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 September 30, 2005
[ ] 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 Identification No.)
of Incorporation or Organization)
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 .
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Securities Exchange Act. Yes ___. No X .
The number of shares of the registrant's common stock, $1 par value, as of
October 31, 2005 is 4,458,422.
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2005
December 31, 2004, and September 30, 2004 3
Consolidated Statements of Income for the three and nine months ended
September 30, 2005 and 2004 4
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 2005 and 2004 5
Consolidated Statements of Cash Flows for the nine months
ended September 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
September 30, 2005, December 31, 2004, and September 30, 2004
(Dollars in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004
----------------- ----------------- ------------------
ASSETS
Cash and due from banks $ 16,675 $ 9,286 $ 14,831
Interest bearing deposits in banks 195 2,442 1,668
Federal funds sold - 35,754 48,275
Securities available for sale, at fair value 119,416 146,795 118,053
Loans held for sale 3,389 2,987 549
Loans:
Loans, net of unearned income 362,049 249,996 230,104
Allowance for loan losses (3,766) (2,790) (2,577)
----------------- ----------------- ------------------
Loans, net 358,283 247,206 227,527
Bank premises and equipment, net 2,375 2,438 2,357
Accrued interest receivable 2,613 1,977 1,746
Other assets 2,777 1,885 1,707
----------------- ----------------- ------------------
TOTAL ASSETS $ 505,723 $ 450,770 $ 416,713
================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing deposits $ 114,547 $ 91,857 $ 102,054
Interest bearing deposits 308,852 312,197 268,565
----------------- ----------------- ------------------
Total deposits 423,399 404,054 370,619
Federal funds purchased 14,974 - -
Federal Home Loan Bank advances 18,000 - -
Trust preferred capital notes 9,279 9,279 9,279
Accrued interest payable and other liabilities 1,421 536 643
----------------- ----------------- ------------------
Total liabilities 467,073 413,869 380,541
----------------- ----------------- ------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized
10,000,000 shares; 4,458,422 issued
and outstanding at September 30, 2005,
4,445,224 at December 31, 2004, 4,437,869
at September 30, 2004 4,458 4,445 4,438
Capital surplus 24,469 24,325 24,204
Retained earnings 11,406 8,458 7,633
Accumulated other comprehensive income (loss) (1,683) (327) (103)
----------------- ----------------- ------------------
Total stockholders' equity 38,650 36,901 36,172
----------------- ----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 505,723 $ 450,770 $ 416,713
================= ================= ==================
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) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 5,795 $ 3,318 $ 15,065 $ 9,128
Loans held for sale 46 8 104 26
Securities, taxable 1,271 988 4,112 2,813
Federal funds sold 74 112 208 162
Other interest income 28 - 39 -
------------- ------------- ------------- -------------
Total interest and dividend income 7,214 4,426 19,528 12,129
------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits 2,208 1,120 5,731 2,838
Federal funds purchased 140 - 277 36
Borrowed funds 160 117 445 327
------------- ------------- ------------- -------------
Total interest expense 2,508 1,237 6,453 3,201
------------- ------------- ------------- -------------
Net interest income 4,706 3,189 13,075 8,928
PROVISION FOR LOAN LOSSES 234 273 1,013 766
------------- ------------- ------------- -------------
Net interest income after provision for loan losses 4,472 2,916 12,062 8,162
------------- ------------- ------------- -------------
NONINTEREST INCOME:
Service charges and fees 90 72 247 254
Gain (loss) on sale of securities (5) - 13 54
Gain on sale of loans 280 77 636 248
Other 144 82 348 265
------------- ------------- ------------- -------------
Total noninterest income 509 231 1,244 821
------------- ------------- ------------- -------------
NONINTEREST EXPENSES:
Salaries and wages 1,683 905 4,532 2,721
Employee benefits 280 178 807 520
Occupancy expenses 305 265 901 593
Equipment expenses 166 138 491 304
Other operating expenses 708 589 2,093 1,575
------------- ------------- ------------- -------------
Total noninterest expenses 3,142 2,075 8,824 5,713
------------- ------------- ------------- -------------
Income before income taxes 1,839 1,072 4,482 3,270
PROVISION FOR INCOME TAXES 629 367 1,534 1,125
------------- ------------- ------------- -------------
Net income $ 1,210 $ 705 $ 2,948 $ 2,145
============= ============= ============= =============
EARNINGS PER SHARE, basic $ 0.27 $ 0.16 $ 0.66 $ 0.48
EARNINGS PER SHARE, diluted $ 0.26 $ 0.15 $ 0.63 $ 0.46
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 Nine Months Ended September 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 2,145 $ 2,145 2,145
Net change in unrealized (loss)
on available for sale securities, net of
deferred taxes of $69 (134) (134) (134)
-------
Total comprehensive income $ 2,011
=======
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 13 186 199
------- ------ ------- ------- --------
BALANCE, SEPTEMBER 30, 2004 $ 4,438 $24,204 $ 7,633 $ (103) $ 36,172
======= ======= ======= ======= ========
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 2,948 $ 2,948 2,948
Net change in unrealized (loss)
on available for sale securities, net of
deferred taxes of $698 (1,356) (1,356) (1,356)
--------
Total comprehensive income $ 1,592
=======
Issuance of common stock 5 103 108
Exercise of stock options 8 41 49
------- ------ ------- ------- --------
BALANCE, SEPTEMBER 30, 2005 $4,458 $24,469 $ 11,406 $ (1,683) $ 38,650
======= ======= ======= ======= ========
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 Nine Months Ended September 30, 2005 and 2004
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,948 $ 2,145
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 447 257
Provision for loan losses 1,013 766
Amortization of bond premium 195 243
Accretion of bond discount (181) (62)
Realized (gain) on sales of securities available for sale (13) (54)
Realized (gain) on sales of loans held-for-sale (636) (248)
Origination of loans held-for-sale (43,116) (12,724)
Proceeds from sales of loans held-for-sale 43,350 12,984
Deferred income tax (benefit) (317) (340)
(Increase) in accrued interest receivable (636) (410)
(Increase) decrease in other assets 123 (53)
Increase (decrease) in accrued interest payable and other liabilities 885 (115)
-------- ---------
Net cash provided by operating activities 4,062 2,389
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (3,178) (50,349)
Proceeds from calls and maturities of securities available for sale 14,644 18,197
Proceeds from sales of securities available for sale 13,858 36,169
Purchases of premises and equipment (384) (1,226)
(Increase) decrease in interest bearing cash balances 2,247 (1,668)
(Increase) decrease in Federal funds sold 35,754 (48,275)
Net (increase) in loans (112,090) (61,201)
-------- ---------
Net cash (used in) investing activities (49,149) (108,353)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, savings deposits
and money market accounts (28,004) 109,905
Net increase in time deposits 47,349 5,598
Net increase (decrease) in Federal funds purchased 14,974 (6,886)
Net increase in Federal Home Loan Bank advances 18,000 -
Proceeds from issuance of common stock 157 273
Cash paid in lieu of fractional shares - (3)
-------- ---------
Net cash provided by financing activities 52,476 108,887
-------- ---------
Increase in cash and due from banks $ 7,389 $ 2,923
CASH AND DUE FROM BANKS
Beginning $ 9,286 $ 11,908
-------- ---------
Ending $ 16,675 $ 14,831
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 6,185 $ 3,383
======== =========
Income taxes paid $ 1,627 $ 1,218
======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized (loss) on securities available for sale $ (2,054) $ (203)
======== =========
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 September 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, one branch in Manassas, Virginia, and one
loan production office in Gaithersburg, Maryland.
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 nine month period
ended September 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 September 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.
Effective April 13, 2005, the Board of Directors of 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- -----------------
(Dollars in thousands, except per share data)
Net income, as reported $ 1,210 $ 705 $ 2,948 $ 2,145
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (201) (114) (965) (556)
---------------- ----------------- ----------------- -----------------
Pro forma net income $ 1,009 $ 591 $ 1,983 $ 1,589
================ ================= ================= =================
Earnings per share:
Basic- as reported 0.27 0.16 0.66 0.48
================ ================= ================= =================
Basic- pro forma 0.23 0.13 0.45 0.36
================ ================= ================= =================
Diluted- as reported 0.26 0.15 0.63 0.46
================ ================= ================= =================
Diluted- pro forma 0.21 0.13 0.42 0.34
================ ================= ================= =================
NOTE 2. EARNINGS PER SHARE
The following table discloses the calculation of basic and diluted earnings per
share for the three months and nine months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ------------------------------------
2005 2004 2005 2004
---------------- ---------------- ---------------- ---------------
(Dollars in thousands, except per share data)
Net Income $ 1,210 $ 705 $ 2,948 $ 2,145
================ ================ ================ ===============
Weighted average shares outstanding--basic 4,451,945 4,437,527 4,448,526 4,434,214
Common share equivalents for stock options 282,754 240,809 256,463 238,316
---------------- ---------------- ---------------- ---------------
Weighted average shares outstanding--diluted 4,734,699 4,678,336 4,704,989 4,672,530
================ ================ ================ ===============
Earnings per share-basic $ 0.27 $ 0.16 $ 0.66 $ 0.48
================ ================ ================ ===============
Earnings per share-diluted $ 0.26 $ 0.15 $ 0.63 $ 0.46
================ ================ ================ ===============
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 September 30, 2005, December 31, 2004, and
September 30, 2004, are summarized in the tables that follow. The Company
classifies all securities as available for sale.
SEPTEMBER 30, 2005
----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------- --------------- -------------- ---------------
U.S. agency $ 97,645 $ - $ (1,908) $ 95,737
Mortgage-backed securities 19,752 33 (481) 19,304
Corporate notes 1,853 - (194) 1,659
Restricted stock 2,716 - - 2,716
-------------- --------------- -------------- ---------------
Total securities $ 121,966 $ 33 $ (2,583) $ 119,416
============== =============== ============== ===============
DECEMBER 31, 2004
----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------- --------------- -------------- ---------------
U.S. 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 securities $ 147,291 $ 427 $ (923) $ 146,795
============== =============== ============== ===============
SEPTEMBER 30, 2004
----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------- --------------- -------------- ---------------
U.S. agency $ 97,718 $ 356 $ (503) $ 97,571
Mortgage-backed securities 17,289 165 (197) 17,257
Corporate notes 2,154 45 (22) 2,177
Restricted Stock 1,048 - - 1,048
-------------- --------------- -------------- ---------------
Total securities $ 118,209 $ 566 $ (722) $ 118,053
============== =============== ============== ===============
9
Information pertaining to securities with gross unrealized losses at September
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:
SEPTEMBER 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 $ 68,619 $ (1,032) $ 27,118 $ (876)
Mortgage backed 11,953 (322) 5,115 (159)
Corporate notes 728 (84) 931 (110)
------------- ------------ ------------ -------------
Total $ 81,300 $ (1,438) $ 33,164 $ (1,145)
============= ============ ============ =============
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 September 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 September 30, 2005,
26 are U.S. Government agency issued bonds (Government National Mortgage
Association and the Federal Home Loan Bank) rated AAA by Standard and Poor's, 38
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 September 30, 2005, December 31, 2004, and
September 30, 2004 are summarized in the following table.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(Dollars in thousands) 2005 2004 2004
----------------- ----------------- ------------------
Construction loans $ 42,220 $ 35,166 $ 30,163
Commercial loans 39,792 32,782 32,519
Commercial real estate loans 260,517 167,696 154,286
Real estate 1-4 family residential 1,358 1,559 1,607
Home equity loans 8,190 5,400 5,242
Consumer loans 9,664 7,290 6,230
Deposit overdrafts 308 103 57
----------------- ----------------- ------------------
Total loans 362,049 249,996 230,104
Less: allowance for loan losses (3,766) (2,790) (2,577)
----------------- ----------------- ------------------
Net Loans $ 358,283 $ 247,206 $ 227,527
================= ================= ==================
Changes in the allowance for loan losses are as follows:
NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 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) (10)
-------------- ------------------ -------------------
Total charge-offs (37) (156) (145)
Recoveries of loans previously charged-off:
Commercial - - -
Consumer - 1 1
-------------- ------------------ -------------------
Total recoveries - 1 1
-------------- ------------------ -------------------
Net charge-offs (37) (155) (144)
-------------- ------------------ -------------------
Provision for loan losses 1,013 990 766
-------------- ------------------ -------------------
Ending balance $ 3,766 $ 2,790 $ 2,577
============== ================== ===================
11
The following table presents the amounts of nonperforming assets at the
dates indicated.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(Dollars in thousands) 2005 2004 2004
----------------- ----------------- -----------------
Nonaccrual loans
Commercial $ 225 $ 349 $ 354
Consumer - - -
----------------- ----------------- -----------------
Total nonaccrual loans 225 349 354
Loans past-due 90-days or more
Commercial 22 - 40
Consumer 96 - 7
----------------- ----------------- -----------------
Total loans past-due 90-days or more 118 - 47
Restructured loans - - -
----------------- ----------------- -----------------
Total nonperforming assets $ 343 $ 349 $ 401
================= ================= =================
NOTE 5. DEPOSITS
Interest bearing deposits consist of the following:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(Dollars in thousands) 2005 2004 2004
---------------- ---------------- ----------------
NOW accounts $ 18,126 $ 14,389 $ 14,209
Savings accounts 3,189 4,361 4,421
Money market accounts 167,056 220,315 195,824
Certificates of deposit under $100,000 13,710 12,210 11,637
Certificates of deposit $100,000 and over 104,794 59,310 40,991
Individual retirement accounts 1,977 1,612 1,483
---------------- ---------------- ----------------
Total interest bearing deposits $ 308,852 $ 312,197 $ 268,565
================ ================ ================
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 June 26, 2005 was 7.07%. The rate for the quarterly period beginning
September 26, 2005 is 7.56%. 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 June 30, 2005
was 6.59%. The rate for the quarterly period beginning September 30, 2005 is
7.06%. 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. 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 Company 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 a material impact on the Company's results of operations at the present
time.
In March 2005, the SEC issued Staff Accounting Bulletin 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 Company'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
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 Company does not anticipate this
revision will have a material effect on its financial statements.
13
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 nine months ended September 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 third 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.
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.
14
COMPANY HIGHLIGHTS SINCE DECEMBER 31, 2004 ARE:
o Assets grew $55.0 million (12%).
o Loans grew $112 million (45%).
o Deposits grew $19 million (5%).
o Net interest margin was 3.80% for the first nine months of 2005
compared to 3.72% for the full year 2004 and 3.78% during the first
nine months of 2004.
o Asset quality remained strong as the dollar volume of total
nonperforming loans at September 30, 2005 declined $6,000, from
$349,000 at December 31, 2004 to $343,000 at September 30, 2005.
More importantly, the percentage of total loans represented by such
nonperforming loans has declined significantly from 0.14% at
December 31, 2004 to 0.09% at September 30, 2005. The allowance for
loan losses totaled 1.04% of total loans outstanding at September
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 60% for the
third 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
September 30, 2005 vs. December 31, 2004 and September 30, 2004. Total
assets increased to $505.7 million at September 30, 2005, an increase of $55.0
million from December 31, 2004, and an increase of $89.0 million from September
30, 2004. The increase in assets since September 30, 2004 was funded by the
Company's growth in deposits and short term borrowings. Since September 30,
2004, deposits increased $52.8 million, with noninterest bearing deposits
increasing $12.5 million, and interest bearing deposits increasing $40.3
million. Short term borrowings totaled $33.0 million at quarter-end. Through the
growth in deposits and short term borrowings, combined with a reallocation of
federal funds sold to higher yielding assets, the Company was able to fund
$131.9 million increase in loans. Securities increased $1.4 million and
overnight investments decreased $48.3 million. Net loans increased $112.1
million from December 31, 2004 funded by deposit growth of $19.3 million,
borrowings of $33.0 million, and a decline in securities and funds sold of $63.1
million.
RESULTS OF OPERATIONS
Nine Months 2005 vs. Nine Months 2004. For the nine months ended
September 30, 2005, the Company had net income of $2,948,000, or $.63 per
diluted share, compared to $2,145,000 or $.46 per diluted share, for the
comparable period of 2004. Annualized return on average assets was .82% for the
nine months ended September 30, 2005, compared to .85% for the same nine month
period in 2004. Return on average equity was 10.40% for the nine months ended
September 30, 2005, compared with 8.14% for the same nine month period in 2004.
Third Quarter 2005 vs. Third Quarter 2004. For the quarter ended
September 30, 2005, the Company had net income of $1,210,000, or $.26 per
diluted share, compared to $705,000 or $.15 per diluted share, for the
comparable period of 2004. Annualized return on average assets was .95% for the
three months ended September 30, 2005, compared to .76% for the same three month
period in 2004. Return on average equity was 12.36% for the nine months ended
September 30, 2005, compared with 7.89% for the same nine month period in 2004.
15
During the third 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 eleven
increases aggregating 275 basis points, beginning on June 30, 2004 through
September 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 slightly in the first nine months of 2005
compared to the same period in 2004, increasing to 3.80%. 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 60.25% for the third 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.
16
QUARTERLY RESULTS OF OPERATIONS
2005 2004
------------------------------------------- --------------------------
THIRD SECOND FIRST FOURTH THIRD
(Dollars in thousands except share data) QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net interest income $ 4,706 $ 4,345 $ 4,024 $ 3,701 $ 3,189
Provision for loan losses 234 345 434 224 273
Other income 509 403 332 354 232
Noninterest expense 3,142 2,929 2,753 2,574 2,075
Income before taxes 1,839 1,474 1,169 1,257 1,072
Net income 1,210 970 768 825 705
PER SHARE DATA:
Earnings per share, basic $ 0.27 $ 0.22 $ 0.17 $ 0.19 $ 0.16
Earnings per share, diluted $ 0.26 $ 0.21 $ 0.16 $ 0.18 $ 0.15
Weighted average shares
outstanding - basic 4,451,945 4,448,363 4,445,269 4,440,940 4,437,527
- diluted 4,734,699 4,687,227 4,693,041 4,683,093 4,678,247
AT PERIOD END:
Loans $ 362,049 $ 333,603 $ 291,600 $ 249,996 $ 230,104
Earning assets 485,049 511,102 439,697 437,974 398,649
Total assets 505,723 534,261 464,627 450,770 416,434
Deposits 423,399 485,455 417,749 404,054 370,619
Stockholders' equity 38,650 38,385 36,253 36,901 36,172
Book value per share $ 8.67 $ 8.62 $ 8.15 $ 8.30 $ 8.15
Shares outstanding 4,458,422 4,450,564 4,447,252 4,445,224 4,437,869
PERFORMANCE RATIOS:
Return on average assets 0.95% 0.80% 0.70% 0.76% 0.76%
Return on average equity 12.36% 10.37% 8.36% 8.93% 7.89%
Net interest margin 3.83% 3.75% 3.82% 3.58% 3.67%
Efficiency ratio (1) 60.25% 61.69% 63.20% 63.48% 62.07%
OTHER RATIOS:
Allowance for loan losses to total loans 1.04% 1.06% 1.11% 1.12% 1.12%
Equity to assets 7.64% 7.18% 7.80% 8.19% 8.69%
Nonperforming loans to total loans 0.09% 0.09% 0.11% 0.14% 0.17%
Net charge-offs to total loans 0.00% 0.01% 0.00% 0.00% 0.00%
Risk adjusted capital ratios:
Leverage ratio 9.7% 9.9% 10.5% 10.7% 12.3%
Tier 1 13.0% 13.3% 14.7% 16.1% 17.4%
Total 14.0% 14.3% 15.8% 17.1% 18.3%
(1) 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.
17
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 nine months and quarters ended September 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.
Nine Months 2005 vs. Nine Months 2004. For the nine month period ended
September 30, 2005, net interest income increased $4.2 million, or 46%, to $13.1
million from $8.9 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 growth in higher yielding deposit products and borrowed
funds. During the nine months ended September 30, 2005, total average earning
assets increased by $144.6 million, or 46%, from the same period of 2004.
Average loans outstanding grew by $110.9 million, or 56%, during the first nine
months of 2005 compared to the same period in 2004, while at the same time, the
yield on such loans increased by 36 basis points. Average securities increased
$37.8 million, or 38%, during the first nine months of 2005 compared to the same
period in 2004 and the yield on the securities portfolio increased by 23 basis
points. Average Federal funds sold declined by $6.0 million, or 33%, during the
first nine months of 2005 compared to the same period in 2004 and the yield on
these funds increased by 156 basis points.
During the nine months ended September 30, 2005, total average interest
bearing liabilities grew by $117.5 million, or 53% from the same period of 2004.
Interest bearing deposits increased $111.2 million with money market accounts
growing $64.2 million, or 45% and time deposits growing $43.5 million, or 88%.
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,
Federal Home Loan Bank advances and trust preferred capital notes, increased
$6.2 million over the same period of 2004. Interest expense paid on liabilities
for the first nine months of 2005 was $6.5 million compared with $3.2 million
for the same period of 2004.
The yield on earning assets improved 54 basis points from 5.14% for the
nine month period ending September 30, 2004 to 5.68% during the same period in
2005. The overall yield on loans grew 36 basis points, the securities portfolio
increased 23 basis points, and Federal funds sold grew 156 basis points
reflecting the overall rise in interest rates from the first nine months of 2004
to the same period this year. The cost of funds increased 62 basis points from
1.92% for the nine month period ending September 30, 2004 to 2.54% during the
same period in 2005.
The resulting effect of the changes in interest rates between the nine
month periods ended September 30, 2005 and 2004, offset by changes in the volume
and mix of earning assets and interest bearing liabilities resulted in a slight
rise in the net interest margin of 2 basis points from 3.78% in 2004 versus
3.80% 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.
18
TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
---------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ---------- ---------- ------------- ---------- ----------
ASSETS
Loans:
Commercial $ 68,905 $3,421 6.64% $ 51,720 $ 2,342 6.05%
Commercial real estate 217,128 10,576 6.51% 132,019 6,208 6.28%
Consumer 22,434 1,068 6.36% 13,833 578 5.58%
------------ ---------- ------------- ----------
Total loans 308,467 15,065 6.53% 197,572 9,128 6.17%
Loans held for sale 2,533 104 5.49% 619 26 5.61%
Taxable securities 137,158 4,112 4.01% 99,390 2,813 3.78%
Federal funds sold and cash equivalents 11,904 247 2.77% 17,874 162 1.21%
------------ ---------- ------------- ----------
Total earning assets 460,062 19,528 5.68% 315,455 12,129 5.14%
------------ ---------- ------------- ----------
Less: allowance for loan losses (3,316) (2,209)
Cash and due from banks 16,344 17,077
Premises and equipment, net 2,419 1,951
Other assets 4,667 3,211
------------ -------------
TOTAL ASSETS $480,176 $335,485
============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing demand deposits $ 16,005 $ 100 0.84% $ 12,950 $ 62 0.64%
Money market deposit accounts 207,625 3,487 2.25% 143,447 1,909 1.78%
Savings accounts 3,923 40 1.36% 3,441 32 1.24%
Time deposits 93,063 2,104 3.02% 49,532 835 2.25%
------------ ---------- ------------- ----------
Total interest bearing deposits 320,616 5,731 2.39% 209,370 2,838 1.81%
Borrowings:
Trust preferred capital notes 9,279 445 6.41% 9,279 327 4.71%
Other borrowed funds 9,956 277 3.72% 3,715 36 1.29%
------------ ---------- ------------- ----------
Total borrowings 19,235 722 5.02% 12,994 363 3.73%
------------ ---------- ------------- ----------
Total interest bearing liabilities 339,851 6,453 2.54% 222,364 3,201 1.92%
------------ ---------- ------------- ----------
Net interest income and net yield
on interest earning assets $ 13,075 3.80% $ 8,928 3.78%
========== ==========
Noninterest-bearing demand deposits 100,994 76,853
Other liabilities 1,449 1,090
Stockholders' equity 37,882 35,178
------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUTIY $480,176 $335,485
============ =============
19
Third Quarter 2005 vs. Third Quarter 2004. For the quarter ended
September 30, 2005, net interest income increased $1.5 million, or 48%, to $4.7
million from $3.2 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 September 30,
2005, total average earning assets increased by $140.8 million, or 41%, from the
same period of 2004. Average loans outstanding grew by $127.2 million, or 59%,
during the third quarter of 2005 compared to the same quarter in 2004, while at
the same time, the yield on such loans increased by 60 basis points. Average
securities increased $31.2 million, or 32%, during the third quarter of 2005
compared to the same period in 2004 and the yield on the securities portfolio
declined by 11 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 $20.4 million over the same period last year and
the yield on these funds increased by 194 basis points.
During the third quarter of 2005, average interest bearing liabilities
increased $110.6 million, or 45% from the same period of 2004. Interest bearing
deposits increased $97.7 million with money market accounts growing by $26.8
million, or 16%, and time deposits increasing by $66.9 million, or 129%. During
the third quarter of 2005, borrowings, which includes Federal funds purchased,
Federal Home Loan Bank advances and trust preferred capital notes, increased
$12.9 million. Interest expense paid on liabilities during the third quarter of
2005 was $2.5 million compared with $1.2 million for the same period of 2004.
The yield on earning assets increased 79 basis points to 5.88% for the
quarter ending September 30, 2005 from 5.09% during the same period in 2004
reflecting the overall rise in interest rates from the third quarter of 2004 to
the same period this year. The overall yield on loans increased 60 basis points
while the yield on the securities portfolio declined 11 basis points and the
yield on overnight investments increased 194 basis points. The cost of funds
rose 79 basis points to 2.79% for the quarter ending September 30, 2005 from
2.00% during the same period in 2004.
The resulting effect of the changes in interest rates between the
quarters ended September 30, 2005 and 2004, offset by changes in the volume and
mix of earning assets and interest bearing liabilities resulted in a slight
increase in the net interest margin of 16 basis points from 3.67% in 2004 to
3.83% in 2005. Management believes this stability during a period of strong
organic growth is indicative of the Company's interest rate risk management
process.
20
TABLE 2: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
----------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ---------- ---------- ------------- ---------- ----------
ASSETS
Loans:
Commercial $ 72,785 $ 1,255 6.84% $ 56,959 $ 850 5.94%
Commercial real estate 245,001 4,102 6.64% 145,003 2,267 6.22%
Consumer 26,045 438 6.67% 14,694 201 5.44%
------------ ---------- ------------- ----------
Total loans 343,831 5,795 6.69% 216,656 3,318 6.09%
Loans held for sale 3,287 46 5.55% 550 8 5.79%
Taxable securities 128,081 1,271 3.95% 96,850 988 4.06%
Federal funds sold and cash equivalents 11,690 102 3.33% 32,074 112 1.39%
------------ ---------- ------------- ----------
Total earning assets 486,889 7,214 5.88% 346,130 4,426 5.09%
------------ ---------- ------------- ----------
Less: allowance for loan losses (3,580) (2,410)
Cash and due from banks 16,020 17,748
Premises and equipment, net 2,387 2,548
Other assets 4,953 3,253
------------ -------------
TOTAL ASSETS $506,669 $367,269
============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing demand deposits $ 17,799 $ 36 0.80% $ 13,169 $ 22 0.66%
Money market deposit accounts 194,811 1,174 2.39% 167,999 792 1.88%
Savings accounts 3,582 12 1.33% 4,185 13 1.24%
Time deposits 118,910 986 3.29% 52,019 293 2.24%
------------ ---------- ------------- ----------
Total interest bearing deposits 335,102 2,208 2.61% 237,372 1,120 1.88%
Borrowings:
Trust preferred capital notes 9,279 160 6.84% 9,279 117 5.02%
Other borrowed funds 12,876 140 4.31% - - n.a.
------------ ---------- ------------- ----------
Total borrowings 22,155 300 5.37% 9,279 117 5.02%
------------ ---------- ------------- ----------
Total interest bearing liabilities 357,257 2,508 2.79% 246,651 1,237 2.00%
------------ ---------- ------------- ----------
Net interest income and net yield
on interest earning assets $ 4,706 3.83% $3,189 3.67%
========== ==========
Noninterest-bearing demand deposits 108,948 84,064
Other liabilities 1,615 1,002
Stockholders' equity 38,849 35,552
------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUTIY $506,669 $367,269
============ =============
21
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 September 30, 2005, as
compared to the quarter ended September 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 $50,000 decline of net interest income during the third
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 $2.8 million during
the third quarter of 2005 compared to the third 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 $547,000.
Interest expense during these comparable quarters increased $1.3 million with
$673,000 of this rise attributable to growth in interest bearing liabilities
while changes in rates resulted in an increase of interest expense of $598,000.
The increase in net interest income of $4.1 million for the nine months
ended September 30, 2005, as compared to the nine months ended September 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 $287,000 reduction of net interest income, whereas the
growth in earning assets and interest bearing liabilities resulted in an
increase of $4.4 million to net interest income. Interest income increased $7.4
million during the first nine months of 2005 compared to the first nine months
of 2004 as higher yielding loans grew at a faster pace than securities and
overnight investments resulting in a $6.2 million increase in interest income
attributable to growth while changes in rates resulted in growth of interest
income of $1.2 million. Interest expense during the first nine months of 2005
compared to the same period in 2004 grew $3.3 million with $1.8 million of this
rise attributable to growth in interest bearing liabilities while changes in
rates resulted in an increase of interest expense of $1.5 million.
TABLE 3
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $ 2,477 $ 1,953 $ 524 $ 5,937 $ 5,119 $ 818
Loans held for sale 38 40 (2) 78 80 (2)
Securities 283 315 (32) 1,299 1,068 231
Federal funds sold and cash equivalents (10) (67) 57 85 (54) 139
------- ------- ----- ------- ------- ------
Total interest income 2,788 2,241 547 7,399 6,213 1,186
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits 14 8 6 38 15 23
Money market deposit accounts 382 127 255 1,578 853 725
Savings deposits (1) (2) 1 8 4 4
Time deposits 693 378 315 1,269 733 536
Borrowed funds 183 163 20 359 174 185
------- ------- ----- ------- ------- ------
Total interest expense 1,271 674 597 3,252 1,779 1,473
------- ------- ----- ------- ------- ------
Net interest income $ 1,517 $ 1,567 $ (50) $ 4,147 $ 4,434 $ 287
======= ======= ===== ======= ======= ======
22
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 September 30, 2005, the Company
had a $163 thousand impaired loan on nonaccrual status, which is performing, and
an additional $180,000 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 September 30, 2005 declined $58,000, or 14%, from $401,000 at September 30,
2004 to $343,000 at September 30, 2005, more importantly, the percentage of
total loans represented by such nonperforming loans has declined significantly
from 0.17% at September 30, 2004 to 0.14% at December 31, 2004 to 0.09% at
September 30, 2005.
The Company's methodology 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.
SEPTEMBER 30, 2005 DECEMBER 31, 2004 SEPTEMBER 30, 2004
--------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ -----
Construction loans $ 304 11.6% $ 299 14.1% $ 78 13.1%
Commercial loans 830 11.0% 553 13.1% 1,237 14.1%
Commercial real estate loans 2,474 71.9% 1,868 67.0% 1,205 67.1%
Real estate 1-4 family residential 20 0.4% 20 0.6% 14 0.7%
Home equity loans 21 2.3% 17 2.2% 18 2.3%
Consumer loans 117 2.8% 33 3.0% 25 2.7%
------------ ------------ ------------ ------------- ------------ ------------
Balance end of the period $ 3,766 100% $ 2,790 100% $ 2,577 100%
============ ============ ============ ============= ============ ============
LOANS
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At September 30,
2005, total loans were $362 million, a 57.3% increase from the $230.1 million in
loans outstanding at September 30, 2004. Total loans at September 30, 2005
represented a 44.8% 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 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.
23
Virtually all of the Company's commercial real estate mortgage and
development loans, which account for approximately 72% of our total loans at
September 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, 23% of the Company's loans are fixed
rate loans and 95% 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 5.5% of the loan portfolio
at September 30, 2005, as compared to 5.7% at September 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 September 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.
SEPTEMBER 30, 2005
----------------------------------------------------
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
Construction loans $ 36,028 $ 1,955 $ 4,237 $ 42,220
Commercial loans 30,241 9,380 171 39,792
Commercial real estate loans 130,165 118,641 11,711 260,517
Real estate 1-4 family residential 518 553 287 1,358
Home equity loans 8,190 - - 8,190
Consumer loans 7,842 1,822 - 9,664
Deposit overdrafts 308 - - 308
--------- --------- -------- ---------
Total loans $ 213,292 $ 132,351 $ 16,406 $ 362,049
========= ========= ======== =========
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
Fixed rate $ 31,326 $ 44,031 $ 9,255 $ 84,612
Variable/Adjustable rate 181,966 88,320 7,151 277,437
--------- --------- -------- ---------
Total loans $ 213,292 $ 132,351 $ 16,406 $ 362,049
========= ========= ======== =========
24
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 SEPTEMBER 30, 2005 AT SEPTEMBER 30, 2004
----------------------------------------------------------
PERCENT OF PERCENT OF
(Dollars in thousands) BALANCE PORTFOLIO BALANCE PORTFOLIO
------------- ------------ ------------- ------------
Available for sale (fair value):
U.S. Agency $ 95,737 80.2% $ 97,571 82.7%
Mortgage-backed securities 18,210 15.2% 15,472 13.1%
Adjustable rate mortgage-backed securities 1,094 0.9% 1,785 1.5%
Corporate bonds 1,659 1.4% 2,177 1.8%
Restricted stock 2,716 2.3% 1,048 0.9%
------------- ------------ ------------- ------------
Total $ 119,416 100.0% $ 118,053 100.0%
============= ============ ============= ============
TABLE 7
The following table provides information regarding the maturity
composition of our investment portfolio, at fair value, at September 30, 2005.
MATURITY OF SECURITIES
Years to Maturity
Within Over 1 Year Over 5 Years Over
(Dollars in thousands) 1 Year through 5 Years through 10 Years 10 Years Total
---------------- --------------- ---------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
AVAILABLE FOR SALE (FAIR VALUE):
U. S. Agency $67,452 3.78% $28,285 3.74% $ - - $ - - $ 95,737 3.77%
Mortgage-backed securities 44 5.92% 427 4.15% 2,070 4.30% 15,669 4.80% 18,210 4.73%
Adjustable rate mortgage-
backed securities - - - - - - 1,094 3.89% 1,094 3.89%
Corporate bonds - - 1,659 5.21% - - - - 1,659 5.21%
Restricted stock - - - - - 2,716 3.33% 2,716 3.33%
------- ------- ------- ------- --------
Total $67,496 3.78% $30,371 3.83% $ 2,070 4.30% $19,479 4.54% $119,416 3.93%
======= ======= ======= ======= ========
25
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 September 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 September 30, 2005, the following 12-month impact on net interest
income is estimated to range from a positive impact of 4.6% in a rising rate
scenario, to a negative impact of (2.9)% 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 1.7% if rates were to
immediately increase 200 basis points, to a negative impact of (3.7)% 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.
26
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 September 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.
Rising Rate Scenario 4.6 %
Ramp Up 200bp- 12 months 2.6 %
Ramp Up 100bp- 12 months 1.4 %
Most Likely Rates 1.2 %
Static Rates -0- %
Ramp Down 100bp- 12 months (1.3)%
Ramp Down 200bp- 12 months (2.9)%
Low Rate Environment (1.1)%
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 nine month periods ended September 30, 2005 and 2004.
TABLE 8
The categories of noninterest income that exceed 1% of operating
revenue are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
(Dollars in thousands) 2005 2004 2005 2004
--------------- -------------- --------------- --------------
Service charges on deposit accounts $ 90 $ 72 $ 247 $ 254
Cash management fees 27 27 79 75
Other fee income 117 55 269 190
Gain on sale of loans 280 77 636 248
Gain on sale of securities (5) - 13 54
--------------- -------------- --------------- --------------
Total noninterest income $ 509 $ 231 $ 1,244 $ 821
=============== ============== =============== ==============
The increase in noninterest income during the three and nine month
periods ended September 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.
27
TABLE 9
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
(Dollars in thousands) 2005 2004 2005 2004
-------------- -------------- -------------- --------------
Salaries and benefits $ 1,963 $ 1,083 $ 5,339 $ 3,241
Occupancy cost, net 305 265 901 593
Equipment expense 166 138 491 304
Professional fees 86 38 254 101
Data processing costs 126 192 360 523
Courier and express services 7 32 24 108
Advertising and public relations 57 66 211 171
State franchise tax 103 66 289 197
Director fees 62 41 178 127
Compliance expense 53 26 145 26
Other 214 128 632 322
-------------- -------------- -------------- --------------
Other noninterest expense $ 3,142 $ 2,075 $ 8,824 $ 5,713
============== ============== ============== ==============
Noninterest expense increased $3.1 million from $5.7 million to $8.8
million for the first nine months of 2005, as compared to the same period in
2004. Approximately 67% of this increase is in salary and benefit costs. During
2005 the Company added personnel and administrative staff to support the growth
in customers and transactions being processed. Occupancy costs and equipment
costs increased 51% and 61% respectively over the first nine months of 2005 as
two new branches were opened in the third quarter of 2004 and the mortgage
company occupied a new facility starting in the third quarter of 2005. 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 $1.1 million from $2.0 million to $3.1 million for the third 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.
28
TABLE 10
The following table reflects deposits by category for the periods
indicated.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
2005 2004
----------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE RATE BALANCE RATE
--------- ---------- ---------- --------
Deposits:
Noninterest-bearing demand $ 108,948 - % $ 84,064 - %
Interest-bearing demand 17,799 0.80 13,169 0.66
Money market 194,811 2.39 167,999 1.88
Savings 3,582 1.33 4,185 1.24
Certificates of deposit of $100,000 or more 103,304 3.34 38,665 2.22
Other time 15,606 2.95 13,354 2.30
--------- -------- --------- --------
Total interest bearing deposits 335,102 2.61 % 237,372 1.88 %
--------- ---------
Total deposits $ 444,050 $ 321,436
========= =========
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
September 30, 2005.
3 MONTHS 4 TO 6 7 TO 9 10 TO 12 OVER 12
(Dollars in thousands) OR LESS MONTHS MONTHS MONTH MONTHS TOTAL
---------- -------- -------- ---------- --------- -------
Certificates of deposit less than
$100,000 $ 4,109 $ 2,389 $ 3,107 $ 2,973 $ 3,109 $ 15,687
Certificates of deposit of
$100,000 or more 23,793 28,960 18,446 11,107 22,488 104,794
----------- ------------ ------------ ----------- ----------- -------------
Total certificates of deposit $27,902 $ 31,349 $ 21,553 $14,080 $25,597 $ 120,481
=========== ============ ============ =========== =========== =============
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 September 30, 2005, stockholders' equity
increased $2.5 million to $38.7 million from the $36.2 million in equity at
September 30, 2004. The rise in equity was a result of the $3.8 million increase
in retained earnings over the past twelve months offset by the $1.6 million
decrease in other comprehensive income resulting from an increase in unrealized
losses on securities. In addition, $285,000 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 September 30, 2005, compared to minimum regulatory capital
guidelines is shown in the table that follows.
29
TABLE 12
MINIMUM MINIMUM TO BE
ACTUAL GUIDELINES "WELL CAPITALIZED"
----------------- ------------------ -----------------------
Total Risk-Based Capital
Company 14.0% 8.0% N/A
Bank 12.7% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 13.0% 4.0% N/A
Bank 11.7% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 9.7% 4.0% N/A
Bank 8.8% 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, except that in October 2005, the Company issued an additional $8 million
aggregate liquidation amount of trust preferred securities..
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 Company's internal control over financial reporting (as defined
in Rule 13a-15 under the Securities Act of 1934) during the quarter ended
September 30, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
30
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 None
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,
Inc. and U.S. Bank, National Association, as trustee (3)
4(e) Amended and Restated Declaration of Trust, dated as of July 31, 2003
among James Monroe Bancorp, Inc., U.S. Bank, National Association, as
Institutional Trustee, and John R. Maxwell, David W. Pijor and Richard
I. Linhart as Administrators (3)
4(f) Guarantee Agreement dated as of July 31, 2003, between James Monroe
Bancorp, Inc. and U.S. Bank, National Association, as trustee (3)
4(g) Indenture, dated as of October 3, 2005 between James Monroe Bancorp,
Inc. and U.S. Bank National Association, as trustee (3)
4(h) Amended and Restated Declaration of Trust, dated as of October 3, 2005
among James Monroe Bancorp, Inc., U.S. Bank National Association, as
trustee, and John R. Maxwell and John J. Brough as Administrators (3)
4(i) Guarantee Agreement dated as of October 3, 2005, 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
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
- --------------------------
(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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 2005 BY: /s/John R. Maxwell
---------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: November 11, 2005 BY: /s/ Richard I. Linhart
-----------------------------------
Richard I. Linhart, Executive Vice President &
Chief Operating Officer
Date: November 11, 2005 BY: /s/ John J. Brough
-------------------------------
John J. Brough, Senior Vice President &
Chief Financial Officer
33