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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, 2003
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 35-1594017
- ------------------------------- ---------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
Yes [ ] No [X]
Outstanding Shares of Common Stock on June 30, 2003: 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 Statement 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......................... 12
Forward Looking Statements................................................. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 22
Item 4. Controls and Procedures....................................... 24
Part II. Other Information:
Item 1. Legal Proceedings............................................. 26
Item 2. Changes In Securities......................................... 26
Item 3. Defaults Upon Senior Securities............................... 26
Item 4. Submission of Matters to a Vote of Security Holders........... 26
Item 5. Other Information............................................. 26
Item 6a. Exhibits...................................................... 26
Item 6b. Reports Filed on Form 8-K..................................... 27
Signatures................................................................. 29
Exhibit Index.............................................................. 29
2
Part I.- Financial Information
Item 1...Financial Statements
- ------- ---------------------
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share data)
June 30, December 31,
2003 2002
(Unaudited)
------------------------
Assets
Cash and due from banks .................................... $ 18,565 $ 20,526
Federal funds sold ....................................... 18,200 --
------------------------
Cash and cash equivalents ........................... 36,765 20,526
Trading securities ......................................... 3,086 2,817
Investment securities
Available for sale ..................................... 55,190 43,033
Held to maturity ....................................... 48,297 57,929
------------------------
Total investment securities ....................... 103,487 100,962
Loans held for sale ...................................... 8,131 7,417
Loans, net of allowance for loan losses of $5,878 and $4,574 400,181 379,324
Premises and equipment ..................................... 11,661 11,793
Federal Home Loan Bank of Indianapolis stock, at cost ...... 2,274 1,882
Interest receivable and other assets ....................... 8,341 8,596
------------------------
Total assets ........................................... $ 573,926 $ 533,317
========================
Liabilities
Deposits
Noninterest-bearing .................................... $ 60,465 $ 60,476
Interest-bearing ....................................... 369,871 338,091
------------------------
Total deposits .................................... 430,336 398,567
Borrowings ................................................. 94,212 85,240
Interest payable and other liabilities ..................... 4,620 5,247
------------------------
Total liabilities ...................................... 529,168 489,054
------------------------
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 ................................. 3,377 3,368
Retained earnings .......................................... 40,964 40,619
Accumulated other comprehensive income ..................... 816 675
Unearned ESOT shares ....................................... (536) (536)
------------------------
Total shareholders' equity .......................... 44,758 44,263
------------------------
Total liabilities and shareholders' equity ............. $ 573,926 $ 533,317
========================
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,
---------------------
2003 2002
---------------------
Interest Income
Loans, including fees ..................................... $ 11,816 $ 12,543
Trading securities ...................................... 27 33
Investment securities
Taxable ............................................... 1,726 1,816
Tax exempt ............................................ 452 550
Federal funds sold ...................................... 50 58
---------------------
Total interest income ................................. 14,071 15,000
---------------------
Interest Expense
Deposits .................................................. 3,492 4,586
Short-term borrowings ..................................... 156 216
Other borrowings .......................................... 944 924
---------------------
Total interest expense ................................ 4,592 5,726
---------------------
Net Interest Income ............................................ 9,479 9,274
Provision for loan losses ................................. 3,110 552
---------------------
Net Interest Income After Provision for Loan Losses ............ 6,369 8,722
---------------------
Other Income
Fiduciary activities ...................................... 503 456
Service charges on deposit accounts ....................... 1,334 1,257
Commission income ......................................... 463 411
Securities gains .......................................... 166 46
Unrealized gains (losses) on trading securities ........... 191 (205)
Net gains on loan sales ................................... 826 393
Other operating income .................................... 518 386
---------------------
Total other income .................................... 4,001 2,744
---------------------
Other Expenses
Salaries and employee benefits ............................ 4,701 4,216
Net occupancy and equipment expenses ...................... 1,205 1,195
Advertising ............................................... 289 348
Legal fees .............................................. 248 69
Appreciation (depreciation) in directors' and executives'
deferred compensation plans ........................ 219 (178)
Other operating expense ................................... 1,365 1,224
---------------------
Total other expenses .................................. 8,027 6,874
---------------------
Income Before Income Tax ....................................... 2,343 4,592
Income tax expense ........................................ 533 1,530
---------------------
Net Income ..................................................... $ 1,810 $ 3,062
=====================
Basic earnings per share........................................ $ .30 $ .50
Diluted earnings per share...................................... .30 .50
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,
--------------------
2003 2002
--------------------
Interest Income
Loans, including fees ..................................... $ 5,961 $ 6,163
Trading securities ...................................... 14 17
Investment securities
Taxable ............................................... 825 1,011
Tax exempt ............................................ 218 271
Federal funds sold ...................................... 28 27
--------------------
Total interest income ................................. 7,046 7,489
--------------------
Interest Expense
Deposits .................................................. 1,688 2,276
Short-term borrowings ..................................... 81 98
Other borrowings .......................................... 518 468
--------------------
Total interest expense ................................ 2,287 2,842
--------------------
Net Interest Income ............................................ 4,759 4,647
Provision for loan losses ................................. 2,705 276
--------------------
Net Interest Income After Provision for Loan Losses ............ 2,054 4,371
--------------------
Other Income
Fiduciary activities ...................................... 230 239
Service charges on deposit accounts ....................... 700 662
Commission income ......................................... 277 203
Securities gains .......................................... 171 46
Unrealized gains (losses) on trading securities ........... 217 (192)
Net gains on loan sales ................................... 462 174
Other operating income .................................... 260 197
--------------------
Total other income .................................... 2,317 1,329
--------------------
Other Expenses
Salaries and employee benefits ............................ 2,451 2,101
Net occupancy and equipment expenses ...................... 567 600
Advertising ............................................... 162 181
Legal fees ............................................. 147 33
Appreciation (depreciation) in directors' and executives'
deferred compensation plans ........................ 238 (178)
Other operating expense ................................... 757 627
--------------------
Total other expenses .................................. 4,322 3,364
--------------------
Income Before Income Tax ....................................... 49 2,336
Income tax expense/(benefit) .............................. (213) 773
--------------------
Net Income ..................................................... $ 262 $ 1,563
====================
Basic earnings per share........................................ $ .04 $ .26
Diluted earnings per share...................................... .04 .26
See notes to consolidated condensed financial statements.
5
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended June 30, 2003
(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, 2003 6,150,240 $ 137 $ 3,368 $40,619 $ 675 $ (536) $44,263
Comprehensive Income:
Net income for the
period................. $ 1,810 1,810 1,810
Unrealized gains on
securities (net of tax
expense)............... 141 141 141
ESOT shares earned......... 9
9
Cash dividend ($.24 per
share)..................... (1,465) (1,465)
--------------------------------------------------------------------------------------------
Balances, June 30, 2003 6,150,240 $ 137 $ 3,377 $ 1,951 $40,964 $ 816 $ (536) $44,758
============================================================================================
See notes to consolidated condensed financial statements.
6
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
----------------------
2003 2002
----------------------
Operating Activities
Net income ......................................................... $ 1,810 $ 3,062
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses ........................................ 3,110 552
Depreciation and amortization .................................... 460 438
Deferred income tax ........................................... 73 39
Investment securities amortization, net .......................... 245 128
Available for sale securities gain ............................... (170) (46)
Origination of loans held for sale ............................ (55,405) (19,751)
Proceeds from sale of loans held for sale ..................... 55,517 26,832
Gain on sale of loans held for sale .............................. (826) (393)
ESOT compensation ................................................ 9 3
Net change in:
Trading securities ............................................. (269) 137
Interest receivable and other assets ........................... 109 473
Interest payable and other liabilities ......................... (627) (27)
----------------------
Net cash provided by operating activities ................. 4,036 11,447
----------------------
Investing Activities
Purchases of securities available for sale ......................... (23,997) (19,236)
Proceeds from sales of securities available for sale ............... 7,494 3,281
Proceeds from paydowns and maturities of securities
available for sale .......................................... 4,568 1,399
Purchases of securities held to maturity ........................... -- (14,934)
Proceeds from paydowns and maturities of securities held to maturity 9,549 15,708
Purchase of FHLB stock ........................................... (392) (348)
Net change in loans ................................................ (23,967) (16,718)
Purchases of premises and equipment ................................ (328) (782)
----------------------
Net cash used by investing activities ..................... (27,073) (31,630)
----------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 35,244 9,832
Certificates of deposit .......................................... (3,475) 34,458
Borrowings ....................................................... (1,279) (18,309)
Proceeds of Federal Home Loan Bank advances ........................ 12,000 7,398
Repayment of Federal Home Loan Bank advances ..................... (1,749) (2,233)
Cash dividends paid .............................................. (1,465) (1,464)
----------------------
Net cash provided by financing activities ................. 39,276 29,682
----------------------
Net Change in Cash and Cash Equivalents ................................. 16,239 9,499
Cash and Cash Equivalents, Beginning of Period .......................... 20,526 17,276
----------------------
Cash and Cash Equivalents, End of Period ................................ $ 36,765 $ 26,775
======================
Supplemental cash flow disclosures
Interest paid ...................................................... $ 4,741 $ 5,806
Income tax paid .................................................... 1,485 1,500
See notes to consolidated condensed financial statements.
7
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 2003
(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") and the Bank's wholly owned subsidiary MB Portfolio
Management, Inc. A summary of significant accounting policies is set forth in
Note 1 of Notes to Financial Statements included in the December 31, 2002,
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, 2003, and for the six
months ended June 30, 2003 and 2002, 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, 2002
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, 2003 June 30, 2002
------------- -------------
Net income (in thousands) ......... $ 1,810 $ 3,062
=========== ===========
Weighted average shares outstanding 6,150,240 6,150,240
Average unearned ESOT shares ...... (45,089) (50,461)
----------- -----------
Shares used to compute basic
earnings per share ......... 6,105,151 6,099,779
Effect of dilutive securities
Stock options ................. 5,818 3,227
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,110,969 6,103,006
=========== ===========
Earnings per share basic........... $ .30 $ .50
Earnings per share, diluted........ .30 .50
Options to purchase 105,000 shares at June 30, 2002 were not included in the
earnings per share calculation because the exercise price exceeded the average
market price.
Three months ended
------------------
June 30, 2003 June 30, 2002
------------- -------------
Net income (in thousands) ......... $ 262 $ 1,563
=========== ===========
Weighted average shares outstanding 6,150,240 6,150,240
Average unearned ESOT shares ...... (44,426) (49,823)
----------- -----------
Shares used to compute basic
earnings per share ......... 6,105,814 6,100,417
Effect of dilutive securities
Stock options ................. 5,998 8,762
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,111,812 6,109,179
=========== ===========
Earnings per share basic........... $ .04 $ .26
Earnings per share, diluted........ .04 .26
9
Note 3: Stock Options
- ---------------------
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2002 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Table dollar amounts are in thousands except per share data.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
----------------------------------
Net income, as reported ............................... $ 3,062 $ 1,810
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes ....................................... 3 8
--------------------------
Pro forma net income .................................. $ 1,807 $ 3,054
==========================
Earnings per share:
Basic - as reported ............................... $ .30 $ .50
Basic - pro forma ................................. .30 .50
Diluted - as reported ............................. .30 .50
Diluted - pro forma ............................... .30 .50
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Net income, as reported................................ $ 1,563 $ 262
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes........................................ 1 4
--------------------------
Pro forma net income................................... $ 1,559 $ 261
==========================
Earnings per share:
Basic - as reported................................ $ .04 $ .26
Basic - pro forma.................................. .04 .26
Diluted - as reported.............................. .04 .26
Diluted - pro forma................................ .04 .26
10
Note 4: Effect of Recent Accounting Pronouncements
- --------------------------------------------------
The Financial Accounting Standards Board ("FASB") adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the second few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The implementation for this
proposed statement is not known.
11
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, formerly Monroe County 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 85 percent of the Bank's business is 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 personal 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 annuities and other investment products.
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 Company now has three full service branch offices in eastern Hendricks
County, which is adjacent to Marion County and Indianapolis, Indiana. These
three branches are providing important balance sheet growth generating $47.5
million of loans at June 30, 2003, an increase of 44.2 percent over December 31,
2002, and $55.5 million of deposits, an increase of 63.5 percent over December
31, 2002. The Company expects the balance sheet growth taking place at its
Hendricks County branches to continue as the result of the recent hiring of John
E. Christy as Regional President. We believe that Mr. Christy will provide
leadership and expand the Bank's business development efforts within the Central
Indiana market.
Critical Accounting Policies
- ----------------------------
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements on pages 33 to 35 of the
December 31, 2002 Annual Report to Shareholders. Certain of these 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 has
identified the determination of the allowance for loan losses to be the
accounting area that requires the most subjective or complex judgments, and as
such could be the most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the
largest asset type on the consolidated balance sheet. Note 1 to the consolidated
financial statements in the December 31, 2002 Annual Report to Shareholders
describes the methodology used to determine the allowance for loan losses and a
discussion of the factors
12
driving changes in the amount of the allowance for loan losses is included in
the Asset Quality and Provision for Loan Losses section of the Management's
Discussion and Analysis included in the December 31, 2002 Annual Report to
Shareholders.
Non-GAAP Financial Measures
- ---------------------------
In January 2003, the United States Securities and Exchange Commission ("SEC")
issued Regulation G, "Conditions for Use of Non-GAAP Financial Measures." A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles ("GAAP"). Regulation G requires companies that present non-GAAP
financial measures to disclose a numerical reconciliation to the most directly
comparable measurement using GAAP as well as the reason why the non-GAAP measure
is an important measure.
Management has used several non-GAAP financial measures throughout this
quarterly report on Form 10-Q related to the special provision for loan losses
(see chart below). We believe the non-GAAP disclosures of net income and various
ratios before the special provision are useful to both investors and management
because they provide insight into how the Company would have performed without
this special provision. In the "Other Income / Other Expense" section of this
document, we also report Other Income and Other Expense without the effect of
gains and losses recognized on securities in a grantor trust (rabbi trust) which
is also a non-GAAP financial measure. Reasons for this are further discussed in
the "Other Income / Other Expense" section of this document.
Results of Operations
- ---------------------
The following table presents information to assist in analyzing the Company's
income before and after the $2.3 million special provision for loan losses which
was taken during the second quarter of 2003. Table dollar amounts are in
thousands, except for per share data.
Income Statement With and Without Special $2.3 Million Provision
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
-------------------------------- ----------------------------------
Without Impact With Without Impact With
Special of Special Special of Special
Provision Provision Provision Provision Provision Provision
--------- --------- --------- --------- --------- ---------
Interest income ........................................ $ 7,046 -- $ 7,046 $14,071 -- $14,071
Interest expense ....................................... 2,287 -- 2,287 4,592 -- 4,592
--------- --------- --------- --------- --------- ---------
Net interest income ............................... 4,759 -- 4,759 9,479 -- 9,479
Provision for loan losses .............................. 405 $ 2,300 2,705 810 $ 2,300 3,110
--------- --------- --------- --------- --------- ---------
Net interest income after provision for loan losses 4,354 (2,300) 2,054 8,669 (2,300) 6,369
Total other income ..................................... 2,317 -- 2,317 4,001 -- 4,001
Total other expense .................................... 4,322 -- 4,322 8,027 -- 8,027
--------- --------- --------- --------- --------- ---------
Income before income tax .......................... 2,349 (2,300) 49 4,643 (2,300) 2,343
Income tax expense (benefit) ........................... 698 (911) (213) 1,444 (911) 533
--------- --------- --------- --------- --------- ---------
Net income ................................... $ 1,651 $(1,389) $ 262 $ 3,199 $(1,389) $ 1,810
========= ========= ========= ========= ========= =========
Basic earnings per share ............................... $ 0.27 $ (0.23) $ 0.04 $ 0.52 $ (0.23) $ 0.30
Diluted earnings per share ............................. $ 0.27 $ (0.23) $ 0.04 $ 0.52 $ (0.23) $ 0.30
Return on average equity ............................... 14.73% (12.39%) 2.34% 14.37% (6.24%) 8.13%
Return on average assets ............................... 1.18% (.99%) 0.19% 1.17% (0.51%) 0.66%
13
Overview
- --------
Net income for the second quarter 2003 was $262,000, an 83.2 percent decrease
over the same quarter last year. The decline in earnings resulted from a special
provision to the reserve for loan losses in the amount of $2.3 million. This
special provision reduced second quarter after tax net income by $1.4 million.
The special provision is directly related to an analysis of the collateral
values and many other factors related to loans outstanding to a certain real
estate developer, who recently filed bankruptcy, and to parties affiliated with
the developer. Consequently, diluted earnings per share for the second quarter
of 2003 were $0.04 compared to $0.26 for the second quarter of 2002. Before the
special provision, the Company's 2003 second quarter net income was $1.7
million, a 5.6 percent increase over second quarter 2002, and diluted earnings
per share were $0.27.
Net income was $1.8 million and $3.1 million for the six-month periods ended
June 30, 2003 and 2002, respectively, a decrease of $1.3 million or 40.1
percent. Before the special provision, 2003 year to date net income was $3.2
million, an increase of 4.5 percent over 2002, and diluted earnings per share
were $0.52 compared to $0.50 for the same period in 2002.
Annualized return on average equity (ROE) for the second quarter of 2003
decreased to 2.34 percent compared to 14.91 percent for second quarter of 2002.
The annualized return on average assets (ROA) was 0.19 percent for the second
quarter of 2003 compared with 1.21 percent for the same period in 2002. Before
the special provision, second quarter ROE was 14.73 percent and ROA was 1.18
percent. For the six-month periods ended June 30, 2003, and 2002, annualized ROE
was 8.13 percent and 14.84 percent, respectively, while annualized ROA was .66
percent and 1.21 percent, respectively. Before the special provision, annualized
year to date 2003 ROE was 14.37 percent and ROA was 1.17 percent.
The growth in net income, excluding the special provision for loan losses, shown
between the second quarter of 2003, and the same period in 2002 can be primarily
attributed to growth in mortgage loan sales, gains on securities sold and an
increase in commission (platform investment sales and brokerage) income.
Year to date 2003 dividends paid were $0.24 per share, unchanged from the same
period of 2002. At June 30, 2003 the dividend yield was 3.55 percent compared to
3.48 percent at June 30, 2002. The increase in yield occurred due to a decrease
in the market value of the stock. At June 30, 2003, the closing market price of
Monroe Bancorp stock was $13.51 per share compared to $13.78 per share at June
30, 2002.
Net Interest Income / Net Interest Margin
- -----------------------------------------
The tables on the following two pages present information to assist in analyzing
net interest income. The table of Average Balance Sheets and Interest Rates
presents the major components of interest-earning assets and interest-bearing
liabilities, related interest income and expense and the resulting yield or
cost. Interest income presented in the table has been adjusted to a tax
equivalent basis assuming a 40 percent tax rate (tax savings) for the period
after securities were transferred to the Delaware subsidiary in 2002 and 34
percent tax rate (tax savings) for all other periods. The tax equivalent
adjustment recognizes the income tax savings when comparing taxable and
tax-exempt assets. The discussion which follows the tables is based on GAAP
interest income figures and yields.
14
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
--------------------------------- ---------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable ......................................... $ 82,016 $ 864 4.22% $ 71,602 $ 1,049 5.88%
Tax-exempt (1) .................................. 23,377 362 6.21% 26,735 445 6.68%
--------- --------- --------- ---------
Total securities ........................... 105,392 1,225 4.66% 98,337 1,494 6.09%
Loans (2) ............................................ 411,925 5,966 5.81% 375,757 6,169 6.59%
Time deposits with banks ............................. 38 -- 0.00% 43 -- 0.00%
FHLB Stock ........................................... 2,209 27 4.90% 1,882 29 6.18%
Federal funds sold ................................... 9,211 27 1.18% 6,437 27 1.68%
--------- --------- --------- ---------
Total interest earning assets ............ 528,775 7,245 5.50% 482,456 7,719 6.42%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ............................. (5,727) (4,240)
Premises and equipment & other assets ................ 19,774 19,903
Cash and due from banks .............................. 19,023 16,702
--------- ---------
Total assets ............................... $ 561,845 $ 514,821
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ...................... $ 358,045 1,687 1.89% $ 331,866 2,276 2.75%
Borrowed funds ....................................... 88,715 600 2.71% 77,575 566 2.93%
--------- --------- --------- ---------
Total interest-bearing liabilities .............. 446,760 2,287 2.05% 409,441 2,842 2.78%
--------- --------- --------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits .................. 65,070 57,681
Other liabilities .................................... 5,039 5,651
Shareholders' equity ................................. 44,976 42,048
--------- ---------
Total liabilities and shareholders' equity $ 561,845 $ 514,821
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ....................... $ 4,958 3.44% $ 4,877 3.63%
========= =========
T/E net interest margin as a percent of
total average earning assets .................... 3.76% 4.05%
Tax equivalent adjustment (3) ............................. $ 199 $ 230
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal income tax rate of 40% for the period
after investments were transferred to the Delaware subisdiary (April 2002)
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
(3) Interest income adjustment to convert tax-exempt investment securities
interest to fully tax equivalent basis using a marginal rate of 40% after
securities were transferred to the Delaware subsidiary and 34% before they
were transferred
15
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
--------------------------------- ---------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable ......................................... $ 80,874 $ 1,808 4.51% $ 65,207 $ 1,843 5.70%
Tax-exempt (1) .................................. 24,150 753 6.28% 27,171 868 6.44%
--------- --------- --------- ---------
Total securities ........................... 105,023 2,561 4.92% 92,378 2,711 5.92%
Loans (2) ............................................ 404,014 11,820 5.90% 374,580 12,551 6.76%
Time deposits with banks ............................. 45 0 0.73% 50 -- 0.00%
FHLB Stock ........................................... 2,063 52 5.12% 1,859 56 6.07%
Federal funds sold ................................... 8,340 50 1.20% 7,107 58 1.65%
--------- --------- --------- ---------
Total interest earning assets ............ 519,485 14,483 5.62% 475,974 15,376 6.51%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ............................. (5,203) (4,256)
Premises and equipment & other assets ................ 19,662 20,071
Cash and due from banks .............................. 17,729 16,961
--------- ---------
Total assets ............................... $ 551,674 $ 508,750
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ...................... $ 356,655 3,492 1.97% $ 325,115 4,572 2.84%
Borrowed funds ....................................... 81,699 1,100 2.72% 78,356 1,154 2.97%
--------- --------- --------- ---------
Total interest-bearing liabilities .............. 438,354 4,592 2.11% 403,471 5,726 2.86%
--------- --------- --------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits .................. 63,081 57,733
Other liabilities .................................... 5,343 5,927
Shareholders' equity ................................. 44,896 41,619
--------- ---------
Total liabilities and shareholders' equity $ 551,674 $ 508,750
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ....................... $ 9,891 3.51% $ 9,650 3.65%
========= =========
T/E net interest margin as a percent of
total average earning assets .................... 3.84% 4.09%
Tax equivalent adjustment (3) ............................. $ 412 $ 376
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal income tax rate of 40% for the period
after investments were transferred to the Delaware subisdiary (April 2002)
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
(3) Interest income adjustment to convert tax-exempt investment securities
interest to fully tax equivalent basis using a marginal rate of 40% after
securities were transferred to the Delaware subsidiary and 34% before they
were transferred
16
Net Interest Income / Net Interest Margin (continued)
- -----------------------------------------------------
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.
The net interest margin was 3.6 percent for the quarter ended June 30, 2003, a
decrease from 3.9 percent for the same quarter last year. Average second quarter
2003 loan yields declined by 78 basis points (0.78 percent) over second quarter
2002 yields and deposit yields declined 86 basis points in the same time period.
Average second quarter 2003 securities yields declined by 126 basis points over
the second quarter of 2002, and borrowed funds yields declined 22 basis points.
The decline in yields on borrowed funds was lower because approximately half of
the borrowed funds have longer-term maturities while the other half are tied to
the federal funds rate, which declined 75 basis points from the second quarter
of 2002.
Net interest income after the provision for loan losses was $2.1 million for the
three months ended June 30, 2003 compared to $4.4 million for the same period in
2002, a decrease of 53.0 percent. As previously mentioned and as discussed
further in the section titled "Classification of Assets, Allowance for Loan
Losses and Nonperforming Loans," the decrease results entirely from the increase
in the provision for loan losses, which was $2.7 million for the second quarter
of 2003 compared to $276,000 for the second quarter of 2002. Net interest income
before the provision for loan losses increased $112,000, or 2.4 percent during
the second quarter of 2003 compared to the second quarter of 2002.
Total interest income decreased by $443,000, or 5.9 percent, for the second
quarter of 2003 compared to the second quarter of 2002. This decrease was the
result of a decrease in the average yield on earning assets to 5.3 percent
compared to 6.2 percent for the second quarter of 2002. This decrease reflects
loans repricing downward and higher yielding securities maturing and being
replaced by lower yielding securities. The decline also reflects more loans
being on nonaccrual status during the second quarter of 2003. Average nonaccrual
loans totaled $8.2 million during the second quarter of 2003 compared to $1.5
million during the second quarter of 2002. At June 30, 2003, the prime rate was
4.0 percent, compared to 4.75 percent at June 30, 2002, which contributed to the
declining yield on loans indexed to prime. The decline in yields on earning
assets was more than offset by the decline in interest expense, which
contributed to the growth in net interest income. Interest expense decreased by
$555,000, or 19.5 percent, for the second quarter of 2003 compared to the second
quarter of 2002. This decrease resulted from a decrease in the average rate paid
on interest bearing liabilities to 2.1 percent during the second quarter of 2003
from 2.8 percent for the same quarter in 2002. Also contributing to the growth
in net interest income was an increase in the volume of loans. The average
balance of loans grew to $411.9 million during the second quarter of 2003
compared to $375.8 million for the same period in 2002, an increase of $36.2
million or 9.6 percent. The average balance of investment securities also
increased to $105.4 million in the second quarter of 2003 compared to $98.3
million in the second quarter of 2002. Average interest bearing liabilities
increased $37.3 million, or 9.1 percent, in the second quarter of 2003 compared
to second quarter 2002.
For the six months ended June 30, 2003, net interest income after the provision
for loan losses was $6.4 million compared to $8.7 million for the same period in
2002 a decrease of 27.0 percent. Once again, the decrease is a result of the
increase in the provision for loan losses which was $3.1 million for the first
six months of 2003 compared to $552,000 for the same period in 2002. Net
interest income before the provision was $9.5 million for the first six months
of 2003 compared to $9.3 million in 2002, an increase of $205,000 or 2.2
percent. The tax-equivalent net interest margin was 3.8 percent for the first
six months of 2003 compared to 4.1 percent for the same period in 2002. The
growth in average loans of 7.9 percent over this period of time more than offset
the decrease in the margin to provide an overall increase in net interest
income.
17
Other Income / Other Expense
- ----------------------------
Total other income increased $988,000 for the three months ended June 30, 2003
compared to the same period in 2002. The increase in other income includes
unrealized securities gains and losses which are comprised entirely of net
unrealized gains and losses on trading securities (mutual funds) held in a
grantor trust ("rabbi trust") in connection with the Company's Directors'
Deferred Compensation Plan. These securities are held as trading securities,
hence, unrealized gains and losses are recognized on the income statement. Any
unrealized or realized loss on securities held in the rabbi trust net of any
dividend or interest income earned on the securities in the rabbi trust
(included in net interest income) are directly offset by a decrease to
directors' fee/deferred executive compensation expense, and conversely, any net
realized or unrealized gain combined with interest and dividends earned on the
securities in the trust are directly offset by an increase to directors'
fee/deferred executive compensation expense. These offsets are included in the
line item identified on pages 4 and 5 of the consolidated condensed financial
statements as "Appreciation (depreciation) on directors' and executives'
deferred compensation plans." The activity in the rabbi trust has no effect on
the Company's net income, therefore, management believes a more accurate
comparison of current and prior year other income can be made if the rabbi trust
realized and unrealized gains and losses are removed.
Omitting the realized and unrealized gains on rabbi trust securities in the
amount of $217,000 in 2003 and losses in the amount of $192,000 in 2002, other
income increased $579,000 or 38.1 percent during the second quarter of 2003
compared to the second quarter of 2002.
This growth mainly occurred in three areas. First, the Bank sells substantially
all fixed rate residential mortgage loans it originates on the secondary market.
Gains on these sales increased $288,000 during the second quarter of 2003
compared to 2002, or 165.5 percent, primarily because the Company expanded its
marketing and loan origination efforts to take advantage of the opportunity
created by decreases in interest rates which have prompted customers to
refinance their home mortgages. Management does not believe this same rate of
growth in gains on the sale of real estate loans will occur for the remainder of
2003 due to the likelihood of changing market conditions. Second, income from
securities sales increased by $125,000, or 271.7 percent. Third, commission
income (platform investment sales and full service brokerage) increased $74,000
or 36.5 percent primarily due to an increase in investment sales.
For the first six months of 2003, other income increased $1.3 million over the
same period in 2002. Omitting the net realized losses of $5,000 and unrealized
gains of $191,000 (from the rabbi trust) for 2003 and unrealized losses from the
rabbi trust of $205,000 in 2002, other income increased $866,000 or 29.4
percent. Increases occurred primarily in the following areas: an increase in
gains on mortgage sales of $433,000, or 110.2 percent, an increase in available
for sale securities gains of $125,000, or 271.7 percent, and an increase in
service charges on deposit accounts of $77,000, or 6.1 percent.
Total other expense increased $958,000 during the second quarter of 2003
compared to the same period in 2002. As previously discussed, the net unrealized
gains on trading securities in the rabbi trust directly increased director fee
expense in 2003 and net unrealized losses directly decreased director fee and
deferred compensation expense in 2002. Omitting the appreciation in Directors'
Deferred Compensation Plan of $238,000 in 2003 and the depreciation in the Plan
of $178,000 in 2002 (which equals the net of interest and dividends earned on
the rabbi trust and the realized and unrealized losses on the securities in the
trust), other expense increased $542,000 or 15.3 percent. Salaries and employee
benefits increased $350,000 or 16.7 percent primarily due to increases in
commissions mainly to mortgage lenders ($200,000) and increases in health
insurance expense ($126,000). Legal fees increased $114,000, or 345.5 percent,
as a result of the loans made to the real estate developer, who recently filed
bankruptcy, and to parties affiliated with the developer.
For the first six months of 2003, other expense increased $1.2 million over the
same period in 2002. Omitting the effect of the 2003 rabbi trust unrealized net
gains of $219,000 and 2002 unrealized losses of $178,000 on directors fees and
deferred compensation, other expense increased $756,000, or 10.7 percent. Once
again, increases occurred primarily in the areas of salaries and employee
benefits primarily commission expense
18
which increased $255,000 or 43.2 percent and health insurance expense which
increased $118,000 or 56.4 percent, and legal fees which increased $179,000 or
259.4 percent over the first six months of 2002.
Financial Condition
- -------------------
Assets and Liabilities
Total assets of the Company at June 30, 2003 increased 7.6 percent, or $40.6
million compared to December 31, 2002. Deposit growth exceeded loan growth
during the first six months of 2003, and federal funds sold were $18.2 million
at June 30, 2003, compared to none sold at December 31, 2002. At June 30, 2003,
total loans (net of the allowance for loan losses) grew by $21.6 million, or 5.6
percent over December 31, 2002 balances. Deposits grew by $31.8 million, or 8.0
percent during the first six months of 2003, and borrowings (federal funds
purchased, repurchase agreements, participation loans and FHLB advances)
increased $9.0 million, or 10.5 percent.
Capital
- -------
Shareholders' equity increased $495,000 at June 30, 2003 compared to December
31, 2002. This increase was a result of year-to-date net income of $1.8 million,
dividends paid of $1.5 million and other comprehensive gains, consisting solely
of the change (increase) in net unrecognized gains in the Company's
available-for-sale securities portfolio of $141,000 and ESOP shares earned of
$9,000.
There are five capital categories defined in the regulations ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 2003 and December 31,
2002, the Company and the Bank are categorized as well capitalized and met all
subject capital adequacy requirements. There are no conditions or events since
June 30, 2003 that management believes have changed the Company's or Bank's
classification
19
The actual and required capital amounts and ratios are as follows:
Required for Adequate To Be Well
Actual Capital (1) Capitalized (1)
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of June 30, 2003
-------------------
Total capital (1) (to risk-weighted
assets)
Consolidated $ 48,836 12.5% $ 31,303 8.0% N/A N/A
Bank 48,571 12.5 31,038 8.0 $ 38,798 10.0%
Tier I capital (1) (to risk-weighted
assets)
Consolidated 43,932 11.2 15,651 4.0 N/A N/A
Bank 43,709 11.3 15,519 4.0 23,279 6.0
Tier I capital (1) (to average
assets)
Consolidated 43,932 7.8 22,474 4.0 N/A N/A
Bank 43,709 7.8 22,354 4.0 27,942 5.0
As of December 31, 2002
-----------------------
Total capital (1) (to risk-weighted
assets)
Consolidated $ 48,145 13.0% $ 29,681 8.0% N/A N/A
Bank 47,871 13.0 29,443 8.0 $ 36,804 10.0%
Tier I capital (1) (to risk-weighted
assets)
Consolidated 43,571 11.7 14,841 4.0 N/A N/A
Bank 43,297 11.8 14,722 4.0 22,082 6.0
Tier I capital (1) (to average
assets)
Consolidated 43,571 8.2 21,280 4.0 N/A N/A
Bank 43,297 8.2 21,395 4.0 26,743 5.0
(1) As defined by regulatory agencies
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, 2003, the Bank had $17.8 million
of loans internally classified compared to $21.4 million at December 31, 2002.
The allowance for loan losses was $5.9 million, or 1.5 percent of portfolio
loans (excluding loans held for sale) at June 30, 2003 compared to $4.6 million,
or 1.2 percent, of portfolio loans at December 31, 2002. The increase in the
reserve was a result of the $2.3 million special provision. A portion of
classified loans are nonaccrual loans. The Bank had nonaccrual loans totaling
$7.6 million at June 30, 2003 compared to $3.6 million at December 31, 2002. The
amount of nonaccrual loans at June 30, 2003 was essentially unchanged from March
31, 2003. The increase in nonaccrual loans over year- end 2002 primarily
resulted from the addition of several loans associated with the previously
mentioned real estate developer who filed bankruptcy. At June 30, 2003, the Bank
had $407,000 of loans 90 days or more past due but still accruing, compared to
$588,000 at December 31, 2002.
During the second quarter of 2003, the Bank had net loan charge offs totaling
$1.5 million compared to $340,000 charged off for the same period in 2002. Year
to date, $1.8 million of net loans have been charged off compared to $536,000
for the same period in 2002. The increase was primarily caused by charge offs
related to loans associated with the real estate developer who filed bankruptcy.
20
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 $45.2 million at June 30, 2003
compared to $35.0 million at December 31, 2002. At June 30, 2003, the Company
had excess borrowing capacity at the FHLBI of $11.8 million as limited by the
Company's Board resolution in effect at that date. If the Company's borrowing
capacity were not limited by the Board resolution, the Company would have excess
borrowing capacity of $48.8 million based on collateral. Additional advances
were obtained during the first six months of 2003 to match fund five-year fixed
rate loan growth. Management's primary focus is on increasing deposits to fund
future growth, however, the Board may increase its resolution limit if the
Company needs additional liquidity.
The main source used to meet parent company cash requirements continued to be
dividends from its subsidiary, the Bank. During the second quarter of 2003,
dividends totaling $740,000 were declared and paid to the parent company by the
bank subsidiary. At June 30, 2003, the amount of dividends the bank subsidiary
can pay to the parent company without prior regulatory approval was $6.2 million
compared to $5.8 million at December 31, 2002. As discussed in the Company's
2002 Form 10-K, the Company's subsidiary bank is subject to regulation and,
among other things, may be limited in their ability to pay dividends or transfer
funds to the parent company. Accordingly, consolidated cash flows as presented
in the Consolidated Condensed Statements of Cash Flows on page 7 may not
represent cash immediately available to the parent company.
The following discussion relates to the Consolidated Condensed Statements of
Cash Flows (page 7). During the first six months of 2003, $4.0 million of cash
was provided by operating activities, compared to $11.4 million during the same
period in 2002. During the first six months of 2003, $27.1 million was used by
investing activities, compared to $31.6 million for the first six months of
2002. The primary use of funds in this category during 2003 and 2002 was the net
increase in loans, which totaled $24.0 million during the first six months of
2003 compared to $16.7 million during the same period in 2002. During the first
six months of 2003, $39.3 million of cash was provided by financing activities,
primarily from growth in noninterest-bearing demand, interest-bearing demand and
savings deposits, compared to $29.7 million provided during the same period in
2002 with growth occurring primarily in certificates of deposit. Overall, net
cash and cash equivalents increased $16.2 million during the first six months of
2003 compared to increasing $9.5 million during the same period in 2002.
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.
21
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.
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 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Market risk of the Company 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 Company's interest sensitivity position at June 30, 2003 remained consistent
with the Company's primary goal of maximizing interest margin while maintaining
a low exposure to 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.
22
Net portfolio value is the market value of the equity and is equal to the net
present value of the cash flows derived from its assets minus the net present
value of the cash flows associated with its 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 to 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, 2003:
Net Portfolio Value at June 30, 2003
------------------------------------
Change in Interest Rate Dollar Amount $ Change in % Change
(basis points) (in thousands) NPV in NPV
-------------- -------------- --- ------
+300 $ 62,127 $ 4,804 8.38%
+200 60,662 3,339 5.82
+100 59,072 1,749 3.05
0 57,323 -- --
-100 55,160 (2,163) (3.77)
-200 61,292 3,969 6.92
The following table represents the Bank's projected change in NPV for the
various rate shock levels as of December 31, 2002:
Net Portfolio Value at December 31, 2002
----------------------------------------
Change in Interest Rate Dollar Amount $ Change in % Change
(basis points) (in thousands) NPV in NPV
-------------- -------------- --- ------
+300 $ 61,609 $ 2,342 3.95%
+200 60,980 1,713 2.89
+100 60,259 992 1.68
0 59,267 -- --
-100 58,012 (1,255) (2.12)
-200 61,848 2,581 4.36
Management believes a 200 basis point (two percent) decrease in rates is highly
unlikely. Management also believes an increase in rates is more probable;
therefore, we will focus our discussion on the effects of a 100 basis point (one
percent) decrease in rates and an increase of 300 basis points (three percent).
The June 30, 2003 table above indicates that the Bank's estimated NPV would be
expected to increase by 8.38 percent in the event of a sudden and sustained 300
basis point (bp) increase in interest rates. The increase in the Bank's NPV
under this rate shock scenario is the result of the model's projected change in
asset and liability values. Specifically, the model projects the NPV of the
Bank's assets to decline by $18.7 million as a result of the fact that a
majority of the Bank's assets do not immediately reprice. However, the decline
in asset values is more than offset by a $23.5 million dollar decline in the NPV
of the cash flow associated with the Bank's liabilities. The decline in NPV of
the Bank's liabilities (which has a positive impact on the Bank's overall NPV)
is caused by the fact that the change in the rates paid on the Bank's
liabilities is projected to lag any
23
upward interest rate change. The changes projected to the NPV of the Bank's
assets and liabilities combine to yield a $4.8 million (8.38 percent) change in
the net present value of the Bank.
In the event of a sudden and sustained 100 bp decrease in prevailing interest
rates, the Bank's estimated NPV would be expected to decrease 3.77 percent. The
primary reason for this decrease relates to the current low level of interest
rates. While assets can continue to reprice downward by the 100 basis points
(bps) assumed in this scenario, many of the Bank's liabilities (e.g. NOW,
savings and certain money market checking and savings accounts) no longer have
the ability to reprice downward by 100 bps. The NPV impact related to the Bank's
liability sensitivity is greatly reduced by the fact that these interest
sensitive deposit products are approaching their absolute floor rates (0.0
percent). Floors on one-to-four family residential mortgages come into play when
rates decrease 200 bps, which causes NPV to begin to increase again.
The direction of the change in NPV did not vary between June 30, 2003 and
December 31, 2002, however, the magnitude of the changes increased, primarily as
the result of two factors. First, the Bank's earning assets increased by $40.6
million, or 7.7 percent, during the six-month period. Importantly, much of the
growth was focused in categories that are extremely rate sensitive (e.g.,
Federal Funds sold). Second, assets that reprice within one year increased by
$43.7 million during the past six months while liabilities that repriced during
the next twelve months increased by only $12.3 million. These balance sheet
changes yield improved results in the event of rising rates and a lower NPV in
the case of a 100 bps rate drop. As of June 30, 2003, the Company's estimated
changes in NPV at all levels of interest rate changes were within the approved
guidelines established by the Board of Directors.
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 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.
Item 4. Controls and Procedures.
- ------ -----------------------
(a) Evaluation of Disclosure Controls and Procedures. Monroe Bancorp's
principal executive officer and principal financial officer have
concluded that the Monroe Bancorp's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended), based on their evaluation of these controls and
procedures as of the end of the period covered by this Form 10-Q, are
effective.
(b) Changes in Internal Controls. There have been no significant changes in
Monroe Bancorp's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to
significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. Monroe Bancorp's
management, including its principal executive officer and principal
financial officer, does not expect that Monroe Bancorp's disclosure
24
controls and procedures and other internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company
have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and
there only can be reasonable assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over
time, control may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not
be detected.
(d) CEO and CFO Certifications. Appearing as exhibits to this report there
are Certifications of Monroe Bancorp's principal executive officer and
principal financial officer. The Certifications are required in accord
with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). This Item of this report, which you are currently
reading is the information concerning the Evaluation referred to in the
Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
25
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 24,2003 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 a Term of Three Years: For Withheld
--------------------------- --- --------
David D. Baer 4,991,214 18,445
Dr. Bradford J. Bomba, Jr. 5,006,839 2,820
Timothy D. Ellis 5,006,939 2,720
For a Term of One Year:
-----------------------
Harry F. McNaught, Jr. 5,007,139 2,520
Selection of Independent Public Accountants - BKD, LLP,
Indianapolis, Indiana: Votes For - 5,003,719 Votes Against -
3,420, Votes Abstained - 2,520, broker non-votes - none.
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, 2000.
3(ii) Monroe Bancorp Bylaws are incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10(i) 1999 Directors' Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10(ii) 1999 Management Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
26
10(iii) Deferred Compensation Trust for Monroe Bancorp is incorporated
by reference to registrant's Form 10 filed November 14, 2000.
10(iv) Monroe County Bank Agreement for Supplemental Death or
Retirement Benefits is incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10(v) Monroe Bancorp Thrift Plan as Amended and Restated January 1,
2001 is incorporated by reference to registrant's Form 10-Q
filed November 13, 2002.
10(vi) Monroe Bancorp Employee Stock Ownership Plan as Amended and
Restated January 1, 2001 is incorporated by reference to
registrant's Form 10-Q filed November 13, 2002.
31(i) Certification for Quarterly Report on Form 10-Q by Principal
Executive Officer
31(ii) Certification for Quarterly Report on Form 10-Q by Principal
Financial Officer
32(i) Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32 (ii) Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6b. Reports filed on Form 8-K.
--------------------------
Monroe Bancorp filed the following Forms 8-K:
o Filed April 22, 2003 to report a press release of first
quarter 2003 earnings and a summary of first quarter 2003
financial information issued April 22, 2003.
o Filed May 20, 2003 to report a press release announcing a
special loan loss provision issued May 20, 2003.
27
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 13, 2003 By: /s/ Mark D. Bradford
--------------- -------------------------------------
Mark D. Bradford, President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 13, 2003 By: /s/ Gordon M. Dyott
--------------- --------------------------------------
Gordon M. Dyott, Exec. Vice President,
Chief Financial Officer
(Principal Financial Officer)
28
Exhibit Index
Exhibit No: Description of Exhibit:
- ----------- -----------------------
3(i) Monroe Bancorp Articles of Incorporation are incorporated
by reference to registrant's Form 10 filed November 14, 2000.
3(ii) Monroe Bancorp Bylaws are incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10(i) 1999 Directors' Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10(ii) 1999 Management Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10(iii) Deferred Compensation Trust for Monroe Bancorp is incorporated
by reference to registrant's Form 10 filed November 14, 2000.
10(iv) Monroe County Bank Agreement for Supplemental Death or
Retirement Benefits is incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10(v) Monroe Bancorp Thrift Plan as Amended and Restated January 1,
2001 is incorporated by reference to registrant's Form 10-Q
filed November 13, 2002.
10(vi) Monroe Bancorp Employee Stock Ownership Plan as Amended and
Restated January 1, 2001 is incorporated by reference to
registrant's Form 10-Q filed November 13, 2002.
31(i) Certification for Quarterly Report on Form 10-Q by Principal
Executive Officer
31(ii) Certification for Quarterly Report on Form 10-Q by Principal
Financial Officer
32(i) Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32(ii) Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
29