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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission file number 000-31951
MONROE BANCORP
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(Exact name of registrant as specified in its charter)
Indiana 35-1594017
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
210 East Kirkwood Avenue, Bloomington, Indiana 47408
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 336-0201
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
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Securities Registered Pursuant to Section 12(g) of the Act: Common Shares,
No Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value (not necessarily a reliable indication of the price
at which more than a limited number of shares would trade) of the voting stock
held by non-affiliates of the registrant was $67,010,221 on June 30, 2003.
As of March 8, 2004 there were 6,090,340 outstanding common shares, without par
value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
Portions of the 2003 Annual Report to Shareholders Part II
Portions of the Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 22, 2004 Part III
FORM 10-K TABLE OF CONTENTS Form 10-K
Page Number
Part I
Item 1 - Business................................................................3
Item 2 - Properties.............................................................30
Item 3 - Legal Proceedings......................................................32
Item 4 - Submissions of Matters to a Vote of Security Holders...................32
Part II
Item 5 - Market for the Registrant's Common Equity and
Related Shareholder Matters.......................................32
Item 6 - Selected Financial Data................................................33
Item 7 - Management's Discussions and Analysis of Financial
Condition and Results of Operations...............................33
Item 7A - Quantitative and Qualitative Disclosures about Market Risk..............33
Item 8 - Financial Statements and Supplementary Data...........................33
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures..............................33
Item 9a- Controls and Procedures.................................................33
Part III
Item 10 - Directors and Executive Officers of the Registrant....................34
Item 11 - Executive Compensation................................................35
Item 12 - Security Ownership of Certain Beneficial
Owners and Management...........................................35
Item 13 - Certain Relationships and Related Transactions........................35
Item 14 - Principal Accountant Fees and Services...............................36
Part IV
Item 15 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................36
Signatures....................................................................................39
2
PART I
ITEM 1. Business.
GENERAL
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Monroe Bancorp (the "Company") is a one-bank holding company formed under
Indiana law in 1984. At December 31, 2003, on a consolidated basis the Company
had total assets of $589.3 million, total loans of $424.5 million and total
deposits of $436.7 million. The Company holds all of the outstanding stock of
Monroe Bank (the "Bank"), which was formed in 1892. The Bank is the primary
business activity of the Company.
The Bank, with its primary office located in Bloomington, Indiana, conducts
business from sixteen locations in Monroe, Hendricks, Jackson and Lawrence
counties in Indiana. Approximately 80 percent of the Bank's business is in
Monroe County and is concentrated in and around the city of Bloomington.
However, the Company's continued expansion into Hendricks County is expected to
gradually reduce this concentration.
The Company, as a bank holding company, engages in commercial banking through
the Bank. The Company may also engage in certain non-banking activities closely
related to banking and own certain other business companies that are not banks,
subject to applicable laws and regulations, although it has no current plans to
do so.
As of December 31, 2003, the Bank had 193 full-time equivalent employees. As a
community bank, management believes that the Bank must continue to promote
community involvement and leadership among Bank employees.
The Bank is a traditional community bank, which provides a variety of financial
services to its customers, including:
o accepting deposits;
o making commercial, mortgage and installment loans;
o originating fixed rate residential mortgage loans for sale into the
secondary market;
o providing personal and corporate trust services;
o providing investment advisory and brokerage services; and
o providing fixed and variable annuities.
The majority of the Bank's revenue is derived from interest and fees on loans
and investments, and the majority of its expense is interest paid on deposits
and general and administrative expenses related to its business.
Prior to 2003, the Company's operation has yielded eleven consecutive years of
earnings growth. In 2003, after-tax net income was $5.1 million, down $1.0
million from 2002. The decline in net income is largely the result of a specific
provision of $2.3 million that was added to the provision for loan losses as a
result of the Bank's analysis of collateral values and other factors involving
loans to a real estate developer, who filed bankruptcy, and to parties
affiliated with the developer. Efforts to resolve the loans that led to the
increase in the provision contributed to a $432,000 increase in legal expenses.
These expenses were
3
partially offset by increases in several noninterest income categories, most
notably gains on the sale of loans, service fees and trust fees.
The Company has increased its annual dividend each year for 16 years. Based upon
a closing price of $14.25 for the Company's stock on December 31, 2003, (MROE;
listed on NASDAQ), the Company's $.49 dividend provided a dividend yield of 3.44
percent.
Management believes that the Company's culture of community involvement,
outstanding service quality, and customer focus has played a significant role in
the Company's growth and success. Management also believes that other
significant factors contributing to the Company's growth include, but are not
limited to; the attractiveness of the Company's primary markets, an involved
Board that sets high performance standards and the increased use of incentive
and commission compensation plans.
The Company focused much of its effort during 2003 in three areas. The first
area of focus was asset quality, in particular, on efforts to resolve
nonperforming assets and to strengthen the Bank's credit review process. The
second area of focus was residential mortgage lending. The interest rate
environment for most of 2003 was favorable for the origination and sale of fixed
rate mortgages. The Company shifted internal resources to this area of
opportunity and as a result, revenues from the origination and sale of fixed
rate mortgages increased by 59.7 percent to $1.7 million. The third area of
focus was enhancing the Bank's ability to originate commercial real estate and
other business loans within markets in central Indiana. Efforts in this area
resulted in the hiring of a regional president and the addition of two
experienced lenders to the personnel based in Hendricks County.
The addition of the personnel noted above contributed to the significant growth
of the Company's three Hendricks County branch offices. Loans originated at
these locations increased by $24.8 million, or 75.1 percent, during 2003.
Deposits at these locations grew by $21.8 million, or 64.1 percent, during 2003.
Company Goals
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The Company's business strategies are focused on four major areas:
o increasing the growth rate of net interest income,
o improving credit processes to ensure strong credit quality,
o increasing the ratio of noninterest income to net interest income, and
o increasing operating efficiency.
Management will measure its overall success in terms of earnings per share
growth rate, return on equity, the ratio of nonperforming loans to total loans,
service quality and staff retention rates.
The Company, as a bank holding company, engages in commercial banking through
the Bank. The Company may also engage in certain non-banking activities closely
related to banking and own certain other business companies that are not banks,
subject to applicable laws and regulations, although it has no current plans to
do so.
Competition
- -----------
The Company's market area is highly competitive. In addition to competition from
commercial banks (including certain larger regional banks) and savings
associations, the Company also competes with numerous credit unions, finance
companies, insurance companies, mortgage companies, securities and brokerage
firms, money market mutual funds, loan production offices and other providers of
financial services. The Company competes with these firms in terms of pricing,
delivery channels, product features, service quality, responsiveness and other
factors.
4
The Company also competes directly with a large number of financial service
providers who do not have a physical presence in our markets (e.g., Citicorp)
but have been successful in selling their services using technology and
sophisticated target marketing techniques. We fully expect these companies to
increase their future efforts to attract business from our very best customers.
The Company's success in view of the substantial competition is felt to be the
result of factors such as its history of community involvement and support,
commitment to outstanding customer service, awareness of and responsiveness to
customer needs, and its attractive mix of high touch and high tech delivery
channels. The impact of these factors can be seen in the success the Company has
had in increasing its share of deposits in Monroe County.
The Company has been able to increase its deposit market share in the Monroe
County market through competitive pricing, marketing and an emphasis on service.
All FDIC insured deposits held by financial institutions in Monroe County grew
by $143.9 million, or 13.3 percent, during the five-year period between June 30,
1998 and June 30, 2003. During the same period, the Company was able to grow its
deposits within the County by $83.7 million (33.0 percent) and increase its
market share from 23.5 percent in 1998 to 27.6 percent in 2003. Like many
financial institutions, deposit growth over the last five years has not kept
pace with the Company's growth in loans. The Company has addressed short-term
liquidity needs by borrowing federal funds (short-term borrowings from other
banks) and longer term advances from the Federal Home Loan Bank of Indianapolis
(FHLB).
REGULATION AND SUPERVISION
--------------------------
Both the Company and the Bank operate in highly regulated environments and are
subject to supervision and regulation by several governmental regulatory
agencies, including the Federal Reserve Board, The Federal Deposit Insurance
Corporation (the "FDIC") and the Indiana Department of Financial Institutions
(the "DFI"). The laws and regulations established by these agencies are
generally intended to protect depositors, not shareholders. Changes in
applicable laws, regulations, governmental policies, income tax laws and
accounting principles may have a material effect on our business and prospects.
The following summary is qualified by reference to the statutory and regulatory
provisions discussed.
MONROE BANCORP
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The Bank Holding Company Act. Because the Company owns all of the outstanding
capital stock of the Bank, it is registered as a bank holding company under the
federal Bank Holding Company Act of 1956 and is subject to periodic examination
by the Federal Reserve and required to file periodic reports of its operations
and any additional information that the Federal Reserve may require.
Investments, Control, and Activities. With some limited exceptions, the Bank
Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before acquiring another bank holding company or
acquiring more than five percent of the voting shares of a bank (unless it
already owns or controls the majority of such shares).
Bank holding companies are prohibited, with certain limited exceptions, from
engaging in activities other than those of banking or of managing or controlling
banks. They are also prohibited from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiary companies furnishing
services to or performing services for their subsidiaries, and other
subsidiaries engaged in activities which the Federal Reserve Board determines to
be so closely related to banking or managing or controlling banks as to be
incidental to these
5
operations. The Bank Holding Company Act does not place territorial restrictions
on the activities of such nonbanking-related activities.
Effective as of March 11, 2001, the Gramm-Leach-Bliley Act allows bank holding
companies which met certain management, capital and CRA standards and which have
elected to become a finance holding company to engage in a substantially broader
range of nonbanking activities than was previously permissible, including
insurance underwriting and agency, and underwriting and making merchant banking
investments in commercial and financial companies. This act also removes various
restrictions that previously applied to bank holding company ownership of
securities firms and mutual fund advisory companies.
The Company does not currently plan to engage in any activity other than owning
the stock of the Bank.
Dividends. The Federal Reserve's policy is that a bank holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which could only be funded in ways that weakened the bank holding
company's financial health, such as by borrowing. Additionally, the Federal
Reserve possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies.
Source of Strength. In accordance with Federal Reserve Board policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances in which the Company might not
otherwise do so.
MONROE BANK
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General Regulatory Supervision. The Bank is an Indiana-chartered banking
corporation subject to examination by the DFI. The DFI and the FDIC regulate or
monitor virtually all areas of the Bank's operations. The Bank must undergo
regular on-site examinations by the FDIC and DFI and must submit annual reports
to the FDIC and the DFI.
Lending Limits. Under Indiana law, the total loans and extensions of credit by
an Indiana-chartered bank to a borrower outstanding at one time and not fully
secured may not exceed 15 percent of the bank's capital and unimpaired surplus.
Deposit Insurance. Deposits in the Bank are insured by the FDIC up to a maximum
amount, which is generally $100,000 per depositor subject to aggregation rules.
The Bank is subject to deposit insurance assessment by the FDIC pursuant to its
regulations establishing a risk-related deposit insurance assessment system,
based upon the institution's capital levels and risk profile. The Bank is also
subject to assessment for the Financial Corporation (FICO) to service the
interest on its bond obligations. The amount assessed on individual
institutions, including the Bank, by FICO is in addition to the amount paid for
deposit insurance according to the risk-related assessment rate schedule.
Increases in deposit insurance premiums or changes in risk classification will
increase the Bank's cost of funds, and we may not be able to pass these costs on
to our customers.
Transactions with Affiliates and Insiders. The Bank is subject to limitations on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates.
Furthermore, within the foregoing limitations as to amount, each covered
transaction must meet specified collateral requirements. Compliance is also
required with certain provisions designed to avoid the taking of low quality
assets. The
6
Bank is also prohibited from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank to its executive officers, directors, certain
principal shareholders, and their related interests must:
o be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties; and
o not involve more than the normal risk of repayment or present other
unfavorable features.
Dividends. Under Indiana law, the Bank may pay dividends from its undivided
profits in an amount declared by its Board of Directors, subject to prior
approval of the DFI if the proposed dividend, when added to all prior dividends
declared during the current calendar year, would be greater than the current
year's "net profits" and retained "net profits" for the previous two calendar
years.
Federal law generally prohibits the Bank from paying a dividend to the Company
if the depository institution would thereafter be undercapitalized. The FDIC may
prevent an insured bank from paying dividends if the bank is in default of
payment of any assessment due to the FDIC. In addition, payment of dividends by
a bank may be prevented by the applicable federal regulatory authority if such
payment is determined, by reason of the financial condition of such bank, to be
an unsafe and unsound banking practice.
Branching and Acquisitions. Branching by the Bank requires the prior approval of
the FDIC and the DFI. Under current law, Indiana chartered banks may establish
branches throughout the state and in other states. Congress authorized
interstate branching, with certain limitations, beginning in 1997. Indiana law
authorizes an Indiana bank to establish one or more branches in states other
than Indiana through interstate merger transactions and to establish one or more
interstate branches through de novo branching or the acquisition of a branch.
Community Reinvestment Act. The Community Reinvestment Act requires that the
FDIC evaluate the record of the Bank in meeting the credit needs of its local
community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could result in
the imposition of additional requirements and limitations on the Bank.
Capital Regulations. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and account for
off-balance sheet items. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk-weighted
categories of 0 percent, 20 percent, 50 percent, or 100 percent, with higher
levels of capital being required for the categories perceived as representing
greater risk. The guidelines are minimums, and the federal regulators have noted
that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios in excess of the minimums. Neither the Company nor the Bank has
received any notice indicating that either is subject to higher capital
requirements.
The federal bank regulatory authorities have also implemented a leverage ratio
to supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank
holding company may leverage its equity capital base.
7
The Bank is also subject to the FDIC's "prompt corrective action" regulations,
which implement a capital-based regulatory scheme designed to promote early
intervention for troubled banks. This framework contains five categories of
compliance with regulatory capital requirements, including "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." As of December 31, 2002, the Bank was
qualified as "well capitalized." It should be noted that a bank's capital
category is determined solely for the purpose of applying the FDIC's "prompt
corrective action" regulations and that the capital category may not constitute
an accurate representation of the bank's overall financial condition or
prospects. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decreases, as it
moves downward through the capital categories. Bank holding companies
controlling financial institutions can be required to boost the institutions'
capital and to partially guarantee the institutions' performance.
Other Regulations. Interest and other charges collected or contracted for by the
Bank are subject to state usury laws and federal laws concerning interest rates.
The Bank's loan operations are also subject to federal laws applicable to credit
transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending credit;
o Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies; and
o rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
o Customer Information Security Guidelines. The federal bank regulatory
agencies have adopted final guidelines (the "Guidelines") for safeguarding
confidential customer information. The Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of
Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or
integrity of such information; and protect against unauthorized access to or
use of such information that could result in substantial harm or
inconvenience to any customer.
o Electronic Funds Transfer Act, and Regulation E. The Electronic Funds
Transfer Act, which is implemented by Regulation E, governs automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking service.
USA Patriot Act. The United and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot
Act") is intended to strengthen the ability of U. S. Law Enforcement to combat
terrorism on a variety of fronts. The potential impact of the USA Patriot Act on
financial institutions is significant and wide-ranging. The USA Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
requires financial institutions to
8
implement additional policies and procedures with respect to, or additional
measures designed to address, any or all of the following matters, among others:
money laundering, suspicious activities and currency transaction reporting; and
currency crimes.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley
Act") implements a broad range of corporate governance and accounting measures
for public companies designed to promote honesty and transparency in corporate
America and better protect investors from the type of corporate and accounting
scandals that have occurred during the past year. The Sarbanes-Oxley Act's
principal legislation includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including
the requirement that the chief executive officer and chief financial
officer certify financial statements;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
o increase the oversight of, and enhancement of certain requirements
relating to audit committees of public companies and how they interact
with the company's independent auditors;
o requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other
compensatory fees from the issuer;
o requirement that companies disclose whether at least one member of the
committee is a "financial expert" (as such term will be defined by the
Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in complying with
the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
Enforcement Powers. Federal regulatory agencies may assess civil and criminal
penalties against depository institutions and certain "institution-affiliated
parties," including management, employees, and agents of a financial
institution, as well as independent contractors and consultants such as
attorneys and accountants and others who participate in the conduct of the
financial institution's affairs. In addition, regulators may commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, regulators may issue cease-and-desist orders to, among other
things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the regulator to be appropriate.
9
Effect of Governmental Monetary Policies. Our earnings are affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies. The Federal Reserve Bank's monetary policies have
had, and are likely to continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary
policy in order, among other things, to curb inflation or combat a recession.
The monetary policies of the Federal Reserve Board have major effects upon the
levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
FORWARD-LOOKING STATEMENTS
--------------------------
Portions of the information in this Form 10-K include certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995)
concerning the intent, belief, outlook, estimate or expectations of the Company
and its subsidiaries, its directors, or its officers primarily with respect to
future events or the future operations, performance, financial condition and
likelihood of success of the Company and the Bank. You can identify these
statements by use of terms such as "expect," "believe," "goal," "plan,"
"intend," "estimate," "may," "will" or similar words. These forward-looking
statements are not guarantees of future events or performance and are based upon
assumptions rather than historical or current facts. The forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause our actual results to differ materially from those anticipated in
the forward-looking statements. The factors which could cause a difference
between actual results and those in the forward looking statements include
changes in interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes. Shareholders,
potential investors and other readers are urged to consider these factors in
evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements.
10
Statistical Data.
Selected Financial Data
-----------------------
Financial Highlights
(dollar amounts in thousands, except share and per share data)
At or for the Years Ended December 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Summary of operations
Net interest income ...................... $ 19,140 $ 18,738 $ 16,937 $ 15,694 $ 14,769
Less: Provision for Loan Losses ......... 3,920 1,762 1,050 720 585
-------- -------- -------- -------- --------
Net interest income, after provision
for loan losses ....................... 15,220 16,976 15,887 #14,974 14,184
Noninterest income ....................... 8,182 6,070 4,916 3,734 3,852
Noninterest expense ...................... 16,285 13,931 12,046 10,744 11,052
Net income ............................... 5,054 6,098 5,749 5,333 4,723
Per common share
Basic and fully diluted earnings per share $ 0.83 $ 1.00 $ 0.94 $ 0.87 $ 0.77
Cash dividends per share ................. 0.49 0.48 0.44 0.40 0.34
Book value per common share .............. 7.49 7.25 6.67 6.14 5.62
Selected year-end balances
Total assets ............................. $589,263 $533,317 $495,553 $441,831 $416,649
Total securities ......................... 109,498 103,779 88,450 102,250 109,237
Total loans-including loans held for sale 424,511 391,315 371,800 296,759 273,894
Total deposits ........................... 436,683 398,567 359,206 342,995 313,150
Shareholders' equity ..................... 45,375 44,263 40,684 37,732 34,444
Selected average balances
Total assets ............................. $562,836 $520,310 $454,485 $428,582 $393,225
Total securities ......................... 105,242 97,974 91,872 105,495 99,718
Total loans-including loans held for sale 411,762 381,126 327,125 287,485 254,397
Total deposits ........................... 425,378 392,789 354,185 335,505 314,769
Shareholders' equity ..................... 45,188 42,588 39,609 36,075 33,445
Ratios based on average balances
Return on assets (1) ..................... 0.90 % 1.17 % 1.26 % 1.24 % 1.20 %
Return on equity (2) ..................... 11.18 14.32 14.52 14.78 14.12
Dividend payout ratio (3) ................ 59.05 48.01 46.83 45.98 44.06
Equity to assets ratio (4) ............... 8.03 8.19 8.72 8.42 8.51
(1) Net income divided by average total assets
(2) Net income divided by average equity
(3) Dividends per share divided by net income per share
(4) Average equity divided by average total assets
11
NET INTEREST INCOME
-------------------
The table on the following page presents 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. For analytical purposes, interest income presented in the table has been
adjusted to a tax equivalent basis assuming a 40 percent tax rate for the period
after securities were transferred to the Delaware subsidiary in 2002 and 34
percent tax rate for all other periods. The tax equivalent adjustment recognizes
the income tax savings when comparing taxable and tax-exempt assets.
12
Average Balance Sheets and Interest Rates
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ---------------------------- ---------------------------
ASSETS Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest earning assets
Taxable ............................. $ 81,752 $ 3,413 4.18% $ 71,781 $ 3,884 5.41% $ 61,036 $ 3,446 5.65%
Tax-exempt (1) ...................... 23,490 1,463 6.23% 26,193 1,699 6.49% 30,836 1,930 6.26%
--------- --------- --------- --------- --------- ---------
Total securities .................. 105,242 4,877 4.63% 97,974 5,583 5.70% 91,872 5,376 5.85%
Loans (2) ............................. 411,762 23,649 5.74% 381,126 24,825 6.51% 327,125 26,778 8.19%
Time deposits with banks ............. 35 -- 0.00% 41 1 2.44% 32 2 6.25%
FHLB Stock ........................... 2,188 110 5.03% 1,870 113 6.04% 1,359 101 7.43%
Federal funds sold .................... 8,334 90 1.08% 6,122 97 1.58% 2,072 89 4.30%
--------- --------- --------- --------- --------- ---------
Total interest earning assets ........ 527,561 28,726 5.45% 487,133 30,619 6.29% 422,460 32,346 7.66%
--------- --------- --------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ............. (5,689) (4,206) (3,949)
Premises and equipment & other assets . 22,975 20,030 19,597
Cash and due from banks ............... 17,989 17,353 16,377
--------- --------- ---------
Total assets ...................... $ 562,836 $ 520,310 $ 454,485
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits ....... $ 359,129 6,541 1.82% $ 333,710 8,794 2.64% $ 299,400 12,649 4.22%
Borrowed funds:
Short-term borrowings ............. 44,318 280 0.63% 41,499 420 1.01% 38,065 1,224 3.22%
Other borrowings .................. 42,724 1,971 4.61% 37,556 1,834 4.88% 16,362 864 5.28%
--------- --------- --------- --------- --------- ---------
Total borrowed funds ......... 87,042 2,251 2.59% 79,055 2,254 2.85% 54,427 2,088 3.84%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities .... 446,171 8,792 1.97% 412,765 11,048 2.68% 353,827 14,737 4.17%
Noninterest-bearing liabilities
Noninterest-bearing demand deposits ... 66,249 59,079 54,785
Other liabilities ..................... 5,228 5,878 6,264
Shareholders' equity .................. 45,188 42,588 39,609
--------- --------- ---------
Total liabilities and
shareholders' equity ................ $ 562,836 8,792 $ 520,310 11,048 $ 454,485 14,737
========= --------- ========= --------- ========= ---------
Interest margin recap
Net interest income and
interest rate spread
T/E net interest income margin ........ 19,934 3.47% 19,571 3.61% 17,609 3.49%
T/E net interest margin as a percent of
total average earning assets ....... 3.78% 4.02% 4.17%
Tax equivalent adjustment (3) ......... 794 833 672
--------- --------- ---------
Net interest income ........... $ 19,140 $ 18,738 $ 16,937
========= ========= =========
(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 and at 34% for
all other periods.
(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 34% in 2001.
Tax equivalent adjustment in 2002 increased to 40% for effect of out of
state investment subsidiary.
13
The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earning assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year times the interest rate
of the prior year, while the interest rate changes were computed as the
difference in rate between the current and prior year items times the volume of
the prior year. Volume/rate variances have been allocated on the basis of the
absolute relationship between volume variances and rate variances. Nonaccrual
loans were included in the average loan balances used in determining the yields.
Volume / Rate Analysis
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
2003 Compared to 2002 2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- -------------------------- --------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income
- ---------------
Loans ............................... $ 2,091 $(3,267) $(1,176) $ 4,824 $(6,777) $(1,953) $ 3,765 $(2,876) $ 889
Securities:
Taxable .......................... 586 (1,057) (471) 627 (189) 438 (482) (88) (570)
Tax-exempt ....................... (164) (72) (236) (277) 46 (231) (315) (29) (344)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total securities interest ..... 422 (1,129) (707) 350 (143) 207 (797) (117) (914)
------- ------- ------- ------- ------- ------- ------- ------- -------
Time deposits with banks ............ 0 (1) (1) 0 (1) (1) (2) 2 0
FHLB stock .......................... 21 (24) (3) 43 (31) 12 8 (9) (1)
Federal funds sold .................. 41 (48) (7) 257 (249) 8 (11) (44) (55)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income ....... 2,575 (4,469) (1,894) 5,473 (7,201) (1,727) 2,963 (3,044) (81)
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest expense
- ----------------
Interest-bearing deposits ........... 711 (2,965) (2,254) 1,577 (5,432) (3,855) 854 (1,262) (408)
Short-term borrowings ............... 30 (170) (140) 119 (923) (804) (171) (899) (1,070)
Long-term debt ...................... 262 (125) 137 1,199 (229) 970 393 (119) 274
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ...... 1,003 (3,260) (2,257) 2,895 (6,584) (3,689) 1,076 (2,280) (1,204)
------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income
(fully tax-equivalent basis) $ 1,572 $(1,208) 363 $ 2,578 $ (617) 1,962 $ 1,887 $ (763) 1,123
======= ======= ======= ======= ======= =======
Tax equivalent adjustment (1) ......... 39 (161) 120
------- ------- -------
Change in net interest income $ 402 $ 1,801 $ 1,243
======= ======= =======
(1) The tax equivalent adjustment is based on a marginal income tax rate of
40% for the period in 2002 after investments were transferred to the
Delaware subsidiary and at 34% for all other periods.
14
Allowance for Loan Loss and Asset Quality
-----------------------------------------
The following table presents activity in the allowance for loan losses during
the years indicated. The Company's policy is to charge off loans when, in
Management's opinion, the loan is deemed uncollectible, although concerted
efforts are made to maximize future recoveries.
Analysis of Allowance for Loan Losses
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Balance at beginning of year .................... $ 4,574 $ 4,198 $ 3,873 $ 3,343 $ 3,562
Loans charged off
- -----------------
Commercial and industrial ..................... (1,091) (535) (374) (87) (522)
Real estate ................................... (2,391) (849) (191) (56) (143)
Installment ................................... (172) (158) (255) (152) (195)
--------- --------- --------- --------- ---------
Total charge-offs ..................... (3,654) (1,542) (820) (295) (860)
--------- --------- --------- --------- ---------
Charge-offs recovered
- ---------------------
Commercial and industrial ..................... 47 14 39 46 18
Real estate ................................... 63 103 9 14 10
Installment ................................... 69 39 47 45 28
--------- --------- --------- --------- ---------
Total recoveries ...................... 179 156 95 105 56
--------- --------- --------- --------- ---------
Net loans charged off ........................... (3,475) (1,386) (725) (190) (804)
Current year provision .......................... 3,920 1,762 1,050 720 585
--------- --------- --------- --------- ---------
Balance at end of year .......................... $ 5,019 $ 4,574 $ 4,198 $ 3,873 $ 3,343
========= ========= ========= ========= =========
Loans at year end (excluding loans held for sale) $ 422,292 $ 383,898 $ 363,768 $ 295,965 $ 273,471
Ratio of allowance to loans (excluding loans held
for sale) at period end .................... 1.19% 1.19% 1.15% 1.31% 1.22%
Average loans ................................... $ 411,762 $ 381,126 $ 327,125 $ 287,485 $ 254,397
Ratio of net loans charged off
to average loans .............................. 0.84% 0.36% 0.22% 0.07% 0.32%
The allocation of the allowance for loan losses along with the percentage of
each loan type to total loans outstanding is illustrated in the following table.
The Company regards the allowance as a general allowance which is available to
absorb losses from all loans. The allocation of the allowance as shown in this
table should neither be interpreted as an indication of future charge-offs, nor
as an indication that charge-offs in future periods will occur in these amounts.
15
Allocation of the Allowance for Loan Losses
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Balance at December 31:
Commercial and industrial ................. $1,273 19.56 % $1,237 19.84 % $1,430 19.83 %
Real Estate ............................... 2,690 75.65 2,304 74.43 1,941 74.13
Installment ............................... 418 4.79 446 5.73 358 6.04
Unallocated ............................... 638 N/A 587 N/A 469 N/A
------ ------ ------ ------ ------ ------
Total allowance for loan losses ...... $5,019 100.00 % $4,574 100.00 % $4,198 100.00 %
====== ====== ====== ====== ====== ======
2000 1999
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Balance at December 31:
Commercial and industrial ................. $1,022 22.53 % $ 804 21.53 %
Real Estate ............................... 2,327 68.35 1,927 68.78
Installment ............................... 405 9.12 325 9.69
Unallocated ............................... 119 N/A 287 N/A
------ ------ ------ ------
Total allowance for loan losses ...... $3,873 100.00 % $3,343 100.00 %
====== ====== ====== ======
Nonperforming assets and their relative percentages to loan balances are
presented in the table on the following page. The level of nonperforming loans
and leases is an important element in assessing asset quality and the relevant
risk in the credit portfolio. Nonperforming loans include nonaccrual loans,
restructured loans and loans delinquent 90 days or more and still accruing.
Loans are evaluated for nonaccrual status when payments are past due over 90
days. Current year interest previously recorded but not deemed collectible is
reversed and charged against current income. Interest income on these loans is
then recognized when collected. Loans significantly past due, not well secured
and in the process of collection are generally placed on nonaccrual status.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Another element associated with asset quality is other real estate owned (OREO),
which represents properties acquired by the Company through loan defaults by
customers.
16
Nonperforming Assets
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
December 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Principal balance
- -----------------
Nonaccrual .................................. $5,686 $3,612 $ 779 $ 332 $ 389
Restructured ................................ 502 445 373 416 446
90 days or more past due and still accruing . 173 588 1,637 2,289 849
------ ------ ------ ------ ------
Total nonperforming loans ......... $6,361 $4,645 $2,789 $3,037 $1,684
====== ====== ====== ====== ======
Nonperforming loans as a percent of total
loans (including loans held for sale) ... 1.50% 1.19% 0.75% 1.02% 0.61%
Other real estate owned (OREO) .............. $ 534 $ 110 $ 505 $ 362 $ 89
OREO as a percent of total loans (including
loans held for sale) .................... 0.13% 0.03% 0.14% 0.12% 0.03%
Allowance as a percent of nonperforming loans 78.90% 98.47% 150.52% 127.53% 198.52%
Interest income of $103,000 for the year ended December 31, 2003, was recognized
on the nonaccruing and restructured loans listed in the table above, whereas,
interest income of $336,000 would have been recognized under their original
terms.
Potential Problem Loans
In addition to loans classified for regulatory purposes, management also
designates certain loans for internal monitoring purposes in a watch category.
Loans may be placed on management's watch list as a result of delinquent status,
concern about the borrower's financial condition, or the value of the collateral
securing the loan, substandard classification during regulatory examinations, or
simply as a result of management's desire to monitor more closely a borrower's
financial condition and performance. Watch category loans may include loans with
loss potential that are still performing and accruing interest and may be
current under the terms of the loan agreements; however, management may have a
significant degree of concern about the borrowers' ability to continue to
perform according to the terms of the loans. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing these loans. Also, watch category loans may include credits
which, although adequately secured and performing, have past delinquency
problems or where unfavorable financial trends are exhibited by borrowers.
All watch list loans are subject to additional scrutiny and monitoring. The
Company's philosophy encourages loan officers to identify borrowers that should
be monitored in this fashion and believes this process ultimately results in the
identification of problem loans in a more timely fashion.
Management has identified $8.9 million and $14.0 million of loans on its watch
list which were not included in impaired or nonperforming loans at December 31,
2003 and 2002, respectively. The majority of the year-over-year decrease is a
result of the following items. At December 31, 2002, loans totaling $2.5 million
to vendors and other parties related to the aforementioned real estate developer
who declared bankruptcy were included on the watch list but were not yet
considered to be impaired or nonperforming, while at December 31, 2003, these
loans were nonperforming. Also one large loan that was on the watch list at
December 31, 2002 paid off during 2003 and another large loan on the watch
17
list at December 31, 2002 is now current and is no longer classified.
Noninterest Income and Expense
------------------------------
A comparative table and complete discussion of noninterest income and expense is
contained in the 2003 Annual Report to Shareholders - Managements Discussion and
Analysis on pages 23 to 25 under the caption "Other Income and Expense."
Financial Condition
-------------------
Securities
----------
Held-to-maturity securities are those which the Company has both the positive
intent and the ability to hold to maturity. They are reported at amortized cost.
Available-for-sale securities are those which the Company may decide to sell if
needed for liquidity, asset/liability management, or other reasons.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses included in other comprehensive income, net of tax.
Trading securities consist of investments in various mutual funds held in
grantor trusts formed by the Company related to the Monroe Bancorp Directors'
Deferred Compensation Plan. The Company's obligations under the deferred
compensation plan change in concert with the performance of the investments.
The tables on the following page summarize the carrying values of securities
from December 31, 2001 through December 31, 2003. The maturity distribution of
securities at December 31, 2003 is summarized by classification. Yields on
tax-exempt securities are adjusted to a tax equivalent basis using a marginal
federal tax rate of 40 percent after the securities were transferred to the
Delaware subsidiary in 2002 and 34 percent for all other periods.
18
Securities
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Available for sale
- ------------------
U.S. Treasury & government agencies $ 48,471 $ 26,672 $ 16,110
States and political subdivisions . 4,998 3,489 1,475
Mortgage-backed & asset-backed .... 9,600 9,283
Equity securities ................. 3,303 3,589 236
-------- -------- --------
Total available for sale .... 66,372 43,033 17,821
Held to Maturity
- ----------------
U.S. Treasury & government agencies 22,617 35,643 39,172
States and political subdivisions . 17,170 22,269 28,375
Mortgage-backed & asset-backed .... 10 17 22
-------- -------- --------
Total held to maturity ...... 39,797 57,929 67,569
Trading securities
- ------------------
Mutual funds ..................... 3,329 2,817 3,060
-------- -------- --------
Total trading securities .... 3,329 2,817 3,060
-------- -------- --------
Total Securities ........ $109,498 $103,779 $ 88,450
======== ======== ========
Securities Maturity Schedule at December 31, 2003
- -------------------------------------------------
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
---------------- ---------------- ---------------- ---------------- ----------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Available for sale
- ------------------
U.S. Treasury & government agencies $ 9,671 2.86% $38,800 3.06% $ -- $ -- $ 48,471 3.02%
State and municipal ............... 983 3.06% 4,015 2.99% -- -- 4,998 3.00%
Mortgage-backed & asset-backed (1) 2,909 2.86% 5,638 4.35% 1,053 3.21% -- 9,600 4.17%
Equity securities (2) ............. 3,303 1.16% -- -- -- 3,303 1.16%
------- ------- ------- ------- --------
Total available for sale .... $16,866 $48,453 $ 1,053 $ -- $ 66,372 3.09%
======= ======= ======= ======= ========
Held to Maturity
- ----------------
U.S. Treasury & government agencies $15,564 6.06% $ 7,052 4.49% $ -- $ -- $ 22,616 5.57%
State and municipal ............... 10,674 5.82% 6,496 5.50% -- -- 17,170 5.70%
Mortgage-backed & asset-backed (1) 2 7.65% 9 6.37% -- -- 11 6.58%
------- ------- ------- ------- --------
Total held to maturity ...... $26,240 $13,557 $ -- $ -- $ 39,797 5.63%
======= ======= ======= ======= ========
Trading Securities
- ------------------
Mutual funds (2) ................. $ 3,329 1.81% $ -- $ -- $ -- $ 3,329 1.81%
------- ------- ------- ------- --------
Total trading securities .... $ 3,329 $ -- $ -- $ -- $ 3,329 1.81%
======= ======= ======= ======= ========
(1) Mortgage-backed and asset-backed securities maturities are based on average
life at the projected prepayment speed.
(2) Equity securities and mutual funds have no maturities but may be sold at any
time
19
The majority of the securities portfolio is comprised of U.S. Treasury and
government agency securities, and state and municipal securities (tax-exempt).
Trading securities consist solely of mutual funds held in a grantor trust,
established for the Monroe Bancorp Directors' Deferred Compensation Plan.
The securities portfolio carries varying degrees of risk. Investments in U.S.
Treasury and federal agency securities have little or no credit risk.
Obligations of states and political subdivisions and corporate securities are
the areas of highest potential credit exposure in the portfolio. This risk is
minimized through the purchase of high quality investments. The Company's
investment policy requires that general obligations of other states and
political subdivisions and corporate bonds must have a rating of A or better
when purchased. In-state general obligation municipals must be rated Baa or
better. In-state revenue municipals must be rated A or better and out-of-state
revenue municipals must be rated AA or better at the time of purchase. The vast
majority of these investments maintained their original ratings at December 31,
2003. No securities of an individual issuer, excluding the U.S. Government and
its agencies, exceed 10 percent of the Company's shareholders' equity as of
December 31, 2003. The Company does not use off-balance sheet derivative
financial instruments. As of December 31, 2003 and December 31, 2002, the
securities portfolio held no structured notes.
Loans
-----
The loan portfolio constitutes the major earning asset of the Company, and
offers the best alternative for maximizing interest spread above the cost of
funds. The Company's loan personnel have the authority to extend credit under
guidelines established and approved by the Board of Directors. Any credit which
exceeds the authority of the loan officer, but is under $2 million is forwarded
to the Company's Officers' Loan Committee for approval. This committee is
comprised of the President/CEO, the Senior Vice President of Loans and several
experienced loan officers. Individual credits exceeding $2 million are forwarded
to the Board of Directors' loan committee for approval. This loan committee is
comprised of seven board members, one of whom is the President/CEO. The loan
committee not only acts as an approval body to ensure consistent application of
the Company's loan policy, but also provides valuable insight through
communication and pooling of knowledge, judgment, and experience of its members.
The Company's primary lending area generally includes Monroe, Lawrence, Jackson,
Hendricks and contiguous counties in South Central Indiana. The Company extends
out-of-area credit only to borrowers who are considered to be low risk, and
then, only on a limited basis.
20
The following table reflects outstanding balances by loan type.
Loans Outstanding
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
At December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial and industrial $ 81,989 $ 76,301 $ 72,640 $ 66,233 $ 58,177
Agricultural ............ 1,028 1,322 1,084 639 784
Real estate:
One-to-four-family ... 105,455 111,297 119,709 86,512 83,367
Multi-family ......... 43,682 44,640 41,941 37,656 34,078
Commercial ........... 108,871 88,661 71,057 42,424 40,782
Construction ......... 40,560 27,471 28,013 24,277 20,787
Home equity .......... 21,044 17,927 13,637 10,554 7,938
Farm land ............ 1,538 1,270 1,256 1,388 1,454
Installment ............. 20,344 22,426 22,463 27,076 26,527
-------- -------- -------- -------- --------
Total loans ..... $424,511 $391,315 $371,800 $296,759 $273,894
======== ======== ======== ======== ========
The following table presents the composition of the loan portfolio expressed as
a percent of total loans.
At December 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial and industrial. 19.31 % 19.50 % 19.54 % 22.32 % 21.24 %
Agricultural.............. 0.24 0.34 0.29 0.22 0.28
Real estate:
One-to-four-family..... 24.84 28.44 32.20 29.14 30.44
Multi-family........... 10.29 11.41 11.28 12.69 12.44
Commercial............. 25.65 22.66 19.11 14.30 14.89
Construction........... 9.55 7.02 7.53 8.18 7.59
Home equity............ 4.96 4.58 3.67 3.56 2.90
Farm land.............. 0.36 0.32 0.34 0.47 0.53
Installment............... 4.79 5.73 6.04 9.12 9.69
-------- -------- -------- -------- --------
Total............ 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
======== ======== ======== ======== ========
21
A discussion of each material line item set forth in the preceding tables
follows:
o Commercial and Industrial Lending
At December 31 2003, commercial and industrial loans totaled $82.0 million, or
19.3 percent of the total loan portfolio. This category is comprised of business
loans and business lines of credit. Approximately 75 percent of commercial and
industrial loans are secured by business assets; furniture and fixtures,
inventory, accounts receivable or automobiles. Approximately 25 percent of these
loans are unsecured, however, approximately 98 percent of these unsecured loans
carry personal guarantees. At December 31, 2003, 16.2 percent of commercial and
industrial loans were fixed rate and 83.8 percent were variable rate. Adjustable
rate loans carry a maximum maturity of eight years. Fixed-rate loans carry a
maximum maturity of five years. Lines of credit are normally written for a
one-year term or less. Interest rates on variable rate loans are indexed to
prime, and vary as the prime rate changes. These loans are made to a wide
variety of businesses in our primary lending area, and there were no
concentrations in any one industry.
o One-to-four-family Residential Real Estate Lending
At December 31, 2003, one-to-four-family mortgages totaled $105.5 million, or
24.8 percent of the total loan portfolio. Indiana University's presence in the
community provides a strong rental market, accordingly, a material amount of
these loans were for other than single-family residences. At December 31, 2003,
4.2 percent of these loans were fixed rate and 95.8 percent were adjustable
rate. Adjustable-rate mortgages (or ARMs) are offered with either a one-year,
three-year, or five-year term to the initial repricing date. After the initial
period, the interest rate for each ARM loan adjusts annually. The Company uses
an index tied to the one-year U.S. Treasury bill rate to reprice our ARM loans.
These loans have a maximum maturity of 30 years. It is the Company's practice to
sell essentially all of the fixed rate owner-occupied residential mortgages it
originates on the secondary market. The Company obtains a commitment from the
purchaser to buy these loans before they are closed, and does not retain
servicing. Adjustable rate loans generally pose different credit risks than
fixed rate loans, primarily because as interest rates rise, the borrower's
payment rises, increasing the potential for default. The payment history for
these ARM loans has not varied significantly from that of fixed rate loans.
o Multi-family and Commercial Real Estate Lending
These loans are secured primarily by multi-family (five or more) dwellings,
small retail establishments, not-for-profit organizations' buildings and small
office buildings located in the Company's primary lending area. At December 31,
2003, commercial and multi-family loans totaled $152.6 million, or 35.9 percent
of the total loan portfolio. At December 31, 2003, 6.5 percent were fixed rate
while 93.5 percent were adjustable rate. These loans generally require monthly
payments and have maximum maturities of 25 years. The majority of the fixed-rate
loans have maximum maturities of five years. The Company occasionally offers
longer term fixed-rate commercial real estate loans, however, these are match
funded with FHLB advances. The Company offers one-year, three-year and five-year
multi-family and commercial ARMs. These loans are indexed to prime. Loans
secured by multi-family and commercial real estate are underwritten based on the
income-producing potential of the property and the financial strength of the
borrower. In order to monitor the adequacy of cash flows on income-producing
properties, the borrower is required to provide periodic financial information.
Because payments on loans secured by multi-family and commercial real estate are
often dependent on the successful management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy.
22
o Construction and Vacant Land Lending
At December 31, 2003, construction and vacant land loans totaled $40.6 million,
representing 9.6 percent of the total loan portfolio. The Company originates
construction loans on commercial and residential properties located in its
primary lending area. At December 31, 2003, 12.4 percent of these loans were
fixed rate and 87.6 percent were variable rate. The vast majority of these loans
have maturity dates of less than one year. The interest rates on these loans are
indexed to prime. During the construction phase, the borrower generally pays
interest only on a monthly basis. Loans to individuals for the construction of
their residences may either be short-term construction financing or a
construction/ permanent loan which automatically converts to a long-term
mortgage consistent with our one-to-four family loan products. These loans
involve many of the same risks inherent with commercial and multi-family loans
discussed above and tend to be more sensitive to general economic conditions
than many other types of loans.
o Home Equity Lending
At December 31, 2003, home equity loans totaled $21.0 million, representing 5.0
percent of the total loan portfolio. All home equity loans are adjustable rate
loans, and adjust after one year. Interest rates on these loans are tied to
prime and increase as the loan-to-value ratio increases. These loans may be
originated in amounts, together with the existing first mortgage, of up to 100
percent of the value of the property securing the loan. The maximum term of
these loans is 30 years.
o Installment Lending
This category is comprised of new and used automobile loans, mobile home loans,
secured and unsecured personal loans, and personal lines of credit. At December
31, 2003, the balance of this account was $20.3 million, representing 4.8
percent of total loans. Installment loans, at December 31, 2003, were divided
between the following categories: automobile loans 48.9 percent, secured
personal loans 15.2 percent, lines of credit 12.3 percent, unsecured personal
loans 17.1 percent, and mobile home loans 6.5 percent. The indirect lending
function comprises approximately 25 percent of all personal loans. We originate
auto loans, boat and recreational vehicle loans on both a direct and an indirect
basis. We generally buy indirect auto loans on a rate basis, paying the dealer a
cash payment for loans with an interest rate which is sometimes in excess of the
rate we require. Any premium is amortized over the remaining life of the loan.
Any prepayments are charged to future amounts owed that dealer.
We underwrite indirect auto loans using the Fair-Isaacs credit scoring system.
We process the loan application using the same procedures as if we were making
the loan directly to the customer, hence, we accept only the more qualified
buyers based on our scoring. Upon purchasing the contract from the dealer, we
assume all service and liability for the loan.
23
o Loan-to-value Limits
The Company adheres to the FDIC guidelines for loan-to-value limits. These
guidelines are as follows:
Loan Category Loan-to-Value Limit
- ------------- -------------------
Real Estate:
Raw land 65%
Land development 75%
Construction:
Commercial, multi-family and non-residential 80%
One-to-four-family residential 85%
Improved property 85%
Owner-occupied one-to-four-family 90%
Home equity 100%
Non-owner occupied 85%
Commercial and Industrial (secured by):
Accounts receivable 60 days or less past due 80%
Inventory - raw materials 50%
Inventory - finished goods 80%
Equipment 100%
Installment (automobile, RV, boat, etc.) 100%
Management believes the degree of risk assumed on any loan is commensurate with
the interest rate assessed, and is thereby able to receive a higher rate of
return on commercial and real estate construction loans as compared to
residential real estate loans. Although these loan types usually possess
increased elements of risk, the Company's lending practices, policies, and
procedures that are in place are intended to mitigate certain risks associated
with such loans. The Company's commercial and industrial loans are made to local
businesses operating in diverse industries and the portfolio contains no
specific industry concentrations, which mitigates certain risks. The real estate
loan portfolio is strengthened by a stable local economy and by the strong
rental market provided by Indiana University. Adjustable-rate loans generally
pose different credit risks than fixed-rate loans, primarily because as interest
rates rise, the borrower's payment rises, increasing the potential for default.
24
The following table reflects the maturity schedule of loans. Also indicated are
fixed and variable rate loans maturing after one year.
Loan Liquidity
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
Loan Maturities at December 31, 2003
-----------------------------------------
1 Year 1 - 5 Over 5
and Less Years Years Total
-------- -------- -------- --------
Commercial and industrial .......... $ 40,564 $ 31,483 $ 10,970 $ 83,017
Real estate:
One-to-four-family ............ 4,144 2,453 98,858 105,455
Multi-family .................. -- 2,066 41,616 43,682
Commercial .................... 6,258 5,708 96,905 108,871
Construction .................. 28,588 7,421 4,551 40,560
Home equity ................... -- 96 20,948 21,044
Farm land ..................... 11 79 1,448 1,538
Installment ........................ 5,232 11,862 3,250 20,344
-------- -------- -------- --------
Total loans .............. $ 84,797 $ 61,168 $278,546 $424,511
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates ........... $ 12,171 $ 34,442
Floating interest rates ........ 48,997 244,104
-------- --------
$ 61,168 $278,546
======== ========
25
Deposits
--------
The Company offers a wide variety of deposit products and services to individual
and commercial customers, such as noninterest-bearing and interest-bearing
checking accounts, savings accounts, money market accounts, and certificates of
deposit. The deposit base provides the major funding source for earning assets.
The following table shows the average amount of deposits and average rates of
interest paid thereon for the years indicated.
Deposit Information
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Noninterest bearing .......... $ 66,249 $ 59,079 $ 54,785
Interest bearing demand ...... 155,386 0.66% 133,553 1.22% 115,980 2.52%
Savings deposits ............. 26,011 0.57% 20,328 1.03% 17,847 1.83%
Time ......................... 177,732 3.02% 179,829 3.87% 165,573 5.67%
-------- -------- --------
Total average deposits $425,378 1.82% $392,789 2.64% $354,185 4.22%
======== ======== ========
Certificates of deposit and other time deposits of $100,000 or more mature as
follows:
at December 31,
-------------------------------------------
CD's over $100,000 2003 2002 2001
-------- -------- --------
3 months or less..... $ 14,030 $ 15,390 $ 16,391
3 through 6 months... 8,499 14,421 10,676
6 through 12 months.. 14,232 15,464 18,615
Over 12 months....... 26,143 24,735 14,498
-------- -------- --------
$ 62,904 $ 70,010 $ 60,180
======== ======== ========
26
Borrowings
----------
A detailed schedule of short-term borrowings follows:
Short-term Borrowings
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
December 31,
---------------------------
2003 2002 2001
------- ------- -------
Repurchase agreements outstanding ............................. $48,507 $39,158 $36,312
Federal funds purchased ....................................... 8,900 10,050 21,900
------- ------- -------
Total short-term borrowings ................................... $57,407 $49,208 $58,212
======= ======= =======
Average federal funds purchased during the year ............... $ 1,483 $ 2,252 $ 2,560
Average repurchase agreements during the year ................. $42,835 $39,247 $35,504
Maximum month-end repurchase agreements ....................... $48,507 $44,392 $37,313
YTD Average interest rate on repurchase agreements ........... 0.60% 0.96% 3.17%
Average interest rate at end of period on repurchase agreements 0.49% 0.74% 1.10%
Repurchase agreements are borrowings, the majority of which mature daily, and
are secured by U.S. Treasury and government agency obligations.
The Bank became a member of the Federal Home Loan Bank of Indianapolis ("FHLB")
in 1997 and has the authority of the Company's Board of Directors to borrow up
to $57 million from the FHLB. All current and any future borrowings are secured
by a blanket collateral pledge of the Bank's one-to-four family residential
loans and multi-family loans. Other borrowings, consisting of FHLB advances and
loans sold under repurchase agreements, were $44.5 million and $36.0 million, as
of December 31, 2003 and 2002, respectively. The FHLB borrowings accounted for
the vast majority of other borrowings. The Company had a net increase in
borrowings from the FHLB of $8.9 million during 2003, because FHLB advances were
used to help fund the growth of certain commercial loans that were made with
rates fixed for five years and reprice annually thereafter. The Company expects
to primarily use deposit growth in the future as a source of loan funding and
for general liquidity, but may continue to supplement this with additional FHLB
advances.
27
Liquidity
---------
A table detailing the maturity and repricing of the Company's assets accompanied
by a discussion of the Company's interest rate sensitivity and liquidity is
presented in the 2003 Annual Report to Shareholders - Management's Discussion
and Analysis on pages 19 to 21 under the caption "Interest Sensitivity and
Disclosures about Market Risk" and on pages 22 to 23 under the caption
"Liquidity."
The following table details the main components of cash flows for the years
ended December 31, 2003 and 2002.
Funding Uses and Sources
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
Year Ended December 31, 2003 Year Ended December 31, 2002
----------------------------- ------------------------------
Increase/(Decrease) Increase/(Decrease)
Average ------------------- Average -------------------
Balance Amount Percent Balance Amount Percent
-------- -------- ------- -------- -------- -------
Funding Uses
- ------------
Loans, net of unearned income ......... $411,762 $ 30,636 8.04 % $381,126 $ 54,001 16.51 %
Taxable securities .................... 81,752 9,971 13.89 71,781 10,745 17.60
Tax-exempt securities ................. 23,490 (2,703) (10.32) 26,193 (4,643) (15.06)
Federal funds sold .................... 8,334 2,212 36.13 6,122 4,050 195.46
-------- -------- -------- --------
Total uses .................. $525,338 $ 40,116 8.27 $485,222 $ 64,153 15.24
======== ======== ======== ========
Funding Sources
- ---------------
Noninterest bearing deposits .......... $ 66,249 $ 7,170 12.14 % $ 59,079 $ 4,294 7.84 %
Interest bearing demand, savings & time 359,129 25,419 7.62 333,710 34,310 11.46
Short-term borrowings ................. 44,318 2,819 6.79 41,499 3,434 9.02
Other borrowings ...................... 42,724 5,168 13.76 37,556 21,194 129.53
-------- -------- -------- --------
Total sources ............... $512,420 $ 40,576 8.60 $471,844 $ 63,232 15.47
======== ======== ======== ========
Capital Adequacy
----------------
Management believes the Company and Bank met all the capital requirements as of
December 31, 2003 and 2002, and the Bank was well-capitalized under the
guidelines established by the banking regulators. To be well-capitalized, the
Bank must maintain the prompt corrective action capital guidelines described in
the "Capital Regulations" subsection of the "Regulation and Supervision" portion
of this document. Consolidated capital amounts and ratios are presented in the
following table. Bank capital levels are substantially similar.
At December 31, 2003 management was not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on the Company's
consolidated liquidity, capital resources or operations.
28
Capital
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
At December 31,
---------------------
2003 2002
--------- ---------
Tier 1 capital
Shareholders' equity .............................. $ 45,375 $ 44,263
Less: Intangibles ................................. -- --
Add / deduct: Unrealized (gain) loss on securities (406) (692)
--------- ---------
Total Tier 1 capital ......................... $ 44,969 $ 43,571
= ========= =========
Total risk-based capital
Tier 1 capital .................................... $ 44,969 $ 43,571
Tier 2 capital .................................... 5,019 4,574
--------- ---------
Total risk-based capital ..................... $ 49,988 $ 48,145
========= =========
Risk weighted assets ................................... $ 413,624 $ 371,015
Quarterly average assets ............................... $ 574,811 $ 534,868
Risk-based ratios:
Tier 1............................................. 10.87% 11.74%
Total risk-based capital........................... 12.09% 12.98%
Leverage ratios.................................... 7.82% 8.15%
29
ITEM 2. PROPERTIES.
The Company, through the Bank, currently operates its business from its main
office in downtown Bloomington, Indiana and from fifteen additional branch
locations in Monroe, Jackson, Hendricks and Lawrence Counties in Indiana. The
Company also has an operations center. Information about those locations is set
forth in the table on the following page.
30
- -------------------------------------------------------------------------------
NAME OF OFFICE LOCATION/TELEPHONE NUMBER OWNED/LEASED
- -------------------------------------------------------------------------------
Downtown Main Office 210 East Kirkwood Avenue Owned
Bloomington, IN 47408
(812) 336-0201
- -------------------------------------------------------------------------------
Ellettsville Banking Center 4616 West Richland Plaza Owned
Bloomington, IN 47404
(812) 876-6044
- -------------------------------------------------------------------------------
Highland Village Banking Center 4191 West Third Street Owned
Bloomington, IN 47403
(812) 331-3501
- -------------------------------------------------------------------------------
Kinser Crossing Banking Center 1825 North Kinser Pike Leased
Bloomington, IN 47404
(812) 331-3518
- -------------------------------------------------------------------------------
Kirkwood Auto Branch 306 East Kirkwood Avenue Owned
Bloomington, IN 47408
(812) 331-3510
- -------------------------------------------------------------------------------
Loan Center 111 South Lincoln Street Owned
Bloomington, IN 47408
(812) 331-3555
- -------------------------------------------------------------------------------
Mall Road Banking Center 2801 Buick-Cadillac Blvd. Owned
Bloomington, IN 47401
(812) 331-3507
- -------------------------------------------------------------------------------
Walnut Park Banking Center 2490 South Walnut Street Owned
Bloomington, IN 47403
(812) 331-3514
- -------------------------------------------------------------------------------
Brownstown Banking Center 1051 West Spring Street Owned
Brownstown, IN 47220
(812) 358-3171
- -------------------------------------------------------------------------------
Avon Banking Center 7517 Beechwood Centre Road, Suite 300 Leased
Avon, IN 46123
(317) 272-7820
- -------------------------------------------------------------------------------
Brownsburg Banking Center 65 Garner Road, Suite 400 Leased
Brownsburg, IN 46112
(317) 837-5201
- -------------------------------------------------------------------------------
Plainfield Banking Center 2059 Hadley Road Leased
Plainfield, IN 46168
(317) 837-520
- -------------------------------------------------------------------------------
Bedford Banking Center Limestone Business Center, 2119 West Leased
16th Street
Bedford, IN 47421
(812) 275-7800
- -------------------------------------------------------------------------------
Bell Trace Branch 800 Bell Trace Circle Leased
Bloomington, IN 47408
(812) 331-3575
- -------------------------------------------------------------------------------
Meadowood Branch 2455 Tamarack Trail Leased
Bloomington, IN 47408
(812) 353-7722
- -------------------------------------------------------------------------------
Redbud Hills Branch 3211 E. Moores Pike Leased
Bloomington, IN 47401
(812) 353-7720
- -------------------------------------------------------------------------------
Operations Center 5001 North State Road 37-Business Leased
Bloomington, IN 47404
- -------------------------------------------------------------------------------
31
The Company owns its main office. It owns seven of its branch locations and
leases space for eight branches. The Company also leases its Operations Center.
The main office contains approximately 18,656 square feet of space, and is
occupied solely by the Company. The Company's data processing center,
bookkeeping and deposit operations departments are located at the Operations
Center.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than routine litigation
incidental to the business of the Company or the Bank, to which the Company or
the Bank is a party or of which any of its property is subject. Further, there
is no material legal proceeding in which any director, officer, principal
shareholder, or affiliate of the Company, or any associate of such director,
officer or principal shareholder, is a party, or has a material interest,
adverse to the Company.
None of the routine legal proceedings, individually or in the aggregate, in
which the Company or the Bank are involved are expected to have a material
adverse impact on the financial position or the results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2003 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "MROE." The following table sets forth, for the periods indicated, the
high and low sales prices for the Company's common stock as reported by the
Nasdaq National Market:
Price Per Share
Quarter High Low Dividends Declared
- -----------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
- -----------------------------------------------------------------------------
First Quarter $ 14.18 $ 12.25 $ 13.11 $ 10.72 $ .12 $ .12
Second Quarter 14.07 14.57 13.00 12.25 .12 .12
Third Quarter 14.50 14.00 13.46 13.23 .12 .12
Fourth Quarter 14.25 13.91 13.81 12.00 .13 .12
In each quarter during 2002 and 2003, the Company declared and paid the cash
dividends listed in the above table for a per share total of $ .49 and $ .48 in
2003 and 2002, respectively. The Company has paid a regular cash dividend for
over twenty-three consecutive years. The Company currently expects that
comparable cash dividends will continue to be paid in the future.
32
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net profits (as defined) for the current year plus
those for the previous two years. The Bank normally restricts dividends to a
lesser amount because of the need to maintain an adequate capital structure.
Total shareholders' equity of the Bank at December 31, 2003 was $43,912,000 of
which $40,516,000 was restricted from dividend distribution to the Company. The
Company does not anticipate that this regulatory limitation will affect the
future payment of dividends.
As of March 8, 2004, there were approximately 313 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to pages
12 through 13 of the Company's 2003 Annual Report to Shareholders under the
caption "Five-Year Financial Summary."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to pages
14 through 28 of the Company's 2003 Annual Report to Shareholders under the
caption "Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The information required under this item is incorporated by reference to pages
19 through 21 of the Company's 2003 Annual Report to Shareholders - Management's
Discussion and Analysis under the caption "Interest Sensitivity and Disclosures
about Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are
incorporated herein by reference to pages 30 through 49 of the Company's 2003
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The Company's
principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d 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-K, are
effective.
33
(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. The Company's management,
including its principal executive officer and principal financial officer,
does not expect that the Company'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 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 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 10
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2003 fiscal year, which Proxy
Statement will contain such information. The information required by Item 10 is
incorporated herein by reference to such Proxy Statement.
34
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 11
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2003 fiscal year, which Proxy
Statement will contain such information. The information required by Item 11 is
incorporated herein by reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
- ----------------------------------------------------------------------------------------------------------
Number of Number of securities remaining
securities to be available for future issuance
Director and Management issued upon Weighted-average under equity compensation
Incentive Stock Option exercise of exercise price of plans-excluding securities
Plans outstanding options outstanding options reflected in the first column
- ---------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by shareholders 135,000 $ 13.02 445,000
- ---------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 0 0 0
shareholders
- ----------------------------------------------------------------------------------------------------------
Totals 135,000 $ 13.02 445,000
- ----------------------------------------------------------------------------------------------------------
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 12
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2003 fiscal year, which Proxy
Statement will contain such information. The information required by Item 12,
with the exception of the table presented above, is incorporated herein by
reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 13
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2003 fiscal year, which Proxy
Statement will contain such information. The information required by Item 13 is
incorporated herein by reference to such Proxy Statement.
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 14
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2003 fiscal year, which Proxy
Statement will contain such information. The information required by Item 14 is
incorporated herein by reference to such Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
Exhibit 13
Page Number
-----------
(a) 1. Financial Statements:
Independent accountants' report............................ 29
Consolidated balance sheets at
December 31, 2003 and 2002............................. 30
Consolidated statements of income, years ended
December 31, 2003, 2002 and 2001........................ 31
Consolidated statements of shareholders equity,
years ended December 31, 2003, 2002 and 2001............ 32
Consolidated statements of cash flows, years ended
December 31, 2003, 2002 and 2001........................ 33
Notes to consolidated financial statements.................. 34
(a) 2. Financial statement schedules:
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or related notes.
36
(a) 3. Exhibits:
Exhibit No: Description of Exhibit:
- ------------ ----------------------
3 (i) Monroe Bancorp Articles of Incorporation are
incorporated by reference to registrant's Form 10
filed November 14, 2001.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference
to registrant's Form 10 filed November 14, 2001.
10 (i)* 1999 Directors' Stock Option Plan of Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (ii)* 1999 Management Stock Option Plan of Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (iii)* Deferred Compensation Trust for Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (iv)* Monroe County Bank Agreement for Supplemental Death
or Retirement Benefits is incorporated by reference
to registrant's Form 10 filed November 14, 2001.
10 (v)* Monroe Bancorp Thrift Plan 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.
10 (vii)* Third Amendment to the Monroe Bancorp Employee Stock
Ownership Plan is filed as part of this Form 10-K.
10(viii)* Monroe Bancorp Directors' Deferred Compensation Plan
as Amended and Restated Effective January 1, 1999 and
First and Second Amendments are filed as part of this
Form 10-K.
10(ix)* Monroe Bancorp Executives' Deferred Compensation Plan
as Amended and Restated Effective January 1, 1999 and
First, Second and Third Amendments are filed as part
of this Form 10-K.
13 2003 Annual Report to Shareholders (except for the
pages and information expressly incorporated by
reference in this Form 10-K, the Annual Report to
Shareholders is provided solely for the information
of the Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-K).
21 Subsidiaries of the Registrant.
31(i) Certification for Annual Report on Form 10-K by
Principal Executive Officer.
31(ii) Certification for Annual Report on Form 10-K by
Principal Financial Officer.
37
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.
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K:
Monroe Bancorp filed the following Forms 8-K:
Filed October 21, 2003, to report the release of a summary of third
quarter earnings and a financial summary issued the same day.
38
Pursuant to the requirements of Section 13 or 15(d) 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, on this 25th day of March
2004.
MONROE BANCORP
By: /s/Mark D. Bradford
--------------------------------------------
Mark D. Bradford, President, Chief Executive
Officer, (Principal Executive Officer)
By: /s/ Gordon M. Dyott
--------------------------------------------
Gordon M. Dyott
Executive Vice President, Chief Financial
Officer, (Principal Financial Officer)
39
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title/Capacity
- --------- --------------
Date
- ----
/s/ Mark D. Bradford President, Chief Executive Officer
- -------------------------------- (Principal Executive Officer) and Director
March 25, 2004
Mark D. Bradford
/s/ Gordon M. Dyott Executive Vice President, Chief Financial
- -------------------------------- Officer (Principal Financial Officer)
March 25, 2004
Gordon M. Dyott
/s/ Kathryn E. Burns Vice President, Director of Finance
- -------------------------------- (Principal Accounting Officer)
March 25, 2004
Kathryn E. Burns
/s/ David D. Baer Director, Chairman
- --------------------------------
March 25, 2004
David D. Baer
/s/ Bradford J. Bomba, Jr., M.D. Director
- --------------------------------
March 25, 2004
Bradford J. Bomba, Jr. M.D.
/s/ Steven R. Crider Director
-------------------------------
March 25, 2004
Steven R. Crider
/s/ Timothy D. Ellis Director
- --------------------------------
March 25, 2004
Timothy D. Ellis
/s/ Joyce Claflin Harrell Director
- --------------------------------
March 25, 2004
Joyce Claflin Harrell
/s/ Harry F. McNaught, Jr. Director
- --------------------------------
March 25, 2004
Harry F. McNaught, Jr.
/s/ Paul W. Mobley Director
- --------------------------------
March 25, 2004
Paul W. Mobley
/s/ Richard P. Rechter Director
- --------------------------------
March 25, 2004
Richard P. Rechter
/s/ Charles R. Royal, Jr. Director
- --------------------------------
March 25, 2004
Charles R. Royal, Jr.
40