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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 0-31951
-------
MONROE BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1594 017
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
210 East Kirkwood Avenue
Bloomington, IN 47408
(Address of principal executive offices)
(Zip Code)
(812) 336-0201
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Outstanding Shares of Common Stock on July 31, 2002: 6,150,240
---------
MONROE BANCORP AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets....................... 3
Consolidated Condensed Statements of Income - Six Months.... 4
Consolidated Condensed Statements of Income - Three Months.. 5
Consolidated Condensed Statements of Shareholders' Equity... 6
Consolidated Condensed Statements of Cash Flows............. 7
Notes to Consolidated Condensed Financial Statements........ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 16
Forward Looking Statements................................................... 17
Part II. Other Information:
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes In Securities.......................................... 19
Item 3. Defaults Upon Senior Securities................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 19
Item 6a. Exhibits....................................................... 19
Item 6b. Reports Filed on Form 8-K...................................... 20
Signatures................................................................... 21
Exhibit Index................................................................ 22
2
Item 1. Financial Statements
- ------- --------------------
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)
June 30, December 31,
2002 2001
------------------------
Assets
Cash and due from banks .................................... $ 17,575 $ 17,276
Federal funds sold ......................................... 9,200 --
-----------------------
Cash and cash equivalents ............................ 26,775 17,276
Trading securities ......................................... 2,923 3,060
Investment securities
Available for sale ................................... 32,617 17,821
Held to maturity ..................................... 66,682 67,569
-----------------------
Total investment securities .................... 99,299 85,390
Loans held for sale ........................................ 1,344 8,032
Loans, net of allowance for loan losses of $4,186 and $4,198 375,737 359,570
Premises and equipment ..................................... 11,977 11,633
Federal Home Loan Bank of Indianapolis stock, at cost ...... 1,882 1,534
Interest receivable and other assets ....................... 8,507 9,058
-----------------------
Total assets ......................................... $ 528,444 $ 495,553
=======================
Liabilities
Deposits
Noninterest-bearing .................................. $ 59,487 $ 55,034
Interest-bearing ..................................... 344,009 304,172
-----------------------
Total deposits ................................. 403,496 359,206
Short-term borrowings ...................................... 39,903 58,212
Other borrowings ........................................... 36,950 31,785
Interest payable and other liabilities ..................... 5,639 5,666
-----------------------
Total liabilities .................................... 485,988 454,869
-----------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized - 18,000,000 shares
Issued and outstanding - 6,150,240 shares ............ 137 137
Additional paid-in capital ................................. 3,362 3,359
Retained earnings .......................................... 39,047 37,449
Accumulated other comprehensive income ..................... 507 336
Unearned ESOT shares ....................................... (597) (597)
-----------------------
Total shareholders' equity ........................... 42,456 40,684
-----------------------
Total liabilities and shareholders' equity ........... $ 528,444 $ 495,553
=======================
See notes to consolidated condensed financial statements.
3
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Six Months Ended
June 30,
---------------------
2002 2001
---------------------
Interest Income
Loans, including fees .............................. $ 12,543 $ 13,396
Trading securities ................................. 33 43
Investment securities
Taxable ...................................... 1,816 1,878
Tax exempt ................................... 550 654
Federal funds sold ................................. 58 69
---------------------
Total interest income ........................ 15,000 16,040
---------------------
Interest Expense
Deposits ........................................... 4,586 6,851
Short-term borrowings .............................. 216 833
Long-term debt ..................................... 924 233
---------------------
Total interest expense ....................... 5,726 7,917
---------------------
Net Interest Income ...................................... 9,274 8,123
Provision for loan losses .......................... 552 320
---------------------
Net Interest Income After Provision for Loan Losses ...... 8,722 7,803
---------------------
Other Income
Trust fees ......................................... 456 435
Service charges on deposit accounts ................ 1,257 1,050
Commission income .................................. 411 310
Realized and unrealized losses on securities ....... (159) (133)
Gain on sale of loans .............................. 393 229
Other operating income ............................. 386 531
---------------------
Total other income ........................... 2,744 2,422
---------------------
Other Expenses
Salaries and employee benefits ..................... 4,304 3,565
Premises and equipment ............................. 1,195 965
Advertising ........................................ 348 251
Depreciation on directors' and executives' deferred
compensation plan ............................ (178) (96)
Other operating expense ............................ 1,205 1,029
---------------------
Total other expenses ......................... 6,874 5,714
---------------------
Income Before Income Tax ................................. 4,592 4,511
Income tax expense ................................. 1,530 1,560
---------------------
Net Income ............................................... $ 3,062 $ 2,951
=====================
Basic earnings per share ................................. $ .50 $ .48
Diluted earnings per share ............................... . 50 .48
See notes to consolidated condensed financial statements.
4
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
-------------------
2002 2001
-------------------
Interest Income
Loans, including fees .................................... $ 6,163 $ 6,682
Trading securities ....................................... 17 23
Investment securities
Taxable ............................................ 1,011 898
Tax exempt ......................................... 271 321
Federal funds sold ....................................... 27 30
-------------------
Total interest income .............................. 7,489 7,954
-------------------
Interest Expense
Deposits ................................................. 2,276 3,374
Short-term borrowings .................................... 98 333
Long-term debt ........................................... 468 137
-------------------
Total interest expense ............................. 2,842 3,844
-------------------
Net Interest Income ............................................ 4,647 4,110
Provision for loan losses ................................ 276 170
-------------------
Net Interest Income After Provision for Loan Losses ............ 4,371 3,940
-------------------
Other Income
Trust fees ............................................... 239 221
Service charges on deposit accounts ...................... 662 529
Commission income ........................................ 203 196
Realized and unrealized gains (losses) on securities ..... (146) 109
Gain on sale of loans .................................... 174 137
Other operating income ................................... 197 307
-------------------
Total other income ................................. 1,329 1,499
-------------------
Other Expenses
Salaries and employee benefits ........................... 2,138 1,844
Premises and equipment ................................... 600 475
Advertising .............................................. 181 134
Appreciation (depreciation) on directors' and executives'
deferred compensation plan ......................... (178) 128
Other operating expense .................................. 623 551
-------------------
Total other expenses ............................... 3,364 3,132
-------------------
Income Before Income Tax ....................................... 2,336 2,307
Income tax expense ....................................... 773 803
-------------------
Net Income ..................................................... $ 1,563 $ 1,504
===================
Basic earnings per share ....................................... $ .26 $ .24
Diluted earnings per share ..................................... . 26 . 24
See notes to consolidated condensed financial statements.
5
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Shareholders' Equity
For the Six Months Ended June 30, 2002
(Unaudited)
(Dollars in thousands)
Unearned
Common Stock Accumulated Employee
------------------- Additional Other Stock
Shares Paid In Comprehensive Retained Comprehensive Ownership
Outstanding Amount Capital Income Earnings Income Trust Shares Total
----------------------------------------------------------------------------------------------
Balances, January 1, 2002 6,150,240 $ 137 $ 3,359 $ 37,449 $ 336 $ (597) $ 40,684
Comprehensive Income:
Net income for the period $ 3,062 3,062 3,062
Unrealized gains on securities 171 171 171
Cash dividend ($.24 per share) (1,464) (1,464)
ESOT shares earned 3 3
---------- ------ -------- -------- --------- -------- -------- --------
Balances, June 30, 2002 6,150,240 $ 137 $ 3,362 $ 3,233 $ 39,047 $ 507 $ (597) $ 42,456
========== ====== ======== ======== ========= ======== ======== ========
See notes to consolidated condensed financial statements.
6
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
---------------------
2002 2001
-------- --------
Operating Activities
Net income .......................................................... $ 3,062 $ 2,951
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses ........................................ 552 320
Depreciation and amortization .................................... 438 370
Deferred income tax .............................................. 39 148
Investment securities amortization ............................... 128 117
Securities gain .................................................. (46) (4)
Origination of loans held for sale ............................... (19,751) (16,295)
Proceeds from sale of loans held for sale ........................ 26,832 16,706
Gain on sale of loans held for sale .............................. (393) (229)
ESOT compensation ................................................ 3 --
Net change in:
Trading securities ............................................ 137 62
Interest receivable and other assets .......................... 473 (129)
Interest payable and other liabilities ........................ (27) 521
-------- --------
Net cash provided by operating activities ............... 11,447 4,538
-------- --------
Investing Activities
Purchases of securities available for sale .......................... (19,236) (3,515)
Proceeds from sales of securities available for sale ................ 3,281 25
Proceeds from paydowns and maturities of securities
available for sale ............................................ 1,399 9,670
Purchases of securities held to maturity ............................ (14,934) --
Proceeds from paydowns and maturities of securities held to maturity 15,708 8,794
Purchase of FHLB stock .............................................. (348) (93)
Net change in loans ................................................. (16,718) (27,551)
Purchases of premises and equipment ................................. (782) (587)
-------- --------
Net cash used by investing activities ................... (31,630) (13,257)
-------- --------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 9,832 23,856
Certificates of deposit .......................................... 34,458 (5,010)
Short-term borrowings ............................................ (18,309) (13,604)
Proceeds of long-term debt .......................................... 7,398 8,183
Repayment of long-term debt ......................................... (2,233) (2,026)
Cash dividends paid ................................................. (1,464) (1,351)
-------- --------
Net cash provided by financing activities ............... 29,682 10,048
-------- --------
Net Change in Cash and Cash Equivalents ................................... 9,499 1,329
Cash and Cash Equivalents, Beginning of Period ............................ 17,276 25,983
-------- --------
Cash and Cash Equivalents, End of Period .................................. $ 26,775 $ 27,312
======== ========
Supplemental cash flow disclosures
Interest paid ....................................................... $ 5,806 $ 8,114
Income tax paid ..................................................... 1,500 1,505
See notes to consolidated condensed financial statements.
7
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 2002
(Unaudited)
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of Monroe Bancorp
(the "Company") and its wholly owned subsidiary, Monroe Bank, a state chartered
bank (the "Bank"). A summary of significant accounting policies is set forth in
Note 1 of Notes to Financial Statements included in the December 31, 2001,
Annual Report to Shareholders. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 2002, and for the six
months ended June 30, 2002 and 2001, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods.
The consolidated condensed balance sheet of the Company as of December 31, 2001
has been derived from the audited consolidated balance sheet of the Company as
of that date. Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated condensed financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K annual report filed with the
Securities and Exchange Commission.
The results of operations for the period are not necessarily indicative of the
results to be expected for the year.
8
Note 2: Earnings Per Share
- --------------------------
The number of shares used to compute basic and diluted earnings per share was as
follows:
Six months ended
----------------
June 30, 2002 June 30, 2001
------------- -------------
Weighted average shares outstanding...... 6,150,240 6,150,240
Average unearned ESOT shares............. (50,461) (9,313)
--------- ---------
Shares used to compute basic
earnings per share........... 6,099,779 6,140,927
Effect of dilutive securities
stock options................ 3,227 --
--------- ---------
Shares used to compute diluted
earning per share............ 6,103,006 6,140,927
========= =========
For the six months ending June 30, 2002 and 2001, options to purchase 105,000
and 110,000 shares, respectively, were not included in the earnings per share
calculation because the exercise price exceeded the market price.
Three months ended
------------------
June 30, 2002 June 30, 2001
------------- -------------
Weighted average shares outstanding...... 6,150,240 6,150,240
Average unearned ESOT shares............. (49,823) (8,051)
--------- ---------
Shares used to compute basic
earnings per share................ 6,100,417 6,142,189
Effect of dilutive securities
stock options................ 8,762 --
--------- ---------
Shares used to compute diluted
earnings per share........... 6,109,179 6,142,189
========= =========
For the three months ended June 30, 2001, options to purchase 110,000 shares
were not included in the earnings per share calculation because the exercise
price exceeded the market price.
9
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
-------------------------------------------------
General
- -------
Monroe Bancorp (the "Company") is a one-bank holding company formed under
Indiana law in 1984. The Company holds all of the outstanding stock of Monroe
Bank (the "Bank"), which was formed in 1892. Banking is the primary business
activity of the Company.
The Bank, with its primary offices located in Bloomington, Indiana, conducts
business from sixteen locations in Monroe, Jackson, Lawrence, and Hendricks
Counties, Indiana. Approximately 80 percent of the Bank's business is originated
in branches located in Monroe County and is concentrated in and around the city
of Bloomington.
The Bank is a traditional community bank which provides a variety of financial
services to its customers, including:
o accepting deposits;
o making commercial, mortgage and installment loans;
o originating fixed rate residential mortgage loans for sale into the
secondary market;
o providing personal and corporate trust services;
o providing investment advisory and brokerage services; and
o providing fixed and variable annuities.
The majority of the Bank's revenue is derived from interest and fees on loans
and investments, and the majority of its expense is interest paid on deposits
and general and administrative expenses related to its business.
Market Expansion
- ----------------
The Bank now has three branches in Hendricks County, west of Indianapolis. The
Avon and Plainfield branches opened in September and October 2001, respectively,
and a third branch opened in Brownsburg in May of 2002. As of June 30, 2002, the
Bank had $40.2 million in deposits and $25.9 million in loans at the Hendricks
County branches.
The Bank's strategy in opening these branches is as follows:
o Hire experienced and established professionals from within the market.
This accelerates the Bank's ability to build name recognition and
credibility in the new market.
o Avoid the start-up expense associated with pursuing the mass retail
market. Instead open relatively low cost offices in professional
buildings. Target marketing efforts to the high potential commercial
real estate, residential mortgage, and large depositor segments.
o Stress community involvement and business development activities
supported by the involvement of executives from the Company's primary
market.
10
Critical Accounting Policies
- ----------------------------
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on page 30 to 31 of the
annual report for calendar year 2001. Certain of theses policies are important
to the portrayal of the Company's financial condition, since they require
management to make difficult, complex or subjective judgments, some of which may
relate to matters that are inherently uncertain. Management believes that its
primary critical accounting policy is determining the allowance for loan losses
("ALL").
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and applicable
economic and environmental conditions. The allowance for loan losses is
maintained through the provision for loan losses, which is a charge against
earnings. The amount provided for loan losses and the determination of the
appropriateness of the allowance are based on a continuous review of the loan
portfolio, including an internally administered loan "watch" list and an
independent loan review provided by an outside accounting firm (BKD, LLP). The
evaluation takes into consideration identified credit problems from individually
evaluated loans, as well as historical loss experience, adjusted for relevant
qualitative environmental factors, for loans evaluated collectively. Qualitative
environmental factors considered during the analysis include: national and local
economic trends, trends in delinquencies and charge-offs, trends in volume and
terms of loans (including concentrations within industries), recent changes in
underwriting standards, experience and depth of lending staff, and industry
conditions.
The Bank's methodology for assessing the appropriateness of the allowance
consists of several key elements including:
o the formula allowance related to historical losses on homogeneous pools of
loans
o specific allowances related to specifically identified loans
o the unallocated allowance attributed to qualitative environmental factors
Results of Operations
- ---------------------
Overview
- --------
Net income for the second quarter was $1.6 million compared with $1.5 million
for the same quarter last year, an increase of 3.9 percent. Basic and diluted
earnings per share were $0.26 for the three months ended June 30, 2002 compared
to $0.24 for the three months ended June 30, 2001. Net income was $3.1 million
and $3.0 million for the six-month periods ended June 30, 2002 and 2001,
respectively, an increase of 3.8 percent. Basic and diluted earnings per share
were $0.50 for the six months ended June 30, 2002, compared to $0.48 for the six
months ended June 30, 2001.
Annualized return on average equity (ROE) for the second quarter of 2002
increased to 14.91 percent compared to 14.52 percent ROE for year ending
December 31, 2001. However, second quarter ROE decreased when compared to ROE of
15.32 percent for the second quarter in 2001. The annualized return on average
assets (ROA) was 1.21 percent for the second quarter of 2002 compared with 1.36
percent for the same period in 2001. For the six-month periods ended June 30,
2002 and 2001, annualized ROE was 14.84 percent and 15.31 percent, respectively,
while the annualized ROA was 1.21 percent and 1.35 percent, respectively.
The earnings growth rate reflects strong growth in loans, fee income and gains
on mortgages sold in the secondary market offset by the impact of the Bank's
entry into Hendricks County and an increase in the provision for loan losses.
Excluding the start-up operation in Hendricks County, the Company generated a
9.3
11
percent increase in net income for the second quarter 2002 compared to 2001, and
an increase of 9.6 percent year to date.
As of June 30, 2002, year to date dividends paid were $0.24 per share, compared
to $0.22 per share for the same period in 2001, an increase of 9.1 percent. In
keeping with management's strategy, the Company has increased the dividend rate
each year for more than 15 years. At June 30, 2002, the annualized dividend
yield was 3.5 percent compared to 4.4 percent at June 30, 2001. The decrease in
yield occurred due to an increase in the market value of the stock. At June 30,
2002, the closing market price of Monroe Bancorp stock was $13.78 compared to
$9.93 per share at June 30, 2001, an increase of 38.8 percent.
Net Interest Income / Net Interest Margin
- -----------------------------------------
Net interest income is the primary source of the Company's earnings. It is a
function of the net interest margin and the volume of average earning assets.
Net interest income after the provision for loan losses was $4.4 million for the
three months ended June 30, 2002 compared to $3.9 million for the same period in
2001, an increase of 10.9 percent. The increase in net interest income can
primarily be attributed to strong loan growth. Average loans for the second
quarter of 2002 were $375.8 million compared to $314.1 million for the second
quarter of 2001, an increase of $61.7 million, or 19.6 percent.
The second quarter tax-equivalent net interest margin was 4.1 percent in 2002
compared to 4.2 percent in 2001. The decline in the margin occurred primarily
for two reasons. The Bank consciously obtained longer term deposits and Federal
Home Loan Bank of Indianapolis (FHLBI) advances for asset/liability management
purposes. These deposits/borrowings carry a higher rate of interest than if the
Bank had obtained short-term deposits and borrowings. Management believes that
the longer term fixed rate funding has reduced the Company's interest rate risk
even though the short-term effect is a decline in the margin. Also, during the
second quarter of 2002, deposits grew more quickly than loans, and more funds
were invested in federal funds sold than during the second quarter of 2001, when
loans grew faster than deposits. The tax equivalent yield on earning assets
decreased during the second quarter of 2002 to 6.4 percent compared to 7.9
percent for the second quarter of 2001. This was a reflection of loans repricing
as the prime rate decreased from 6.75 percent during the second quarter of 2001
to 4.75 percent at the end of the second quarter of 2002. The rate on interest
bearing liabilities also decreased, from 4.5 percent during the second quarter
of 2001 to 2.8 percent for the second quarter of 2002, due to the declining
interest rate environment.
For the six months ended June 30, 2002, net interest income after the provision
for loan losses was $8.7 million compared to $7.8 million for the same period in
2001, an increase of $919,000, or 11.8 percent. Once again, this growth resulted
primarily from an increase in the average balance of loans to $374.6 million for
the first six months of 2002 compared to $306.1 million for the same period in
2001, an increase of $68.5 million or 22.4 percent. This growth was partially
offset by a decrease in the average balance of investment securities to $92.4
million for the first six months of 2002 compared to $97.3 million for the same
period of 2001. Total interest income decreased to $15.0 million for the first
six months of 2002 from $16.0 million for the same period in 2001. Total
interest expense also decreased from $7.9 million during the first six months of
2001 to $5.7 million for the first six months of 2002. These decreases occurred
because the decline in the interest rate environment.
The increase in net interest income was also offset by an increase in the
provision for loan losses. During the first six months of 2002, $552,000 was
added to the provision, compared to $320,000 during the same period in 2001.
Credit quality remains strong and delinquent loans as a percent of the total
portfolio have decreased to 1.5 percent at June 30, 2002 compared to 2.0 percent
at June 30, 2001. However, the Bank has experienced an increase in loan charged
offs this year compared to last year, and an increase in loans internally
classified and non-accrual loans, as discussed further under "Classification of
Assets, Allowance for Loan Losses, and Nonperforming Loans." These factors,
coupled with significant growth in the loan portfolio, led management to
increase the provision in 2002.
12
The tax-equivalent yield on earning assets decreased from 8.1 percent for the
first six months of 2001 to 6.5 percent for the first six months of 2001. The
rate on interest bearing liabilities decreased to 2.9 percent for the first six
months of 2002 from 4.7 percent for the same period in 2001. The Company's net
interest margin decreased to 4.1 percent for the first six months of 2002
compared to 4.2 percent in the prior year. Reasons for the decrease in the
margin year-to-date are the same as the reasons for the decrease in the second
quarter as discussed above.
Noninterest Income / Noninterest Expense
- ----------------------------------------
Total noninterest income decreased $170,000 for the three months ended June 30,
2002 compared to the same period in 2001. Unrealized securities losses during
the second quarter of 2002 of $192,000 are included in "Realized and unrealized
gains (losses) on securities" on page 5 of the consolidated condensed financial
statements and unrealized gains of $108,000 are included for the second quarter
of 2001. These unrealized losses and gains are comprised entirely of net
unrealized losses and gains on trading securities (mutual funds) held in a
grantor trust ("rabbi trust") in connection with the Company's Directors' and
Executives' Deferred Compensation Plans. These securities are held as trading
securities, hence, unrealized gains and losses are recognized on the income
statement. Any net unrealized loss is directly offset by a decrease to
directors' fee and executives' deferred compensation expense, and conversely,
any unrealized gain is offset by an increase to directors' fee/executives'
deferred compensation expense. This is included in the line item identified on
page 5 of the consolidated condensed financial statements as "Appreciation
(depreciation) on directors' and executives' deferred compensation plan." The
activity in the rabbi trust has no effect on the Company's net income.
Omitting the unrealized losses and gains on the rabbi trust from 2002 and 2001,
noninterest income increased $130,000 or 9.4 percent during the second quarter
of 2002 compared to the same period of 2001. This growth mainly occurred in
service charges, which increased $133,000 or 25.1 percent, due to the maturation
of the Overdraft Protector product. Noninterest income for the second quarter of
2001 includes a one-time gain recognized from the sale of a section of land at
one of the Bank's branches to the City of Bloomington for a road construction
project. The sale resulted in an $88,000 gain. Omitting this 2001 one-time gain,
and the $46,000 gain recognized on the sale of a security during the second
quarter of 2002, noninterest income increased $173,000 or 13.3 percent.
For the first six months of 2002, noninterest income increased $322,000 or 13.3
percent over the same period for 2001. Omitting the realized gains from land and
security sales and unrealized losses from the rabbi trust, noninterest income
increased $432,000, or 17.5 percent. The majority of these increases occurred in
the following areas: service charges which increased $207,000, or 19.7 percent,
due to the maturation of the Overdraft Protector product, gains on the sale of
mortgages in the secondary market which increased $164,000, or 71.6 percent,
primarily due to the favorable declining interest rate environment, and platform
sales and brokerage commission income increased $101,000, or 32.6 percent.
Total other noninterest expense increased $232,000 during the second quarter of
2002 compared to the same period in 2001. As previously discussed above, the net
unrealized losses on trading securities in the rabbi trust directly decreased
director fee expense in 2002, and the net unrealized gains increased directors'
fees in the second quarter of 2001. Without the effect of the rabbi trust on
2002 and 2001, other noninterest expense increased $538,000 or 17.9 percent.
Salaries and employee benefits increased $294,000 or 15.9 percent primarily
because we have fully staffed our three Hendricks County branches now, compared
to having only three Hendricks County employees hired at the end of the second
quarter of 2001. Premises and equipment expense also increased by $125,000, or
26.3 percent, due to the addition of the three Hendricks County branches.
For the first six months of 2002, noninterest expense increased $1.16 million
over the same period of 2001. Without the effect of the rabbi trust unrealized
gains/losses on directors' fee/executives' deferred compensation expense,
noninterest expense increased $1.24 million, or 21.4 percent. As discussed
above, the bulk of this
13
increase occurred in salaries and employee benefits, which increased $739,000 or
20.7 percent due to the increase in Hendricks County staff plus increases in
mortgage, platform sales and brokerage commission expense due to corresponding
increases in commission income. Premises and equipment expense increased
$230,000, or 23.8 percent, primarily due to the expansion in Hendricks County.
The Bank also demolished a branch in Monroe County and built a larger branch in
its place in February of 2002, which contributed to the increase in occupancy
expense. Other operating expense increased $176,000, or 17.1 percent, primarily
because the Bank outsourced its proof operations during the fourth quarter of
2001. This expense was partially offset by a reduction in salaries when the
Proof Department staff filled other open positions within the bank.
Financial Condition
- -------------------
Assets and Liabilities
- ----------------------
Total assets of the Company increased 6.6 percent, or $32.9 million at June 30,
2002 compared to December 31, 2001. As previously mentioned, deposit growth
exceeded loan growth during the first six months of 2002. At June 30, 2002,
total loans grew $9.5 million, or 2.6 percent. This growth occurred despite $9.9
million of loans being securitized with the Federal Home Loan Mortgage
Corporation ("FHLMC"). Without the securitization, loans would have increased
$19.3 million or, 5.2 percent. Total investment securities increased by $13.9
million, or 16.3 percent, at June 30, 2002 compared to December 31, 2001,
primarily because of the $9.9 million securities received from FHLMC in exchange
for the securitized loans. Deposits grew $44.3 million, or 12.3 percent during
first six months of 2002, while short-term borrowings, repurchase agreements and
federal funds purchased, declined $18.3 million or 31.4 percent. The Bank had
$21.9 million of federal funds purchased at December 31, 2001 compared to none
at June 30, 2002. The strong growth in deposits offset the need for the Bank to
purchase federal funds. Other borrowings, primarily FHLBI advances, increased
$5.2 million, or 16.3 percent during the first six months of 2002.
Capital Resources
- -----------------
Shareholders' equity increased $1.8 million at June 30, 2002 compared to
December 31, 2001. This increase was a result of year-to-date net income of $3.1
million, dividends paid of $1.5 million and other comprehensive income (the net
change in the fair market value of the Company's available-for-sale securities
portfolio) of $171,000.
The Company's capital continues to exceed regulatory minimums. At June 30, 2002,
the Company had a Tier I risk-based capital ratio of 11.8 percent, total
risk-based capital ratio of 13.0 percent, and a leverage ratio of 8.2 percent.
Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0
percent and a total risk-based capital ratio of 8.0 percent. Banks with Tier I
risk-based capital ratios of 6.0 percent and total risk-based capital ratios of
10.0 percent are considered "well capitalized."
Classification of Assets, Allowance for Loan Losses, and Nonperforming Loans
- ----------------------------------------------------------------------------
The Bank currently classifies loans internally to assist management in
addressing collection and other risks. These classified loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. As of June 30, 2002, the Bank had $10.1 million
of loans internally classified compared to $6.4 million at December 31, 2001.
The majority of the increase in internally classified assets ($2.9 million)
relates to two credits. One of the credits is in the process of an orderly
liquidation and the Bank expects to be substantially paid by the end of the
third quarter. The second credit had several notes which were delinquent at June
30, 2002, however, none of these notes were more than 30 days delinquent as of
July 31, 2002.
The allowance for loan losses was $4.2 million, or 1.1 percent of total loans at
June 30, 2002 virtually the same as it was on December 31, 2001. A portion of
classified loans are non-accrual loans. The Bank had non-accrual loans totaling
$2.2 million at June 30, 2002 compared to $710,000 at December 31, 2001. The
increase
14
is largely a result of the softening of economic conditions within the Bank's
market. At June 30, 2002, the Bank had $1.2 million of loans 90 days or more
past due but still accruing, compared to $1.7 million at December 31, 2001. As
mentioned before, these decreased because more of these loans were placed on
nonaccrual status.
Liquidity
- ---------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Management believes that the Company has adequate liquidity for its short and
long-term needs. Short-term liquidity needs resulting from normal
deposit/withdrawal functions are provided by the Company by retaining a portion
of cash generated from operations and through utilizing federal funds and
repurchase agreements. Long-term liquidity and other liquidity needs are
provided by the ability of the Company to borrow from the Federal Home Loan Bank
of Indianapolis (FHLBI). FHLBI advances were $35.6 million at June 30, 2002
compared to $30.7 million at December 31, 2001. The Bank has excess borrowing
capacity at the FHLBI of $9.4 million as limited by a Board resolution. If the
Bank's borrowing capacity were not limited by the Board resolution, the Bank
would have excess borrowing capacity of $57.4 million. Management's primary
focus has been on increasing deposits to fund future growth, as is evidenced by
the strong growth in deposits during the first six months of 2002, but the Board
anticipates it would increase its resolution limit if the Bank needs additional
liquidity.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels. The Company
constantly monitors the liquidity and maturity structure of its assets and
liabilities, and believes active asset/liability management has been an
important factor in its ability to record consistent earnings growth through
periods of interest rate volatility.
Other
- -----
The Securities and Exchange Commission maintains a web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including Monroe
Bancorp (ticker symbol MROE). The address is http://www.sec.gov.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Market risk of the Bank encompasses exposure to both liquidity risk and interest
rate risk and is reviewed on an ongoing basis by management and quarterly by the
Asset/Liability Committee ("ALCO") and the Board of Directors. Liquidity was
addressed as part of the discussion entitled "Liquidity."
The Bank's interest sensitivity position at June 30, 2002 remained adequate to
meet its primary goal of achieving optimum interest margins while avoiding undue
interest rate risk.
The Bank's interest rate risk is measured by computing estimated changes in net
interest income and the net portfolio value ("NPV") of its cash flows from
assets and liabilities in the event of adverse movements in interest rates.
Interest rate risk exposure is measured using an interest rate sensitivity
analysis to determine the change in NPV in the event of hypothetical changes in
interest rates. Another method also used to enhance the overall process is
interest rate sensitivity gap analysis. This method is utilized to determine the
repricing characteristics of the Bank's assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities. This particular analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 1 percent to 3 percent (100 - 300 basis point) increase or
decrease in interest rates. The Company's Board of Directors adopted an interest
rate risk policy which established a 10 percent maximum increase or decrease in
the NPV in the event of a sudden and sustained 2 percent (200 basis point)
increase or decrease in interest rates.
The following table represents the Bank's projected change in NPV for the
various rate change (rate shock) levels as of June 30, 2002:
Net Portfolio Value at June 30, 2002
------------------------------------
Change in Interest Rate Dollar Amount $ Change in Percent Change
(basis points) (in thousands) NPV in NPV
-------------- -------------- --- ------
+300 $ 59,815 $ (1,402) (2.29)%
+200 60,326 (891) (1.45)
+100 60,807 (410) (0.67)
0 61,217 --- ---
-100 61,453 236 0.39
-200 61,409 192 0.31
-300 69,200 7,983 13.04
16
The following table represents the Bank's projected change in NPV for the
various rate shock levels as of December 31, 2001:
Net Portfolio Value at December 31, 2001
----------------------------------------
Change in Interest Rate Dollar Amount $ Change in Percent Change
(basis points) (in thousands) NPV in NPV
-------------- -------------- --- ------
+300 $ 58,855 $ (2,236) (3.66)%
+200 59,619 (1,472) (2.41)
+100 60,358 (733) (1.20)
0 61,091 --- ---
-100 61,761 670 1.10
-200 61,974 883 1.45
-300 69,062 7,971 13.05
Management believes a 300 basis point (3 percent) decrease in rates is remote,
and a 200 basis point decrease is unlikely, therefore, we will focus our
discussion on the effects of a 100 basis point decrease and a 300 basis point
increase.
The June 30, 2002 table above indicates that the Bank's estimated NPV would be
expected to decrease by 229 basis points as of June 30, 2002 in the event of a
sudden and sustained 300 basis point increase in interest rates. This would
indicate that the Bank's interest bearing liabilities are slightly more
sensitive to an increase in rates than its assets. In the event of sudden and
sustained 100 basis point decrease in prevailing interest rates, the Bank's
estimated NPV would be expected to increase 39 basis points. As of June 30, 2002
the Company's estimated changes in NPV were within the approved guidelines
established by the Board of Directors. The June 30, 2002 changes in NPV at the
various changes in interest rate are slightly lower than at December 31, 2001,
but are similar in size and direction.
Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate any
actions management may undertake in response to changes in interest rates. The
NPV calculation is based on the net present value of discounted cash flows
utilizing certain prepayment assumptions and market interest rates.
Certain shortcomings are inherent in the method of computing the estimated NPV.
Actual results may differ from that information presented in the table above
should market conditions vary from the assumptions used in preparation of the
table information. If interest rates remain or decrease below current levels,
the proportion of adjustable rate loans in the loan portfolio could decrease in
future periods due to refinancing activity. Also, in the event of an interest
rate change, prepayment and early withdrawal levels would likely be different
from those assumed in the table. Lastly, the ability of many borrowers to repay
their adjustable rate debt may decline during a rising interest rate
environment.
Forward-Looking Statements
- --------------------------
This release contains forward-looking statements about the Company which we
believe are within the meaning of the Private Securities Litigation Reform Act
of 1995. This release contains certain forward-looking statements with respect
to the financial condition, results of operations, plans, objectives, future
performance and business of the Company. Forward-looking statements can be
identified by the fact
17
that they do not relate strictly to historical or current facts. They often
include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could" or "may" or words of similar meaning. These
forward-looking statements, by their nature, are subject to risks and
uncertainties. There are a number of important factors that could cause future
results to differ materially from historical performance and these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to: (1) competitive pressures among depository institutions;
(2) changes in the interest rate environment; (3) prepayment speeds, charge-offs
and loan loss provisions; (4) general economic conditions, either national or in
the markets in which the Company does business (5) legislative or regulatory
changes adversely affect the business of the Company; and (6) changes in real
estate values or the real estate markets. Further information on other factors
which could affect the financial results of the Company are included in the
Company's filings with the Securities and Exchange Commission.
18
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
None
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote by Security Holders.
- ------- ----------------------------------------------------
At the April 25,2002 Annual Meeting of Shareholders, the
following matters were submitted to a vote of the shareholders.
Election of Directors - The following directors were elected for
a term of three years.
VOTE COUNT
----------------------------
FOR WITHHELD
--- --------
Mark D. Bradford 4,557,385 12,520
Steven R. Crider 4,557,385 12,520
Paul W. Mobley 4,440,631 129,274
Selection of Independent Public Accountants - BKD, LLP,
Indianapolis, Indiana: Votes For - 4,548,331 Votes Against - 9,000,
Votes Abstained - 10,054.
Item 5. Other Information.
- ------- ------------------
None.
Item 6a. Exhibits.
- -------- ---------
Exhibit No: Description of Exhibit:
- ----------- -----------------------
3 (i) Monroe Bancorp Articles of Incorporation are incorporated by
reference to registrant's Form 10 filed November 14, 2001.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference to registrant's
Form 10 filed November 14, 2001.
10 (i) 1999 Directors' Stock Option Plan of Monroe Bancorp is incorporated
by reference to registrant's Form 10 filed November 14, 2001.
10 (ii) 1999 Management Stock Option Plan of Monroe Bancorp is incorporated
by reference to registrant's Form 10 filed November 14, 2001.
10 (iii) Deferred Compensation Trust for Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2001.
19
10 (iv) Monroe County Bank Agreement for Supplemental Death or Retirement
Benefits is incorporated by reference to registrant's Form 10 filed
November 14, 2001.
10 (v) Monroe Bancorp Thrift Plan is incorporated by reference to
registrant's Form 10 filed November 14, 2001.
10 (vi) Monroe Bancorp Employee Stock Ownership Plan is incorporated by
reference to registrant's Form 10 filed November 14, 2001.
99(i) Certification pursuant to 18 U.S.C. Section 1350 for Chief Executive
Officer
99(ii) Certification pursuant to 18 U.S.C. Section 1350 for Chief Financial
Officer
Item 6b. Reports filed on Form 8-K.
- ------- --------------------------
Monroe Bancorp filed the following Forms 8-K:
o Filed April 19, 2002 to report the release of a summary of
first quarter earnings issued April 19, 2002.
o Filed May 20, 2002 to report the Quarterly Financial
Statement (March 31, 2002) issued May 17, 2002
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONROE BANCORP
Date: August 12, 2002 By: /s/ Mark D. Bradford
--------------- -------------------------------
Mark D. Bradford, President and
Chief Executive Officer
Date: August 12, 2002 By: /s/ Gordon M. Dyott
--------------- -------------------------------
Gordon M. Dyott, Exec. Vice President,
Chief Financial Officer and Chief
Accounting Officer
Exhibit Index
-------------
Exhibit
Number Description
- ------ -----------
3 (i) Monroe Bancorp Articles of Incorporation are incorporated by
reference to registrant's Form 10 filed November 14, 2001.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference to
registrant's Form 10 filed November 14, 2001.
10 (i) 1999 Directors' Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed November
14, 2001.
10 (ii) 1999 Management Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed November
14, 2001.
10 (iii) Deferred Compensation Trust for Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2001.
10 (iv) Monroe County Bank Agreement for Supplemental Death or Retirement
Benefits is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (v) Monroe Bancorp Thrift Plan is incorporated by reference to
registrant's Form 10 filed November 14, 2001.
10 (vi) Monroe Bancorp Employee Stock Ownership Plan is incorporated by
reference to registrant's Form 10 filed November 14, 2001.
99(i) Certification pursuant to 18 U.S.C. Section 1350 for Chief
Executive Officer
99(ii) Certification pursuant to 18 U.S.C. Section 1350 for Chief
Financial Officer
22