U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________to __________________
Commission file number 000-32641
JAMES MONROE BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1941875
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3033 WILSON BLVD., ARLINGTON, VIRGINIA 22201
(Address of Principal Executive Offices)
703-707-8855
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|.
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |_| No |X|.
The number of shares of the registrant's common stock, $1 par value, as of July
31, 2005 is 4,450,564.
1
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2005,
December 31, 2004, and June 30, 2004 3
Consolidated Statements of Income for the three and six months ended
June 30, 2005 and 2004 4
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 2005 and 2004 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and 2004 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 32
2
PART I. Financial Information
Item 1. Financial Statements
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2005, December 31, 2004, and June 30, 2004
(Dollars in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
2005 2004 2004
--------- --------- ---------
ASSETS
Cash and due from banks $ 19,927 $ 9,286 $ 23,604
Interest bearing deposits in banks 3,621 2,442 -
Federal funds sold 36,951 35,754 42,129
Securities available for sale, at fair value 133,441 146,795 84,875
Loans held for sale 3,486 2,987 250
Loans:
Loans, net of unearned income 333,603 249,996 204,625
Allowance for loan losses (3,532) (2,790) (2,305)
--------- --------- ---------
Total loans, net 330,071 247,206 202,320
Bank premises and equipment, net 2,364 2,438 2,196
Accrued interest receivable 2,057 1,977 1,235
Other assets 2,343 1,885 2,139
--------- --------- ---------
TOTAL ASSETS $ 534,261 $ 450,770 $ 358,748
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing deposits $ 123,092 $ 91,857 $ 93,427
Interest bearing deposits 362,363 312,197 220,794
--------- --------- ---------
Total deposits 485,455 404,054 314,221
Trust preferred capital notes 9,279 9,279 9,279
Accrued interest payable and other liabilities 1,142 536 703
--------- --------- ---------
Total liabilities 495,876 413,869 324,203
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized
10,000,000 shares; 4,450,564 issued and
outstanding, at June 30, 2005, 4,445,224 at
December 31, 2004, 4,437,369 at June 30, 2004 4,451 4,445 4,437
Capital surplus 24,416 24,325 24,197
Retained earnings 10,196 8,458 6,928
Accumulated other comprehensive income (loss) (678) (327) (1,017)
--------- --------- ---------
Total stockholders' equity 38,385 36,901 34,545
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 534,261 $ 450,770 $ 358,748
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 5,042 $ 3,027 $ 9,270 $ 5,810
Loans held for sale 33 10 58 18
Securities, taxable 1,371 802 2,841 1,825
Federal funds sold 78 41 134 50
Other interest income 10 - 11 -
------- ------- ------- -------
Total interest and dividend income 6,534 3,880 12,314 7,703
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 1,918 887 3,523 1,718
Federal funds purchased 122 10 137 36
Borrowed funds 149 105 285 210
------- ------- ------- -------
Total interest expense 2,189 1,002 3,945 1,964
------- ------- ------- -------
Net interest income 4,345 2,878 8,369 5,739
PROVISION FOR LOAN LOSSES 345 194 779 493
------- ------- ------- -------
Net interest income after provision for loan losses 4,000 2,684 7,590 5,246
------- ------- ------- -------
NONINTEREST INCOME:
Service charges and fees 82 98 157 182
Gain on sale of securities 10 14 18 54
Gain on sale of loans 194 108 356 171
Other 117 89 204 183
------- ------- ------- -------
Total noninterest income 403 309 735 590
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and wages 1,502 972 2,849 1,816
Employee benefits 263 163 527 342
Occupancy expenses 289 163 596 328
Equipment expenses 158 92 325 166
Other operating expenses 717 551 1,385 986
------- ------- ------- -------
Total noninterest expenses 2,929 1,941 5,682 3,638
------- ------- ------- -------
Income before income taxes 1,474 1,052 2,643 2,198
PROVISION FOR INCOME TAXES 504 366 905 758
------- ------- ------- -------
Net income $ 970 $ 686 $ 1,738 $ 1,440
======= ======= ======= =======
EARNINGS PER SHARE, BASIC $ 0.22 $ 0.15 $ 0.39 $ 0.32
EARNINGS PER SHARE, diluted $ 0.21 $ 0.15 $ 0.37 $ 0.31
The accompanying notes are an integral part of these consolidated financial
statements.
4
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2005, and 2004
(Dollars in thousands)
(Unaudited)
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME EQUITY
------- ------- -------- -------------- ------------- -------------
BALANCE JANUARY 1, 2004 $ 2,944 $25,425 $ 5,491 $ 31 $ 33,891
Comprehensive income:
Net income 1,440 $ 1,440 1,440
Net change in unrealized (loss)
on available for sale securities,
net of deferred taxes of $540 (1,048) (1,048) (1,048)
-------
Total comprehensive income $ 392
=======
Issuance of common stock 3 71 74
Effect of stock split 1,478 (1,478) -
Cash paid in lieu of fractional shares (3) (3)
Exercise of stock options 12 179 191
------- ------- ------- -------- --------
BALANCE, JUNE 30, 2004 $ 4,437 $24,197 $ 6,928 $ (1,017) $ 34,545
======= ======= ======= ======== ========
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME EQUITY
------- ------- -------- -------------- ------------- -------------
BALANCE JANUARY 1, 2005 $ 4,445 $24,325 $ 8,458 $ (327) $ 36,901
Comprehensive income:
Net income 1,738 $ 1,738 1,738
Net change in unrealized (loss)
on available for sale securities,
net of deferred taxes of $180 (351) (351) (351)
--------
Total comprehensive income $ 1,387
========
Issuance of common stock 4 67 71
Exercise of stock options 2 24 26
------- ------- -------- -------- --------
BALANCE, JUNE 30, 2005 $ 4,451 $24,416 $ 10,196 $ (678) $ 38,385
======= ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Dollars in thousands)
(Unaudited)
SIX MONTHS
ENDED JUNE 30,
----------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,738 $ 1,440
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 291 131
Provision for loan losses 779 493
Amortization of bond premium 143 176
Accretion of bond discount (136) (18)
Realized (gain) on sales of securities available for sale (18) (54)
Realized (gain) on sales of loans held-for-sale (356) (171)
Origination of loans held-for-sale (23,649) (8,589)
Proceeds from sales of loans held-for-sale 23,506 9,071
Deferred income tax (benefit) (243) (185)
(Increase) decrease in accrued interest receivable (80) 101
(Increase) in other assets (35) (97)
Increase (decrease) in accrued interest payable and other liabilities 606 (55)
------- -------
Net cash provided by operating activities 2,546 2,243
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (2,278) (14,32)
Proceeds from calls and maturities of securities available for sale 7,361 13,914
Proceeds from sales of securities available for sale 7,751 36,169
Purchases of premises and equipment (217) (939)
(Increase) in interest bearing cash balances (1,179) -
(Increase) in Federal funds sold (1,197) (42,129)
Net (increase) in loans (83,644) (35,721)
------- -------
Net cash (used in) investing activities (73,403) (43,028)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts 39,155 54,964
Net increase in time deposits 42,246 4,141
Net (decrease) in Federal funds purchased - (6,886)
Proceeds from issuance of common stock 97 265
Cash paid in lieu of fractional shares - (3)
------- -------
Net cash provided by financing activities 81,498 52,481
------- -------
Increase in cash and due from banks $10,641 $11,696
CASH AND DUE FROM BANKS
Beginning $ 9,286 $11,908
------- -------
Ending $19,927 $23,604
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 3,669 $ 1,897
======= =======
Income taxes paid $ 998 $ 851
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized (loss) on securities available for sale $ (531) $(1,588)
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
JAMES MONROE BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
Organization. James Monroe Bancorp, Inc. was incorporated under the laws of the
Commonwealth of Virginia on April 9, 1999 to be the holding company for James
Monroe Bank. James Monroe Bancorp acquired all of the shares of James Monroe
Bank on July 1, 1999 in a mandatory share exchange under which each outstanding
share of common stock of James Monroe Bank was exchanged for one share of James
Monroe Bancorp common stock. James Monroe Bank, a Virginia chartered commercial
bank, which is a member of the Federal Reserve System, is James Monroe Bancorp's
sole operating subsidiary. James Monroe Bank commenced banking operations on
June 8, 1998. As of June 30, 2005 the Company operated the main office in
Arlington, Virginia, one branch in Annandale, Virginia, one branch and a
drive-up facility in Leesburg, Virginia, one branch in Fairfax City, Virginia,
one branch in Chantilly, Virginia, and one branch in Manassas, 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 U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. 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. All such adjustments and reclassifications are
of a normal and recurring nature. Operating results for the six month period
ended June 30, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005, 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, 2004.
Stock Compensation Plans. At June 30, 2005, the Company had three stock based
compensation plans. The Company accounts for these plans 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. The per share calculations have been restated to
reflect the 3-for-2 stock split discussed in Note 7 and all preceding stock
splits.
Effective April 13, 2005, the Board of Directors of James Monroe Bancorp, Inc.
(the "Company") approved the acceleration of the vesting of all "underwater"
unvested stock options including options held by executive officers. A stock
option was considered "underwater" if the option exercise price was greater than
$18.05 per share, the opening market price as of the date of the board action.
In addition, the Board of Directors of the Company approved the granting and
immediate vesting of 11,250 shares of the Company's stock to an Executive
Officer of the Company. Under the Executive Officer's employment agreement with
the Company these shares were originally scheduled to be granted in the fourth
quarter of 2005. As a result of these actions, the vesting of options to
purchase 66,500 shares of the Company's common stock was accelerated.
7
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2005 2004 2005 2004
------- ----- ------ ------
(Dollars in thousands, except per share data)
Net income, as reported $ 970 $ 686 $1,738 $1,440
Additional expense had the company adopted
SFAS No. 123 (724) (111) (764) (442)
------- ----- ------ ------
Pro forma net income $ 246 $ 575 $ 974 $ 998
======= ===== ====== ======
Earnings per share:
Basic- as reported $ 0.22 0.15 $ 0.39 0.32
======= ===== ====== ======
Basic- pro forma $ 0.06 0.13 $ 0.22 0.23
======= ===== ====== ======
Diluted- as reported $ 0.21 0.15 $ 0.37 0.31
======= ===== ====== ======
Diluted- pro forma $ 0.05 0.12 $ 0.21 0.21
======= ===== ====== ======
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, 2005 and 2004. The
average shares outstanding and per share calculations have been restated to
reflect the 3-for-2 stock split discussed in Note 7 and all preceding stock
splits.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Net Income $ 970 $ 686 $ 1,738 $ 1,440
========== ========== ========== ==========
Weighted average shares outstanding--basic 4,448,363 4,435,638 4,446,816 4,432,540
Common share equivalents for stock options 238,864 240,877 243,318 237,088
---------- ---------- ---------- ----------
Weighted average shares outstanding--diluted 4,687,227 4,676,515 4,690,134 4,669,628
========== ========== ========== ==========
Earnings per share-basic $ 0.22 $ 0.15 $ 0.39 $ 0.32
========== ========== ========== ==========
Earnings per share-diluted $ 0.21 $ 0.15 $ 0.37 $ 0.31
========== ========== ========== ==========
8
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 (loss)." Actual gains and losses on
the sales of these securities, if any, are computed using the specific
identification method and included in "gain (loss) 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, 2005, December 31, 2004, and June
30, 2004, are summarized in the tables that follow. The Company classifies all
securities as available for sale.
JUNE 30, 2005
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and federal agency $109,779 $ 99 $ (852) $109,026
Mortgage-backed securities 20,714 108 (185) 20,637
Corporate notes 2,159 2 (199) 1,962
Restricted stock 1,816 - - 1,816
-------- -------- -------- --------
Total $134,468 $ 209 $ (1,236) $133,441
======== ======== ======== ========
DECEMBER 31, 2004
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and federal agency $121,594 $ 229 $ (686) $121,137
Mortgage-backed securities 22,208 172 (208) 22,172
Corporate notes 2,151 26 (29) 2,148
Restricted stock 1,338 - - 1,338
-------- -------- -------- --------
Total $147,291 $ 427 $ (923) $146,795
======== ======== ======== ========
JUNE 30, 2004
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and federal agency $ 66,193 $ 21 $ (1,290) $ 64,924
Mortgage-backed securities 17,077 115 (416) 16,776
Corporate notes 2,157 55 (25) 2,187
Restricted stock 988 - - 988
-------- -------- -------- --------
Total $ 86,415 $ 191 $ (1,731) $ 84,875
======== ======== ======== ========
9
Information pertaining to securities with gross unrealized losses at June 30,
2005 and December 31, 2004, aggregated by investment category and length of time
that the individual securities have been in a continuous loss position, follows:
JUNE 30, 2005
------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE
----------------------- -----------------------
UNREALIZED UNREALIZED
(Dollars in thousands) FAIR VALUE (LOSS) FAIR VALUE (LOSS)
---------- ---------- ---------- ----------
U.S. Government and
federal agency $42,497 $ (241) $33,500 $ (611)
Mortgage backed 8,030 (125) 5,366 (60)
Corporate notes 717 (97) 943 (102)
------- ------- ------- -------
Total $51,244 $ (463) $39,809 $ (773)
======= ======= ======= =======
DECEMBER 31, 2004
------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE
----------------------- -----------------------
UNREALIZED UNREALIZED
(Dollars in thousands) FAIR VALUE (LOSS) FAIR VALUE (LOSS)
---------- ---------- ---------- ----------
U.S. Government and
federal agency $53,745 $ (336) $11,192 $ (350)
Mortgage backed 7,505 (109) 3,556 (99)
Corporate notes 1,020 (29) - -
------- ------- ------- -------
Total $62,270 $ (474) $14,748 $ (449)
======= ======= ======= =======
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
The bonds in an unrealized loss position at June 30, 2005 and December 31, 2004
were temporarily impaired due to the current interest rate environment and not
increased credit risk. All securities owned by the Company are payable at par at
maturity. Of the securities temporarily impaired at June 30, 2005, 28 are U.S.
Government agency issued bonds (Government National Mortgage Association and the
Federal Home Loan Bank) rated AAA by Standard and Poor's, 21 are government
sponsored enterprise issued bonds (Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation) rated AAA by Standard and Poor's, and
two are corporate bonds rated investment grade by Standard and Poor's. As
management has the ability and intends to hold debt securities until maturity,
or for the foreseeable future, no declines are deemed to be other than
temporary.
10
NOTE 4. LOANS
Major classifications of loans at June 30, 2005, December 31, 2004, and June 30,
2004 are summarized in the following table.
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in thousands) 2005 2004 2004
--------- --------- ---------
Construction loans $ 38,825 $ 35,166 $ 22,691
Commercial loans 39,248 32,782 30,112
Commercial real estate loans 236,220 167,696 138,783
Real estate-1-4 family residential 1,355 1,559 1,638
Home equity loans 8,112 5,400 4,720
Consumer loans 9,567 7,290 6,482
Deposit overdrafts 276 103 199
--------- --------- ---------
Total loans 333,603 249,996 204,625
Less allowance for loan losses (3,532) (2,790) (2,305)
--------- --------- ---------
Net loans $ 330,071 $ 247,206 $ 202,320
========= ========= =========
Changes in the allowance for loan losses are as follows:
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in thousands) 2005 2004 2004
----------------- ------------ -----------------
Beginning balance $ 2,790 $ 1,955 $ 1,955
Loan charge-offs:
Commercial (36) (135) (135)
Consumer (1) (21) (9)
------- ------- -------
Total charge-offs (37) (156) (144)
Recoveries of loans previously charged-off:
Commercial - - -
Consumer - 1 1
------- ------- -------
Total recoveries - 1 1
------- ------- -------
Net charge-offs (37) (155) (143)
------- ------- -------
Provision for loan losses 779 990 493
------- ------- -------
Ending balance $ 3,532 $ 2,790 $ 2,305
======= ======= =======
11
The following table presents the amounts of nonperforming assets at the dates
indicated.
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in thousands) 2005 2004 2004
-------- -------- --------
Nonaccrual loans
Commercial $250 $349 $334
Consumer - - -
---- ---- ----
Total nonaccrual loans 250 349 334
Loans past-due 90-days or more
Commercial 25 - 30
Consumer 23 - 1
---- ---- ----
Total loans past-due 90-days or more 48 - 31
Restructured loans - - -
---- ---- ----
Total nonperforming assets $298 $349 $365
==== ==== ====
NOTE 5. DEPOSITS
Interest bearing deposits consist of the following:
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in thousands) 2005 2004 2004
-------- ----------- ---------
NOW accounts $ 16,532 $ 14,389 $ 17,098
Savings accounts 3,724 4,361 3,326
Money market accounts 226,730 220,315 147,717
Certificates of deposit under $100,000 13,328 12,210 12,096
Certificates of deposit $100,000 and over 100,096 59,310 38,986
Individual retirement accounts 1,953 1,612 1,571
-------- -------- --------
Total interest bearing deposits $362,363 $312,197 $220,794
======== ======== ========
NOTE 6. TRUST PREFERRED CAPITAL SECURITIES
On March 25, 2002, James Monroe Statutory Trust I, a subsidiary of the Company,
was formed for the purpose of issuing redeemable trust preferred securities and
purchasing the Company's junior subordinated debentures, which are its sole
assets. The Company owns all of Trust I'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 bear
interest at a rate equal to the three month LIBOR plus 360 basis points, subject
to a cap of 11% which is set and payable on a quarterly basis. During 2004, the
interest rates ranged from 4.71% to 5.55%. The rate for the quarterly period
beginning March 26, 2005 was 6.69%. The rate for the quarterly period beginning
June 26, 2005 is 7.07%. The securities have a maturity date of March 25, 2032,
and are subject to varying call provisions beginning March 26, 2007.
On July 16, 2003, James Monroe Statutory Trust II, 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 Trust II's outstanding common securities. On
July 31, 2003, $4 million of the trust preferred securities were issued in a
private placement transaction. The securities bear interest at a rate equal to
the three month LIBOR plus 310 basis points, subject to a cap of 12% which is
set and payable on a quarterly basis. During 2004, the interest rates ranged
from 4.20% to 5.08%. The rate for the quarterly period beginning March 30, 2005
was 6.19%. The rate for the quarterly period beginning June 30, 2005 is 6.59%.
The securities have a maturity date of July 31, 2033, and are subject to ranging
call provisions beginning July 31, 2008.
12
The trust preferred 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, 2005, all of the trust preferred securities qualified as
Tier 1 capital.
The Company and the Trusts believe that, taken together, the Company's
obligations under the junior subordinated debentures, the Indentures, the Trust
Declarations and the Guarantees entered into in connection with the issuance of
the trust preferred securities constitute a full and unconditional guarantee by
the Company of the Trusts' respective 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
On June 1, 2004 the Company issued 1,478,317 additional shares necessary to
effect a 3-for-2 common stock split in the form of a 50% stock dividend to
shareholders of record on May 14, 2004. The earnings per common share for all
periods prior to June 2004 have been restated to reflect the stock split.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3." The
new standard changes the requirements for the accounting for and reporting of a
change in accounting principle. Among other changes, SFAS No. 154 requires that
a voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented based on the new accounting
principle, unless it is impracticable to do so. SFAS No. 154 also provides that
(1) a change in method of depreciating or amortizing a long-lived nonfinancial
asset be accounted for as a change in estimate (prospectively) that was effected
by a change in accounting principle, and (2) correction of errors in previously
issued financial statements should be termed a "restatement." The new standard
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Corporation does not anticipate
this revision will have a material effect on its financial statements.
On December 16, 2004, the Financial Accounting Standards Board issued Statement
No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. FAS 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic method and requires that such transactions be accounted for
using a fair-value-based method and recognized as expense in the consolidated
statement of income. The effective date of FAS 123R (as amended by the SEC) is
for annual periods beginning after June 15, 2005. The provisions of FAS 123R do
not have an impact on the Corporation's results of operations at the present
time.
In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB
107 expresses the views of the SEC staff regarding the interaction of FAS 123R
and certain SEC rules and regulations and provides the SEC staff's view
regarding the valuation of share-based payment arrangements for public
companies. SAB 107 does not impact the Corporation's results of operations at
the present time.
In November 2004, the Emerging Issues Task Force (EITF) published Issue 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The Task Force discussed the meaning of other-than-temporary
impairment and its application to certain investments carried at cost. The Task
Force requested that the FASB staff consider other impairment models within U.S.
Generally Accepted Accounting Principles (GAAP) when developing its views. The
Task Force also requested that the scope of the impairment issue be expanded to
include equity investments and investments subject to SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and that the issue be
addressed by the Task Force as a separate EITF issue. At the EITF meeting, the
Task Force reached a consensus on one issue that certain quantitative and
qualitative disclosures should be required for securities accounted for under
SFAS No. 115 that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The Board ratified the
consensus on that one issue at its November 25, 2004 meeting. In September 2004,
FASB directed its staff to issue two proposed FASB Staff Positions (FSP):
Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of
paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of
13
interest rate and/or sector spread increases, and Proposed FSP EITF Issue
03-1-b, which delays the effective date of Issue 03-1 for debt securities that
are impaired because of interest rate and/or sector spread increases. In June
2005, the FASB reach a decision whereby they declined to provide additional
guidance on the meaning of other-than-temporary impairment. The Board directed
the FASB staff to issue EITF 03-1a as final and to draft a new FSP that will
replace EITF 03-01. The final FSP (retitled FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and it Application to Certain Investments")
would be effective for other-than-temporary impairment analysis conducted in
periods beginning after September 15, 2005. The Corporation does not anticipate
this revision will have a material effect on its financial statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis and other portions of this
report contain forward looking statements within the meaning of the Securities
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases, forward
looking statements can be identified by use of such words as "may," "will,"
"anticipate," "believes," "expects," "plans," "estimates," "potential,"
"continue," "should," and similar words or phases. These statements are based
upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policies, competitive
factors, government agencies and other third parties, which by their nature are
not susceptible to accurate forecast, and are subject to significant
uncertainty. Because of these uncertainties and the assumptions on which this
discussion and the forward looking statements are based, actual future
operations and results in the future may differ materially from those indicated
herein. Readers are cautioned against placing undue reliance on any such forward
looking statement.
INTRODUCTION
This Management's Discussion and Analysis reviews the financial
condition and results of operations of the Company and its subsidiaries as of
and for the six months ended June 30, 2005 and 2004. Some tables cover more than
these periods to comply with Securities and Exchange Commission disclosure
requirements or to illustrate trends over a period of time. When reading this
discussion, reference should be made to the consolidated financial statements
and related notes that appear herein and to our consolidated financial
statements and footnotes thereto for the year ended December 31, 2004.
CRITICAL ACCOUNTING POLICIES
There were no changes to the Company's critical accounting policies in
the second quarter of 2005. Critical accounting policies are those applications
of accounting principles or practices that require considerable judgment,
estimation, or sensitivity analysis by management. In the financial service
industry, examples, albeit not an all inclusive list, of disclosures that may
fall within this definition are the determination of the adequacy of the
allowance for loan losses, valuation of mortgage servicing rights, valuation of
derivatives or securities without a readily determinable market value, and the
valuation of the fair value of intangibles and goodwill. Except for the
determination of the adequacy of the allowance for loan losses, the Company does
not believe there are other practices or policies that require significant
sensitivity analysis, judgments, or estimations.
Allowance for Loan Losses. The Company has developed a methodology to
determine, on a quarterly basis, an allowance to absorb probable loan losses
inherent in the portfolio based on evaluations of the collectibility of loans,
historical loss experience, peer bank loss experience, delinquency trends,
economic conditions, portfolio composition, and specific loss estimates for
loans considered substandard or doubtful. All commercial and commercial real
estate loans that exhibit probable or observed credit weaknesses are subject to
individual review. If necessary, reserves would be allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral and other sources of cash flow. Any reserves for
impaired loans are measured based on the present rate or fair value of the
underlying collateral. The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. A composite
allowance factor that considers the Company's and other peer bank loss
experience ratios, delinquency trends, economic conditions, and portfolio
composition are applied to the total of commercial and commercial real estate
loans not specifically evaluated. A percentage of this composite allowance
factor is also applied to the aggregate of unused commercial lines of credit
which the Company has an obligation to honor but where the borrower has not
elected to draw on their lines of credit.
Homogeneous 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 homogeneous pool of loans based on the
expected net charge offs from a current trend in delinquencies, losses or
historical experience and general economic conditions. The Company has no
material delinquencies in these types of loans, and has not, since inception,
had a trend or an indication of a trend that would guide the Company in expected
material losses in these types of homogeneous pools of loans.
The Company's allowance for loan losses is determined based upon a
methodology developed by management as described above and is approved by the
board of directors each quarter.
15
COMPANY HIGHLIGHTS SINCE DECEMBER 31, 2004 ARE:
o Assets grew $83.5 million (19%).
o Loans grew $83.6 million (33%).
o Deposits grew $81.4 million (20%).
o Net interest margin was 3.78% for the first six months of 2005
compared to 3.72% for the full year 2004 and 3.85% during the first
six months of 2004.
o Asset quality remained strong as nonperforming assets decreased
$51,000 to $298,000. The allowance for loan losses totaled 1.06% of
total loans outstanding at June 30, 2005.
o The Company ended the quarter with adequate capital to support further
growth.
o Initiatives undertaken during 2004 including the Company's expansion
into the Chantilly and Manassas markets, and the opening of a new
operations center, were growth oriented initiatives taken after
additional capital was raised in the fourth quarter of 2003. While
these pro-active initiatives have increased operating expenses, as
evidenced by the rise in the Bank's efficiency ratio to 62% for the
second quarter of 2005, the Company's focus remains on a long term
strategy of expanding our franchise throughout the Northern Virginia
market.
FINANCIAL OVERVIEW
The following discussion provides information about the results of
operations and financial condition, liquidity, and capital resources of the
Company and should be read in conjunction with our consolidated financial
statements and notes thereto for the year ended December 31, 2004.
BALANCE SHEET
June 30, 2005 vs. December 31, 2004 and June 30, 2004. Total assets
increased to $534.2 million at June 30, 2005, an increase of $83.5 million from
December 31, 2004, and an increase of $175.5 million from June 30, 2004. The
increase in assets since June 30, 2004 resulted from the Company's emphasis on
deposit generation. Since June 30, 2004, deposits increased $171.2 million, with
noninterest bearing deposits increasing $29.7 million, and interest bearing
deposits increasing $141.6 million. With the growth in deposits, the Company was
able to fund $129.0 million net increase in loans. Securities increased $48.6
million and overnight investments decreased $5.2 million. Net loans increased
$83.6 million from December 31, 2004 funded in part by deposit growth of $81.4
million.
RESULTS OF OPERATIONS
Six Months 2005 vs. Six Months 2004. For the six months ended June 30,
2005, the Company had net income of $1,738,000, or $.37 per diluted share,
compared to $1,440,000 or $.31 per diluted share, for the comparable period of
2004. Annualized return on average assets was .75% for the six months ended June
30, 2005, compared to .91% for the same six month period in 2004. Return on
average equity was 9.37% for the six months ended June 30, 2005, compared with
8.27% for the same six month period in 2004.
Second Quarter 2005 vs. Second Quarter 2004. For the quarter ended June
30, 2005, the Company had net income of $970,000, or $.21 per diluted share,
compared to $686,000 or $.15 per diluted share, for the comparable period of
2004. Annualized return on average assets was .80% for the three months ended
June 30, 2005, compared to .84% for the same three month period in 2004. Return
on average equity was 10.37% for the six months ended June 30, 2005, compared
with 7.85% for the same six month period in 2004.
During the second quarter of 2005, the Company continued to focus on
managing its net interest margin, especially in light of the low, but rising,
interest rate environment. Beginning in 2001 through June 2003, the Federal
Reserve reduced the federal funds target rate an aggregate of 550 basis points.
These dramatic reductions over a relatively short period continued to impact the
loan and investment portfolios in 2003 and 2004, 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. While the Federal
Reserve began to reverse the rate reductions, through a series of seven
increases aggregating 225 basis points, beginning on June 30, 2004 through June
30, 2005, the rate reductions and continuing low rate environment have caused a
reduction in the net interest margin throughout the period, from 5.09% in 2000
to 4.56% in 2001 to 3.90% in 2002 to 3.73% in 2003 to 3.72% in 2004. Despite
these reductions, the Company's practice of managing its interest rate risk
process has mitigated the negative effect of such a severely declining and low
rate environment. As the rate increases have begun to impact the Company, the
net interest margin improved in the first quarter of 2005 compared to the fourth
quarter of 2004, increasing to 3.82%, however,
16
the margin declined to 3.75% during the second quarter as higher yielding
certificate of deposit accounts grew at a faster pace than lower yielding
deposit products. The Company expects that continued increases in the federal
funds target rate will contribute to increased margin as earning assets reprice,
while repricing of deposits lags. However, as discussed further under "Liquidity
and Interest Rate Sensitivity Management," as a result of competitive factors,
market conditions, customer preferences and other factors, the Company may not
be able to benefit from further increases in market interest rates.
Although the Company has continued to grow in asset size since its
inception in 1998, it has been able to control its operating efficiency. Within
the past year the Company expanded into the Chantilly and Manassas markets and
opened a new operations center. These are growth oriented initiatives taken
after additional capital was raised in the fourth quarter of 2003. While these
pro-active initiatives have increased operating expenses, as evidenced by the
rise in the Bank's efficiency ratio to 62% for the second quarter of 2005, the
Company's focus remains on a long term strategy of expanding our franchise
throughout the Northern Virginia market. The efficiency ratio is a non-GAAP
financial measure, which we believe provides investors with important
information regarding our operational efficiency. We compute our efficiency
ratio by dividing noninterest expense by the sum of net interest income on a tax
equivalent basis and noninterest income, which includes securities gains or
losses and gains or losses on the sale of mortgage loans. Comparison of our
efficiency ratio with those of other companies may not be possible, because
other companies may calculate the efficiency ratio differently.
17
QUARTERLY RESULTS OF OPERATIONS
2005 2004
------------------------------ ---------------------------------------------
SECOND FIRST FOURTH THIRD SECOND
(Dollars in thousands except share data) QUARTER QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- ------------- -------------
RESULTS OF OPERATIONS:
Net interest income $ 4,345 $ 4,024 $ 3,701 $ 3,189 $ 2,878
Provision for loan losses 345 434 224 273 194
Other income 403 332 354 232 309
Noninterest expense 2,929 2,753 2,574 2,075 1,941
Income before taxes 1,474 1,169 1,257 1,072 1,052
Net income 970 768 825 705 686
PER SHARE DATA:
Earnings per share, basic (1) $ 0.22 $ 0.17 $ 0.19 $ 0.16 $ 0.15
Earnings per share, diluted (1) $ 0.21 $ 0.16 $ 0.18 $ 0.15 $ 0.15
Weighted average shares (1)
outstanding - basic 4,448,363 4,445,269 4,440,940 4,437,527 4,435,638
- diluted 4,687,227 4,693,041 4,683,093 4,678,247 4,676,515
AT PERIOD END:
Loans $ 333,603 $ 291,600 $ 249,996 $ 230,104 $ 204,625
Earning assets 511,102 439,697 437,974 398,649 331,879
Total assets 534,261 464,627 450,770 416,434 358,469
Deposits 485,455 417,749 404,054 370,619 314,221
Stockholders' equity 38,385 36,253 36,901 36,172 34,545
Book value per share (1) $ 8.62 $ 8.15 $ 8.30 $ 8.15 $ 7.79
Shares outstanding (1) 4,450,564 4,447,252 4,445,224 4,437,869 4,437,369
PERFORMANCE RATIOS:
Return on average assets 0.80% 0.70% 0.76% 0.76% 0.84%
Return on average equity 10.37% 8.36% 8.93% 7.89% 7.85%
Net interest margin 3.75% 3.82% 3.58% 3.67% 3.81%
Efficiency ratio (2) 61.69% 63.20% 63.48% 62.07% 60.90%
OTHER RATIOS:
Allowance for loan losses to total loans 1.06% 1.11% 1.12% 1.12% 1.13%
Equity to assets 7.18% 7.80% 8.19% 8.69% 9.64%
Nonperforming loans to total loans 0.09% 0.11% 0.14% 0.17% 0.18%
Net charge-offs to total loans 0.01% 0.00% 0.00% 0.00% 0.00%
Risk adjusted capital ratios:
Leverage ratio 9.9% 10.5% 10.7% 12.3% 13.6%
Tier (1) 13.3% 14.7% 16.1% 17.4% 19.4%
Total 14.3% 15.8% 17.1% 18.3% 20.4%
(1) Information has been adjusted to reflect the 3-for-2 stock split paid on
June 1, 2004.
(2) Computed by dividing noninterest expense by the sum of net interest income
on a tax equivalent basis and noninterest income, including securities gains or
losses and gains or losses on the sale of loans. This is a non-GAAP financial
measure, which we believe provides investors with important information
regarding our operational efficiency. Comparison of our efficiency ratio with
those of other companies may not be possible, because other companies may
calculate the efficiency ratio differently.
18
NET INTEREST INCOME, AVERAGE BALANCES AND YIELDS
Net interest income is the difference between interest and fees earned
on assets and the interest paid on deposits and borrowings. Net interest income
is one of the major determining factors in the Bank's performance as it is the
principal source of revenue and earnings. Unlike the larger regional or
mega-banks that have significant sources of fee income, community banks, such as
James Monroe Bank, rely on net interest income from traditional banking
activities as the primary revenue source.
Tables 1 and 2 provide certain information relating to the Company's
average consolidated statements of financial condition and reflects the interest
income on interest earning assets and interest expense of interest bearing
liabilities for the six months and quarters ended June 30, 2005 and 2004 and the
average yields earned and rates paid during those periods. 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. The Company did not
have any tax exempt income during any of the periods presented in Tables 1 and
2. Nonaccrual loans have been included in the average balances of loans
receivable.
Six Months 2005 vs. Six Months 2004. For the six month period ended
June 30, 2005, net interest income increased $2.6 million, or 46%, to $8.4
million from $5.7 million earned during the same period in 2004. This was
primarily a result of the increase in the volume of earning assets, and
partially offset by the effect of both a declining net interest margin and
strong growth in higher yielding deposit products. During the six months ended
June 30, 2005, total average earning assets increased by $146.5 million, or 49%,
from the same period of 2004. Average loans outstanding grew by $102.6 million,
or 55%, during the first six months of 2005 compared to the same period in 2004,
while at the same time, the yield on such loans increased by 22 basis points.
Average securities increased $41.1 million, or 41%, during the first six months
of 2005 compared to the same period in 2004 and the yield on the securities
portfolio increased by 39 basis points. Fed funds sold grew by $1.3 million, or
13%, during the first six months of 2005 compared to the same period in 2004 and
the yield on these funds increased by 153 basis points.
During the six months ended June 30, 2005, total interest bearing
liabilities grew by $121.7 million, or 58% from the same period of 2004.
Interest bearing deposits increased $118.5 million with money market accounts
growing $83.1 million, or 63% and time deposits growing $31.7 million, or 66%.
Much of the growth in deposits can be attributed to the two new branches opened
in the third quarter of 2004. Borrowings, which includes fed funds purchased and
trust preferred capital notes, increased $3.2 million over the same period of
2004. Interest expense paid on these liabilities for the first six months of
2005 was $3.9 million compared with $2.0 million for the same period of 2004.
The yield on earning assets improved 40 basis points from 5.17% for the
six month period ending June 30, 2004 to 5.57% during the same period in 2005.
The overall yield on loans grew 22 basis points, the securities portfolio
increased 39 basis points, and Federal funds sold grew 153 basis points
reflecting the overall rise in interest rates from the first six months of 2004
to the same period this year. The cost of funds increased 51 basis points from
1.89% for the six month period ending June 30, 2004 to 2.40% during the same
period in 2005.
The resulting effect of the changes in interest rates between the six
month periods ended June 30, 2005 and 2004, offset by changes in the volume and
mix of earning assets and interest bearing liabilities resulted in a slight
decline in the net interest margin of 7 basis points from 3.85% in 2004 versus
3.78% in 2005. Management believes this relatively stable net interest margin,
during a period of strong organic growth, is indicative of the Company's
interest rate risk management process.
19
TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
---------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------ --------- -------- ------
ASSETS
Loans:
Commercial $ 65,472 $ 2,166 6.67% $ 49,451 $ 1,362 5.54%
Commercial real estate 202,960 6,474 6.43% 125,075 4,071 6.55%
Consumer 22,060 630 5.76% 13,399 377 5.66%
--------- ------- --------- -------
Total loans 290,492 9,270 6.44% 187,925 5,810 6.22%
Loans held for sale 2,150 58 5.44% 653 18 5.48%
Securities 141,772 2,841 4.04% 100,675 1,825 3.65%
Federal funds sold and cash equivalents 11,581 145 2.52% 10,250 50 0.99%
--------- ------- --------- -------
Total earning assets 445,995 12,314 5.57% 299,503 7,703 5.17%
--------- ------- --------- -------
Less: allowance for loan losses (3,181) (2,107)
Cash and due from banks 16,939 16,738
Premises and equipment, net 2,435 1,648
Other assets 4,521 2,912
--------- ---------
TOTAL ASSETS $ 466,709 $ 318,694
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing demand deposits $ 15,094 $ 64 0.86% $ 12,351 $ 41 0.66%
Money market deposit accounts 214,138 2,313 2.18% 131,037 1,116 1.71%
Savings accounts 4,096 27 1.33% 3,064 19 1.24%
Time deposits 79,926 1,119 2.82% 48,276 542 2.26%
--------- ------- --------- -------
Total interest bearing deposits 313,254 3,523 2.27% 194,728 1,718 1.77%
Borrowings:
Trust preferred capital notes 9,279 285 6.19% 9,000 210 4.68%
Other borrowed funds 8,472 137 3.26% 5,593 36 1.30%
--------- ------- --------- -------
Total borrowings 17,751 422 4.79% 14,593 246 3.39%
--------- ------- --------- -------
Total interest bearing liabilities 331,005 3,945 2.40% 209,321 1,964 1.89%
--------- ------- --------- -------
Net interest income and net yield
on interest earning assets $ 8,369 3.78% $ 5,739 3.85%
======= =======
Noninterest-bearing demand deposits 96,950 73,250
Other liabilities 1,364 1,134
Stockholders' equity 37,390 34,989
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUTIY $ 466,709 $ 318,694
========= =========
20
Second Quarter 2005 vs. Second Quarter 2004. For the quarter ended June
30, 2005, net interest income increased $1.5 million, or 51%, to $4.3 million
from $2.9 million earned during the same period in 2004. This was primarily a
result of growth in earning assets, partially offset by increases in rates paid
on interest bearing liabilities which exceeded the growth in rates received on
interest earning assets. During the quarter ended June 30, 2005, total average
earning assets increased by $160.2 million, or 53%, from the same period of
2004. Average loans outstanding grew by $113.2 million, or 57%, during the
second quarter of 2005 compared to the same quarter in 2004, while at the same
time, the yield on such loans increased by 36 basis points. Average securities
increased $51.3 million, or 59%, during the second quarter of 2005 compared to
the same period in 2004 and the yield on the securities portfolio increased by
27 basis points. Additional securities were purchased from the liquidity
generated throughout the past year and invested in securities at yields greater
than federal funds, but less than yields generated by loans. Federal funds sold
decreased by $5.9 million over the same period last year and the yield on these
funds increased by 191 basis points.
During the second quarter of 2005, average interest bearing liabilities
increased $131.3 million, or 61% from the same period of 2004. Interest bearing
deposits increased $119.8 million with money market accounts growing by $78.6
million, or 58%, and time deposits increasing by $37.5 million, or 77%. During
the second quarter of 2005, borrowings, which includes Federal funds purchased
and trust preferred capital notes, increased $11.5 million. Interest expense
paid on these liabilities during the second quarter of 2005 was $2.2 million
compared with $1.0 million for the same period of 2004.
The yield on earning assets increased 52 basis points to 5.64% for the
quarter ending June 30, 2005 from 5.12% during the same period in 2004
reflecting the overall rise in interest rates from the second quarter of 2004 to
the same period this year. The overall yield on loans increased 36 basis points
while the yield on the securities portfolio increased 27 basis points and the
yield on overnight investments increased 191 basis points. The cost of funds
rose 66 basis points to 2.55% for the quarter ending June 30, 2005 from 1.89%
during the same period in 2004.
The resulting effect of the changes in interest rates between the
quarters ended June 30, 2005 and 2004, offset by changes in the volume and mix
of earning assets and interest bearing liabilities resulted in a slight decline
in the net interest margin of 6 basis points from 3.81% in 2004 to 3.75% in
2005. Management believes this stability during a period of strong organic
growth is indicative of the Company's interest rate risk management process.
21
TABLE 2: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
---------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------ --------- -------- ------
ASSETS
Loans:
Commercial $ 65,410 $ 1,117 6.85% $ 51,496 $ 704 5.50%
Commercial real estate 222,019 3,567 6.44% 133,266 2,132 6.43%
Consumer 24,262 358 5.92% 13,769 191 5.58%
--------- ------- --------- ---------
Total loans 311,691 5,042 6.49% 198,531 3,027 6.13%
Loans held for sale 2,384 33 5.55% 730 10 5.51%
Taxable securities 138,252 1,371 3.98% 86,956 802 3.71%
Federal funds sold and cash equivalents 12,615 88 2.80% 18,555 41 0.89%
--------- ------- --------- ---------
Total earning assets 464,942 6,534 5.64% 304,772 3,880 5.12%
--------- ------- --------- ---------
Less: allowance for loan losses (3,394) (2,200)
Cash and due from banks 18,605 20,561
Premises and equipment, net 2,412 1,812
Other assets 4,746 3,462
--------- ---------
TOTAL ASSETS $ 487,311 $ 328,407
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing demand deposits $ 16,306 $ 32 0.79% $ 12,993 $ 22 0.68%
Money market deposit accounts 214,308 1,228 2.30% 135,707 582 1.72%
Savings accounts 3,690 12 1.30% 3,370 10 1.19%
Time deposits 86,547 646 2.99% 49,014 273 2.24%
--------- ------- --------- ---------
Total interest bearing deposits 320,851 1,918 2.40% 201,084 887 1.77%
Borrowings:
Trust preferred capital notes 9,279 149 6.44% 9,000 105 4.69%
Other borrowed funds 14,714 122 3.33% 3,499 10 1.15%
--------- ------- --------- ---------
Total borrowings 23,993 271 4.53% 12,499 115 3.72%
--------- ------- --------- ---------
Total interest bearing liabilities 344,844 2,189 2.55% 213,583 1,002 1.89%
--------- ------- --------- ---------
Net interest income and net yield
on interest earning assets $ 4,345 3.75% $ 2,878 3.81%
======= =========
Noninterest-bearing demand deposits 103,301 78,490
Other liabilities 1,672 1,229
Stockholders' equity 37,494 35,105
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUTIY $ 487,311 $ 328,407
========= =========
22
Table 3 shows the composition of the net change in net interest income
for the periods indicated, as allocated between the change due to changes in the
volume of average earning assets and interest bearing liabilities, and the
changes due to changes in interest rates. As the table shows, the increase in
net interest income of $1.5 million for the quarter ended June 30, 2005, as
compared to the quarter ended June 30, 2004, is due to the growth in the volume
of earning assets and interest bearing liabilities. While the rise in interest
rates has, to date, had an impact on interest income, it has had a greater
impact on interest expense. Management has controlled its exposure to changes in
interest rates such that dramatic declines in rates from 2001 through 2003 and
the low but steadily rising interest rate environment since June 2004 has
resulted in a modest $90,000 decline of net interest income during the second
quarter of 2005 compared to the same quarter last year, whereas the growth in
earning assets and interest bearing liabilities resulted in an increase of $1.6
million to net interest income. Interest income increased $2.7 million during
the second quarter of 2005 compared to the second quarter of 2004 as higher
yielding loans grew at a faster pace than securities and overnight investments
resulting in a $2.2 million increase in interest income attributable to asset
growth while changes in rates resulted in growth of interest income of $434,000.
Interest expense during these comparable quarters increased $1.2 million with
$663,000 of this rise attributable to growth in interest bearing liabilities
while changes in rates resulted in an increase of interest expense of $524,000.
The increase in net interest income of $2.6 million for the six months
ended June 30, 2005, as compared to the six months ended June 30, 2004, is due
to growth in earning assets and interest bearing liabilities offset slightly by
changes in interest rates. While the rise in interest rates has, to date, had an
impact on interest income, it has had a greater impact on interest expense.
Management has controlled its exposure to changes in interest rates resulting in
a modest $220,000 reduction of net interest income, whereas the growth in
earning assets and interest bearing liabilities resulted in an increase of $2.9
million to net interest income. Interest income increased $4.6 million during
the first six months of 2005 compared to the first six months of 2004 as higher
yielding loans grew at a faster pace than securities and overnight investments
resulting in a $3.9 million increase in interest income attributable to growth
while changes in rates resulted in growth of interest income of $624,000.
Interest expense during the first six months of 2005 compared to the same period
in 2004 grew $2.0 million with $1.1 million of this rise attributable to growth
in interest bearing liabilities while changes in rates resulted in an increase
of interest expense of $844,000.
TABLE 3
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2005 VS. 2004 2005 VS. 2004
-------------------------------- ---------------------------------
DUE TO CHANGE DUE TO CHANGE
INCREASE IN AVERAGE INCREASE IN AVERAGE
OR -------------------- OR --------------------
(Dollars in thousands) (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- ------ ---- ---------- ------ ----
EARNING ASSETS:
Loans $ 2,015 $ 1,735 $ 280 $ 3,460 $ 3,190 $ 270
Loans held for sale 23 23 0 40 41 (1)
Securities 569 476 93 1,016 750 266
Federal funds sold and cash equivalents 47 (13) 60 95 7 88
------- ------- ------- ------- ------- -------
Total interest income 2,654 2,221 433 4,611 3,988 623
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits 10 6 4 23 9 14
Money market deposit accounts 646 339 307 1,197 711 486
Savings deposits 2 1 1 8 6 2
Time deposits 373 210 163 577 358 219
Borrowed funds 156 107 49 176 54 122
------- ------- ------- ------- ------- -------
Total interest expense 1,187 663 524 1,981 1,138 843
------- ------- ------- ------- ------- -------
Net interest income $ 1,467 $ 1,558 $ (91) $ 2,630 $ 2,850 $ (220)
======= ======= ======= ======= ======= =======
23
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon a methodology that includes
among other factors, a specific evaluation of commercial and commercial real
estate loans that are considered special mention, substandard or doubtful. All
other loans are then categorized in pools of loans with common characteristics.
A potential loss factor is applied to these loans which considers the historical
charge off history of the Company and its peer group, trends in delinquencies
and loan grading, current economic conditions, and factors that include the
composition of the Company's loan portfolio. At June 30, 2005, the Company had a
$165,000 impaired loan on nonaccrual status, which is performing, and an
additional $133,000 in loans on nonaccrual status or past due 90 days or more
and still accruing. See Note 4 to the unaudited consolidated financial
statements for additional information regarding the Company's asset quality and
allowance for loan losses. While the dollar volume of total nonperforming loans
at June 30, 2005 declined $67,000, or 18%, from $365,000 at June 30, 2004 to
$298,000 at June 30, 2005, more importantly, the percentage of total loans
represented by such nonperforming loans has declined significantly from 0.18% at
June 30, 2004 to 0.14% at December 31, 2004 to 0.09% at June 30, 2005.
A methodology established in 2002 determining an appropriate allowance
for loan losses was approved by the Audit Committee and the Board of Directors.
The quarterly allowance and provision are approved by the Board. The methodology
is reevaluated on a quarterly basis. Pending the development of a negative trend
with respect to past due loans or charge offs or significant changes in economic
conditions, the Company continues to maintain an allowance it believes is
adequate.
As reflected in Table 4 below, the allowance is allocated among the
various categories of loans based upon the methodology described herein.
TABLE 4
The following table shows the allocation of the allowance for loan
losses at the dates indicated. The allocation of portions of the allowance to
specific categories of loans is not intended to be indicative of future losses,
and does not restrict the use of the allowance to absorb losses in any category
of loans. See Note 4 to the unaudited consolidated financial statements included
in this report for additional information regarding the allowance for loan
losses and nonperforming assets.
JUNE 30, 2005 DECEMBER 31, 2004 JUNE 30, 2004
---------------- ------------------- ---------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----- ------- ----- ------- ----- -------
Construction loans $ 271 11.6% $ 299 14.1% $ 58 11.1%
Commercial loans 851 11.8% 553 13.1% 1,182 14.7%
Commercial real estate loans 2,192 70.8% 1,868 67.0% 1,006 67.8%
Real estate 1-4 family residential 27 0.4% 20 0.6% 18 0.8%
Home equity loans 58 2.4% 17 2.2% 15 2.3%
Consumer loans 133 3.0% 33 3.0% 26 3.3%
------ ----- ------ ----- ------ -----
Balance end of the period $3,532 100% $2,790 100% $2,305 100%
====== ===== ====== ===== ====== =====
LOANS
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At June 30, 2005,
total loans were $333.6 million, a 63% increase from the $204.6 million in loans
outstanding at June 30, 2004. Total loans at June 30, 2005 represented a 33.4%
increase from the $250.0 million of loans at December 31, 2004. In general,
loans are internally generated with the exception of a small percentage of
participation loans purchased from other local community banks. Lending activity
is largely confined to our market of Northern Virginia. We do not engage in
highly leveraged transactions or foreign lending activities.
Loans in the commercial category, as well as commercial real estate
mortgages, consist primarily of short term (five year or less final maturity)
and/or floating or adjustable rate commercial loans made to small to medium
sized
24
companies. We do not have any agricultural loans in the portfolio. There are no
substantial loan concentrations to any one industry or to any one borrower.
Virtually all of the Company's commercial real estate mortgage and
development loans, which account for approximately 71% of our total loans at
June 30, 2005, 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. The local real estate market
remains generally strong, and the Company attempts to mitigate risk though
careful underwriting, including primary reliance on the borrower's financial
capacity and ability to repay without resort to the property, and lends
primarily with respect to properties occupied or managed by the owner.
The Company's 1-4 family residential real estate loans are generally
not the typical purchase money first mortgage loan or refinancing, but are loans
made for other purposes and the collateral obtained is a first deed of trust on
the residential property of the borrower. The underlying loan would have a final
maturity much shorter than the typical first mortgage and may be a variable or
fixed rate loan. As reflected in Table 5, 26% of the Company's loans are fixed
rate loans and 91% of the Company's loans reprice or have a maturity date that
falls within five years.
Consumer loans consist primarily of secured installment credits to
individuals. The consumer portfolio, which includes consumer loans, home equity
loans, and 1-4 family residential loans, represents 5.8% of the loan portfolio
at June 30, 2005, as compared to 6.4% at June 30, 2004 and 5.8% at December 31,
2004.
TABLE 5
Table 5 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at June 30, 2005. Maturities are based on
the earlier of contractual maturity or repricing date. Demand loans, loans with
no contractual maturity and overdrafts are represented in one year or less.
JUNE 30, 2005
----------------------------------------------------------
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
Construction loans $ 32,702 $ 2,942 $ 3,181 $ 38,825
Commercial loans 28,497 10,541 210 39,248
Commercial real estate loans 155,671 55,120 25,429 236,220
Real estate 1-4 family residential 353 724 278 1,355
Home equity loans 8,112 - - 8,112
Consumer loans 7,909 1,658 - 9,567
Deposit overdrafts 276 - - 276
-------- -------- -------- --------
Total loans $233,520 $ 70,985 $ 29,098 $333,603
======== ======== ======== ========
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
Fixed rate $ 28,250 $ 46,123 $ 11,857 $ 86,230
Variable/Adjustable rate 205,270 24,862 17,241 247,373
-------- -------- -------- --------
Total loans $233,520 $ 70,985 $ 29,098 $333,603
======== ======== ======== ========
25
INVESTMENT SECURITIES
The Company currently, and for all periods shown, classifies its entire
securities portfolio as available for sale. Increases in the portfolio have
occurred whenever deposit growth has outpaced loan demand and the forecast for
loan growth is such that the investment of excess liquidity in investment
securities (as opposed to short term investments such as federal funds) is
warranted. In general, our investment philosophy is to acquire high quality
government agency securities or high grade corporate bonds, with a maturity of
five to six years or less in the case of fixed rate securities. In the case of
mortgage backed securities, the policy is to invest only in those securities
whose average expected life is projected to be approximately five to six years
or less. Mortgage backed securities with a maturity of ten years or more are
either adjustable rate securities or the expected life of the mortgage pool is
generally no more than five or six years. To the extent possible, we attempt to
"ladder" the one time call dates for all our securities. The Company's
investment policy is driven by its interest rate risk process and the need to
minimize the effect of changing interest rates to the entire balance sheet.
The following table provides information regarding the composition of
our investment portfolio at the dates indicated.
TABLE 6
AT JUNE 30, 2005 AT JUNE 30, 2004
-------------------------- ---------------------------
PERCENT OF PERCENT OF
(Dollars in thousands) BALANCE PORTFOLIO BALANCE PORTFOLIO
------- --------- ------- ---------
Available for sale (at market value):
U.S. Agency $109,026 81.7% $ 64,924 76.5%
Mortgage-backed securities 19,309 14.5% 14,794 17.4%
Adjustable rate mortgage-backed securities 1,328 1.0% 1,982 2.3%
Corporate bonds 1,962 1.5% 2,187 2.6%
Restricted stock 1,816 1.3% 988 1.2%
-------- ----- -------- -----
Total $133,441 100.0% $ 84,875 100.0%
======== ===== ======== =====
TABLE7
The following table provides information regarding the maturity
composition of our investment portfolio, at fair value, at June 30, 2005.
MATURITY OF SECURITIES
Years to Maturity
Within Over 1 Year Over 5 Years Over
1 Year through 5 Years through 10 Years 10 Years Total
---------------- ---------------- ----------------- ----------------- ---------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Available for sale (fair value):
U. S. Agency $ 83,702 3.94% $ 25,324 3.69% $ - - $ - - $109,026 3.88%
Mortgage-backed securities 32 5.60% 2,306 4.21% 434 4.30% 16,537 4.84% 19,309 4.76%
Adjustable rate mortgage-
backed securities - - - - - - 1,328 3.83% 1,328 3.83%
Corporate bonds - - 1,962 5.19% - - - - 1,962 5.19%
Restricted stock - - - - - - 1,816 3.57% 1,816 3.57%
-------- -------- -------- -------- --------
Total $ 83,734 3.94% $ 29,592 3.83% $ 434 4.30% $ 19,681 4.66% $133,441 4.02%
======== ======== ======== ======== ========
26
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset and liability management are to provide
for the safety of depositor and investor funds, assure adequate liquidity, and
maintain an appropriate balance between interest sensitive earning assets and
interest bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers, who may be depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs.
We define liquidity for these purposes as the ability to raise cash
quickly at a reasonable cost without principal loss. The primary liquidity
measurement we utilize is called the Basic Surplus, which captures the adequacy
of our access to reliable sources of cash relative to the stability of our
funding mix of deposits. Accordingly, we have established borrowing facilities
with other banks (Federal funds) and the Federal Home Loan Bank as sources of
liquidity in addition to the deposits.
Financial institutions utilize a number of methods to evaluate interest
rate risk. Methods range from the original static gap analysis (the difference
between interest sensitive assets and interest sensitive liabilities repricing
during the same period, measured at a specific point in time), to running
multiple simulations of potential interest rate scenarios, to rate shock
analysis, to highly complicated duration analysis.
One tool that we utilize in managing our interest rate risk is the
matched funding matrix. The matrix arrays repricing opportunities along a time
line for both assets and liabilities. The longer term, more fixed rate sources
are presented in the upper left hand corner while the shorter term, more
variable rate items, are at the lower left. Similarly, uses of funds, such as
assets, are arranged across the top moving from left to right.
The body of the matrix is derived by allocating the longest fixed rate
funding sources to the longest fixed rate assets and shorter term variable
sources to shorter term variable uses. The result is a graphical depiction of
the time periods over which we expect to experience exposure to rising or
falling rates. Since the scales of the liability and assets sides are identical,
all numbers in the matrix would fall within the diagonal lines if we were
perfectly matched across all repricing time frames. Numbers outside the diagonal
lines represent two general types of mismatches: liability sensitive in time
frames when numbers are to the left of the diagonal line and asset sensitive in
time frames when numbers are to the right of the diagonal line.
At June 30, 2005, we were modestly liability sensitive in the short
term and then we become asset sensitive beyond three years. 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 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. These products may not reprice
consistently with assets such as variable rate commercial loans or other loans
that immediately reprice as the prime rate changes. While the traditional gap
analysis and the matched funding matrix show a general picture of our potential
sensitivity to changes in interest rates, it cannot quantify the actual impact
of interest rate changes.
Thus, the Company manages its exposure to possible changes in interest
rates by simulation modeling or "what if" scenarios to quantify the potential
financial implications of changes in interest rates. In practice, each quarter
approximately 14 different "what if" scenarios are evaluated which include the
following scenarios: Static Rates, Most Likely Rate Projection, Rising Rate
Environment, Declining Rate Environment, Ramp Up 100bp and 200bp over 12-months,
and Ramp Down 100bp and 200bp over 12-months scenarios. In addition, 8 rate
shock scenarios are modeled at 50bp up and 50bp down increments but not below
zero. At June 30, 2005, the following 12-month impact on net interest income is
estimated to range from a positive impact of 9.6% in a rising rate scenario, to
a negative impact of (6.0)% if rates decline 200 basis points from current
levels. In the rate shock scenarios the 12-month impact on net interest income
is estimated to range from a positive impact of 2.1% if rates were to
immediately increase 200 basis points, to a negative impact of (9.1)% if rates
were to immediately decline 200 basis points. The Company believes these ranges
of exposure to changes in interest rates to be well within acceptable range
given a wide variety of potential rate change scenarios. This process is
performed each quarter to ensure the Company is not materially at risk to
possible changes in interest rates.
27
The following are the projected potential percentage impact on the
Company's net interest income over the next 12 months for the scenarios the
Company believes are most likely to occur, but measured against a static
interest rate environment as of June 30, 2005. The Company is positioned to
improve earnings if rates continue to rise. With respect to further reductions
in rates, the Company would experience further negative implications on margins
and earnings; however, the Company does not believe that a 100 basis point
decline is realistic given that interest rates remain at low levels, and in
light of the Federal Reserve's indications with respect to the interest rate
environment. Thus management believes the exposure to further changes in
interest rates would not have a material negative effect on the results of
operations.
Static Rates -0-%
Most Likely Rates 2.7 %
Ramp Up 100bp- 12 months 2.6 %
Ramp Up 200bp- 12 months 5.0 %
Ramp Down 100bp- 12 months (2.8)%
Ramp Down 200bp- 12 months (6.0)%
Rising Rate Scenario 9.6 %
Low Rate Environment 0.2 %
NONINTEREST INCOME AND EXPENSE
Noninterest income consists primarily of service charges on deposit
accounts, gains on sales of loans and fees and other charges for banking
services. Noninterest expense consists primarily of salary and benefit costs and
occupancy and equipment expense. To date, the company has not been required to
pay any premiums for deposit insurance. To the extent that deposit premiums may
become required, the Company's results of operations will be adversely affected.
The following table shows the detail of noninterest income for the
three and six month periods ended June 30, 2005 and 2004.
TABLE 8
The categories of noninterest income that exceed 1% of operating
revenue are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
(Dollars in thousands) 2005 2004 2005 2004
------ ------- ----- -------
Service charges on deposit accounts $ 82 $ 98 $157 $182
Cash management fees 24 24 53 48
Other fee income 93 65 151 135
Gain on sale of loans 194 108 356 171
Gain on sale of securities 10 14 18 54
---- ---- ---- ----
Total noninterest income $403 $309 $735 $590
==== ==== ==== ====
The increase in noninterest income during the three and six month
periods ended June 30, 2005 compared to the same period last year is due in
large part to an increase in the gain on sale of loans as the addition of
mortgage lending officers and stepped-up marketing efforts have lead to a growth
in loan originations.
28
TABLE 9
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(Dollars in thousands) 2005 2004 2005 2004
------ ------ ------ ------
Salaries and benefits $1,765 $1,135 $3,376 $2,158
Occupancy cost, net 289 163 596 328
Equipment expense 158 92 325 166
Professional fees 44 56 82 101
Data processing costs 116 98 235 203
Courier and express services 5 35 17 76
Advertising and public relations 93 61 155 105
State franchise tax 103 66 186 131
Compliance expense 49 - 92 -
Other 307 235 618 370
------ ------ ------ ------
Other noninterest expense $2,929 $1,941 $5,682 $3,638
====== ====== ====== ======
Noninterest expense increased $2.1 million from $3.6 million to $5.7
million for the first six months of 2005, as compared to the same period in
2004. Approximately 60% of this increase is in salary and benefit costs. During
2004 the Company added personnel to staff the newly opened branches and
administrative staff to support the growth in customers and transactions being
processed. Occupancy costs and equipment costs increased 82% and 96%
respectively over the first six months of 2004 as two new banking offices and an
operations center were opened in the third quarter of 2004. The increase in
state franchise tax is due to the increased capital of the Bank from earnings
retention and capital infusions in 2004 and 2005. Noninterest expense increased
$1.0 million from $1.9 million to $2.9 million for the second quarter of 2005,
as compared to the same period in 2004. Compliance expense is now captured as a
separate category and includes expenses related to compliance with regulatory
initiatives such as the Bank Secrecy Act, Sarbanes-Oxley 404, and the
Graham-Leach-Bliley Act.
DEPOSITS AND OTHER BORROWINGS
The principal sources of funds for the Bank are core deposits (demand
deposits, NOW accounts, money market accounts, savings accounts and certificates
of deposit less than $100,000) from the local market areas surrounding the
Bank's offices. The Bank's deposit base includes transaction accounts, time and
savings accounts and accounts which customers use for cash management and which
provide the Bank with a source of fee income and cross marketing opportunities
as well as a low cost source of funds. Time and savings accounts, including
money market deposit accounts, also provide a relatively stable and low cost
source of funding.
29
TABLE 10
The following table reflects deposits by category for the periods
indicated.
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
2005 2004 2003
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- ------- -------- ------- -------
Deposits:
Noninterest-bearing demand $103,301 -% $ 78,490 -% $ 67,480 -%
Interest-bearing demand 16,306 0.79 12,993 0.68 9,689 0.87
Money Market 214,308 2.30 135,707 1.72 109,087 1.94
Savings 3,690 1.30 3,370 1.19 1,607 1.50
Certificates of deposit of $100,000 or more 71,702 3.06 34,834 2.22 26,962 2.75
Other time 14,845 2.32 14,180 2.29 14,472 2.72
-------- ---- -------- ---- -------- ----
Total interest bearing deposits 320,851 2.40% 201,084 1.77% 161,817 2.08%
-------- -------- --------
Total deposits $424,152 $279,574 $229,297
======== ======== ========
TABLE 11
The following table indicates the amount of certificates of deposit of
less than $100,000 and $100,000 or more, and their remaining maturities as of
June 30, 2005.
3 MONTHS 4 TO 6 7 TO 9 10 TO 12 OVER 12
(Dollars in thousands) OR LESS MONTHS MONTHS MONTHS MONTHS TOTAL
------- ------- -------- -------- ------- ---------
Certificates of
deposit less
than $100,000 $ 5,423 $ 1,784 $ 1,810 $ 1,955 $ 4,309 $ 15,281
Certificates of
deposit of
$100,000 or more 26,567 25,474 15,709 14,501 17,845 100,096
------- ------ ------ ------ ------ -------
$ 31,990 $ 27,258 $ 17,519 $ 16,456 $ 22,154 $115,377
======== ======= ======= ======= ======= ========
CAPITAL MANAGEMENT
Management monitors historical and projected earnings, asset growth, as
well as its liquidity and various balance sheet risks in order to determine
appropriate capital levels. At June 30, 2005, stockholders' equity increased
$3.8 million to $38.4 million from the $34.6 million in equity at June 30, 2004.
The rise in equity was a result of the $3.3 million increase in retained
earnings over the past twelve months and the $339,000 increase in other
comprehensive income resulting from a decline in unrealized losses on
securities. In addition, $233,000 was contributed to capital from the exercise
of options and sale of shares in the Company's KSOP plan.
Capital Requirement. A comparison of the Company's and the Bank's
regulatory capital at June 30, 2005, compared to minimum regulatory capital
guidelines is shown in the table that follows.
30
TABLE 12
MINIMUM MINIMUM TO BE
ACTUAL GUIDELINES "WELL CAPITALIZED"
------ ---------- ------------------
Total Risk-Based Capital
Company 14.3% 8.0% N/A
Bank 12.1% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 13.3% 4.0% N/A
Bank 11.1% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 9.9% 4.0% N/A
Bank 8.3% 4.0% 5.0%
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
For information about off balance sheet arrangements and contractual
obligations of the Company, refer to item 7 of the Company's Form 10-K for the
year ended December 31, 2004. There have been no material changes in off balance
sheet arrangements and contractual obligations of the Company since December 31,
2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to Item 2 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", under the caption
"Liquidity and Interest Rate Sensitivity Management."
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the
participation of the Chief Executive Officer, Chief Operating Officer, and Chief
Financial Officer, evaluated, as of the last day of the period covered by this
report, the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. There were no
changes in the Bank's internal control over financial reporting (as defined in
Rule 13a-15 under the Securities Act of 1934) during the quarter ended June 30,
2005 that has materially affected, or is reasonably likely to materially affect,
the Bank's internal control over financial reporting.
31
PART II. Other Information
Item 1. Legal Proceedings
None
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities. None
(b) Use of Proceeds Not Applicable.
(c) Purchases of Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders.
On April 28, 2005, the annual meeting of shareholders of the Company
was held for the purpose of electing eleven (11) directors to serve until the
next annual meeting and until their successors are duly elected and qualified.
The name of each director elected at the meeting, who constitute the entire
Board of Directors in office upon completion of the meeting, and the votes cast
for such persons are set forth below.
Broker
Name For Against Non-votes
---- --------- ------ ---------
Dr. Terry L. Collins 3,099,059 51,664 -
Norman P. Horn 3,099,059 51,664 -
Dr. David C. Karlgaard 3,099,059 51,664 -
Richard I. Linhart 3,091,437 59,286 -
Richard C. Litman 3,098,464 52,259 -
John R. Maxwell 3,099,059 51,664 -
Dr. Alvin E. Nashman 3,099,059 51,664 -
Thomas L. Patterson 3,098,809 51,914 -
David W. Pijor 3,099,059 51,664 -
Helen Newman Roche 3,098,714 52,009 -
Russell E. Sherman 3,098,809 51,914 -
Item 5. Other Information
(a) Required Form 8-K Disclosures None
(b) Changes in Procedures for Director
Nominations by Security Holders. None
Item 6. Exhibits
Number Description
- ------ -----------
3(a) Articles of Incorporation of James Monroe Bancorp (1)
3(b) Bylaws of James Monroe Bancorp (2)
4(a) Indenture, dated as of March 26, 2002 between James Monroe Bancorp,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, as trustee (3)
4(b) Amended and Restated Declaration of Trust, dated as of March 26, 2002
among James Monroe Bancorp, Inc., State Street Bank and Trust Company
of Connecticut, National Association, as Institutional Trustee, and
John R. Maxwell, David W. Pijor and Richard I. Linhart as
Administrators (3)
4(c) Guarantee Agreement dated as of March 26, 2002, between James Monroe
Bancorp, Inc. and State Street Bank and Trust Company of Connecticut,
National Association, as trustee (3)
4(d) Indenture, dated as of July 31, 2003 between James Monroe Bancorp,
and U.S. Bank, Inc. National Association, as trustee (3)
32
4(e) Amended and Restated Declaration of Trust, dated as of July 31, 2003
among James Monroe Bancorp, Inc., U.S. Bank, National Association, as
Institutional Trustee, and John R. Maxwell, David W. Pijor and
Richard I. Linhart as Administrators (3)
4(f) Guarantee Agreement dated as of July 31, 2003, between James Monroe
Bancorp, Inc. and U.S. Bank, National Association, as trustee (3)
10(a) Employment contract between James Monroe Bancorp and John R.
Maxwell(4)
10(b) Employment contract between James Monroe Bancorp and Richard I.
Linhart (5)
10(c) James Monroe Bancorp 1998 Management Incentive Stock Option Plan (6)
10(d) James Monroe Bancorp 2000 Director's Stock Option Plan (7)
10(e) James Monroe Bancorp, Inc. 2003 Equity Compensation Plan (8)
11 Statement re: Computation of Per Share Earnings Please refer to Note
2 to the financial statements included in this report.
21 Subsidiaries of the Registrant
31(a) Certification of Chief Executive Officer
31(b) Certification of Chief Operating Officer
31(c) Certification of Chief Financial Officer
32(a) Certification of Chief Executive Officer
32(b) Certification of Chief Operating Officer
32(c) Certification of Chief Financial Officer
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(1) Incorporated by reference to exhibit 3(a) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2004.
(2) Incorporated by reference to exhibit 3(b) to the Company's registration
statement on Form SB-2 (No. 333-38098).
(3) Not filed in accordance with the provisions of Item 601(b)(4)(iii) of
Regulation SK. The Company agrees to provide a copy of these documents to
the Commission upon request.
(4) Incorporated by reference to exhibit of same number to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002.
(5) Incorporated by reference to exhibit of same number to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2003.
(6) Incorporated by reference to exhibit 10(b) to the Company's registration
statement on Form SB-2 (No. 333-38098).
(7) Incorporated by reference to exhibit 10(c) to the Company's registration
statement on Form SB-2 (No. 333-38098).
(8) Incorporated by reference to exhibit 10(e) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2003.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2005 BY: /s/John R. Maxwell
------------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: August 12, 2005 BY: /s/ Richard I. Linhart
------------------------------------------
Richard I. Linhart, Executive Vice President &
Chief Operating Officer
Date: August 12, 2005 BY: /s/ John J. Brough
------------------------------------------
John J. Brough, Senior Vice President &
Chief Financial Officer
34