Back to GetFilings.com
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 September 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 (IRS Employer Identification No.)
of 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 September 30, 2003: 6,139,540
----------
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 - Nine 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....................................................23
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......23
Item 4. Controls and Procedures..........................................25
Part II. Other Information:
Item 1. Legal Proceedings................................................27
Item 2. Changes In Securities............................................27
Item 3. Defaults Upon Senior Securities..................................27
Item 4. Submission of Matters to a Vote of Security Holders..............27
Item 5. Other Information................................................27
Item 6a. Exhibits.........................................................27
Item 6b. Reports Filed on Form 8-K........................................28
Signatures....................................................................29
Exhibit Index.................................................................30
2
Part I.- Financial Information
Item 1. Financial Statements
- ------- ---------------------
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share data)
September 30, December 31,
2003 2002
(Unaudited)
---------------------------
Assets
Cash and due from banks .................................... $ 16,967 $ 20,526
Federal funds sold ......................................... 11,250 --
------------------------
Cash and cash equivalents ........................... 28,217 20,526
Trading securities ......................................... 3,136 2,817
Investment securities
Available for sale ..................................... 58,091 43,033
Held to maturity ....................................... 41,004 57,929
------------------------
Total investment securities ....................... 99,095 100,962
Loans held for sale ........................................ 4,392 7,417
Loans, net of allowance for loan losses of $6,246 and $4,574 399,513 379,324
Premises and equipment ..................................... 11,586 11,793
Federal Home Loan Bank of Indianapolis stock, at cost ...... 2,302 1,882
Interest receivable and other assets ....................... 16,633 8,596
------------------------
Total assets ........................................... $ 564,874 $ 533,317
========================
Liabilities
Deposits
Noninterest-bearing .................................... $ 68,742 $ 60,476
Interest-bearing ....................................... 357,829 338,091
------------------------
Total deposits .................................... 426,571 398,567
Borrowings ................................................. 88,225 85,240
Interest payable and other liabilities ..................... 4,897 5,247
------------------------
Total liabilities ...................................... 519,693 489,054
------------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized - 18,000,000 shares
Issued and outstanding - 6,139,540 shares ........ 137 137
Additional paid-in capital ................................. 3,230 3,368
Retained earnings .......................................... 41,871 40,619
Accumulated other comprehensive income ..................... 476 675
Unearned ESOT shares ....................................... (533) (536)
------------------------
Total shareholders' equity .......................... 45,181 44,263
------------------------
Total liabilities and shareholders' equity ............. $ 564,874 $ 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)
Nine Months Ended
September 30,
---------------------
2003 2002
---------------------
Interest Income
Loans, including fees ..................................... $ 17,786 $ 18,758
Trading securities ........................................ 38 47
Investment securities
Taxable ............................................... 2,498 2,806
Tax exempt ............................................ 659 798
Federal funds sold ........................................ 66 86
---------------------
Total interest income ................................. 21,047 22,495
---------------------
Interest Expense
Deposits .................................................. 5,048 6,798
Short-term borrowings ..................................... 223 322
Other borrowings .......................................... 1,463 1,385
---------------------
Total interest expense ................................ 6,734 8,505
---------------------
Net Interest Income ............................................ 14,313 13,990
Provision for loan losses ................................. 3,515 957
---------------------
Net Interest Income After Provision for Loan Losses ............ 10,798 13,033
---------------------
Other Income
Fiduciary activities ...................................... 793 710
Service charges on deposit accounts ....................... 2,041 1,928
Commission income ......................................... 647 606
Securities gains .......................................... 166 197
Unrealized gains (losses) on trading securities ........... 222 (444)
Net gains on loan sales ................................... 1,444 632
Other operating income .................................... 801 609
---------------------
Total other income .................................... 6,114 4,238
---------------------
Other Expenses
Salaries and employee benefits ............................ 7,187 6,380
Net occupancy and equipment expenses ...................... 1,799 1,790
Advertising ............................................... 440 475
Legal fees ................................................ 425 88
Appreciation (depreciation) in directors' and executives'
deferred compensation plans .......................... 257 (407)
Other operating expense ................................... 2,043 1,878
---------------------
Total other expenses .................................. 12,151 10,204
---------------------
Income Before Income Tax ....................................... 4,761 7,067
Income tax expense ........................................ 1,312 2,348
---------------------
Net Income ..................................................... $ 3,449 $ 4,719
=====================
Basic earnings per share ....................................... $ .56 $ .77
Diluted earnings per share ..................................... .56 .77
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
September 30,
-------------------
2003 2002
-------------------
Interest Income
Loans, including fees ..................................... $ 5,970 $ 6,215
Trading securities ........................................ 11 14
Investment securities
Taxable ............................................... 772 990
Tax exempt ............................................ 207 248
Federal funds sold ........................................ 16 28
------- -------
Total interest income ................................. 6,976 7,495
------- -------
Interest Expense
Deposits .................................................. 1,556 2,212
Short-term borrowings ..................................... 67 106
Other borrowings .......................................... 519 461
------- -------
Total interest expense ................................ 2,142 2,779
------- -------
Net Interest Income ............................................ 4,834 4,716
Provision for loan losses ................................. 405 405
------- -------
Net Interest Income After Provision for Loan Losses ............ 4,429 4,311
------- -------
Other Income
Fiduciary activities ...................................... 290 254
Service charges on deposit accounts ....................... 707 671
Commission income ......................................... 184 195
Securities gains (losses) ................................. -- 151
Unrealized gains (losses) on trading securities ........... 31 (239)
Net gains on loan sales ................................... 618 239
Other operating income .................................... 283 223
------- -------
Total other income .................................... 2,113 1,494
------- -------
Other Expenses
Salaries and employee benefits ............................ 2,486 2,164
Net occupancy and equipment expenses ...................... 594 595
Advertising ............................................... 151 127
Legal fees ................................................ 177 19
Appreciation (depreciation) in directors' and executives'
deferred compensation plans .......................... 38 (229)
Other operating expense ................................... 678 654
------- -------
Total other expenses .................................. 4,124 3,330
------- -------
Income Before Income Tax ....................................... 2,418 2,475
Income tax expense/(benefit) .............................. 779 818
------- -------
Net Income ..................................................... $ 1,639 $ 1,657
======= =======
Basic earnings per share ....................................... $ .27 $ .27
Diluted earnings per share ..................................... .27 .27
See notes to consolidated condensed financial statements.
5
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 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................... $ 3,449 3,449 3,449
Unrealized loss on
securities (net of tax
benefit)........... (199) (199) (199)
ESOT shares earned........... 3 16
13
Repurchase of stock, at
cost............... (10,700) (151) (151)
Cash dividend ($.36 per
share)................... (2,197) (2,197)
----------------------------------------------------------------------------------------------
Balances, September 30, 2003 6,139,540 $ 137 $ 3,230 $ 3,250 $41,871 $ 476 $ (533) $45,181
==============================================================================================
See notes to consolidated condensed financial statements.
6
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
----------------------
2003 2002
----------------------
Operating Activities
Net income ......................................................... $ 3,449 $ 4,719
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses ........................................ 3,515 957
Depreciation and amortization .................................... 674 652
Deferred income tax .............................................. (102) 100
Investment securities amortization, net .......................... 384 227
Available for sale securities gain ............................... (170) (198)
Origination of loans held for sale ............................... (94,320) (48,626)
Proceeds from sale of loans held for sale ........................ 98,913 49,014
Gain on sale of loans held for sale .............................. (1,444) (632)
ESOT compensation ................................................ 16 10
Net change in:
Trading securities ............................................. (319) 353
Interest receivable and other assets ........................... (7,832) 511
Interest payable and other liabilities ......................... (350) (20)
----------------------
Net cash provided by operating activities ................. 2,414 7,067
----------------------
Investing Activities
Purchases of securities available for sale ......................... (30,099) (27,651)
Proceeds from sales of securities available for sale ............... 7,494 5,420
Proceeds from paydowns and maturities of securities
available for sale .......................................... 7,150 3,018
Purchases of securities held to maturity ........................... -- (15,949)
Proceeds from paydowns and maturities of securities held to maturity 16,806 19,903
Purchase of FHLB stock ............................................. (420) (348)
Net change in loans ................................................ (23,828) (19,543)
Purchases of premises and equipment ................................ (467) (942)
----------------------
Net cash used by investing activities ..................... (23,364) (36,092)
----------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 37,056 16,733
Certificates of deposit .......................................... (9,052) 28,352
Borrowings ....................................................... (6,230) (18,738)
Proceeds of Federal Home Loan Bank advances ........................ 12,000 9,338
Repayment of Federal Home Loan Bank advances ....................... (2,785) (5,035)
Cash dividends paid ................................................ (2,197) (2,196)
Repurchase of common stock ......................................... (151) (571)
----------------------
Net cash provided by financing activities ................. 28,641 28,454
----------------------
Net Change in Cash and Cash Equivalents ................................. 7,691 (571)
Cash and Cash Equivalents, Beginning of Period .......................... 20,526 17,276
----------------------
Cash and Cash Equivalents, End of Period ................................ $ 28,217 $ 16,705
======================
Supplemental cash flow disclosures
Interest paid ...................................................... $ 6,926 $ 8,558
Income tax paid .................................................... 1,485 2,360
See notes to consolidated condensed financial statements.
7
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
September 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 September 30, 2003, and for the
nine months ended September 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:
Nine months ended
-----------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net income (in thousands).............. $ 3,449 $ 4,719
================ ================
Weighted average shares outstanding.... 6,150,040 6,150,240
Average unearned ESOT shares........... (44,427) (49,721)
---------------- ----------------
Shares used to compute basic
earnings per share.............. 6,105,613 6,100,519
Effect of dilutive securities
Stock options...................... 6,331 3,543
---------------- ----------------
Shares used to compute diluted
earnings per share............. 6,111,944 6,104,062
================ ================
Earnings per share basic............... $ .56 $ .77
Earnings per share, diluted............ .56 .77
For the nine months ended September 30, 2003 and 2002, options to purchase
27,391 and 105,000 shares, respectively, were not included in the earnings per
share calculation because the exercise price exceeded the average market price.
Three months ended
------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net income (in thousands).............. $ 1,639 $ 1,657
================ ================
Weighted average shares outstanding.... 6,149,645 6,150,240
Average unearned ESOT shares........... (43,101) (48,381)
---------------- ----------------
Shares used to compute basic
earnings per share.............. 6,106,544 6,101,859
Effect of dilutive securities
Stock options...................... 7,357 6,655
---------------- ----------------
Shares used to compute diluted
earnings per share............. 6,113,901 6,108,514
================ ================
Earnings per share basic............... $ .27 $ .27
Earnings per share, diluted............ .27 .27
For the three months ended September 30, 2003, 27,391 shares were not included
in the earnings per share calculation because the exercise price exceeded the
average market price.
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.
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
-------------------------------------------------
Net income, as reported................................... $ 3,449 $ 4,719
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes........................................... 4 12
-------------------------------------------------
Pro forma net income...................................... $ 3,445 $ 4,707
=================================================
Earnings per share:
Basic - as reported................................... $ .56 $ .77
Basic - pro forma..................................... .56 .77
Diluted - as reported................................. .56 .77
Diluted - pro forma................................... .56 .77
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
-------------------------------------------------
Net income, as reported................................... $ 1,639 $ 1,657
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes........................................... 1 4
-------------------------------------------------
Pro forma net income...................................... $ 1,638 $ 1,653
=================================================
Earnings per share:
Basic - as reported................................... $ .27 $ .27
Basic - pro forma..................................... .27 .27
Diluted - as reported................................. .27 .27
Diluted - pro forma................................... .27 .27
10
Note 4: Effect of Recent Accounting Pronouncements
- --------------------------------------------------
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity
SFAS 150 was effective for public entities' mandatorily redeemable financial
instruments on July 1, 2003. The Statement was to apply to nonpublic companies'
fiscal periods beginning after December 15, 2003. However, the FASB has proposed
to defer provisions related to mandatorily redeemable financial instruments to
periods beginning after December 15, 2004 for specified nonpublic companies. The
Company has determined that it has no such instruments.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies
reporting of contracts as either derivatives or hybrid instruments. The Company
has determined that it has no such instruments.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 provides guidance with
respect to variable interest entities and when the assets, liabilities,
noncontrolling interest, and results of operations of a variable interest entity
need to be included in a company's consolidated financial statements. A variable
interest entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics are the direct or indirect
ability to make decisions about an entity's activities through voting rights or
similar rights, the obligation to absorb the expected losses of an entity if
they occur, and the right to receive the expected residual returns of the entity
if they occur.
FIN No. 46 was effective immediately for new entities that were created or
acquired after January 31, 2003. The effective date for entities in which the
Company had a variable interest prior to February 1, 2003 was originally July 1,
2003 but the FASB delayed the effective date for these entities to December 15,
2003. The effect of the adoption did not have a material impact on the results
of operations, financial position or cash flows of the Company.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation - Transition and Disclosure, which provides guidance for transition
from the intrinsic value method of accounting for stock-based compensation under
Accounting Principles Board ("APB") Opinion No. 25 to SFAS No. 123's fair value
method of accounting, if a company so elects. The Company applies APB Opinion
No. 25 and related Interpretations in accounting for the stock option plan.
Accordingly, no compensation costs have been recognized, as all options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Had compensation cost for the Company's stock option plan
been recorded based on the fair value at the grant dates for awards under the
plan consistent with the method prescribed by SFAS No. 123, net income and net
income per share would have been adjusted to the proforma amounts indicated in
Note 3.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others was issued. FIN 45 requires the disclosures to be made by
a guarantor in its financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The most significant FIN 45
instruments of the Company are standby letters of credit. The Company has
determined that its standby letters of credit obligations under FIN 45 are not
material for disclosure.
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 (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 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 $47.1 million of loans at
September 30, 2003, an increase of 43.0 percent over December 31, 2002, and
$54.6 million of deposits, an increase of 60.9 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 two additional
business and commercial real estate lenders.
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 driving changes in the amount of the allowance for
loan losses is included in the Asset Quality and Provision
12
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 on the following page). 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 unrealized gains and losses 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.
13
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. This special provision was directly
related to an analysis of the collateral values and many other factors related
to loans outstanding to a real estate developer who filed bankruptcy and to
parties affiliated with the developer. Table dollar amounts are in thousands,
except for per share data.
Income Statement With and Without Special $2.3 Million Provision
Nine Months Ending
September 30, 2003
------------------------------------
Without Impact With
Special of Special
Provision Provision Provision
--------- --------- ---------
Interest income ........................................ $ 21,047 $ 21,047 047
Interest expense ....................................... 6,734 -- 6,734
-------- -------- --------
Net interest income ............................... 14,313 -- 14,313
Provision for loan losses .............................. 1,215 $ 2,300 3,515
-------- -------- --------
Net interest income after provision for loan losses 13,098 (2,300) 10,798
Total other income ..................................... 6,114 6,114
Total other expense .................................... 12,151 12,151
-------- -------- --------
Income before income tax .......................... 7,061 (2,300) 4,761
Income tax expense (benefit) ........................... 2,223 (911) 1,312
-------- -------- --------
Net income ................................... $ 4,838 $ (1,389) $ 3,449
======== ======== ========
Basic earnings per share ............................... $ 0.79 $ (0.23) $ 0.56
Diluted earnings per share ............................. $ 0.79 $ (0.23) $ 0.56
Return on average equity ............................... 14.36% (4.13%) 10.23%
Return on average assets ............................... 1.16% (0.34%) 0.82%
Overview
- --------
Net income for the third quarter 2003 was $1.6 million, a 1.1 percent decrease
over the same quarter last year. Diluted earnings per share for the third
quarter of 2003 were $0.27 unchanged from the third quarter of 2002.
Net income was $3.5 million and $4.7 million for the nine-month periods ended
September 30, 2003 and 2002, respectively, a decrease of $1.2 million or 26.9
percent. Before the special provision of $2.3 million ($1.3 million after tax),
2003 year to date net income was $4.8 million, an increase of 2.5 percent over
2002, and diluted earnings per share were $0.79 compared to $0.77 for the same
period in 2002.
Annualized return on average equity (ROE) for the third quarter of 2003
decreased to 14.36 percent compared to 15.25 percent for third quarter of 2002.
The annualized return on average assets (ROA) was 1.14 percent for the third
quarter of 2003 compared with 1.24 percent for the same period in 2002. For the
nine-month periods ended September 30, 2003, and 2002, annualized ROE was 10.23
percent and 14.98 percent, respectively, while annualized ROA was .82 percent
and 1.22 percent, respectively. Before the special provision, annualized year to
date 2003 ROE was 14.36 percent and ROA was 1.16 percent.
14
Year to date 2003 dividends paid were $0.36 per share, unchanged from the same
period of 2002. At September 30, 2003 the dividend yield was 3.4 percent
compared to 3.6 percent at September 30, 2002. The decrease in yield occurred
due to a increase in the market value of the stock. At September 30, 2003, the
closing market price of Monroe Bancorp stock was $14.15 per share compared to
$13.23 per share at September 30, 2002. Monroe Bancorp has historically
increased dividends for over fifteen years.
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.
15
Average Balance Sheets and Interest Rates
-------------------------------------------------------------------------
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
------------------------------------ ------------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
--------- --------- -------------- --------- --------- --------------
Interest earning assets
Interest earning assets
Securities
Taxable ....................................... $ 81,023 $ 2,608 4.30% $ 69,629 $ 2,838 5.45%
--------- --------- --------- ---------
Tax-exempt (1) ................................ 23,651 1,098 6.21% 26,363 1,281 6.50%
Total securities ......................... 104,674 3,706 4.73% 95,992 4,119 5.74%
Loans (2) .......................................... 410,169 17,794 5.80% 377,669 18,769 6.64%
Time deposits with banks ........................... 38 0 0.57% 46 1 2.91%
FHLB Stock ......................................... 2,141 81 5.06% 1,867 86 6.16%
Federal funds sold ................................. 7,735 65 1.12% 7,005 86 1.64%
--------- --------- --------- ---------
Total interest earning assets .......... 524,757 21,646 5.52% 482,579 23,061 6.39%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ........................... (5,497) (4,239)
Premises and equipment & other assets .............. 21,747 20,194
Cash and due from banks ............................ 17,796 16,869
--------- ---------
Total assets ............................. $ 558,803 $ 515,403
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
Total interest bearing deposits .................... $ 357,709 5,048 1.89% $ 330,606 6,798 2.75%
Borrowed funds ..................................... 86,067 1,686 2.62% 78,777 1,707 2.90%
--------- --------- --------- ---------
Total interest-bearing liabilities ............ 443,776 6,734 2.03% 409,383 8,505 2.78%
--------- --------- --------- ---------
Noninterest bearing liabilities
Noninterest bearing demand deposits ................ 64,734 78,981
Other liabilities .................................. 5,232 5,910
Shareholders' equity ............................... 45,061 42,129
--------- ---------
Total liabilities and shareholders' ....
equity $ 558,803 $ 515,403
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ..................... 14,912 3.49% 14,556 3.61%
T/E net interest margin as a percent of
total average earning assets .................. 3.80% 4.03%
Less: tax equivalent adjustment (3) .................... 599 566
--------- ---------
Net interest income margin ......................... $ 14,313 3.33% $ 13,990 3.45%
========= =========
Net interest margin as a percent of
total average earning assets .................. 3.65% 3.88%
(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
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------------
Three Months Ended September 30, 2003 Three Months Ended September 30, 2002
------------------------------------- -------------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
--------- --------- -------------- --------- --------- --------------
Interest earning assets
Securities
Taxable ....................................... $ 81,314 $ 800 3.90% $ 78,331 $ 1,013 5.13%
Tax-exempt (1) ................................ 22,671 347 6.07% 24,771 413 6.61%
--------- --------- --------- ---------
Total securities ......................... 103,985 1,147 4.37% 103,102 1,426 5.49%
Loans (2) .......................................... 422,276 5,972 5.61% 383,744 6,219 6.43%
Time deposits with banks ........................... 26 -- 0.00% 38 1 10.44%
FHLB Stock ......................................... 2,296 28 4.84% 1,882 30 6.32%
Federal funds sold ................................. 6,544 16 0.97% 6,805 28 1.63%
--------- --------- --------- ---------
Total interest earning assets .......... 535,127 7,163 5.31% 495,571 7,704 6.17%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses .......................... (6,077) (4,208)
Premises and equipment & other assets .............. 25,836 20,441
Cash and due from banks ............................ 17,927 16,685
--------- ---------
Total assets ............................. $ 572,813 $ 528,489
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
Total interest bearing deposits .................... $ 359,781 1,556 1.72% $ 341,410 2,212 2.57%
Borrowed funds ..................................... 94,663 585 2.45% 79,608 567 2.83%
--------- --------- --------- ---------
Total interest-bearing liabilities ............ 454,444 2,141 1.87% 421,018 2,779 2.62%
--------- --------- --------- ---------
Noninterest bearing liabilities
Noninterest bearing demand deposits ................ 67,987 58,467
Other liabilities .................................. 5,094 5,900
Shareholders' equity ............................... 45,275 43,104
--------- ---------
Total liabilities and shareholders'
equity $ 572,813 $ 528,489
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ..................... 5,022 3.44% 4,925 3.55%
--------- ---------
T/E net interest margin as a percent of
total average earning assets .................. 3.72% 3.94%
Tax equivalent adjustment (3) ........................... 188 209
--------- ---------
Net interest income margin ......................... $ 4,834 3.30% $ 4,716 3.38%
========= =========
Net interest margin as a percent of
total average earning assets .................. 3.58% 3.78%
(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
17
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 September 30,
2003, a decrease from 3.8 percent for the same quarter last year. Average third
quarter 2003 loan yields declined by 82 basis points (0.82 percent) over third
quarter 2002 yields and deposit yields declined 85 basis points in the same time
period. Average third quarter 2003 securities yields declined by 103 basis
points over the third quarter of 2002, and borrowed funds yields declined 38
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 third quarter of 2002.
Net interest income after the provision for loan losses was $4.4 million for the
three months ended September 30, 2003 compared to $4.3 million for the same
period in 2002, an increase of 2.7 percent. Loan and deposit volume increased in
2003, but the decline in yields and decrease in the margin partially offset the
income generated by the increase in volume.
Total interest income decreased by $519,000, or 6.9 percent, for the third
quarter of 2003 compared to the third quarter of 2002. This decrease was the
result of a decrease in the average yield on earning assets to 5.2 percent
compared to 6.0 percent for the third 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 third quarter of 2003. Average nonaccrual
loans totaled $7.9 million during the third quarter of 2003 compared to $2.0
million during the third quarter of 2002. At September 30, 2003, the prime rate
was 4.0 percent, compared to 4.75 percent at September 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 $637,000, or 22.9 percent, for the third quarter of 2003
compared to the third quarter of 2002. This decrease resulted from a decrease in
the average rate paid on interest bearing liabilities to 1.9 percent during the
third quarter of 2003 from 2.6 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 $422.3 million during the third
quarter of 2003 compared to $383.7 million for the same period in 2002, an
increase of $38.5 million or 10.0 percent. Average interest bearing liabilities
were $454.4 million during the third quarter of 2003 compared to $421.0 million
for the same period in 2002, an increase of $33.4 million, or 7.9 percent, in
the third quarter of 2003 compared to third quarter 2002.
For the nine months ended September 30, 2003, net interest income after the
provision for loan losses was $10.8 million compared to $13.0 million for the
same period in 2002 a decrease of $2.2 million or 17.2 percent. The decrease is
a result of the increase in the provision for loan losses which was $3.5 million
for the first nine months of 2003 compared to $957,000 for the same period in
2002. The increase in the provision was the result of a $2.3 million special
provision taken during the second quarter. This special provision was directly
related to an analysis of the collateral values and many other factors related
to loans outstanding to a real estate developer who filed bankruptcy and to
parties affiliated with the developer. Net interest income before the provision
was $14.3 million for the first nine months of 2003 compared to $14.0 million in
2002, an increase of $323,000 or 2.3 percent. The net interest margin was 3.7
percent for the first nine months of 2003 compared to 3.9 percent for the same
period in 2002. The growth in average loans of 8.6 percent over this period of
time more than offset the decrease in the margin to provide an overall increase
in net interest income.
Other Income / Other Expense
- ----------------------------
Total other income increased $619,000 for the three months ended September 30,
2003 compared to the same period in 2002. The increase in other income includes
unrealized securities gains and losses which are
18
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 $31,000 in 2003 and losses in the amount of $239,000 in 2002, other
income increased $349,000 or 20.1 percent during the third quarter of 2003
compared to the third quarter of 2002.
The growth in other income mainly occurred in two areas. The Company sells
substantially all fixed rate residential mortgage loans it originates on the
secondary market. Gains on these sales increased $379,000 or 158.6 percent
during the third quarter of 2003 compared to 2002 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, the Bank
purchased Bank Owned Life Insurance (BOLI) on selected bank officers during the
third quarter of 2003 to help fund the increasing costs of providing employee
health benefits. The Company recognized $71,000 of tax-free income on this asset
during the third quarter of 2003. During the third quarter of 2002, a security
sale occurred and a gain of $151,000 was recognized. There were no security
sales during the third quarter of 2003.
For the first nine months of 2003, other income increased $1.9 million over the
same period in 2002. Omitting the net realized losses of $5,000 and unrealized
gains of $222,000 (from the rabbi trust) for 2003 and unrealized losses from the
rabbi trust of $444,000 in 2002, other income increased $1.2 million or 26.0
percent. Increases occurred primarily in the following areas: an increase in
gains on mortgage sales of $812,000, or 128.5 percent, an increase in service
charges on deposit accounts of $113,000 or 5.9 percent primarily due to an
increase in overdraft protector fees and an increase in trust fees of $83,000 or
11.7 percent primarily due to an increase in assets under management.
Total other expense increased $794,000 during the third 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 $38,000 in 2003 and the depreciation in the Plan of
$229,000 in 2002 (which equals the sum of 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 $527,000 or 14.8 percent.
Salaries and employee benefits increased $322,000 or 14.8 percent primarily due
to an increase in salaries of $143,000 or 9.4 percent due to new hires and
annual raises, and increases in health insurance expense of $114,000 or 135.7
percent due to lower than usual expenses in 2002 due to switching carriers and
higher than usual claims in 2003. Legal fees increased $158,000, or 831.6
percent, as a result of collection efforts on loans made to the real estate
developer, who filed bankruptcy in 2002, and to parties affiliated with the
developer.
For the first nine months of 2003, other expense increased $1.9 million over the
same period in 2002. Omitting the effect of the 2003 rabbi trust realized and
unrealized net gains of $257,000 and 2002 unrealized losses of
19
$407,000 on directors' fees and deferred compensation, other expense increased
$1.3 million, or 12.1 percent. Once again, increases occurred primarily in the
areas of salaries and employee benefits primarily commission expense which
increased $289,000 or 30.5 percent and health insurance expense which increased
$231,000 or 78.8 percent, and legal fees which increased $337,000 or 383.0
percent over the first nine months of 2002.
Financial Condition
- -------------------
Assets and Liabilities
- ----------------------
Total assets of the Company at September 30, 2003 were $564.9 million an
increase of 5.9 percent or $31.6 million compared to $533.3 million at December
31, 2002. Deposit growth exceeded loan growth during the first nine months of
2003, hence federal funds sold were $11.2 million at September 30, 2003,
compared to none sold at December 31, 2002. At September 30, 2003, loans (net of
the allowance for loan losses) grew by $17.2 million, or 4.4 percent over
December 31, 2002 balances. During the first nine months of 2003, $97.5 million
of fixed rate mortgages were closed and subsequently sold into the secondary
market. Deposits grew by $28.0 million, or 7.0 percent during the first nine
months of 2003, and borrowings (federal funds purchased, repurchase agreements,
participation loans and FHLB advances) increased $3.0 million, or 3.5 percent.
In July 2003, the Company purchased a $6.8 million Bank Owned Life Insurance
(BOLI) policy on selected Bank officers to help fund the increasing costs of
providing employee health benefits.
Capital
- -------
Shareholders' equity increased $918,000 at September 30, 2003 compared to
December 31, 2002. This increase was a result of year-to-date net income of $3.4
million, dividends paid of $2.2 million and other comprehensive losses,
consisting solely of the change (decrease) in net unrecognized losses in the
Company's available-for-sale securities portfolio of $199,000 and ESOP shares
earned of $16,000.
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 September 30, 2003 and
December 31, 2002, the Company and the Bank were categorized as well capitalized
and met all subject capital adequacy requirements. There are no conditions or
events since September 30, 2003 that management believes have changed the
Company's or Bank's classification
20
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 September 30, 2003
------------------------
Total capital(1)(to risk-weighted
assets)
Consolidated $ 49,684 12.5% $ 31,841 8.0% N/A N/A
Bank 49,415 12.5 31,573 8.0 $ 39,466 10.0%
Tier I capital(1)(to risk-weighted
assets)
Consolidated 44,694 11.2 15,920 4.0 N/A N/A
Bank 44,466 11.3 15,786 4.0 23,680 6.0
Tier I capital(1)(to average
assets)
Consolidated 44,694 7.8 22,913 4.0 N/A N/A
Bank 44,466 7.8 22,782 4.0 28,641 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 September 30, 2003, the Bank had $17.9
million of loans internally classified compared to $21.4 million at December 31,
2002. The allowance for loan losses was $6.2 million, or 1.5 percent of
portfolio loans (excluding loans held for sale) at September 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 $8.5 million at September 30, 2003 compared to $3.6 million at December
31, 2002. 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 and to parties affiliated
with the developer. The amount of nonaccrual loans at September 30, 2003
increased $900,000 from June 30, 2003. Between September 30, 2003 and October
16, 2003, the Company reduced nonaccrual loans by $2.0 million. At September 30,
2003, the Bank had $346,000 of loans 90 days or more past due but still
accruing, compared to $588,000 at December 31, 2002.
During the third quarter of 2003, the Bank had net loan charge offs totaling
$37,000 compared to $660,000 charged off for the same period in 2002. Year to
date, $1.9 million of net loans have been charged off compared to $1.2 million
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.
21
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 the next twelve
months. 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 $44.2 million at September 30, 2003 compared to $35.0 million at
December 31, 2002. At September 30, 2003, the Company had excess borrowing
capacity at the FHLBI of $12.8 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 $46.3 million based on collateral. Additional advances were obtained
during the first nine 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 the Company cash requirements continued to be
dividends from its subsidiary, the Bank. During the third quarter of 2003,
dividends totaling $740,000 were declared and paid to the parent company by the
bank subsidiary. At September 30, 2003, the amount of dividends the bank
subsidiary can pay to the parent company without prior regulatory approval was
$7.1 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 nine months of 2003, $2.4 million of cash
was provided by operating activities, compared to $7.1 million during the same
period in 2002. During the first nine months of 2003, $23.4 million was used for
investing activities, compared to $36.1 million for the first nine months of
2002. The primary use of funds in this category during 2003 and 2002 was the net
increase in loans, which totaled $23.8 million during the first nine months of
2003 compared to $19.5 million during the same period in 2002. During the first
nine months of 2003, $28.6 million of cash was provided by financing activities,
primarily from growth in noninterest-bearing demand, interest-bearing demand and
savings deposits, compared to $28.4 million provided during the same period in
2002 with growth occurring primarily in certificates of deposit. Overall, net
cash and cash equivalents increased $7.7 million during the first nine months of
2003 compared to decreasing $571,000 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.
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
22
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
- --------------------------
Portions of information in this Form 10-Q contain forward-looking statements
about the Company which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. This Form 10-Q 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 Form 10-K for the
year ended December 31, 2002 as filed 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 September 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.
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
23
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 September 30, 2003:
Net Portfolio Value at September 30, 2003
-----------------------------------------
Change in Interest Rate Dollar Amount $ Change in % Change
(basis points) (in thousands) NPV in NPV
----------------------- -------------- ----------- --------
+300 $ 65,833 $ 2,896 4.60%
+200 64,540 1,603 2.55
+100 63,270 333 0.53
0 62,937 --- ---
-100 61,406 (1,531) (2.43)
-200 65,203 2,266 3.60
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 September 30, 2003 table above indicates that the Bank's estimated NPV would
be expected to increase by 4.60 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 $19.5 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 $22.4 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 upward interest rate change. The changes
projected to the NPV of the Bank's assets and liabilities combine to yield a
$2.9 million (4.60 percent) change in the net present value of the Bank.
24
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 2.43 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 September 30, 2003 and
December 31, 2002, and the magnitude of the projected NPV changes increased only
modestly. As of September 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 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 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
25
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.
26
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.
- ------- ----------------------------------------------------
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.
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.
27
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 July 23, 2003 to report a press release of second
quarter 2003 earnings and a summary of second quarter
2003 financial information issued July 23, 2003.
o Filed September 3, 2003 to report a press release
announcing a $2 million stock repurchase.
o Filed September 25, 2003 to report the June 30, 2003
Quarterly Financial Statement distributed September 25,
2003.
28
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: November 13, 2003 By: /s/ Mark D. Bradford
----------------- -------------------------------
Mark D. Bradford, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 By: /s/ Gordon M. Dyott
----------------- -------------------------------
Gordon M. Dyott, Exec. Vice
President, Chief Financial
Officer
(Principal Financial Officer)
29
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.
30