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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 September 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 November 5, 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 - Nine Months..4
Consolidated Condensed Statements of Income - Three Months.5
Consolidated Condensed Statement of Shareholders' Equity...6
Consolidated Condensed Statements of Cash Flows............7
Notes to Consolidated Condensed Financial Statements.......8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................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 2. Unregistered Sales of Equity 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 6. Exhibits.......................................................25
Signatures....................................................................27
Exhibit Index.................................................................28
Part I. Financial Information
Item 1. Financial Statements
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share data)
September 30, December 31,
2004 2003
(Unaudited)
--------- ---------
Assets
Cash and due from banks ...................................... $ 24,237 $ 29,708
Trading securities, at fair value ............................ 3,420 3,329
Investment securities
Available for sale ...................................... 93,851 66,372
Held to maturity ........................................ 14,683 39,797
--------- ---------
Total investment securities ........................ 108,534 106,169
Loans ........................................................ 453,571 422,292
Allowance for loan losses .................................... (4,830) (5,019)
--------- ---------
Net loans ............................................... 448,741 417,273
Loans held for sale .......................................... 3,760 2,219
Premises and equipment ....................................... 11,630 11,683
Federal Home Loan Bank of Indianapolis stock, at cost ........ 2,413 2,331
Other assets ................................................. 17,722 16,551
--------- ---------
Total assets ............................. $ 620,457 $ 589,263
========= =========
Liabilities
Deposits
Noninterest-bearing ..................................... $ 95,206 $ 73,579
Interest-bearing ........................................ 368,817 363,104
--------- ---------
Total deposits ..................................... 464,023 436,683
Borrowings ................................................... 101,869 101,872
Other liabilities ............................................ 7,903 5,333
--------- ---------
Total liabilities ........................ 573,795 543,888
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized, 18,000,000 shares
Issued and outstanding - 6,035,110 and 6,095,640
shares, respectively ............................... 137 137
Additional paid-in capital ................................... 1,583 2,618
Retained earnings ............................................ 45,319 42,689
Accumulated other comprehensive income ....................... 95 406
Unearned ESOT shares ......................................... (472) (475)
--------- ---------
Total shareholders' equity ............... 46,662 45,375
--------- ---------
Total liabilities and shareholders' equity $ 620,457 $ 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)
Nine Months Ended
September 30,
2004 2003
------- -------
Interest Income
Loans, including fees ................................................. $18,399 $17,786
Trading securities .................................................... 48 38
Investment securities
Taxable .......................................................... 2,262 2,498
Tax exempt ....................................................... 480 659
Federal funds sold .................................................... 5 66
------- -------
Total interest income ............................. 21,194 21,047
------- -------
Interest Expense
Deposits .............................................................. 4,633 5,048
Short-term borrowings ................................................. 320 223
Other borrowings ...................................................... 1,416 1,463
------- -------
Total interest expense ............................ 6,369 6,734
------- -------
Net interest income ............................... 14,825 14,313
Provision for loan losses ............................................. 990 3,515
------- -------
Net interest income after provision for loan losses 13,835 10,798
------- -------
Other Income
Fiduciary activities .................................................. 1,034 793
Service charges on deposit accounts ................................... 2,206 2,041
Commission income ..................................................... 703 647
Securities gains ...................................................... 212 166
Unrealized gains on trading securities ................................ 48 222
Net gains on loan sales ............................................... 781 1,444
Other operating income ................................................ 1,086 801
------- -------
Total other income ................................ 6,070 6,114
------- -------
Other Expenses
Salaries and employee benefits ........................................ 7,618 7,187
Net occupancy and equipment expense ................................... 1,847 1,799
Advertising ........................................................... 489 440
Legal fees ............................................................ 396 425
Appreciation in directors' and executives'
deferred compensation plans ...................................... 64 257
Other operating expense ............................................... 2,157 2,043
------- -------
Total other expenses .............................. 12,571 12,151
------- -------
Income before income tax .......................... 7,334 4,761
Income tax expense ................................ 2,357 1,312
------- -------
Net income ..................... $ 4,977 $ 3,449
======= =======
Basic earnings per share .............................................. $ 0.83 $ 0.56
Diluted earnings per share ............................................ $ 0.82 $ 0.56
See notes to consolidated condensed financial statements.
4
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
2004 2003
------- -------
Interest Income
Loans, including fees ................................................. $ 6,322 $ 5,970
Trading securities .................................................... 15 11
Investment securities
Taxable .......................................................... 733 772
Tax exempt ....................................................... 140 207
Federal funds sold .................................................... -- 16
------- -------
Total interest income ............................. 7,210 6,976
------- -------
Interest Expense
Deposits .............................................................. 1,627 1,556
Short-term borrowings ................................................. 175 67
Other borrowings ...................................................... 454 519
------- -------
Total interest expense ............................ 2,256 2,142
------- -------
Net interest income ............................... 4,954 4,834
Provision for loan losses ............................................. 330 405
------- -------
Net interest income after provision for loan losses 4,624 4,429
------- -------
Other Income
Fiduciary activities .................................................. 357 290
Service charges on deposit accounts ................................... 738 707
Commission income ..................................................... 237 184
Securities gains ...................................................... 96 --
Unrealized gains (losses) on trading securities ....................... (12) 31
Net gains on loan sales ............................................... 271 618
Other operating income ................................................ 397 283
------- -------
Total other income ................................ 2,084 2,113
------- -------
Other Expenses
Salaries and employee benefits ........................................ 2,530 2,486
Net occupancy and equipment expense ................................... 607 594
Advertising ........................................................... 142 151
Legal fees ............................................................ 105 177
Appreciation in directors' and executives'
deferred compensation plans ...................................... -- 38
Other operating expense ............................................... 738 678
------- -------
Total other expenses .............................. 4,122 4,124
------- -------
Income before income tax .......................... 2,586 2,418
Income tax expense ................................ 836 779
------- -------
Net income ..................... $ 1,750 $ 1,639
======= =======
Basic and diluted earnings per share .................................. $ 0.29 $ 0.27
See notes to consolidated condensed financial statements.
5
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended
September 30, 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 $4,977 4,977 4,977
Unrealized loss on securities
net of tax benefit of $160
(net of reclassification
adjustment of $38 for
realized gains included (311) (311) (311)
in income).................
ESOT shares earned................ 22 3 25
Repurchase of stock, at cost...... (75,530) (1,232) (1,232)
Stock options exercised........... 15,000 175 175
Cash dividend ($.39 per share) (2,347) (2,347)
-----------------------------------------------------------------------------------------------
Balances September 30, 2004....... 6,035,110 $ 137 $1,583 $4,666 $45,319 $ 95 $(472) $46,662
===============================================================================================
See notes to consolidated condensed financial statements.
6
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2004 2003
-------- --------
Operating Activities
Net income ........................................................... $ 4,977 $ 3,449
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ....................................... 990 3,515
Depreciation and amortization ................................... 681 674
Deferred income tax ............................................. (160) (102)
Investment securities amortization, net ......................... 361 384
Securities gain ................................................. (234) (170)
Origination of loans held for sale .............................. (53,448) (94,320)
Proceeds from sale of loans held for sale ....................... 52,688 98,913
Gain on sale of loans held for sale ............................. (781) (1,444)
ESOT compensation ............................................... 25 16
Net change in:
Trading securities ......................................... (91) (319)
Interest receivable and other assets ....................... (852) (1,032)
Interest payable and other liabilities ..................... 2,570 (350)
-------- --------
Net cash provided by operating activities ........ 6,726 9,214
-------- --------
Investing Activities
Purchase of securities available for sale ............................ (48,293) (30,099)
Proceeds from sales of securities available for sale ................. 8,452 7,494
Proceeds from paydowns and maturities of securities available for sale 11,846 7,150
Proceeds from paydowns and maturities of securities held to maturity . 25,033 16,806
Purchase of bank owned life insurance (BOLI) ......................... -- (6,800)
Purchase of FHLB stock ............................................... (82) (420)
Net change in loans .................................................. (32,458) (23,828)
Purchase of premises and equipment ................................... (628) (467)
-------- --------
Net cash used by investing activities ............ (36,130) (30,164)
-------- --------
Financing Activities
Net change in:
Noninterest-bearing, interest-bearing demand and savings deposits 99 37,056
Certificates of deposit ......................................... 27,241 (9,052)
Borrowings ...................................................... 4,944 (6,230)
Proceeds from Federal Home Loan Bank advances ........................ -- 12,000
Repayments of Federal Home Loan Bank advances ........................ (4,947) (2,785)
Cash dividends paid .................................................. (2,347) (2,197)
Stock options exercised .............................................. 175 --
Repurchase of common stock ........................................... (1,232) (151)
-------- --------
Net cash provided by financing activities ........ 23,933 28,641
-------- --------
Net Change in Cash and Cash Equivalents ....................................... (5,471) 7,691
Cash and Cash Equivalents, Beginning of Period ................................ 29,708 20,526
-------- --------
Cash and Cash Equivalents, End of Period ...................................... $ 24,237 $ 28,217
======== ========
Supplemental cash flow disclosures
Interest paid ........................................................ $ 6,266 $ 6,926
Income tax paid ...................................................... 1,760 1,485
See notes to consolidated condensed financial statements.
7
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
September 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 September 30, 2004,
and for the nine and three months ended September 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:
Nine months ended
-----------------
September 30, 2004 September 30, 2003
------------------ ------------------
Net income (in thousands) ......... $ 4,977 $ 3,449
=========== ===========
Weighted average shares outstanding 6,066,199 6,150,040
Average unearned ESOT shares ...... (39,258) (44,427)
----------- -----------
Shares used to compute basic
earnings per share ......... 6,026,941 6,105,613
Effect of dilutive securities -
stock options ................. 16,896 6,331
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,043,837 6,111,944
=========== ===========
Earnings per share, basic ......... $ 0.83 $ 0.56
Earnings per share, diluted ....... 0.82 0.56
For the nine months ended September 30, 2003, options to purchase 27,391 shares
were not included in the earnings per share calculation because the exercise
price exceeded the average market price.
Three months ended
------------------
September 30, 2004 September 30, 2003
------------------ ------------------
Net income (in thousands) ......... $ 1,750 $ 1,639
=========== ===========
Weighted average shares outstanding 6,036,588 6,149,645
Average unearned ESOT shares ...... (37,721) (43,101)
----------- -----------
Shares used to compute basic
earnings per share ......... 5,998,867 6,106,544
Effect of dilutive securities -
stock options ................. 17,564 7,357
----------- -----------
Shares used to compute diluted
earnings per share ........ 6,016,431 6,113,901
=========== ===========
Earnings per share, basic ......... $ 0.29 $ 0.27
Earnings per share, diluted ....... 0.29 0.27
For the three months ended September 30, 2003, options to purchase 27,931 shares
were not included in the earnings per share calculation because the exercise
price exceeded the average market price.
9
Note 3: Stock Options
- ---------------------
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
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.
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Net income, as reported ..................................... $ 4,977 $ 3,449
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes ............................................ 10 4
--------- ---------
Pro forma net income ........................................ $ 4,967 $ 3,445
========= =========
Earnings per share:
Basic - as reported .................................... $ 0.83 $ 0.56
Basic - pro forma ...................................... 0.82 0.56
Diluted - as reported .................................. 0.82 0.56
Diluted - pro forma .................................... 0.82 0.56
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Net income, as reported ..................................... $ 1,750 $ 1,639
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes ............................................ 3 1
--------- ---------
Pro forma net income ........................................ $ 1,747 $ 1,638
========= =========
Earnings per share:
Basic - as reported .................................... $ 0.29 $ 0.27
Basic - pro forma ...................................... 0.29 0.27
Diluted - as reported .................................. 0.29 0.27
Diluted - pro forma .................................... 0.29 0.27
Note 4: Reclassifications
- --------------------------
Reclassification of certain amounts in the 2003 consolidated condensed financial
statements have been made to conform to the 2004 presentation.
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 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
trading securities, and hence, unrealized gains and losses are recognized
on the income statement. Any
11
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 third 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 additional
provision are useful to both investors and management because they provide
insight into how the Company would have performed in 2003 without this
additional 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 additional provision for loan
losses which was taken during the third quarter of 2003. This additional
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 Statement With and Without Special $2.3 Million Provision
Nine Months Ended September 30,
-------------------------------------------------------
2004 2003
-------- ----------------------------------------
Without Impact With
Special of Special
Provision Provision Provision
-------- --------- --------- ---------
Interest income ........................................ $ 21,194 $ 21,047 -- $ 21,047
Interest expense ....................................... 6,369 6,734 -- 6,734
-------- -------- -------- --------
Net interest income ............................... 14,825 14,313 -- 14,313
Provision for loan losses .............................. 990 1,215 $ 2,300 3,515
-------- -------- -------- --------
Net interest income after provision for loan losses 13,835 13,098 (2,300) 10,798
Total other income ..................................... 6,070 6,114 -- 6,114
Total other expense .................................... 12,571 12,151 -- 12,151
-------- -------- -------- --------
Income before income tax .......................... 7,334 7,061 (2,300) 4,761
Income tax expense (benefit) ........................... 2,357 2,223 (911) 1,312
-------- -------- -------- --------
Net income ................................... $ 4,977 $ 4,838 $ (1,389) $ 3,449
======== ======== ======== ========
Basic earnings per share ............................... $ 0.83 $ 0.79 $ (0.23) $ 0.56
Diluted earnings per share ............................. $ 0.82 $ 0.79 $ (0.23) $ 0.56
Return on average equity ............................... 14.42% 14.14% (3.91%) 10.23%
Return on average assets ............................... 1.11% 1.16% (0.34%) 0.82%
Overview
- --------
Net income for the third quarter 2004 was $1.75 million, a 6.7 percent increase
over net income of $1.64 million for the same quarter last year. Basic and
diluted earnings per share for the third quarter of 2004 were $0.29, up from
$0.27 for the third quarter of 2003.
Net income was $5.0 million and $3.5 million for the nine-month periods ended
September 30, 2004 and 2003, respectively, an increase of $1.5 million or 44.3
percent. Excluding the additional provision of $2.3 million ($1.4 million after
tax), 2003 year to date net income would have been $4.8 million. Diluted
earnings per share for the nine months ended September 30, 2004 were $0.82
compared to $0.56 for the same period in 2003. Without the additional provision,
diluted earnings per share would have been $0.79 for the first nine months of
2003.
Annualized return on average equity (ROE) for the third quarter of 2004
increased to 15.14 percent compared to 14.36 percent for third quarter of 2003.
The annualized return on average assets (ROA) was 1.14 percent for the third
quarter of 2004, unchanged from the same period in 2003.
Annualized return on average equity (ROE) for the nine months ended September
30, 2004 increased to 14.42 percent compared to 10.23 percent for same period of
2003. The annualized return on average assets (ROA) was 1.11 percent for the
nine months ended September 30, 2004 compared with 0.82 percent for the same
period in 2003. Without the additional provision for loan losses, ROE for the
nine months ended September 30, 2003 would have been 14.14 percent and ROA would
have been 1.16 percent.
Year to date 2004 dividends paid were $0.39 per share, up from $0.36 per share
for the same period of 2003, an increase of 8.3 percent. At September 30, 2004
the dividend yield was 3.1 percent compared to 3.4 percent at September 30,
2003. The decrease in yield occurred due to an increase in the market value of
the stock. At September 30, 2004, the closing market price of Monroe Bancorp
stock was $17.00 per share compared to
13
$14.15 per share at September 30, 2003, an increase of 20.1 percent. Monroe
Bancorp has increased its dividend each year for more than sixteen years.
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
-------------------------------------------------------------------------
Nine Months Ended September 30, 2004 Nine Months Ended September 30, 2003
------------------------------------ ------------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable .......................................... $ 88,257 $ 2,367 3.58% $ 81,023 $ 2,608 4.30%
Tax-exempt (1) ................................... 21,785 800 4.91% 23,651 1,098 6.21%
--------- --------- --------- ---------
Total securities ............................ 110,042 3,167 3.84% 104,674 3,706 4.73%
Loans (2) ............................................. 445,219 18,405 5.52% 410,169 17,794 5.80%
Time deposits with banks .............................. 20 -- 0.00% 38 -- 0.00%
FHLB Stock ............................................ 2,380 81 4.55% 2,141 81 5.06%
Federal funds sold .................................... 643 5 1.04% 7,735 65 1.12%
--------- --------- --------- ---------
Total interest earning assets ............. 558,304 21,657 5.18% 524,757 21,646 5.52%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses .............................. (5,087) (5,497)
Premises and equipment & other assets ................. 29,044 21,747
Cash and due from banks ............................... 18,628 17,796
--------- ---------
Total assets ................................ $ 600,889 $ 558,803
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ....................... 379,012 4,634 1.63% 357,709 5,048 1.89%
Borrowed funds ........................................ 95,243 1,735 2.43% 86,067 1,686 2.62%
--------- --------- --------- ---------
Total interest-bearing liabilities ............... 474,255 6,369 1.79% 443,776 6,734 2.03%
--------- --------- --------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits ................... 74,312 64,734
Other liabilities ..................................... 6,205 5,232
Shareholders' equity .................................. 46,117 45,061
--------- ---------
Total liabilities and shareholders' equity $ 600,889 $ 558,803
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ........................ 15,288 3.39% 14,912 3.49%
T/E net interest margin as a percent of
total average earning assets ..................... 3.66% 3.80%
Less: Tax equivalent adjustment (1) ....................... 463 599
--------- ---------
Net interest income .................................. $ 14,825 $ 14,313
========= =========
(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
-------------------------------------------------------------------------
Nine Months Ended September 30, 2004 Nine Months Ended September 30, 2003
------------------------------------ ------------------------------------
Average Average Rate Average Average Rate
ASSETS Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable .......................................... $ 90,211 $ 766 3.38% $ 81,314 $ 800 3.90%
Tax-exempt (1) ................................... 19,020 233 4.88% 22,671 347 6.07%
--------- -------- --------- --------
Total securities ............................ 109,231 999 3.64% 103,985 1,147 4.37%
Loans (2) ............................................. 456,581 6,323 5.51% 422,276 5,972 5.61%
Time deposits with banks .............................. 25 -- 0.00% 26 -- 0.00%
FHLB Stock ............................................ 2,407 27 4.46% 2,296 28 4.84%
Federal funds sold .................................... -- -- 0.00% 6,544 16 0.97%
--------- -------- --------- --------
Total interest earning assets ............. 568,244 7,349 5.14% 535,127 7,163 5.31%
--------- -------- --------- --------
Noninterest earning assets
Allowance for loan losses .............................. (5,054) (6,077)
Premises and equipment & other assets ................. 29,624 25,836
Cash and due from banks ............................... 19,611 17,927
--------- ---------
Total assets ................................ $ 612,425 $ 572,813
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ....................... $ 379,813 1,627 1.70% $ 359,781 1,556 1.72%
Borrowed funds ........................................ 103,093 629 2.43% 94,663 585 2.45%
--------- -------- --------- --------
Total interest-bearing liabilities ............... 482,906 2,256 1.86% 454,444 2,141 1.87%
--------- -------- --------- --------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits ................... 77,279 67,987
Other liabilities ..................................... 6,263 5,107
Shareholders' equity .................................. 45,977 45,275
--------- ---------
Total liabilities and shareholders' equity $ 612,425 $ 572,813
========= =========
Interest margin recap
Net interest income and interest rate spread
T/E net interest income margin ........................ 5,093 3.29% 5,022 3.44%
T/E net interest margin as a percent of
total average earning assets ..................... 3.57% 3.72%
Less: Tax equivalent adjustment (1) ....................... 139 188
-------- --------
Net interest income .................................. $ 4,954 $ 4,834
======== ========
(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 3.57 percent for the quarter ended September 30, 2004, a decrease from 3.72
percent for the same quarter last year. Average third quarter 2004 loan yields
declined by 10 basis points (0.10 percent) over third quarter 2003 yields and
deposit yields declined 2 basis points in the same time period. Average third
quarter 2004 tax-equivalent securities yields declined by 74 basis points over
the third quarter of 2003, and borrowed funds yields declined 2 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 $5.1 million for the three months ended
September 30, 2004 compared to $5.0 million for the same period in 2003, an
increase of 2.0 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 nine months ended September 30, 2004, the tax-equivalent net interest
margin as a percent of average earning assets was 3.66 percent, a decrease from
3.80 percent for the same period last year. Average loan yields for the first
nine months of 2004 declined by 28 basis points over the same period in 2003 and
deposit yields declined 26 basis points. Average tax-equivalent securities
yields for the first nine months of 2004 declined by 89 basis points over the
same period in 2003, and borrowed funds yields declined 19 basis points.
Tax-equivalent net interest income was $15.3 million for the nine months ended
September 30, 2004 compared to $14.9 million for the same period in 2003, an
increase of 2.7 percent.
Other Income / Other Expense
- ----------------------------
Total other income decreased $29,000 for the three months ended September 30,
2004 compared to the same period in 2003. Omitting the net realized and
unrealized losses on rabbi trust securities in the amount of $12,000 in the
third quarter of 2004 and gains in the amount of $31,000 in the third quarter of
2003, other income increased $14,000 or 0.7 percent during the third quarter of
2004 compared to the third quarter of 2003.
Increases in other income occurred in the following areas:
o Trust fee income totaled $357,000 for the third quarter of 2004 compared to
$290,000 for the third quarter of 2003, an increase of $67,000 or 23.1
percent. The Company's Wealth Management Group, formerly named the
Financial Management Services Division, continues to grow. Trust assets
under management grew from $182.4 million at September 30, 2003 to $207.9
million at September 30, 2004.
o Service charges on deposit accounts were $738,000 during the third quarter
of 2004 compared to $707,000 in the third quarter of 2003, an increase of
$31,000 or 4.4 percent. Growth primarily occurred in fees associated with
the Overdraft Protector product.
o Commission income was $237,000 for the third quarter of 2004 compared to
$184,000 for the same period in 2003, an increase of $53,000 or 28.8
percent. Full-service brokerage commissions increased $15,000 and platform
(branch based) annuity and mutual fund sales commissions increased $38,000.
o Other operating income grew by $114,000 or 40.3 percent during the third
quarter of 2004. This growth resulted primarily because the Company
recognized $45,000 of losses on other real estate owned (OREO) in the third
quarter of 2003 compared to no losses in the third quarter of 2004. Debit
card interchange income also increased by $39,000 in the third quarter of
2004.
o Gains were recognized on the sale of securities in the amount of $96,000 in
the third quarter of 2004 compared to no gains in the third quarter of
2003.
17
Decreases in other income occurred in the following area:
o Gains on mortgage loans sold in the secondary market were $271,000 for the
third quarter of 2004 compared to $618,000 for the third quarter of 2003, a
decrease of $347,000 or 56.2 percent. The decline in gains from the sale of
mortgages was the result of a less favorable environment for refinancing
transactions during the third quarter of 2004 compared to the third quarter
of 2003.
For the nine months ended September 30, 2004, total other income decreased
$44,000 compared to the same period in 2003. Omitting the net realized and
unrealized gains on rabbi trust securities in the amount of $25,000 in the first
nine months of 2004 and gains in the amount of $217,000 during the same period
of 2003, other income increased $148,000 or 2.5 percent during the first nine
months of 2004. Significant increases occurred in the following areas:
o trust fee income grew $241,000 or 30.4 percent, due to both a service fee
increase and growth in assets under mangement;
o other income grew by $285,000 primarily due to the purchase of the BOLI
policy and the related increase in its cash surrender value, and an
increase in debit card interchange income; and
o service charges on deposit accounts grew by $165,000 or 8.1 percent.
These increases were partially offset by decreases in mortgage sale income,
which declined $663,000 or 45.9 percent.
For the quarter ending September 30, 2004, total other expense decreased $2,000
compared to the same period in 2003. Omitting the appreciation in the Directors'
and Executives' Deferred Compensation Plan of $38,000 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 (there was no
appreciation or depreciation on the plan in the third quarter of 2004), other
expense increased $36,000 or 0.9 percent. Significant changes occurred in the
following area:
o legal fees declined $72,000 or 40.1 percent due to a decrease in legal fees
associated with collection efforts on loans made to a certain real estate
developer who filed bankruptcy in 2002 and to parties affiliated with the
developer.
Occupancy expense and salaries and employee benefit expenses experienced very
modest increases in the third quarter of 2004 compared to the same period in
2003.
For the nine months ended September 30, 2004, total other expense increased
$420,000 compared to the same period in 2003. Omitting the appreciation in the
Directors' and Executives' Deferred Compensation Plan of $64,000 in 2004 and
$257,000 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 $613,000 or 5.2 percent.
Increases occurred primarily in the following areas:
o salaries and employee benefits increased $431,000 or 6.0 percent, primarily
due to filing new positions in our growing Central Indiana region; and
o advertising expense grew $49,000 or 11.1 percent due to increased
advertising for deposit and loan products.
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
18
to the Company's financial statement income and the federal and state statutory
rate of approximately 40 percent is interest on tax-exempt securities.
The Company's effective tax rate was 32.1 percent for the nine months ended
September 30, 2004 compared to 27.6 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 is totally exempt from state taxes and partially exempt
from federal taxes) to represent a higher percentage of the Company's taxable
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 September 30, 2004 were $620.5 million an
increase of 5.3 percent or $31.2 million compared to $589.3 million at December
31, 2003. Loans (including loans held for sale) grew to $457.3 million at
September 30, 2004 compared to $424.5 million at December 31, 2003, an increase
of 7.7 percent. The Company's Central Indiana operations provided 39.1 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
$464.0 at September 30, 2004 compared to $436.7 at December 31, 2003, an
increase of 6.3 percent. The increase in deposits resulted primarily from an
increase in time deposits of $27.2 million. Cash and due from bank accounts
declined by $5.5 million at September 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 remained virtually
unchanged at September 30, 2004 compared to December 31, 2003.
Capital
- -------
Shareholders' equity increased $1.3 million at September 30, 2004 compared to
December 31, 2003. This increase was a result of year-to-date net income of $5.0
million, dividends paid of $2.3 million, other comprehensive income, consisting
solely of the change (decrease) in net unrecognized gains in the Company's
available-for-sale securities portfolio of $311,000, treasury stock purchased of
$1.2 million, options issued of $175,000 (exercise price) and ESOP shares earned
of $25,000.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At September 30, 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 September 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 September 30, 2004
------------------------
Total capital 1 (to risk-weighted assets)
Consolidated $ 51,397 11.6% $ 35,603 8.0% N/A N/A
Bank 51,291 11.6 35,327 8.0 $ 44,159 10.0%
Tier I capital 1 (to risk-weighted assets)
Consolidated 46,567 10.5 17,801 4.0 N/A N/A
Bank 46,461 10.5 17,664 4.0 26,495 6.0
Tier I capital 1 (to average assets)
Consolidated 46,567 7.6 24,358 4.0 N/A N/A
Bank 46,461 7.6 24,497 4.0 30,621 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 September 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 $4.8 million,
or 1.06 percent of portfolio loans (excluding loans held for sale) at September
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 $4.5 million, or 1.0 percent of total
loans at September 30, 2004 compared to $6.4 million or 1.5 percent of total
loans at December 31, 2003. September 30, 2004 nonperforming loans also
significantly decreased when compared to September 30, 2003, when nonperforming
loans were $9.3 million, or 2.2 percent of total loans.
During the third quarter of 2004, the Bank had net loan charge offs totaling
$759,000 compared to $37,000 charged off for the same period in 2003. Charge
offs for the quarter ending September 30, 2003 were unusually low. For the nine
months ended September 30, 2004, net loan charge offs were $1.2 million compared
to $1.9 million during the same period in 2003. Charge offs were higher year to
date 2003 due to several loans charged off related to a real estate developer
who filed bankruptcy and his affiliates.
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 $38.9 million at September
30, 2004 compared to $43.8 million at December 31, 2003. At September 30, 2004,
the Company had excess borrowing capacity at the FHLB of $18.1 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 $50.9 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 September 30, 2004, the Bank's primary liquidity ratio (net cash, short-term
and marketable assets divided by net deposits and short-term liabilities) was
18.1 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 third quarter of 2004, the
Bank declared dividends to the holding company of $780,000. As of October 1,
2004, the amount of dividends the Bank can pay to the parent company without
prior regulatory approval was $6.3 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 many regulations 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 7 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 nine months ended
September 30, 2004, $6.7 million of cash was provided by operating activities,
compared to $9.2 million during the same period in 2003. The decrease in this
area was primarily a result of more mortgages sold in the secondary market in
2003 coupled with a decline in the provision for loan losses in 2004. During the
first nine months of 2004, $36.1 million was used for investing activities,
compared to $30.1 million in the same period of 2003. The increase in the use of
funds in this category occurred primarily because the Company had a $32.5
million increase in loans in the first nine months of 2004 compared to a $23.8
million increase in the same period of 2003. In the first nine months of 2004,
$23.9 million of cash was provided by financing activities, primarily from
growth in certificates of deposit, compared to $28.6 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 $5.5 million during
the nine months ended September 30, 2004 compared to an increase of $7.7 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 September 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.
NPV 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 September 30, 2004:
Net Portfolio Value at September 30, 2004
-----------------------------------------
Change in Interest Rate Dollar Amount $ Change in % Change in
(basis points) (in thousands) NPV NPV
-------------- -------------- ----------- -----------
+300 $ 66,762 $ 1,778 2.74%
+200 66,627 1,643 2.53
+100 65,862 878 1.35
0 64,984 -- --
-100 64,265 (719) (1.11)
-200 60,726 (4,258) (6.55)
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 in % Change in
(basis points) (in thousands) NPV 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 September 30, 2004 table above indicates that the Bank's estimated NPV would
be expected to increase by 2.74 percent in the event of a sudden and sustained
300 basis point increase in interest rates and decrease 1.11 percent in the
event of an immediate 100 basis point decrease in interest rates. While there
has been a modest change in the NPVs between the two periods, 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 as of September 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
23
preparation of the table information. If interest rates remain or decrease below
current levels, the proportion of adjustable rate loans in the loan portfolio
could decrease in future periods due to refinancing activity. Also, in the event
of an interest rate change, prepayment and early withdrawal levels would likely
be different from those assumed in the table. Lastly, the ability of many
borrowers to repay their adjustable rate debt may decline during a rising
interest rate environment.
Item 4. Controls and Procedures.
- ------ -----------------------
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 September 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 Company's disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures as of September 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 Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
24
Part II - Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2c. Unregistered Sales of Equity Securities and Use 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)
- ---------------------------------------------------------------------------------------------
July 1-31, 2004 5,230 $ 16.38 5,230 --
August 1-31, 2004 -- -- --
September 1-30, 2004 -- -- --
-------------------------------------------------------------------
Total for Period 5,230 $ 16.38 5,230 --
===================================================================
The stock repurchase plan was announced September 3, 2003. Total dollar amount
approved: $2,000,000. The plan has no expiration date, however, the Company
announced on July 27, 2004 that it had completed its purchases 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 of Security Holders.
- ------- ----------------------------------------------------
None
Item 5. Other Information.
- ------- ------------------
Not applicable.
Item 6. 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.
25
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 is 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 are 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 are 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 pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31(ii) Certification for Quarterly Report on Form 10-Q by Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONROE BANCORP
Date: November 12, 2004 By: /s/ Mark D. Bradford
----------------- ---------------------------------
Mark D. Bradford, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November12, 2004 By: /s/ Gordon M. Dyott
---------------- ---------------------------------
Gordon M. Dyott, Exec. Vice President,
Chief Financial Officer
(Principal Financial Officer)
27
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 is 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 are 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 are 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 pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31(ii) Certification for Quarterly Report on Form 10-Q by Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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.
28