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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 March 31, 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|.
The number of shares of the registrant's common stock, $1 par value, as of May
13, 2005 is 4,448,752.
1
JAMES MONROE BANCORP, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2005,
December 31, 2004, and March 31, 2004 3
Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2005 and 2004 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29
2
PART I. Financial Information
Item 1. Financial Statements
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2005, December 31, 2004, and March 31, 2004
(Dollars in thousands, except share data)
(Unaudited) (Audited) (Unaudited)
MARCH 31, DECEMBER 31, MARCH 31,
2005 2004 2004
--------- --------- ---------
ASSETS
Cash and due from banks $ 20,569 $ 9,286 $ 15,845
Interest bearing deposits in banks 554 2,442 -
Federal funds sold 2,040 35,754 16,365
Securities available for sale, at fair value 142,279 146,795 110,158
Loans held for sale 3,224 2,987 590
Loans, net of allowance for loan losses of
$3,223 at March 31, 2005, $2,790 at December 31,
2004, $2,111 at March 31, 2004 288,377 247,206 187,203
Bank premises and equipment, net 2,421 2,438 1,613
Accrued interest receivable 2,454 1,977 1,536
Other assets 2,709 1,885 1,073
--------- --------- ---------
TOTAL ASSETS $ 464,627 $ 450,770 $ 334,383
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing deposits $ 108,502 $ 91,857 $ 91,350
Interest bearing deposits 309,247 312,197 192,031
--------- --------- ---------
Total deposits 417,749 404,054 283,381
Federal funds purchased - - 5,000
Trust preferred capital notes 9,279 9,279 9,279
Accrued interest payable and other liabilities 1,346 536 1,105
--------- --------- ---------
Total liabilities 428,374 413,869 298,765
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized
10,000,000 shares; issued and outstanding,
4,447,252 at March 31, 2005, 4,445,224 at December
31, 2004, 4,435,331 at March 31, 2004 4,447 4,445 4,435
Capital surplus 24,360 24,325 24,163
Retained earnings 9,226 8,458 6,245
Accumulated other comprehensive income (loss), net (1,780) (327) 775
--------- --------- ---------
Total stockholders' equity 36,253 36,901 35,618
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 464,627 $ 450,770 $ 334,383
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
JAMES MONROE BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2005 2004
-------------- -------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $4,228 $2,783
Loans held for sale 25 8
Securities, taxable 1,470 1,023
Federal funds sold 56 9
Other interest income 1 -
------ ------
Total interest and dividend income 5,780 3,823
------ ------
INTEREST EXPENSE:
Deposits 1,605 831
Federal funds purchased 15 26
Borrowed funds 136 105
------ ------
Total interest expense 1,756 962
------ ------
Net interest income 4,024 2,861
PROVISION FOR LOAN LOSSES 434 299
------ ------
Net interest income after provision for loan
losses 3,590 2,562
------ ------
NONINTEREST INCOME:
Service charges and fees 75 84
Gain on sale of securities 8 40
Gain on sale of loans 162 63
Other 87 94
------ ------
Total noninterest income 332 281
------ ------
NONINTEREST EXPENSES:
Salaries and wages 1,347 844
Employee benefits 264 179
Occupancy expenses 307 165
Equipment expenses 167 74
Other operating expenses 668 435
------ ------
Total noninterest expenses 2,753 1,697
------ ------
Income before income taxes 1,169 1,146
PROVISION FOR INCOME TAXES 401 392
------ ------
Net income $ 768 $ 754
====== ======
EARNINGS PER SHARE, basic $ 0.17 $ 0.17
EARNINGS PER SHARE, diluted $ 0.16 $ 0.16
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 Three Months Ended March 31, 2005, and 2004
(Dollars in thousands)
(Unaudited)
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON CAPITAL RETAINED INCOME COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS (LOSS) INCOME (LOSS) EQUITY
-------- -------- -------- ------------- ------------- -------------
BALANCE JANUARY 1, 2004 $ 2,944 $ 25,425 $ 5,491 $ 31 $ 33,891
Comprehensive income:
Net income 754 $ 754 754
Net change in unrealized gain
on available for sale
securities, net of deferred taxes
of $383 744 744 744
--------
Total comprehensive income $ 1,498
========
Issuance of common stock 2 59 61
Effect of stock split 1,478 (1,478) -
Exercise of stock options 11 157 168
-------- -------- -------- -------- --------
BALANCE, MARCH 31, 2004 $ 4,435 $ 24,163 $ 6,245 $ 775 $ 35,618
======== ======== ======== ======== ========
BALANCE JANUARY 1, 2005 $ 4,445 $ 24,325 $ 8,458 $ (327) $ 36,901
Comprehensive income:
Net income 768 $ 768 768
Net change in unrealized (loss)
on available for sale
securities, net of deferred taxes
of $749 (1,453) (1,453) (1,453)
--------
Total comprehensive loss $ (685)
========
Issuance of common stock 2 35 37
-------- -------- -------- -------- --------
BALANCE, MARCH 31, 2005 $ 4,447 $ 24,360 $ 9,226 $ (1,780) $ 36,253
======== ======== ======== ======== ========
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 Three Months Ended March 31, 2005, and 2004
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 768 $ 754
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 146 65
Provision for loan losses 434 299
Amortization of bond premium 79 33
Accretion of bond discount (82) (2)
Realized (gain) on sales of securities available for sale (8) (40)
Realized (gain) on sales of loans held-for-sale (162) (63)
Origination of loans held-for-sale (11,201) (3,288)
Proceeds from sales of loans held-for-sale 11,126 3,322
Deferred income tax (benefit) (115) (118)
(Increase) in accrued interest receivable (477) (200)
Decrease in other assets 40 362
Increase in accrued interest payable and other liabilities 810 347
-------- --------
Net cash provided by operating activities 1,358 1,471
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (2,158) (6,324)
Proceeds from calls and maturities of securities available for sale 3,665 5,825
Proceeds from sales of securities available for sale 818 13,422
Purchases of premises and equipment (129) (290)
Decrease in interest bearing cash balances 1,888 -
(Increase) decrease in Federal funds sold 33,714 (16,365)
Net (increase) in loans (41,605) (20,410)
-------- --------
Net cash (used in) investing activities (3,807) (24,142)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts 5,376 29,937
Net increase (decrease) in time deposits 8,319 (1,672)
Net (decrease) in Federal funds purchased - (1,886)
Proceeds from issuance of common stock 37 229
-------- --------
Net cash provided by financing activities 13,732 26,608
-------- --------
Increase in cash and due from banks $ 11,283 $ 3,937
CASH AND DUE FROM BANKS
Beginning $ 9,286 $ 11,908
-------- --------
Ending $ 20,569 $ 15,845
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 1,664 $ 939
======== ========
Income taxes paid $ 385 $ 279
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain (loss) on securities available for sale $ (2,202) $ 1,127
======== ========
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 March 31, 2005 the Company operated the main office in
Arlington, Virginia, one branch in Annandale, Virginia, one branch and a
drive-up facility in Leesburg, Virginia, one branch in Fairfax City, Virginia,
one branch in Chantilly, Virginia, and one branch in Manassas, Virginia.
Basis of Presentation. In the opinion of management, the accompanying unaudited
consolidated financial statements of James Monroe Bancorp, Inc. and Subsidiaries
(the Company) have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all the information
and footnotes required for complete financial statements. In the opinion of
management, all adjustments and reclassifications necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 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 March 31, 2005, the Company had three stock based
compensation plans. The Company accounts for these plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock Based Compensation, to stock
based employee compensation. The per share calculations have been restated to
reflect the 3-for-2 stock split discussed in Note 7 and all preceding stock
splits.
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
------ -------
(Dollars in thousands, except per share data)
Net income, as reported $ 768 $ 754
Additional expense had the company adopted
SFAS No. 123 (112) (336)
----- -----
Pro forma net income $ 656 $ 418
===== =====
Earnings per share:
Basic- as reported $0.17 $0.17
===== =====
Basic- pro forma $0.15 $0.09
===== =====
Diluted- as reported $0.16 $0.16
===== =====
Diluted- pro forma $0.14 $0.09
===== =====
7
NOTE 2. EARNINGS PER SHARE
The following table discloses the calculation of basic and diluted earnings per
share for the three months ended March 31, 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
MARCH 31,
-------------------------
2005 2004
---------- ----------
(Dollars in thousands, except per share data)
Net Income $ 768 $ 754
========== ==========
Weighted average shares outstanding--basic 4,445,269 4,429,442
Common share equivalents for stock options 247,772 233,298
---------- ----------
Weighted average shares outstanding--diluted 4,693,041 4,662,740
========== ==========
Earnings per share-basic $ 0.17 $ 0.17
========== ==========
Earnings per share-diluted $ 0.16 $ 0.16
========== ==========
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 March 31, 2005, December 31, 2004, and March
31, 2004, are summarized in the tables that follow. The Company classifies all
securities as available for sale.
MARCH 31, 2005
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
------------- ------------ ------------- ---------
U.S. Government and federal agency $119,618 $ - $ (2,133) $117,485
Mortgage-backed securities 21,501 54 (433) 21,122
Corporate notes 2,162 5 (191) 1,976
Restricted stock 1,696 - - 1,696
-------- -------- -------- --------
Total $144,977 $ 59 $ (2,757) $142,279
======== ======== ======== ========
DECEMBER 31, 2004
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
------------- ------------ ------------- ---------
U.S. Government and federal agency $121,594 $ 229 $ (686) $121,137
Mortgage-backed securities 22,208 172 (208) 22,172
Corporate notes 2,151 26 (29) 2,148
Restricted stock 1,338 - - 1,338
-------- -------- -------- --------
Total $147,291 $ 427 $ (923) $146,795
======== ======== ======== ========
MARCH 31, 2004
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
------------- ------------ ------------- ---------
U.S. Government and federal agency $ 80,016 $ 828 $ (105) $ 80,739
Mortgage-backed securities 21,544 181 (60) 21,665
Corporate notes 6,280 331 - 6,611
Restricted stock 1,143 - - 1,143
-------- -------- -------- --------
Total $108,983 $ 1,340 $ (165) $110,158
======== ======== ======== ========
9
Information pertaining to securities with gross unrealized losses at March 31,
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:
MARCH 31, 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 $105,483 $ (1,590) $ 12,002 $ (543)
Mortgage backed 9,912 (241) 8,698 (192)
Corporate notes 1,671 (191) - -
-------- -------- -------- --------
Total $117,066 $ (2,022) $ 20,700 $ (735)
======== ======== ======== ========
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 March 31, 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 March 31, 2005, 17 are U.S.
Government agency issued bonds (Government National Mortgage Association and the
Federal Home Loan Bank) rated AAA by Standard and Poor's, 25 are government
sponsored enterprise issued bonds (Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation) rated AAA by Standard and Poor's, and
one is a corporate bond rated BBB by Standard and Poor's. As management has the
ability 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 March 31, 2005, December 31, 2004, and March
31, 2004 are summarized in the following table.
MARCH 31, DECEMBER 31, MARCH 31,
(Dollars in thousands) 2005 2004 2004
--------- ------------ ---------
Construction loans $ 36,211 $ 35,166 $ 20,751
Commercial loans 42,602 32,782 31,374
Commercial real estate loans 197,331 167,696 123,895
Real estate-1-4 family residential 1,391 1,559 1,445
Home equity loans 5,866 5,400 3,677
Consumer loans 7,986 7,290 7,986
Deposit overdrafts 213 103 186
--------- --------- ---------
Total loans 291,600 249,996 189,314
Less allowance for loan losses (3,223) (2,790) (2,111)
--------- --------- ---------
Net loans $ 288,377 $ 247,206 $ 187,203
========= ========= =========
Changes in the allowance for loan losses are as follows:
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31,
(Dollars in thousands) 2005 2004 2004
-------- ------- -------
Beginning balance $ 2,790 $ 1,955 $ 1,955
Loan charge-offs:
Commercial - (135) (135)
Consumer (1) (21) (9)
------- ------- -------
Total charge-offs (1) (156) (144)
Recoveries of loans previously charged-off:
Commercial - - -
Consumer - 1 1
------- ------- -------
Total recoveries - 1 1
------- ------- -------
Net charge-offs (1) (155) (143)
------- ------- -------
Provision for loan losses 434 990 299
------- ------- -------
Ending balance $ 3,223 $ 2,790 $ 2,111
======= ======= =======
11
The following table presents the amounts of nonperforming assets at the
dates indicated.
MARCH 31, DECEMBER 31, MARCH 31,
(Dollars in thousands) 2005 2004 2004
------ ------- ------
Nonaccrual loans
Commercial $293 $349 $343
Consumer - - -
---- ---- ----
Total nonaccrual loans 293 349 343
Loans past-due 90-days or more
Commercial 5 - 7
Consumer 17 - -
---- ---- ----
Total loans past-due 90-days or more 22 - 7
Restructured loans - - -
---- ---- ----
Total nonperforming assets $315 $349 $350
==== ==== ====
NOTE 5. DEPOSITS
Interest bearing deposits consist of the following:
MARCH 31, DECEMBER 31, MARCH 31,
(Dollars in thousands) 2005 2004 2004
-------- -------- --------
NOW accounts $ 15,143 $ 14,389 $ 11,147
Savings accounts 5,162 4,361 2,448
Money market accounts 207,491 220,315 131,595
Certificates of deposit under $100,000 12,533 12,210 13,194
Certificates of deposit $100,000 and over 67,323 59,310 32,226
Individual retirement accounts 1,595 1,612 1,421
-------- -------- --------
Total interest bearing deposits $309,247 $312,197 $192,031
======== ======== ========
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 December 26, 2004 was 6.15%. The rate for the quarterly period
beginning March 26, 2005 is 6.69%. 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 December 31,
2004 was 5.66%. The rate for the quarterly period beginning March 31, 2005 is
6.19%. 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 March 31, 2005, all of the trust preferred securities qualified as
Tier 1 capital.
The Company and the Trusts believe that, taken together, the Company's
obligations under the junior subordinated debentures, the Indentures, the Trust
Declarations and the Guarantees entered into in connection with the issuance of
the trust preferred securities constitute a full and unconditional guarantee by
the Company of the Trusts' respective obligations with respect to the trust
preferred securities.
Subject to certain exceptions and limitations, the Company may elect from time
to time to defer interest payments on the junior subordinated debt securities,
which would result in a deferral of distribution payments on the related trust
preferred securities.
NOTE 7. COMMON STOCK SPLIT
On June 1, 2004 the Company issued 1,478,317 additional shares necessary to
effect a 3-for-2 common stock split in the form of a 50% stock dividend to
shareholders of record on May 14, 2004. The earnings per common share for all
periods prior to June 2004 have been restated to reflect the stock split.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued Statement
No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments. FAS 123R
eliminates the ability to account for share-based compensation transactions
using the intrinsic method and requires that such transactions be accounted for
using a fair-value-based method and recognized as expense in the consolidated
statement of income. The effective date of FAS 123R (as amended by the SEC) is
for annual periods beginning after June 15, 2005. The provisions of FAS 123R do
not have an impact on the Corporation's results of operations at the present
time.
In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB
107 expresses the views of the SEC staff regarding the interaction of FAS 123R
and certain SEC rules and regulations and provides the SEC staff's view
regarding the valuation of share-based payment arrangements for public
companies. SAB 107 does not impact the Corporation's results of operations at
the present time.
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 three months ended March 31, 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 first quarter of 2005. Critical accounting policies are those applications
of accounting principles or practices that require considerable judgment,
estimation, or sensitivity analysis by management. In the financial service
industry, examples, albeit not an all inclusive list, of disclosures that may
fall within this definition are the determination of the adequacy of the
allowance for loan losses, valuation of mortgage servicing rights, valuation of
derivatives or securities without a readily determinable market value, and the
valuation of the fair value of intangibles and goodwill. Except for the
determination of the adequacy of the allowance for loan losses, the Company does
not believe there are other practices or policies that require significant
sensitivity analysis, judgments, or estimations.
Allowance for Loan Losses. The Company has developed a methodology to
determine, on a quarterly basis, an allowance to absorb probable loan losses
inherent in the portfolio based on evaluations of the collectibility of loans,
historical loss experience, peer bank loss experience, delinquency trends,
economic conditions, portfolio composition, and specific loss estimates for
loans considered substandard or doubtful. All commercial and commercial real
estate loans that exhibit probable or observed credit weaknesses are subject to
individual review. If necessary, reserves would be allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral and other sources of cash flow. Any reserves for
impaired loans are measured based on the present rate or fair value of the
underlying collateral. The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. A composite
allowance factor that considers the Company's and other peer bank loss
experience ratios, delinquency trends, economic conditions, and portfolio
composition are applied to the total of commercial and commercial real estate
loans not specifically evaluated. A percentage of this composite allowance
factor is also applied to the aggregate of unused commercial lines of credit
which the Company has an obligation to honor but where the borrower has not
elected to draw on their lines of credit.
Homogeneous loans, such as consumer installment, residential mortgage
loans, home equity loans, and smaller consumer loans are not individually risk
graded. Reserves are established for each homogeneous pool of loans based on the
expected net charge offs from a current trend in delinquencies, losses or
historical experience and general economic conditions. The Company has no
material delinquencies in these types of loans, and has not, since inception,
had a trend or an indication of a trend that would guide the Company in expected
material losses in these types of homogeneous pools of loans.
The Company's allowance for loan losses is determined based upon a
methodology developed by management as described above and is approved by the
board of directors each quarter.
14
COMPANY HIGHLIGHTS SINCE DECEMBER 31, 2004 ARE:
o Assets grew $13.9 million (3%).
o Loans grew $41.6 million (17%).
o Deposits grew $13.7 million (3%).
o Net interest margin was 3.82% for the first three months of 2005
compared to 3.72% for the full year 2004 and 3.91% during the first
three months of 2004.
o Asset quality remained strong as nonperforming assets decreased
$34,000 to $315,000. The allowance for loan losses totaled 1.11% of
total loans outstanding at March 31, 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 63% for the
first 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
March 31, 2005 vs. December 31, 2004 and March 31, 2004. Total assets
increased to $464.6 million at March 31, 2005, an increase of $13.9 million from
December 31, 2004, and an increase of $130.2 million from March 31, 2004. The
increase in assets since March 31, 2004 resulted from the Company's emphasis on
deposit generation. Since March 31, 2004, deposits increased $134.4 million,
with noninterest bearing deposits increasing $17.2 million, and interest bearing
deposits increasing $117.2 million. With the growth in deposits, the Company was
able to fund $102.3 million net increase in loans. Securities increased $32.1
million and overnight investments decreased $14.3 million. Net loans increased
$41.6 million from December 31, 2004 funded in part by deposit growth of $13.7
million and a decrease in overnight investments of $33.7 million.
RESULTS OF OPERATIONS
First Quarter 2005 vs. First Quarter 2004. For the three months ended
March 31, 2005, the Company had net income of $768,000, or $.16 per diluted
share, compared to $754,000 or $.16 per diluted share, for the comparable period
of 2004. Annualized return on average assets was .70% for the three months ended
March 31, 2005, compared to .98% for the same three month period in 2004. Return
on average equity was 8.36% for the three months ended March 31, 2005, compared
with 8.70% for the same three month period in 2004.
During the first quarter of 2005, the Company continued to focus on
managing its net interest margin, especially in light of the low, but rising,
interest rate environment. Beginning in 2001 through June 2003, the Federal
Reserve reduced the federal funds target rate an aggregate of 550 basis points.
These dramatic reductions over a relatively short period continued to impact the
loan and investment portfolios in 2003 and 2004, as loans repriced on a delayed
basis or renewed at lower interest rates, and as investment securities matured
or were called, and were reinvested at lower rates. This was partially offset by
continued repricing upon renewal of certificates of deposit. While the Federal
Reserve began to reverse the rate reductions, through a series of seven
increases aggregating 175 basis points, beginning on June 30, 2004 through March
22, 2005, the rate reductions and continuing low rate environment have caused a
reduction in the net interest margin throughout the period, from 5.09% in 2000
to 4.56% in 2001 to 3.90% in 2002 to 3.73% in 2003 to 3.72% in 2004. Despite
these reductions, the Company's practice of managing its interest rate risk
process has mitigated the negative effect of such a severely declining and low
rate environment. As the rate increases have begun to impact the Company, the
net interest margin improved in the first quarter of 2005 compared to the fourth
quarter of 2004, increasing to 3.82%. The Company expects that continued
increases in the federal funds target rate will further 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.
15
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 63% for the first 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
---------- ----------------------------------------------------
(Dollars in thousands except share data) First Fourth Third Second First
---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net interest income $ 4,024 $ 3,701 $ 3,189 $ 2,878 $ 2,861
Provision for loan losses 434 224 273 194 299
Other income 332 354 232 309 281
Noninterest expense 2,753 2,574 2,075 1,941 1,697
Income before taxes 1,169 1,257 1,072 1,052 1,146
Net income 768 825 705 686 754
PER SHARE DATA:
Earnings per share, basic (1) $ 0.17 $ 0.19 $ 0.16 $ 0.15 $ 0.17
Earnings per share, diluted (1) $ 0.16 $ 0.18 $ 0.15 $ 0.15 $ 0.16
Weighted average shares (1)
outstanding - basic 4,445,269 4,440,940 4,437,527 4,435,638 4,429,442
- diluted 4,693,041 4,683,093 4,678,247 4,676,515 4,662,740
AT PERIOD END
Loans $ 291,600 $ 249,996 $ 230,104 $ 204,625 $ 189,314
Earning assets 439,697 437,974 398,649 331,879 316,427
Total assets 464,627 450,770 416,434 358,469 334,104
Deposits 417,749 404,054 370,619 314,221 283,381
Stockholders' equity 36,253 36,901 36,172 34,545 35,581
Book value per share (1) $ 8.15 $ 8.30 $ 8.15 $ 7.79 $ 8.02
Shares outstanding (1) 4,447,252 4,445,224 4,437,869 4,437,369 4,435,331
PERFORMANCE RATIOS:
Return on average assets 0.70% 0.76% 0.76% 0.84% 0.98%
Return on average equity 8.36% 8.93% 7.89% 7.85% 8.70%
Net interest margin 3.82% 3.58% 3.67% 3.81% 3.91%
Efficiency ratio (2) 63.20% 63.48% 62.07% 60.90% 54.01%
OTHER RATIOS:
Allowance for loan losses to total
loans 1.11% 1.12% 1.12% 1.13% 1.12%
Equity to assets 7.80% 8.19% 8.69% 9.64% 10.66%
Nonperforming loans to total loans 0.11% 0.14% 0.17% 0.18% 0.18%
Net charge-offs to total loans 0.00% 0.00% 0.00% 0.00% 0.08%
Risk adjusted capital ratios:
Leverage ratio 10.5% 10.7% 12.3% 13.6% 14.2%
Tier 1 14.7% 16.2% 17.4% 19.4% 20.4%
Total 15.8% 17.1% 18.3% 20.4% 21.4%
(1) Information has been adjusted to reflect the 3-for-2 stock split paid on
June 1, 2004.
(2) Computed by dividing noninterest expense by the sum of net interest income
on a tax equivalent basis and noninterest income, including securities gains or
losses and gains or losses on the sale of loans. This is a non-GAAP financial
measure, which we believe provides investors with important information
regarding our operational efficiency. Comparison of our efficiency ratio with
those of other companies may not be possible, because other companies may
calculate the efficiency ratio differently.
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.
Table 1 provides 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 quarters ended March 31, 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 Table 1. Nonaccrual loans have been included in
the average balances of loans receivable.
First Quarter 2005 vs. First Quarter 2004. For the quarter ended March
31, 2005, net interest income increased $1.2 million, or 41%, to $4.0 million
from $2.9 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
increases in rates on interest bearing liabilities which exceeded the increase
in rates on interest earning assets. During the quarter ended March 31, 2005,
total average earning assets increased by $132.2 million, or 45%, from the same
period of 2004. Average loans outstanding grew by $91.7 million, or 52%, during
the first quarter of 2005 compared to the same quarter in 2004, and at the same
time, the yield on such loans increased by 6 basis points. Average securities
increased $30.9 million, or 27%, during the first quarter of 2005 compared to
the same period in 2004 and the yield on the securities portfolio increased by
50 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
increased by $8.2 million over the same period last year and the yield on these
funds increased by 61 basis points.
During the first quarter of 2005, average interest bearing liabilities
increased $112.0 million, or 55% from the same period of 2004. Interest bearing
deposits increased $117.2 million and borrowings, which includes Federal funds
purchased and trust preferred capital notes, decreased $5.2 million. Interest
expense paid on these liabilities during the first quarter of 2005 was $1.8
million compared with $962,000 for the same period of 2004.
The yield on earning assets increased 27 basis points to 5.49% for the
quarter ending March 31, 2005 from 5.22% during the same period in 2004
reflecting the overall rise in interest rates from the first quarter of 2004 to
the same period this year. The overall yield on loans increased slightly by 6
basis points while the yield on the securities portfolio increased 50 basis
points and the yield on overnight investments increased 61 basis points. The
cost of funds rose 36 basis points to 2.25% for the quarter ending March 31,
2005 from 1.89% during the same period in 2004.
The resulting effect of the changes in interest rates between the
quarters ended March 31, 2005 and 2004, offset by changes in the volume and mix
of earning assets and interest bearing liabilities resulted in a relatively
stable net interest margin of 3.82% in 2005 versus 3.91% in 2004. Management
believes this stability is indicative of the Company's interest rate risk
management process.
18
TABLE 1: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
---------------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ---------- --------- --------- -------
ASSETS
Loans:
Commercial $ 71,318 $ 1,117 6.35% $ 47,033 $ 659 5.64%
Commercial real estate 179,262 2,838 6.42% 117,290 1,938 6.65%
Consumer 18,477 273 5.99% 13,027 186 5.74%
--------- --------- --------- ---------
Total loans 269,057 4,228 6.37% 177,350 2,783 6.31%
Mortgage loans held for sale 1,914 25 5.30% 576 8 5.59%
Taxable securities 145,331 1,471 4.10% 114,394 1,023 3.60%
Federal funds sold and cash equivalents 10,536 56 2.16% 2,334 9 1.55%
--------- --------- --------- --------- ------
Total earning assets 426,838 5,780 5.49% 294,654 3,823 5.22%
--------- --------- --------- --------- ------
Less: allowance for loan losses (2,966) (2,014)
Cash and due from banks 15,255 12,916
Premises and equipment, net 2,459 1,484
Other assets 4,293 2,362
--------- ---------
TOTAL ASSETS $ 445,879 $ 309,402
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing demand deposits $ 13,868 $ 32 0.94% $ 11,708 $ 19 0.65%
Money market deposit accounts 213,966 1,085 2.06% 126,366 535 1.70%
Savings accounts 4,506 15 1.35% 2,759 8 1.17%
Time deposits 73,232 473 2.62% 47,538 269 2.28%
--------- --------- --------- ---------
Total interest bearing deposits 305,572 1,605 2.13% 188,371 831 1.77%
Borrowings:
Trust preferred capital notes 9,279 136 5.94% 9,000 105 4.71%
Other borrowed funds 2,160 15 2.82% 7,686 26 1.34%
--------- --------- --------- ---------
Total borrowings 11,439 151 5.35% 16,686 131 3.16%
--------- --------- --------- ---------
Total interest bearing liabilities 317,011 1,756 2.25% 205,057 962 1.89%
--------- --------- --------- ---------
Net interest income and net yield
on interest earning assets $ 4,024 3.82% $ 2,861 3.91%
========= =========
Noninterest-bearing demand deposits 90,527 68,432
Other liabilities 1,055 1,039
Stockholders' equity 37,286 34,874
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUTIY $ 445,879 $ 309,402
========= =========
19
Table 2 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 $1.2 million for the quarter ended March 31, 2005, as
compared to the quarter ended March 31, 2004, is due to the growth in the volume
of earning assets and interest bearing liabilities. While the slight rise in
interest rates has, to date, had minimal 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 continued low interest rate environment has resulted in a modest
$126,000 decline of net interest income during the first quarter of 2005
compared to the same quarter last year, whereas the growth in earning assets and
deposits resulted in an increase of $1.3 million to net interest income.
Interest income increased $2.0 million during the first quarter of 2005 compared
to the first quarter of 2004 as higher yielding loans grew at a faster pace than
lower yielding securities and overnight investments resulting in a $1.8 million
increase in interest income attributable to asset growth while changes in rates
resulted in growth of interest income of $181,000. Interest expense during these
comparable quarters increased $794,000 or 83%, from $962,000 in interest expense
in 2004 to $1.8 million in interest expense in 2005. The overall cost of
interest bearing liabilities increased 36 basis points from 1.89% in 2004 to
2.25% in 2005.
TABLE 2
THREE MONTHS ENDED MARCH 31
2005 VS. 2004
------------------------------------
DUE TO CHANGE
INCREASE IN AVERAGE
OR ----------------------
(Dollars in thousands) (DECREASE) VOLUME RATE
---------- ------ -------
EARNING ASSETS:
Loans $ 1,445 $ 1,447 $ (2)
Mortgage loans 17 19 (2)
Taxable securities 448 278 170
Federal funds sold and cash equivalents 47 32 15
------- ------- -------
Total interest income 1,957 1,776 181
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits 13 4 9
Money market deposit accounts 550 373 177
Savings deposits 7 5 2
Time deposits 204 146 58
Borrowed funds 20 (41) 61
------- ------- -------
Total interest expense 794 486 308
------- ------- -------
Net interest income $ 1,163 $ 1,289 $ (126)
======= ======= =======
20
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 March 31, 2005, the Company had
a $173,000 impaired loan on nonaccrual status and an additional $142,000 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 March 31, 2005 is
approximately the same as the volume of such loans at March 31, 2004 and
December 31, 2004, the percentage of total loans represented by such
nonperforming loans has declined significantly from 0.18% at March 31, 2004 to
0.14% at December 31, 2004 to 0.11% at March 31, 2005.
A methodology established in 2003 determining an appropriate allowance
for loan losses was approved by the Audit Committee and the Board of Directors.
The quarterly provision is approved by the Board. The methodology is reevaluated
on a quarterly basis. Pending the development of a negative trend with respect
to past due loans or charge offs or significant changes in economic conditions,
the Company continues to maintain an allowance it believes is adequate.
As reflected in Table 3 below, the allowance is allocated among the
various categories of loans based upon the methodology described herein.
TABLE 3
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.
MARCH 31, 2005 DECEMBER 31, 2004 MARCH 31, 2004
----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT
OF OF OF
TOTAL TOTAL TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- --------- ---------- --------- ---------- ---------
Construction loans $ 312 12.4% $ 299 14.1% $ 49 11.0%
Commercial loans 725 14.6% 553 13.1% 1,359 16.6%
Commercial real estate loans 2,073 67.7% 1,868 67.0% 635 65.4%
Real estate 1-4 family residential 16 0.5% 20 0.6% 19 0.8%
Home equity loans 15 2.0% 17 2.2% 14 1.9%
Consumer loans 82 2.8% 33 3.0% 35 4.3%
------ ----- ------ ----- ------ -----
Balance end of the period $3,223 100% $2,790 100% $2,111 100%
====== ===== ====== ===== ====== =====
LOANS
The loan portfolio is the largest component of earning assets and
accounts for the greatest portion of total interest income. At March 31, 2005,
total loans were $291.6 million, a 54% increase from the $189.3 million in loans
outstanding at March 31, 2004. Total loans at March 31, 2005 represented a 17%
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.
21
Virtually all of the Company's commercial real estate mortgage and
development loans, which account for approximately 68% of our total loans at
March 31, 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. While the region has
experienced some decline in economic activity during 2002 and 2003, 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 4, 29% of the Company's loans are fixed
rate loans and 94% 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 5.1% of the loan portfolio
at March 31, 2005, as compared to 7.0% at March 31, 2004 and 5.8% at December
31, 2004.
TABLE 4
Table 4 shows the maturities of the loan portfolio and the sensitivity
of loans to interest rate fluctuations at March 31, 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.
MARCH 31, 2005
--------------------------------------------
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
-------- ------------ ---------- --------
Construction loans $ 31,754 $ 1,831 $ 2,626 $ 36,211
Commercial loans 35,867 6,671 64 42,602
Commercial real estate loans 89,890 91,487 15,954 197,331
Real estate 1-4 family residential 107 996 288 1,391
Home equity loans 5,866 - - 5,866
Consumer loans 6,248 1,738 - 7,986
Deposit overdrafts 213 - - 213
-------- -------- -------- --------
Total loans $169,945 $102,723 $ 18,932 $291,600
======== ======== ======== ========
AFTER ONE
WITHIN YEAR THROUGH AFTER FIVE
(Dollars in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
-------- ------------ ---------- --------
Fixed rate $ 33,894 $ 43,036 $ 8,494 $ 85,424
Variable/Adjustable rate 136,051 59,687 10,438 206,176
-------- -------- -------- --------
Total loans $169,945 $102,723 $ 18,932 $291,600
======== ======== ======== ========
22
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 5
AT MARCH 31, 2005 AT MARCH 31, 2004
--------------------- ----------------------
(Dollars in thousands) PERCENT PERCENT
OF OF
BALANCE PORTFOLIO BALANCE PORTFOLIO
-------- --------- -------- ----------
Available for sale (at market value):
U.S. Agency $117,485 82.6% $ 80,739 73.4%
Mortgage-backed securities 19,673 13.8% 19,414 17.6%
Adjustable rate mortgage-backed securities 1,449 1.0% 2,251 2.0%
Corporate bonds 1,976 1.4% 6,611 6.0%
Restricted stock 1,696 1.2% 1,143 1.0%
-------- ----- -------- -----
Total $142,279 100.0% $110,158 100.0%
======== ===== ======== =====
TABLE 6
The following table provides information regarding the maturity
composition of our investment portfolio, at fair value, at March 31, 2005.
Within Over 1 Year Over 5 Years Over
1 Year through 5 Years through 10 Years 10 Years Total
---------------- ------------------ ------------------ ----------------- -----------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- ------- ------
Available for sale (fair
value):
U. S. Agency $ 79,823 3.81% $ 36,432 4.12% $ 1,230 4.05% - - $117,485 3.91%
Mortgage-backed securities 18 5.54% 592 4.49% 2,296 4.20% 16,767 4.85% 19,673 4.76%
Adjustable rate mortgage-
backed securities - - - - - - 1,449 3.84% 1,449 3.84%
Corporate bonds - - 1,976 5.20% - - - - 1,976 5.20%
Restricted stock - - - - - - 1,696 4.09% 1,696 4.09%
-------- -------- ------- -------- --------
Total $ 79,841 3.81% $ 39,000 4.18% $ 3,526 4.15% $ 19,912 4.71% $142,279 4.05%
======== ======== ======= ======== ========
23
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset and liability management are to provide
for the safety of depositor and investor funds, assure adequate liquidity, and
maintain an appropriate balance between interest sensitive earning assets and
interest bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers, who may be depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs.
We define liquidity for these purposes as the ability to raise cash
quickly at a reasonable cost without principal loss. The primary liquidity
measurement we utilize is called the Basic Surplus, which captures the adequacy
of our access to reliable sources of cash relative to the stability of our
funding mix of deposits. Accordingly, we have established borrowing facilities
with other banks (Federal funds) and the Federal Home Loan Bank as sources of
liquidity in addition to the deposits.
The Basic Surplus approach enables us to adequately manage liquidity
from both tactical and contingency perspectives. At March 31, 2005, our Basic
Surplus ratio (net access to cash and secured borrowings as a percentage of
total assets) was approximately 18.9% compared to the present internal minimum
guideline range of 5% to 10%.
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 March 31, 2005, we were modestly liability sensitive in the short
term and then we become asset sensitive out 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 March 31, 2005, the following 12-month impact on net interest income is
estimated to range from a positive impact of 6.3% in a rising rate scenario, to
a negative impact of (2.4)% 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 0.71% if rates were to
immediately increase 200 basis points, to a negative impact of (6.12)% 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.
24
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 March 31, 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 near historically low
levels, and in light of the Federal Reserve's indications with respect to the
interest rate environment. Thus management believes the exposure to further
changes in interest rates would not have a material negative effect on the
results of operations.
Static Rates -0- %
Most Likely Rates 4.5 %
Ramp Up 100bp- 12 months 0.8 %
Ramp Up 200bp- 12 months 1.9 %
Ramp Down 100bp- 12 months (0.8)%
Rising Rate Scenario 6.3 %
Low Rate Environment 1.5 %
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 month periods ended March 31, 2005 and 2004.
TABLE 7
The categories of noninterest income that exceed 1% of operating
revenue are as follows:
THREE-MONTHS ENDED
MARCH 31,
----------------
(Dollars in thousands) 2005 2004
------ ------
Service charges on deposit accounts $ 75 $ 84
Cash management fees 28 24
Other fee income 59 70
Gain on sale of mortgages 162 63
Gain on sale of securities 8 40
---- ----
Total noninterest income $332 $281
==== ====
The increase in noninterest income during the three month period ended
March 31, 2005 compared to the same period last year is due in large part to an
increase in the gain on sale of mortgages. Gains on sales of securities declined
in the first quarter of 2005 compared to the same period last year.
25
TABLE 8
The categories of noninterest expense that exceed 1% of operating
revenue are as follows:
THREE-MONTHS ENDED
MARCH 31,
--------------------
(Dollars in thousands) 2005 2004
-------- -------
Salaries and benefits $1,611 $1,023
Occupancy cost, net 307 165
Equipment expense 167 74
Professional fees 38 45
Data processing costs 148 116
Courier and express services 12 41
Advertising and public relations 61 44
State franchise tax 82 65
Compliance expense 43 -
Other 284 124
------ ------
Other noninterest expense $2,753 $1,697
====== ======
Noninterest expense increased $1.1 million from $1.7 million to $2.8
million for the first three months of 2005, as compared to the same period in
2004. Approximately 56% of this increase is in salary and benefit costs. During
2004 the Company added personnel to staff the newly opened branches and
administrative staff to support the growth in customers and transactions being
processed. Occupancy costs and equipment costs increased over the first quarter
of 2004 as two new banking offices and an operations center were opened in the
third quarter of 2004. The increase in state franchise tax is due to the
increased capital of the Bank from earnings retention and capital infusions in
2004 and 2005.
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.
26
TABLE 9
The following table reflects deposits by category for the periods
indicated.
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------
2005 2004 2003
------------------ ----------------- ---------------------
(Dollars in thousands) AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ------- ------- ------- ------- --------
Deposits:
Noninterest-bearing demand $ 90,527 -% 68,432 -% 49,662 -%
Interest-bearing demand 13,868 0.94 11,708 0.65 8,168 0.89
Money Market 213,966 2.06 126,366 1.70 101,513 2.00
Savings 4,506 1.35 2,759 1.17 1,321 1.54
Certificates of deposit of $100,000 or more 59,028 2.64 33,003 2.25 26,956 2.83
Other time 14,204 2.48 14,535 2.32 13,437 3.00
--------
Total interest bearing deposits 305,572 2.13% 188,371 1.77% 151,395 2.18%
-------- -------- --------
Total deposits $396,099 256,803 201,057
======== ======== ========
TABLE 10
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
March 31, 2005.
3 MONTHS 4 TO 6 7 TO 12 OVER 12
(Dollars in thousands) OR LESS MONTHS MONTHS MONTHS TOTAL
-------- -------- --------- --------- --------
Certificates of deposit less than $100,000 $ 2,894 $ 2,232 $ 4,884 $ 4,118 $ 14,128
Certificates of deposit of $100,000 or more 14,259 18,331 18,769 15,964 67,323
-------- -------- --------- --------- --------
$ 17,153 $ 20,563 $ 23,653 $ 20,082 $ 81,451
======== ======== ========= ========= ========
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 March 31, 2005, stockholders' equity increased
$635,000 to $36.3 million from the $35.6 million in equity at March 31, 2004 as
a result of the $3.0 million increase in retained earnings over the past twelve
months offset by the decline in other comprehensive income of $2.6 million
resulting from unrealized losses on securities. In addition, $209,000 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 March 31, 2005, compared to minimum regulatory capital
guidelines is shown in the table that follows.
27
TABLE 11
Minimum Minimum To Be
Actual Guidelines "Well Capitalized"
------ ---------- ------------------
Total Risk-Based Capital
Company 15.8% 8.0% N/A
Bank 12.0% 8.0% 10.0%
Tier 1 Risk-Based Capital
Company 14.7% 4.0% N/A
Bank 11.0% 4.0% 6.0%
Tier 1 Leverage Ratio
Company 10.5% 4.0% N/A
Bank 8.0% 4.0% 5.0%
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 adequate. There were no
changes in the Bank's internal control over financial reporting (as defined in
Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
the Bank's internal control over financial reporting.
28
PART II. Other Information
Item 1. Legal Proceedings
None
Item 2 - Unregistered Sale 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)
10(a) Employment contract between James Monroe Bancorp and John R.
Maxwell(4)
10(b) Employment contract between James Monroe Bancorp and Richard I.
Linhart (5)
10(c) James Monroe Bancorp 1998 Management Incentive Stock Option Plan (6)
10(d) James Monroe Bancorp 2000 Director's Stock Option Plan (7)
10(e) James Monroe Bancorp, Inc. 2003 Equity Compensation Plan (8)
11 Statement re: Computation of Per Share Earnings
Please refer to Note 2 to the financial statements included in this
report.
21 Subsidiaries of the Registrant
31(a) Certification of Chief Executive Officer
31(b) Certification of Chief Operating Officer
31(c) Certification of Chief Financial Officer
32(a) Certification of Chief Executive Officer
32(b) Certification of Chief Operating Officer
32(c) Certification of Chief Financial Officer
29
- --------------------------
(1) Incorporated by reference to exhibit 3(a) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 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.
30
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: May 13, 2005 BY: /s/John R. Maxwell
------------------------------------
John R. Maxwell, President &
Chief Executive Officer
Date: May 13, 2005 BY: /s/ Richard I. Linhart
------------------------------------
Richard I. Linhart, Executive Vice
President & Chief Operating Officer
Date: May 13, 2005 BY: /s/ John J. Brough
-------------------------------
John J. Brough, Senior Vice President &
Chief Financial Officer
31