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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File No. 0-31951
-------
MONROE BANCORP
--------------
(Exact name of registrant as specified in its charter)
Indiana 35-1594017
- ------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
210 East Kirkwood Avenue
Bloomington, IN 47408
---------------------
(Address of principal executive offices)
(Zip Code)
(812) 336-0201
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Outstanding Shares of Common Stock on August 6, 2004: 6,035,110
MONROE BANCORP AND SUBSIDIARY
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets..........................3
Consolidated Condensed Statements of Income - Six Months.......4
Consolidated Condensed Statements of Income - Three Months.....5
Consolidated Condensed Statement of Shareholders' Equity.......6
Consolidated Condensed Statements of Cash Flows................7
Notes to Consolidated Condensed Financial Statements...........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......22
Item 4. Controls and Procedures..........................................24
Part II. Other Information:
Item 1. Legal Proceedings................................................25
Item 2e. Changes In Securities and Use of Proceeds........................25
Item 3. Defaults Upon Senior Securities..................................25
Item 4. Submission of Matters to a Vote of Security Holders..............25
Item 5. Other Information................................................25
Item 6a. Exhibits.........................................................26
Item 6b. Reports on Form 8-K..............................................27
Signatures....................................................................28
Exhibit Index.................................................................29
2
Part I. Financial Information
Item 1. Financial Statements
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share data)
June 30, December 31,
2004 2003
(Unaudited)
--------- ---------
Assets
Cash and due from banks .............................. $ 17,368 $ 29,708
Trading securities, at fair value .................... 3,420 3,329
Investment securities
Available for sale .............................. 84,869 66,372
Held to maturity ................................ 20,681 39,797
--------- ---------
Total investment securities ................ 105,550 106,169
Loans ................................................ 450,482 422,292
Allowance for loan losses ............................ (5,258) (5,019)
--------- ---------
Net loans ....................................... 445,224 417,273
Loans held for sale .................................. 3,493 2,219
Premises and equipment ............................... 11,749 11,683
Federal Home Loan Bank of Indianapolis stock, at cost 2,386 2,331
Other assets ......................................... 18,253 16,551
--------- ---------
Total assets ............................. $ 607,443 $ 589,263
========= =========
Liabilities
Deposits
Noninterest-bearing ............................. $ 70,822 $ 73,579
Interest-bearing ................................ 375,728 363,104
--------- ---------
Total deposits ............................. 446,550 436,683
Borrowings ........................................... 109,399 101,872
Other liabilities .................................... 6,252 5,333
--------- ---------
Total liabilities ........................ 562,201 543,888
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized, 18,000,000 shares
Issued and outstanding - 6,040,340 and 6,095,640
shares, respectively ....................... 137 137
Additional paid-in capital ........................... 1,661 2,618
Retained earnings .................................... 44,347 42,689
Accumulated other comprehensive income (loss) ........ (428) 406
Unearned ESOT shares ................................. (475) (475)
--------- ---------
Total shareholders' equity ............... 45,242 45,375
--------- ---------
Total liabilities and shareholders' equity $ 607,443 $ 589,263
========= =========
See notes to consolidated condensed financial statements.
3
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Six Months Ended
June 30,
2004 2003
------- -------
Interest Income
Loans, including fees ......................................... $12,077 $11,816
Trading securities ............................................ 33 27
Investment securities
Taxable .................................................. 1,525 1,726
Tax exempt ............................................... 344 452
Federal funds sold ............................................ 5 50
------- -------
Total interest income ............................. 13,984 14,071
------- -------
Interest Expense
Deposits ...................................................... 3,006 3,492
Short-term borrowings ......................................... 145 156
Other borrowings .............................................. 962 944
------- -------
Total interest expense ............................ 4,113 4,592
------- -------
Net interest income ............................... 9,871 9,479
Provision for loan losses ..................................... 660 3,110
------- -------
Net interest income after provision for loan losses 9,211 6,369
------- -------
Other Income
Fiduciary activities .......................................... 677 503
Service charges on deposit accounts ........................... 1,468 1,334
Commission income ............................................. 466 463
Securities gains .............................................. 115 166
Unrealized gains on trading securities ........................ 61 191
Net gains on loans sales ...................................... 510 826
Other operating income ........................................ 688 518
------- -------
Total other income ................................ 3,985 4,001
------- -------
Other Expenses
Salaries and employee benefits ................................ 5,087 4,701
Net occupancy and equipment expense ........................... 1,239 1,205
Advertising ................................................... 347 289
Legal fees .................................................... 291 248
Appreciation in directors' and executives'
deferred compensation plans .............................. 64 219
Other operating expense ....................................... 1,421 1,365
------- -------
Total other expenses .............................. 8,449 8,027
------- -------
Income before income tax .......................... 4,747 2,343
Income tax expense ................................ 1,520 533
------- -------
Net income ............................ $ 3,227 $ 1,810
======= =======
Basic and diluted earnings per share .......................... $ 0.53 $ 0.30
See notes to consolidated condensed financial statements.
4
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
2004 2003
------- -------
Interest Income
Loans, including fees ......................................... $ 6,160 $ 5,961
Trading securities ............................................ 15 14
Investment securities
Taxable .................................................. 741 825
Tax exempt ............................................... 162 218
Federal funds sold ............................................ 3 28
------- -------
Total interest income ............................. 7,081 7,046
------- -------
Interest Expense
Deposits ...................................................... 1,536 1,688
Short-term borrowings ......................................... 68 81
Other borrowings .............................................. 478 518
------- -------
Total interest expense ............................ 2,082 2,287
------- -------
Net interest income ............................... 4,999 4,759
------- -------
Provision for loan losses ..................................... 330 2,705
------- -------
Net interest income after provision for loan losses 4,669 2,054
------- -------
Other Income
Fiduciary activities .......................................... 342 230
Service charges on deposit accounts ........................... 761 700
Commission income ............................................. 238 277
Securities gains (losses) ..................................... (17) 171
Unrealized gains (losses) on trading securities ............... (5) 217
Net gains on loans sales ...................................... 318 462
Other operating income ........................................ 297 260
------- -------
Total other income ................................ 1,934 2,317
------- -------
Other Expenses
Salaries and employee benefits ................................ 2,534 2,451
Net occupancy and equipment expense ........................... 613 567
Advertising ................................................... 199 162
Legal fees .................................................... 164 147
Appreciation (depreciation) in directors' and executives'
deferred compensation plans .............................. (10) 238
Other operating expense ....................................... 770 757
------- -------
Total other expenses .............................. 4,270 4,322
------- -------
Income before income tax .......................... 2,333 49
Income tax expense (benefit) ...................... 759 (213)
------- -------
Net income ............................ $ 1,574 $ 262
======= =======
Basic and diluted earnings per share .......................... $ 0.26 $ 0.04
See notes to consolidated condensed financial statements.
5
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended
June 30, 2004
(Unaudited)
(Dollars in thousands)
Unearned
Common Stock Accumulated Employee
------------------- Additional Other Stock
Shares Paid in Comprehensive Retained Comprehensive Ownership
Outstanding Amount Capital Income Earnings Income (Loss) Trust Shares Total
--------------------------------------------------------------------------------------------
Balances January 1, 2004.......... 6,095,640 $ 137 $2,618 $42,689 $ 406 $(475) $45,375
Comprehensive Income:
Net income for the period $3,227 3,227 3,227
Unrealized loss on securities
net of tax benefit of $429
(net of reclassification
adjustment of $44 for
realized gains included (834) (834) (834)
in income).................
ESOT shares earned................ 14 14
Repurchase of stock, at cost...... (70,300) (1,146) (1,146)
Stock options exercised........... 15,000 175 175
Cash dividend ($.26 per share) (1,569) (1,569)
--------------------------------------------------------------------------------------------
Balances June 30, 2004............ 6,040,340 $ 137 $1,661 $2,393 $44,347 $(428) $(475) $45,242
============================================================================================
See notes to consolidated condensed financial statements.
6
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
2004 2003
-------- --------
Operating Activities
Net income ........................................................... $ 3,227 $ 1,810
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................... 660 3,110
Depreciation and amortization ................................... 436 460
Deferred income tax ............................................. (430) 73
Investment securities amortization, net ......................... 255 245
Securities gain ................................................. (138) (170)
Origination of loans held for sale .............................. (35,992) (55,405)
Proceeds from sale of loans held for sale ....................... 35,229 55,517
Gain on sale of loans held for sale ............................. (511) (826)
ESOT compensation ............................................... 14 9
Net change in:
Trading securities ......................................... (91) (269)
Interest receivable and other assets ....................... (842) 109
Interest payable and other liabilities ..................... 919 (627)
-------- --------
Net cash provided by operating activities ........ 2,736 4,036
-------- --------
Investing Activities
Purchase of securities available for sale ............................ (31,147) (23,997)
Proceeds from sales of securities available for sale ................. 4,548 7,494
Proceeds from paydowns and maturities of securities available for sale 6,780 4,568
Proceeds from paydowns and maturities of securities held to maturity . 19,057 9,549
Purchase of FHLB stock ............................................... (55) (392)
Net change in loans .................................................. (28,611) (23,967)
Purchase of premises and equipment ................................... (502) (328)
-------- --------
Net cash used by investing activities ............ (29,930) (27,073)
-------- --------
Financing Activities
Net change in:
Noninterest-bearing, interest-bearing demand and savings deposits (19,522) 35,244
Certificates of deposit ......................................... 29,389 (3,475)
Borrowings ...................................................... 10,435 (1,279)
Proceeds from Federal Home Loan Bank advances ........................ -- 12,000
Repayments of Federal Home Loan Bank advances ........................ (2,908) (1,749)
Cash dividends paid .................................................. (1,569) (1,465)
Stock options exercised .............................................. 175 --
Repurchase of common stock ........................................... (1,146) --
-------- --------
Net cash provided by financing activities ........ 14,854 39,276
-------- --------
Net Change in Cash and Cash Equivalents ..................................... (12,340) 16,239
Cash and Cash Equivalents, Beginning of Period .............................. 29,708 20,526
-------- --------
Cash and Cash Equivalents, End of Period .................................... $ 17,368 $ 36,765
======== ========
Supplemental cash flow disclosures
Interest paid ........................................................ $ 4,067 $ 4,741
Income tax paid ...................................................... 965 1,485
See notes to consolidated condensed financial statements.
7
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 2004
(Unaudited)
Note 1: Basis of Presentation
- -----------------------------
The consolidated condensed financial statements include the accounts of Monroe
Bancorp (the "Company") and its wholly owned subsidiary, Monroe Bank, a state
chartered bank (the "Bank") and the Bank's wholly owned subsidiary MB Portfolio
Management, Inc. A summary of significant accounting policies is set forth in
Note 1 of Notes to Financial Statements included in the December 31, 2003,
Annual Report to Shareholders. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim consolidated condensed financial statements have been prepared in
accordance with instructions to Form 10-Q, and therefore do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The interim consolidated condensed financial statements at June 30, 2004, and
for the six and three months ended June 30, 2004 and 2003, have not been audited
by independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
The consolidated condensed balance sheet of the Company as of December 31, 2003
has been derived from the audited consolidated balance sheet of the Company as
of that date. Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report filed with the Securities and
Exchange Commission.
The results of operations for the period are not necessarily indicative of the
results to be expected for the year.
8
Note 2: Earnings Per Share
The number of shares used to compute basic and diluted earnings per share was as
follows:
Six months ended
----------------
June 30, 2004 June 30, 2003
------------- -------------
Net income (in thousands) ......... $ 3,227 $ 1,810
=========== ===========
Weighted average shares outstanding 6,081,004 6,150,240
Average unearned ESOT shares ...... (40,030) (45,089)
----------- -----------
Shares used to compute basic
earnings per share ......... 6,040,974 6,105,151
Effect of dilutive securities
stock options ................. 16,595 5,818
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,057,569 6,110,969
=========== ===========
Earnings per share basic .......... $ 0.53 $ 0.30
Earnings per share, diluted ....... 0.53 0.30
Three months ended
------------------
June 30, 2004 June 30, 2003
------------- -------------
Net income (in thousands) ......... $ 1,574 $ 262
=========== ===========
Weighted average shares outstanding 6,068,087 6,150,240
Average unearned ESOT shares ...... (39,698) (44,426)
----------- -----------
Shares used to compute basic
earnings per share ......... 6,028,389 6,105,814
Effect of dilutive securities
stock options ................. 18,401 5,998
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,046,790 6,111,812
=========== ===========
Earnings per share basic .......... $ 0.26 $ 0.04
Earnings per share, diluted ....... 0.26 0.04
9
Note 3: Stock Options
- ---------------------
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2003 Annual Report to Shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Table dollar amounts are in thousands except per share data.
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
Net income, as reported ................................ $ 3,227 $ 1,810
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes ....................................... 7 3
--------- ---------
Pro forma net income ................................... $ 3,220 $ 1,807
========= =========
Earnings per share:
Basic - as reported ............................... $ 0.53 $ 0.30
Basic - pro forma ................................. 0.53 0.30
Diluted - as reported ............................. 0.53 0.30
Diluted - pro forma ............................... 0.53 0.30
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------ ------------------
Net income, as reported ................................ $ 1,574 $ 262
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes ....................................... 3 1
--------- ---------
Pro forma net income ................................... $ 1,571 $ 261
========= =========
Earnings per share:
Basic - as reported ............................... $ 0.26 $ 0.04
Basic - pro forma ................................. 0.26 0.04
Diluted - as reported ............................. 0.26 0.04
Diluted - pro forma ............................... 0.26 0.04
10
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- Results of Operations
---------------------------------------------------------------
General
- -------
Monroe Bancorp (the "Company") is a one-bank holding company formed under
Indiana law in 1984. The Company holds all of the outstanding stock of Monroe
Bank (the "Bank"), which was formed in 1892. Banking is the primary business
activity of the Company.
The Bank, with its primary offices located in Bloomington, Indiana, conducts
business from sixteen locations in Monroe, Jackson, Lawrence, and Hendricks
counties in Indiana. Approximately 80 percent of the Bank's business is in
Monroe County and is concentrated in and around the city of Bloomington.
The Bank is a traditional community bank which provides a variety of financial
services to its customers, including:
o accepting deposits;
o making commercial, mortgage and personal loans;
o originating fixed rate residential mortgage loans for sale into the
secondary market;
o providing personal and corporate trust services;
o providing investment advisory and brokerage services; and
o providing annuities and other investment products.
The majority of the Bank's revenue is derived from interest and fees on loans
and investments, and the majority of its expense is interest paid on deposits
and general and administrative expenses related to its business.
Critical Accounting Policies
- ----------------------------
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements on pages 34 to 36 of the
December 31, 2003 Annual Report to Shareholders. Certain of these policies are
important to the portrayal of the Company's financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain. Management has
identified these policies in the Critical Accounting Policies section of the
Management's Discussion and Analysis on pages 15 to 16 of the December 31, 2003
Annual Report to Shareholders. There have been no changes in these critical
accounting policies to date.
Non-GAAP Financial Measures
- ---------------------------
In January 2003, the United States Securities and Exchange Commission ("SEC")
issued Regulation G, "Conditions for Use of Non-GAAP Financial Measures." A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles ("GAAP"). Regulation G requires companies that present non-GAAP
financial measures to disclose a numerical reconciliation to the most directly
comparable measurement using GAAP as well as the reason why the non-GAAP measure
is an important measure.
Management has used three non-GAAP financial measures throughout this quarterly
report on Form 10-Q.
o In the "Net Interest Income / Net Interest Margin" section, the discussion
is focused on tax-equivalent rates and margin. Management believes a
discussion of the changes in tax-equivalent rates and margin is more
relevant because it better explains changes in after-tax net income.
o In the "Other Income / Other Expense" section of this document, we report
other income and other expense without the effect of unrealized gains and
losses on securities in a grantor trust (rabbi trust) which is a non-GAAP
financial measure. Other income includes realized and unrealized securities
gains and losses on trading securities (mutual funds) held in a grantor
trust ("rabbi trust") in connection with the Company's Directors' and
Executives' Deferred Compensation Plans. These securities are held as
11
trading securities, hence, unrealized gains and losses are recognized on
the income statement. Any unrealized or realized loss on securities held in
the rabbi trust net of any dividend or interest income earned on the
securities in the rabbi trust (included in net interest income) are
directly offset by a decrease to directors' fee/deferred executive
compensation expense (included in other expense), and conversely, any net
realized or unrealized gain combined with interest and dividends earned on
the securities in the trust are directly offset by an increase to
directors' fee/deferred executive compensation expense. These offsets are
included in the line item identified on page 4 of the consolidated
financial statements as "Appreciation (depreciation) on directors' and
executives' deferred compensation plans." The activity in the rabbi trust
has no effect on the Company's net income, therefore, management believes a
more accurate comparison of current and prior year other income and other
expense can be made if the rabbi trust realized and unrealized gains and
losses and offsetting appreciation (depreciation) on the deferred
compensation plans are removed.
o Several non-GAAP financial measures throughout this quarterly report on
Form 10-Q relate to the additional $2.3 million provision for loan losses
taken during the second quarter of 2003 (see chart on the following page)
as a result of loans made to a real estate developer who filed bankruptcy
and to parties affiliated with the developer. We believe the non-GAAP
disclosures of net income and various ratios before the special provision
are useful to both investors and management because they provide insight
into how the Company would have performed in 2003 without this special
provision.
Results of Operations
- ---------------------
The table on the following page presents information to assist in analyzing the
Company's income before and after the $2.3 million special provision for loan
losses which was taken during the second quarter of 2003. This special provision
was directly related to an analysis of the collateral values and many other
factors related to loans outstanding to a real estate developer who filed
bankruptcy and to parties affiliated with the developer. Table dollar amounts
are in thousands, except for per share data.
12
Income Statements With and Without 2003 Additional $2.3 Million Provision
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------- ------------------------------- ------- -------------------------------
Without Impact With Without Impact With
Special of Special Special of Special
INCOME STATEMENT Provision Provision Provision Provision Provision Provision
--------- --------- --------- ------------------- ---------
Interest Income $ 4,999 $ 4,759 $ 4,759 $ 9,871 $ 9,479 $ 9,479
Loan Loss Provision 330 405 $ 2,300 2,705 660 810 $ 2,300 3,110
Total Non-Interest Income 1,934 2,317 2,317 3,985 4,001 4,001
Total Non-Interest Expense 4,270 4,322 4,322 8,449 8,027 8,027
Income Before Income Tax 2,333 2,349 (2,300) 49 4,747 4,643 (2,300) 2,343
Income Tax Expense (Benefit) 759 698 (911) (213) 1,520 1,444 (911) 533
Net Income $ 1,574 $ 1,651 $(1,389) $ 262 $ 3,227 $ 3,199 $(1,389) $ 1,810
Basic and Diluted Earnings Per Share $ 0.26 $ 0.27 $ (0.23) $ 0.04 $ 0.53 $ 0.52 $ (0.23) $ 0.30
Return on Average Equity 13.70% 14.50% (12.16%) 2.34% 14.09% 14.24% (6.11%) 8.13%
Return on Average Assets 1.05% 1.18% (0.99%) 0.19% 1.09% 1.17% (0.51%) 0.66%
Overview
- --------
Net income for the second quarter 2004 was $1.6 million, a 500.8 percent
increase over the same quarter last year. Basic and diluted earnings per share
for the second quarter of 2004 were $0.26 up from $0.04 for the second quarter
of 2003. Second quarter of 2003 net income was decreased by an additional $2.3
million ($1.4 million after tax) provision for loan losses. Without this
additional provision, net income for the second quarter of 2003 would have been
$1.7 million.
Net income was $3.2 million and $1.8 million for the six-month periods ended
June 30, 2004 and 2003, respectively, an increase of $1.4 million or 78.3
percent. Excluding the additional provision of $2.3 million ($1.4 million after
tax), 2003 year to date net income would have been $3.2 million. Diluted
earnings per share for the six months ended June 30, 2004 were $0.53 compared to
$0.30 for the same period in 2003. Without the additional provision, diluted
earnings per share would have been $0.52 for the first six months of 2003.
Annualized return on average equity (ROE) for the second quarter of 2004
increased to 13.70 percent compared to 2.34 percent for second quarter of 2003.
The annualized return on average assets (ROA) was 1.05 percent for the second
quarter of 2004 compared with 0.19 percent for the same period in 2003. Without
the additional provision for loan losses, second quarter 2003 ROE would have
been 14.50 percent and ROA would have been 1.18 percent.
Annualized return on average equity (ROE) for the six months ended June 30, 2004
increased to 14.09 percent compared to 8.13 percent for same period of 2003. The
annualized return on average assets (ROA) was 1.09 percent for the six months
ended June 30, 2004 compared with 0.66 percent for the same period in 2003.
Without the additional provision for loan losses, ROE for the six months ended
June 30, 2003 would have been 14.24 percent and ROA would have been 1.17
percent.
Year to date 2004 dividends paid were $0.26 per share, up from $0.24 per share
for the same period of 2003, an increase of 8.3 percent. At June 30, 2004 the
dividend yield was 3.2 percent compared to 3.6 percent at June 30, 2003. The
decrease in yield occurred due to an increase in the market value of the stock.
At June 30, 2004, the closing market price of Monroe Bancorp stock was $16.39
per share compared to $13.51 per share at June 30, 2003, an increase of 21.3
percent. Monroe Bancorp has increased its dividend each year for more than
sixteen years.
13
Net Interest Income / Net Interest Margin
- -----------------------------------------
The tables on the following pages present information to assist in analyzing net
interest income. The tables of Average Balance Sheets and Interest Rates present
the major components of interest-earning assets and interest-bearing
liabilities, related interest income and expense and the resulting yield or
cost. Interest income presented in the table has been adjusted to a tax
equivalent basis assuming a 40 percent tax rate. The tax equivalent adjustment
recognizes the income tax savings when comparing taxable and tax-exempt assets.
14
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
--------------------------------- --------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable....................................... $ 87,270 $ 1,600 3.69% $ 80,874 $ 1,808 4.51%
Tax-exempt (1)................................ 23,182 568 4.93% 24,150 753 6.28%
--------- -------- --------- --------
Total securities......................... 110,452 2,168 3.95% 105,023 2,561 4.92%
Loans (2).......................................... 439,476 12,079 5.53% 404,014 11,820 5.90%
Time deposits with banks........................... 18 -- 0.00% 45 0 0.73%
FHLB Stock......................................... 2,367 55 4.67% 2,063 52 5.12%
Federal funds sold 968 5 1.04% 8,340 50 1.20%
--------- -------- --------- --------
Total interest earning assets.......... 553,281 14,308 5.20% 519,485 14,483 5.62%
--------- -------- --------- --------
Noninterest earning assets
Allowance for loan losses........................... (5,104) (5,203)
Premises and equipment & other assets............... 28,735 19,662
Cash and due from banks............................. 18,131 17,729
--------- ---------
Total assets............................. $ 595,043 $ 551,674
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities............................
Total interest-bearing deposits.................... 378,607 3,006 1.60% 356,655 3,492 1.97%
Borrowed funds..................................... 91,274 1,107 2.44% 81,699 1,100 2.72%
--------- -------- --------- --------
Total interest-bearing liabilities............ 469,881 4,113 1.76% 438,354 4,592 2.11%
--------- -------- --------- --------
Noninterest-bearing liabilities.........................
Noninterest-bearing demand deposits................ 72,812 63,081
Other liabilities.................................. 6,278 5,343
Shareholders' equity............................... 46,072 44,896
--------- ---------
Total liabilities and shareholders' equity $ 595,043 $ 551,674
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin..................... 10,195 3.44% 9,891 3.51%
T/E net interest margin as a percent of
total average earning assets.................. 3.71% 3.84%
Tax equivalent adjustment (1)........................... 324 412
-------- --------
Net interest income............................... $ 9,871 $ 9,479
======== ========
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal income tax rate of 40%.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
15
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------
Three Months Ended June 30, 2004 Three Months Ended June 30, 2003
--------------------------------- --------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable........................................... $ 89,912 $ 782 3.50% $ 82,016 $ 864 4.22%
Tax-exempt (1).................................... 21,040 265 5.07% 23,376 362 6.21%
--------- -------- --------- --------
Total securities............................. 110,952 1,047 3.79% 105,392 1,225 4.66%
Loans (2).............................................. 447,285 6,162 5.54% 411,925 5,966 5.81%
Time deposits with banks............................... 24 - 0.00% 38 - 0.00%
FHLB Stock............................................. 2,381 23 3.89% 2,209 27 4.90%
Federal funds sold..................................... 1,125 3 1.07% 9,211 27 1.18%
--------- -------- --------- --------
Total interest earning assets.............. 561,767 7,234 5.18% 528,775 7,245 5.50%
--------- -------- --------- --------
Noninterest earning assets
Allowance for loan losses............................... (5,150) (5,727)
Premises and equipment & other assets.................. 29,006 19,774
Cash and due from banks................................ 18,433 19,023
--------- ---------
Total assets................................. $ 604,056 $ 561,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits........................ $ 384,387 1,536 1.61% $ 358,045 1,688 1.89%
Borrowed funds......................................... 90,256 546 2.43% 88,715 599 2.71%
--------- -------- --------- --------
Total interest-bearing liabilities................ 474,643 2,082 1.76% 446,760 2,287 2.05%
--------- -------- --------- --------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits.................... 76,190 65,070
Other liabilities...................................... 7,012 5,039
Shareholders' equity................................... 46,211 44,976
--------- ---------
Total liabilities and shareholders' equity $ 604,056 $ 561,845
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin......................... 5,152 3.42% 4,958 3.44%
T/E net interest margin as a percent of
total average earning assets...................... 3.69% 3.76%
Tax equivalent adjustment (1)............................... 153 199
-------- --------
Net interest income $ 4,999 $ 4,759
======== ========
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal income tax rate of 40%.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
16
Net Interest Income / Net Interest Margin (continued)
- -----------------------------------------------------
Net interest income is the primary source of the Company's earnings. It is a
function of the net interest margin and the volume of average earning assets.
The tax-equivalent net interest margin as a percent of average earning assets
was 3.69 percent for the quarter ended June 30, 2004, a decrease from 3.76
percent for the same quarter last year. Average second quarter 2004 loan yields
declined by 27 basis points (0.27 percent) over second quarter 2003 yields and
deposit yields declined 28 basis points in the same time period. Average second
quarter 2004 tax-equivalent securities yields declined by 87 basis points over
the second quarter of 2003, and borrowed funds yields declined 28 basis points.
The decline in securities yields was greater than the decline in loan yields
because a significant portion of the securities portfolio matured during the
past year and was reinvested at considerably lower rates.
Tax-equivalent net interest income was $5.2 million for the three months ended
June 30, 2004 compared to $5.0 million for the same period in 2003, an increase
of 4.0 percent. Loan and deposit volume increased in 2004, but this growth was
partially offset by the decline in yields and decrease in the margin.
For the six months ended June 30, 2004, the tax-equivalent net interest margin
as a percent of average earning assets was 3.71 percent, a decrease from 3.84
percent for the same period last year. Average loan yields for the first six
months of 2004 declined by 37 basis points over the same period in 2003 and
deposit yields also declined 37 basis points. Average tax-equivalent securities
yields for the first six months of 2004 declined by 97 basis points over the
same period in 2003, and borrowed funds yields declined 28 basis points.
Tax-equivalent net interest income was $10.2 million for the six months ended
June 30, 2004 compared to $9.9 million for the same period in 2003, an increase
of 3.0 percent
Other Income / Other Expense
- ----------------------------
Total other income decreased $383,000 for the three months ended June 30, 2004
compared to the same period in 2003. Omitting the net realized and unrealized
losses on rabbi trust securities in the amount of $22,000 in the second quarter
of 2004 and gains in the amount of $217,000 in 2003, other income decreased
$144,000 or 6.7 percent during the second quarter of 2004 compared to the second
quarter of 2003.
Decreases in other income occurred in the following areas:
o Losses were recognized on the sale of securities in the amount of $17,000
in the second quarter of 2004 compared to gains of $171,000 in the second
quarter of 2003. The losses that were recognized during the second quarter
of 2004 were associated with the rabbi trust, and have no effect on net
income. No securities were sold from the Company's available for sale
portfolio during the second quarter of 2004.
o Gains on mortgage loans sold in the secondary market were $318,000 for the
second quarter of 2004 compared to $462,000 for the second quarter of 2003,
a decrease of $144,000 or 31.2 percent. The decline in gains from the sale
of mortgages was the result of a less favorable environment for refinancing
transactions during the second quarter of 2004 compared to the second
quarter of 2003.
Increases in other income occurred in the following areas:
o Trust fee income totaled $342,000 for the second quarter of 2004 compared
to $230,000 for the second quarter of 2003, an increase of $112,000 or 48.7
percent. The Company's Wealth Management Group, formerly named the
Financial Management Services Division, continues to grow. Trust assets
under management grew from $177.5 million at June 30, 2003 to $203.8
million at June 30, 2004.
o Service charges on deposit accounts were $761,000 during the second quarter
of 2004 compared to $700,000 in the second quarter of 2003, an increase of
$61,000 or 8.7 percent. Growth primarily occurred in fees associated with
the Overdraft Protector product.
o Other operating income grew by $37,000 or 14.2 percent during the second
quarter of 2004. This growth resulted primarily because the Company
purchased bank owned life insurance (BOLI) in the last
17
half of 2003 on selected Bank officers to help fund the increasing costs of
providing employee health benefits. Tax-free income of $91,000 was
recognized on the BOLI policies during the second quarter of 2004. Debit
card income for the second quarter of 2004 also increased by $29,000 over
the second quarter of 2003. This growth was partially offset by a $91,000
increase in losses on sales of other real estate (OREO) and repossessions.
For the six months ended June 30, 2004, total other income decreased $16,000
compared to the same period in 2003. Omitting the net realized and unrealized
gains on rabbi trust securities in the amount of $38,000 in the first six months
of 2004 and gains in the amount of $186,000 during the same period of 2003,
other income increased $132,000 or 3.5 percent during the first six months of
2004. Increases occurred in the following areas:
o trust fee income grew $174,000 or 34.6 percent;
o other income grew by $170,000 primarily due to the purchase of the BOLI
policy; and
o service charges on deposit accounts grew by $134,000 or 10.0 percent.
These increases were partially offset by decreases in mortgage sale income,
which declined $316,000 or 38.3 percent.
For the quarter ending June 30, 2004, total other expense decreased $52,000
compared to the same period in 2003. Omitting the depreciation in the Directors'
and Executives' Deferred Compensation Plan of $10,000 in 2004 and the
appreciation in the Plan of $238,000 in 2003 (which equals the sum of the
interest and dividends earned on the rabbi trust and the realized and unrealized
gains or losses on the securities in the trust), other expense increased
$196,000 or 4.8 percent. Increases occurred in the following areas:
o salaries and employee benefits were $2,534,000 during the second quarter of
2004 compared to $2,451,000 for the same period last year, an increase of
3.4 percent;
o premises and equipment increased to $613,000 compared to $567,000, an
increase of 8.1 percent. This increase occurred primarily due to a negative
adjustment to real estate taxes during the second quarter of 2003 due to a
state-wide reassessment of property; and
o advertising expense increased to $199,000 for the second quarter of 2004
compared to $162,000 for the same period in 2003, an increase of 22.8
percent.
For the six months ended June 30, 2004, total other expense increased $422,000
compared to the same period in 2003. Omitting the appreciation in the Directors'
and Executives' Deferred Compensation Plan of $64,000 in 2004 and $219,000 in
2003 (which equals the sum of the interest and dividends earned on the rabbi
trust and the realized and unrealized gains or losses on the securities in the
trust), other expense increased $577,000 or 7.4 percent. Increases occurred in
the following areas:
o salaries and employee benefits increased $386,000 or 8.2 percent, primarily
due to filing new positions in our growing Central Indiana region;
o advertising expense grew $58,000 or 20.1 percent due to increased
advertising for deposit and loan products and;
o legal fees increased $43,000 or 17.3 percent due to collection efforts
pertaining to the real estate developer who filed bankruptcy and to parties
affiliated with the developer previously mentioned in this document.
Income Taxes
- ------------
The Company records a provision for income taxes currently payable, along with a
provision for those taxes payable in the future. Such deferred taxes arise from
differences in timing of certain items for financial statement reporting rather
than income tax reporting. The major difference between the effective tax rate
applied to the Company's financial statement income and the federal and state
statutory rate of approximately 40 percent is interest on tax-exempt securities.
18
The Company's effective tax rate was 32.0 percent for the six months ended June
30, 2004 compared to 22.7 percent for the same period in 2003. The tax rate was
lower in 2003 because the $2.3 million additional provision for loan losses
taken during the second quarter of 2003 caused the bank's investment portfolio
income (which totally exempt from state taxes and partially exempt from federal
taxes) to represent an unusually high percentage of the Company's taxable net
income. In addition to this, additional state tax credits were obtained in 2003
from loans made to businesses located in urban enterprise zones.
Financial Condition
- -------------------
Assets and Liabilities
- ----------------------
Total assets of the Company at June 30, 2004 were $607.4 million an increase of
3.1 percent or $18.2 million compared to $589.3 million at December 31, 2003.
Loans (including loans held for sale) grew to $454.0 million at June 30, 2004
compared to $424.5 million at December 31, 2003, an increase of 6.9 percent. The
Company's Central Indiana operations provided 32.1 percent of the year-to-date
loan growth, with the remainder occurring in the Company's core market of Monroe
County and the surrounding counties. Growth primarily occurred in construction
and commercial real estate loans. Deposits increased to $446.6 at June 30, 2004
compared to $436.7 at December 31, 2003, an increase of 2.3 percent. Time
deposits increased by $29.4 million during the same period, while
interest-bearing and non-interest bearing demand deposits declined by $19.5
million. Most of the decline in demand deposits related to a reduction in public
fund deposit accounts, which had been unusually high at December 31, 2003. Cash
and due from banks declined by $12.4 million at June 30, 2004 compared to
December 31, 2003. The decline is the result of the Bank having an unusually
high balance in its check clearing account at December 31, 2003 as a result of
customer transactions. The balance in this cash equivalent account returned to
more typical levels early in the first quarter of 2004. Borrowings increased
$7.5 million at June 30, 2004 compared to December 31, 2003. The increase in
borrowings was a result of federal funds purchased increasing by $12.8 million,
which was partially offset by securities sold under agreement to repurchase
decreasing by $2.4 million and Federal Home Loan Bank (FHLB) advances decreasing
by $2.9 million.
Capital
- -------
Shareholders' equity decreased $133,000 at June 30, 2004 compared to December
31, 2003. This decrease was a result of year-to-date net income of $3.2 million,
dividends paid of $1.6 million, other comprehensive income, consisting solely of
the change (decrease) in net unrecognized gains in the Company's
available-for-sale securities portfolio of $834,000, treasury stock purchased of
$1.1 million, options issued of $175,000 (exercise price) and ESOP shares earned
of $14,000.
There are five capital categories defined in the regulations ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 2004 and December 31,
2003, the Company and the Bank were categorized as well capitalized and met all
subject capital adequacy requirements. There are no conditions or events since
June 30, 2004 that management believes have changed the Company's or Bank's
classification.
19
The actual and required capital amounts and ratios are as follows:
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of June 30, 2004
-------------------
Total capital 1 (to risk-weighted
assets)
Consolidated $ 50,928 11.6% $ 35,045 8.0% N/A N/A
Bank 50,740 11.7 34,762 8.0 $ 43,452 10.0%
Tier I capital 1 (to risk-weighted
assets)
Consolidated 45,670 10.4 17,522 4.0 N/A N/A
Bank 45,482 10.5 17,381 4.0 26,071 6.0
Tier I capital 1 (to average
assets)
Consolidated 45,670 7.6 24,163 4.0 N/A N/A
Bank 45,482 7.6 24,002 4.0 30,002 5.0
As of December 31, 2003
-----------------------
Total capital 1 (to risk-weighted
assets)
Consolidated $ 49,998 12.1% $ 33,090 8.0% N/A N/A
Bank 48,525 11.9 32,712 8.0 $ 40,890 10.0%
Tier I capital 1 (to risk-weighted
assets)
Consolidated 44,969 10.9 16,545 4.0 N/A N/A
Bank 43,506 10.6 16,356 4.0 24,534 6.0
Tier I capital 1 (to average
assets)
Consolidated 44,969 7.8 22,992 4.0 N/A N/A
Bank 43,506 7.6 22,859 4.0 28,574 5.0
1 As defined by regulatory agencies
Classification of Assets, Allowance for Loan Losses, and Nonperforming Loans
- ----------------------------------------------------------------------------
The Bank currently classifies loans internally to assist management in
addressing collection and other risks. These classified loans represent credits
characterized by the distinct possibility that some loss will be sustained if
deficiencies are not corrected. As of June 30, 2004, the Bank had $10.7 million
of loans internally classified compared to $15.7 million at December 31, 2003, a
31.8 percent reduction. The allowance for loan losses was $5.3 million, or 1.17
percent of portfolio loans (excluding loans held for sale) at June 30, 2004
compared to $5.0 million, or 1.19 percent, of portfolio loans at December 31,
2003. A portion of classified loans are nonaccrual loans. The Bank had
nonperforming loans (nonaccrual loans, restructured loans and ninety days past
due loans still accruing) totaling $5.4 million, or 1.2 percent of total loans
at June 30, 2004 compared to $6.4 million or 1.5 percent or total loans at
December 31, 2003. June 30, 2004 nonperforming loans also significantly
decreased when compared to June 30, 2003, when nonperforming loans were $8.9
million, or 2.1 percent of total loans.
During the second quarter of 2004, the Bank had net loan charge offs totaling
$98,000 compared to $1,534,000 charged off for the same period in 2003. For the
six months ended June 30, 2004, net loan charge offs were $421,000 compared to
$1,833,000 during the same period in 2003.
Liquidity
- ---------
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
20
Cash Requirements
Management believes that the Company has adequate liquidity and adequate sources
for obtaining additional liquidity if needed. Short-term liquidity needs
resulting from normal deposit/withdrawal functions are provided by the Company
retaining a portion of cash generated from operations and through utilizing
federal funds and repurchase agreements. Long-term liquidity and other liquidity
needs are provided by the ability of the Company to borrow from the Federal Home
Loan Bank of Indianapolis (FHLB). FHLB advances were $40.9 million at June 30,
2004 compared to $43.8 million at December 31, 2003. At June 30, 2004, the
Company had excess borrowing capacity at the FHLB of $16.1 million as limited by
the Company's board resolution in effect at that date. If the Company's
borrowing capacity were not limited by the board resolution, the Company would
have excess borrowing capacity of $44.9 million based on collateral. In terms of
managing the Company's liquidity, management's primary focus is on increasing
deposits to fund future growth. However, the Board may increase its resolution
limit on FHLB advances if the Company needs additional liquidity. The Company's
internal Asset/Liability Committee (ALCO) meets regularly to review projected
loan demand and discuss appropriate funding sources to adequately manage the
Company's gap position and minimize interest rate risk.
At June 30, 2004, the Bank's primary liquidity ratio (net cash, short-term and
marketable assets divided by net deposits and short-term liabilities) was 15.8
percent, compared to 19.1 percent at December 31, 2003. Management considers
this ratio to be adequate.
At the bank holding company level, the Company primarily uses cash to pay
dividends to shareholders. The main source of funding for the holding company is
dividends from its subsidiary (the Bank). During the second quarter of 2004, the
Bank declared dividends to the holding company of $625,000. As of July 1, 2004,
the amount of dividends the Bank can pay to the parent company without prior
regulatory approval was $5.4 million, versus $3.4 million at January 1, 2004. As
discussed in Note 10 to the Consolidated Financial Statements (page 42 of the
2003 Annual Report to Shareholders) and Item 1 of the December 31, 2003 Form
10-K, the Bank is subject to regulation and, among other things, may be limited
in its ability to pay dividends or transfer funds to the holding company.
Accordingly, consolidated cash flows as presented in the Consolidated Statements
of Cash Flows on page 6 may not represent cash immediately available to the
holding company.
Sources and Uses of Cash
The following discussion relates to the Consolidated Statements of Cash Flows
(page 7 of the consolidated financial statements). During the six months ended
June 30, 2004, $2.7 million of cash was provided by operating activities,
compared to $4.0 million during the same period in 2003. The decrease in this
area was primarily a result of the decrease in provision for loan losses. During
the first six months of 2004, $29.9 million was used for investing activities,
compared to $27.1 million in the same period of 2003. The increase in the use of
funds in this category occurred primarily because the Company had a $28.6
million increase in loans in the first six months of 2004 compared to a $24.0
million increase in the same period of 2003. In the first six months of 2004,
$14.9 million of cash was provided by financing activities, primarily from
growth in certificates of deposit which offset declines in demand deposits,
savings deposits and borrowings, compared to $39.3 million provided during the
same period in 2003 with growth occurring primarily in demand deposits and FHLB
advances. Overall, net cash and cash equivalents decreased $12.3 million during
the six months ended June 30, 2004 compared to an increase of $16.2 million in
the same period of 2003.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and
21
liabilities are critical to the maintenance of acceptable performance levels.
The Company constantly monitors the liquidity and maturity structure of its
assets and liabilities, and believes active asset/liability management has been
an important factor in its ability to record consistent earnings growth through
periods of interest rate volatility.
Other
- -----
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including Monroe
Bancorp (ticker symbol MROE). The address is http://www.sec.gov.
Forward-Looking Statements
- --------------------------
Portions of information in this Form 10-Q contain forward-looking statements
about the Company which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. This Form 10-Q contains certain
forward-looking statements with respect to the financial condition, results of
operations, plans, objectives, future performance and business of the Company.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words "believe,"
"expect," "anticipate," "intend," "plan," "estimate" or words of similar
meaning, or future or conditional verbs such as "will," "would," "should,"
"could" or "may" or words of similar meaning. These forward-looking statements,
by their nature, are subject to risks and uncertainties. There are a number of
important factors that could cause future results to differ materially from
historical performance and these forward-looking statements. Factors that might
cause such a difference include, but are not limited to: (1) competitive
pressures among depository institutions; (2) changes in the interest rate
environment; (3) prepayment speeds, charge-offs and loan loss provisions; (4)
general economic conditions, either national or in the markets in which the
Company does business; (5) legislative or regulatory changes adversely affect
the business of the Company; and (6) changes in real estate values or the real
estate markets. Further information on other factors which could affect the
financial results of the Company are included in the Company's Form 10-K for the
year ended December 31, 2003 as filed with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Market risk of the Company encompasses exposure to both liquidity risk and
interest rate risk and is reviewed on an ongoing basis by management and
quarterly by the Asset/Liability Committee ("ALCO") and the Board of Directors.
Liquidity was addressed as part of the discussion entitled "Liquidity."
The Company's interest sensitivity position at June 30, 2004 remained consistent
with the Company's primary goal of maximizing interest margin while maintaining
a low exposure to interest rate risk.
The Bank's interest rate risk is measured by computing estimated changes in net
interest income and the net portfolio value ("NPV") of its cash flows from
assets and liabilities in the event of adverse movements in interest rates.
Interest rate risk exposure is measured using an interest rate sensitivity
analysis to determine the change in NPV in the event of hypothetical changes in
interest rates. Another method also used to enhance the overall process is
interest rate sensitivity gap analysis. This method is utilized to determine the
repricing characteristics of the Bank's assets and liabilities.
Net portfolio value is the market value of the equity and is equal to the net
present value of the cash flows derived from its assets minus the net present
value of the cash flows associated with its liabilities. This particular
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 1 percent to 3 percent (100 to 300 basis point)
increase or decrease in interest rates. The Company's Board of Directors adopted
an interest rate risk policy which established a 10 percent maximum increase or
decrease in the NPV in the event of a sudden and sustained 2 percent (200 basis
point) increase or decrease in interest rates.
22
The following table represents the Bank's projected change in NPV for the
various rate change (rate shock) levels as of June 30, 2004:
Net Portfolio Value at June 30, 2004
------------------------------------
Change in Interest Rate Dollar Amount $ Change % Change
(basis points) (in thousands) in NPV in NPV
-------------- -------------- ------- ------
+300 $ 64,821 $ 371 0.58%
+200 64,924 474 0.74
+100 64,460 10 0.02
0 64,449 -- --
-100 64,765 315 0.49
-200 63,870 (580) (0.90)
The following table represents the Bank's projected change in NPV for the
various rate shock levels as of December 31, 2003:
Net Portfolio Value at December 31, 2003
----------------------------------------
Change in Interest Rate Dollar Amount $ Change % Change
(basis points) (in thousands) in NPV in NPV
-------------- -------------- ------- ------
+300 $ 66,910 $ 2,609 4.06%
+200 65,953 1,652 2.57
+100 64,826 525 0.82
0 64,301 -- --
-100 63,484 (817) (1.27)
-200 67,245 2,944 4.58
Management believes a 200 basis point (two percent) decrease in rates is highly
unlikely. Management also believes an increase in rates is more probable;
therefore, we will focus our discussion on the effects of a 100 basis point (one
percent) decrease in rates and an increase of 300 basis points (three percent).
The June 30, 2004 table above indicates that the Bank's estimated NPV would be
expected to increase by .58 percent in the event of a sudden and sustained 300
basis point increase in interest rates and increase .49 percent in the event of
an immediate 100 basis point decrease in interest rates. While there has been a
modest change in the NPVs, the results from both time periods indicate that the
interest rate sensitivities of the expected cash flows from the Bank's assets
and liabilities are well matched over the rate shock ranges between a drop of
100 basis points and an increase of 300 basis points. The estimated changes in
NPV calculated by as of June 30, 2004, are within the approved guidelines
established by the Board of Directors.
Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate actions
management may undertake in response to changes in interest rates. The NPV
calculation is based on the net present value of discounted cash flows utilizing
certain prepayment assumptions and market interest rates.
Certain shortcomings are inherent in the method of computing the estimated NPV.
Actual results may differ from that information presented in the table above
should market conditions vary from the assumptions used in preparation of the
table information. If interest rates remain or decrease below current levels,
the proportion of adjustable rate loans in the loan portfolio could decrease in
future periods due to refinancing activity. Also, in
23
the event of an interest rate change, prepayment and early withdrawal levels
would likely be different from those assumed in the table. Lastly, the ability
of many borrowers to repay their adjustable rate debt may decline during a
rising interest rate environment.
Item 4. Controls and Procedures.
- ------ -----------------------
Monroe Bancorp's management is responsible for establishing and maintaining
effective disclosure controls and procedures, as defined under Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2004, an
evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, management concluded that
disclosure controls and procedures as of June 30, 2004 were effective in
ensuring material information required to be disclosed in this Quarterly Report
on Form 10-Q was recorded, processed, summarized, and reported on a timely
basis. Additionally, there were no changes in the Corporation's internal control
over financial reporting that occurred during the quarter ended June 30, 2004
that have materially affected, or are reasonably likely to materially affect,
the Corporation's internal control over financial reporting.
24
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2e. Changes in Securities and Uses of Proceeds.
- -------- -------------------------------------------
(d) Approximate
Dollar Value of
of Shares that
(c) Total Number of May Yet Be
(a) Total Shares Purchased as Purchased Under
Number of (b) Average Part of Publicly the Plans or
Shares Price Paid Announced Programs Programs (dollar
Period Purchased per Share or Plans amount in thousands)
- --------------------------------------------------------------------------------------------------
April 1-30, 2004 22,000 16.51 22,000 $ 740
May 1-31, 2004 16,000 16.33 16,000 479
June 1-30, 2004 24,000 16.38 24,000 86
The stock repurchase plan was announced September 3, 2003. Total dollar amount
approved: $2,000,000. The plan has no expiration date. The Corporation announced
on July 27, 2004 that it had completed its purchases under this program and that
no further purchases would be made under this program.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote by Security Holders.
- ------- ----------------------------------------------------
(a) On April 22, 2004, the Corporation held its annual meeting of
shareholders.
(b) At the annual meeting, the following individuals were elected to
a three-year term expiring in 2007: Joyce Claflin Harrell,
Charles R. Royal, Jr., and Harry F. McNaught, Jr.
The following individual's terms as directors continued after the
meeting: Mark D. Bradford, Steven R. Crider, Paul W. Mobley,
David D. Baer, Bradford J. Bomba, Jr. MD, and Timothy D. Ellis.
(c) At the annual meeting, the first item was the election of three
directors. The vote tabulation for the election of Joyce Claflin
Harrell was 4,923,700 "for" and 58,199 withheld; the vote
tabulation for Charles R. Royal, Jr. was 4,978,478 "for" and
3,421 withheld; and, the vote tabulation for Harry F. McNaught,
Jr. was 4,978,718 "for" and 3,182 withheld.
The second item was the ratification of BKD, LLP, Certified
Public Accountants, as the Corporation's independent auditors for
fiscal year ending December 31, 2004. This matter was approved by
a vote of 4,970,066 shares "for", 500 shares against, and 11,333
shares abstained.
Item 5. Other Information.
- ------- ------------------
Not applicable.
25
Item 6a. Exhibits.
- -------- --------
Exhibit No: Description of Exhibit:
3 (i) Monroe Bancorp Articles of Incorporation are incorporated by reference
to registrant's Form 10 filed November 14, 2000.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference to registrant's
Form 10 filed November 14, 2000.
10 (i)* 1999 Directors' Stock Option Plan of Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2000.
10 (ii)* 1999 Management Stock Option Plan of Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2000.
10 (iii)* Deferred Compensation Trust for Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2000.
10 (iv)* Monroe County Bank Agreement for Supplemental Death or Retirement
Benefits is incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10 (v)* Monroe Bancorp Thrift Plan as Amended and Restated January 1, 2001 is
incorporated by reference to registrant's Form 10-Q filed November 13,
2003.
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, 2003.
10(vii)* Third Amendment to the Monroe Bancorp Employees' Stock Ownership Plan
incorporated by reference to registrant's Form 10-K filed March 29,
2004
10(viii)* Monroe Bancorp Directors' Deferred Compensation Plan as Amended and
Restated Effective January 1, 1999 and First, Second and Third
Amendments incorporated by reference to registrant's Form 10-K filed
March 29, 2004.
10(ix)* Monroe Bancorp Executives' Deferred Compensation Plan as Amended and
Restated Effective January 1, 1999 and First, Second and Third
Amendments incorporated by reference to registrant's Form 10-K filed
March 29, 2004.
31(i) Certification for Quarterly Report on Form 10-Q by Principal Executive
Officer
31(ii) Certification for Quarterly Report on Form 10-Q by Principal Financial
Officer
32(i) Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32 (ii) Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement.
26
Item 6b. Reports on Form 8-K.
- ------- --------------------
Monroe Bancorp filed the following Form 8-K:
o Filed April 20, 2004 pursuant to Items 9 and 12 of Form 8-K to
report a press release of first quarter 2004 earnings and a
summary of first quarter 2004 financial information issued April
20, 2004.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONROE BANCORP
Date: August 13, 2004 By: /s/ Mark D. Bradford
--------------- ------------------------
Mark D. Bradford, President and Chief
Executive Officer (Principal Executive Officer)
Date: August 13, 2004 By: /s/ Gordon M. Dyott
--------------- -------------------------
Gordon M. Dyott, Exec. Vice President,
Chief Financial Officer (Principal Financial
Officer)
28
Exhibit Index
-------------
Exhibit No Description of Exhibit:
- ----------- -----------------------
3 (i) Monroe Bancorp Articles of Incorporation are incorporated
by reference to registrant's Form 10 filed November 14, 2000.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10 (i) 1999 Directors' Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10 (ii) 1999 Management Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed
November 14, 2000.
10 (iii) Deferred Compensation Trust for Monroe Bancorp is incorporated
by reference to registrant's Form 10 filed November 14, 2000.
10 (iv) Monroe County Bank Agreement for Supplemental Death or
Retirement Benefits is incorporated by reference to
registrant's Form 10 filed November 14, 2000.
10 (v) Monroe Bancorp Thrift Plan as Amended and Restated January 1,
2001 is incorporated by reference to registrant's Form 10-Q
filed November 13, 2003.
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, 2003.
10(vii) Third Amendment to the Monroe Bancorp Employees' Stock
Ownership Plan incorporated by reference to registrant's
Form 10-K filed March 29, 2004
10(viii) Monroe Bancorp Directors' Deferred Compensation Plan as
Amended and Restated Effective January 1, 1999 and First,
Second and Third Amendments incorporated by reference to
registrant's Form 10-K filed March 29, 2004.
10(ix) Monroe Bancorp Executives' Deferred Compensation Plan as
Amended and Restated Effective January 1, 1999 and First,
Second and Third Amendments incorporated by reference to
registrant's Form 10-K filed March 29, 2004.
31(i) Certification for Quarterly Report on Form 10-Q by Principal
Executive Officer
31(ii) Certification for Quarterly Report on Form 10-Q by Principal
Financial Officer
32(i) Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32 (ii) Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
29