REGISTRATION STATEMENT NO. 333-38098
FILED PURSUANT TO RULE 424(B)(3)
PROSPECTUS
344,828 SHARES OF COMMON STOCK
MINIMUM PURCHASE - 400 SHARES
[LOGO] JAMES MONROE BANCORP, INC.
James Monroe Bancorp, Inc. is the holding company for James Monroe Bank,
Arlington, Virginia.
James Monroe Bancorp is offering to sell 344,828 newly issued shares of its
common stock at a price of $14.50 per share. If the volume of subscriptions
exceeds the number of shares offered, we may also sell up to an additional
137,930 newly issued shares of common stock. This is our initial registered
public offering of the common stock.
There is no minimum number of shares which must be sold in the offering.
The offering is being made through the efforts of our directors and executive
officers without an underwriter. No underwriter or other person is obligated to
purchase any shares in the offering, or to find purchasers. Until your
subscription is accepted and the sale of shares completed, all funds will be
placed in an escrow account at James Monroe Bank under the control of an
independent third party. If all or a portion of your subscription is not
accepted, the appropriate part of your subscription payment will be promptly
returned, generally without interest.
Our common stock is not traded on any exchange or in any organized market,
and we do not expect that there will be any organized trading market for the
common stock upon completion of the offering.
This offering will continue until October 16, 2000, unless extended in the
discretion of the Board of Directors to not later than November 15, 2000.
-----------------
Shares of our common stock are not deposits, savings accounts, or other
obligations of a depository institution and are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency. Investing in
common stock involves investment risks.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if this
prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense.
------------------
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
Per share Total
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<S> <C> <C>
Price to public $14.50 $5,000,006
Underwriting discounts and commissions None N/A
</TABLE>
<PAGE>]
<TABLE>
<CAPTION>
Per share Total
--------------- ---------------
<S> <C> <C>
Net proceeds of the offering (before
expenses) $14.50 $5,000,006
</TABLE>
The date of this prospectus is August 11, 2000
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Summary..............................................................................1
Risk Factors.........................................................................4
Selected Consolidated Financial Data.................................................7
The Offering.........................................................................8
Use of Proceeds.....................................................................13
Dilution............................................................................15
Regulatory Capital Requirements.....................................................15
Market for Common Stock and Dividends...............................................16
Management's Discussion and Analysis................................................17
Business of James Monroe Bancorp and James Monroe Bank..............................29
Supervision and Regulation..........................................................34
Share Ownership of Directors, Officers and Certain Beneficial Owners................39
Management..........................................................................41
Executive Compensation and Certain Transactions.....................................42
Shares Eligible for Future Sale.....................................................43
Description of Capital Stock........................................................44
Legal Matters.......................................................................45
Experts.............................................................................46
Where You Can Find Additional Information About James Monroe Bancorp................46
Index to Financial Statements......................................................F-1
</TABLE>
<PAGE>
SUMMARY
This summary presents selected information from this prospectus. You should
carefully read this entire document in order to understand this offering. This
summary includes page references that direct you to more complete discussions
elsewhere in this document.
THE OFFERING
Shares Offered. James Monroe Bancorp is offering to sell 344,828 newly
issued shares of its common stock. If the volume of subscriptions exceeds the
amount offered, we may also sell up to an additional 137,930 newly issued shares
of common stock. If all shares offered are sold, the number of shares
outstanding after the offering will be 1,089,118, or 1,227,048 if all of the
oversubscription shares are sold.
Price per Share. We are offering to sell the common stock for $14.50 per
share.
Market for the Common Stock. The common stock is not traded on any exchange
or in any organized market. We do not expect that there will be an organized
market for the common stock upon completion of the offering. Trading in the
common stock has been sporadic, and the prices at which the common stock has
traded do not necessarily reflect the value of the common stock. See "Market for
Common Stock and Dividends" at page 16
Determination of Offering Price. The price at which we are offering to sell
the common stock was not determined as a result of third party evaluation or
negotiations, or by reference to the market price of the common stock. The Board
of Directors considered a number of factors in setting the offering price,
including the price of recent trades known to have occurred, the book value of
the common stock, the price to earnings and price to book ratios of other newly
formed banks and other institutions we deemed to be comparable, and our estimate
of our earnings prospects. The offering price, therefore, does not necessarily
reflect the market value of the common stock. See "The Offering -- Determination
of Offering Price" at page 11 Prior to this offering all shares were issued at
$10.00 per share, and all options have exercise prices of $10.00 per share.
Proceeds of the Offering. The net proceeds of the offering to James Monroe
Bancorp will be approximately $4,890,000 if the offering is fully subscribed, or
approximately $6,890,000 if all of the oversubscription shares are sold, after
deduction of estimated expenses of the offering. See "The Offering -- General"
at page 8
No Minimum Offering. There is no minimum total number of shares which must
be sold in the offering. The offering is not underwritten, and no broker-dealer
or other person is obligated to purchase any shares in the offering. See and
"The Offering -- General -- No Minimum Offering" at page 8
Director and Officer Subscriptions. Our directors and executive officers
currently intend to purchase at least 101,375 shares in the offering. See "The
Offering -- General -- Intentions of Directors, Executive Officers and Others"
at page 12
Minimum and Maximum Subscription. The minimum number of shares for which
any person may subscribe is 400, although we may permit smaller subscriptions in
our discretion. There is no maximum number of shares for which any person or any
group of affiliated or related persons may subscribe. We may, however, reduce or
reject any subscription in whole or in part. If you would own more than a
certain percentage of the common stock after the offering, usually 5% or 10%,
you may be required to file applications with state or federal bank regulatory
agencies as a condition of the purchase. We reserve the right to reduce, or
reject, in whole or in part, any subscription which would require prior
regulatory application or approval if such approval is not obtained prior to the
termination of the offering. See "The Offering -- General" at page 8
Term of the Offering. The offering will run until October 16, 2000, or such
later date as the Board of
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Directors may determine, but not later than November 15, 2000. See "The Offering
-- General" at page 8
Escrow Account. Until the closing of the offering, subscription funds will
be held in an escrow account at James Monroe Bank under the control of an
independent escrow agent. If the offering is not completed, or if your
subscription is not accepted, your subscription funds will be promptly returned
without interest or deduction, except that interest will be paid to the extent
that law, regulation or administrative policy of your state of residence
specifically requires. The closing may not occur until as late as the end of the
term of the offering. See "The Offering -- Escrow Agreement; Release of Funds;
No Interest on Subscription Funds" at page 10
How to Subscribe. To subscribe for shares, you should complete the
subscription agreement accompanying this prospectus and submit it, along with
payment in full for the shares, to:
Richard I. Linhart, Subscription Agent for
James Monroe Bancorp, Inc.
3033 Wilson Boulevard
Arlington, Virginia 22201
prior to the expiration of the offering. You should make your check payable to
"James Monroe Bancorp, Inc. Escrow Account." You should carefully follow the
instructions contained in this prospectus under the caption "The Offering" at
page 8 and those included on the subscription agreement.
Use of Proceeds. We intend to use the net proceeds from the offering for
general corporate purposes, which will include an immediate capital contribution
of the first $1 million of net proceeds of the offering to James Monroe Bank,
our subsidiary bank, for use in its lending and investment activities.
Additional proceeds will be held for future contribution to James Monroe Bank
and for other corporate purposes. Other than contributions to James Monroe Bank
for use in connection with the expansion of its business, we have no specific
plans for any part of the proceeds of the offering. Until we use the proceeds
for these purposes, we may invest the net proceeds in a variety of short to
medium term, interest-bearing assets, including federal funds transactions,
interest-bearing deposits in other banks, and similar investments. See "Use of
Proceeds" at page 13.
JAMES MONROE BANCORP, INC.
JAMES MONROE BANCORP, INC.
3033 Wilson Boulevard
Arlington, Virginia 22201
703.524.8100
James Monroe Bancorp is a one-bank holding company headquartered in
Arlington, Virginia. We provide general commercial and consumer banking services
through our wholly owned banking subsidiary, James Monroe Bank, Arlington,
Virginia. James Monroe Bancorp was organized on April 9, 1999 to be the holding
company for James Monroe Bank.
James Monroe Bank was organized and opened for business in June 1998, and
became a wholly owned subsidiary of James Monroe Bancorp on July 1, 1999. At
March 31, 2000, we had consolidated assets of $61.3 million, deposits of $54.3
million, and shareholders' equity of $6.7 million. See "Selected Consolidated
Financial Data" at page 7, "Management's Discussion and Analysis" at page 17,
and "Consolidated Financial Statements" beginning on page F - 1.
James Monroe Bank, our sole subsidiary, is an independent, community
oriented full service financial institution. It conducts a general commercial
and consumer banking business. These services include the usual deposit
functions of commercial banks, including business and personal checking
accounts, "NOW" accounts and savings accounts; business and commercial loans,
residential mortgages and consumer loans and cash management services. James
Monroe Bank is a Virginia chartered bank which is a member of the Federal
Reserve System, and its deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation. See "Business of James Monroe Bancorp and
James Monroe Bank" at page 28.
While James Monroe Bank served both commercial and consumer customers, its
primary business focus is on lending to small and medium sized businesses in its
market area. This is evidenced by the composition of the loan portfolio at March
31, 2000, which consisted of 10.8% consumer installment, mortgage and home
equity loans and 89.2% of loans to commercial customers.
James Monroe Bank's primary service area is Arlington and Fairfax counties
in Virginia, and the surrounding Northern Virginia counties and suburban
Washington DC metropolitan area. James Monroe Bank operates through its main
office in Arlington,
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Virginia, and one branch office located in Annandale, Virginia.
Recent Developments. For the quarter ended June 30, 2000, we had earnings
of $212 thousand, or $0.28 per share. For the six months ended June 30, 2000, we
earned a total of $324 thousand, or $0.42 per share At June 30, 2000, we had
consolidated assets of $69.8 million, including total loans of $42.9 million,
deposits of $62.5 million, and shareholders' equity of $6.9 million. See
"Management's Discussion and Analysis -- Recent Developments" at page 28.
3
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RISK FACTORS
An investment in the common stock involves various risks. You should
carefully consider the risk factors listed below. These risk factors may cause
James Monroe Bancorp's future earnings to be lower or its financial condition to
be less favorable than it expects. In addition, other risks of which we are not
aware, which relate to the banking and financial services industries in general,
or which we do not believe are material, may cause our earnings to be lower, or
hurt our future financial condition. You should read this section together with
the other information in this prospectus.
AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK DOES NOT CURRENTLY EXIST, AND
WILL PROBABLY NOT EXIST AFTER THE OFFERING. AS A RESULT, SHAREHOLDERS MAY NOT BE
ABLE TO EASILY SELL THEIR COMMON STOCK.
While the common stock will be freely transferable by most shareholders, we
do not expect that there will be an active market for trading the common stock
following the offering. We cannot be sure that an active or established trading
market will develop following completion of the offering, or if one develops,
that it will continue, or whether the price of the common stock will be higher
or lower than the offering price. The common stock will not be listed on The
Nasdaq National Market, The Nasdaq SmallCap Market or any other securities
market upon completion of the offering. There can be no assurance that trading
in the over-the-counter market, through brokers or through market makers will
develop. As a result, an investment in the common stock may be relatively
illiquid. See "The Offering -- Limited Market for Common Stock" at page 9.
NO BROKER HAS AGREED TO PURCHASE ANY OF THE COMMON STOCK AND WE MAY NOT BE
ABLE TO SELL ALL THE SHARES IN THE OFFERING. OUR FUTURE RESULTS OF OPERATIONS
MAY BE ADVERSELY AFFECTED IF LESS THAN ALL OF THE OFFERED SHARES ARE SOLD.
The common stock is being sold directly, through the efforts of our
directors and executive officers. No broker-dealer or other person has any
obligation to purchase, or find purchasers for, any shares of common stock. See
"The Offering -- Manner of Distribution" at page 12.
Because the offering is not underwritten, there can be no assurance that
any particular number of shares will be sold. If less than all of the shares
offered are subscribed for, we will have less capital to fund operations and
growth, which could result in restricted or slower growth for James Monroe Bank,
slower expansion of activities, and lower shareholder returns. We could be
required to raise additional capital earlier than it would if all of the shares
offered are sold. See "The Offering" at page 7.
AS A RESULT OF THEIR LEVEL OF SHARE OWNERSHIP, OUR DIRECTORS AND EXECUTIVE
OFFICERS COULD MAKE IT MORE DIFFICULT TO OBTAIN APPROVAL FOR CERTAIN MATTERS
SUBMITTED TO SHAREHOLDER VOTE, INCLUDING VOTES ON SOME ACQUISITIONS OF THE
COMPANY. THE RESULTS OF THE VOTE MAY BE CONTRARY TO THE DESIRES OR INTERESTS OF
THE PUBLIC SHAREHOLDERS.
Following completion of the offering, our directors and executive officers
of and their affiliates will own at least 22.36% and possibly as much as 32.44%
of the outstanding shares of common stock, assuming that they purchase the
number of shares in the offering which they currently intend. These persons may
purchase a greater or lesser number of shares in the offering.
See "Share Ownership of Directors, Officers and Certain Beneficial Owners"
at page 37.
By voting against a proposal submitted to shareholders, the directors and
officers, as a group, may be able to make approval more difficult for proposals
requiring the vote of shareholders, such as mergers, share exchanges, certain
asset sales, and certain amendments to James Monroe Bancorp's Articles of
Incorporation. See "Description of Capital Stock -- Certain Provisions of the
Articles of Incorporation and Virginia Law" at page 42.
The ownership of common stock, and purchase of shares in the offering, by
directors and executive officers does not necessarily mean that an investment in
the common stock is appropriate for any other investor.
CONSUMMATION OF THE OFFERING IS NOT SUBJECT TO THE RECEIPT OF SUBSCRIPTIONS
FOR A MINIMUM NUMBER OF SHARES. SUBSCRIBERS WILL BE REQUIRED TO PURCHASE SHARES
EVEN IF LESS THAN ALL OF THE SHARES OFFERED ARE SOLD. A SUBSCRIBER MAY BE ONE OF
ONLY A SMALL NUMBER OF PURCHASERS IN THE OFFERING.
There is no minimum number of shares that must be sold in the offering, and
subscriptions, once received, are irrevocable. The offering may be completed
even if substantially less than the total number of shares offered is sold. If
this happens, our capital would not be increased to the extent it would be if
all of the shares being offered were sold. Once made, subscriptions will not be
revocable by subscribers, and
4
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we intend to accept subscriptions even if the offering has not been fully
subscribed. See "The Offering" at page 7.
Although directors and executive officers currently intend to purchase
shares in the offering, they are not obligated to subscribe for any shares.
Subscribers will be required to purchase shares even if the directors and
executive officers do not purchase as many shares as currently intended.
WE HAVE ONLY A LIMITED OPERATING HISTORY, AND AS A RESULT, OUT HISTORICAL
RESULTS OF OPERATION MAY NOT BE INDICATIVE OF OUR FUTURE PERFORMANCE.
James Monroe Bank, our sole operating business, has been in operation only
since June 1998. Our future results of operations are not necessarily indicated
by those during this brief period. We may not be able to maintain the rate of
growth, interest rate spreads, levels of loan losses and problem assets and
other favorable factors which we have achieved since June 1998.
THE BOOK VALUE OF A SHARE OF COMMON STOCK AFTER THE OFFERING WILL BE LOWER
THAN THE PRICE PAID FOR SHARES IN THE OFFERING.
If all of the shares being offered are sold, then book value per share at
March 31, 2000, after giving effect to completion of the offering, would be
$10.62 per share. The post-offering book value would be less than the offering
price, and accordingly, investors in the offering would experience dilution of
$3.88, or 26.76%, per share, calculated on the basis of the difference between
the offering price and book value. If fewer than all of the shares offered are
sold, book value per share will be lower and you will experience greater
dilution. See "Dilution" at page 13.
THE OFFERING PRICE WAS DETERMINED BY THE BOARD OF DIRECTORS IN ITS
DISCRETION, AND DOES NOT NECESSARILY REFLECT THE FAIR MARKET VALUE OF THE COMMON
STOCK. THEREFORE, YOU MAY NOT BE ABLE TO SELL THE COMMON STOCK AT THE OFFERING
PRICE FOLLOWING THE OFFERING.
The Board of Directors considered a number of factors in determining the
offering price for the common stock, including, but not limited to the price of
recent trades known to have occurred, the book value of the common stock, the
price to earnings and price to book ratios of other newly formed banks and other
institutions we deemed to be comparable, and our estimate of our earnings
prospects. No independent third party or negotiations were involved in the
determination of the offering price, and the price therefore, does not
necessarily reflect the market value of the common stock.
The price at which the common stock trades after the offering may be higher
or lower than the offering price. You may not be able to sell the common stock
at or before the offering price after the offering.
OUR LOAN PORTFOLIO HAS GROWN RAPIDLY SINCE JAMES MONROE BANK OPENED, AND
CONSISTS ALMOST ENTIRELY OF LOANS WHICH ARE LESS THAN TWO YEARS OLD. BECAUSE OF
THE UNSEASONED NATURE OF OUR PORTFOLIO, WEAKNESSES IN LOANS WHICH MAY ULTIMATELY
CAUSE LOSSES HAVE NOT YET BECOME APPARENT.
All of the loans in our portfolio have been made since June 1998, more than
two-thirds of them since January 1999. Because the portfolio is unseasoned,
weaknesses in loans which may cause them to become nonperforming have not yet
become apparent. The allowance for loan losses which we maintain may not be
sufficient to absorb losses which may develop as the portfolio matures. Also,
rapid expansion of the portfolio would result in losses if our underwriting
standards have been compromised in seeking rapid loan growth.
A SUBSTANTIAL PORTION OF OUR LOANS ARE IN REAL ESTATE RELATED LOANS IN THE
WASHINGTON DC METROPOLITAN AREA, AND ADVERSE CHANGES IN THE REAL ESTATE MARKET
IN THIS AREA COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS, AND
ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
James Monroe Bank has a substantial amount of loans secured by real estate
as collateral At March 31, 2000, 7% of our loans were construction and land
development loans, 6% were 1-4 family residential real estate loans, and 40%
were commercial real estate loans. Additionally, 37% were commercial and
industrial loans, which are not secured by real estate. These concentrations
expose us to the risk that adverse developments in the real estate market could
increase the levels of nonperforming loans and charge-offs, and reduce loan
demand and deposit growth.
PROPOSED LEGISLATION WHICH WOULD PERMIT BANKS TO PAY INTEREST ON BUSINESS
CHECKING ACCOUNTS COULD HAVE A NEGATIVE IMPACT ON OUR EARNINGS AND FINANCIAL
PERFORMANCE.
A pending bill in Congress, if enacted into law, would permit banks to pay
interest on checking and demand deposit accounts established by businesses,
which is currently prohibited by regulation. A significant portion of our
deposits, 32.6% at March 31, 2000, are noninterest bearing business demand
deposits. If the proposed legislation is enacted, it is likely that we may be
required to pay interest on at least a portion of these deposits in order to
compete successfully against other banks. This could have a significant negative
effect on our net interest income, net income, net interest margin, return on
assets and return on equity.
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MANAGEMENT WILL HAVE DISCRETION IN ALLOCATING A SUBSTANTIAL PORTION OF THE
PROCEEDS, AND MAY USE THEM FOR PURPOSES NOT SPECIFICALLY IDENTIFIED IN THIS
PROSPECTUS.
Our Boards of Directors will have substantial discretion in determining the
use of the proceeds of the offering. While the proceeds of the offering are
intended to provide capital for use in the lending and investment business of
James Monroe Bank, they will be available for use in lines of business, and for
business opportunities which may develop after the offering, and which are not
presently contemplated. Management will determine which additional business
opportunities are appropriate for James Monroe Bank and James Monroe Bancorp. WE
ARE NOT CURRENTLY PERMITTED TO PAY DIVIDENDS WITHOUT PRIOR REGULATORY APPROVAL.
WE CANNOT BE CERTAIN THAT WE WILL HAVE SUFFICIENT EARNINGS TO BE LEGALLY ABLE TO
PAY DIVIDENDS. WE HAVE NO CURRENT PLANS TO COMMENCE PAYING DIVIDENDS. James
Monroe Bank is our principal revenue producing operation. As a result, our
ability to pay dividends largely depends on receiving dividends from James
Monroe Bank. The amount of dividends that James Monroe Bank may pay is limited
by state and federal laws and regulations. To date, James Monroe Bank has not
had earnings that would permit the payment of dividends without prior regulatory
approval.
Even if James Monroe Bank or James Monroe Bancorp has earnings in an amount
sufficient to pay dividends, the Board of Directors may decide to retain
earnings for the purpose of financing growth. We have no current plans to
commence paying dividends. See "Description of Capital Stock -- Limitations on
Payment of Dividends" at page 42, "The Offering -- Limited Market for Common
Stock" at page 9, and "Market for Common Stock and Dividends" at page 14.
WE CAN ELECT TO DELAY CLOSING OF THE OFFERING UNTIL AS LATE AS NOVEMBER 15,
2000, AND CAN DECIDE TO NOT ACCEPT ALL OR A PART OF YOUR SUBSCRIPTION. UNTIL
THAT DECISION IS MADE, YOU WILL NOT HAVE USE OF YOUR FUNDS.
We reserve the right to extend the offering until as late as November 15,
2000. We will have broad discretion in determining which subscriptions, other
than those of our directors and officers, to accept, in whole or in part,
including if the offering is oversubscribed. In deciding which subscriptions to
accept, we may consider the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct business to, James
Monroe Bank, and the desire to have a broad distribution of stock ownership. As
a result, a subscriber cannot be assured of receiving the full number of shares
subscribed for, and may forego use of all or a portion of such subscriber's
funds pending allocation of available shares. See "The Offering -- General" at
page 7 and " -- Acceptance and Refunding of Subscriptions" at page 9.
THE LOSS OF THE SERVICES OF ANY KEY EMPLOYEES COULD ADVERSELY AFFECT
INVESTOR RETURNS.
Our business is service-oriented, and its success depends to a large extent
upon the services of John R. Maxwell, President and Chief Executive Officer of
James Monroe Bancorp and James Monroe Bank, and Richard I. Linhart, Executive
Vice President and Chief Operating Officer of James Monroe Bank and James Monroe
Bancorp. The loss of the services of Mr. Maxwell or Mr. Linhart could adversely
affect our business. Although we have employment contracts with both Mr. Maxwell
and Mr. Linhart, these cannot insure that we will retain their services.
Although we have $1 million in key man insurance on Mr. Maxwell, the proceeds of
this policy are not intended to fully compensate the company for the loss of Mr.
Maxwell's services. See "Management" at page 38.
OUR PROFITABILITY WILL DEPEND ON ECONOMIC POLICIES AND FACTORS BEYOND OUR
CONTROL.
Our operating income and net income depend to a great extent on "rate
differentials," i.e., the difference between the interest yields we receive on
loans, securities and other interest bearing assets and the interest rates we
pay on interest bearing deposits and other liabilities. These rates are highly
sensitive to many factors which are beyond our control, including general
economic conditions and the policies of various governmental and regulatory
authorities, including the Board of Governors of the Federal Reserve System. See
"Supervision and Regulation -- James Monroe Bank" at page 33, and "Business of
James Monroe Bancorp and James Monroe Bank -- Proposed Legislation" at page 30.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial data
for James Monroe Bancorp. You should read it in connection with the historical
consolidated financial information contained in the Consolidated Financial
Statements for the year ended December 31, 1999 and for the three months ended
March 31, 2000 included in this prospectus and with the other information
provided in this prospectus. See "Consolidated Financial Statements" beginning
on page F - 1, and "Management's Discussion and Analysis" at page 15.
Information for the year and seven months ended December 31, 1999 and 1998,
respectively, is derived from the audited consolidated financial statements.
Information for the three month periods ended March 31, 2000 and 1999 is derived
from unaudited interim financial statements and includes, in the opinion of
management, all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the data for such period. The results of operations
for the three-month period ended March 31, 2000 do not necessarily indicate the
results which may be expected for any period or for the full year.
<TABLE>
<CAPTION>
From Inception
(June 8, 1998)
Year Ended through
Three Months Ended March 31, December 31, December 31,
---------------------------- ------------- -------------
2000 1999 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
($ in thousands, except share data)
RESULTS OF OPERATIONS:
Total interest income $ 1,021 $ 511 $ 2,845 $ 630
Total interest expense 365 148 921 147
Net interest income 656 363 1,924 482
Provision for loan losses 56 60 231 132
Net interest income after provision for loan 600 303 1,693 350
Other income 64 19 159 14
Other expenses 553 355 1,727 817
Income (loss) before income taxes 112 (34) 125 (452)
Net income (loss) 112 (34) 125 (452)
EARNINGS PER SHARE:
Basic earnings (loss) per common share $ .15 $ (.05) $ .17 $ (.61)
Diluted earnings (loss) per common share .15 (.05) .17 (.61)
PERIOD-ENDING BALANCES:
Total assets $ 61,259 $ 32,035 $ 49,618 $ 23,509
Total loans 37,579 18,090 31,039 12,769
Total deposits 54,349 25,263 42,819 16,781
Shareholders' equity 6,681 6,635 6,599 6,659
Shareholders' equity per share 8.98 8.93 8.89 9.03
Average weighted shares outstanding at period
end:
Basic 744,290 740,368 742,028 737,590
Diluted 764,830 740,368 750,952 737,590
ASSET QUALITY RATIOS:
Allowance for loan losses to loans 1.12 % 1.06 % 1.17 % 1.03 %
Nonperforming loans to loans(1) N/a n/a n/a n/a
Allowance for loan losses to nonperforming N/a n/a n/a n/a
Nonperforming assets to loans and other real N/a n/a n/a n/a
Net loan charge-offs to average loans(1) N/a n/a n/a n/a
CAPITAL RATIOS:
Tier I risk-based capital ratio 16.4 % 32.5 % 20.3 % 43.8 %
Total risk-based capital ratio 17.4 % 33.4 % 21.4 % 44.7 %
Leverage ratio 13.1 % 23.0 % 13.9 % 30.6 %
SELECTED RATIOS:
Return on average total assets(2) .85 % (.47) % .32 % (4.54) %
Return on average shareholders' equity(2) 6.75 % (2.07) % 1.88 % (11.14) %
Net interest margin 5.35 % 5.35 % 5.25 % 5.27 %
Shareholders' equity to total assets 10.95 % 20.71 % 13.30 % 28.33 %
</TABLE>
(1) James Monroe Bancorp did not have any nonperforming loans, other real
estate owned, or charged off loans during any period presented.
(2) Annualized for the three months ended March 31, 2000 and 1999.
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THE OFFERING
GENERAL
Securities Offered. We are offering to sell 344,828 newly issued shares of
our common stock at $14.50 per share. If the volume of subscriptions exceeds the
number of shares offered, we may also sell up to an additional 137,930 newly
issued shares of common stock.
No Minimum Offering. There is no minimum number of shares which must be
sold in the offering. The offering will be consummated if any valid
subscriptions are received, unless the Board of Directors has terminated the
offering in its entirety. While our directors and executive officers intend to
purchase shares in the offering, they are not obligated to purchase any minimum
number of shares. See "-- Intentions of Directors, Executive Officers and
Others" at page 10.
Expiration Time. Subscriptions to purchase shares must be received no later
than 5:00 p.m., Eastern time, on Monday, October 16, 2000, unless we terminate
the offering earlier or extend it. We may terminate the offering at any time
prior to October 16, 2000, or to extend the termination date for up to one
period of thirty (30) days, without notice to subscribers. Under no
circumstances will we extend the offering beyond November 15, 2000. See "The
Offering -- Procedure for Subscribing to Common Stock in the Offering" below and
" -- Acceptance and Refunding of Subscriptions" at page 9.
Minimum and Maximum Subscription. Investors must subscribe for the purchase
of a minimum of 400 shares, for a minimum investment of $5,800. We may, however,
permit smaller subscriptions in our discretion. There is no maximum number of
shares which any person or group of affiliated persons will be permitted to
purchase. In considering whether to accept a subscription, we may consider the
number of shares purchased by a subscriber in other capacities, the potential of
the subscriber to do business with, or direct business to, James Monroe Bank,
and other factors relating to a particular subscription, and the number of
shares which have not been subscribed for at the time a subscription is
accepted. We may also consider the identity of the subscriber and the
subscriber's intentions with respect to the operation, management and direction
of James Monroe Bancorp.
WE RESERVE THE RIGHT TO ACCEPT OR REJECT ANY SUBSCRIPTION IN WHOLE OR IN
PART. IN DETERMINING WHETHER TO ACCEPT ANY SUBSCRIPTION, IN WHOLE OR IN PART,
THE DIRECTORS MAY, IN THEIR SOLE DISCRETION, TAKE INTO ACCOUNT:
o THE ORDER IN WHICH SUBSCRIPTIONS ARE RECEIVED,
o A SUBSCRIBER'S POTENTIAL TO DO BUSINESS WITH, OR TO DIRECT CUSTOMERS
TO, JAMES MONROE BANK, AND
o OUR DESIRE TO HAVE A BROAD DISTRIBUTION OF STOCK OWNERSHIP, AS WELL AS
LEGAL OR REGULATORY RESTRICTIONS.
YOU MAY NOT REVOKE A SUBSCRIPTION AFTER IT HAS BEEN RECEIVED.
PROCEDURE FOR SUBSCRIBING TO COMMON STOCK IN THE OFFERING
Investors who wish to participate in the offering and invest in James
Monroe Bancorp may do so by completing and signing the subscription agreement
accompanying this prospectus and delivering the completed subscription prior to
the termination of the offering, together with payment in full of the offering
price of all shares for which you have subscribed. Payment in full must be by:
(a) check or bank draft drawn upon a U.S. bank; or
(b) postal, telegraphic or express money order,
in either case, payable to "James Monroe Bancorp, Inc. Escrow Account".
The offering price will be deemed to have been received only upon:
8
<PAGE>
(a) clearance of any uncertified check, or
(b) receipt of any certified check or bank draft drawn upon a U.S. bank or of
any postal, telegraphic or express money order.
9
<PAGE>
A postage paid, addressed envelope is included for the return of the
subscription agreement.
If you are paying by uncertified personal check, please note that the check
may take at least five business days to clear. If you wish to pay the offering
price by means of uncertified personal check, we urge you to make payment
sufficiently before the end of the offering to ensure that such payment is
received and clears before the end of the offering. All funds received in
payment of the subscription price will be deposited in the James Monroe Bancorp,
Inc. Escrow Account and, until closing of the offering, will be invested at the
direction of James Monroe Bancorp.
The address to which subscription agreements and payment of the offering
price should be delivered is:
Richard I. Linhart, Subscription Agent
James Monroe Bancorp, Inc.
3033 Wilson Boulevard
Arlington, Virginia 22201
703.524.8100
If the amount you send with your subscription is insufficient to purchase
the number of shares that you indicate are being subscribed for, or if you do
not specify the number of shares to be purchased, then we will treat your
subscription as one to purchase shares to the full extent of the payment sent.
If the amount you send with your subscription exceeds the amount necessary to
purchase the number of shares that you indicate are being subscribed for, then
we will treat your subscription as one to purchase shares to the full extent of
the excess payment sent. We reserve the right to reject, in whole or in part,
any subscription. In determining whether to accept any subscription, in whole or
in part, the directors may, in their sole discretion, take into account the
order in which subscriptions are received, a subscriber's potential to do
business with, or to direct customers to, James Monroe Bank and our desire to
have a broad distribution of stock ownership, as well as legal or regulatory
restrictions. We may also consider the identity of the subscriber and the
subscriber's intentions with respect to the operation, management and direction
of James Monroe Bancorp.
FAILURE TO INCLUDE THE FULL OFFERING PRICE WITH YOUR SUBSCRIPTION AGREEMENT
MAY CAUSE US TO REJECT YOUR SUBSCRIPTION.
The method of delivery of subscription agreements and payment of the
offering price will be your election and risk. If you send your subscription by
mail, we recommend that you use registered mail, return receipt requested, and
that you allow a sufficient number of days to ensure delivery and clearance of
payment prior to the termination date. You will be required to pay the
additional postage costs relating to registered mail.
We will decide all questions concerning the timeliness, validity, form and
eligibility of subscription agreements, and our decisions will be final and
binding. James Monroe Bancorp, in its sole discretion, may waive any defect or
irregularity in any subscription, may permit any defect or irregularity to be
corrected within such time as we may allow, or may reject the purported
subscription. We will not consider a subscription to have been received or
accepted until all irregularities have been waived or cured within such time as
we determine in our sole discretion. Neither James Monroe Bancorp, its officers,
directors, and agents, the subscription agent nor any other person will be under
any duty to give a subscriber notice of any defect or irregularity in the
submission of subscription agreements, or incur any liability for failure to
give such notice.
SUBSCRIPTIONS FOR COMMON STOCK MAY NOT BE REVOKED BY SUBSCRIBERS.
ESCROW ACCOUNT; RELEASE OF FUNDS; NO INTEREST ON SUBSCRIPTION FUNDS
All funds received in payment of the offering price will be promptly
deposited into an escrow account at James Monroe Bank subject to the control of
Neil Title, Esquire, Escrow Agent, until consummation or termination of the
10
<PAGE>
offering. Funds in the escrow account will be invested in short-term obligations
of the United States government or a sweep account collateralized by US
government or agency securities. Subscription funds will be released from the
escrow account to James Monroe Bancorp only upon receipt by the escrow agent of
the certification of the President of James Monroe Bancorp that subscriptions
relating to such funds have been accepted and that shares of common stock will
be issued to subscribers in respect of such subscriptions. Earnings on funds in
the escrow account will be retained by James Monroe Bancorp whether or not the
offering is consummated.
Subscriptions for common stock which are received by the subscription
agent may not be revoked. No interest will be paid to subscribers on
subscription funds, even if the offering is terminated in its entirety or an
individual subscription is rejected. By submitting a subscription, subscribers
will forego interest they otherwise could have earned on the funds for the
period during which their funds are held in escrow. We will, however, pay
interest to the extent that law, regulation or administrative policy of an
investor's state of residence specifically requires in the event that the
offering is not completed. Prior to the time the offering is completed or
terminated, we will be entitled to request, from time to time, that the escrow
agent distribute accrued earnings on the escrowed funds to us for general
corporate purposes.
ACCEPTANCE AND REFUNDING OF SUBSCRIPTIONS
Subscription agreements are not binding on James Monroe Bancorp until
accepted by James Monroe Bancorp. We reserve the right to reject, in whole or in
part, in our sole discretion, any subscription agreement or, if the offering is
oversubscribed, to allot a lesser number of shares than the number for which a
person has subscribed. In determining the number of shares to allot to each
subscriber if the offering is oversubscribed, the directors, in their sole
discretion, may take into account the order in which subscriptions are received,
a subscriber's potential to do business with, or to direct customers to, James
Monroe Bank, and our desire to have a broad distribution of stock ownership, as
well as legal or regulatory restrictions. We will decide which subscription
agreements to accept within ten days after the termination of the offering. Once
made, a subscription is irrevocable by the subscriber during the period of the
offering, including extensions, if any.
We may elect, at any time and from time to time, to accept any or all of
the subscriptions which have been received to date, issue shares of common stock
for those subscriptions, and continue the offering with respect to any remaining
shares.
If we reject all or a portion of any subscription, the escrow agent will
promptly refund to the subscriber by check sent by first-class mail all, or the
appropriate portion, of the amount submitted with the subscription agreement,
without interest or deduction, except that interest will be paid to the extent
that the law, regulation or administrative policy of your state of residence
specifically requires. If the offering is not completed, all subscription funds
will be promptly refunded without interest or deduction, except that interest
will be paid if and to the extent that the law, regulation or administrative
policy of your state of residence specifically requires.
After all refunds have been made, the escrow agent, James Monroe Bancorp,
James Monroe Bank and their respective directors, officers, and agents will have
no further liabilities to subscribers. Certificates representing shares duly
subscribed and paid for will be issued as soon as practicable after funds are
released to by the escrow agent.
LIMITED MARKET FOR COMMON STOCK
Except for common stock held by our directors and certain of our executive
officers, the common stock will be freely transferable immediately upon issuance
and will not be subject to any transfer restrictions. There does not currently
exist an active or organized public market for the common stock. No
broker-dealers currently offer to make a market in the common stock. The common
stock has been the subject of only sporadic trades. There can be no assurance
that an over-the-counter market will develop for the common stock. It is not
anticipated that the common stock will be listed on any stock exchange or be
designated for trading on the Nasdaq system upon completion of the offering or
in the immediate future.
DETERMINATION OF OFFERING PRICE
11
<PAGE>
The offering price has been determined by the Board of Directors after
consideration of various factors which it deemed relevant. These factors
included, among other things, our current financial condition and operating
performance as presented in our financial statements, recent trades of the
common stock, the market value, and price to earnings and price to book value
ratios of the common stock of other banking organizations which we deem
comparable, and pro forma financial position after giving effect to the
offering. NEITHER THE BOARD OF DIRECTORS NOR MANAGEMENT HAS EXPRESSED AN OPINION
OR HAS MADE ANY RECOMMENDATION AS TO WHETHER ANYONE SHOULD PURCHASE SHARES OF
COMMON STOCK IN THE OFFERING. ANY DECISION TO INVEST IN THE COMMON STOCK MUST BE
MADE BY EACH INVESTOR BASED UPON HIS OR HER OWN EVALUATION OF THE OFFERING IN
THE CONTEXT OF HIS OR HER BEST INTERESTS.
There can be no assurance that, following completion of the offering and
the issuance of the common stock, you will be able to sell shares purchased in
the offering at a price equal to or greater than the offering price. Moreover,
until certificates for shares of common stock are delivered, you may not be able
to sell the shares of common stock that you have purchased in the offering. See
"-- Issuance of Common Stock" below.
INTENTIONS OF DIRECTORS, EXECUTIVE OFFICERS AND OTHERS
Our directors and executive officers have indicated that they intend to
subscribe for an aggregate of 101,375 shares of common stock in the offering.
Any shares purchased by directors and executive officers are intended to be held
as an investment. These intentions are not commitments and could change based
upon individual circumstances. See "Share Ownership of Directors, Officers and
Certain Beneficial Owners" at page 37.
REGULATORY LIMITATION
If you would own ten percent (10%) or more of our common stock after the
offering, five percent (5%) in some circumstances, you may be required to
provide certain information to, or seek the prior approval of, state and federal
bank regulators. We will not be required to issue shares of common stock in the
offering to any person who, in our opinion, would be required to obtain prior
clearance or approval from any state or federal bank regulatory authority to own
or control such shares if, at the termination date, such clearance or approval
has not been obtained or any required waiting period has not expired. We reserve
the right to reduce or reject, in whole or in part, any subscription which would
require prior regulatory application or approval if such has not been obtained
prior to the termination date. See "The Offering -- Acceptance and Refunding of
Subscriptions" at page 9
RIGHT TO AMEND OR TERMINATE THE OFFERING
We expressly reserve the right to amend the terms and conditions of the
offering. In the event of a material change to the terms of the offering, we
will file an amendment to the registration statement, of which this prospectus
is a part, and resolicit subscribers to the extent required by the SEC. In the
event of such a resolicitation, all proceeds received will be returned promptly
to any subscriber who does not provide the subscription agent with an
affirmative reconfirmation of the subscription. We expressly reserve the right,
at any time prior to delivery of shares of common stock offered hereby, to
terminate the offering if the offering is prohibited by law or regulation or if
the Board of Directors concludes, in its sole judgment, that it is not in the
best interests of James Monroe Bancorp to complete the offering under the
circumstances. The offering may be terminated by James Monroe Bancorp giving
oral or written notice thereof to the subscription agent and making a public
announcement thereof. If the offering is so terminated, all funds received will
be promptly refunded, without interest.
ISSUANCE OF COMMON STOCK
Certificates representing shares of common stock purchased in the offering
will be delivered to purchasers, via registered or certified mail, as soon as
practicable after the expiration time and after all prorations and adjustments
contemplated by the offering have been effected. No fractional shares will be
issued in the offering.
REQUESTS FOR ADDITIONAL INFORMATION
12
<PAGE>
If you have questions or require additional information concerning the
offering, contact John R. Maxwell, President and Chief Executive Officer, James
Monroe Bancorp, Inc., or Richard I. Linhart, Executive Vice President and Chief
Operating Officer, James Monroe Bank and James Monroe Bancorp, Inc., 3033 Wilson
Boulevard, Arlington, Virginia 22201, telephone 703.524.8100.
MANNER OF DISTRIBUTION
Certain of our directors and executive officers will assist in the
offering. None of our directors and officers will receive compensation for such
services. Such directors and officers are not authorized to make statements
about James Monroe Bancorp or James Monroe Bank unless such information is set
forth in this prospectus, nor will they render investment advice. None of our
directors or executive officers are registered as securities brokers or dealers
under the federal or applicable state securities laws (except for Richard I.
Linhart, who is registered as an issuer agent under various state laws), nor are
any of them affiliated with any broker or dealer. Because they are not in the
business of either effecting securities transactions for others or buying and
selling securities for their own account, they are not required to register as
brokers or dealers under the federal securities laws. In addition, the proposed
activities of our directors and executive officers are excepted from
registration pursuant to a specific safe-harbor provision under Rule 3a4-1 under
the Securities Exchange Act of 1934, as amended. Substantially similar
exemptions from registration are available under applicable state securities
laws.
NO BROKER-DEALER OR OTHER PERSON IS OBLIGATED TO PURCHASE ANY OF THE SHARES
OFFERED, OR TO FIND PURCHASERS FOR ANY SHARES. THERE CAN BE NO ASSURANCE THAT
ANY MINIMUM NUMBER OF SHARES WILL BE SOLD.
USE OF PROCEEDS
The gross proceeds to James Monroe Bancorp from the sale of the common
stock offered hereby will be $5,000,006 if all of the shares being offered are
sold, and $6,999,991 if all of the oversubscription shares are sold, in each
case before deducting expenses of the offering, which are estimated at $110,000.
The proceeds of the offering will be used to strengthen James Monroe Bank's
capital base and position it to continue to exceed minimum regulatory capital
ratios, which will allow for future growth through expansion of its existing
business. We plan to use the net proceeds for general corporate purposes, which
will include contribution to James Monroe Bank for use in its lending and
investment activities. We expect that the proceeds of this offering will support
the growth of James Monroe Bank for two to three years, although the exact
period is dependent on our actual level of growth and earnings, opportunities
for growth and additional business opportunities which may develop, and economic
conditions in general and the northern Virginia/metropolitan Washington DC area
in particular. We intend to contribute the first $1,000,000 of net proceeds of
the offering to James Monroe Bank immediately upon completion of the offering.
The balance of the funds will then be invested in medium to short-term U.S.
Government and U.S. Government Agency securities, or other investments we deem
appropriate, until the funds are needed for contribution to James Monroe Bank,
holding company expenses, or for other corporate purposes. Other than
contribution to James Monroe Bank for use in connection with the expansion of
its business, we have no specific plans for any part of the proceeds of the
offering. Proceeds of the offering will also be available for use in lines of
business or activities for which opportunities develop after the offering.
The offering will enable James Monroe Bank to establish additional branch
locations, to expand into desirable market areas, and to provide increased
lending services to its existing customers and markets. Proceeds will be
available for payment of expenses incurred in connection with branch expansion,
including construction, buildout, furniture, fixtures and equipment, lease and
real estate purchase costs. As of the date of this prospectus, we have not
identified any locations at which we will establish additional branches,
although we have several possible sites in Loudon County and Leesburg under
evaluation. There can be no assurance that any additional branches will be
established, or if established that they will be successful. We have not
allocated any specific dollar amount of the proceeds to branching related costs.
The actual costs which may be incured in connection with any branching activity
will vary based upon the site selected and the existing facilities at the site.
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<PAGE>
The following table reflects the anticipated allocation of the net proceeds
of the offering, after deducting estimated expenses of $110,000. The
presentation assumes the sale of 344,828 shares.
<TABLE>
<CAPTION>
Amount % of Proceeds(1)
--------------- -----------------
<S> <C> <C>
James Monroe Bancorp
Net proceeds $ 4,890,006 100%
Capital contribution to James Monroe Bank 1,000,000 20.45%
Working capital(2) 3,890,006 79.55%
James Monroe Bank
Proceeds of capital contributions by James Monroe Bancorp 1,000,000 79.55%
Working capital(3) 1,000,000 79.55%
</TABLE>
(1) Represents, in case of James Monroe Bank, percentage of total net proceeds
of offering.
(2) Represents finds available for future contribution to James Monroe Bank and
for other corporate purposes.
(3) Represents funds available for use in James Monroe Bank's lending and
investment businesses.
14
<PAGE>
DILUTION
Dilution represents the difference between the amount per share paid by
purchasers of common stock in this offering and the net tangible book value per
share of common stock immediately after the offering. The tangible book value of
James Monroe Bancorp was $6.68 million at March 31, 2000, or $8.98 per share.
After adjusting for the receipt of the net proceeds of the sale of 344,828
shares of common stock in the offering, the pro forma book value would be $11.57
million, or $10.62 per share. As the tangible below shows, this represents an
immediate dilution of $3.88 per share to new investors, based on the difference
between pro forma book value and the offering price.
<TABLE>
<S> <C> <C>
Offering price per share $14.50
Net tangible book value per share before the offering $8.98
Increase in net tangible book value per share attributable to $1.64
Pro forma net tangible book value per share after the offering $10.62
---------------
Dilution to investors in the offering, per share $3.88
===============
</TABLE>
If all of the oversubscription shares were sold, net tangible book value
per share would be $11.06 and dilution to investors in the offering would be
$3.44 per share.
REGULATORY CAPITAL REQUIREMENTS
For capital adequacy purposes, the Board of Governors of the Federal
Reserve requires state member banks such as James Monroe Bank to maintain two
separate capital ratios, both of which compare certain capital account items to
total assets and off-balance-sheet instruments, as adjusted to reflect their
relative credit risks ("Total Risk-Weighted Assets"). These are called
"Risk-Based Capital Ratios." The first of these is the "Total Risk-Based Capital
Ratio," which compares the total capital account, which may include a limited
amount of general reserves for loan losses to Total Risk-Weighted Assets. The
minimum level for this ratio is 8.0%. The second of these is the "Tier 1
Risk-Based Capital Ratio," where "Tier 1 Capital," (which must constitute at
least one-half of total capital) defined as common equity, retained earnings,
non-cumulative perpetual preferred stock and a limited amount of cumulative
perpetual preferred stock, less goodwill, is compared to Total Risk-Weighted
Assets. The minimum level for this ratio is 4.0%.
The Federal Reserve also has established an additional capital adequacy
guideline referred to as the "Leverage Capital Ratio," which measures the ratio
of Tier 1 Capital (as defined above) to total assets, less goodwill. Although
the most highly-rated bank holding companies are required to maintain a minimum
Leverage Capital Ratio of 3.0%, such as James Monroe Bancorp, most bank holding
companies are required to maintain Leverage Capital Ratios of 4.0% to 5.0%. The
actual required ratio is based on the Federal Reserve's assessment of the
individual bank holding company's asset quality, earnings performance,
interest-rate risk and liquidity. There can be no assurance, however, that James
Monroe Bancorp will not be required to maintain a higher Leverage Capital Ratio.
See "Supervision and Regulation -- James Monroe Bank -- Capital Adequacy
Guidelines" at page 34.
The Federal Reserve has also promulgated regulations and adopted a
statement of policy regarding the capital adequacy of bank holding companies,
such as James Monroe Bancorp. These guidelines, which are substantially similar
to those adopted by the Federal Reserve for state member banks, will not apply
to James Monroe Bancorp until its has total assets of $150 million, has public
debt or engages in certain highly leveraged activities.
The following table sets forth the actual regulatory capital ratios of
James Monroe Bancorp and James Monroe Bank at March 31, 2000, and as adjusted to
give effect to the receipt of the estimated net proceeds from the sale of the
common stock offered hereby, based on the assumptions set forth in the footnotes
and James Monroe Bancorp incurring expenses of $110,000 in the offering. The as
adjusted capital ratios are calculated assuming that all amounts contributed are
invested in assets having a 100% risk weighting under applicable regulatory
capital calculations. If the assets actually invested in are assumed to have a
lower risk weighting, the adjusted capital ratios will be higher.
15
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------
Regulatory
Actual As Adjusted 1(1) As Adjusted 2(2) Minimum(3)
----------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
JAMES MONROE BANCORP:
Total Risk-Based Capital Ratio 17.4 % 28.4 % 32.7 % 8.0 %
Tier 1 Risk-Based Capital Ratio 16.4 % 27.5 % 31.8 % 4.0 %
Leverage Capital Ratio 13.1 % 20.6 % 23.2 % 3.0-5.0 %
JAMES MONROE BANK:
Total Risk-Based Capital Ratio 17.4 % 19.7 % 19.7 % 8.0 %
Tier 1 Risk-Based Capital Ratio 16.4 % 18.7 % 18.7 % 4.0 %
Leverage Capital Ratio 13.2 % 14.8 % 14.8 % 3.0-5.0 %
------------------------------------
</TABLE>
(1) Assumes the sale of 344,828 shares in the offering and the immediate
contribution of $1.0 million to James Monroe Bank.
(2) Assumes the sale of 482,758 shares in the offering and the immediate
contribution of $1.0 million to James Monroe Bank.
(3) The regulatory capital ratios set forth in the table are not currently
applicable to James Monroe Bancorp. They will become applicable after it
has at least $150,000,000 in total assets, has public debt or it engages in
certain highly leveraged activities.
MARKET FOR COMMON STOCK AND DIVIDENDS
The common stock is not traded on any exchange or Nasdaq. There does not
currently exist an organized public trading market for shares of James Monroe
Bancorp common stock. Trading in the common stock has been sporadic, and
consists mainly of private trades conducted without brokers. We are aware of 12
trades of the common stock since June 1998, when the common stock of James
Monroe Bank was first issued, at prices ranging from $10.00 to $12.25 per share.
The last trade known to us was a trade of 300 shares at $12.25 per share on
March 29, 2000. There may be other trades of which we are either not aware, or
with respect to which we are not aware of the price. These trades and
transactions do not necessarily reflect the intrinsic or market values of the
common stock. As of March 31, 2000, there were 744,290 shares of common stock
outstanding, held by approximately 467 shareholders of record.
As of March 31, 2000, there were options to purchase 110,130 shares of
common stock outstanding pursuant to our stock option plans, of which 52,199 are
presently exercisable.
Set forth below is certain financial information relating to James Monroe
Bancorp's share price history for the each quarter since the second quarter of
1998. Information for the period prior to July 1, 1999 represents trades in the
common stock of James Monroe Bank. High and low sales prices reflect trades
known to James Monroe Bancorp, and do not necessarily reflect all trades which
occurred.
<TABLE>
<CAPTION>
2000 1999 1998
--------------------- ---------------------- ----------------------
Period Ended High Low High Low High Low
--------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 12.25 $ 10.00 $ 11.00 $ 11.00 $ N/A $ N/A
June 30 $ 12.25 $ 11.44 $ 11.00 $ 11.00 $ N/A $ N/A
September 30 $ 12.00 $ 11.25 $ 10.00 $ 10.00
December 31 $ 12.00 $ 12.00 $ 11.00 $ 10.00
</TABLE>
Dividends. Holders of the common stock are entitled to receive dividends as
and when declared by the Board of Directors. James Monroe Bancorp has not paid
cash dividends since it became the holding company for James
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<PAGE>
Monroe Bank, and prior to that time James Monroe Bank did not pay any cash
dividends, each electing to retain earnings to support growth. We currently
intend to continue the policy of retaining dividends to support growth for the
immediate future. Future dividends will depend primarily upon James Monroe
Bank's earnings, financial condition, and need for funds, as well as applicable
governmental policies and regulations. There can be no assurance that we will
have earnings at a level sufficient to support the payment of dividends, or that
we will in the future elect to pay dividends. As James Monroe Bank is the
primary source of funds for payment of dividends by James Monroe Bancorp, the
inability of James Monroe Bank to pay dividends could adversely affect the
ability of James Monroe Bancorp to pay dividends.
Regulations of the Federal Reserve and Virginia law place a limit on the
amount of dividends James Monroe Bank may pay without prior approval. Prior
regulatory approval is required to pay dividends which exceed James Monroe
Bank's net profits for the current year plus its retained net profits for the
preceding two calendar years, less required transfers to surplus. At March 31,
2000 dividends may not be paid without prior approval. State and federal
regulatory authorities also have authority to prohibit a bank from paying
dividends if they deem payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that James Monroe Bancorp may pay in the future. In 1985, the Federal Reserve
issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weakened
the holding company's financial health, such as by borrowing.
As a depository institution, the deposits of which are insured by the FDIC,
James Monroe Bank may not pay dividends or distribute any of its capital assets
while it remains in default on any assessment due the FDIC. James Monroe Bank is
not currently in default under any of its obligations to the FDIC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of
operations and financial condition, liquidity, and capital resources of James
Monroe Bancorp and should be read in conjunction with our consolidated financial
statements for the year ended December 31, 1999.
In addition, in reading and understanding the information contained herein,
it should be noted that our wholly owned subsidiary, James Monroe Bank, was
chartered and commenced business on June 8, 1998. Therefore, the information
contained herein for 1998 represents approximately seven months of operations,
1999 was our first full year of operations, and, therefore, the two year
comparisons of operations are not meaningful.
OVERVIEW
The strategic vision of the newly chartered James Monroe Bank, our wholly
owned subsidiary, was to focus on growing the bank by concentrating on lending
to small and medium size businesses in Northern Virginia. While we offer all the
typical retail or consumer products at competitive prices, this segment of
business is not the primary focus. James Monroe Bancorp attempts to develop
business and grow by offering nearly all the products and services of larger
financial institutions at similar competitive prices to commercial customers,
but attempts to provide a higher level of personalized service with less fee
charges. We do not currently offer services such as insurance products,
securities sales, or single family first trust real estate loans.
James Monroe Bank started with nine employees, one location, and $7.4
million of capital. It currently has 16 full-time and 3 part-time employees and
two locations. We have grown significantly faster than the initial projections
and achieved profitability much earlier than expected. Assets have grown from
zero when operations commenced on June 8, 1998 to $23.5 million at December 31,
1998, $49.6 million at December 31, 1999, and
17
<PAGE>
reached $61.3 million, at March 31, 2000. During these same periods deposits
grew to $16.8 million, $42.8 million, and $54.3 million, respectively, while
loans grew to $12.8 million, $31.0 million, and $37.6 million, respectively.
Deposit growth has outpaced loan growth and therefore we have generated excess
liquidity, which we have invested in high quality government agency securities,
corporate bonds, and federal funds.
We have attempted to offer competitive loan and deposit rates. The deposit
mix is such that we have funded our assets with low cost core deposits and have
not been reliant on high cost or large denomination time deposits. This has
translated into a strong net interest margin of 5.27% for 1998, 5.25% for 1999,
and 5.35% for the first quarter of 1999 and the first quarter of 2000. As a
result, we had our first month of profitability in March 1999, and have earned a
profit each month thereafter. While we lost $452,000 for the seven month period
ended December 31, 1998, we earned a profit of $125,000 in 1999. For the first
quarter of 1999 we lost $34,000 but earned $112,000 in the first quarter of
2000. See "Risk Factors" at page 3 and "Business of James Monroe Bancorp and
James Monroe Bank -- Proposed Legislation" at page 30.
In the first twenty-two months of operations through March 31, 2000, asset
quality has been exceptional. We have not had a loan charged-off, or classified
a loan as nonaccrual, nor has any loan been restructured. In addition, no loan
has been over 90-days past-due. It is not likely that we will continue to
experience no nonperforming loans as we go forward.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on
assets and the interest paid on deposits and borrowings. Net interest income is
one of the major determining factors in a financial institution's performance as
it is the principal source of earnings. Table 1 presents average balance sheets
and a net interest income analysis for the quarter ended March 31, 2000,
compared with the quarter ended March 31, 1999, and for the fiscal year ended
December 31, 1999 compared with the fiscal year ended December 31, 1998 (a seven
month period from the date James Monroe Bank opened for business). James Monroe
Bancorp did not have any tax exempt income during any period presented.
As reflected in Table 1, net interest income increased $294,000, or 81%,
from $363,000 for the first quarter of 1999 to $657,000 for the first quarter of
2000. The increase was due primarily to the increase in average total earning
assets, and average loans in particular. Total average earning assets increased
by $22 million, or 80.9%, from the first quarter of 1999 to the first quarter of
2000, and the yield on earning assets increased by 79 basis points. Average
loans outstanding grew by $17.5 million, or 114.5% and the yield on such loans
increased by 31 basis points. Also contributing to the increase in earning
assets on a quarter to quarter basis was the increase in taxable securities
which increased $5.7 million and a 53 basis point increase in the average yield
on securities.
In comparing fiscal year 1999 to 1998, the increase in net interest income
of $1,442,000, or 299.2%, can be attributed to the growth in total earning
assets. Since James Monroe Bank was chartered and opened for business on June 8,
1998, fiscal year 1998 is comprised of seven months of operations compared with
the full year of operations in 1999.
Table 2 shows the composition of the net change in net interest income for
the periods indicated, as allocated between the change in net interest income
due to changes in the volume of average assets and the changes in net interest
income due to changes in interest rates. As the table shows, for both the
comparison of net interest income for the first quarter of 2000 compared with
the first quarter of 1999 and for fiscal year 2000 compared with fiscal year
1999, the increase in net interest income is almost entirely due to changes in
the volume of earning assets and interest-bearing liabilities. The net interest
margin for the quarter-to-quarter comparison held steady at 5.35% and thus very
little of the change in net interest income is due to net changes in interest
rates.
In comparing 1999 with 1998, the same holds true although the net interest
margin did decline slightly, by 2 basis points, from 5.27% for the short year
1998 to 5.25% for the full year 1999.
18
<PAGE>
As discussed further below, interest rates changed a number of times during
the period of June 1998 through March 31, 2000, yet we have been able to
maintain a stable, yet strong, net interest margin of 5.27% in 1998, a 5.25% in
1999 and a 5.35% margin for the first quarter of 1999 and 2000.
TABLE 1
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
--------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Commercial $ 16,812 $ 361 8.64% $ 6,499 $ 143 8.85%
Commercial real estate 12,676 328 10.41 6,246 143 9.21
Consumer 3,239 68 8.44 2,514 55 8.80
----------- --------- ---------- ----------
Total Loans 32,727 757 9.30 15,259 341 8.99
Taxable securities 13,829 224 6.51 8,141 121 5.98
Federal funds sold 2,814 40 5.72 3,890 49 5.07
----------- --------- ---------- ----------
TOTAL EARNING ASSETS $ 49,370 $ 1,021 8.32% $ 27,290 $ 511 7.53%
Less allowance for loan losses (381) (155)
Cash and due from banks 3,053 1,317
Premises and equipment, net 722 488
Other assets 524 195
----------- ----------
TOTAL ASSETS $ 53,288 29,135
=========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing demand deposits $ 3,124 $ 16 2.06% $ 2,092 $ 6 1.15%
Money market deposit accounts 18,646 205 4.42 9,738 94 3.38
Savings accounts 308 2 2.61 174 1 2.31
Time deposits 10,799 141 5.25 3,795 47 4.98
----------- --------- ---------- ----------
TOTAL INTEREST-BEARING
LIABILITIES $ 32,877 $ 364 4.45% $ 15,799 $ 148 3.77%
Net interest income and net yield on
interest earning assets $ 657 5.35% $ 363 5.35%
========= ==========
Noninterest-bearing demand deposits $ 13,541 $ 6,521
Other liabilities 238 157
Stockholders' equity 6,632 6,658
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 53,288 $ 29,135
=========== ==========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Seven Months Ended December 31, 1998
--------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Commercial $ 10,012 $ 865 8.64 % $ 1,667 $ 155 9.30%
Commercial real estate 8,672 850 9.80 1,462 145 9.92
Consumer 3,517 293 8.33 419 40 9.55
----------- ---------- ---------- ---------
Total Loans 22,201 2,008 9.04 3,548 340 9.58
Taxable securities 10,176 622 6.11 700 39 5.57
Federal funds sold 4,268 215 5.04 4,899 251 5.12
----------- ---------- ---------- ---------
TOTAL EARNING ASSETS $ 36,645 $ 2,845 7.76 % $ 9,147 $ 630 6.89%
Less allowance for loan losses (242) (31)
Cash and due from banks 2,261 500
Premises and equipment, net 508 286
Other assets 353 63
----------- ----------
TOTAL ASSETS 39,525 9,965
=========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing demand deposits $ 2,738 $ 41 1.50 % $ 543 $ 12 2.21%
Money market deposit accounts 13,614 556 4.08 1,676 75 4.47
Savings accounts 255 7 2.75 65 2 3.08
Time deposits 6,338 317 5.00 1,118 59 5.28
----------- ---------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 22,945 $ 921 4.01 % $ 3,402 $ 148 4.35%
Net interest income and net yield on
interest earning assets $ 1,924 5.25 % $ 482 5.27%
========== =========
Noninterest-bearing demand deposits $ 9,760 $ 2,477
Other liabilities 160 29
Stockholders' equity 6,660 4,057
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 39,525 $ 9,965
=========== ==========
</TABLE>
20
<PAGE>
INTEREST INCOME
The following table indicates changes in interest income and interest
expense attributable to changes in average volume and average rates in
comparison with the same period in the preceding year. The change in interest
due to combined rate-volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of the changes in each.
TABLE 2
<TABLE>
<CAPTION>
March 2000 vs. March 1999 1999 vs. 1998
---------------------------------------- ----------------------------------------
Due to Change in Average Due to Change in Average
--------------------------- ---------------------------
Increase or Increase or
(Decrease) Volume Rate (Decrease) Volume Rate
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $ 416 404 12 $ 1,668 1,686 $ (18)
Taxable securities 103 91 12 583 579 4
Federal funds sold (9) (17) 8 (36) (32) (4)
---------------------------------------- ----------------------------------------
Total interest income 510 478 32 2,215 2,233 (18)
---------------------------------------- ----------------------------------------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits 10 4 6 29 32 (3)
Money market deposit accounts 111 96 15 481 487 (6)
Savings deposits 1 1 0 5 5 (0)
Time deposits 94 91 3 258 261 (3)
---------------------------------------- ----------------------------------------
Total interest expense 216 192 24 773 785 (12)
---------------------------------------- ----------------------------------------
Net interest income $ 294 $ 286 $ 8 $ 1,442 $ 1,447 $ (6)
======================================== ========================================
</TABLE>
First Quarter 2000 versus First Quarter 1999. Interest income increased
$510,000 for the quarter ended March31, 2000, to $1,021,000 nearly doubling the
interest income for the first quarter of 1999 of $511,000. This improvement was
almost entirely the result of the increase in loans and securities. The increase
in the yield on earning assets from 7.53% to 8.32% contributed $32,000 to the
increase. In the early stages of James Monroe Bank's existence, it had a high
level of Federal funds and securities. As it matured and more loans were made, a
lower percentage of assets were in Federal funds. Thus, the change in the mix of
earning assets contributed to the improvement in the overall yield.
1999 versus 1998. As can be seen from the table above, the increase in
interest income during 1999 of $2,215,000, or 351.6%, over 1998 is entirely due
to the increase in the volume of earning assets. This growth in earning assets
is a combination of the fact that 1998 was a seven month fiscal year and the
second factor is that we have experienced exceptional and consistent growth from
month to month since inception.
INTEREST EXPENSE
First Quarter 2000 versus First Quarter 1999. Interest expense for the
first quarter of 2000 was $364,000, an increase of approximately $216,000, or
146%, over interest expense for the first quarter of 1999. The increase is
attributable principally to the $17.1 million increase in interest bearing
deposits, augmented by a 63 basis point increase in average yield.
1999 versus 1998. Interest expense for 1999 was $921,000, compared to
$148,000 for the seven month period ending December 31, 1998. The increase is
due entirely to the growth in interest bearing liabilities as the bank matured
and reflecting the fact that 1999 represented a full year of operations.
21
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's best estimate of
probable losses which have been incurred. Since James Monroe Bank is a de novo
bank with a limited operating history, it has no history of loan losses. It also
has not had any nonaccrual loans, loans past due 90-days or more, restructured
loans, other real estate owned or foreclosed properties. At March 31, 2000,
there were no loans which were performing but as to which information known to
us caused management to have serious doubts as to the ability of the borrower to
comply with the current loan repayment terms. In determining the adequacy of the
allowance, the value and adequacy of the collateral is considered as well as the
growth and composition of the portfolio, as well as the loss experience of other
banks in our peer group. Consideration is given to the results of examinations
and evaluations of the overall portfolio by senior management, external
auditors, and regulatory examiners. While the methodology we use for
establishing the allowance for loan losses is reevaluated on a regular basis,
our current policy is to maintain the allowance at approximately 1.20% of total
loans. As reflected in table 4 below, the allowance is allocated among the
various categories of loans in rough proportion to the level of loans
outstanding in such categories. Management considers the allowance to be
adequate for the periods presented.
The accompany tables reflect the composition of the loan portfolio at March
31, 2000 and March 31, 1999, and for the years ended in 1999 and 1998, a history
of net charge-offs and the allocation of the allowance by loan category for the
same periods.
TABLE 3
The following table presents the activity in the allowance for loan and
lease losses for the quarters ended March 31, 2000 and 1999 and for the year
ended December 31, 1999 and seven months ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended Seven Months Ended
Three Months Ended March 31, December 31, December 31,
-------------------------------- --------------- ----------------------
(Dollars in thousands) 2000 1999 1999 1998
-------------- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1 $ 363 $ 132 $ 132 $ 0
Provision for loan losses 56 60 231 132
Loan charge-offs 0 0 0 0
Loan recoveries 0 0 0 0
-------------- --------------- --------------- ----------------------
Net charge-offs 0 0 0 0
-------------- --------------- --------------- ----------------------
Balance End of Period $ 419 $ 192 $ 363 $ 132
============== =============== =============== ======================
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended Seven Months Ended
March 31, December 31, December 31,
---------------------------------------------- ---------------------------------------------------
(Dollars in thousands) 2000 1999 1999 1998
--------------------------------------------------- ---------------------------------------------------------------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 174 41.6% $ 76 39.6% $ 178 50.9% $ 58 44.3%
Commercial real estate 200 47.6 84 43.8 134 35.6 55 41.6
Consumer 45 10.8 32 16.6 51 13.5 19 14.1
Other 0 0 0 0 0 0 0 0
---------- ------- --------- --------- ----------- ---------- --------- ----------
Balance End of Period $ 419 100% $ 192 100% $ 363 100% $ 132 100%
========== ======= ========= ========= =========== ========== ========= ==========
</TABLE>
(1) Represents percentage of loans in each category to total loans.
22
<PAGE>
TABLE 5
Table 5 shows the maturities of the loan portfolio and the sensitivity of
loans to interest rate fluctuations at March 31, 2000. Maturities are based on
the earlier of contractual maturities or rate repricing. Demand loans and loans
with no contractual maturity are reported in as due in one year or less.
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 2000
---------------------------------------------------------------------------
One Year or After One Year
Less Through Five Years After Five Years Total
--------------- -------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 7,422 $ 5,100 $ -- $ 12,522
Government Guaranteed Loans -- -- 350 350
Commercial real estate 7,118 10,330 2,589 20,037
Consumer loans 2,587 1,676 407 4,670
Overdrafts 59 -- -- --
--------------- -------------------- ----------------- --------------
Total Loans $ 17,127 $ 17,106 $ 3,346 $ 37,579
=============== ==================== ================= ==============
Loans with :
Fixed Rate $ 9,294 $ 16,089 $ 2,076 $ 27,459
Variable Rate 7,833 1,017 1,270 10,120
--------------- -------------------- ----------------- --------------
Total $ 17,127 $ 17,106 $ 3,346 $ 37,579
=============== ==================== ================= ==============
</TABLE>
LOANS
The loan portfolio is the largest component of earning assets and accounts
for the greatest portion of total interest income. At March 31, 2000, total
loans were $37.6 million, a 108% increase from March 31, 1999. In general, loans
are internally generated with the exception of a small percentage of
participation loans purchased from other local community banks, and lending
activity is 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 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.
Consumer loans consist primarily of secured installment credits to
individuals, residential construction loans secured by a first deed of trust,
home equity loans, or home improvement loans. The consumer portfolio represents
7% of the loan portfolio at March 31, 2000.
TABLE 6
The following table presents the composition of the loan portfolio by type
of loan at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------- -------------------------------
(Dollars in thousands) 2000 1999 1999 1998
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Commercial $ 17,284 $ 7,163 $ 14,748 $ 5,639
Government Guaranteed Loans 1,043 -- 1,064 --
Commercial real estate 16,502 7,922 11,010 5,308
Consumer loans 2,691 3,004 4,178 1,802
Overdrafts 59 1 39 20
------------- ------------ --------------- -------------
Total Loans $ 37,579 $ 18,090 $ 31,039 $ 12,769
============= ============ =============== =============
</TABLE>
23
<PAGE>
INVESTMENT SECURITIES
The carrying value of James Monroe Bancorp's securities portfolio increased
$5.9 million to $14.6 million at March 31, 2000 from the same quarter a year
earlier. From December 31, 1998 to December 31, 1999, the portfolio increased
$9.5 million to $13.5 million. James Monroe Bancorp 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 years or less in the case of fixed rate securities. In
the case of mortgaged-backed securities, the policy is to invest only in those
securities whose average expected life is projected to be five years or less. To
the extent possible the Company attempts to "ladder" the maturities of such
securities.
TABLE 7
The following table provides information regarding the composition of our
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31 At December 31,
---------------------- ---------------------------------------------------
2000 1999 1998
---------------------- ----------------------- ----------------------
(Dollars in thousands) Balance Percent(1) Balance Percent(1) Balance Percent(1)
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
(AT ESTIMATED MARKET VALUE):
%
U.S. Government Agency obligations $ 11,263 78 $ 11,307 84% $ 3,767 94%
Mortgage-backed securities 1,954 13 2,011 14 0 0
Corporate debt securities 996 7 0 0 0 0
---------- ---------- ---------- ----------- ---------- ----------
14,213 98 13,318 99 3,767 94
---------- ---------- ---------- ----------- ---------- ----------
Other investments 345 2 200 1 221 6
---------- ---------- ---------- ----------- ---------- ----------
Total $ 14,558 100% $ 13,518 100% $ 3,988 100%
========== ========== ========== =========== ========== ==========
</TABLE>
(1) Represents percentage of investments in each category to total investments.
TABLE 8
The following table presents the amount and maturities of the investment
securities in our portfolio at March 31, 2000.
<TABLE>
<CAPTION>
Years to Maturity
----------------------------------------------------------------------------------------------
Over 1 through 5 Over 5 through 10
(Dollars in thousands) Within 1 Year Years Years Over 10 Years
------------------ ------------------ ------------------- ----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
(AT ESTIMATED MARKET VALUE):
U. S. Government Agency $ -- 0.00% $ 11,263% $ 6.19 % $ --% $ 0.00% $ --% $ 0.00%
Mortgage-backed securities -- -- -- -- 1,479 6.36 475 6.37
Corporate bonds -- -- 996 7.27 -- --
-------- ------- -------- ------- ------- ------- -------- ---------
Total Debt Securities
Available-for-Sale $ -- 0.00% $ 12,259% $ 6.27% $ 1,479% $ 6.36% $ 475% $ 6.37%
========== ======== ======= ========
</TABLE>
24
<PAGE>
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 a tactical and contingency perspectives. At December 31, 1999, our Basic
Surplus ratio (net access to cash and secured borrowings) as a percentage of
total assets was 27% compared to the present internal minimum guideline range of
7% 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 depicted in the accompanying table. The matrix arrays repricing
opportunities along a time line for both assets and liabilities. The longest
term, most fixed rate sources are presented in the upper left hand corner while
the shorter term, most variable rate items, are at the lower left. Similarly,
uses of funds are arranged across the top moving from left to right.
The body of the matrix is derived by allocating the longest fixed rate
funding sources to the longest fixed rate assets and shorter term variable
sources to shorter term variable uses. The result is a graphical depiction of
the time periods over which we expect to experience exposure to rising or
falling rates. Since the scales of the liability and assets sides are identical,
all numbers in the matrix would fall within the diagonal lines if we were
perfectly matched across all repricing time frames. Numbers outside the diagonal
lines represent two general types of mismatches: liability sensitive in time
frames when numbers are to the left of the diagonal line and asset sensitive
when numbers are to the right of the diagonal line.
As can be seen in the Table 9 below, we are asset sensitive in the short
term and then become slightly liability sensitive. This is primarily caused by
the assumptions used in allocating a repricing term to nonmaturity
deposits-demand deposits, savings accounts, and money market deposit accounts.
While the traditional gap analysis and the matched funding matrix show a general
picture of our potential sensitivity to changes in interest rates, it cannot
quantify the actual impact of interest rate changes. The actual impact due to
changes in interest rates is difficult to quantify in that the administrative
ability to change rates on these products is influenced by competitive market
conditions in changing rate environments, prepayments of loans, customer
demands, and many other factors.
Thus, the Company utilizes 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. At March 31, 2000, the following 12-month impact on net interest
income is estimated to range from a positive impact of 8% to a negative impact
of 4% for the multiple scenarios. In the next 12-month period the range of
impact on net interest income is estimated to be from a positive impact of 9% to
a negative impact of 4%. The Company believes this to be well within acceptable
range given a wide variety of potential interest rate change scenarios. This
process is performed each quarter to ensure the Company is not materially at
risk to possible changes in interest rates.
TABLE 9
JAMES MONROE BANK
25
<PAGE>
JAMES MONROE BANK
MATCH FUNDING MATRIX
MARCH 31, 2000
<TABLE>
<CAPTION>
ASSETS 60+ 36 - 59 24 - 35 12 - 23 10-11 7 - 9 4 - 6 2 - 3 1
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTH O/N TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES &
EQUITY 6,985 17,646 3,773 3,417 3,666 2,202 2,669 1,664 6,625 13,180 61,827
------------------------------------------------------------------------------------------------------------------------------------
60+
MONTHS 11,225 4,240 11,225
------------------------------------------------------------------------------------------------------------------------------------
36 - 59
MONTHS 5,193 ASSET SENSITIVE 5,193
------------------------------------------------------------------------------------------------------------------------------------
24 - 35
MONTHS 4,610 4,610 4,610
------------------------------------------------------------------------------------------------------------------------------------
12 - 23
MONTHS 5,313 3,603 1,710 5,313
------------------------------------------------------------------------------------------------------------------------------------
10 - 11
MONTHS 3,916 2,063 1,853 3,916
------------------------------------------------------------------------------------------------------------------------------------
7 - 9
MONTHS 2,312 1,564 748 2,312
------------------------------------------------------------------------------------------------------------------------------------
4 - 6
MONTHS 9,739 2,918 2,202 2,669 1,664 286 9,739
------------------------------------------------------------------------------------------------------------------------------------
2 - 3
MONTHS 18,203 6,339 11,864 18,203
------------------------------------------------------------------------------------------------------------------------------------
1
MONTH 776 LIABILITY SENSITIVE 776 776
------------------------------------------------------------------------------------------------------------------------------------
O/N 0 540
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 61,287 6,985 17,646 3,773 3,417 3,666 2,202 2,669 1,664 6,625 13,180 61,827
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest income consist primarily of services charges on deposit
accounts and fees and other charges for banking services. Noninterest expense
consists primarily of salary and benefit costs and occupancy expense. The
following tables shows the detail for the quarters ended March 31, 2000 and 1999
and for the fiscal year ended December 31, 1999 and seven month period ended
December 31, 1998.
26
<PAGE>
TABLE 10
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------- Year Ended Seven Months Ended
(Dollars in thousands) 2000 1999 December 31, 1999 December 31, 1998
--------------- --------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Services charges on deposit accounts $ 48 $ 13 $ 111 $ 5
Other fee income 16 6 48 9
--------------- --------------- --------------------- ----------------------
Total Noninterest Income $ 64 $ 19 $ 159 $ 14
=============== =============== ===================== ======================
</TABLE>
The increase in noninterest income for the comparative periods is the
result of the continued growth of the company and the expansion of products
resulting in fee income.
TABLE 11
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------ Year Ended Seven Months Ended
(Dollars in thousands) 2000 1999 December 31, 1999 December 31, 1998
------------------ ---------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Personnel $ 290 $ 168 $ 841 $ 355
Occupancy and equipment 110 77 338 157
Other 153 110 548 305
------------------ ---------------- --------------------- ----------------------
Total Noninterest Income $ 553 $ 355 $ 1,727 $ 817
================== ================ ===================== ======================
</TABLE>
First Quarter 2000 versus First Quarter 1999. Noninterest expense increased
$198,000 or 56% from $355,000 in the first quarter of 1999 to $553,000 in the
first quarter of 2000. The increase in personnel expense is the result of adding
staff at our main office and the addition of the first branch in December 1999.
James Monroe Bank opened in June 1998 with a staff of 9 personnel and operated
with 9-10 personnel until 1999. The significant growth that we experienced
required adding four personnel in 1999 in both the business development
functions and in the operations functions. In December 1999, four additional
personnel were added to staff the new branch. No additional personnel have been
added since that time. In addition to increased staffing, merit increases
effective January 1 of each year contributed to the increase in personnel costs.
Occupancy and equipment costs increased $33,000 in the first quarter of
2000 over the first quarter of 1999. The increase is predominately due to the
rent and other costs of the new branch. With respect to the $43,000 increase in
other expenses in the comparative quarters, other expenses in connection with
the additional facility, higher data processing costs due to the growth of the
bank and the significant increase in the number of accounts being serviced, and
the general overall higher costs to operate a significantly larger bank were the
cause of the increase.
1999 versus 1998. Noninterest expense in 1999 totaled $727,000, an increase
of $910,000 over the period ended December 31, 1998, which consisted of only
seven months of operations. In addition to the full twelve month period, the
increases in costs reflects additional personnel and occupancy costs resulting
from growth and branch expansion as discussed above.
TABLE 12
The following table indicates the amount of certificates of deposit of
$100,000 or more and less than $100,000, and their remaining maturities. For
additional information regarding our deposit base, see Table 1 at page 17, and
Note 5 to the consolidated financial statements. See also "Risk Factors" at page
3 and "Business of James Monroe Bancorp and James Monroe Bank - Proposed
Legislation" at page 30.
27
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<TABLE>
<CAPTION>
Remaining Maturity
-----------------------------------------------
3 Months 4 to 6 to 12 ver 12
(Dollars in thousands) or Less Months 7 Months O Months Total
------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100MM $ 1,374 $ 1,331 $ 1,619 $ 1,301 $ 5,625
Certificates of deposit of $100MM or more 1,261 2,242 2,457 931 6,891
------------ ------------ ----------- ----------- -------------
$ 2,635 $ 3,573 $ 4,076 $ 2,232 $ 12,516
============ ============ =========== =========== =============
</TABLE>
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, 2000, stockholders' equity increased
$82,000 or 1% from the $6,599,000 of equity at December 31, 1999 reflecting
earnings of $112,000 partially off-set by a $30,000 negative after-tax change in
the fair value of securities for the quarter. Stockholders' equity at December
31, 1999, was $6,599,000 or a $60,000 decrease from stockholders' equity at
December 31, 1998, or $6,659,000 reflecting earnings of $125,000 off-set by an
after tax decline in the fair value of securities of $185,000. Nineteen-ninety
nine was a period of rising interest rates resulting in an unrealized loss on
the securities portfolio during this period.
James Monroe Bancorp has reported a steady improvement in earnings since
James Monroe Bank opened on June 8, 1998. Positive earnings were reported in the
ninth month of operations and culminated with $125,000 of earnings in 1999.
Earnings for the first quarter of 2000 were $112,000, nearly the earnings level
for the entire year of 1999. We are making every effort to restore the initial
lost capital from the initial organization costs of $254,000 and the earnings
loss of $452,000 for 1998. All but $469,000 of the initial losses and start-up
costs has been recaptured with earnings. We expect to complete the recovery by
the end of 2000 and should have fully recovered the Net Operating Losses for tax
purposes before the end of 2000. There can be no assurance, however, that we
will be able to successfully continue our recent history of growth in earnings.
Asset quality remains strong, the net interest margin has been consistently
over 5%, and loan and deposit growth continues strong as well. With these
factors in place we believe the current level of capital as augmented by this
offering and earnings, will be adequate for the next two to three years, based
upon anticipated rates of growth. However, if we experience growth rates in
excess of the levels we currently expect, then additional capital will be
required to support the higher level of assets before the expiration of that
period. Additionally, if opportunities for establishment or acquisition of
additional branches develop, our growth rate may exceed those currently
anticipated, possibly requiring additional capital earlier. The availability of
opportunities to engage in non-banking activities may also require us to seek
additional capital sooner than currently anticipated.
RECENT DEVELOPMENTS
For the quarter ended June 30, 2000, we had earnings of $212 thousand, or
$0.28 per share, compared to $37,000, or $0.05 per share, during the same period
in 1999. For the six months ended June 30, 2000, we earned a total of $324
thousand, or $0.42 per share, as compared to $3 thousand, or a fraction of one
cent per share, for the first six months of 1999. At June 30, 2000, we had
consolidated assets of $69.8 million, deposits of $62.5 million,, including
total loans of 42.9 million, and shareholders' equity of $6.9 million.
The net interest margin was 5.54% for the three months ended June 30, 2000,
and was 5.45% for the six months ended June 30, 2000 as compared to 5.39% for
the three and six months ended June 30, 2000. We experienced no charge-offs
during the first six months of 2000, and had no non-performing loans or loans
identified as potential problem loans. At June 30, 2000 the allowance for loan
losses was $497 thousand, or 1.16% of total loans.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Statement 133 "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 establishes accounting and reporting standards for
derivative financial instruments and other similar financial instruments and for
hedging activities. The standard also allows securities classified as
held-to-maturity to be transferred to the available-for-sale category at the
date of initial application of the standard. FAS 133 is effective for all fiscal
years beginning after June 15, 2000.
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<PAGE>
This statement is not expected to have a significant impact on James Monroe
Bancorp since, as of the date of this prospectus, we have no derivative
instruments and classify all of our securities as available-for-sale.
BUSINESS OF JAMES MONROE BANCORP AND JAMES MONROE BANK
GENERAL
James Monroe Bancorp was incorporated under the laws of the State 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 subsidiary.
James Monroe Bank commenced banking operations on June 8, 1998, and currently
operates out of its main office and one branch office. James Monroe Bank seeks
to provide a high level of personal service and a sophisticated menu of products
to individuals and small to medium sized businesses. While James Monroe Bank
offers a full range of services to a wide array of depositors and borrowers, it
has chosen the small to medium sized business, professionals and the individual
retail customer as its primary target market. James Monroe Bank believes that as
financial institutions grow and are merged with or acquired by larger
institutions with headquarters that are far away from the local customer base,
the local business and individual is further removed from the point of decision
making. James Monroe Bank attempts to place the customer contact and the
ultimate decision on products and credits as close together as possible.
LENDING ACTIVITIES
James Monroe Bank offers a wide array of lending services to its customers,
including commercial loans, lines of credit, personal loans, auto loans and
financing arrangements for personal equipment and business equipment. Loan
terms, including interest rates, loan to value ratios, and maturities, are
tailored as much as possible to meet the needs of the borrower. A special effort
is made to keep loan products as flexible as possible within the guidelines of
prudent banking practices in terms of interest rate risk and credit risk.
When considering loan requests, the primary factors taken into
consideration are the cash flow and financial condition of the borrower, the
value of the underlying collateral, if applicable, and the character and
integrity of the borrower. These factors are evaluated in a number of ways
including an analysis of financial statements, credit reviews, trade reviews,
and visits to the borrower's place of business. We have implemented a
comprehensive loan policy and procedures manual to provide our loan officers
with term, collateral, loan-to-value and pricing guidelines. The policy manual
and sound credit analysis, together with thorough review by the Asset-Liability
Committee, have resulted in a profitable loan portfolio, with no non-performing
assets.
Our aim is to build and maintain a commercial loan portfolio consisting of
term loans, lines of credit and commercial real estate loans provided to
primarily locally-based borrowers. These types of loans are generally considered
to have a higher degree of risk of default or loss than other types of loans,
such as residential real estate loans, because repayment may be affected by
general economic conditions, interest rates, the quality of management of the
business, and other factors which may cause a borrower to be unable to repay its
obligations. Traditional installment loans and personal lines of credit will be
available on a selective basis. General economic conditions can directly affect
the quality of a small and mid-sized business loan portfolio. We attempt to
manage the loan portfolio to avoid high concentrations of similar industry
and/or collateral pools, although this cannot be assured. Approximately 45% of
the loan portfolio will be comprised of commercial mortgage loans, approximately
15% will consist of commercial term loans, approximately 20% in commercial lines
of credit and 15% in consumer loan products (car loans, residential real estate
loans, personal lines of credit and other similar forms of credit products).
There can be no assurance that we will be able achieve or maintain this
distribution of loans. At March 31, 2000 our loan portfolio's actual composition
consisted of approximately 21% commercial lines of credit, 48% commercial loans
secured by real estate, 11% consumer loans, 17% commercial term loans and 3%
government guaranteed commercial loans.
Loan business is generated primarily through referrals and direct-calling
efforts. Referrals of loan business come from directors, shareholders, current
customers and professionals such as lawyers, accountants and financial
intermediaries.
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<PAGE>
At March 31, 2000, James Monroe Bank's statutory lending limit to any
single borrower was $1,113,225, subject to certain exceptions provided under
applicable law. As of March 31, 2000, James Monroe Bank's credit exposure to its
largest borrower was $984,837.
Commercial Loans. Commercial loans are written for any business purpose,
including the financing of plant and equipment, the carrying of accounts
receivable, contract administration, and the acquisition and construction of
real estate projects. Special attention is paid to the commercial real estate
market which is particularly active in the Northern Virginia market area. James
Monroe Bank's commercial loan portfolio reflects a diverse group of borrowers
with no concentration in any borrower, or group of borrowers.
The lending activities in which we engage carry the risk that the borrowers
will be unable to perform on their obligations. As such, interest rate policies
of the Federal Reserve Board and general economic conditions, nationally and in
our primary market area will have a significant impact on our results of
operations. To the extent that economic conditions deteriorate, business and
individual borrowers may be less able to meet their obligations to James Monroe
Bank in full, in a timely manner, resulting in decreased earnings or losses to
James Monroe Bank. To the extent that loans are secured by real estate, adverse
conditions in the real estate market may reduce ability of the borrower to
generate the necessary cash flow for repayment of the loan, and reduce our
ability to collect the full amount of the loan upon a default. To the extent
that James Monroe Bank makes fixed rate loans, general increases in interest
rates will tend to reduce our spread as the interest rates we must pay for
deposits increase while interest income is flat. Economic conditions and
interest rates may also adversely affect the value of property pledged as
security for loans.
We constantly strive to mitigate risks in the event of unforeseen threats
to the loan portfolio as a result of an economic downturn or other negative
influences. Plans for mitigating inherent risks in managing loan assets include
carefully enforcing loan policies and procedures, evaluating each borrower's
industry and business plan during the underwriting process, identifying and
monitoring primary and alternative sources for repayment and obtaining
collateral that is margined to minimize loss in the event of liquidation.
Commercial real estate loans will generally be owner occupied or managed
transactions with a principal reliance on the borrower's ability to repay, as
well as prudent guidelines for assessing real estate values. Risks inherent in
managing a commercial real estate portfolio relate to either sudden or gradual
drops in property values as a result of a general or local economic downturn. A
decline in real estate values can cause loan to value margins to increase and
diminish the bank's equity cushion on both an individual and portfolio basis.
James Monroe Bank attempts to mitigate commercial real estate lending risks by
carefully underwriting each loan of this type to address the perceived risks in
the individual transaction. Generally, James Monroe Bank requires a loan to
value ratio of 75% of the lower of an appraisal or cost. A borrower's ability to
repay is carefully analyzed and policy calls for an ongoing cash flow to debt
service requirement of 1.1:1.0. An approved list of commercial real estate
appraisers selected on the basis of rigorous standards has been established.
Each appraisal is scrutinized in an effort to insure current comparable market
values.
As noted above, commercial real estates loans are generally made on owner
occupied or managed properties where there is both a reliance on the borrower's
financial health and the ability of the borrower and the business to repay.
Whenever appropriate and available, James Monroe Bank seeks Federal and State
loan guarantees, such as the Small Business Administration's "7A" and "504" loan
programs, to reduce risks. James Monroe Bank generally requires personal
guarantees on all loans as a matter of policy policy; exceptions to policy are
documented. All borrowers will be required to forward annual corporate,
partnership and personal financial statements to comply with bank policy and
enforced through the loan covenants documentation for each transaction. Interest
rate risks to James Monroe Bank are mitigated by using either floating interest
rates or by fixing rates for a short period of time, generally less than five
years. While loan amortizations may be approved for up to 360 months, loans
generally have a call provision (maturity date) of 10 years or less.
Non-specific provisions for loan loss reserves are generally set at 1.20% of the
portfolio value, subject to adjustment depending on national and local economic
circumstances. Specific reserves are used to increase overall reserves based on
increased credit and/or collateral risks on an individual loan basis. A risk
rating system is used to proactively determine loss exposure and provide a
measurement system for setting general and specific reserve allocations.
30
<PAGE>
Commercial term loans are used to provide funds for equipment and general
corporate needs. This loan category is designed to support borrowers who have a
proven ability to service debt over a term generally not to exceed 60 months.
James Monroe Bank generally requires a first lien position on all collateral and
guarantees from owners having at least a 20% interest in the involved business.
Interest rates on commercial term loans is generally floating or fixed for a
term not to exceed five years. Management carefully monitors industry and
collateral concentrations to avoid loan exposures to a large group of similar
industries and/or similar collateral. Commercial loans are evaluated for
historical and projected cash flow attributes, balance sheet strength, and
primary and alternate resources of personal guarantors. Commercial term loan
documents require borrowers to forward regular financial information on both the
business and on personal guarantors. Loan covenants require at least annual
submission of complete financial information and in certain cases this
information is required more frequently, depending on the degree to which
lenders desire information resources for monitoring a borrower's financial
condition and compliance with loan covenants. Examples of properly margined
collateral for loans, as required by bank policy, would be a 75% advance on the
lesser of appraisal or recent sales price on commercial property, 80% or less
advance on eligible receivables, 50% or less advance on eligible inventory and
an 80% advance on appraised residential property. Collateral borrowing
certificates may be required to monitor certain collateral categories on a
monthly or quarterly basis. Key person life insurance is required as appropriate
and as necessary to mitigate the risk loss of a primary owner or manager.
James Monroe Bank attempts to further mitigate commercial term loan loss by
using Federal and State loan guarantee programs such as offered by the United
States Small Business Administration. The loan loss reserve of approximately
1.20% of the entire portfolio in this group has been established. Specific loan
reserves will be used to increase overall reserves based on increased credit
and/or collateral risks on an individual loan basis. A risk rating system is
used to proactively determine loss exposure and provide a measurement system for
setting general and specific reserve allocations.
Commercial lines of credit are used to finance a business borrower's
short-term credit needs and/or to finance a percentage of eligible receivables
and inventory. In addition to the risks inherent in term loan facilities, line
of credit borrowers typically require additional monitoring to protect the
lender against increasing loan volumes and diminishing collateral values.
Commercial lines of credit are generally revolving in nature and require close
scrutiny. James Monroe Bank generally requires at least an annual out of debt
period (for seasonal borrowers) or regular financial information (monthly or
quarterly financial statements, borrowing base certificates, etc.) for borrowers
with more growth and greater permanent working capital financing needs. Advances
against collateral are generally in the same percentages as in term loan
lending. Lines of credit and term loans to the same borrowers are generally
cross-defaulted and cross-collateralized. Industry and collateral concentration,
general and specific reserve allocation and risk rating disciplines are the same
as those used in managing the commercial term loan portfolio. Interest rate
charges on this group of loans generally float at a factor at or above the prime
lending rate. Generally, personal guarantees are required on these loans.
As part of its internal loan review process, James Monroe Bank's
Asset-Liability Committee, comprised of loan officers and staff, reviews all
loans 30-days delinquent, loans on the Watch List, loans rated special mention,
substandard, or doubtful, and other loans of concern at least quarterly. Loan
reviews are reported to the Audit and Examining Committee with any adversely
rated changes specifically mentioned. All other loans with their respective risk
ratings are reported monthly to James Monroe Bank's Board of Directors. The
Audit and Examining Committee coordinates periodic documentation and internal
control reviews by outside vendors to complement loan reviews.
Other Loans. Loans are considered for any worthwhile personal or business
purpose on a case-by-case basis, such as the financing of equipment,
receivables, contract administration expenses, land acquisition and development,
and automobile financing. Consumer credit facilities are underwritten to focus
on the borrower's credit record, length of employment and cash flow to debt
service. Car, residential real estate and similar loans require advances of the
lesser of 80% loan to collateral value or cost. Loan loss reserves for this
group of loans are generally set at 1.2% subject to adjustments as required by
national or local economic conditions.
INVESTMENT ACTIVITIES
The investment policy of James Monroe Bank is an integral part of its
overall asset/liability management program. The investment policy is to
establish a portfolio which will provide liquidity necessary to facilitate
funding of
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loans and to cover deposit fluctuations while at the same time achieving a
satisfactory return on the funds invested. James Monroe Bank seeks to maximize
earnings from its investment portfolio consistent with the safety and liquidity
of those investment assets.
The securities in which James Monroe Bank may invest are subject to
regulation and, for the most part, are limited to securities which are
considered investment grade securities. In addition, James Monroe Bank's
internal investment policy restricts investments to the following categories:
U.S. Treasury securities; obligations of U.S. government agencies; investment
grade obligations of U.S. private corporations; mortgage-backed securities,
including securities issued by Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation; and securities of states and political
subdivisions, all of which must be considered investment grade by a recognized
rating service. See Note 2 to the Consolidated Financial Statements and
"Management's Discussion and Analysis" at page 15 for further information about
the investment portfolio.
SOURCES OF FUNDS
Deposits. Deposits obtained through bank offices have traditionally been
the principal source of James Monroe Bank's funds for use in lending and for
other general business purposes. At March 31, 2000 total deposits amounted to
$54.3 million. Non-interest bearing demand accounts and money market demand
accounts were James Monroe Bank's primary source of deposit funds, representing
over 32.5% and 37.5% of the deposit base, respectively. See "Management's
Discussion and Analysis" at page 15 for additional information regarding James
Monroe Bank's deposit base. See also "Business of James Monroe Bancorp and James
Monroe Bank -- Proposed Legislation" below.
In order to better serve the needs of its customers, James Monroe Bank
offers several types of deposit accounts in addition to standard savings,
checking, and NOW accounts. Special deposit accounts include the Clarendon and
Fairfax Money Market Accounts which pays a higher rate of interest but requires
a larger minimum deposit. Personal checking requires a $300 minimum balance and
may have no monthly fee, per check charge, or activity limit. Small Business
Checking allows a small business to pay no monthly service charge with a minimum
balance of $1,000 but limits the number of checks and deposits per month. If the
minimums are exceeded in this account, the small business automatically moves to
another account with a minimum balance of $2,500 and would be entitled to a
higher minimum number of checks and deposits without incurring a monthly fee. If
the small business grows and exceeds these minimums, the regular commercial
analysis account is available where adequate balance can offset the cost of
activity. Therefore, the bank offers a range of accounts to meet the needs of
the customer without the customer incurring charges or fees.
Borrowing. While we have not traditionally placed significant reliance on
borrowings as a source of liquidity, we have has established various borrowing
arrangements in order to provide management with additional sources of liquidity
and funding, thereby increasing flexibility. Management believes that James
Monroe Bancorp currently has adequate liquidity available to respond to current
liquidity demands. See "Management's Discussion and Analysis" at page 15.
PROPOSED LEGISLATION
A bill is currently pending in Congress which would permit banks to pay
interest on checking and demand deposit accounts established by businesses, a
practice which is currently prohibited by regulation. If the proposed
legislation is enacted in its current form, of which there can be no assurance,
it is likely that we may be required to pay interest on some portion of our
noninterest bearing deposits in order to compete against other banks. As a
significant portion of our deposits, 32.5% at March 31, 2000, are non-interest
bearing demand deposits established by businesses, payment of interest on these
deposits could have a significant negative impact on our net income, net
interest income, interest margin, return on assets and equity, and other indices
of financial performance. We expect that other banks would be faced with similar
negative impacts. We also expect that the primary focus of competition would
continue to be based on other factors, such as quality of service.
COMMUNITY REINVESTMENT ACT
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James Monroe Bank is committed to serving the banking needs of the entire
community, including low and moderate income areas, and is a supporter of the
Community Reinvestment Act ("CRA"). There are several ways in which James Monroe
Bank attempts to fulfill this commitment, including working with economic
development agencies, undertaking special projects, and becoming involved with
neighborhood outreach programs.
James Monroe Bank has contacts with state and city agencies that assist in
the financing of affordable housing developments as well as with groups which
promote the economic development of low and moderate income individuals. James
Monroe Bank has computer software to geographically code all types of accounts
to track business development and performance by census tract and to assess
market penetration in low and moderate income neighborhoods within the primary
service area. James Monroe Bank is a registered Small Business Administration
lender.
James Monroe Bancorp encourages its directors and officers to participate
in community, civic and charitable organizations. Management and members of the
Board of Directors periodically review the various CRA activities of James
Monroe Bank, including the advertising program and geo-coding of real estate
loans by census tract data which specifically focuses on low income
neighborhoods, its credit granting process with respect to business prospects
generated in these areas, and its involvement with community leaders on a
personal level.
OFFICE PROPERTIES
The executive offices of James Monroe Bancorp and James Monroe Bank, and
the main office of James Monroe Bank are located at 3033 Wilson Boulevard,
Arlington, Virginia. Our offices occupy 5,400 square feet on the ground floor of
a seven story office building, including approximately 1,800 feet used for the
banking lobby. We lease the property in which the main office is located under a
ten year lease at a current monthly rent of $13,600, subject to fixed annual
increases of approximately 3% annually, plus an allocated portion of the
building annual operating expenses. There are no options to renew the lease.
James Monroe Bank has one branch, located at 7023 Little River Turnpike,
Annandale, Virginia. The branch consists of 1,445 square feet in a professional
office building. The property is occupied under a five year lease, terminating
on September 30, 2004, at a current monthly rental of $2,450, subject to fixed
annual increases of approximately 3% annually. We have options to renew the
lease for two additional five year terms.
Management believes the existing facilities are adequate to conduct James
Monroe Bancorp's business.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal proceedings occurring in
the ordinary course of business. In the opinion of management, final disposition
of these matters will not have a material adverse effect on our financial
condition or results of operations.
COMPETITION
In attracting deposits and making loans, we encounter competition from
other institutions, including larger commercial banking organizations, savings
banks, credit unions, other financial institutions and non-bank financial
service companies serving our market area. Financial and non-financial
institutions not located in the market are also able to reach persons and
entities based in the market through mass marketing, the internet,
telemarketing, and other means. The principal methods of competition include the
level of loan interest rates, interest rates paid on deposits, efforts to obtain
deposits, range of services provided and the quality of these services. Our
competitors include a number of major financial companies whose substantially
greater resources may afford them a marketplace advantage by enabling them to
maintain numerous banking locations and mount extensive promotional and
advertising campaigns. In light of the deregulation of the financial service
industry and the absence of interest rate controls on deposits, we anticipate
continuing competition from all of these institutions in the future.
Additionally, as a result of legislation which
33
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reduced restrictions on interstate banking and widened the array of companies
that may own banks, we may face additional competition from institutions outside
our market and outside the traditional range of bank holding companies which may
take advantage of such legislation to acquire or establish banks or branches in
our market. There can be no assurance that we will be able to successfully meet
these competitive challenges.
In addition to offering competitive rates for its banking products and
services, our strategy for meeting competition has been to concentrate on
specific segments of the market for financial services, particularly small
business and individuals, by offering such customers customized and personalized
banking services.
We believe that active participation in civic and community affairs is an
important factor in building our reputation and, thereby, attracting customers.
EMPLOYEES
As of March 31, 2000, James Monroe Bank had 16 full-time and 3 part-time
employees. James Monroe Bancorp has no employees who are not also employees of
James Monroe Bank. Our employees are not represented by any collective
bargaining unit, and we believe our employee relations are good. James Monroe
Bank maintains a benefit program which includes health and dental insurance,
life and long-term disability insurance, and a 401(k) plan for substantially all
employees.
SUPERVISION AND REGULATION
JAMES MONROE BANCORP
James Monroe Bancorp is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, (the "Act") and is subject to
supervision by the Federal Reserve Board. As a bank holding company, James
Monroe Bancorp is be required to file with the Federal Reserve Board an annual
report and such other additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of James Monroe Bancorp and each of its subsidiaries.
The Act requires approval of the Federal Reserve Board for, among other
things, the acquisition by a proposed bank holding company of control of more
than five percent (5%) of the voting shares, or substantially all the assets, of
any bank or the merger or consolidation by a bank holding company with another
bank holding company. The Act also generally permits the acquisition by a bank
holding company of control, or substantially all the assets, of any bank located
in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by
state law, but if the bank is at least 5 years old, the Federal Reserve Board
may approve the acquisition.
Under current law, with certain limited exceptions, a bank holding company
is prohibited from acquiring control of any voting shares of any company which
is not a bank or bank holding company and from engaging directly or indirectly
in any activity other than banking or managing or controlling banks or
furnishing services to or performing service for its authorized subsidiaries. A
bank holding company may, however, engage in or acquire an interest in, a
company that engages in activities which the Federal Reserve Board has
determined by order or regulation to be so closely related to banking or
managing or controlling banks as to be properly incident thereto. In making such
a determination, the Federal Reserve Board is required to consider whether the
performance of such activities can reasonably be expected to produce benefits to
the public, such as convenience, increased competition or gains in efficiency,
which outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by the
acquisition, in whole or in part, of a going concern. Some of the activities
that the Federal Reserve Board has determined by regulation to be closely
related to banking include making or servicing loans, performing certain data
processing services, acting as a fiduciary or investment or financial advisor,
and making investments in corporations or projects designed primarily to promote
community welfare.
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<PAGE>
Effective on March 11, 2000, the Gramm Leach Bliley Act (the "GLB Act")
allows a bank holding company or other company to certify status as a financial
holding company, which will allow such company to engage in activities that are
financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank company or any of its subsidiaries, or investments in the stock or
other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing, on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount, deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to the
company or any other subsidiary of the company; or (iii) the customer not obtain
some other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
The Federal Reserve has also adopted capital guidelines for bank holding
companies that are substantially the same as those applying to state member
bank, although these requirements are not currently applicable to James Monroe
Bancorp. See "Regulatory Capital Requirements" at page 13 and "Supervision and
Regulation - James Monroe Bank" below.
JAMES MONROE BANK
James Monroe Bank is a Virginia chartered commercial bank which is a member
of the Federal Reserve System. Its deposit accounts are insured by the Bank
Insurance Fund of the FDIC up to the maximum legal limits of the FDIC and it is
subject to regulation, supervision and regular examination by the Virginia
Bureau of Financial Institutions and the Federal Reserve. The regulations of
these various agencies govern most aspects of James Monroe Bank's business,
including required reserves against deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and location and number of branch offices.
The laws and regulations governing James Monroe Bank generally have been
promulgated to protect depositors and the deposit insurance funds, and not for
the purpose of protecting stockholders.
Competition among commercial banks, savings and loan associations, and
credit unions has increased following enactment of legislation which greatly
expanded the ability of banks and bank holding companies to engage in interstate
banking or acquisition activities. The GLB Act will allow a wider array of
companies to own banks, which could result in companies with resources
substantially in excess of James Monroe Bancorp's entering into competition with
James Monroe Bancorp and James Monroe Bank.
Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of James Monroe Bank's earnings. Thus, the earnings and growth of
James Monroe Bank will be subject to the influence of economic conditions
generally, both domestic and foreign, and also to the monetary and fiscal
policies of the United States and its agencies, particularly the Federal Reserve
Board, which regulates the supply of money through various means including open
market dealings in United States government securities. The nature and timing of
changes in such policies and their impact on James Monroe Bank cannot be
predicted.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") by adopting a law after the date of enactment of the Riegle-
35
<PAGE>
Neal Act and prior to June 1, 1997, which applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches are permitted only if the law of the state
in which the branch is located permits such acquisitions. Such interstate bank
mergers and branch acquisitions are also subject to the nationwide and statewide
insured deposit concentration limitations described in the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. Virginia has enacted laws which permit
interstate acquisitions of banks and bank branches and permit out-of-state banks
to establish de novo branches.
Capital Adequacy Guidelines. The Federal Reserve Board has adopted
risk-based capital adequacy guidelines pursuant to which they assess the
adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital.
Tier 1 Capital generally consists of the sum of common stockholders' equity
and perpetual preferred stock (subject in the case of the latter to limitations
on the kind and amount of such stock which may be included as Tier 1 Capital),
less goodwill, without adjustment for changes in the market value of securities
classified as "available for sale" in accordance with FAS 115. Tier 2 Capital
consists of the following: hybrid capital instruments; perpetual preferred stock
which is not otherwise eligible to be included as Tier 1 Capital; term
subordinated debt and intermediate-term preferred stock; and, subject to
limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with
the categories ranging from 0% (requiring no risk-based capital) for assets such
as cash, to 100% for the bulk of assets which are typically held by a bank
holding company, including certain multi-family residential and commercial real
estate loans, commercial business loans and consumer loans. Residential first
mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which effectively increases the minimum Leverage Capital Ratio for such other
banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, those which are considered a strong
banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which a bank shall achieve its minimum Leverage Capital Ratio requirement. A
bank which fails to file such plan is deemed to be operating in an unsafe and
unsound manner, and could subject that bank to a cease-and-desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding solely on account of its capital
ratios, if it has entered into and is in compliance with a written agreement to
increase its Leverage Capital Ratio and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
capital regulations also provide, among other things, for the issuance of a
capital directive, which is a final order issued to a bank that fails to
maintain minimum capital or to restore its capital to the minimum capital
requirement within a specified time period. Such directive is enforceable in the
same manner as a final cease-and-desist order.
36
<PAGE>
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt corrective
action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) "well capitalized" if it has a Total Risk Based
Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or
more, a Leverage Capital Ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized" if it has a Total Risk
Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
8.0%, a Tier 1 Risk based Capital Ratio that is less than 4.0% or a Leverage
Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Risk Based Capital Ratio that
is less than 6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule is that the FDIC will be appointed as receiver within 90 days after a bank
becomes critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators. In general, good cause is
defined as capital which has been raised and is imminently available for
infusion into a bank except for certain technical requirements which may delay
the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
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<PAGE>
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver
may be appointed for an institution where: (i) an institution's obligations
exceed its assets; (ii) there is substantial dissipation of the institution's
assets or earnings as a result of any violation of law or any unsafe or unsound
practice; (iii) the institution is in an unsafe or unsound condition; (iv) there
is a willful violation of a cease-and-desist order; (v) the institution is
unable to pay its obligations in the ordinary course of business; (vi) losses or
threatened losses deplete all or substantially all of an institution's capital,
and there is no reasonable prospect of becoming "adequately capitalized" without
assistance; (vii) there is any violation of law or unsafe or unsound practice or
condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution's condition, or otherwise seriously
prejudice the interests of depositors or the insurance fund; (viii) an
institution ceases to be insured; (ix) the institution is undercapitalized and
has no reasonable prospect that it will become adequately capitalized, fails to
become adequately capitalized when required to do so, or fails to submit or
materially implement a capital restoration plan; or (x) the institution is
critically undercapitalized or otherwise has substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants substantial
enforcement powers to federal banking regulators. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities.
38
<PAGE>
SHARE OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of April 30, 2000
concerning the number and percentage of shares of the common stock beneficially
owned by our directors and executive officers, and by all of our directors and
executive officers as a group, as well as information regarding each other
person known by the Company to own in excess of 5% of the outstanding common
stock. Also shown, for illustrative purposes only, are the number and percentage
of shares that will be owned by such persons after the offering, based upon
their current intentions to purchase shares in the offering, and assuming that
only directors, officers, five percent shareholders and their affiliates
purchase shares in the offering. The purchase intentions of these people may
change, and they may purchase more shares or fewer shares. Except as otherwise
indicated, all shares are owned directly, and the named person possesses sole
voting and sole investment power with respect to all such shares. Except as set
forth below, we are not aware of any other person or persons who beneficially
own in excess of five percent of the common stock. Further, we are not aware of
any arrangement which at a subsequent date may result in a change of control of
the James Monroe Bancorp.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
OWNED BEFORE PERCENT OF OWNED AFTER PERCENT OF
NAME OFFERING(1) CLASS(1) OFFERING(1) CLASS(1)
------------------------------- ----------------- ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Directors
Fred A. Burroughs, III 4,900 * 8,438 *
Terry L. Collins, Ph.D. 38,200(2) 5.12% 51,993 6.13%
12701 Fair Lake Circle
Fairfax, Virginia 22033
Norman P. Horn 4,967 * 6,696 *
David C. Karlgaard, Ph.D. 38,267(3) 5.12% 53,627 6.32%
3949 Pender Drive
Fairfax, Virginia 22030
Richard I. Linhart 8,016 1.07% 8,016 *
Richard C. Litman 7,700 1.03% 9,429 1.11%
John R. Maxwell 29,586 3.75% 29,586 3.40%
Alvin E. Nashman , Ph.D. 11,700 1.57% 15,159 1.79%
Helen L. Newman 13,733(4) 1.84% 23,905 2.82%
Thomas L. Patterson 8,267 1.11% 11,726 1.38%
David W. Pijor 6,600 * 9041 1.06%
Russell E. Sherman 6,733 * 7,750 *
All directors and
executive officers as a
group (12 persons) 178,669(1) 22.52% 235,217 26.28%
Other 5% Shareholders
Nino Vaghi(5) 43,515 5.85% 88,342 10.45%
5225 Pooks Hill Road
#1512-S
Bethesda, MD 20814
</TABLE>
* Less than one percent
(1) For purposes hereof, a person is deemed to be the beneficial owner of
securities with respect to which he has or shares voting or investment
power. The percentage of shares owned before the offering is based on
744,290 shares outstanding as of April 30, 2000, except with respect to
individuals holding options to acquire common stock exercisable within
sixty days of April 30, 2000, in which event represents percentage of
shares issued and
(Footnotes continued on following page)
39
<PAGE>
(Footnotes continued from prior page)
outstanding as of April 30, 2000 plus the number of such options held by such
person, and all directors and officers as a group, which represents percentage
of shares outstanding as of April 30, 2000 plus the number of such options held
by all such persons as a group.
Directors and executive officers beneficially own option to purchase shares of
common stock which are exercisable within sixty days of April 30, 2000 as
follows: Collins - 2,100 shares; Horn - 1,467 shares; Karlgaard - 2,767 shares;
Litman - 2,700 shares; Maxwell - 24,586 shares; Newman - 1,233 shares; Patterson
- 1,267 shares; Pijor - 4,100 shares; Sherman - 1,733 shares; Linhart - 7,266
shares.
(2) Includes 1,100 shares of Common Stock held individually by Mr. Collins'
daughter. Mr. Collins disclaims beneficial ownership of the shares of
Common Stock held by his daughter.
(3) Includes 35,000 shares of Common Stock held individually by Mr. Karlgaard
and 500 shares of Common Stock held by his children.
(4) Includes 10,500 shares of Common Stock held individually by Mrs. Newman and
2,000 shares of Common Stock held individually by her spouse.
(5) Mr. Vaghi was an organizer of James Monroe Bank, and served on the Board of
Directors from its organization until December 31, 1998.
MANAGEMENT
The following table sets forth the name, age at April 30, 2000, and
principal position with James Monroe Bancorp and James Monroe Bank of each
person who is currently a director or executive officer of James Monroe Bancorp.
James Monroe Bancorp's Board of Directors currently consists of twelve (12)
members, all of which serve for a one year term. Each director of James Monroe
Bancorp is also a director of James Monroe Bank.
<TABLE>
<CAPTION>
Name Age Position
--------------------------------- ----------- -------------------------------------------------------------
<S> <C> <C>
Directors
Fred A. Burroughs, III 64 Director
Terry L. Collins, Ph.D. 53 Director
Norman P. Horn 67 Director
David C. Karlgaard, Ph.D. 53 Director
Richard I. Linhart 56 Director, Executive Vice President and Chief Operating
Officer of James Monroe Bank and James Monroe Bancorp
Richard C. Litman 42 Director
John R. Maxwell 39 Director, President and Chief Executive Officer of James
Monroe Bancorp and James Monroe Bank
Alvin E. Nashman, Ph.D. 73 Director
Helen L. Newman 56 Director
Thomas L. Patterson 48 Director
David W. Pijor 47 Chairman of the Board of Directors
Russell E. Sherman 62 Director
</TABLE>
Set forth below is certain additional information regarding each director
and executive officer of James Monroe Bancorp and James Monroe Bank. Except as
otherwise stated, the principal occupation indicated has been the person's
principle occupation for at least the last five years. Each of the members of
the Board of Directors of James Monroe Bancorp has served since its organization
in April 1999, and has served as a member of the Board of Directors of James
Monroe Bank since its organization in 1998, except for Mr. Burroughs, who joined
the Board of Directors of the Bank in February 1999.
Fred A. Burroughs, III. Mr. Burroughs retired in 1997 from his position as
Chairman of the Board and Chief Executive Officer of The Bank of Northern
Virginia.
40
<PAGE>
Dr. Terry L. Collins. Mr. Collins is the Co-Founder and President of Argon
Engineering Associates, founded in 1997 (Systems and Information Technology
Firm). He was also the Vice President and General Manager of the Falls Church
Operation of Raytheon E-Systems from 1989 - 1997.
Norman P. Horn. Mr. Horn, retired, was a Principal in Homes, Lowry, Horn &
Johnson, Ltd. (Accounting Firm).
Dr. David C. Karlgaard. Mr. Karlgaard is the Founder, Chairman and
President of PEC Solutions, Inc (Information Technology Firm) (listed on the
Nasdaq National Market).
Richard I. Linhart. Prior to joining James Monroe Bank in February 1998,
Mr. Linhart was President of ALM Associates from 1995 to 1998, Executive Vice
President and CFO of Hubco, Inc., Mahwah, New Jersey from 1994 to 1995 and
Executive Vice President and COO of NBT Bancorp, Norwich, New York from 1991 to
1994. Mr. Linhart became a director of James Monroe Bancorp in July 2000
Richard C. Litman. Mr. Litman is a Registered Patent Attorney; President of
Litman Law Offices, Ltd.
John R. Maxwell. Mr. Maxwell has been President and Chief Executive Officer
of the Bank since April 1997 and of the Company since its formation. Prior to
joining James Monroe Bank, he was Senior Vice President - Lending of the Bank of
Northern Virginia from 1988 to 1996 and Executive Vice President and Chief
Lending Officer of the Bank of Northern Virginia from 1996 to 1997.
Dr. Alvin E. Nashman. Mr. Nashman retired in 1992 from his position of Head
of the Systems Group of Computer Sciences Corporation which he held for over 27
years He currently serves as a consultant for Trawick Associates and Unitech
Inc., both of which are technology consulting services companies. Mr. Nashman is
also Director of Halifax Corporation (publicly traded on AMEX); Micros to
Mainframes (publicly traded on Nasdaq), PEC Solutions (publicly traded on
Nasdaq) Director of Andreulis Corporation; Director of Spaceworks; and Director
of Federal Sources, Inc.
Helen L. Newman. Ms. Newman is Senior Vice President of Government
Operations for Gulfstream Aerospace Corporation.
Thomas L. Patterson. Mr. Patterson is an attorney with Linowes and Blocher,
LLP. (Law Firm) since May 2000. From November 1998 until May 2000 he was an
attorney with Venable, Baetjer, Howard & Civiletti (or Tucker, Flyer & Lewis,
which became a part of that firm in 1999). Mr. Patterson was Vice President -
Real Estate Counsel of Federal Realty Investment Trust from March 1997 until
September 1998, and prior to that time was an attorney in private practice.
David W. Pijor. Mr. Pijor has been Chairman of the Bank since February 1997
and Chairman of Bancorp since its formation, and is Of Counsel to the firm of
Sherman & Fromme, P.C. (Law Firm).
Russell E. Sherman. Mr. Sherman is the President of Sherman & Fromme, P.C.
(Law Firm).
DIRECTOR COMPENSATION
Directors do not receive fees for attendance at meetings of the Board of
Directors of Bancorp or the Bank, or committee meetings. Directors are entitled
to receive options under the 1999 Directors' Stock Option Plan (the "Director
Option Plan"). In 1999, director received options to purchase an aggregate of
57,200 shares of Common Stock at an exercise price of $10.00 per share.
The Directors' Option Plan was approved by stockholders in 1999. Under the
Directors' Option Plan, 66,800 shares of common stock are available for issuance
under options granted between 1999 and 2004. The purpose of the Directors'
Option Plan is to enable James Monroe Bancorp to continue to attract and retain
outstanding outside directors, and to further the growth, development and
financial success of James Monroe Bancorp and James Monroe Bank. Only
non-employee directors of James Monroe Bancorp and any subsidiary are eligible
to participate in the Plan.
41
<PAGE>
As of March 31, 2000 there was an aggregate of 55,500 options to purchase shares
of common stock outstanding under the Directors' Option Plan, at an exercise
price of $10.00 per share, and 9,680 options remained available for issuance.
EXECUTIVE OFFICER COMPENSATION AND CERTAIN TRANSACTIONS
COMPENSATION - OVERVIEW
The following table sets forth a comprehensive overview of the compensation
for Mr. Maxwell, James Monroe Bancorp's and James Monroe Bank's Chief Executive
Officer during the 1999 and 1998 fiscal years. No other executive officer of
James Monroe Bancorp received total salary and bonus of $100,000 or more during
the fiscal year ended December 31, 1999
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation Awards
Annual Compensation Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation($)
------------------------------- -------- ------------ ---------------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C>
John R. Maxwell, President 1999 $118,750 $10,000 -0- Less than $10,000
and Chief Executive Officer 1998 $64,167 -0- 36,880 Less than $10,000
</TABLE>
----------------------
(1) Compensation for 1998 is from the date the Bank opened on June 8, 1998
through December 31, 1998
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR AND OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Shares Acquired Options at December 31, 1999 December 31, 1999
Name on Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
---------------------- ------------------ ------------------ ------------------------------- ---------------------------
<S> <C> <C> <C> <C>
John R. Maxwell -0- $-0- 12,294/24,586 $24,588/$49,176
</TABLE>
-----------------------
EMPLOYEE BENEFIT PLANS
James Monroe Bank provides all officers and full-time employees with group
life and medical and dental insurance coverage.
401(k) Plan. James Monroe Bancorp has a defined contribution 401(k)
retirement plan which covers employees that meet certain age and length of
service requirements. The Company does not currently contribute to the 401(k)
plan nor does it currently match employee contributions.
Stock Option Plans. Under James Monroe Bancorp's 1998 Management Incentive
Stock Option Plan, approved by stockholders in 1998 and amended in 1999 (the
"1998 Option Plan"), 91,800 shares of common stock are available for issuance
under options granted between 1998 and 2008. The purpose of the 1998 Option Plan
is to enable James Monroe Bancorp to attract, retain and incentivize outstanding
employees for James Monroe Bancorp and James Monroe Bank, and to reward
excellent performance by the employees and to further the growth, development
and financial success of James Monroe Bancorp. Eligible employees are those
employees, including officers, who at the time options are granted, are deemed
to be "key employees" by the Board of Directors. The Board of Directors
administers the 1998 Option Plan. As of March 31, 2000, there was an aggregate
of 54,630 options to purchase shares of common stock outstanding under the 1998
Option Plan, at $10.00 per share, 64,130 options had been allocated for issuance
to certain employees upon achievement of certain performance goals, and 27,750
options remained available for issuance.
Employment Agreements The Bank and Bancorp have entered into an agreement
with Mr. Maxwell pursuant to which Mr. Maxwell serves as President and Chief
Executive Officer of each institution. Without cause or Mr. Maxwell's consent,
he may not be removed from these positions, nor may any executive position
higher than Mr. Maxwell's be established. The initial term of Mr. Maxwell's
agreement expires on May 31, 2002, and is subject to
42
<PAGE>
automatic one-year extensions on each June 1, provided that neither the company
nor Mr. Maxwell has given written notice of intention not to renew at least 90
days prior to the renewal date. The agreement provides for the payment of cash
and other benefits to Mr. Maxwell, including a base salary of $125,000 during
the period June 1, 1999 to May 31, 2000. Mr. Maxwell's base salary for
subsequent periods is subject to annual review by the Board of Directors,
provided that the salary may not be less than 105% of his base salary for the
prior period. Mr. Maxwell is entitled to an annual bonus determined by the Board
of Directors, $1,000,000 of Bank paid life insurance (subject to increase based
upon the percentage increase in base salary), use of a Bank owned or leased car
and an automobile allowance, and is entitled to reimbursement of reasonable
business expenses. Under the agreement, Mr. Maxwell has been granted non
qualified options to purchase 36,880 shares of common stock at an exercise price
of $10.00 per share, vesting over a three year period ending on June 1, 2001,
exercisable through May 31, 2008, regardless of earlier termination of the
agreement or Mr. Maxwell's employment or the reason for the termination. Mr.
Maxwell is entitled to reimbursement of income taxes payable upon the exercise
of the options, up to the amount of the tax benefit realized by Bancorp as a
result of the exercise, and under certain circumstances, to registration of the
shares under the securities laws. Mr. Maxwell is also entitled to participate in
any pension, retirement, profit sharing, stock purchase, stock option,
insurance, deferred compensation and other benefit plans provided to other
executives or employees.
The agreement terminates as of the end of the initial or any renewal terms
if either party gives notice of nonrenewal. If Mr. Maxwell elects not to renew
the agreement, he is not entitled to any additional payments, and is subject to
a two year noncompetition agreement. If the Bank or Bancorp elects not to renew
the agreement, Mr. Maxwell is entitled to receive continued salary, bonus and
benefits for 18 months, and is subject to the noncompetition agreement for that
period. If the agreement is terminated by Mr. Maxwell, at his option, within six
months of a "change in control" (as defined), Mr. Maxwell shall be entitled to
receive continued salary, bonus and benefits for one year, and is subject to the
noncompetition agreement for that period. If the agreement is terminated by the
Bank or Bancorp in breach of the agreement, Mr. Maxwell is entitled to receive
continued salary, bonus and benefits for 12 months, and is not subject to the
noncompetition agreement. The agreement prohibits conflicts of interest, and
requires that Mr. Maxwell maintain the confidentiality of nonpublic information
regarding the Bank, Bancorp and its customers.
Certain Transactions with Management. James Monroe Bancorp has had, and
expects to have in the future, banking transactions in the ordinary course of
business with some of its directors, officers, and employees and their
associates. In the past, substantially all of such transactions have been on the
same terms, including interest rates, maturities and collateral requirements as
those prevailing at the time for comparable transactions with non-affiliated
persons and did not involve more than the normal risk of collectibility or
present other unfavorable features.
The maximum aggregate amount of loans to officers, directors and affiliates
of James Monroe Bancorp during 1999 amounted to $980,900 representing
approximately 14.7% of total shareholders' equity at December 31, 1999. In the
opinion of the Board of Directors, the terms of these loans are no less
favorable to James Monroe Bancorp than terms of the loans to unaffiliated
parties. On December 31, 1999, $737,500 of loans were outstanding to individuals
who, during 1999, were officers, directors of affiliates of James Monroe
Bancorp. At the time each loan was made, management believed that the loan
involved no more than the normal risk of collectibility and did not present
other unfavorable features. None of such loans were classified as Substandard,
Doubtful or Loss.
SHARES ELIGIBLE FOR FUTURE SALE
All shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act of 1933, except for any
shares purchased by an "affiliate" of James Monroe Bancorp, which will be
subject to the resale limitations set forth in Securities and Exchange
Commission Rule 144.
All of James Monroe Bancorp's directors are considered "affiliates" within
the meaning of Rule 144 and will, therefore, be subject to the applicable resale
limitations with respect to the shares purchased in this offering. In general,
the number of shares that can be sold by each director in brokers' transactions,
(as that term is used in Rule 144) within any three month period may not exceed
the greater of (i) one percent (1%) of the outstanding shares as shown by the
most recent report or statement published by the company, or (ii) the average
weekly reported volume of trading in the shares on all national securities
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the sale.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
James Monroe Bancorp's authorized capital consists of 2,000,000 shares of
common stock, $1.00 par value. As of March 31, 2000, there were 744,290 shares
of common stock outstanding.
Common Stock. Holders of common stock are entitled to cast one vote for
each share held of record, to receive such dividends as may be declared by the
Board of Directors out of legally available funds, and, subject to the rights of
any class of stock having preference to the common stock, to share ratably in
any distribution of James Monroe Bancorp's assets after payment of all debts and
other liabilities, upon liquidation, dissolution or winding up. Shareholders do
not have cumulative voting rights or preemptive rights or other rights to
subscribe for additional shares, and the common stock is not subject to
conversion or redemption. The shares of common stock to be issued in this
offering will be, when issued, fully paid and non-assessable.
Limitations on Payment of Dividends. The payment of dividends by James
Monroe Bancorp will depend largely upon the ability of James Monroe Bank to
declare and pay dividends to James Monroe Bancorp, as the principle source of
James Monroe Bancorp's revenue will be from dividends paid by James Monroe Bank.
Dividends will depend primarily upon the bank's earnings, financial condition,
and need for funds, as well as governmental policies and regulations applicable
to James Monroe Bancorp and James Monroe Bank. Even if James Monroe Bank and
James Monroe Bancorp have earnings in an amount sufficient to pay dividends, the
Board of Directors may determine to retain earnings for the purpose of funding
the growth of James Monroe Bank and James Monroe Bancorp.
Regulations of the Federal Reserve and Virginia law place limits on the
amount of dividends James Monroe Bank may pay to James Monroe Bancorp without
prior approval. Prior regulatory approval is required to pay dividends which
exceed James Monroe Bank's net profits for the current year plus its retained
net profits for the preceding two calendar years, less required transfers to
surplus. Federal bank regulatory agencies also have authority to prohibit a bank
from paying dividends if such payment is deemed to be an unsafe or unsound
practice, and the Federal Reserve Board has the same authority over bank holding
companies.
The Federal Reserve Board has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that James Monroe Bancorp may pay in the future. In 1985, the Federal Reserve
Board issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weaken the
holding company's financial health, such as by borrowing. As a depository
institution, the deposits of which are insured by the FDIC, James Monroe Bank
may not pay dividends or distribute any of its capital assets while it remains
in default on any assessment due the FDIC. See "Market for Common Stock and
Dividends" at page 14.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND VIRGINIA LAW
James Monroe Bancorp's Articles of Incorporation do not contain any
provisions which would require a greater or lesser than normal vote of
shareholders, any provisions which impose special approval or other requirements
on corporate transactions or other matters, or which could be deemed to have an
antitakeover effect. The Virginia Stock Corporation Act (the "VSCA") which is
applicable to James Monroe Bancorp and the holders of common stock contains
provisions which could be deemed to have an antitakeover effect. The discussion
of the following provisions is not exhaustive, and is not intended to imply that
all material provisions of either the Articles of Incorporation or the FBCA are
enumerated herein.
Affiliated Transactions. The VSCA contains provisions governing "affiliated
transactions." These include various transactions such as mergers, share
exchanges, sales, leases, or other material dispositions of assets, issuances of
securities, dissolutions, and similar transactions with an "interested
shareholder." An interested shareholder is generally the beneficial owner of
more than 10% of any class of a corporation's outstanding voting shares. During
the three years following the date a shareholder becomes an interested
shareholder, any affiliated
44
<PAGE>
transaction with the interested shareholder must be approved by both a majority
of the "disinterested directors" (those directors who were directors before the
interested shareholder became an interested shareholder or who were recommended
for election by a majority of disinterested directors) and by the affirmative
vote of the holders of two-thirds of the corporation's voting shares other than
shares beneficially owned by the interested shareholder. These requirements do
not apply to affiliated transactions if, among other things, a majority of the
disinterested directors approve the interested shareholder's acquisition of
voting shares making such a person an interested shareholder before such
acquisition. Beginning three years after the shareholder becomes an interested
shareholder, the corporation may engage in an affiliated transaction with the
interested shareholder if:
o the transaction is approved by the holders of two-thirds of the
corporation's voting shares, other than shares beneficially owned by
the interested shareholder,
o the affiliated transaction has been approved by a majority of the
disinterested directors, or subject to certain additional
requirements, in the affiliated transaction the holders of each class
o or series of voting shares will receive consideration meeting
specified fair price and other requirements designed to ensure that
all shareholders receive fair and equivalent consideration, regardless
of when they tendered their shares.
Control Share Acquisitions. Under the VSCA's control share acquisitions
law, voting rights of shares of stock of a Virginia corporation acquired by an
acquiring person or other entity at ownership levels of 20%, 33 1/3%, and 50% of
the outstanding shares may, under certain circumstances, be denied. The voting
rights may be denied:
o unless conferred by a special shareholder vote of a majority of the
outstanding shares entitled to vote for directors, other than shares
held by the acquiring person and officers and directors of the
corporation, or
o among other exceptions, such acquisition of shares is made pursuant to
a affiliation agreement with the corporation or the corporation's
articles of incorporation or by-laws permit the acquisition of such
shares before the acquiring person's acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws,
the statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than 50% of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value." The
provisions of the Affiliated Transactions Statute and the Control Share
Acquisition Statute are only applicable to public corporations that have more
than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but
we have not done so.
Supermajority Voting Provisions. The VSCA provides that, unless a
corporation's articles of incorporation provide for a higher or lower vote,
certain significant corporate actions must be approved by the affirmative vote
of the holders of more than two-thirds of the votes entitled to be cast on the
matter. Corporate actions requiring a two-thirds vote include amendments to a
corporation's articles of incorporation, adoption of plans of affiliation or
exchange, sales of all or substantially all of a corporation's assets other than
in the ordinary course of business and adoption of plans of dissolution
("Fundamental Actions"). The VSCA provides that a corporation's articles may
either increase the vote required to approve Fundamental Actions or may decrease
the required vote to not less than a majority of the votes entitled to be cast.
The articles of incorporation of James Monroe Bancorp do not contain any
provisions altering the vote required for any Fundamental Action.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for James
Monroe Bancorp by Kennedy, Baris & Lundy, L.L.P., Bethesda, Maryland. Members of
such firm may subscribe to purchase shares of common stock offered hereby.
45
<PAGE>
EXPERTS
The audited financial statements of James Monroe Bancorp, Inc. for year
ended December 31, 1999 which are included in this prospectus, have been
included in reliance upon the report of Yount, Hyde & Barbour, P.C., independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
On May 24, 1999, Keller Bruner & Company, LLP ("Keller Bruner"), the
independent certified public accountants which audited James Monroe Bank's
financial statements for the period from June 8, 1998 and ending December 31,
1998, was dismissed by the Board of Directors upon the recommendation of the
audit committee. Keller Bruner's report on James Monroe Bank's financial
statements for the period from June 8, 1998 and ending December 31, 1998 did not
contain an adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles.
During the period June 8, 1998 (date of inception) to December 31, 1998 and
through the date on which they were dismissed, there were no disagreements with
Keller Bruner on any matter of accounting principles or practices, financial
statement disclosure, audit scope or procedure which, if not resolved to its
satisfaction, would have caused it to make reference to such disagreement in
connection with its report.
Yount, Hyde & Barbour, P.C. was retained by James Monroe Bancorp on May 24,
1999 to audit its financial statements for fiscal year 1999 as its certifying
accountant. The appointment of Yount, Hyde and Barbour, P.C. was recommended by
the audit committee of the Board of Directors and approved by the Board of
Directors. There were no consultations between James Monroe Bancorp and Yount,
Hyde & Barbour. P.C. regarding the application of accounting principles to any
matter, or as to any type of opinion that might be issued on James Monroe
Bancorp's financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
ABOUT JAMES MONROE BANCORP
This prospectus is part of a registration statement on Form SB-2 filed by
James Monroe Bancorp with the Securities and Exchange Commission. This
prospectus does not contain all of the information contained in the registration
statement, certain parts of which have been omitted under SEC rules. Any
statements in this prospectus about the provisions of any document filed as an
exhibit to the registration statement or otherwise filed with the SEC are not
necessarily complete, and reference is made to the copy of the filed document
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by such reference. The registration statement may
be read and copied at the SEC's public reference room located at 450 Fifth
Street, NW, Room 1024, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The SEC
maintains an Internet web site that contains information of issuers, including
James Monroe Bancorp, who file electronically with the SEC. The address of that
web-site is http://www.sec.gov.
James Monroe Bancorp distributes annual reports containing audited
financial statements to its shareholders. As a result of the effectiveness of
the registration statement of which this prospectus is a part, James Monroe
Bancorp will file annual and quarterly reports under the Securities Exchange Act
of 1934, and will continue to file such reports until such time as it has fewer
than 300 shareholders of record.
46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999
Independent Auditor's Reports..................................................................F-2
Audited Balance Sheet..........................................................................F-4
Audited Statement of Income....................................................................F-5
Audited Statement of Changes in Stockholders' Equity...........................................F-6
Audited Statement of Cash Flows................................................................F-7
Notes to Audited Financial Statements..........................................................F-8
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000
Unaudited Balance Sheet.......................................................................F-26
Unaudited Statement of Operations.............................................................F-27
Unaudited Statement of Changes in Stockholders' Equity .......................................F-28
Unaudited Statement of Cash Flows.............................................................F-29
Notes to Unaudited Financial Statements.......................................................F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
James Monroe Bancorp, Inc. and Subsidiary
Arlington, Virginia
We have audited the accompanying consolidated balance sheet of James Monroe
Bancorp, Inc. and Subsidiary as of December 31, 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of James Monroe Bank as of December 31, 1998 and for the period June
8, 1998 (commencement of banking operations) through December 31, 1998 were
audited by other auditors whose report, dated February 17, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of James Monroe
Bancorp, Inc. and Subsidiary as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 7, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT0
To the Stockholders and Directors
James Monroe Bancorp, Inc. and Subsidiary
Arlington, Virginia
We have audited the accompanying balance sheet of James Monroe Bancorp, Inc. and
Subsidiary (formerly "James Monroe Bank") as of December 31, 1998, and the
related statements of income, changes in stockholders' equity (deficit), and
cash flows for the period June 8, 1998, (commencement of banking operations)
through December 31, 1998. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of James Monroe Bancorp, Inc. and
Subsidiary as of December 31, 1998, and the results of its operations and its
cash flows for the period June 8, 1998 (commencement of banking operations)
through December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Keller Bruner & Company, LLP
Frederick, Maryland
February 17, 1999
F-3
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,640,520 $ 1,305,528
Federal funds sold 1,537,000 4,967,000
Securities available for sale at fair value 13,518,256 3,988,212
Loans, net of allowance for loan losses of $363,000 in 1999
and $132,000 in 1998 30,675,915 12,637,318
Bank premises and equipment, net 713,978 493,163
Accrued interest receivable 345,794 87,686
Other assets 186,166 29,655
------------- ------------
$ 49,617,629 $ 23,508,562
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 13,216,794 $ 6,493,982
Interest-bearing deposits 29,602,269 10,287,015
------------- ------------
Total deposits $ 42,819,063 $ 16,780,997
Accrued interest payable and other liabilities 199,078 68,926
------------- ------------
Total liabilities $ 43,018,141 $ 16,849,923
------------- ------------
COMMITMENTS AND CONTINGENCIES $ -- $ --
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 2,000,000 shares;
issued and outstanding 742,590 shares in 1999, 737,590 shares in 1998 $ 742,590 $ 737,590
Capital surplus 6,683,310 6,638,310
Retained earnings (deficit) (581,059) (706,503)
Accumulated other comprehensive (loss) (245,353) (10,758)
------------- ------------
Total stockholders' equity $ 6,599,488 $ 6,658,639
------------- ------------
$ 49,617,629 $ 23,508,562
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1999 and for the Period from
June 8, 1998 (Commencement of Banking Operations) through December 31, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FROM JUNE 8, 1998
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- -------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 2,007,874 $ 339,630
Securities, taxable 622,129 39,217
Federal funds sold 214,770 250,824
----------- ----------
Total interest income $ 2,844,773 $ 629,671
----------- ----------
INTEREST EXPENSE, deposits $ 920,740 $ 147,442
----------- ----------
Net interest income $ 1,924,033 $ 482,229
PROVISION FOR LOAN LOSSES 231,000 132,000
----------- ----------
Net interest income after provision for loan losses $ 1,693,033 $ 350,229
----------- ----------
NONINTEREST INCOME:
Service charges and fees $ 110,764 $ 4,936
Other 48,605 9,013
----------- ----------
Total noninterest income $ 159,369 $ 13,949
----------- ----------
NONINTEREST EXPENSES:
Salaries and wages $ 743,885 $ 305,929
Employee benefits 96,998 49,084
Occupancy expenses 234,265 119,084
Equipment expenses 103,992 37,950
Advertising and promotion 48,416 38,329
Professional fees 60,471 45,785
Data processing 121,794 39,238
Courier service 30,720 13,758
Franchise taxes 66,483 40,000
Other operating expenses 219,934 127,503
----------- ----------
Total noninterest expenses $ 1,726,958 $ 816,660
----------- ----------
Income (loss) before income taxes $ 125,444 $ (452,482)
PROVISION FOR INCOME TAXES -- --
----------- ----------
Net income (loss) $ 125,444 $ (452,482)
=========== ==========
EARNINGS (LOSS) PER SHARE, basic and assuming dilution $ 0.17 $ (0.61)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1999 and for the Period from
June 8, 1998 (Commencement of Banking Operations) through December 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPRE- COMPRE- TOTAL
COMMON CAPITAL EARNINGS HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS (DEFICIT) (LOSS) (LOSS) EQUITY
----------- ------------ ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 8, 1998 $ 737,590 $ 6,638,310 $ (254,021) $ -- $ 7,121,879
Comprehensive (loss):
Net (loss) -- -- (452,482) -- $ (452,482) (452,482)
Net change in unrealized (losses)
on available for sale securities,
net of deferred taxes of $5,542 -- -- -- (10,758) (10,758) (10,758)
--------- ----------- ---------- ---------- ---------- -----------
Total comprehensive (loss) $ (463,240)
==========
BALANCE, DECEMBER 31, 1998 $ 737,590 $ 6,638,310 $ (706,503) $ (10,758) $ 6,658,639
Comprehensive (loss):
Net income -- -- 125,444 -- $ 125,444 125,444
Net change in unrealized (losses)
on available for sale securities,
net of deferred taxes of $120,852 -- -- -- (234,595) (234,595) (234,595)
----------
Total comprehensive (loss) $ (109,151)
==========
Issuance of common stock 5,000 45,000 -- -- 50,000
--------- ----------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 $ 742,590 $ 6,683,310 $ (581,059) $ (245,353) $ 6,599,488
========= =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and for the Period from
June 8, 1998 (Commencement of Banking Operations) through December 31, 1998
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FROM JUNE 8, 1998
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 125,444 $ (452,482)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 80,681 37,815
Provision for loan losses 231,000 132,000
(Increase) in accrued interest receivable (258,108) (87,686)
Amortization of bond premium 3,213 2,560
Accretion of bond discount (6,653) --
(Increase) in other assets (35,660) (7,423)
Increase in accrued interest and other liabilities 130,152 68,926
------------- --------------
Net cash provided by (used in) operating activities $ 270,069 $ (306,290)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale $ (11,112,050) $ (4,007,072)
Proceeds from calls and maturities of securities available for sale 1,230,000 --
Purchases of premises and equipment (301,496) (363,629)
(Increase) decrease in Federal funds sold 3,430,000 (4,967,000)
Net (increase) in loans (18,269,597) (12,769,318)
------------- --------------
Net cash (used in) investing activities $ (25,023,143) $ (22,107,019)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts $ 19,945,916 $ 13,462,570
Net increase in time deposits 6,092,150 3,318,427
Proceeds from issuance of common stock 50,000 --
------------- --------------
Net cash provided by financing activities $ 26,088,066 $ 16,780,997
------------- --------------
Increase (decrease)in cash and due from banks $ 1,334,992 $ (5,632,312)
CASH AND DUE FROM BANKS
Beginning 1,305,528 6,937,840
------------- --------------
Ending $ 2,640,520 $ 1,305,528
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash payments for interest paid to depositors $ 825,947 $ 120,686
============= ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized (loss) on securities available for sale $ (355,447) $ (16,300)
============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
On May 27, 1999, the stockholders of James Monroe Bank voted in favor of a
merger to become a wholly owned subsidiary of James Monroe Bancorp, Inc., which
became a newly formed one-bank holding company.
Upon consummation of the reorganization effective July 1, 1999, each outstanding
common share of James Monroe Bank was exchanged for one share of James Monroe
Bancorp, Inc. common stock, par value $1 per share. The exchange of shares was a
tax-free transaction for federal income tax purposes. The merger was accounted
for on the same basis as a pooling-of-interests and financial statements for
prior periods are identical to the financial statement of the Bank.
Stockholders' equity has been restated to reflect this transaction in all prior
periods.
James Monroe Bancorp, Inc. and Subsidiary (the Corporation) offers various loan,
deposit and other financial service products to its customers, principally
located throughout Northern Virginia. Additionally, the Corporation maintains
correspondent banking relationships and transacts daily federal funds
transactions on an unsecured basis, with regional correspondent banks.
The accounting and reporting policies and practices of the Corporation conform
with generally accepted accounting principles. The following is a summary of the
most significant of such policies and procedures.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of James Monroe
Bancorp, Inc. and its wholly owned subsidiary, James Monroe Bank. In
consolidation, significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of asset and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation of deferred tax
assets.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks include cash on
hand and amounts due from banks, including cash items in process of clearing.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are equity securities with readily
determinable fair values and those debt securities that the Corporation intends
to hold for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. These securities
are carried at fair value, with any unrealized gains or losses reported as a
separate component of other comprehensive income net of the related deferred tax
effect. Interest income, including amortization of premiums and accretion of
discounts, computed by the interest method, is included in interest income in
the statements of income.
LOANS
The Corporation grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by commercial real
estate loans throughout Northern Virginia. The ability of the Corporation's
debtors to honor their contracts is dependent upon the real estate and general
economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for the allowance for loan losses and any
deferred fees or costs on originated loans. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
Interest on loans is accrued based on the principal amounts outstanding. Loans
are placed on nonaccrual status when principal or interest is delinquent for 90
days or more. Any unpaid interest previously accrued on nonaccrual loans is
reversed from income.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
Because the Bank has no history of loan losses, the current policy is to build
an allowance for loan losses of approximately 1.20% of total loans. This
percentage was determined based on peer group experience and the composition of
the Bank's loan portfolio.
In the future, the allowance for loan losses will be evaluated on a regular
basis by management, and will be based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as more information
becomes available.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization that is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements 10
Furniture and equipment 5-10
Computer equipment and software 3
</TABLE>
Costs incurred for maintenance and repairs are expensed currently.
INCOME TAXES
The provision for income taxes relates to items of revenue and expenses
recognized for financial accounting purposes. The actual current tax liability
may differ from the charge against earnings due to the effect of temporary
differences between financial and tax accounting, resulting in deferred income
taxes. The differences relate principally to amortization and provisions for
credit losses. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will be either taxable or
deductible when the asset and liabilities are recovered or settled, computed on
the liability method. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
F-10
<PAGE>
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the change in equity of a business enterprise
during a reportable period from transactions and other events and circumstances
from non-owner sources. In addition to the Corporation's net income (loss),
change in equity components under comprehensive income (loss) reporting include
the net change in unrealized gains and losses on available for sale securities.
Notes to Financial Statements
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments, " requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
should not be considered an indication of the fair value of the Corporation
taken as a whole.
EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury stock method.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-------------- ------------- ------------ -------------
1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agency $ 11,654,751 $ -- $ (347,662) $ 11,307,089
Mortgage-backed 2,035,402 4,733 (28,818) 2,011,317
Equity securities 199,850 -- -- 199,850
-------------- ------------- ------------- -------------
$ 13,890,003 $ 4,733 $ (376,480) $ 13,518,256
============== ============= ============= =============
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-------------- ------------- ------------ -------------
1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agency $ 3,783,212 $ 1,521 $ (17,821) $ 3,766,912
Equity securities 221,300 -- -- 221,300
-------------- ------------- ------------ -------------
$ 4,004,512 $ 1,521 $ (17,821) $ 3,988,212
============== ============= ============ =============
</TABLE>
At December 31, 1999 and 1998, securities with a carrying value of $1,750,000
and $600,630, respectively, were pledged to secure public deposits as required
by law.
The amortized cost and fair value of securities available for sale by
contractual maturity at December 31, 1999, follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Over 1 year through 5 years $ 11,654,751 $ 11,307,089
After 5 years through 10 years 1,548,766 1,519,948
Over 10 years 486,636 491,369
Equity securities 199,850 199,850
------------- -------------
$ 13,890,003 $ 13,518,256
============= =============
</TABLE>
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Commercial $ 15,812,035 $ 5,639,371
Commercial real estate 11,010,355 5,307,686
Residential real estate - construction -- 1,424,809
Consumer 4,216,525 397,452
----------------- -----------------
$ 31,038,915 $ 12,769,318
Allowance for credit losses 363,000 132,000
----------------- -----------------
$ 30,675,915 $ 12,637,318
================= =================
</TABLE>
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FROM JUNE 8,
YEAR ENDED 1998 THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Balance, beginning $ 132,000 $ --
Provision charged to operations 231,000 132,000
----------------- -----------------
Balance, ending $ 363,000 $ 132,000
================= =================
</TABLE>
The Corporation has had no loans charged off since its inception.
NOTE 4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998
----------------- --------------
<S> <C> <C>
Leasehold improvements $ 213,689 $ 207,506
Furniture and equipment 199,004 188,725
Computers 117,994 100,957
Software 53,974 33,790
Premises and equipment in process 247,813 --
----------------- -----------------
$ 832,474 $ 530,978
Less: Accumulated depreciation 118,496 37,815
----------------- -----------------
$ 713,978 $ 493,163
================= =================
</TABLE>
Depreciation and amortization charged to operations totaled $80,681 for the year
ended December 31, 1999 and $37,815 for the period from June 8, 1998 through
December 31, 1998.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 5. DEPOSITS
Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998
----------------- --------------
<S> <C> <C>
NOW accounts $ 3,009,059 $ 1,081,863
Savings accounts 319,140 193,680
Money market accounts 16,863,493 5,693,045
Certificates of deposit under $100,000 4,347,889 1,200,470
Certificates of deposit $100,000 and over 4,790,576 2,103,957
Individual retirement accounts 272,112 14,000
----------------- -----------------
$ 29,602,269 $ 10,287,015
================= =================
</TABLE>
At December 31, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000 $ 8,014,085
2001 927,783
2002 65,641
2003 113,041
2004 and thereafter 290,027
-----------------
$ 9,410,577
=================
</TABLE>
NOTE 6. INCOME TAXES
Significant components of the Corporation's deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses $ 42,840 $ 13,552
Unrealized loss on securities available for sale 126,394 5,542
Amortization of organization and start-up costs 56,344 76,748
Other 2,074 1,020
Net operating loss carryforward 105,171 145,890
----------------- -----------------
$ 332,823 $ 242,752
Deferred tax liabilities:
Depreciation 13,565 --
----------------- -----------------
$ 319,258 $ 242,752
Less valuation allowance 192,864 237,210
----------------- -----------------
$ 126,394 $ 5,542
================= =================
</TABLE>
The Corporation has a net operating loss carryforward totaling $254,967 that is
available until December 31, 2018, to offset future taxable income.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The income tax provision differs from the amount of income tax determined by
applying the U.S. Federal income tax rate to pretax income for the year ended
December 31, 1999 and the period from June 8, 1998 through December 1998, due to
the following
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ 42,651 $ (153,944)
Increase (decrease) in income taxes resulting from:
Other nondeductible expenses 1,695 2,508
Change in valuation allowance (44,346) 151,436
----------------- -----------------
$ -- $ --
================= =================
</TABLE>
NOTE 7. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Corporation leases its facilities under operating leases expiring at various
dates through 2007. The leases provide that the Corporation pay as additional
rent, its proportionate share of real estate taxes, insurance, and other
operating expenses. The leases contain a provision for annual increases of 3%.
Total rental expense for the year ended December 31, 1999 was $168,326 and
$92,794 for the period from June 8, 1998 through December 31, 1998.
The minimum lease commitments for the next five years and thereafter are:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000 $ 176,092
2001 181,375
2002 186,816
2003 192,421
2004 184,408
2005 and thereafter 525,641
</TABLE>
NOTE 8. STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
The Corporation has a stock option plan (Plan) for key employees, which is
accounted for in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation cost has been recognized for grants under this
Plan. The Plan provides that 66,880 shares of the Corporation's common stock
will be reserved for both incentive stock options and non-qualified stock
options to purchase common stock of the Corporation. The exercise price per
share for incentive stock options and non-qualified stock options shall not be
less than the fair market value of a share of common stock on the date of grant.
One-third of the options granted become vested and exercisable in each of the
three years following the grant date. Each incentive and non-qualified stock
option granted under this plan shall expire not more than ten years from the
date the option is granted.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Had compensation cost for the Corporation's employee stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the
Corporation's net income and earnings per share would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------
<S> <C> <C> <C>
Net income (loss) As reported $ 125,444 $ (452,482)
Pro forma $ 71,021 $ (486,439)
Earnings (loss) per share As reported $ 0.17 $ (0.61)
Pro forma $ 0.10 $ (0.66)
Earnings (loss) per share - As reported $ 0.17 $ (0.61)
assuming dilution Pro forma $ 0.09 $ (0.66)
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected life 10 years 10 years
Expected volatility 0.50% 0.50%
Risk-free interest rate 5.83% 4.50%
</TABLE>
A summary of the status of the Corporation's employee stock option plan is
presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 46,880 $ 10.00 -- $ --
Granted 3,000 10.00 46,880 10.00
------------- -----------
Outstanding at end of year 49,880 10.00 46,880 10.00
============= ===========
Options exercisable at year end 16,624 --
Weighted average fair value of
options granted during the year $ 4.37 $ 3.59
</TABLE>
F-18
<PAGE>
DIRECTOR STOCK OPTION PLAN
In 1999, the Corporation adopted a stock option plan in which options for 66,880
shares of common stock were reserved for issuance. The Corporation applies APB
Opinion 25 and related interpretations in accounting for the stock option plan.
Accordingly, no compensation cost has been recognized for grants under this
plan. The stock option plan required that options be granted at an exercise
price equal to at least 100% of the fair market value of the common stock on the
date of grant. One-third of the options granted become vested and exercisable in
each of the three years following the grant date and shall expire not more than
ten years from the date the option is granted.
A summary of the status of the Corporation's director stock option plan is
presented below:
<TABLE>
<CAPTION>
1999
--------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------------
<S> <C> <C>
Fixed Options:
Outstanding at beginning of year -- $ --
Granted 57,200 10.00
---------
Outstanding at end of year 57,200 10.00
=========
Options exercisable at year end 19,067
</TABLE>
F-19
<PAGE>
Information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED -------------------------------- ------------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL RANGE OF NUMBER EXERCISE NUMBER EXERCISE
LIFE EXERCISE PRICES OUTSTANDING PRICE EXERCISABLE PRICE
----------------- ----------------- ------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
8.5 yrs. $ 10.00 46,880 $ 10.00 15,626 $ 10.00
9.5 yrs. $ 10.00 3,000 $ 10.00 998 $ 10.00
9.75 yrs. $ 10.00 57,200 $ 10.00 19,067 $ 10.00
</TABLE>
NOTE 9. 401(K) PLAN
Effective January 1, 1999, the Corporation adopted a Section 401(k) plan
covering employees meeting certain eligibility requirements as to minimum age
and years of service. Employees may make voluntary contributions to the 401(k)
plan through payroll deductions on a pre-tax basis. The Corporation may make
discretionary contributions to the 401(k) plan based on its earnings. The
employer's contributions are subject to a vesting schedule requiring the
completion of five years of service before these benefits become vested. A
participant's 401(k) plan account, together with investment earnings thereon, is
distributable following retirement, death, disability or other termination of
employment under various payout options.
F-20
<PAGE>
NOTE 10. STOCKHOLDERS' EQUITY
CAPITAL
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999 and 1998, that the Corporation and the Bank met all capital adequacy
requirements to which they are subject.
F-21
<PAGE>
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the Bank's category. The Corporation's and the Bank's
actual capital amounts and ratios as of December 31, 1999 and 1998 are also
presented in the table.
<TABLE>
<CAPTION>
ACTUAL
--------------
AMOUNT RATIO
------ -----
(Amount in Millions)
<S> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 7,208 21.4%
James Monroe Bank $ 7,254 21.5%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 6,845 20.3%
James Monroe Bank $ 6,891 20.4%
Tier 1 Capital (to
Average Assets):
Consolidated $ 6,845 13.9%
James Monroe Bank $ 6,891 14.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets $ 6,801 44.7%
Tier 1 Capital (to Risk
Weighted Assets) $ 6,669 43.8%
Tier 1 Capital (to
Average Assets) $ 6,669 30.6%
<CAPTION>
MINIMUM CAPITAL
REQUIREMENT
-----------------------------
AMOUNT RATIO
------ -----
(Amount in Millions)
<S> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated Greater than or equal to$ 2,700 Greater than or equal to 8.0%
James Monroe Bank Greater than or equal to$ 2,700 Greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated Greater than or equal to$ 1,350 Greater than or equal to 4.0%
James Monroe Bank Greater than or equal to$ 1,350 Greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets):
Consolidated Greater than or equal to$ 1,474 Greater than or equal to 3.0%
James Monroe Bank Greater than or equal to$ 1,474 Greater than or equal to 3.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets Greater than or equal to$ 1,217 Greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets) Greater than or equal to$ 609 Greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets) Greater than or equal to$ 873 Greater than or equal to 4.0%
<CAPTION>
MINIMUM
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------------
AMOUNT RATIO
------- -------
(Amount in Millions)
<S> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated N/A
James Monroe Bank Greater than or equal to$ 3,375 Greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A
James Monroe Bank Greater than or equal to$ 2,025 Greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated N/A
James Monroe Bank Greater than or equal to$ 1,474 Greater than or equal to 3.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets Greater than or equal to$ 1,522 Greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets) Greater than or equal to$ 913 Greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets) Greater than or equal to$ 1,091 Greater than or equal to 5.0%
</TABLE>
F-22
<PAGE>
RESTRICTION ON DIVIDENDS
The approval of the Bank's regulatory agencies is required to pay dividends
which exceed the Bank's net profits for the current year plus its retained net
profits for the preceding two years. The Bank did not pay any dividends during
the year ended December 31, 1999.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Corporation's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit,
stand-by letters of credit and revolving lines of credit. A summary of the
notional amount of the Corporation's commitments and contingent liabilities is
as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Commitments to extend credit $ 8,589,750 $ 6,639,388
Stand-by letters of credit $ 47,000 $ 52,500
</TABLE>
Commitments to extend credit and stand-by letters of credit include exposure to
some credit loss in the event of nonperformance of the customer. The
Corporation's credit policies and procedures for credit commitments and
financial guarantees are the same as those for extensions of credit that are
recorded on the balance sheets. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to the Bank.
The Corporation has entered an agreement to invest a minimum of $57,500 in the
Virginia Bankers Insurance Center, LLC. As of December 31, 1999, $5,750 had been
invested.
NOTE 12. TRANSACTIONS WITH DIRECTORS AND OFFICERS
The Corporation has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors and principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties). In the opinion
of management, such loans are made on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
others. They do not involve more than normal credit risk or present other
unfavorable features.
Aggregate loan balances with related parties totaled $735,719 and $666,903 at
December 31, 1999 and 1998, respectively. During the year ended December 31,
1999, total principal additions were $935,000 and total principal payments were
$866,184.
F-23
<PAGE>
NOTE 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
SECURITIES - Fair values are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
LOANS RECEIVABLE - Fair value for performing loans is calculated by discounting
estimated cash flows using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Fair value for non-performing loans is based on the lesser of estimated cash
flows which are discounted using a rate commensurate with the risk associated
with the estimated cash flows, or values of underlying collateral.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
ACCRUED INTEREST - The carrying amounts of accrued interest approximate fair
value.
The estimated fair values of the Corporation's financial instruments at December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,640,520 $ 2,640,520 $ 1,305,528 $ 1,305,528
Federal funds sold 1,537,000 1,537,000 4,967,000 4,967,000
Securities 13,518,256 13,518,256 3,988,212 3,988,212
Loans 30,675,915 31,586,141 12,637,318 12,744,518
Accrued interest 345,794 345,794 87,686 87,686
---------------- --------------- --------------- ---------------
$ 48,717,485 $ 49,627,711 $ 22,985,744 $ 23,092,944
================ =============== =============== ===============
Financial liabilities:
Deposits $ 42,819,063 $ 42,807,489 $ 16,780,997 $ 16,798,906
Accrued interest 73,441 73,441 26,757 26,757
---------------- --------------- --------------- ---------------
$ 42,892,504 $ 42,880,930 $ 16,807,754 $ 16,825,663
================ =============== =============== ===============
</TABLE>
F-24
<PAGE>
NOTE 14. LINES OF CREDIT
The Bank has unsecured lines of credit with correspondent banks totaling
$5,000,000 available for overnight borrowing. There were no amounts drawn on
these lines at December 31, 1999 and 1998.
NOTE 15. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and
the effect on the weighted average number of shares of dilutive potential common
stock. The potential common stock did not have a significant impact on net
income.
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Weighted average number of common
shares, basic 742,028 737,590
Effect of dilutive stock options 8,924 --
--------------- ----------------
Weighted number of common shares
and dilutive potential common stock
used in diluted EPS 750,952 737,590
=============== ================
</TABLE>
F-25
<PAGE>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,875,420 $ 1,667,190
Federal funds sold 5,328,000 3,157,000
Securities available for sale at fair value 14,558,049 8,575,180
Loans, net of allowance for loan losses of $419,200 in 2000
and $192,000 in 1999 37,159,429 17,897,692
Bank premises and equipment, net 715,352 483,567
Accrued interest receivable 409,667 226,966
Other assets 212,658 53,819
------------ ------------
$ 61,258,575 $ 32,061,414
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 17,723,361 $ 5,654,519
Interest-bearing deposits 36,625,445 19,604,788
------------ ------------
Total deposits 54,348,806 25,259,307
Accrued interest payable and other liabilities 228,344 167,434
------------ ------------
Total liabilities 54,577,150 25,426,741
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 2,000,000 shares;
issued and outstanding 744,290 in 2000 and 742,590 in 1999 744,290 742,590
Capital surplus 6,698,610 6,683,310
Retained earnings (deficit) (469,158) (740,736)
Accumulated other comprehensive (loss) (292,317) (50,491)
Total stockholders' equity 6,681,425 6,634,673
------------ ------------
$ 61,258,575 $ 32,061,414
============ ============
</TABLE>
F-26
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
For the Quarter For the Quarter
Ended Ended
March 31, March 31,
2000 1999
----------------- -----------------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 757,471 $ 340,433
Securities, taxable 223,823 122,171
Federal funds sold 39,990 48,529
----------- ---------
Total interest income 1,021,284 511,133
INTEREST EXPENSE, deposits 364,548 148,403
----------- ---------
Net interest income 656,736 362,730
PROVISION FOR LOAN LOSSES 56,200 60,000
----------- ---------
Net interest income after provision for loan losses 600,536 302,730
NONINTEREST INCOME:
Service charges and fees 48,201 12,992
Other 15,620 5,734
----------- ---------
Total noninterest income 63,821 18,726
NONINTEREST EXPENSES:
Salaries and wages 253,511 145,159
Employee benefits 36,443 23,199
Occupancy expenses 66,452 54,065
Equipment expenses 43,395 23,452
Other operating expenses 152,655 109,814
Total noninterest expenses 552,456 355,689
----------- ---------
Income (loss) before income taxes 111,901 (34,233)
PROVISION FOR INCOME TAXES -- --
----------- ---------
Net income (loss) $ 111,901 $ (34,233)
=========== =========
EARNINGS PER SHARE, basic and assuming dilution $ 0.15 $ (0.46)
=========== =========
</TABLE>
F-27
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Quarters Ended March 31, 2000 and March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPRE- COMPRE- TOTAL
COMMON CAPITAL EARNINGS HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS (DEFICIT) (LOSS) INCOME EQUITY
--------- ----------- ---------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $ 742,590 $ 6,683,310 $ (581,059) $ (245,595) $ 6,599,246
Comprehensive (loss):
Net income 111,901 $111,901 111,901
Net change in unrealized (losses)
on available for sale securities,
net of deferred taxes of $24,821 (46,722) (46,722) (46,722)
---------
Total comprehensive (loss) $ 65,179
=========
Exercise of stock options 1,700 15,300 -- -- 17,000
--------- ----------- ---------- ---------- -----------
BALANCE, MARCH 31, 2000 $ 744,290 $ 6,698,610 $ (469,158) $ (292,317) $ 6,681,425
========= =========== ========== ========== ===========
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPRE- COMPRE- TOTAL
COMMON CAPITAL EARNINGS HENSIVE HENSIVE STOCKHOLDERS'
STOCK SURPLUS (DEFICIT) (LOSS) INCOME EQUITY
--------- ----------- ---------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ 737,590 $ 6,638,310 $ (706,503) $ (10,758) $ 6,658,639
Comprehensive (loss):
Net loss (34,233) $ (34,233) (34,233)
Net change in unrealized (losses)
on available for sale securities,
net of deferred taxes of $20,468 (39,733) (39,733) (39,733)
---------
Total comprehensive (loss) $ (73,966)
=========
Issuance of common stock 5,000 45,000 $ 50,000
--------- ----------- ---------- ---------- -----------
BALANCE, MARCH 31, 1999 $ 742,590 $ 6,683,310 $ (740,736) $ (50,491) $ 6,634,673
========= =========== ========== ========== ===========
</TABLE>
F-28
<PAGE>
JAMES MONROE BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
FOR THE QUARTER FOR THE QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 111,901 $ (34,233)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 30,714 18,957
Provision for loan losses 56,200 60,000
(Increase) in accrued interest receivable (63,873) (139,280)
Amortization of bond premium 151 1,853
Accretion of bond discount (2,541) (271)
(Increase) in other assets (2,298) (3,697)
Increase in accrued interest and other liabilities 28,598 98,508
-------------- ------------
Net cash provided by (used in) operating activities $ 158,852 $ 1,837
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale $ (1,143,424) $ (4,998,750)
Proceeds from calls and maturities of securities available for sale 35,531 350,000
Purchases of premises and equipment (32,088) (9,361)
(Increase) decrease in Federal funds sold (3,791,000) 1,810,000
Net (increase) in loans (6,539,714) (5,320,374)
------------- ------------
Net cash (used in) investing activities $ (11,470,695) $ (8,168,485)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings deposits
and money market accounts $ 5,437,593 $ 7,698,348
Net increase in time deposits 6,092,150 779,962
Proceeds from issuance of common stock 17,000 50,000
------------- ------------
Net cash provided by financing activities $ 11,546,743 $ 8,528,310
------------- ------------
Increase (decrease)in cash and due from banks $ 234,900 $ 361,662
CASH AND DUE FROM BANKS
Beginning 2,640,520 1,305,528
------------- ------------
Ending $ 2,875,420 $ 1,667,190
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash payments for interest paid to depositors $ 364,548 $ 148,482
============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized (loss) on securities available for sale $ 79,430 $ 39,733
============= ============
</TABLE>
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of James Monroe
Bancorp, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. All significant intercompany balances and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments and reclassifications
consistently of a normal and recurring nature considered necessary to present
fairly the financial positions as of March 31, 2000 and December 31, 1999, and
the results of operations and cash flows for three months ended March 31, 2000
and 1999.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
F-30
<PAGE>
[LOGO]
JAMES MONROE BANCORP, INC.
344,828 SHARES
COMMON STOCK
Prospectus
August 11, 2000
JAMES MONROE BANCORP HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATION ABOUT THE OFFERING THAT DIFFERS FROM, OR ADDS TO, THE
INFORMATION IN THIS PROSPECTUS OR IN ITS DOCUMENTS THAT ARE PUBLICLY FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE DOES GIVE YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. THE DELIVERY OF
THIS PROSPECTUS AND/OR THE SALE OF SHARES OF COMMON STOCK DO NOT MEAN THAT THERE
HAVE NOT BEEN ANY CHANGES IN JAMES MONROE BANCORP'S CONDITION SINCE THE DATE OF
THIS PROSPECTUS. IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO
SELL, OR TO ASK FOR OFFERS TO BUY, THE SECURITIES OFFERED BY THIS PROSPECTUS, OR
IF YOU ARE A PERSON TO WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE
OFFER PRESENTED BY THIS PROSPECTUS DOES NOT EXTEND TO YOU. THIS PROSPECTUS
SPEAKS ONLY AS OF ITS DATE EXCEPT WHERE IT INDICATES THAT ANOTHER DATE APPLIES.
UNTIL NOVEMBER 29, 2000, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
