to 2003, 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. The increase in
net interest income in 2002 as compared to 2001 is primarily due to the growth
in the volume of earning assets and interest bearing liabilities. While the
decrease in interest rates has, to date, affected total interest income, and to
a lesser extent, total interest expense, management has managed our exposure to
changes in interest rates such that the negative effect of the decline in rates
in 2001 resulted in a $1.7 million reduction of net interest income, whereas the
growth in earning assets and deposits resulted in an increase of $3.5 million to
net interest income. For the changes between 2000 and 2001, the increase in net
interest income is almost entirely due to the growth in the volume of earning
assets and interest bearing liabilities for the comparative periods despite the
fact that interest rates changed six times for an aggregate increase of 175
basis points from June 1999 to December 31, 2000.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2003 VS. 2002 2002 VS. 2001 2001 VS. 2000
------------------------------ ------------------------------ -----------------------------
DUE TO CHANGE IN DUE TO CHANGE IN DUE TO CHANGE IN
INCREASE AVERAGE INCREASE AVERAGE INCREASE AVERAGE
OR ------------------ OR ------------------ OR ------------------
(Dollars in thousands) (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
----------- -------- -------- ---------- --------- ------- --------- -------- --------
EARNING ASSETS:
Loans $ 983 $ 1,248 $ (265) $ 2,114 $ 2,779 $ (665) $ 1,666 $ 2,034 $ (368)
Mortgage loans 25 25 -- -- -- -- -- -- --
Taxable securities 670 814 (144) 598 823 (225) 397 432 (35)
Federal funds sold (25) 34 (59) (169) 721 (890) 72 117 (45)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income 1,653 2,121 (468) 2,543 4,323 (1,780) 2,135 2,583 (448)
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST BEARING
LIABILITIES:
Interest bearing demand
deposits 11 16 (5) (17) 20 (37) 1 (0) 1
Money market deposit
accounts 348 462 (114) 547 756 (209) 217 359 (142)
Savings deposits 1 2 (1) 5 8 (3) 7 8 (1)
Time deposits (234) 15 (249) (62) (254) 192 519 599 (80)
Trust preferred capital
notes 50 54 (4) 218 218 -- -- -- --
Other borrowed funds -- -- -- -- -- -- (3) (1) (2)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 176 549 (373) 691 748 (57) 741 965 (224)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income $ 1,477 $ 1,572 $ (95) $ 1,852 $ 3,575 $(1,723) $ 1,394 $ 1,618 $ (224)
======= ======= ======= ======= ======= ======= ======= ======= =======
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 our and our
peer group's historical charge off history, trends in delinquencies and loan
grading, current economic conditions and factors that include the composition of
our loan portfolio.
The methodology established for determining an appropriate allowance
for loan losses was approved by our Audit Committee and Board of Directors. The
provision is approved by the Board on a quarterly basis. 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, we continue to maintain an allowance we believe is adequate.
As reflected in the table below, the allowance is allocated among the
various categories of loans based upon the methodology described.
18
The following table presents the activity in the allowance for loan
losses for the periods indicated.
SIX MONTHS YEAR ENDED DECEMBER 31
ENDED -------------------------------------------------------------
(Dollars in thousands) JUNE 30, 2003 2002 2001 2000 1999 1998
-------------- ------- ------- ------- ------- -------
Balance, beginning of period $ 1,390 $ 1,030 $ 600 $ 363 $ 132 $ --
Provision for loan losses 349 483 450 237 231 132
Loan charge offs:
Commercial (34) (122) (5) -- -- --
Consumer (36) (4) (15) -- -- --
------- ------- ------- ------- ------- -------
Total charge offs (70) (126) (20) -- -- --
Loan recoveries:
Consumer -- 3 -- -- -- --
------- ------- ------- ------- ------- -------
Net charge offs (70) (123) (20) -- -- --
------- ------- ------- ------- ------- -------
Balance, end of period $ 1,669 $ 1,390 $ 1,030 $ 600 $ 363 $ 132
======= ======= ======= ======= ======= =======
Ratio of net charge offs to average
loans outstanding during the period 0.05% 0.12% 0.03% 0.00% 0.00% 0.00%
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 3 to the audited consolidated financial statements, and Note
4 to the unaudited consolidated financial statements included in this report for
additional information regarding the allowance for loan losses and nonperforming
assets.
DECEMBER 31,
JUNE 30, --------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
---------------- ----------------- ----------------- ----------------- ----------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT TLOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------ ------
Construction loans $ 45 11.9% $ 35 10.0% $ 78 10.9% $ 53 8.9% $ -- --% $ 14 11.0%
Commercial loans 678 16.1 765 23.0 281 27.3 202 33.7 200 50.9 58 44.0
Commercial real
estate loans 841 64.5 504 58.1 528 51.3 250 41.5 120 31.7 56 42.0
Real estate 1-4
family residential
loans 4 0.9 6 1.7 40 3.9 50 8.3 10 3.2 -- --
Home equity loans 9 2.0 8 2.0 19 1.8 -- 1.1 -- 0.5 -- --
Consumer loans 92 4.6 72 5.2 84 4.8 45 6.5 33 13.7 4 3.0
------ ----- ------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Balance, end of
period $1,669 100.0% $1,390 100.0% $1,030 100.0% $ 600 100.0% $ 363 100.0% $ 132 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ===== ===== ===== =====
The following table shows the amounts of nonperforming assets at the dates
indicated.
DECEMBER 31,
JUNE 30, ----------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ----- ----
Nonaccrual loans excluded from impaired loans:
Commercial $188 $ 22 $ -- $ -- $ -- $ --
Consumer -- 34 -- -- -- --
Accruing loans past due 90 days or more:
Commercial -- -- 266 39 -- --
Impaired loans:
Commercial 228 240 -- -- -- --
---- ---- ---- ---- ---- ----
Total nonperforming assets $416 $296 $266 $ 39 $ -- $ --
==== ==== ==== ==== ==== ====
At June 30, 2003, there were no performing loans considered potential
problem loans, defined as loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
19
possible credit problems causes management to have serious doubts as to the
ability of the borrowers to comply with the current loan repayment terms. For
the six months ended June 30, 2003, $8 thousand in gross interest income would
have been recorded if the $188 thousand of nonaccrual loans had been accruing
interest throughout the period. For the year ended December 31, 2002, $10
thousand in gross interest income would have been recorded if the $56 thousand
of nonaccrual loans had been accruing interest throughout the period.
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 $145.7 million, a 38.3% increase from the $105.4 million in
loans outstanding at June 30, 2002. Total loans at June 30, 2003 represented a
20.4% increase from the $121.0 million of loans at December 31, 2002. At
December 31, 2002, total loans were $121.0 million, a 40.5% increase from the
$86.1 million in loans outstanding at December 31, 2001. Total loans at December
31, 2001 represented a 72.1% increase from the $50.0 million of loans at
December 31, 2000. In general, loans are internally generated with the exception
of a small percentage of participation loans purchased from other local
community banks. Lending activity is largely confined to our market of Northern
Virginia. We do not engage in highly leveraged transactions or foreign lending
activities.
The following table presents the composition of the loan portfolio by
type of loan at the dates indicated.
DECEMBER 31,
JUNE 30, -------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- ---------
Construction loans $ 17,342 $ 12,160 $ 9,408 $ 4,429 $ -- $ 1,425
Commercial loans 23,430 27,862 23,478 16,842 15,812 5,639
Commercial real estate loans 93,952 70,318 44,192 20,783 9,849 5,308
Real estate-1-4 family
residential loans 1,251 2,069 3,363 4,165 1,003 --
Home equity loans 2,935 2,390 1,554 546 158 --
Consumer loans 6,709 6,088 4,025 3,275 4,217 397
Overdrafts 68 160 119 -- -- --
--------- --------- --------- --------- --------- ---------
145,687 121,047 86,139 50,040 31,039 12,769
Less allowance for loan losses (1,669) (1,390) (1,030) (600) (363) (132)
--------- --------- --------- --------- --------- ---------
Net loans $ 144,018 $ 119,657 $ 85,109 $ 49,440 $ 30,676 $ 12,637
========= ========= ========= ========= ========= =========
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.
Except as discussed below, we have no substantial loan concentrations to any one
industry or to any one borrower.
Virtually all of our commercial real estate mortgage and development
loans, which account for approximately 60.4% of our 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
we attempt to mitigate risk through careful underwriting, including primary
reliance on the borrower's financial capacity and ability to repay without
resorting to the property, and we lend primarily with respect to properties
which are occupied or managed by the owner.
The 1-4 family residential real estate loans which we hold in our
portfolio 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 the table
below, 25.7% of our loans at June 30, 2003 are fixed rate loans. At June 30,
2003, 98.1% of our loans were scheduled to reprice or had a maturity date within
five years.
20
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, which
includes consumer loans, home equity loans, and 1-4 family residential loans,
represents 7.5% of the loan portfolio at June 30, 2003, as compared to 8.7% at
December 31, 2002, 10.4% at December 31, 2001 and 16.0% at December 31, 2000.
The following tables show 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.
DUE
---------------------------------------------------
WITHIN ONE AFTER ONE YEAR AFTER FIVE
(Dollars in thousands) YEAR THROUGH FIVE YEARS YEARS TOTAL
-------------- ------------------ -------------- ------------
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
-------- -------- -------- --------
Total $ 90,898 $ 52,018 $ 2,771 $145,687
======== ======== ======== ========
DUE
---------------------------------------------------
WITHIN ONE AFTER ONE YEAR AFTER FIVE
(Dollars in thousands) YEAR THROUGH FIVE YEARS YEARS TOTAL
-------------- ------------------ -------------- ------------
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
======== ======== ======== ========
At June 30, 2003, the aggregate amount of loans due after one year
which have fixed rates was approximately $20.1 million, and the amount with
variable or adjustable rates was approximately $34.7 million.
INVESTMENT SECURITIES
The carrying value (fair value) of our securities portfolio increased
$5.5 million to $81.6 million at June 30, 2003 from $76.1 million at December
31, 2002. The carrying value of our securities portfolio increased $54.0
million, to $76.1 million, at December 31, 2002 from $22.1 million at December
31, 2001. The carrying value of the securities portfolio increased $2.1 million
to $22.1 million at December 31, 2001 from $20.0 million at December 31, 2000.
We currently, and for all periods shown, classify our 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, we attempt to
"ladder" the one time call dates for all our securities. Our investment policy
is driven by our interest rate risk process and the need to minimize the effect
of changing interest rates to the entire balance sheet.
21
The following table presents the composition of our investment
securities portfolio at the dates indicated.
DECEMBER 31,
JUNE 30, -------------------------------------------------------------
2003 2002 2001 2000
----------------------- ------------------- ------------------- --------------------
(Dollars in thousands)
Available for Sale (at
estimated market value): BALANCE PERCENT(1) BALANCE PERCENT(1) BALANCE PERCENT(1) BALANCE PERCENT(1)
------- ---------- ------- ---------- ------- ---------- ------- ----------
U.S. Agency $47,922 58.7% $35,298 46.5% $ 3,593 16.2% $12,135 60.6%
Mortgage backed securities 14,598 18.0 20,954 27.5 6,451 29.2 5,256 26.2
Adjustable rate mortgage
backed securities 4,852 5.9 6,159 8.1 1,699 7.7 -- 0.0
Corporate bonds 13,367 16.4 13,023 17.1 9,942 44.9 2,275 11.4
Restricted stock 841 1.0 629 0.8 434 2.0 373 1.9
------- ----- ------- ----- ------- ----- ------- -----
Total $81,580 100.0% $76,063 100.0% $22,119 100.0% $20,039 100.0%
======= ===== ======= ===== ======= ===== ======= =====
- -----------------------
(1) Represents percentage of investments securities in each category to total
investments.
The following table presents the amount and maturities of the
investment debt securities in our portfolio at June 30, 2003.
YEARS TO MATURITY
-----------------------------------------------------------------------------
OVER 1 THROUGH OVER 5 THROUGH
WITHIN 1 YEAR 5 YEARS 10 YEARS OVER 10 YEARS TOTAL
----------------- ------------------- --------------- ------------------ -----------------
(Dollars in thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
Available for Sale (at
estimated market value):
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 13,367 3.54
Restricted stock -- -- -- -- -- -- 841 2.58 841 2.58
------- ------- ------- ------- -------
Total $ 35 8.77% $55,165 2.82% $ 7,167 3.68% $19,213 5.20% $81,580 3.46%
======= ======= ======= ======= =======
For additional information regarding the investment portfolio, see Note
2 to the consolidated financial statements for the year ended December 31, 2002
and Note 3 to the unaudited consolidated financial statements for the six months
ended June 30, 2003.
At June 30, 2003, there were no issuers, other than issuers who are
U.S. government agencies, whose securities owned by us had an aggregate book
value of more than 10% of our total stockholders' equity.
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 of Atlanta as
sources of liquidity in addition to the deposits.
22
The Basic Surplus approach enables us to adequately manage liquidity
from both tactical and contingency perspectives. At 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%.
Financial institutions utilize a number of methods to evaluate interest
rate risk. Methods include 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), matched funding
matrix analysis, running multiple simulations of potential interest rate
scenarios, rate shock analysis, and highly complicated duration analysis.
The static gap analysis measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing within various time
periods. A gap analysis is presented in the table below and reflects the earlier
of the maturity or repricing dates for various assets and liabilities as of June
30, 2003. At that point in time, we had a cumulative net asset sensitive twelve
month gap position of $19.6 million, or a positive 6.6% of total interest
earning assets. 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. The static gap analysis portrays only a snapshot
of a bank's asset liability picture and does not take into account other factors
that impact on changes in a bank's interest income and expense. Management does
not believe that the gap table necessarily reflects the quantifiable impact of
changes in interest rates.
UP TO 3 MONTHS 1 TO OVER 5
(Dollars in thousands) 3 MONTHS TO 1 YEAR 5 YEARS YEARS TOTAL
--------- --------- ---------- --------- ---------
ASSETS:
Cash and cash equivalents $ 42,971 $ -- $ -- $ 22,182 $ 65,153
Investment securities 7,843 43,748 19,736 10,198 81,526
Loans 66,893 27,612 52,017 2,703 149,225
All other assets -- -- -- 1,150 1,150
--------- --------- --------- --------- ---------
Rate sensitive assets $ 117,707 $ 71,360 $ 71,753 $ 36,234 $ 297,054
========= ========= ========= ========= =========
LIABILITIES AND EQUITY:
Noninterest bearing deposits $ 54,447 $ 9,608 $ 38,433 $ 4,270 $ 106,758
Interest bearing non-maturity deposits 18,443 48,192 57,162 362 124,159
Time deposits 9,934 23,788 6,460 -- 40,182
Trust preferred capital notes 5,000 -- -- -- 5,000
Other liabilities and equity -- -- -- 20,955 20,955
--------- --------- --------- --------- ---------
Rate sensitive liabilities and equity $ 87,824 $ 81,589 $ 102,055 $ 25,587 $ 297,054
========= ========= ========= ========= =========
Period GAP $ 29,883 $ (10,228) $ (30,301) $ 10,647 $ --
Cumulative GAP $ 29,883 $ 19,655 $ (10,647) $ --
Period GAP/earning assets 10.98% (3.76)% (11.14)% 3.91%
Cumulative GAP/earning assets 10.98% 7.22 % (3.91)% 0.00%
- -----------------------
(1) Loans are categorized based upon the earlier of their next repricing date or
maturity date, whichever is earlier.
(2) The following assumptions have been used in allocating nonmaturity deposits
over the maturity periods shown:
Noninterest bearing demand: 25% per month - months 1 - 2; 1% per month -
months 3 - 36; 0.5% per month thereafter.
Interest bearing demand and Money market accounts: 5% per month - months 1
- 10; 2.083% per month - months 11 - 34.
Savings: 1.67% per month - months 1 - 34; 0.83% per month thereafter.
At June 30, 2003, we are asset sensitive in the short term and then
become slightly liability sensitive. This position would generally indicate that
earnings should increase over the following 12 months in a rising interest rate
environment as more assets would reprice than liabilities. However, this
measurement represents a static position as of a single day, is not necessarily
indicative of our position at any other point in time. While the traditional gap
23
analysis shows 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, we manage our 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, including 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. In addition, eight rate shock
scenarios are modeled at 50 basis point up and 50 basis point 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 we
are not materially at risk to possible changes in interest rates.
Since our inception in 1998, we have generated more deposit growth than
we have 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, we
expect 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 our 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 we are positioned to improve earnings if and when rates rise. With
respect to further reductions in rates (Declining Rate and Ramp Down scenarios),
we would experience further negative implications on margins and earnings;
however, we do 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.
Static Rates 0.0%
Most Likely Rates 0.5%
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 service 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. To date, we have not been required to pay any premiums for deposit
insurance. To the extent that deposit premiums may become required, our results
of operations will be adversely affected.
24
The following table provides information regarding our noninterest
income for the periods indicated.
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------
(Dollars in thousands) JUNE 30, 2003 2002 2001 2000
-------------- ----------- ---------- -----------
Service charges on deposit accounts $155 $263 $263 $190
Cash management fee income 53 130 113 48
Gain on sale of mortgage loans 85 -- -- --
Gain on sale of securities 56 244 107 17
Other fee income 80 123 71 47
---- ---- ---- ----
Total noninterest income $429 $760 $554 $302
==== ==== ==== ====
The increases in noninterest income for the each period shown are the
result of our continued growth and the expansion of products resulting in fee
income. During the second quarter of 2003, we began originating conforming
residential mortgage loans on a pre-sold basis, for sale to secondary market
investors, servicing released. In addition, we earn cash management fees
relating to off-balance sheet customer sweep accounts which had average balances
of between $20 and $25 million during 2002. During 2003, cash management fees
have declined primarily due to lower balances resulting from commercial
customers not utilizing the product during this sustained extremely low interest
rate environment.
Major expense categories that exceed 1% of operating revenues for the
periods indicated as follows:
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------
(Dollars in thousands) JUNE 30, 2003 2002 2001 2000
-------------- -------------- ------------- ---------------
Salaries and benefits $1,437 $2,220 $1,513 $1,203
Occupancy cost, net 303 541 367 266
Equipment expense 200 308 184 149
Data processing costs 197 360 269 251
Advertising and public relations 46 123 84 56
Professional fees 204 168 181 76
Courier and express services 59 105 73 52
Meals & entertainment 27 44 38 40
Supplies 39 75 54 35
Postage 26 43 35 27
State franchise tax 93 155 107 94
Other 157 252 128 99
------ ------ ------ ------
Total noninterest expense $2,788 $4,394 $3,033 $2,348
====== ====== ====== ======
Noninterest expense increased $716 thousand or 34.6% 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 loan operation commenced in early 2003. Our growth 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 increase in
James Monroe Bank's capital due to earnings retention and capital infusions from
James Monroe Bancorp in 2003.
25
Noninterest expense increased $1.4 million or 44.8% from $3.0 million
for the year ended December 31, 2001, to $4.4 million for 2002. Approximately
half of this increase is in salary and benefit costs. In February 2002, we
opened our fourth banking office, in Fairfax City, with three personnel, and
added personnel at the main office in order to support the growth in customers
and transactions being processed. In addition, we opened our fifth banking
office, a drive through/walk through branch in Leesburg, in July 2002. The
increase in occupancy cost is due to the cost of the new locations. The increase
in professional fees is primarily due to higher legal expenses and the transfer
of the stock transfer function to a third party. The increase in the other
expense category is due to the director fees paid beginning in 2001 and the
increase in regulatory assessments that are a function of asset size.
DEPOSITS AND OTHER BORROWINGS
Our principal sources of funds are core deposits (demand deposits, NOW
accounts, money market accounts, savings accounts and certificates of deposit
less than $100,000) from the local market areas surrounding our banking offices.
Our deposit base includes transaction accounts, time and savings accounts and
accounts which customers use for cash management and which provide us 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.
The following table reflects average deposits and average rates paid,
by category, for the periods indicated.
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------------------
(Dollars in thousands) JUNE 30, 2003 2002 2001 2000
---------------- ---------------- ---------------- ----------------
Deposits
Noninterest bearing demand $ 58,619 --% $ 39,554 --% $ 28,786 --% $ 17,570 --%
Interest bearing demand 8,933 0.88 5,739 1.06 4,851 1.61 3,667 2.10
Money market 105,321 1.97 69,037 2.53 33,516 3.59 20,826 4.73
Savings 1,465 1.51 1,240 1.77 687 2.47 337 2.97
Certificates of deposit of
$100,000 or more 27,103 2.78 24,528 3.70 15,123 5.73 10,174 6.18
Other time deposits 13,814 2.89 16,853 3.86 13,523 5.58 7,734 6.10
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $215,255 1.55% $156,951 2.16% $ 96,486 3.02% $ 60,308 3.60%
======== ==== ======== ==== ======== ==== ======== ====
The following table indicates the amount of certificates of deposit of
$100 thousand or more and less than $100 thousand, and their remaining
maturities, at June 30, 2003.
REMAINING MATURITY
------------------------------------------------
(Dollars in thousands) 3 MONTHS 4 TO 6 7 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
----------- ----------- ------------ ---------- ---------
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
------- ------- ------- ------- -------
Total $10,533 $ 8,927 $14,278 $ 6,398 $40,136
======= ======= ======= ======= =======
CAPITAL MANAGEMENT
Management monitors historical and projected earnings, asset growth, as
well as our 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 $569 thousand
increase in unrealized gains on securities available for sale. During 2002,
stockholders' equity increased $7.2 million from the $12.0. million of equity at
December 31, 2001 as a result of the $1.6 million in retained earnings in 2002
and the $4.7 million in equity sold in June 2002.
We have reported a steady improvement in earnings since James Monroe
Bank opened on June 8, 1998. Positive earnings were reported in the ninth month
of operations and have continued with $810 thousand of earnings in 2000, $1.1
million of earnings for 2001, and $1.6 million of earnings for 2002. One of our
initial strategies was to
26
restore the initial lost capital from the initial organization costs of $254
thousand and the accumulated earnings loss of $452 thousand for 1998. As of
December 31, 2001, the earnings for 2000 and 2001 had recouped the losses and at
December 31, 2002 we had retained earnings of approximately $2.9 million. In
addition, we have fully utilized our net operating losses for tax purposes
beginning in September 2001 and has been at a 34% effective tax rate since that
date.
At June 30, 2003, our capital position and that of our subsidiary,
James Monroe Bank, continued to exceed regulatory requirements. The primary
indicators relied on by bank regulators in measuring the capital position are
the Tier 1 risk-based capital, total risk-based capital, and leverage ratios.
Tier 1 capital consists of common and qualifying preferred stockholders' equity
less goodwill. Total risk-based capital consists of Tier 1 capital, qualifying
subordinated debt, and a portion of the allowance for credit losses. Risk-based
capital ratios are calculated with reference to risk-weighted assets. The
following table sets forth our regulatory capital ratios as of June 30, 2003.
MINIMUM TO BE "WELL
CAPITALIZED" UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL GUIDELINES ACTION DIRECTIVES
----------------- ------------------ -------------------------
Total risk-based capital
James Monroe Bancorp 14.41% 8.00% n/a
James Monroe Bank 11.84% 8.00% 10.00%
Tier 1 risk-based capital
James Monroe Bancorp 13.48% 4.00% n/a
James Monroe Bank 13.44% 4.00% 6.00%
Tier 1 leverage ratio
James Monroe Bancorp 9.48% 4.00% n/a
James Monroe Bank 7.79% 4.00% 5.00%
BUSINESS
GENERAL
We were incorporated under the laws of the Commonwealth of Virginia on
April 9, 1999 to be the holding company for James Monroe Bank. We 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 our common stock. James Monroe Bank, a Virginia
chartered commercial bank, which is a member of the Federal Reserve System, is
our sole operating subsidiary. James Monroe Bank commenced banking operations on
June 8, 1998, and currently operates out of its main office and three full
service branch offices and one drive through/walk through limited service
branch. We have leased space in a new building under construction in Chantilly,
which we expect to occupy late in the second quarter of 2004. The new facility
will house our sixth office, certain administrative and operations functions,
which will move from the main office in Arlington, and our mortgage division,
which will move from Annandale.
We seek to provide a high level of personal service and a sophisticated
menu of products to individuals and small to medium-sized businesses. While we
offer a full range of services to a wide array of depositors and borrowers, we
have chosen small to medium-sized businesses, professionals and the individual
retail customer as our primary target market. We believe that as financial
institutions grow and are merged with or acquired by larger institutions with
headquarters that are far away from the local customer base, the local business
and individual is further removed from the point of decision-making. We attempt
to place the customer contact and the ultimate decision on products and credits
as close together as possible.
THE NORTHERN VIRGINIA MARKET
We believe that a key factor in our ability to achieve our business
strategy goal and to create shareholder value is the attractiveness of the
Northern Virginia market. The market in which we operate and where we are
establishing our branches has seen considerable population and economic growth
in the past several decades, and we
27
expect such favorable growth to continue. Our primary service area includes
Arlington, Fairfax and Loudoun counties, markets that we believe have the most
profitable banking opportunities in Northern Virginia.
Collectively, the markets in which we operate are some of the largest
in Virginia. From 1990 to 2000, Fairfax County's population increased 18.5% to
969,749, the highest in the state. During the same period, the populations of
Arlington and Loudoun counties increased 10.8% and 96.9% to 189,453 and 169,599,
respectively. Loudoun County's growth during 1990 to 2000 placed it as the sixth
highest county in the United States in terms of percentage change in population
during that period, and it is expected to increase by 77.1% from 2000 to 2010.
Arlington and Fairfax counties, two of the more densely populated counties in
Virginia, are projected to grow 6.9% and 15.1%, respectively, during the 2000 to
2010 period. If Fairfax County were a city, it would rank 10th in population in
the United States.
In addition to the compelling population growth, these areas continue
to rank among the top counties in the nation in terms of median household
income, a solid indicator of an affluent market. Fairfax County's median
household income is the second highest in the United States at $81,050, which is
nearly double the national median. Loudoun County is second highest in Virginia,
and ranks third in the country, with median household income of $80,648.
BUSINESS STRATEGY
Our goal is to enhance our franchise value by continuing our strong
growth trend in assets and profitability while maintaining asset quality and
individualized customer service. Our strategic plan has the following four
primary components:
o CONTINUE TO EXPAND AND PENETRATE HIGH GROWTH MARKETS. We believe we
are well positioned to take full advantage of the favorable
demographic and economic characteristics in our expanding Northern
Virginia market. The areas in which we operate are characterized by
high concentrations of small to medium-sized businesses and
professionals, our target customers. We will look for opportunities
to expand our franchise in these high growth markets on a selective
and opportunistic basis. We are continuously seeking additional
branching opportunities, centered around experienced lending
officers with a significant portfolio of commercial customers. We
will increase our market share by branching selectively, by
continuing to capitalize on niche products to service our small and
medium-sized business customers, and by enhancing our marketing
efforts to build brand identification.
o HIRE EXPERIENCED LENDING OFFICERS. Our branching strategy has
revolved around the hiring of highly experienced local banking
professionals with successful track records and established
customer relationships with small to medium-sized businesses and
affluent households. These officers have been able to attract
customers with which they have built relationships over the years,
enhancing our loan production. We typically hire one or more
officers for a specific location, and then establish a branch
office to support business generation.
We currently have seven experienced loan officers with an average
of over 25 years of experience in the financial services industry.
Our lenders have operated in our market area for many years, and
have experienced a wide range of economic cycles and lending
market conditions. We will continue to grow and build our
franchise by having seasoned, local lenders and other bankers join
our organization. Our lending officers are supported by members of
our executive management team and our Board of Directors, who have
broad experience during a variety of economic cycles in loan
production, credit administration, investments, asset liability
management and compliance - key strengths in building and growing
our company.
o TARGET SMALL TO MEDIUM-SIZED BUSINESSES IN OUR COMMUNITIES. The
Northern Virginia banking market has been characterized by
significant consolidation among financial institutions. Over the
past five years, a number of independent community banks in our
market area have been acquired by large regional or national banks,
most of which are headquartered out of our market area. While many
of the large banks operating in our market are now targeting the
small and medium-sized business market, our customers have told us
that the corporate service culture and operational infrastructure
at large
28
banks often do not provide satisfactory customer experiences.
Automation and 800 numbers take the place of personalized and
time-sensitive service. Personnel turnover prevents the development
of a banking relationship that adds value to a customer's business.
This atmosphere provides an excellent opportunity for James Monroe
Bank, a community-oriented bank delivering a wide array of
personalized products through an integrated and responsive sales
and service approach. We believe that our experienced team of
banking professionals focused on relationship banking, who have a
history of serving Northern Virginia's small to medium-sized
businesses with annual sales generally up to $10 million, gives us
a distinct competitive advantage in attracting and keeping this
customer base.
o PERSONALIZE CUSTOMER SERVICE, OFTEN BY LEVERAGING OUR TECHNOLOGY
CAPABILITIES. We are able to compete effectively in our market by
offering products comparable to a larger financial institution,
while maintaining the high level of customer service, quick
response time and personalized attention of a locally headquartered
bank. We are able to solidify this competitive advantage with the
use of technology to tailor products and services to specific
segments of our targeted banking customer market. Our ability to
optimize the capacities of our technology systems, in creating,
marketing and delivering defined products to serve the different
needs of our customers, will allow us to realize economies of scale
as we further execute our expansion strategy.
LENDING ACTIVITIES
We offer a wide array of lending services to our customers, including
commercial loans, lines of credit, personal loans, auto loans and financing
arrangements for personal equipment and business equipment. Loan terms,
including interest rates, loan-to-value ratios and maturities, are tailored as
much as possible to meet the needs of the borrower. A special effort is made to
keep loan products as flexible as possible within the guidelines of prudent
banking practices in terms of interest rate risk and credit risk.
When considering loan requests, the primary factors taken into
consideration are the cash flow and financial condition of the borrower, the
value of the underlying collateral, if applicable, and the character and
integrity of the borrower. These factors are evaluated in a number of ways
including an analysis of financial statements, credit reviews, trade reviews and
visits to the borrower's place of business. We have implemented a comprehensive
loan policy and procedures manual to provide our loan officers with term,
collateral, loan-to-value and pricing guidelines. The policy manual and sound
credit analysis, together with thorough review by our Asset-Liability Committee,
have resulted in a profitable loan portfolio with minimal delinquencies or
problem loans.
Our aim is to build and maintain a commercial loan portfolio consisting
of term loans, demand loans, lines of credit and commercial real estate loans
provided predominantly to borrowers who are located in our market area. These
types of loans are generally considered to have a higher degree of risk of
default or loss than other types of loans, such as residential real estate
loans, because repayment may be affected by general economic conditions,
interest rates, the quality of management of the business and other factors
which may cause a borrower to be unable to repay its obligations. Traditional
installment loans and personal lines of credit are also available on a selective
basis. General economic conditions can directly affect the quality of a
portfolio of loans to small and medium-sized businesses. We attempt to manage
the loan portfolio to avoid high concentrations of similar industry and/or
collateral pools, although this cannot be assured.
Loan business is generated primarily through referrals and direct
calling efforts. Referrals of loan business come from directors, shareholders,
current customers and professionals such as lawyers, accountants and financial
intermediaries.
At June 30, 2003, our statutory lending limit to any single borrower
was approximately $3.2 million, subject to certain exceptions provided under
applicable law. As of June 30, 2003, our credit exposure to our largest borrower
was approximately $3.0 million.
Commercial Loans. Commercial loans are made for a wide variety of
business purposes, including the financing of plant and equipment, the carrying
of accounts receivable, contract administration and the acquisition and
construction of real estate projects. Special attention is paid to the
commercial real estate market, which is particularly
29
active in the Northern Virginia market area. Our commercial loan portfolio
reflects a diverse group of borrowers with no concentration in any borrower or
group of borrowers.
The lending activities in which we engage carry the risk that the
borrowers will be unable to perform on their obligations. As such, interest rate
policies of the Federal Reserve and general economic conditions, nationally and
in our primary market area, will have a significant impact on our results of
operations. To the extent that economic conditions deteriorate, business and
individual borrowers may be less able to meet their obligations in full, or in a
timely manner, resulting in decreased earnings or losses to us. To the extent
that loans are secured by real estate, adverse conditions in the real estate
market may reduce ability of the borrower to generate the necessary cash flow
for repayment of the loan, and reduce our ability to collect the full amount of
the loan upon a default. To the extent that we make fixed rate loans, general
increases in interest rates will tend to reduce our spread as the interest rates
we must pay for deposits increase while interest income is flat. Economic
conditions and interest rates may also adversely affect the value of property
pledged as security for loans.
We constantly strive to mitigate risks in the event of unforeseen
threats to the loan portfolio as a result of an economic downturn or other
negative influences. Plans for mitigating inherent risks in managing loan assets
include carefully enforcing loan policies and procedures, evaluating each
borrower's industry and business plan during the underwriting process,
identifying and monitoring primary and alternative sources for repayment and
obtaining collateral that is margined to minimize loss in the event of
liquidation.
Commercial real estate loans will generally be in respect of properties
that are occupied or managed by the owner, and will be underwritten with a
principal reliance on the borrower's ability to repay, as well as prudent
guidelines for assessing real estate values. Risks inherent in managing a
commercial real estate portfolio relate to either sudden or gradual drops in
property values as a result of a general or local economic downturn. A decline
in real estate values can cause loan-to-value margins to increase and diminish
our equity cushion on both an individual and portfolio basis. We attempt to
mitigate commercial real estate lending risks by carefully underwriting each
loan of this type to address the perceived risks in the individual transaction.
Generally, we require a loan-to-value ratio of not more than 75% of the lower of
appraised value or the cost of the property. A borrower's ability to repay is
carefully analyzed and policy calls for an ongoing cash flow to debt service
requirement of at least 1.1 to 1. An approved list of commercial real estate
appraisers selected on the basis of rigorous standards has been established.
Each appraisal is scrutinized in an effort to insure current comparable market
values.
As noted above, commercial real estates loans are generally made on
properties occupied or managed by the owner where there is both a reliance on
the borrower's financial health and the ability of the borrower and the business
to repay. Whenever appropriate and available, we seek federal and state loan
guarantees, such as the Small Business Administration's "7A" and "504" loan
programs, to reduce risk. We generally require personal guarantees on all loans
as a matter of policy; exceptions to policy are documented. All borrowers are be
required to forward annual corporate, partnership and personal financial
statements to comply with bank policy and enforced through the loan covenants
documentation for each transaction. Interest rate risks are mitigated by using
either floating interest rates or by fixing rates for a short period of time,
generally less than five years. While loan amortizations may be approved for up
to 30 years, loans generally have a call provision (maturity date) of 5-10 years
or less.
Commercial term loans are used to provide funds for equipment and
general corporate needs. This loan category is designed to support borrowers who
have a proven ability to service debt over a term generally not to exceed 60
months. We generally require a first lien position on all collateral and
guarantees from owners having at least a 20% interest in the involved business.
Interest rates on commercial term loans are generally floating, adjust within 3
to 5 years, or are fixed for a term not to exceed five years. Management
carefully monitors industry and collateral concentrations to avoid loan
exposures to a large group of similar industries and/or similar collateral.
Commercial loans are evaluated for historical and projected cash flow
attributes, balance sheet strength, and primary and alternate resources of
personal guarantors. Commercial term loan documents require borrowers to forward
regular financial information on both the business and on personal guarantors.
Loan covenants require at least annual submission of complete financial
information and in certain cases this information is required more frequently.
Examples of properly margined collateral for loans, as required by bank policy,
would be a 75% advance on the lesser of appraisal or recent sales price on
commercial property, 80% or less advance on eligible receivables, 50% or less
advance on eligible inventory and an 80% advance on appraised residential
property. Collateral borrowing certificates may be required to monitor certain
collateral categories on a monthly or quarterly
30
basis. Key person life insurance is required as appropriate and as necessary to
mitigate the risk loss of a primary owner or manager.
We attempt to further mitigate commercial term loan loss by using
federal and state loan guarantee programs such as offered by the Small Business
Administration. As of June 30, 2003, a loan loss reserve of approximately 1.15%
of the entire portfolio in this group had been established. Specific and
non-specific provisions for loan loss reserves are generally set based upon a
methodology developed by management and approved by the Board of Directors and
described more fully under "Critical Accounting Policies" at page 13. Specific
loan reserves will be used to increase overall reserves based on increased
credit and/or collateral risks on an individual loan basis. A risk rating system
is used to proactively determine loss exposure and provide a measurement system
for setting general and specific reserve allocations.
Commercial lines of credit are used to finance a business borrower's
short term credit needs and/or to finance a percentage of eligible receivables
and inventory. In addition to the risks inherent in term loan facilities, line
of credit borrowers typically require additional monitoring to protect the
lender against increasing loan volumes and diminishing collateral values.
Commercial lines of credit are generally revolving in nature and require close
scrutiny. We generally require at least an annual out of debt period (for
seasonal borrowers) or regular financial information (monthly or quarterly
financial statements, borrowing base certificates, etc.) for borrowers with more
growth and greater permanent working capital financing needs. Advances against
collateral are generally in the same percentages as in term loan lending. Lines
of credit and term loans to the same borrowers are generally cross-defaulted and
cross-collateralized. Industry and collateral concentration, general and
specific reserve allocation and risk rating disciplines are the same as those
used in managing the commercial term loan portfolio. Interest rate charges on
this group of loans generally float at a factor at or above the prime lending
rate. Generally, personal guarantees are required on these loans.
As part of our internal loan review process, management reviews all
loans 30 days delinquent, loans on the watch list, loans rated special mention,
substandard, or doubtful, and other loans of concern at least quarterly. Watch
list loans are any loan classified by state or federal regulators, external loan
auditors or internal loan review, or that in the opinion of management
represents an undue risk to the institution. Loan reviews are reported to the
Board of Directors with any adversely rated changes specifically mentioned. All
other loans with their respective risk ratings are reported monthly to James
Monroe Bank's Board of Directors. Our Audit Committee coordinates periodic
documentation and internal control reviews by outside vendors to complement loan
reviews.
Mortgage Lending. In the first quarter of 2003, we established a
mortgage lending operation, which originates conforming, 1-4 family residential
mortgage loans, on a pre-sold basis, for sale to secondary market purchasers,
servicing released. We employed a mortgage banker with significant experience in
operating a bank affiliated mortgage operation to establish and manage the
operation. This activity produces noninterest income in the form of gain on
sales of loans, and also produces additional interest income. Under the program,
we originate and fund loans in conformity with the standards of the secondary
market purchasers, which, prior to funding, the secondary market purchasers
agree to purchase. While we may be required to repurchase certain loans which
are ultimately determined not to meet the purchaser's standards, including as a
result of inaccuracies or fraud in borrower's documentation, our risk related to
the borrower's credit in respect of these loans is expected to be minimal.
Activity in the residential mortgage loan market is highly sensitive to changes
in interest rates. There can be no assurance that we will be able to
successfully operate the mortgage loan business in the future, that it will be
profitable, or that we will not be subject to borrower credit risks in respect
of these loans in the future.
Other Loans. Loans are considered for a variety of personal or business
purpose on a case by case basis, such as the financing of equipment,
receivables, contract administration expenses, land acquisition and development,
and automobile financing. Consumer credit facilities are underwritten to focus
on the borrower's credit record, length of employment and cash flow to debt
service. Car, residential real estate and similar loans require advances of the
lesser of 80% loan to collateral value or cost.
INVESTMENT ACTIVITIES
Our investment policy is an integral part of our overall
asset/liability management program. The investment policy is to establish a
portfolio which will provide liquidity necessary to facilitate funding of loans
and to cover
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deposit fluctuations while at the same time achieving a satisfactory return on
the funds invested. We seek to maximize earnings from the investment portfolio
consistent with the safety and liquidity of those investment assets.
The securities in which we may invest are subject to regulation and are
limited to securities which are considered investment grade securities. In
addition, our internal investment policy restricts investments to the following
categories: U.S. Treasury securities; obligations of U.S. government agencies;
investment grade obligations of U.S. private corporations; mortgage backed
securities, including securities issued by Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation; and securities of states and
political subdivisions.
SOURCES OF FUNDS
Deposits. Deposits obtained through bank offices have traditionally
been our principal source of funds for use in lending and for other general
business purposes. In order to better serve the needs of our customers, we offer
several types of deposit accounts in addition to standard savings, checking, and
NOW accounts. Special deposit accounts include the Clarendon, Loudoun and
Fairfax Money Market Accounts which pay a higher rate of interest but require a
larger minimum deposit. Personal checking requires a $300 minimum balance and
may have no monthly fee, per check charge or activity limit. Small Business
Checking allows a business to pay no monthly service charge with a minimum
balance of $1,000 but limits the number of checks and deposits per month. If the
minimums are exceeded in this account, the business automatically moves to
another account with a minimum balance of $2,500 and would be entitled to a
higher minimum number of checks and deposits without incurring a monthly fee. If
the business grows and exceeds these minimums, the regular commercial analysis
account is available where adequate balance can offset the cost of activity.
Therefore, we offer a range of accounts to meet the needs of the customer
without the customer incurring charges or fees.
We have made a special effort to obtain deposits from title and
mortgage loan closing companies, which generally provide a good source of
noninterest bearing deposits. We have developed products and services using
available technology that meet the needs of these customers, including on-line,
real-time access to account and sub-account balances and transaction
information, the on-line ability to initiate wire and ACH transactions, perform
funds transfers between the customer's own accounts and initiate stop payment
notices, and the ability to upload employee payroll information to the
customer's internal accounting systems for account reconciliation. Balances of
these deposits tend to fluctuate greatly during any given quarter, depending on
transaction scheduling, and are subject to significant reduction during slow
real estate markets. Meeting the withdrawal needs of these customers requires
that we maintain greater than normal short term liquidity.
Proposed legislation has been introduced in each of the last several
Congresses which would effectively permit banks to pay interest on checking and
demand deposit accounts established by businesses, a practice which is currently
prohibited by regulation. If the legislation effectively permitting the payment
of interest on business demand deposits is enacted, of which there can be no
assurance, it is likely that we may be required to pay interest on some portion
of our noninterest bearing deposits in order to compete against other banks. As
a significant portion of our deposits are noninterest bearing demand deposits
established by businesses, payment of interest on these deposits could have a
significant negative impact on our net income, net interest income, interest
margin, return on assets and equity, and other indices of financial performance.
We expect that other banks would be faced with similar negative impacts. We also
expect that the primary focus of competition would continue to be based on other
factors, such as quality of service.
Borrowing. While we have not placed significant reliance on borrowings
as a source of liquidity, we have established various borrowing arrangements in
order to provide management with additional sources of liquidity and funding,
thereby increasing flexibility. Management believes that we currently have
adequate liquidity available to respond to current liquidity demands.
COMMUNITY REINVESTMENT ACT
We are committed to serving the banking needs of the entire community,
including low and moderate income areas, and are a supporter of the Community
Reinvestment Act ("CRA"). There are several ways in which we attempt to fulfill
this commitment, including working with economic development agencies,
undertaking special projects and becoming involved with neighborhood outreach
programs.
32
We have contacts with state and city agencies that assist in the
financing of affordable housing developments as well as with groups which
promote the economic development of low and moderate income individuals. We have
computer software to geographically code all types of accounts to track business
development and performance by census tract and to assess market penetration in
low and moderate income neighborhoods within the primary service area. James
Monroe Bank is a registered Small Business Administration lender.
We encourage our directors and officers to participate in community,
civic and charitable organizations. Management and members of our Board of
Directors periodically review our CRA activities, including the advertising
program and geo-coding of real estate loans by census tract data which
specifically focuses on low income neighborhoods, our credit granting process
with respect to business prospects generated in these areas and our involvement
with community leaders on a personal level.
COMPETITION
In attracting deposits and making loans, we encounter competition from
other institutions, including larger commercial banking organizations, savings
banks, credit unions, other financial institutions and non-bank financial
service companies serving our market area. Financial and non-financial
institutions not located in the market are also able to reach persons and
entities based in the market through mass marketing, the Internet, telemarketing
and other means. The principal methods of competition include the level of loan
interest rates, interest rates paid on deposits, efforts to obtain deposits,
range of services provided and the quality of these services. Our competitors
include a number of major financial companies whose substantially greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous banking locations and mount extensive promotional and advertising
campaigns. In light of the deregulation of the financial service industry and
the absence of interest rate controls on deposits, we anticipate continuing
competition from all of these institutions in the future. Additionally, as a
result of legislation which reduced restrictions on interstate banking and
widened the array of companies that may own banks, we may face additional
competition from institutions outside our market and outside the traditional
range of bank holding companies which may take advantage of such legislation to
acquire or establish banks or branches in our market. There can be no assurance
that we will be able to successfully meet these competitive challenges.
In addition to offering competitive rates for our banking products and
services, our strategy for meeting competition has been to concentrate on
specific segments of the market for financial services, particularly small and
medium-sized businesses and professionals, by offering such customers customized
and personalized banking services, and by using available technology to enhance
the delivery of services.
We believe that active participation in civic and community affairs is
an important factor in building our reputation and, thereby, attracting
customers.
EMPLOYEES
As of June 30, 2003, we had 43 full-time and 6 part-time employees. We
have no employees who are not also employees of James Monroe Bank. Our employees
are not represented by any collective bargaining unit, and we believe our
employee relations are good. We maintain a benefit program, which includes
health and dental insurance, life, short term and long term disability
insurance, and a retirement plan for substantially all employees, under which
they can purchase shares of our common stock.
PROPERTIES
We currently maintain five banking offices in the Northern Virginia
market. All of our properties are occupied under leases which have terms
extending until at least 2007 and have one or more renewal options. We have also
leased approximately 14,000 square feet of space in a new building in Chantilly,
Virginia which will house our sixth banking office, and we expect it will
eventually house certain administrative and operations functions, which will
move from the main office in Arlington, and our mortgage division, which will
move from Annandale. Space vacated in the main office by these operations will
be used for additional lenders and customer service personnel. Our office
locations are set forth below.
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ADDRESS TYPE OF FACILITY
------- ----------------
3033 Wilson Boulevard Main banking office, executive offices, back office
Arlington, Virginia operations
7023 Little River Turnpike Full service branch, mortgage division
Annandale, Virginia
10509 Judicial Drive Full service branch
Fairfax, Virginia
606 South King Street Full service branch
Leesburg, Virginia
10 W. Market St. Drive though/walk though limited service branch
Leesburg, Virginia
3914 Centreville Road Full service branch - expected to open 2nd quarter
Chantilly, Virginia 2004; Future site of certain administrative and
operations functions and mortgage division
LEGAL PROCEEDINGS
We may be involved in routine legal proceedings in the ordinary course
of our business. At June 30, 2003, there were no pending or threatened legal
proceedings.
ADDITIONAL INFORMATION
For additional information regarding our business and finances, please
refer to the "Management's Discussion and Analysis" at page 13 and the
consolidated financial statements at page F-1, and to the documents listed in
"Where You Can Find Additional Information About James Monroe Bancorp" which are
incorporated by reference in this prospectus.
RECENT DEVELOPMENTS
On July 31, 2003, we issued $4 million of trust preferred securities in
a private placement transaction though a newly formed subsidiary trust. 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, 2008. The
securities have a maturity date of July 31, 2033, and are subject to optional
call provisions beginning July 31, 2008.
In August 2003, a newly formed subsidiary of James Monroe Bank was
organized for the purpose of applying to become qualified as a "community
development enterprise" and then applying for an allocation of tax credits under
the U.S. Treasury Department's New Markets Tax Credit Program. Under that
program, eligible community development entities which make loans or investments
in designated low income communities can receive federal tax credits of up to
39% of the investment in the entity over a seven year period. If our
applications are approved, we expect that we would be able to receive
significant tax benefits for loans to businesses and individuals which we
already make in portions of our market which constitute designated low income
communities. The application process for the grant of New Market Tax Credits is
rigorous and highly competitive and there is no assurance that we will be
qualified for participation in the program, that we will receive an allocation
of tax credits or that we will be able to utilize them if received.
Please refer to the "Summary - Recent Developments" for recent
developments regarding our results of operations for the nine months ended
September 30, 2003.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
- ---- --- --------
Fred A. Burroughs, III.................... 67 Director
Dr. Terry L. Collins...................... 57 Director
Norman P. Horn............................ 71 Director
Dr. David C. Karlgaard.................... 56 Director
Richard I. Linhart........................ 60 Director, Executive Vice President
and Chief Financial and Operating
Officer
Richard C. Litman......................... 45 Director
John R. Maxwell........................... 43 Director, President and Chief
Executive Officer
Dr. Alvin E. Nashman...................... 76 Director
Helen L. Newman .......................... 59 Director
Thomas L. Patterson....................... 50 Director
David W. Pijor............................ 51 Chairman of the Board
Russell E. Sherman........................ 66 Director
Jon M. Peterson........................... 39 Director of James Monroe Bank only
Set forth below is a description of the principal occupation and
business experience of each of our directors and executive officers. Except as
expressly indicated below, each person has been engaged in his principal
occupation for at least five years. Each of the members of the Board of
Directors has served since the organization of James Monroe Bancorp in 1999, and
has served as a director of James Monroe Bank since it commenced operations in
1998, except Mr. Burroughs, who joined the Board of James Monroe Bank in
February 2000, Mr. Linhart, who joined the Board of James Monroe Bancorp in June
2001 and the Board of James Monroe Bank in May 2001, and Mr. Peterson who joined
the Board of James Monroe Bank in February 2002.
Fred A. Burroughs, III. Mr. Burroughs retired in 1997 from his position
as Chairman of the Board and Chief Executive Officer of The Bank of Northern
Virginia.
Dr. Terry L. Collins. Dr. Collins is the Co-Founder and President of
Argon Engineering Associates, founded in 1997 (Systems and Information
Technology Firm). He was also the Vice President and General Manager of the
Falls Church Operation of Raytheon E-Systems from 1989 to 1997.
Norman P. Horn. Mr. Horn retired in 1997 from his position as a
Principal in the Northern Virginia accounting firm, Homes, Lowry, Horn &
Johnson, Ltd.
Dr. David C. Karlgaard. Dr. Karlgaard is the Founder, Chairman and
President of PEC Solutions, Inc. an information technology firm (listed on the
Nasdaq National Market).
Richard I. Linhart. Mr. Linhart has been Executive Vice President and
Chief Operating Officer of James Monroe Bank since February 1998 and of James
Monroe Bancorp since its formation. Prior to that time, Mr. Linhart was
President of ALM Associates from 1995 to 1998, Executive Vice President and CFO
of Hubco, Inc., Mahwah, New Jersey from 1994 to 1995 and Executive Vice
President and COO of NBT Bancorp, Norwich, New York from 1991 to 1994.
Richard C. Litman. Mr. Litman is a Registered Patent Attorney;
President of Litman Law Offices, Ltd.
John R. Maxwell. Mr. Maxwell has been President and Chief Executive
Officer of James Monroe Bank since April 1997 and of James Monroe Bancorp since
its formation. Prior to joining James Monroe Bank, he was
35
Senior Vice President - Lending of The Bank of Northern Virginia from 1988 to
1996 and Executive Vice President and Chief Lending Officer of The Bank of
Northern Virginia from 1996 to 1997.
Dr. Alvin E. Nashman. Dr. Nashman retired in 1991 from his position of
Head of the Systems Group of Computer Sciences Corporation which he held for
over 27 years.
Helen L. Newman. Mrs. Newman was Senior Vice President of Government
Operations for Gulfstream Aerospace Corporation until December 31, 2002. She is
currently retired.
Thomas L. Patterson. Mr. Patterson is an attorney with the law firm of
Linowes and Blocher, LLP. since May 2000. From November 1998 until May 2000, he
was an attorney with the firm of Venable, Baetjer, Howard & Civiletti (or
Tucker, Flyer & Lewis, which became a part of that firm in 2000). Mr. Patterson
was Vice President - Real Estate Counsel of Federal Realty Investment Trust from
March 1997 until September 1998, and prior to that time was an attorney in
private practice.
David W. Pijor. Mr. Pijor has been Chairman of James Monroe Bank since
February 1997 and Chairman of James Monroe Bancorp since its formation. Mr.
Pijor has been an attorney in private practice for the past 26 years.
Russell E. Sherman. Mr. Sherman is the President of the law firm of
Sherman & Fromme, P.C.
Jon M. Peterson. Mr. Peterson, a director of James Monroe Bank only, is
currently Senior Vice President of The Peterson Companies, formerly The Hazel
/Peterson Companies, and has been with that company, one of the largest
privately held commercial and residential real estate development companies in
the Washington metropolitan area, since 1986. Mr. Peterson previously served on
the Board of Directors of F&M Bank - Northern Virginia, from 1998 until the
acquisition of its parent company in 2002.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% percent of the common
stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5
with the Securities and Exchange Commission, and to provide us with copies of
all Forms 3, 4, and 5 they file.
Based solely upon the review of the copies of the forms which we have
received through December 31, 2002, and written representations from our
directors and executive officers, we are not aware of any failure of any such
person to comply with the requirements of Section 16(a) through December 31,
2002.
EXECUTIVE COMPENSATION
The following table sets forth a comprehensive overview of the
compensation for Mr. Maxwell, our President and Chief Executive Officer, and Mr.
Linhart, the only other executive officer who received total salary and bonus of
$100,000 or more during the fiscal year ended December 31, 2002.
36
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------- ---------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ---------------------------- ------- ----------- ------------- --------------------- -----------------
John R. Maxwell, 2002 $170,000 $50,400 -- Less than $10,000
President and Chief 2001 145,833 38,000 -- Less than $10,000
Executive Officer 2000 133,750 30,000 -- Less than $10,000
Richard I. Linhart, 2002 $125,000 $35,000 3,375(1) Less than $10,000
Executive Vice President 2001 115,000 27,000 3,375(1) Less than $10,000
and Chief Operating Officer 2000 102,000 25,000 3,375(1) Less than $10,000
- ----------------------------
(1) Adjusted to reflect the three-for-two stock split in the form of a 50% stock
dividend paid on July 25, 2002 and a five-for-four stock split in the form
of a 25% stock dividend paid on May 16, 2003.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE PER
NAME GRANTED(1) YEAR SHARE(1) EXPIRATION DATE
- ---------------------- -------------------- ----------------------- --------------- ------------------
John R. Maxwell -- n/a n/a n/a
Richard I. Linhart 3,375 16.0% $9.67 January 9, 2012
- ----------------------
(1) Adjusted to reflect the three-for-two stock split in the form of a 50% stock
dividend paid on July 25, 2002 and a five-for-four stock split in the form
of a 25% stock dividend paid on May 16, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR AND OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED 2002 DECEMBER 31, 2002
ON VALUE ------------------------- ---------------------------
NAME EXERICSE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- --------------------- ----------------- -------------- ------------------------- ---------------------------
John R. Maxwell -- $ -- 69,150/$- $532,455/$-
Richard I. Linhart -- $ -- 27,750/1,125 $195,833/$3,971
- ---------------------
(1) Based on $13.04 per share, the adjusted last sale price of the common stock
as of December 31, 2002.
EMPLOYMENT AGREEMENTS
John R. Maxwell. We have entered into an agreement with Mr. Maxwell,
pursuant to which he serves as President and Chief Executive Officer of James
Monroe Bank and James Monroe Bancorp. Without cause or his consent, he may not
be removed from these positions, nor may any executive position higher than his
be established. The term of his agreement expires on December 31, 2004, and is
subject to automatic one year extensions on each January 1 thereafter, provided
that neither we nor Mr. Maxwell has given written notice of intention not to
renew at least 90 days prior to the renewal date. The agreement provides for the
payment of cash and other benefits to Mr. Maxwell, including a base salary of
$170,000 during the period January 1, 2002 to December 31, 2002. Mr. Maxwell's
base salary for subsequent periods is subject to annual review by the Board of
Directors, and is currently $190,000 for calendar year 2003. Under the
agreement, he was entitled to a bonus of 28% of the bonus pool established for
employees in 2002, or $50,400. In future years, he is entitled to a bonus as
determined in the Board's discretion, after consultation with Mr. Maxwell.
Seventy-five percent of future bonuses is to be based on objective performance
criteria. The amount of the bonus pool is established by the Board of Directors,
with the actual award based upon the achievement of income and asset size goals
determined by the Board of Directors. Mr. Maxwell is also entitled to $1,700,000
of life insurance at our expense (subject to increase based upon the percentage
increase in base salary), use of a car and an automobile allowance, and is
entitled to reimbursement of reasonable business expenses. He is also entitled
to reimbursement of income taxes payable upon the exercise of 69,150 options (as
adjusted for the stock splits)
37
previously granted under a prior employment agreement, up to the amount of the
tax benefit we realize as a result of the exercise. Mr. Maxwell is entitled to
receive supplemental payments upon disability, in excess of those provided under
our generally applicable plan, to bring total payments to 100% of his base
salary for the first six months of the disability. Subsequently, he will be
entitled to receive only payments under our disability income plan, except he
shall not be subject to the generally applicable $5,000 monthly payment limit.
He is also entitled to participate in any pension, retirement, profit sharing,
stock purchase, stock option, insurance, deferred compensation and other benefit
plans provided to other executives or employees.
His agreement terminates as of the end of the initial or any renewal
terms if either party gives notice of non-renewal. If he elects not to renew the
agreement, he is not entitled to any additional payments, and is subject to a
two year non-competition restriction. If we elect not to renew the agreement,
Mr. Maxwell is entitled to receive continued salary, bonus and benefits for 18
months, and is subject to the non-competition restriction for that period. If,
within 12 months of a change in control (as defined), Mr. Maxwell terminates the
agreement after we materially change his status, duties or responsibilities,
discontinue compensation plans in which he is participating without providing a
comparable replacement plan, limit his outside activities, or assign the
agreement or our obligations under the agreement, without his consent, he will
be entitled to receive continued salary, bonus and benefits for 24 months, and
will be subject to the non-competition restriction for that period. If we
terminate the agreement in breach of the agreement, or Mr. Maxwell terminates
because of such breach, he will be entitled to receive continued salary, bonus
and benefits for 12 months, and outplacement assistance from an organization of
his choice, at our expense up to 18% of his base salary at the time of
termination, and he will not be subject to the non-competition restriction. The
agreement prohibits conflicts of interests, and requires that Mr. Maxwell
maintain the confidentiality of nonpublic information regarding us and our
customers.
Richard I. Linhart. We have entered into an agreement with Mr. Linhart,
pursuant to which he serves as Executive Vice President and Chief Operating
Officer. The current term of Mr. Linhart's agreement expires on December 31,
2003. The agreement provides for the payment of cash and other benefits,
including a base salary of $125,000 during the period January 1, 2002 to
December 31, 2002. Mr. Linhart's base salary, $137,000 for the calendar year
2003, is subject to annual review, provided that the salary may not be less than
his base salary for the prior period. Mr. Linhart is entitled to reimbursement
of income taxes payable upon the exercise of options to purchase 18,750 shares
(as adjusted for the stock splits) previously granted under a prior employment
agreement, up to the amount of the tax benefit we realize as a result of the
exercise. He is entitled to disability payments in the same manner as Mr.
Maxwell. He is also entitled to major medical health insurance as provided to
other officers, to a car allowance in the amount of $500 per month and to
participate in any pension, retirement, profit sharing, stock purchase, stock
option, insurance, deferred compensation and other benefit plans provided to
other executives or employees.
If Mr. Linhart terminates the agreement for "good reason" (as defined)
within 12 months of a "change in control" (as defined), he will be entitled to
receive continued salary and benefits for 24 months. If we terminate the
agreement in breach of the agreement, or by Mr. Linhart as a result of our
breach, Mr. Linhart is entitled to receive continued salary, bonus and benefits
for the greater of 12 months or the remaining term of the agreement, and
outplacement assistance from an organization of his choice, at our expense up to
18% of his base salary at the time of termination.
We have agreed to a new employment agreement with Mr. Linhart. Although
the agreement has not been prepared yet, it will have a term extending until
December 31, 2006, and is expected to provide for an initial base salary of
$150,000 commencing January 1, 2004, and a car allowance of $600 per month. Mr.
Linhart will receive non-incentive options under the 2003 Equity Compensation
Plan to purchase 15,000 shares at an exercise price equal to the offering price,
and non-incentive options to purchase 7,500 additional shares on each of October
15, 2004 and 2005 with exercise prices equal to the fair market value of the
common stock as of such dates, subject to adjustment in accordance with the 2003
Equity Compensation Plan. The options will vest in equal installments over the
period from the date of grant through December 31, 2008, subject to acceleration
of vesting if Mr. Linhart retires after December 31, 2006 and he complies with
certain non-competition provisions. The agreement will contain other provisions,
including change in control provisions, comparable to those in his current
agreement.
401(k) Retirement Plan. We maintain a 401(k) defined contribution plan
for all eligible employees. Employees who are at least 21 years of age, have
completed at least ninety days of continuous service with James Monroe Bank and
have completed at least 1,000 hours of work during any plan year are eligible to
participate. Under the plan, a participant may contribute up to 15% of his or
her compensation for the year, subject to certain limitations. We may also make,
but are not required to make, a discretionary contribution for each participant.
The amount of such contribution is determined annually by the Board of
Directors, and is currently 83.33% of employee contributions up to 6% of salary.
Company contributions totaled $29,000 for the fiscal year ended December 31,
2002. Since the second quarter of this year, employees participating in the
retirement plan may allocate a portion of their available funds for the purchase
shares of our common stock. Shares are purchased on a quarterly basis, at market
value, and are expected to be issued out of authorized but unissued shares. An
aggregate of 100,000 shares have been reserved for issuance under the plan, of
which approximately 1,000 have been issued to date.
38
Stock Option Plans. We maintain the 1998 Stock Option Plan for key
employees, pursuant to which options to purchase up to 172,275 shares of common
stock may be issued as either incentive stock options or nonincentive stock
options. As of September 30, 2003, 12,506 options remained available for
issuance under the 1998 plan.
We also maintain the 2003 Equity Compensation Plan, approved at the
2003 Annual Meeting of Shareholders. The purpose of the 2003 plan is to promote
our long term interests by motivating selected key personnel and directors
through the grant of equity compensation, in the form of stock options,
restricted stock awards, stock appreciation rights, phantom stock and
performance shares. Under this plan, 250,000 shares, as adjusted for the May
2003 stock split, are available for issuance upon the exercise of awards under
the plan. As of September 30, 2003, options to purchase 19,994 shares of common
stock had been issued under the plan. Under his new employment agreement, Mr.
Linhart will be entitled to receive options to purchase 30,000 shares under the
plan.
DIRECTORS' COMPENSATION
Directors receive $300 for attendance at meetings of the Board of
Directors of the holding company or the bank, and $100 for each committee
meeting, other than Mr. Pijor, the Chairman, who receives a monthly retainer of
$2,500 in addition to regular meeting fees. Directors are entitled to receive
options under the 2000 Directors' Option Plan. In 2002, each director received
options to purchase 1,391 shares of common stock at an exercise price of $9.87
per share, except Mr. Burroughs, who was granted an option to purchase 5,625
shares. The Directors' Option Plan was approved by stockholders in 2000. Under
the Directors' Option Plan, 124,400 shares of common stock, as adjusted for the
stock splits, were available for issuance under options. Only non-employee
directors are eligible to participate in the plan. As of December 31, 2002, no
options remained available for issuance under the Directors' Option Plan.
Directors are also eligible to receive awards under the 2003 Equity Compensation
Plan, discussed above. In July 2003, each director other than Messrs. Horn and
Sherman was awarded options to purchase 1,538 shares of common stock at an
exercise price of $22.86 per share under the 2003 Equity Compensation Plan.
Messrs. Horn and Sherman each received options to purchase 3,076 shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have had, and expect to have in the future, banking transactions in
the ordinary course of business with some of our directors, officers, and
employees and their associates. In the past, substantially all of such
transactions have been on the same terms, including interest rates, maturities
and collateral requirements as those prevailing at the time for comparable
transactions with non-affiliated persons and did not involve more than the
normal risk of collectibility or present other unfavorable features. It is our
policy that transactions with officers, directors and five percent shareholders
be on terms no less favorable to James Monroe Bank and/or James Monroe Bancorp
than could be obtained from independent third parties.
The maximum aggregate amount of loans to our officers, directors and
affiliates during 2002 amounted to $1.5 million, representing approximately 8.0%
of total shareholders' equity at December 31, 2002. In the opinion of the Board
of Directors, the terms of these loans are no less favorable than terms of the
loans we make to unaffiliated parties. On December 31, 2002, $1.3 million of
loans were outstanding to individuals who, during 2002, were our officers,
directors or affiliates. At the time each loan was made, management believed
that the loan involved no more than the normal risk of collectibility and did
not present other unfavorable features. None of such loans were classified as
substandard, doubtful or loss.
David W. Pijor, our Chairman, has performed legal services for us in
the ordinary course of business, and we expect that he will continue to perform
services for us. In 2002, the aggregate fee paid to Mr. Pijor was $78,857. In
2001, he received $32,437 for his services. Fred A. Burroughs, III has a
management consulting agreement with James Monroe Bank under which he receives
$60,000 annually for business development services and activities.
SHARE OWNERSHIP OF MANAGEMENT AND FIVE PERCENT BENEFICIAL OWNERS
The following table sets forth information as of September 30, 2003
concerning the number and percentage of shares of the common stock beneficially
owned by our directors and executive officers named in the summary compensation
table above and by all of our directors and executive officers as a group, as
well as information regarding each other person known by us to own in excess of
five percent of the outstanding common stock. Except as otherwise indicated, all
shares are owned directly, and the named person possesses sole voting and sole
investment power with
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respect to all such shares. Except as set forth below, we are not aware of any
other person or persons who beneficially own in excess of five percent of the
common stock. We are not aware of any arrangement which at a subsequent date may
result in a change of control of James Monroe Bancorp.
NAME SHARES BENEFICIALLY OWNED(1) PERCENTAGE
--------------------------------------- ---------------------------- -----------
Directors
Fred A. Burroughs, III 35,228 1.51%
Dr. Terry L. Collins 115,991 4.94%
Norman P. Horn 18,967 0.81%
Dr. David C. Karlgaard 123,303 5.24%
12750 Fair Lakes Circle
Fairfax, VA 22033
Richard I. Linhart 31,687 1.36%
Richard C. Litman 32,178 1.37%
John R. Maxwell 92,337 3.84%
Dr. Alvin E. Nashman 60,788(2) 2.60%
Helen L. Newman 55,054(3) 2.36%
Thomas L. Patterson 32,682(4) 1.39%
David W. Pijor 43,135(5) 1.83%
Russell E. Sherman 28,279 1.20%
Jon M. Peterson(6) 6,744 0.29%
Executive officers, directors and James 676,433 26.72%
Monroe Bank directors as a
group (13 individuals)
Five Percent Shareholder
Nino Vaghi 190,547 8.17%
c/o National Mailing Systems
1749 Old Meadow Road
McLean, VA 22101
-----------------------------------
(1) The shares "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the U.S. Securities and Exchange
Commission and may include shares owned by or for the individual's
spouse and minor children and any other relative of the individual who
lives in the same home, as well as shares to which the individual has,
or shares, voting or investment power, or has the right to acquire
beneficial ownership within sixty (60) days after September 30, 2003.
Beneficial ownership may be disclaimed as to certain of the shares.
Directors and executive officers beneficially own the following stock
options which are exercisable within 60-days following September 30,
2003: Burroughs -- 7,163 shares; Collins -- 14,741 shares; Horn --
12,717 shares; Karlgaard -- 18,491 shares; Linhart -- 1,125 shares;
Litman -- 18,116 shares; Maxwell -- 69,150 shares; Nashman -- 1,538
shares; Newman -- 2,929 shares; Patterson -- 10,054 shares; Pijor --
25,991 shares; Sherman -- 14,217 shares; Peterson -- 1,538.
(2) Includes 9,750 shares held individually by his spouse.
(3) Includes 43,375 shares of common stock held individually by Mrs.
Newman and 6,750 shares of common stock held individually by her
spouse.
(4) Includes 9,503 shares held in various trusts which Mr. Patterson has
voting and/or investment power. Does not include 6,335 shares held by
Mr. Patterson's sibling for benefit of Mr. Patterson's son.
(5) Includes 13,738 shares held individually by Mr. Pijor, 2,906 shares
held jointly, and 500 shares held by his minor children.
(6) Mr. Peterson is a director of James Monroe Bank only.
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SUPERVISION AND REGULATION
JAMES MONROE BANCORP
James Monroe Bancorp is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, (the "Act") and is subject to
supervision by the Federal Reserve. As a bank holding company, we are required
to file with the Federal Reserve an annual report and such other additional
information as the Federal Reserve may require pursuant to the Act. The Federal
Reserve may also examine James Monroe Bancorp and each of our subsidiaries.
The Act requires approval of the Federal Reserve for, among other
things, the acquisition by a proposed bank holding company of control of more
than five percent (5%) of the voting shares, or substantially all the assets, of
any bank or the merger or consolidation by a bank holding company with another
bank holding company. The Act also generally permits the acquisition by a bank
holding company of control, or substantially all the assets, of any bank located
in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by
state law, but if the bank is at least 5 years old, the Federal Reserve may
approve the acquisition.
Under current law, with certain limited exceptions, a bank holding
company is prohibited from acquiring control of any voting shares of any company
which is not a bank or bank holding company and from engaging directly or
indirectly in any activity other than banking or managing or controlling banks
or furnishing services to or performing service for its authorized subsidiaries.
A bank holding company may, however, engage in or acquire an interest in, a
company that engages in activities which the Federal Reserve has determined by
order or regulation to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such a
determination, the Federal Reserve is required to consider whether the
performance of such activities can reasonably be expected to produce benefits to
the public, such as convenience, increased competition or gains in efficiency,
which outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve is also empowered to differentiate
between activities commenced de novo and activities commenced by the
acquisition, in whole or in part, of a going concern. Some of the activities
that the Federal Reserve has determined by regulation to be closely related to
banking include making or servicing loans, performing certain data processing
services, acting as a fiduciary or investment or financial advisor, and making
investments in corporations or projects designed primarily to promote community
welfare.
Effective on March 11, 2001, the Gramm Leach Bliley Act (the "GLB Act")
allows a bank holding company or other company to certify status as a financial
holding company, which will allow such company to engage in activities that are
financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank company or any of its subsidiaries, or investments in the stock or
other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing, on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount, deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to a
holding company or any other subsidiary of a holding company; or (iii) the
customer not obtain some other credit, property or service from competitors,
except for reasonable requirements to assure the soundness of credit extended.
The Federal Reserve has also adopted capital guidelines for bank
holding companies that are substantially the same as those applying to state
member banks.
41
JAMES MONROE BANK
James Monroe Bank is a Virginia chartered commercial bank and a member
of the Federal Reserve System. Its deposit accounts are insured by the Bank
Insurance Fund of the FDIC up to the maximum legal limits of the FDIC and it is
subject to regulation, supervision and regular examination by the Virginia
Bureau of Financial Institutions and the Federal Reserve. The regulations of
these various agencies govern most aspects of James Monroe Bank's business,
including required reserves against deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and location and number of branch offices.
The laws and regulations governing James Monroe Bank generally have been
promulgated to protect depositors and the deposit insurance funds, and not for
the purpose of protecting stockholders.
Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of James Monroe Bank's earnings. Thus, our earnings and growth
will be subject to the influence of economic conditions generally, both domestic
and foreign, and also to the monetary and fiscal policies of the United States
and its agencies, particularly the Federal Reserve, which regulates the supply
of money through various means including open market dealings in United States
government securities. The nature and timing of changes in such policies and
their impact on James Monroe Bank cannot be predicted.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") by adopting a law after the date of enactment of the
Riegle-Neal Act and prior to June 1, 1997, which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in
the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. Virginia has enacted laws which permit
interstate acquisitions of banks and bank branches and permit out-of-state banks
to establish de novo branches.
Capital Adequacy Guidelines. The Federal Reserve has adopted risk-based
capital adequacy guidelines pursuant to which they assess the adequacy of
capital in examining and supervising banks and bank holding companies and in
analyzing bank regulatory applications. Risk-based capital requirements
determine the adequacy of capital based on the risk inherent in various classes
of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total
qualifying capital (the sum of core capital (Tier 1) and supplementary capital
(Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%)
should be in the form of core capital.
Tier 1 Capital generally consists of the sum of common stockholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such stock which may be included as Tier 1
Capital), less goodwill, without adjustment for changes in the market value of
securities classified as "available for sale" in accordance with Financial
Accounting Standard 115. Tier 2 Capital consists of the following: hybrid
capital instruments; perpetual preferred stock which is not otherwise eligible
to be included as Tier 1 Capital; term subordinated debt and intermediate term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into account
different risk characteristics, with the categories ranging from 0% (requiring
no risk-based capital) for assets such as cash and certain U.S. government and
agency securities, to 100% for the bulk of assets which are typically held by a
bank holding company, including certain multi-family residential and commercial
real estate loans, commercial business loans and consumer loans. Residential
first mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past due or nonperforming and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately issued mortgage backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
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In addition to the risk-based capital requirements, the Federal Reserve
has established a minimum 4.0% Leverage Capital Ratio (Tier 1 Capital to total
adjusted assets) requirement for the most highly rated banks, with an additional
cushion of at least 100 to 200 basis points for all other banks, which
effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% - 6.0% or more. The highest rated banks are those that are not anticipating
or experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, those which are considered a strong banking
organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which a bank shall achieve its minimum Leverage Capital Ratio requirement. A
bank that fails to file such plan is deemed to be operating in an unsafe and
unsound manner, and could subject that bank to a cease and desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding solely on account of its capital
ratios, if it has entered into and is in compliance with a written agreement to
increase its Leverage Capital Ratio and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
capital regulations also provide, among other things, for the issuance of a
capital directive, which is a final order issued to a bank that fails to
maintain minimum capital or to restore its capital to the minimum capital
requirement within a specified time period. Such directive is enforceable in the
same manner as a final cease and desist order.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total risk-based
capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 6.0% or
more, a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any
written capital order or directive; (ii) "adequately capitalized" if it has a
Total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a Total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a Total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership.
43
The general rule is that the FDIC will be appointed as receiver within 90 days
after a bank becomes critically undercapitalized unless extremely good cause is
shown and an extension is agreed to by the federal regulators. In general, good
cause is defined as capital, which has been raised and is imminently available
for infusion into a bank except for certain technical requirements which may
delay the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long
term cost to the deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or unsound
condition; (iv) there is a willful violation of a cease and desist order; (v)
the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of law
or unsafe or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the institution
is undercapitalized and has no reasonable prospect that it will become
adequately capitalized, fails to become adequately capitalized when required to
do so, or fails to submit or materially implement a capital restoration plan; or
(x) the institution is critically undercapitalized or otherwise has
substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants
substantial enforcement powers to federal banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
Deposit Insurance Premiums. The FDIA establishes a risk-based deposit
insurance assessment system. Under applicable regulations, deposit premium
assessments are determined based upon a matrix formed utilizing capital
categories - well capitalized, adequately capitalized and undercapitalized -
defined in the same manner as those categories are defined for purposes of
Section 38 of the FDIA. Each of these groups is then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from 0.04% of insured deposits for well
capitalized institutions having the lowest level of supervisory concern, to
0.31% of insured deposits for undercapitalized institutions having the highest
level of supervisory concern. In general, while the Bank Insurance Fund of the
FDIC ("BIF") maintains a reserve ratio of 1.25% or greater, no deposit insurance
premiums are required. When the BIF reserve ratio falls below that level, all
insured banks would be required to pay premiums. Payment of deposit premiums,
either under current law or as the deposit insurance system may be reformed,
will have an adverse impact on earnings.
DESCRIPTION OF OUR CAPITAL STOCK
James Monroe Bancorp's authorized capital consists of 5,000,000 shares
of common stock, $1.00 par value. As of September 30, 2003, there were 2,333,642
shares of common stock outstanding. Assuming the sale of all of the
44
shares offered hereby, other than those subject to the over-allotment option,
there will be 2,855,381 shares of common stock outstanding immediately. An
aggregate of 256,518 shares of common stock are reserved for issuance upon the
exercise of outstanding stock options as of September 30, 2003, 229,328 of which
are exercisable. Subsequent to September 30, 2003, we agreed to grant Mr.
Linhart options to purchase an aggregate of 30,000 shares over the term of his
new employment agreement. Options to purchase an aggregate of 216,512 shares of
common stock remain available for grant under our option plans.
Common Stock. Holders of common stock are entitled to cast one vote for
each share held of record, to receive such dividends as may be declared by the
Board of Directors out of legally available funds, and, subject to the rights of
any class of stock having preference to the common stock, to share ratably in
any distribution of assets after payment of all debts and other liabilities,
upon liquidation, dissolution or winding up. Shareholders do not have cumulative
voting rights or preemptive rights or other rights to subscribe for additional
shares, and the common stock is not subject to conversion or redemption. The
shares of common stock to be issued in this offering will be, when issued, fully
paid and nonassessable.
Limitations on Payment of Dividends. The payment of dividends will
depend largely upon the ability of James Monroe Bank to declare and pay
dividends to the holding company. Dividends will depend primarily upon James
Monroe Bank's earnings, financial condition, and need for funds, as well as
governmental policies and regulations applicable to us. Even if we have earnings
in an amount sufficient to pay dividends, the Board of Directors may determine
to retain earnings for the purpose of funding the growth.
Regulations of the Federal Reserve and Virginia law place limits on the
amount of dividends James Monroe Bank may pay without prior approval. Prior
regulatory approval is required to pay dividends which exceed a state member
bank's net profits for the current year plus its retained net profits for the
preceding two calendar years, less required transfers to surplus. federal bank
regulatory agencies also have authority to prohibit a bank from paying dividends
if such payment is deemed to be an unsafe or unsound practice, and the Federal
Reserve has the same authority over bank holding companies. At June 30, 2003,
approximately $3.2 million of dividends may be paid without prior approval.
State and federal regulatory authorities also have authority to prohibit a bank
from paying dividends if they deem payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that we may pay in the future. The Federal Reserve has issued a policy statement
on the payment of cash dividends by bank holding companies. In the statement,
the Federal Reserve expressed its view that a holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income, or
which could only be funded in ways that weaken the holding company's financial
health, such as by borrowing. As a depository institution, the deposits of which
are insured by the FDIC, James Monroe Bank may not pay dividends or distribute
any of its capital assets while it remains in default on any assessment due the
FDIC.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND VIRGINIA LAW
Our Articles of Incorporation do not contain any provisions which would
require a greater or lesser than normal vote of shareholders, any provisions
which impose special approval or other requirements on corporate transactions or
other matters, or which could be deemed to have an antitakeover effect. The
Virginia Stock Corporation Act (the "VSCA"), which is applicable to us and the
holders of common stock, contains provisions which could be deemed to have an
antitakeover effect. The discussion of the following provisions is not
exhaustive, and is not intended to imply that all material provisions of either
the Articles of Incorporation or the VSCA are enumerated herein.
Affiliated Transactions. The VSCA contains provisions governing
"affiliated transactions." These include various transactions such as mergers,
share exchanges, sales, leases, or other material dispositions of assets,
issuances of securities, dissolutions, and similar transactions with an
"interested shareholder." An interested shareholder is generally the beneficial
owner of more than 10% of any class of a corporation's outstanding voting
shares. During the three years following the date a shareholder becomes an
interested shareholder, any affiliated
45
transaction with the interested shareholder must be approved by both a majority
of the "disinterested directors" (those directors who were directors before the
interested shareholder became an interested shareholder or who were recommended
for election by a majority of disinterested directors) and by the affirmative
vote of the holders of two-thirds of the corporation's voting shares other than
shares beneficially owned by the interested shareholder. These requirements do
not apply to affiliated transactions if, among other things, a majority of the
disinterested directors approve the interested shareholder's acquisition of
voting shares making such a person an interested shareholder before such
acquisition. Beginning three years after the shareholder becomes an interested
shareholder, the corporation may engage in an affiliated transaction with the
interested shareholder if:
o the transaction is approved by the holders of two-thirds of the
corporation's voting shares, other than shares beneficially owned
by the interested shareholder,
o the affiliated transaction has been approved by a majority of the
disinterested directors, or subject to certain additional
requirements, in the affiliated transaction the holders of each
class or series of voting shares will receive consideration meeting
specified fair price and other requirements designed to ensure that
all shareholders receive fair and equivalent consideration,
regardless of when they tendered their shares.
Control Share Acquisitions. Under the VSCA's control share acquisitions
law, voting rights of shares of stock of a Virginia corporation acquired by an
acquiring person or other entity at ownership levels of 20%, 33 1/3%, and 50% of
the outstanding shares may, under certain circumstances, be denied. The voting
rights may be denied:
o unless conferred by a special shareholder vote of a majority of the
outstanding shares entitled to vote for directors, other than
shares held by the acquiring person and officers and directors of
the corporation, or
o among other exceptions, such acquisition of shares is made pursuant
to a affiliation agreement with the corporation or the
corporation's articles of incorporation or bylaws permit the
acquisition of such shares before the acquiring person's
acquisition thereof.
If authorized in a corporation's articles of incorporation or bylaws,
the statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than 50% of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value."
The provisions of the Affiliated Transactions Statute and the Control
Share Acquisition Statute are only applicable to public corporations that have
more than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but
we have not done so.
Supermajority Voting Provisions. The VSCA provides that, unless a
corporation's articles of incorporation provide for a higher or lower vote,
certain significant corporate actions must be approved by the affirmative vote
of the holders of more than two-thirds of the votes entitled to be cast on the
matter. Corporate actions requiring a two-thirds vote include amendments to a
corporation's articles of incorporation, adoption of plans of affiliation or
exchange, sales of all or substantially all of a corporation's assets other than
in the ordinary course of business and adoption of plans of dissolution
("Fundamental Actions"). The VSCA provides that a corporation's articles may
either increase the vote required to approve Fundamental Actions or may decrease
the required vote to not less than a majority of the votes entitled to be cast.
Our Articles of Incorporation do not contain any provisions altering the vote
required for any Fundamental Action.
UNDERWRITING
James Monroe Bancorp and Scott & Stringfellow, Inc., the underwriter
for the offering, have entered into an underwriting agreement with respect to
the shares being offered. Subject to the terms and conditions contained in the
underwriting agreement, Scott & Stringfellow has agreed to purchase from us all
of the shares of common stock in this offering.
46
Scott & Stringfellow proposes to offer the shares of common stock
directly to the public at the public offering price set forth on the cover of
this prospectus and to certain securities dealers at that price less a
concession not to exceed $0.96 per share. Scott & Stringfellow may allow, and
these dealers may re-allow, a discount of not more than $0.10 per share on sales
to other brokers or dealers. If all of the shares are not sold at the public
offering price, Scott & Stringfellow may change the offering price and other
selling terms.
We have granted to Scott & Stringfellow an option, exercisable for 30
days after the date of this prospectus, to purchase up to 78,261 additional
shares of our common stock at the public offering price less the underwriting
discount set forth on the cover page of this prospectus. Scott & Stringfellow
may exercise this option only to cover over-allotments, if any, made in
connection with this offering. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to Scott & Stringfellow to the
extent the option is exercised. If any additional shares of common stock are
purchased, Scott & Stringfellow will offer the additional shares on the same
terms as those on which the 521,739 shares are being offered.
Of the 521,739 shares of common stock to be sold pursuant to the
offering, Scott & Stringfellow has accepted our request to sell up to 86,956
shares to our directors, executive officers and a founding director who no
longer sits on the Board of Directors at the public offering price set forth on
the cover and an underwriting discount of $0.837 per share. Although such
persons are not legally bound to make such purchases, it is expected that our
directors and executive officers will purchase all or substantially all of such
shares. Accordingly, assuming that the directors and executive officers purchase
such shares, and otherwise purchase shares as expected in the offering, such
persons would beneficially own an aggregate of 566,489 shares of common stock,
or 19.8% of the outstanding common stock following the offering (assuming no
exercise of the underwriter's over-allotment option).
The underwriting agreement provides that the obligations of Scott &
Stringfellow are conditional and may be terminated at its discretion based on
its assessment of the state of the financial markets. The obligations of Scott &
Stringfellow may also be terminated upon the occurrence of the events specified
in the underwriting agreement. The underwriting agreement provides that Scott &
Stringfellow is obligated to purchase all of the shares of common stock in this
offering if any are purchased, other than those shares covered by the
over-allotment option described above.
The shares of common stock are being offered by Scott & Stringfellow,
subject to prior sale, when, as and if issued to and accepted by it, subject to
approval of certain legal matters by counsel for Scott & Stringfellow and other
conditions specified in the underwriting agreement. Scott & Stringfellow
reserves the right to withdraw, cancel or modify this offer and to reject orders
in whole or in part.
The following table shows the per share and total underwriting discount
we will pay to Scott & Stringfellow. These amounts are shown assuming both no
exercise and full exercise of Scott & Stringfellow's over-allotment option to
purchase additional shares.
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------
Discounts per share $ 1.61 $ 1.61
Discounts, total $ 772,783 $ 898,783
Total offering proceeds to us $11,227,214 $12,901,217
Scott and Stringfellow has agreed that the underwriting discount will
be $ 0.837 per share for up to 86,956 shares, which may be purchased by our
directors, executive officers and founding directors. The total offering
proceeds shown in the above table assume the purchase of 86,956 shares by such
persons.
We estimate that the total expenses of the offering, excluding
underwriting discount, will be approximately $175,000 and are payable by us.
We, and our executive officers and directors, have agreed, for a period
of 90 days after the date of this prospectus, not to sell, offer, agree to sell,
contract to sell, hypothecate, pledge, grant any option to sell, make any
47
short sale or otherwise dispose of or hedge, directly or indirectly, any shares
of our common stock or securities convertible into, exchangeable or exercisable
for any shares of our common stock or warrants or other rights to purchase
shares of our common stock or other similar securities, without, in each case,
the prior written consent of Scott & Stringfellow. These restrictions are
expressly agreed to preclude us, and our executive officers and directors, from
engaging in any hedging or other transaction or arrangement that is designed to,
or which reasonably could be expected to, lead to or result in a sale,
disposition or transfer, in whole or in part, of any of the economic
consequences of ownership of our common stock, whether such transaction would be
settled by delivery of common stock or other securities, in cash or otherwise.
This consent may be given at any time without public notice.
Our common stock is quoted on the Nasdaq SmallCap Market under the
symbol "JMBI." The last reported sale price of our common stock on November 10,
2003 was $25.80 per share. The public offering price of the shares will be
determined by negotiation between Scott & Stringfellow and us, taking into
consideration the market price of our common stock, prevailing market conditions
generally and bank stocks specifically.
In connection with this offering, Scott & Stringfellow may engage in
stabilizing transactions, over-allotment transactions and covering transactions.
o Stabilizing transactions permit bids to purchase shares of common stock
so long as the stabilizing bids do not exceed a specified maximum, and
are engaged in for the purpose of preventing or retarding a decline in
the market price of the common stock while the offering is in progress.
o Over-allotment transactions involve sales by Scott & Stringfellow of
shares of common stock in excess of the number of shares Scott &
Stringfellow is obligated to purchase. This creates a short position
which may be either a covered short position or a naked short position.
In a covered short position, the number of shares over-allotted by
Scott & Stringfellow is not greater than the number of shares that it
may purchase in the over-allotment option. In a naked short position,
the number of shares involved is greater than the number of shares in
the over-allotment option. Scott & Stringfellow may close out any short
position by exercising its over-allotment option and/or purchasing
shares in the open market.
o Covering transactions involve purchases of common stock in the open
market after the distribution has been completed in order to cover
short positions. In determining the source of shares to close out the
short position, Scott & Stringfellow will consider, among other things,
the price of shares available for purchase in the open market as
compared with the price at which it may purchase shares through
exercise of the over-allotment option. If Scott & Stringfellow sells
more shares than could be covered by exercise of the over-allotment
option and, therefore, has a naked short position, the position can be
closed out only by buying shares in the open market. A naked short
position is more likely to be created if Scott & Stringfellow is
concerned that after pricing there could be downward pressure on the
price of the shares in the open market that could adversely affect
investors who purchase in the offering.
These stabilizing transactions and covering transactions may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common stock. As a
result, the price of our common stock in the open market may be higher than it
would otherwise be in the absence of these transactions. Neither we nor Scott &
Stringfellow make any representation or prediction as to the effect that the
transactions described above may have on the price of our common stock. These
transactions may be effected on the Nasdaq SmallCap Market or otherwise and, if
commenced, may be discontinued at any time.
In connection with this offering, Scott & Stringfellow and selected
dealers, if any, who are qualified market makers on the Nasdaq SmallCap Market,
may engage in passive market making transactions in our common stock on the
Nasdaq SmallCap Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of such
security. If all independent bids are lowered below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded.
We have agreed to indemnify Scott & Stringfellow against specified
liabilities, including liabilities under the Securities Act of 1933, or
Securities Act, and to contribute to payments that Scott & Stringfellow may be
required to make in respect thereof.
From time to time, some of Scott & Stringfellow has provided, and may
continue to provide, investment banking services to us in the ordinary course of
its respective businesses.
48
LEGAL MATTERS
The validity of the shares offered hereby and selected other legal
matters in connection with the offering will be passed upon for James Monroe
Bancorp by the law firm of Kennedy, Baris & Lundy, L.L.P., Bethesda, Maryland.
Certain legal matters will be passed upon for the underwriter by LeClair Ryan, A
Professional Corporation, Richmond, Virginia.
EXPERTS
The consolidated balance sheets of James Monroe Bancorp, Inc and
Subsidiaries as of December 31, 2002 and 2001 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three years ended December 31, 2002, 2001 and 2000 included and incorporated by
reference in this prospectus have been audited by Yount, Hyde & Barbour, P.C.,
independent auditors, as stated in their report, included and incorporated by
reference herein, and have been included and incorporated in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
ABOUT JAMES MONROE BANCORP
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that we file with the SEC at the SEC's public reference room
at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The SEC
maintains a World Wide Web site on the Internet at "http://www.sec.gov" that
contains reports, proxy and information statements, and other information
regarding companies, including James Monroe Bancorp, that file electronically
with the SEC. On the SEC website, our reports are listed under the name "Monroe
James Bancorp Inc." and our CIK number is 0001114868.
We have filed a Registration Statements on Form S-2 to register the
common stock to be sold in the offering. This prospectus is a part of those
Registration Statement. As allowed by SEC rules, this prospectus does not
contain all the information you can find in the Registration Statements or the
exhibits to the Registration Statements. SEC regulations require us to
"incorporate by reference" information into this prospectus, which means that
important information is disclosed by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
part of this prospectus. Information incorporated by reference from earlier
documents is superceded by information that in included in this prospectus or is
incorporated by reference from more recent documents, to the extent that they
are inconsistent.
This prospectus incorporates by reference the documents listed below
that we have previously filed with the SEC (file no. 0-32641).
(1) Annual Report on Form 10-KSB for the year ended December 31, 2002;
(2) Quarterly Report on Form 10-QSB for the quarters ended March 31,
2003 and June 30, 2003; and
(3) Current Reports on Form 8-K filed April 11, 2003, July 15, 2003
and October 9, 2003.
Also incorporated by reference are additional documents that we may
file with the SEC after the date of this prospectus and before the termination
of the offering. These additional documents will be deemed to be incorporated by
reference, and to be a part of, this prospectus from the date of their filing.
These documents include proxy statements and periodic reports, such as Annual
Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, and to the extent they
are considered filed, Current Reports on Form 8-K. Information incorporated by
reference from later filed documents supercedes information that in included in
this prospectus or is incorporated by reference from earlier documents, to the
extent that they are inconsistent.
You can obtain any of the documents incorporated by reference from us,
the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from James Monroe Bancorp without
charge, including any exhibits specifically incorporated by reference therein.
You may obtain documents incorporated by reference in this prospectus by
requesting them in writing or by telephone from:
49
Richard I. Linhart, Chief Financial Officer
James Monroe Bancorp, Inc.
3033 Wilson Boulevard
Arlington, Virginia 22201
Telephone: (703) 524-8100
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus. This
prospectus is dated November 10, 2003. You should not assume that the
information contained in this prospectus is accurate as of any date other than
that date.
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Independent Auditor's Report............................................................F-2
Consolidated Balance Sheets.............................................................F-3
Consolidated Statements of Income.......................................................F-4
Consolidated Statements of Changes in Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows...................................................F-6
Notes to Consolidated Financial Statements..............................................F-7
UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Unaudited Consolidated Balance Sheets..................................................F-25
Unaudited Consolidated Statements of Income............................................F-26
Unaudited Consolidated Statements of Changes in Stockholders' Equity...................F-27
Unaudited Consolidated Statements of Cash Flows........................................F-28
Notes to Unaudited Consolidated Financial Statements...................................F-29
F-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
James Monroe Bancorp, Inc. and Subsidiaries
Arlington, Virginia
We have audited the accompanying consolidated balance sheets of James
Monroe Bancorp, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of James Monroe
Bancorp, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for the years ended December 31, 2002,
2001 and 2000, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Yount, Hyde & Barlour, P.C.
Winchester, Virginia
January 10, 2003
F-2
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Dollars in thousands, except share data)
DECEMBER 31,
----------------------
2002 2001
-------- --------
ASSETS
Cash and due from banks $ 11,051 $ 5,982
Interest-bearing deposits in banks 655 2,035
Federal funds sold 28,826 9,469
Securities available for sale, at fair value 76,063 22,119
Loans, net of allowance for loan losses of $1,390 in 2002
and $1,030 in 2001 119,657 85,109
Bank premises and equipment, net 1,333 1,007
Accrued interest receivable 916 631
Other assets 292 306
-------- --------
TOTAL ASSETS $238,793 $126,658
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 66,729 $ 35,034
Interest-bearing deposits 147,141 79,225
-------- --------
Total deposits 213,870 114,259
Trust preferred capital notes 5,000 --
Accrued interest payable and other liabilities 728 432
-------- --------
Total liabilities 219,598 114,691
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 5,000,000 shares; issued
and outstanding 1,840,677 shares in 2002, 960,467 shares in 2001 1,841 960
Capital surplus 13,354 9,522
Retained earnings 2,894 1,341
Accumulated other comprehensive income 1,106 144
-------- --------
Total stockholders' equity 19,195 11,967
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $238,793 $126,658
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
------- ------- -------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 7,757 $ 5,643 $ 3,977
Securities, taxable 2,062 1,464 1,067
Federal funds sold 260 379 343
Other interest income 12 62 26
------- ------- -------
Total interest and dividend income 10,091 7,548 5,413
------- ------- -------
INTEREST EXPENSE:
Deposits 3,391 2,918 2,174
Borrowed funds 218 -- 3
------- ------- -------
Total interest expense 3,609 2,918 2,177
------- ------- -------
Net interest income 6,482 4,630 3,236
PROVISION FOR LOAN LOSSES 483 450 237
------- ------- -------
Net interest income after provision for loan losses 5,999 4,180 2,999
------- ------- -------
NONINTEREST INCOME:
Service charges and fees 263 263 190
Gain on sale of securities 244 107 17
Other 253 184 95
------- ------- -------
Total noninterest income 760 554 302
------- ------- -------
NONINTEREST EXPENSES:
Salaries and wages 1,907 1,307 1,061
Employee benefits 313 206 142
Occupancy expenses 541 367 266
Equipment expenses 308 184 149
Other operating expenses 1,325 969 730
------- ------- -------
Total noninterest expenses 4,394 3,033 2,348
------- ------- -------
Income before income taxes 2,365 1,701 953
PROVISION FOR INCOME TAXES 812 589 143
------- ------- -------
Net income $ 1,553 $ 1,112 $ 810
======= ======= =======
EARNINGS PER SHARE, basic $ 0.94 $ 0.77 $ 0.69
EARNINGS PER SHARE, diluted $ 0.90 $ 0.74 $ 0.67
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
ACCUMULATED
OTHER
COMPRE-
HENSIVE COMPRE- TOTAL
COMMON CAPITAL RETAINED INCOME HENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS (LOSS) INCOME EQUITY
------- -------- -------- ----------- ------- -------------
BALANCE, DECEMBER 31, 1999 $ 743 $ 6,683 $ (581) $ (245) $ 6,600
Comprehensive income:
Net income 810 $ 810 810
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $152 295
Less: reclassification adjustment,
net of income taxes of $6 (11)
-------
Other comprehensive income,
net of tax 284 284 284
-------
Total comprehensive income $ 1,094
=======
Exercise of stock options 1 16 17
Issuance of common stock 215 2,807 3,022
------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2000 959 9,506 229 39 10,733
Comprehensive income:
Net income 1,112 $ 1,112 1,112
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $91 176
Less: reclassification adjustment,
net of income taxes of $36 (71)
-------
Other comprehensive income,
net of tax 105 105 105
-------
Total comprehensive income $ 1,217
=======
Exercise of stock options 1 16 17
------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2001 960 9,522 1,341 144 11,967
Comprehensive income:
Net income 1,553 $ 1,553 1,553
Net change in unrealized gains
on available for sale securities,
net of deferred taxes of $579 1,123
Less: reclassifications adjustment,
net of income taxes of $83 (161)
-------
Other comprehensive income,
net of tax 962 962 962
-------
Total comprehensive income $ 2,515
=======
Exercise of stock options 7 60 67
Issuance of common stock 261 4,385 4,646
Effect of 3 for 2 stock split 613 (613) --
------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2002 $ 1,841 $ 13,354 $ 2,894 $ 1,106 $ 19,195
======= ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,553 $ 1,112 $ 810
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 257 177 112
Provision for loan losses 483 450 237
Amortization of bond premium 212 46 5
Accretion of bond discount (67) (49) (22)
Realized (gain) on sales of securities available for sale (244) (107) (17)
Deferred income tax (benefit) (109) (125) (159)
(Increase) in accrued interest receivable (285) (64) (221)
(Increase) decrease in other assets (196) (48) 12
Increase (decrease) in accrued interest payable and other liabilities 119 (23) 256
--------- --------- ---------
Net cash provided by operating activities
1,723 1,369 1,013
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (85,969) (21,655) (8,904)
Proceeds from calls and maturities of securities available for sale 27,223 13,889 332
Proceeds from sales of securities available for sale 6,359 5,955 2,515
Purchases of premises and equipment (583) (492) (90)
(Increase) decrease in interest-bearing cash balances 1,380 (25) (2,010)
(Increase) decrease in Federal funds sold (19,357) 464 (8,396)
Net (increase) in loans (35,031) (36,119) (19,001)
--------- --------- ---------
Net cash (used in) investing activities (105,978) (37,983) (35,554)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts 90,879 33,178 17,812
Net increase in time deposits 8,732 3,039 17,411
Proceeds from issuance of common stock 4,713 17 3,039
Proceeds from issuance of trust preferred capital notes 5,000 -- --
--------- --------- ---------
Net cash provided by financing activities 109,324 36,234 38,262
--------- --------- ---------
Increase (decrease) in cash and due from banks 5,069 (380) 3,721
CASH AND DUE FROM BANKS
Beginning 5,982 6,362 2,641
--------- --------- ---------
Ending $ 11,051 $ 5,982 $ 6,362
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 3,640 $ 2,945 $ 2,036
========= ========= =========
Income taxes paid $ 859 $ 732 $ 235
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain on securities available for sale $ 1,458 $ 160 $ 430
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of
James Monroe Bancorp, Inc. (the "Company") and its wholly owned
subsidiaries, James Monroe Bank (the "Bank") and James Monroe
Statutory Trust I (the "Trust"). In consolidation, significant
inter-company accounts and transactions have been eliminated.
BUSINESS
The Company, through its banking subsidiary, offers various loan,
deposit and other financial service products to its customers,
principally located throughout Northern Virginia. Additionally,
the Company maintains correspondent banking relationships and
transacts daily federal funds transactions on an unsecured basis,
with regional correspondent banks.
The accounting and reporting policies and practices of the Company
conform with accounting principles generally accepted in the
United States of America. The following is a summary of the most
significant of such policies and procedures.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation
of deferred tax assets.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks
include cash on hand and amounts due from banks, including cash
items in process of clearing.
INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks mature within one month and are
carried at cost.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are equity securities
with readily determinable fair values and those debt securities
that the Company intends to hold for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations,
and other similar factors. These securities are carried at fair
value, with any unrealized gains or losses reported as a separate
component of other comprehensive income net of the related
deferred tax effect. Declines in the fair value below their cost
that are deemed to be other than temporary are reflected in
earnings as realized losses. Interest income, including
amortization of premiums and accretion of discounts, computed by
the interest method, is included in interest income in the
consolidated statements of income. Gains and losses on the sale of
securities are recorded on the trade date and are determined using
the specific identification method.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS
The Company, through its banking subsidiary, grants mortgage,
commercial and consumer loans to customers. A substantial portion
of the loan portfolio is represented by commercial real estate
loans throughout Northern Virginia. The ability of the Company's
debtors to honor their contracts is dependent upon the real estate
and general economic conditions in this area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted
for charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as
an adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection. Other
personal loans are typically charged off no later than 180 days
past due. In all cases, loans are placed on nonaccrual or charged
off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not collected for loans that is placed on
nonaccrual or charged off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future
payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management, and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that
are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment
status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market
price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for
impairment disclosures.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization that is computed using the
straight-line method over the following estimated useful lives:
YEARS
-----
Leasehold improvements 10
Furniture and equipment 3-10
Costs incurred for maintenance and repairs are expensed currently.
INCOME TAXES
Deferred income tax assets and liabilities are determined using
the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the temporary differences between the book and tax
bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented should not be considered an indication of
the fair value of the Company taken as a whole.
STOCK COMPENSATION PLANS
At December 31, 2002, the Company had a stock-based compensation
plan on which is described more fully in Note 8. 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.
YEAR ENDED
DECEMBER 31,
---------------------------------------------
2002 2001 2000
------- ------- -------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,553 $ 1,112 $ 810
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (75) (86) (100)
------- ------- -------
Pro forma net income $ 1,478 $ 1,026 $ 710
======= ======= =======
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
DECEMBER 31,
-----------------------------------
2002 2001 2000
------- ------- -------
Earnings per share:
Basic- as reported 0.94 0.77 0.69
======= ======= =======
Basic- pro forma 0.90 0.71 0.61
======= ======= =======
Diluted- as reported 0.90 0.74 0.67
======= ======= =======
Diluted- pro forma 0.85 0.69 0.59
======= ======= =======
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 2001 2000
-------- -------- --------
Dividend yield 0.00% 0.00% 0.00%
Expected life 10 years 10 years 10 years
Expected volatility 0.50% 0.50% 0.50%
Risk-free interest rate 5.05% 4.93% 6.41%
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share
reflects additional common shares that would have been outstanding
if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the
Company relate solely to outstanding stock options, and are
determined using the treasury stock method.
Earnings per common share have been computed based on the
information in the following table. Shares have been restated to
reflect the 3-for-2 stock split as discussed in Note 18. No
options were excluded from the computation of diluted earnings per
share for the years ended December 31, 2002, 2001 and 2000.
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
------ ------ ------
(Dollars In Thousands)
Net income $1,553 $1,112 $ 810
====== ====== ======
Weighted average common shares outstanding 1,644 1,440 1,169
Effect of dilutive options 85 53 38
------ ------ ------
Weighted average common shares outstanding
used to calculate diluted earnings per share 1,729 1,493 1,207
====== ====== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2001, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 01-6, Accounting
by Certain Entities (Including Entities with Trade Receivables)
That Lend to or Finance the Activities of Others, to reconcile and
conform the accounting and financial reporting provisions
established by various AICPA industry audit guides. This Statement
is effective for annual and interim financial statements issued
for fiscal years beginning after December 15, 2001, and did not
have a material impact on the Corporation's consolidated financial
statements.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, the Financial Accounting Standards Board issued
SFAS No. 145, Rescission of FASB No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. The amendment to
Statement 13 eliminates 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 SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement requires recognition of a liability,
when incurred, for costs associated with an exit or disposal
activity. The liability should be measured at fair value. The
provisions of the Statement are effective for exit or disposal
activities initiated after December 31, 2002.
Effective January 1, 2002, the Company adopted Financial
Accounting Standards Board SFAS No. 142, Goodwill and Other
Intangible Assets. Accordingly, goodwill is no longer subject to
amortization over its estimated useful life, but is subject to at
least an annual assessment for impairment by applying a fair value
based test. Additionally, SFAS No. 142 requires that acquired
intangible assets (such as core deposit intangibles) be separately
recognized if the benefit of the asset can be sold, transferred,
licensed, rented, or exchanged, and amortized over their estimated
useful life. Branch acquisition transactions were outside the
scope of the Statement and therefore any intangible asset arising
from such transactions remained subject to amortization over their
estimated useful life.
In October 2002, the Financial Accounting Standards Board issued
SFAS No. 147, Acquisitions of Certain Financial Institutions. The
Statement amends previous interpretive guidance on the application
of the purchase method of accounting to acquisitions of financial
institutions, and requires the application of SFAS No. 141,
Business Combinations, and SFAS No. 142 to branch acquisitions if
such transactions meet the definition of a business combination.
The provisions of the Statement do not apply to transactions
between two or more mutual enterprises. In addition, the Statement
amends SFAS No. 144, Accounting for the Impairment of Long-Lived
Assets, to include in its scope core deposit intangibles of
financial institutions. Accordingly, such intangibles are subject
to a recoverability test based on undiscounted cash flows, and to
the impairment recognition and measurement provisions required for
other long-lived assets held and used.
The adoption of Statements 142, 145, 146 and 147 did not have a
material impact on the Company's consolidated financial
statements.
The Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of Statement No. 123, in December 2002.
The Statement amends SFAS No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. Finally, this Statement amends APB
Opinion No. 28, Interim Financial Reporting, to require disclosure
about the effects of stock options in interim financial
information. The amendments to SFAS No. 123 are effective for
financial statements for fiscal years ending after December 15,
2002. The amendments to APB No. 28 are effective for financial
reports containing condensed financial statements for interim
periods beginning after December 15, 2002. Early application is
encouraged for both amendments. The Company continues to record
stock options under APB Opinion No. 25, Accounting for Stock
Issued to Employees, and has not adopted the alternative methods
allowable under SFAS No. 148.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities
available for sale, with gross unrealized gains and losses
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
2002
----------------------------------------------------
(Dollars in Thousands)
U.S. Government and
federal agency $ 35,013 $ 285 $ -- $ 35,298
Mortgage-backed 26,606 571 (64) 27,113
Corporate notes 12,139 884 -- 13,023
Restricted stock 629 -- -- 629
-------- -------- -------- --------
$ 74,387 $ 1,740 $ (64) $ 76,063
======== ======== ======== ========
2001
----------------------------------------------------
U.S. Government and
federal agency $ 3,501 $ 94 $ (2) $ 3,593
Mortgage-backed 8,008 144 (2) 8,150
Corporate notes 9,958 128 (144) 9,942
Restricted stock 434 -- -- 434
-------- -------- -------- --------
$ 21,901 $ 366 $ (148) $ 22,119
======== ======== ======== ========
The amortized cost and fair value of securities by contractual
maturity at December 31, 2002 follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(Dollars in Thousands)
Due after one year but within five years $ 40,561 $ 41,136
Due after five years but within ten years 9,499 10,148
Due after ten years 23,698 24,150
-------- --------
73,758 75,434
Restricted stock 629 629
-------- --------
Total available for sale securities $ 74,387 $ 76,063
======== ========
Securities carried at $29,244,330 and $2,500,000 at December 31,
2002 and 2001, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
For the years ended December 31, 2002, 2001 and 2000, proceeds
from sales of securities available for sale amounted to
$6,359,000, $5,955,000 and $2,515,000, respectively. Gross
realized gains amounted to $244,000, $107,000 and $17,000,
respectively. The tax provision applicable to these realized gains
amounted to $83,000, $36,000 and $6,000, respectively.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
DECEMBER 31,
-------------------------
2002 2001
--------- ---------
(Dollars in Thousands)
Construction loans $ 12,160 $ 9,408
Commercial loans 27,862 23,478
Real estate - commercial 70,318 44,192
Real estate - 1 to 4 family residential 2,069 3,363
Home equity loans 2,390 1,554
Consumer loans 6,088 4,025
Deposit overdrafts 160 119
--------- ---------
121,047 86,139
Less allowance for loan losses (1,390) (1,030)
--------- ---------
Net loans $ 119,657 $ 85,109
========= =========
Changes in the allowance for loan losses are as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
------- ------- -------
(Dollars in Thousands)
Beginning balance $ 1,030 $ 600 $ 363
Loans charged-off (126) (20) --
Recoveries of loans previously charged-off 3 -- --
------- ------- -------
Net charge-offs (123) (20) --
------- ------- -------
Provision for loan losses 483 450 237
------- ------- -------
Ending balance $ 1,390 $ 1,030 $ 600
======= ======= =======
The following is a summary of information pertaining to impaired
loans:
DECEMBER 31,
---------------------
2002 2001
------- -------
(Dollars in Thousands)
Impaired loans without a
valuation allowance $ -- $ --
Impaired loans with a valuation
allowance 240 --
------- -------
Total impaired loans $ 240 $ --
======= =======
Valuation allowance related to
impaired loans $ 115 $ --
======= =======
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
------ ------ ------
(Dollars In thousands)
Average investments in impaired
loans $ 243 $ -- $ --
====== ====== ======
Interest income recognized on
impaired loans $ -- $ -- $ --
====== ====== ======
Interest income recognized on
a cash basis on impaired loans $ -- $ -- $ --
====== ====== ======
No additional funds are committed to be advanced in connection
with impaired loans.
Nonaccrual loans excluded from impaired loan disclosure under SFAS
No. 114 amounted to $56,000 at December 31, 2002, and $0 at
December 31, 2001 and 2000. If interest on these loans had been
accrued, such income would have approximated $9,822 for 2002 and
$3,000 for 2001. There were no nonaccrual loans in 2000.
There were no loans 90 days past due and still accruing at
December 31, 2002, 2001 and 2000, respectively.
NOTE 4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
DECEMBER 31,
----------------------
2002 2001
------ ------
(Dollars in Thousands)
Leasehold improvements $ 645 $ 470
Furniture and equipment 665 419
Computers 382 207
Software 262 179
Premises and equipment in process 31 134
------ ------
1,985 1,409
Less accumulated depreciation 652 402
------ ------
$1,333 $1,007
====== ======
Depreciation and amortization charged to operations totaled
$257,000, $177,000 and $112,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. DEPOSITS
Interest-bearing deposits consist of the following:
DECEMBER 31,
----------------------
2002 2001
-------- --------
(Dollars in Thousands)
NOW accounts $ 7,490 $ 4,993
Savings accounts 1,290 1,056
Money market accounts 100,040 43,589
Certificates of deposit under $100,000 12,272 11,263
Certificates of deposit $100,000 and over 24,315 17,247
Individual retirement accounts 1,734 1,077
-------- --------
$147,141 $ 79,225
======== ========
At December 31, 2002, the scheduled maturities of time deposits
are as follows:
(Dollars in Thousands)
2003 $ 33,044
2004 2,646
2005 1,855
2006 102
2007 674
--------
$ 38,321
NOTE 6. INCOME TAXES
Significant components of the Company's net deferred tax assets
(liabilities) consist of the following:
DECEMBER 31,
----------------------
2002 2001
----- -----
(Dollars in Thousands)
Deferred tax assets:
Provision for loan losses $ 405 $ 273
Amortization of organization and
start-up costs 12 31
----- -----
417 304
----- -----
Deferred tax liabilities:
Depreciation (24) (20)
Unrealized gain on securities available for sale (570) (74)
----- -----
(594) (94)
----- -----
Deferred tax asset (liability), net $(177) $ 210
===== =====
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allocation of federal income taxes between current and deferred
portions for the years ended December 31, 2002, 2001 and 2000 is
as follows:
DECEMBER 31,
-----------------------------
2002 2001 2000
----- ----- -----
(Dollars in Thousands)
Current tax provision $ 921 $ 714 $ 302
Deferred tax (benefit) (109) (125) (159)
----- ----- -----
$ 812 $ 589 $ 143
===== ===== =====
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 2002, 2001 and 2000, due
to the following:
DECEMBER 31,
-----------------------------
2002 2001 2000
----- ----- -----
(Dollars in Thousands)
Computed "expected" tax expense $ 804 $ 578 $ 324
Increase (decrease) in income taxes
resulting from:
Other nondeductible expenses 8 11 11
Change in valuation allowance -- -- (192)
----- ----- -----
$ 812 $ 589 $ 143
===== ===== =====
NOTE 7. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company leases its facilities under operating leases expiring
at various dates through 2011. The leases provide that the Company
pay as additional rent, its proportionate share of real estate
taxes, insurance, and other operating expenses. The leases contain
a provision for annual increases of 3%. Total rental expense for
the years ended December 31, 2002, 2001 and 2000 was $398,000,
$270,000 and $198,000, respectively.
The minimum lease commitments for the next five years and
thereafter are:
(Dollars in Thousands)
2003 $ 425
2004 446
2005 462
2006 478
2007 493
Thereafter 6,835
-------
$ 9,139
=======
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
The Company's stock option plan (Plan) for key employees is
accounted for in accordance with Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. The Plan provides that 137,820 shares of the
Company's common stock will be reserved for both incentive stock
options and non-qualified stock options to purchase common stock
of the Company. The exercise price per share for incentive stock
options and non-qualified stock options shall not be less than the
fair market value of a share of common stock on the date of grant,
and may be exercised in increments commencing after the date of
grant. One-third of the options granted become vested and
exercisable in each of the three years following the grant date.
Each incentive and non-qualified stock option granted under this
plan shall expire not more than ten years from the date the option
is granted.
A summary of the status of the Company's employee stock option
plan is presented in the table below. Information has been
restated to reflect the 3-for-2 stock split as discussed in Note
18.
2002 2001 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 91,320 $ 6.97 81,945 $ 6.67 74,820 $ 6.67
Granted 16,875 12.09 9,375 9.67 7,125 6.67
-------- -------- --------
Outstanding at end of year 108,195 7.78 91,320 6.97 81,945 6.67
======== ======== ========
Options exercisable at year end 93,817 $ 7.19 82,689 $ 6.78 52,248 $ 6.67
======== ======== ========
Weighted average fair value of
Options granted during the year $ 4.75 $ 3.73 $ 3.12
DIRECTOR STOCK OPTION PLAN
In 1999, the Company adopted a stock option plan in which options
for 100,320 shares of common stock were reserved for issuance to
directors of the bank. The Company applies APB Opinion 25 and
related interpretations in accounting for the stock option plan.
Accordingly, no compensation has been recognized for grants under
this plan. The stock option plan required that options be granted
at an exercise price equal to at least 100% of the fair market
value of the common stock on the date of grant. One-third of the
options granted become vested and exercisable in each of the three
years following the grant date and shall expire not more than ten
years from the date the option is granted.
A summary of the status of the Company's director stock option
plan is presented in the table below. Information has been
restated to reflect the 3-for-2 stock split as discussed in Note
18.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 80,700 $ 6.67 83,250 $ 6.67 85,800 $ 6.67
Granted 14,517 12.34 -- -- -- --
Exercised (9,213) 7.35 (2,550) 6.67 (2,550) 6.67
-------- -------- --------
Outstanding at end of year 86,004 7.55 80,700 6.67 83,250 6.67
======== ======== ========
Options exercisable at year end 86,004 7.55 80,700 6.67 54,650 6.67
======== ======== ========
Weighted average fair value
of options granted
during the year $ 4.90 $ -- $ --
Information pertaining to options outstanding for both plans at
December 31, 2002 is as follows:
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL EXERCISE NUMBER NUMBER
LIFE PRICES OUTSTANDING EXERCISABLE
----------- -------- ----------- -----------
5.5 Year $ 6.67 70,320 70,320
6.5 Years $ 6.67 4,500 4,500
6.75 Years $ 6.67 72,600 72,600
7 Years $ 6.67 7,125 7,125
8 Years $ 9.67 9,375 6,253
9 Years $ 12.09 16,875 5,622
9.5 Years $ 12.34 13,404 13,404
NOTE 9. 401(k) PLAN
Effective January 1, 1999, the Company adopted a Section 401(k)
plan covering employees meeting certain eligibility requirements
as to minimum age and years of service. Employees may make
voluntary contributions to the 401(k) plan through payroll
deductions on a pre-tax basis. The Company may make discretionary
contributions to the 401(k) plan based on its earnings. The
employer's contributions are subject to a vesting schedule
requiring the completion of five years of service before these
benefits become vested. A participant's 401(k) plan account,
together with investment earnings thereon, is distributable
following retirement, death, disability or other termination of
employment under various payout options. For the years ended
December 31, 2002 and 2001, expense attributable to the plan
amounted to $29,000 and $19,000, respectively. For the year ended
December 31, 2000 no discretionary contributions were made by the
Company.
NOTE 10. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
and Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are
also subject to
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions
are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002
and 2001, that the Company and the Bank exceeded all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following tables. There are no
conditions or events since the notification that management
believes have changed the Bank's category. The Company's and the
Bank's actual capital amounts and ratios as of December 31, 2002
and 2001 are also presented in the table.
MINIMUM TO BE
WELL CAPITALIZED
MINIMUM CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
As of December 31, 2002:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 24,479 16.4% $ 11,964 8.0% N/A N/A
Bank $ 17,754 12.0% $ 11,843 8.0% $ 14,804 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 23,089 15.4% $ 5,982 4.0% N/A N/A
Bank $ 16,364 11.1% $ 5,922 4.0% $ 8,882 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 23,089 10.5% $ 8,772 4.0% N/A N/A
Bank $ 16,364 7.7% $ 8,499 4.0% $ 10,623 5.0%
As of December 31, 2001:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 12,853 13.0% $ 7,919 8.0% N/A N/A
Bank $ 10,803 11.0% $ 7,885 8.0% $ 9,856 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 11,823 11.9% $ 3,959 4.0% N/A N/A
Bank $ 9,773 9.9% $ 3,943 4.0% $ 5,914 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 11,823 9.5% $ 3,724 4.0% N/A N/A
Bank $ 9,773 8.0% $ 3,662 4.0% $ 3,662 5.0%
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTION ON DIVIDENDS
Prior approval of the Bank's regulatory agencies is required to
pay dividends which exceed the Bank's net profits for the current
year, plus its retained net profits for the preceding two years.
At December 31, 2002, the Bank could pay $2,938,000 in dividends
without prior regulatory approval. The Bank did not pay any cash
dividends during the years ended December 31, 2002, 2001 or 2000.
NOTE 11. OFF-BALANCE SHEET ACTIVITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS. The Company is a party to
credit related financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of
credit. Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized
in consolidated balance sheets.
The Company's exposure to credit loss is represented by the
contractual amount of these commitments. The Company follows the
same credit policies in making commitments as it does for
on-balance sheet instruments. At December 31, 2002 and 2001, the
following financial instruments were outstanding whose contract
amounts represent credit risk:
2002 2001
-------- -------
(Dollars in Thousands)
Commitments to extend credit $ 24,864 $ 18,241
Stand-by letters-of-credit $ 420 $ 440
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
commitments for equity lines of credit may expire without being
drawn upon. Therefore, the total commitments amounts do not
necessarily represent future cash requirements. The amount of
collateral obtained, if it is deemed necessary by the Company, is
based on management's credit evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving
credit lines and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines-of-credit are uncollateralized and usually do not
contain a specified maturity date and may not be drawn upon to the
total extent to which the Company is committed.
Commercial and standby letters-of-credit are conditional
commitments issued by the Company to guarantee the performance of
a customer to a third party. Those letters-of-credit are primarily
issued to support public and private borrowing arrangements.
Essentially all letters-of-credit issued have expiration dates
within one year. The credit risk involved in issuing
letters-of-credit is essentially the same as that involved in
extending loan facilities to customers. The Company generally
holds collateral supporting those commitments if deemed necessary.
The Company maintains a portion of its cash balances with several
financial institutions. Accounts at each institution are secured
by the Federal Deposit Insurance Corporation up to $100,000.
Unsecured balances were approximately $2,528,000 at December 31,
2002.
NOTE 12. TRANSACTIONS WITH DIRECTORS AND OFFICERS
The Company has had, and may be expected to have in the future,
banking transactions in the ordinary course of business with
directors and principal officers, their immediate families and
affiliated companies in which they are principal stockholders
(commonly referred to as related parties). In the opinion of
management, such loans are made on the same terms, including
interest rates and collateral, as those
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prevailing at the time for comparable transactions with others.
They do not involve more than normal credit risk or present other
unfavorable features.
Aggregate loan balances with related parties totaled $1,252,000
and $1,481,000 at December 31, 2002 and 2001, respectively. During
the year ended December 31, 2002, total principal additions were
$433,000 and total principal payments were $662,000.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND CASH EQUIVALENTS - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INTEREST-BEARING DEPOSITS IN BANKS - The carrying amounts of
interest-bearing deposits maturing within ninety days approximate
their fair value.
AVAILABLE FOR SALE SECURITIES - Fair values are based on quoted
market prices. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
LOANS RECEIVABLE - Fair value for performing loans is calculated
by discounting estimated cash flows using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality.
Fair value for non-performing loans is based on the lesser of
estimated cash flows which are discounted using a rate
commensurate with the risk associated with the estimated cash
flows, or values of underlying collateral.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings
accounts and certain money market deposits is the amount payable
on demand at the reporting date. The fair value of certificates of
deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
LONG-TERM BORROWINGS - The fair values of the Company's long-term
borrowings are estimated using discounted cash flow analysis based
on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
ACCRUED INTEREST - The carrying amounts of accrued interest
approximate fair value.
OFF BALANCE SHEET INSTRUMENTS - Fair values for off-balance sheet
credit-related instruments are based on fees currently charged to
enter similar arrangements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates. The fair value of standby letters of
credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. At
December 31, 2002 and 2001, the carrying amounts of loan
commitments and standby letters of credit approximated fair
values.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments
at December 31, 2002 and 2001 are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
FINANCIAL ASSETS:
Cash and due from banks $ 11,051 $ 11,051 $ 5,982 $ 5,982
Interest-bearing deposits in banks 655 655 2,035 2,035
Federal funds sold 28,826 28,826 9,469 9,469
Securities available for sale 76,063 76,063 22,119 22,119
Loans 121,047 119,440 85,109 85,349
Accrued interest 916 916 631 631
FINANCIAL LIABILITIES:
Deposits $213,870 $214,223 $114,259 $114,646
Long-term borrowings 5,000 4,997 -- --
Accrued interest 206 206 237 237
The Company assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal
operations. As a result, the fair values of the Company's
financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest
rate risk. However, borrowers with fixed rate obligations are less
likely to prepay in a rising rate environment and more likely to
prepay in a falling rate environment. Conversely, depositors who
are receiving fixed rates are more likely to withdraw funds before
maturity in a rising rate environment and less likely to do so in
a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize
interest rate risk by adjusting terms of new loans and deposits
and by investing in securities with terms that mitigate the
Company's overall interest rate risk.
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank has unsecured lines of credit with correspondent banks
totaling $12,098,000 available for overnight borrowing. There were
no amounts drawn on these lines at December 31, 2002 or 2001.
As a member of the Federal Reserve System, the Bank is required to
maintain certain average reserve balances. For the final reporting
period in the year ended December 31, 2002, the aggregate amount
of daily average balances was approximately $2,316,000.
NOTE 15. OTHER NONINTEREST INCOME AND EXPENSES
The principal components of other noninterest income in the
consolidated statements of income are:
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Cash management fee income $130 $113 $ 48
Other fee income 123 71 47
---- ---- ----
$253 $184 $ 95
==== ==== ====
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal components of other operating expenses in the
consolidated statements of income are:
2002 2001 2000
------ ------ ------
(Dollars in Thousands)
Data processing costs $ 360 $ 269 $ 251
Advertising and public relations 123 84 56
Professional fees 168 181 76
Courier and express services 105 73 52
Meals and entertainment 44 38 40
Supplies 75 54 35
Postage 43 35 27
State franchise tax 155 107 94
Other 252 128 99
------ ------ ------
$1,325 $ 969 $ 730
====== ====== ======
NOTE 16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to James Monroe Bancorp,
Inc. is as follows:
CONDENSED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
------- -------
(Dollars in Thousands)
ASSETS
Interest-bearing deposits in banks $ 655 $ 2,035
Securities available for sale, at fair value 6,113 --
Investment in subsidiary bank 17,310 9,916
Other assets 200 16
------- -------
$24,278 $11,967
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 83 --
Trust preferred capital notes 5,000 --
Stockholders' equity 19,195 11,967
------- -------
$24,278 $11,967
======= =======
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED INCOME STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------- ------- -------
(Dollars in Thousands)
$
Interest income $ 229 $ 62 26
Interest expense 218 -- --
Operating expense 69 49 --
------- ------- -------
Income (loss) before income tax expense
(benefit) and equity in undistributed income
of subsidiary bank (58) 13 26
Income tax expense (benefit) (20) 6 (7)
Equity in undistributed income of subsidiary bank 1,591 1,105 777
------- ------- -------
Net income $ 1,553 $ 1,112 $ 810
======= ======= =======
Condensed Statements of Cash Flow
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------- ------- -------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,553 $ 1,112 $ 810
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiary bank (1,591) (1,105) (777)
(Increase) decrease in other assets (184) 5 (20)
Increase (decrease) in other liabilities 1 (4) (42)
------- ------- -------
Net cash provided by (used in) operating activities (221) 8 (29)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (7,121) -- --
Proceeds from calls and maturities of securities available for sale 1,249 -- --
Investment in subsidiary bank (5,000) -- (1,000)
(Increase) decrease in interest-bearing deposits in banks 1,380 (25) (2,010)
------- ------- -------
Net cash (used in) investing activities (9,492) (25) (3,010)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,713 17 3,039
Proceeds from issuance of trust preferred capital notes 5,000 -- --
------- ------- -------
Net cash provided by financing activities 9,713 17 3,039
Increase in cash and cash equivalents -- -- --
CASH AND CASH EQUIVALENTS, beginning of year -- -- --
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ -- $ -- $ --
======= ======= =======
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. 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 December 26, 2002, was 5.00%. 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 December 31, 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 18. 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.
F-25
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
F-26
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars 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 unaudited consolidated financial statements.
F-27
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars 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 unaudited consolidated financial statements.
F-28
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2003 and 2002
(Dollars 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 unaudited consolidated financial statements.
F-29
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars 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 unaudited consolidated financial statements.
F-30
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
======= ======= ======= =======
F-31
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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
======== ======== ======== ========
F-32
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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
========= ========= =========
F-33
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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:
Commercial -- -- 5
Impaired loans:
Commercial 228 240 --
-------- -------- --------
Total nonperforming assets $ 416 $ 296 $ 255
======== ======== ========
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
F-34
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-35
========================================================== =======================================================
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATION ABOUT THE OFFERING THAT DIFFERS
FROM, OR ADDS TO, THE INFORMATION IN THIS PROSPECTUS OR
IN OUR DOCUMENTS THAT ARE PUBLICLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE 521,739 SHARES
DOES GIVE YOU DIFFERENT OR ADDITIONAL INFORMATION, YOU
SHOULD NOT RELY ON IT. THE DELIVERY OF THIS PROSPECTUS
AND/OR THE SALE OF SHARES OF COMMON STOCK DO NOT MEAN
THAT THERE HAVE NOT BEEN ANY CHANGES IN OUR CONDITION [James Monroe Bancorp, Inc.
SINCE THE DATE OF THIS PROSPECTUS. IF YOU ARE IN A Logo Omitted]
JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO SELL, OR
TO ASK FOR OFFERS TO BUY, THE SECURITIES OFFERED BY THIS
PROSPECTUS, OR IF YOU ARE A PERSON TO WHOM IT IS
UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER
PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU.
THIS PROSPECTUS SPEAKS ONLY AS OF ITS DATE EXCEPT WHERE
IT INDICATES THAT ANOTHER DATE APPLIES. Common Stock
------------------
Prospectus
------------------
TABLE OF CONTENTS
PAGE
Summary............................................... 1
Risk Factors.......................................... 6 SCOTT & STRINGFELLOW, INC.
Caution About Forward Looking Statements.............. 9
Use of Proceeds.......................................10
Capitalization........................................10
Market for Common Stock and Dividends.................10
Selected Consolidated Financial Data..................12 NOVEMBER 10, 2003
Management's Discussion and Analysis..................13
Business..............................................28
Management............................................36
Share Ownership of Management and
Five Percent Beneficial Owners.....................41
Supervision and Regulation............................42
Description of Our Capital Stock......................45
Underwriting..........................................47
Legal Matters.........................................50
Experts...............................................50
Where You Can Find Additional Information
About James Monroe Bancorp.........................50
Index to Consolidated Financial Statements...........F-1
========================================================== =======================================================
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the Offering
described in this Registration Statement are as follows:
Registration Fee...........................................................$936
*Blue Sky Filing Fees and Expenses (Including counsel fees).............$30,000
NASD Corporate Finance Fee...............................................$1,650
*Nasdaq Listing Fees.....................................................$4,600
*Legal Fees.............................................................$75,000
*Printing, Engraving and Edgar..........................................$25,000
*Accounting Fees and Expenses...........................................$25,000
*Other Expenses.........................................................$12,814
-------
Total................................................$175,000
========
---------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of James Monroe Bancorp provide that
James Monroe Bancorp shall indemnify its officers and directors against all
claims, liabilities, judgments, settlements, costs and expenses (including
attorney's fees) resulting from any action suit, proceeding or claim to which
such person is a party as a result of having been an officer or director if not
grossly negligent in such person's actions, such person conducted himself in
good faith and believed (a) in the case of such person's official capacity, that
his conduct was in the best interests of the corporation, (b) in all other cases
that his conduct was at least not opposed to its best interests; and (c) in the
case of any criminal proceeding, that he had no reasonable cause to believe that
his conduct was unlawful. The indemnification provided by the Articles of
Incorporation is not exclusive of any right to indemnification which any person
may be entitled to under any bylaw, resolution, agreement, vote of stockholders
or provision of law. No indemnification may be made where indemnification would
be in violation of Virginia law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed as part of this registration statement are as
follows:
(a) LIST OF EXHIBITS
Number Description
------ -----------
1 Form of Underwriting Agreement
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 (1)
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 (1)
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 (1)
4(d) Indenture, dated as of July 31, 2003 between James Monroe
Bancorp, Inc. and U.S. Bank, National Association, as trustee
(1)
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 (1)
4(f) Guarantee Agreement dated as of July 31, 2003, between James
Monroe Bancorp, Inc. and U.S. Bank, National Association, as
trustee (1)
II-1
Number Description
------ -----------
5 Opinion of Kennedy, Baris & Lundy, L.L.P., previously filed
10(a) Employment contract between James Monroe Bancorp and John R.
Maxwell(2)
10(b) Employment contract between James Monroe Bancorp and Richard
I. Linhart(2)
10(c) James Monroe Bancorp1998 Management Incentive Stock Option
Plan (3)
10(d) James Monroe Bancorp 2000 Director's Stock Option Plan (4)
10(e) James Monroe Bancorp, Inc. 2003 Equity Compensation Plan (5)
23(a) Consent of Yount, Hyde & Barbour, PC, Independent Auditors
23(b) Consent of Kennedy, Baris & Lundy, L.L.P. (included in Exhibit
5)
23(c) Consent of LeClair Ryan, A Professional Corporation,
previously filed
- ----------------------------
(1) 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.
(2) 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.
(3) Incorporated by reference to exhibit 10(b) to the Company's
registration statement on Form SB-2 (No. 333-38098).
(4) Incorporated by reference to exhibit 10(c) to the Company's
registration statement on Form SB-2 (No. 333-38098).
(5) Incorporated by reference to exhibit 10(e) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 2003.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
II-2
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Arlington, Virginia, on November 4, 2003.
JAMES MONROE BANCORP, INC.
By: /s/ John R. Maxwell
--------------------------------
John R. Maxwell, President
In accordance with the requirements of the Securities Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Fred A. Burroughs, III Director November 4, 2003
- -------------------------------
Fred A. Burroughs, III
/s/ Dr. Terry L. Collins Director November 4, 2003
- -------------------------------
Dr. Terry L. Collins
/s/ Norman P. Horn Director November 4, 2003
- -------------------------------
Norman P. Horn
/s/ Dr. David C. Karlgaard Director November 4, 2003
- -------------------------------
Dr. David C. Karlgaard
/s/ Richard I. Linhart Director, Chief Operating Officer, November 4, 2003
- ------------------------------- Secretary (Principal Accounting and
Richard I. Linhart Financial Officer)
/s/ Richard C. Litman Director November 4, 2003
- -------------------------------
Richard C. Litman
/s/ John R. Maxwell President, Chief Executive Officer November 4, 2003
- ------------------------------- and Director (Principal Executive Officer)
John R. Maxwell
/s/ Dr. Alvin E. Nashman Director November 4, 2003
- -------------------------------
Dr. Alvin E. Nashman
/s/ Helen L. Newman Director November 4, 2003
- -------------------------------
Helen L. Newman
/s/ Thomas L. Patterson Director November 4, 2003
- -------------------------------
Thomas L. Patterson
/s/ David W. Pijor Chairman of the Board of Directors November 4, 2003
- -------------------------------
David W. Pijor
/s/ Russell E. Sherman Director November 4, 2003
- -------------------------------
Russell E. Sherman