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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004 Commission file number 000-31951
MONROE BANCORP
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(Exact name of registrant as specified in its charter)
Indiana 35-1594017
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
210 East Kirkwood Avenue, Bloomington, Indiana 47408
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 336-0201
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value (not necessarily a reliable indication of the price
at which more than a limited number of shares would trade) of the voting stock
held by non-affiliates of the registrant was $85,045,137 on June 30, 2004,
computed by reference to the closing price as reported by the Nasdaq National
Market system.
As of March 7, 2005 there were 6,036,284 outstanding common shares of common
stock, without par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
--------- -----------------------
Portions of the 2004 Annual Report to Shareholders Part II
Portions of the Definitive Proxy Statement for
the Annual Meeting of Shareholders to be held
April 28, 2005 Part III
FORM 10-K TABLE OF CONTENTS Form 10-K
Page Number
Part I
Item 1 - Business...................................................................3
Item 2 - Properties................................................................29
Item 3 - Legal Proceedings.........................................................31
Item 4 - Submission of Matters to a Vote of Security Holders.......................31
Part II
Item 5 - Market for the Registrant's Common Equity,
Related Shareholder Matters and Issuer Purchase of Equity Shares........31
Item 6 - Selected Financial Data...................................................32
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation......................................32
Item 7A - Quantitative and Qualitative Disclosures about Market Risk................32
Item 8 - Financial Statements and Supplementary Data...............................33
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures...................................33
Item 9A - Controls and Procedures..................................................33
Item 9B - Other Information........................................................34
Part III
Item 10 - Directors and Executive Officers of the Registrant.......................34
Item 11 - Executive Compensation...................................................34
Item 12 - Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters.................35
Item 13 - Certain Relationships and Related Transactions...........................35
Item 14 - Principal Accountant Fees and Services...................................35
Part IV
Item 15 - Exhibits and Financial Statement Schedules...............................36
Signatures...................................................................................38
2
PART I
ITEM 1. Business.
General
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Monroe Bancorp (the "Company") is a one-bank holding company formed as a general
corporation under Indiana law in 1984. At December 31, 2004, on a consolidated
basis the Company had total assets of $634.0 million, total loans of $477.1
million and total deposits of $483.5 million. The Company holds all of the
outstanding stock of Monroe Bank (the "Bank"), which was formed in 1892. The
Bank is the primary business activity of the Company.
The Bank, with its primary office located in Bloomington, Indiana, conducts
business from sixteen locations in Monroe, Hendricks, Jackson and Lawrence
counties in Indiana. Approximately 75 percent of the Bank's business is in
Monroe County and is concentrated in and around the city of Bloomington.
However, the Company's anticipated continued development of additional banking
business in Hendricks County is expected to gradually reduce this concentration.
The Company, as a bank holding company, engages in commercial banking through
the Bank. The Company may also engage in certain non-banking activities closely
related to banking and own certain other business companies that are not banks,
subject to applicable laws and regulations, although it has no current plans to
do so.
As of December 31, 2004, the Bank had 199 full-time equivalent employees.
The Bank is a traditional community bank, which provides a variety of financial
services to its customers, including:
o accepting deposits;
o making commercial, mortgage and installment loans;
o originating fixed rate residential mortgage loans for sale into the
secondary market;
o providing personal and corporate trust services;
o providing investment advisory and brokerage services; and
o providing fixed and variable annuities.
The majority of the Bank's revenue is derived from interest and fees on loans
and investments, and the majority of its expense is interest paid on deposits
and general and administrative expenses related to its business.
The Company has increased its annual dividend each year for 17 years. Based upon
a closing price of $18.15 for the Company's stock on December 31, 2004, (MROE;
listed on Nasdaq), the Company's $.52 dividend per share provided a dividend
yield of 2.87 percent.
Management believes that the Company's culture of community involvement,
outstanding service quality, and customer focus has played a significant role in
the Company's growth and success. Management also believes that other
significant factors contributing to the Company's growth include, but are not
limited to;
3
the attractiveness of the Company's primary markets, an involved Board that sets
high performance standards and the increased use of incentive and commission
compensation plans.
The Company focused much of its effort during 2004 in three areas. The first
area of focus was asset quality, in particular, to address the credit quality
issues that had a significant impact on net income in 2003. Considerable
progress was made towards this objective as indicated by several measures of
credit quality. The Company had a 41.2 percent reduction in non-performing
assets (nonaccrual loans, restructured loans and other real estate owned) and
90-day past due loans which are still accruing year over year. At December 31,
2004, non-performing assets and 90-day past due loans totaled $4,053,000 (0.64
percent of total assets) compared to $6,895,000 (1.17 percent of total assets)
one year earlier. The Company also realized a significant improvement in its
loan delinquency ratio. The Company's loan delinquency ratio (loan balances past
due 30 days or more as a percent of total loans) was 0.92 percent at December
31, 2004, down from 1.95 percent at December 31, 2003.
The second area of focus was loan growth. As a result of hiring of additional
lenders and increased business development activity, total loans at December 31,
2004 were $477,085,000 which was 12.4 percent greater than the year earlier
total of $424,511,000. Most of the growth took place in commercial real estate
and construction loans. Nearly half (45.5 percent) of the loan growth took place
at the Company's Hendricks County locations.
The third area of focus was noninterest income. The Company was able to increase
total noninterest income even though a less favorable interest rate environment
led to a $604,000 decline in fees from the origination and sale of residential
mortgages. Noninterest income totaled $8,302,000 for the year ended December 31,
2004 compared to $8,182,000 for the previous year. Included in noninterest
income are net realized and unrealized securities gains of $432,000 for 2004 and
$582,000 for 2003. Excluding net realized and unrealized securities gains,
noninterest income for 2004 increased $270,000 or 3.6 percent over the 2003
amount.
Growth in several noninterest income categories allowed the Company to more than
offset the $604,000 drop in fees from the sale of residential mortgages.
Categories contributing to this growth include Trust fees, which increased by
$262,000 (23.5 percent), service fees on deposit accounts which increased by
$169,000 (6.0 percent), and fees earned on the Bank's debit card program which
increased by $141,000 (39.2 percent).
Company Goals
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The Company's business strategies are focused on four major areas:
o increasing the growth rate of net interest income;
o improving credit processes to ensure strong credit quality;
o increasing the ratio of noninterest income to net interest income; and
o increasing operating efficiency.
Achievement of the Company's financial objectives will require strong loan and
deposit growth from the Bank's initiatives in Hendricks County and Hamilton
County, two markets next to Indianapolis, as well as from its core markets in
and around Monroe County.
Management will measure its overall success in terms of earnings per share
growth rate, return on equity, the ratio of nonperforming loans to total loans,
service quality and staff retention rates.
Competition
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The Company's market area is highly competitive. In addition to competition from
commercial banks (including certain larger regional banks) and savings
associations, the Company also competes with
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numerous credit unions, finance companies, insurance companies, mortgage
companies, securities and brokerage firms, money market mutual funds, loan
production offices and other providers of financial services. The Company
competes with these firms in terms of pricing, delivery channels, product
features, service quality, responsiveness and other factors.
The Company also competes directly with a large number of financial service
providers who do not have a physical presence in our markets (e.g., Citicorp)
but have been successful in selling their services using technology and
sophisticated target marketing techniques. We fully expect these companies to
increase their future efforts to attract business from our very best customers.
The Company's success in view of the substantial competition is felt to be the
result of factors such as its history of community involvement and support,
commitment to outstanding customer service, awareness of and responsiveness to
customer needs, and its attractive mix of high touch and high tech delivery
channels. The impact of these factors can be seen in the success the Company has
had in increasing its share of deposits in Monroe County.
The Company has been able to increase its deposit market share in the Monroe
County market through competitive pricing, marketing and an emphasis on service.
All FDIC insured deposits held by financial institutions in Monroe County grew
by $157.0 million, or 14.0 percent, during the five-year period between June 30,
1999 and June 30, 2004. During the same period, the Company was able to grow its
deposits within Monroe County by $72.1 million (25.8 percent) and increase its
market share from 24.9 percent in 1999 to 27.5 percent in 2004. Like many
financial institutions, deposit growth over the last five years has not kept
pace with the Company's growth in loans. In 2004, the Company addressed
short-term liquidity needs by borrowing federal funds (short-term borrowings
from other banks) and by soliciting time deposits from out of market sources by
posting rates on an internet based service (QwickRate.com).
Available Information
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All reports filed electronically by the Company with the United States
Securities and Exchange Commission (SEC), including the Annual Report on Form
10-K, quarterly reports on Form 10-Q, and current event reports on Form 8-K, as
well as any amendments to those reports, are accessible at no cost on the
Company's Web site at www.monroebank.com. These filings are also accessible on
the SEC's Web site at www.sec.gov.
REGULATION AND SUPERVISION
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Both the Company and the Bank operate in highly regulated environments and are
subject to supervision and regulation by several governmental regulatory
agencies, including the Federal Reserve Board, The Federal Deposit Insurance
Corporation (the "FDIC") and the Indiana Department of Financial Institutions
(the "DFI"). The laws and regulations established by these agencies are
generally intended to protect depositors, not shareholders. Changes in
applicable laws, regulations, governmental policies, income tax laws and
accounting principles may have a material effect on our business and prospects.
The following summary is qualified by reference to the statutory and regulatory
provisions discussed.
MONROE BANCORP
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The Bank Holding Company Act. Because the Company owns all of the outstanding
capital stock of the Bank, it is registered as a bank holding company under the
federal Bank Holding Company Act of 1956 and is subject to periodic examination
by the Federal Reserve and required to file periodic reports of its operations
and any additional information that the Federal Reserve may require.
5
Investments, Control, and Activities. With some limited exceptions, the Bank
Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before acquiring another bank holding company or
acquiring more than five percent of the voting shares of a bank (unless it
already owns or controls the majority of such shares).
Bank holding companies are prohibited, with certain limited exceptions, from
engaging in activities other than those of banking or of managing or controlling
banks. They are also prohibited from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiary companies furnishing
services to or performing services for their subsidiaries, and other
subsidiaries engaged in activities which the Federal Reserve Board determines to
be so closely related to banking or managing or controlling banks as to be
incidental to these operations. The Bank Holding Company Act does not place
territorial restrictions on the activities of such nonbanking-related
activities.
Effective as of March 11, 2001, the Gramm-Leach-Bliley Act allows bank holding
companies which meet certain management, capital and CRA standards and which
have elected to become a finance holding company to engage in a substantially
broader range of nonbanking activities than was previously permissible,
including insurance underwriting and agency, and underwriting and making
merchant banking investments in commercial and financial companies. This act
also removes various restrictions that previously applied to bank holding
company ownership of securities firms and mutual fund advisory companies.
The Company does not currently plan to engage in any activity other than owning
the stock of the Bank.
Dividends. The Federal Reserve's policy is that a bank holding company
experiencing earnings weakness should not pay cash dividends exceeding its net
income or which could only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. Additionally, the Federal
Reserve possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies.
Source of Strength. In accordance with Federal Reserve Board policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances in which the Company might not
otherwise do so.
MONROE BANK
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General Regulatory Supervision. The Bank is an Indiana-chartered banking
corporation subject to examination by the DFI. The DFI and the FDIC regulate or
monitor virtually all areas of the Bank's operations. The Bank must undergo
regular on-site examinations by the FDIC and DFI and must submit annual reports
to the FDIC and the DFI.
Lending Limits. Under Indiana law, the total loans and extensions of credit by
an Indiana-chartered bank to a borrower outstanding at one time and not fully
secured may not exceed 15 percent of the bank's capital and unimpaired surplus.
In addition, the total amount of outstanding loans and extensions of credit to
any borrower outstanding at one time and fully secured by readily marketable
collateral may not exceed ten percent of the unimpaired capital and unimpaired
surplus of the bank (this limitation is separate from and in addition to the
above limitation).
6
Deposit Insurance. Deposits in the Bank are insured by the FDIC up to a maximum
amount, which is generally $100,000 per depositor subject to aggregation rules.
The Bank is subject to deposit insurance assessment by the FDIC pursuant to its
regulations establishing a risk-related deposit insurance assessment system,
based upon the institution's capital levels and risk profile. The Bank is also
subject to assessment for the Financial Corporation (FICO) to service the
interest on its bond obligations. The amount assessed on individual
institutions, including the Bank, by FICO is in addition to the amount paid for
deposit insurance according to the risk-related assessment rate schedule.
Increases in deposit insurance premiums or changes in risk classification will
increase the Bank's cost of funds, and we may not be able to pass these costs on
to our customers.
Transactions with Affiliates and Insiders. The Bank is subject to limitations on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates.
Furthermore, within the foregoing limitations as to amount, each covered
transaction must meet specified collateral requirements. Compliance is also
required with certain provisions designed to avoid the taking of low quality
assets. The Bank is also prohibited from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank to its executive officers, directors, certain
principal shareholders, and their related interests must:
o be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with third parties; and
o not involve more than the normal risk of repayment or present other
unfavorable features.
Dividends. Under Indiana law, the Bank may pay dividends from its undivided
profits in an amount declared by its Board of Directors, subject to prior
approval of the DFI if the proposed dividend, when added to all prior dividends
declared during the current calendar year, would be greater than the current
year's "net profits" and retained "net profits" for the previous two calendar
years.
Federal law generally prohibits the Bank from paying a dividend to the Company
if the depository institution would thereafter be undercapitalized. The FDIC may
prevent an insured bank from paying dividends if the bank is in default of
payment of any assessment due to the FDIC. In addition, payment of dividends by
a bank may be prevented by the applicable federal regulatory authority if such
payment is determined, by reason of the financial condition of such bank, to be
an unsafe and unsound banking practice.
Branching and Acquisitions. Branching by the Bank requires the prior approval of
the FDIC and the DFI. Under current law, Indiana chartered banks may establish
branches throughout the state and in other states. Congress authorized
interstate branching, with certain limitations, beginning in 1997. Indiana law
authorizes an Indiana bank to establish one or more branches in states other
than Indiana through interstate merger transactions and to establish one or more
interstate branches through de novo branching or the acquisition of a branch.
Community Reinvestment Act. The Community Reinvestment Act requires that the
FDIC evaluate the record of the Bank in meeting the credit needs of its local
community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could result in
the imposition of additional requirements and limitations on the Bank.
7
Capital Regulations. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and account for
off-balance sheet items. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk-weighted
categories of 0 percent, 20 percent, 50 percent, or 100 percent, with higher
levels of capital being required for the categories perceived as representing
greater risk. The guidelines are minimums, and the federal regulators have noted
that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios in excess of the minimums. Neither the Company nor the Bank has
received any notice indicating that either is subject to higher capital
requirements.
The federal bank regulatory authorities have also implemented a leverage ratio
to supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank
holding company may leverage its equity capital base.
The Bank is also subject to the FDIC's "prompt corrective action" regulations,
which implement a capital-based regulatory scheme designed to promote early
intervention for troubled banks. This framework contains five categories of
compliance with regulatory capital requirements, including "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." As of December 31, 2004, the Bank was
qualified as "well capitalized." It should be noted that a bank's capital
category is determined solely for the purpose of applying the FDIC's "prompt
corrective action" regulations and that the capital category may not constitute
an accurate representation of the bank's overall financial condition or
prospects. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decrease, as it
moves downward through the capital categories. Bank holding companies
controlling financial institutions can be required to boost the institutions'
capital and to partially guarantee the institutions' performance.
Other Regulations. Interest and other charges collected or contracted for by the
Bank are subject to state usury laws and federal laws concerning interest rates.
The Bank's loan operations are also subject to federal laws applicable to credit
transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
o Home Mortgage Disclosure Act of 1975, requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation
to help meet the housing needs of the community it serves;
o Equal Credit Opportunity Act, prohibiting discrimination on the basis
of race, creed or other prohibited factors in extending credit;
o Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts
may be collected by collection agencies; and
o rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
o Customer Information Security Guidelines. The federal bank regulatory
agencies have adopted final guidelines (the "Guidelines") for
safeguarding confidential customer information. The Guidelines require
each financial institution, under the supervision and ongoing
oversight of its Board of Directors, to create a comprehensive written
information security program designed to
8
ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or
integrity of such information; and protect against unauthorized access
to or use of such information that could result in substantial harm or
inconvenience to any customer.
o Electronic Funds Transfer Act, and Regulation E. The Electronic Funds
Transfer Act, which is implemented by Regulation E, governs automatic
deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller
machines and other electronic banking service.
Check Clearing for the 21st Century Act. Effective October 28, 2004, the Board
of Governors of the Federal Reserve System (the "Board") adopted final
amendments to Regulation CC and its commentary to implement the Check Clearing
for the 21st Century Act (the "Check 21 Act"). The Check 21 Act was enacted on
October 28, 2003 and became effective on October 28, 2004.
To facilitate check truncation and electronic check exchange, the Check 21 Act
authorizes a new negotiable instrument called a "substitute check" and provides
that a properly prepared substitute check is the legal equivalent of the
original check for all purposes. A substitute check is a paper reproduction of
the original check that can be processed just like the original check. The Check
21 Act does not require any bank to create substitute checks or to accept checks
electronically. The Board's amendments: (i) set forth the requirements of the
Check 21 Act that apply to all banks, including those that choose not to create
substitute checks; (ii) provide a model disclosure and model notices relating to
substitute checks; and (iii) set forth bank endorsement and identification
requirements for substitute checks. The amendments also clarify some existing
provisions of the rule and commentary.
USA Patriot Act. The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot
Act") is intended to strengthen the ability of U. S. Law Enforcement to combat
terrorism on a variety of fronts. The potential impact of the USA Patriot Act on
financial institutions is significant and wide-ranging. The USA Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
requires financial institutions to implement additional policies and procedures
with respect to, or additional measures designed to address, any or all of the
following matters, among others: money laundering, suspicious activities and
currency transaction reporting; and currency crimes.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley
Act") represents a comprehensive revision of laws affecting corporate
governance, accounting obligations and corporate reporting. Among other
requirements, the Sarbanes-Oxley Act established: (i) new requirements for audit
committees of public companies, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the chief executive officers and chief financial officers of
reporting companies; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for reporting companies
regarding various matters relating to corporate governance, and (v) new and
increased civil and criminal penalties for violation of the securities laws.
Enforcement Powers. Federal regulatory agencies may assess civil and criminal
penalties against depository institutions and certain "institution-affiliated
parties," including management, employees, and agents of a financial
institution, as well as independent contractors and consultants such as
attorneys and accountants and others who participate in the conduct of the
financial institution's affairs. In addition, regulators may commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, regulators may issue cease-and-desist orders to, among other
things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnifications or
guarantees
9
against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the regulator to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies. The Federal Reserve Bank's monetary policies have
had, and are likely to continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary
policy in order, among other things, to curb inflation or combat a recession.
The monetary policies of the Federal Reserve Board have major effects upon the
levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
FORWARD-LOOKING STATEMENTS
--------------------------
Portions of the information in this Form 10-K include certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995)
concerning the intent, belief, outlook, estimate or expectations of the Company
and its subsidiaries, its directors, or its officers primarily with respect to
future events or the future operations, performance, financial condition and
likelihood of success of the Company and the Bank. You can identify these
statements by use of terms such as "expect," "believe," "goal," "plan,"
"intend," "estimate," "may," "will" or similar words. These forward-looking
statements are not guarantees of future events or performance and are based upon
assumptions rather than historical or current facts. The forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause our actual results to differ materially from those anticipated in
the forward-looking statements. The factors which could cause a difference
between actual results and those in the forward looking statements include, but
are not limited to, changes in interest rates; loss of deposits and loan demand
to other financial institutions; substantial changes in financial markets;
changes in real estate values and the real estate market; or regulatory changes.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements.
10
Statistical Data.
Selected Financial Data
Financial Highlights
(dollar amounts in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------------------------
At or for the Years Ended December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Summary of operations
Net interest income ................................ $ 19,864 $ 19,140 $ 18,738 $ 16,937 $ 15,694
Less: Provision for loan losses .................... 1,320 3,920 1,762 1,050 720
-------- -------- -------- -------- --------
Net interest income, after provision for loan losses 18,544 15,220 16,976 15,887 14,974
Noninterest income ................................. 8,302 8,182 6,070 4,916 3,734
Noninterest expense ................................ 16,921 16,285 13,931 12,046 10,744
Net income ......................................... 6,705 5,054 6,098 5,749 5,333
Per common share
Basic and fully diluted earnings per share ......... $ 1.11 $ 0.83 $ 1.00 $ 0.94 $ 0.87
Cash dividends per share ........................... 0.52 0.49 0.48 0.44 0.40
Book value per common share ........................ 7.90 7.49 7.25 6.67 6.14
Selected year-end balances
Total assets ....................................... $633,970 $589,263 $533,317 $495,553 $441,831
Total securities ................................... 109,712 106,195 100,292 88,322 102,119
Total loans-including loans held for sale .......... 477,085 424,511 391,315 371,800 296,759
Total deposits ..................................... 483,534 436,683 398,567 359,206 342,995
Shareholders' equity ............................... 47,384 45,375 44,263 40,684 37,732
Selected average balances
Total assets ....................................... $607,619 $562,836 $520,310 $454,485 $428,582
Total securities ................................... 106,703 100,479 96,392 91,743 105,415
Total loans-including loans held for sale .......... 451,055 411,762 381,126 327,125 287,485
Total deposits ..................................... 459,765 425,378 392,789 354,185 335,505
Shareholders' equity ............................... 46,428 45,188 42,588 39,609 36,075
Ratios based on average balances
Return on assets (1) ............................... 1.10 % 0.90 % 1.17 % 1.26 % 1.24 %
Return on equity (2) ............................... 14.44 11.18 14.32 14.52 14.78
Dividend payout ratio (3) .......................... 46.64 59.05 48.01 46.83 45.98
Equity to assets ratio (4) ......................... 7.64 8.03 8.19 8.72 8.42
(1) Net income divided by average total assets
(2) Net income divided by average equity
(3) Dividends per share divided by net income per share
(4) Average equity divided by average total assets
11
Net Interest Income
-------------------
The table on the following page presents information to assist in analyzing net
interest income. The table of Average Balance Sheets and Interest Rates presents
the major components of interest-earning assets and interest-bearing
liabilities, related interest income and expense and the resulting yield or
cost. For analytical purposes, interest income presented in the table has been
adjusted to a tax equivalent basis assuming a 40 percent tax rate for the
periods after investments were transferred to the Delaware subsidiary (April
2002) and at 34% for the first quarter of 2002. The tax equivalent adjustment
recognizes the income tax savings when comparing taxable and tax-exempt assets.
12
Average Balance Sheets and Interest Rates
(dollar amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets
Taxable securities .................. $ 88,848 $ 3,144 3.54% $ 77,124 $ 3,375 4.38% $ 70,199 $ 3,860 5.50%
Tax-exempt securities (1) ........... 17,855 960 5.38% 23,355 1,435 6.14% 26,193 1,699 6.49%
-------- -------- -------- -------- -------- --------
Total securities .................. 106,703 4,104 3.85% 100,479 4,810 4.79% 96,392 5,560 5.77%
Commercial loans ...................... 86,283 4,468 5.18% 79,922 4,294 5.37% 75,567 4,704 6.22%
Real estate loans ..................... 346,375 19,255 5.56% 310,562 17,775 5.72% 282,633 18,263 6.46%
Installment loans ..................... 18,397 1,317 7.16% 21,278 1,580 7.43% 22,926 1,858 8.10%
-------- -------- -------- -------- -------- --------
Total loans (2) .................. 451,055 25,040 5.55% 411,762 23,649 5.74% 381,126 24,825 6.51%
Interest bearing deposits ............. 3,743 72 1.91% 4,798 67 1.39% 1,623 24 1.50%
FHLB Stock ............................ 2,393 106 4.43% 2,188 110 5.03% 1,870 113 6.04%
Federal funds sold .................... 752 10 1.33% 8,334 90 1.08% 6,122 97 1.58%
-------- -------- -------- -------- -------- --------
Total interest earning assets ........ 564,646 29,332 5.19% 527,561 28,726 5.45% 487,133 30,619 6.29%
-------- -------- -------- -------- -------- --------
Noninterest earning assets
Allowance for loan losses ............. (5,061) (5,689) (4,206)
Premises and equipment & other assets . 29,011 22,975 20,030
Cash and due from banks ............... 19,023 17,989 17,353
-------- -------- --------
Total assets ...................... $607,619 $562,836 $520,310
======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Total interest-bearing deposits ....... $384,259 6,479 1.69% $359,129 6,541 1.82% $333,710 8,794 2.64%
Borrowed funds:
Short-term borrowings ............. 53,893 537 1.00% 44,318 280 0.63% 41,499 420 1.01%
Other borrowings .................. 41,069 1,852 4.51% 42,724 1,971 4.61% 37,556 1,834 4.88%
-------- -------- -------- -------- -------- --------
Total borrowed funds ......... 94,962 2,389 2.52% 87,042 2,251 2.59% 79,055 2,254 2.85%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .... 479,221 8,868 1.85% 446,171 8,792 1.98% 412,765 11,048 2.68%
Noninterest-bearing liabilities
Noninterest-bearing demand deposits ... 75,506 66,249 59,079
Other liabilities ..................... 6,464 5,228 5,878
Shareholders' equity .................. 46,428 45,188 42,588
-------- -------- --------
Total liabilities and
shareholders' equity ................ $607,619 8,868 $562,836 8,792 $520,310 11,048
======== -------- ======== ------- ======== --------
Interest margin recap
Net interest income and
interest rate spread
T/E net interest income margin ........ 20,464 3.34% 19,934 3.47% 19,571 3.61%
T/E net interest margin as a percent of
total average earning assets ....... 3.62% 3.78% 4.02%
Less: Tax-equivalent adjustment (3) ... 600 794 833
-------- -------- --------
Net interest income ........... $ 19,864 $ 19,140 $ 18,738
======== ======== ========
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal income tax rate of 40% for the periods
after investments were transferred to the Delaware subisdiary (April 2002)
and at 34% for the first quarter of 2002.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
(3) Interest income adjustment to convert tax-exempt investment securities
interest to fully tax equivalent basis using a marginal rate of 40% for the
periods after the investments were transferred to the Delaware subsidiary
(April 2002) and a 34% tax rate for the first quarter of 2002.
13
The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earning assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year times the interest rate
of the prior year, while the interest rate changes were computed as the
difference in rate between the current and prior year items times the volume of
the prior year. Volume/rate variances have been allocated on the basis of the
absolute relationship between volume variances and rate variances. Nonaccrual
loans were included in the average loan balances used in determining the yields.
Volume / Rate Analysis
(dollar amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
2004 Compared to 2003 2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------- --------------------------- ---------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income
- ---------------
Loans ............................... $ 2,313 $ (922) $ 1,391 $ 2,091 $(3,267) $(1,176) $ 4,824 $(6,777) $(1,953)
Securities:
Taxable .......................... 556 (787) (231) 406 (893) (486) 538 (121) 416
Tax-exempt ....................... (248) (227) (475) (165) (99) (264) (277) 46 (231)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total securities interest ..... 308 (1,014) (706) 241 (992) (751) 261 (75) 186
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest bearing deposits ............ (22) 27 5 51 (9) 42 50 (29) 20
FHLB stock ........................... 11 (15) (4) 21 (24) (3) 43 (31) 12
Federal funds sold ................... (56) (24) (80) 41 (48) (7) 257 (249) 8
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income ....... 2,553 (1,947) 606 2,445 (4,339) (1,894) 5,435 (7,162) (1,727)
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest expense
- ----------------
Interest-bearing deposits ........... 474 (536) (62) 711 (2,965) (2,254) 1,577 (5,432) (3,855)
Short-term borrowings ............... 70 187 257 30 (170) (140) 119 (923) (804)
Long-term debt ...................... (72) (47) (119) 262 (125) 137 1,199 (229) 970
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ...... 472 (396) 76 1,003 (3,260) (2,257) 2,895 (6,584) (3,689)
------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income
(fully tax-equivalent basis) $ 2,081 $(1,551) 530 $ 1,442 $(1,079) 363 $ 2,540 $ (578) 1,962
======= ======= ======= ======= ======= =======
Tax-equivalent adjustment (1) ......... 194 39 (161)
------- ------- -------
Change in net interest income $ 724 $ 402 $ 1,801
======= ======= =======
(1) The tax-equivalent adjustment is based on a marginal income tax rate of 40%
for the periods after investments were transferred to the Delaware
subsidiary (April 2002) and at 34% for the first quarter of 2002.
14
Allowance for Loan Loss and Asset Quality
-----------------------------------------
The following table presents activity in the allowance for loan losses during
the years indicated. The Company's policy is to charge off loans when, in
Management's opinion, the loan is deemed uncollectible. However, management
makes a concerted effort to collect charged off loans.
Analysis of Allowance for Loan Losses
(dollar amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Balance at beginning of year .................... $ 5,019 $ 4,574 $ 4,198 $ 3,873 $ 3,343
Loans charged off
- -----------------
Commercial and industrial ..................... (502) (1,091) (535) (374) (87)
Real estate ................................... (867) (2,391) (849) (191) (56)
Installment ................................... (127) (172) (158) (255) (152)
--------- --------- --------- --------- ---------
Total charge-offs ..................... (1,496) (3,654) (1,542) (820) (295)
--------- --------- --------- --------- ---------
Charge-offs recovered
- ---------------------
Commercial and industrial ..................... 127 47 14 39 46
Real estate ................................... 181 63 103 9 14
Installment ................................... 43 69 39 47 45
--------- --------- --------- --------- ---------
Total recoveries ...................... 351 179 156 95 105
--------- --------- --------- --------- ---------
Net loans charged off ........................... (1,145) (3,475) (1,386) (725) (190)
Current year provision .......................... 1,320 3,920 1,762 1,050 720
--------- --------- --------- --------- ---------
Balance at end of year .......................... $ 5,194 $ 5,019 $ 4,574 $ 4,198 $ 3,873
========= ========= ========= ========= =========
Loans at year end (excluding loans held for sale) $ 474,345 $ 422,292 $ 383,898 $ 363,768 $ 295,965
Ratio of allowance to loans (excluding loans held
for sale) at period end .................... 1.09% 1.19% 1.19% 1.15% 1.31%
Average loans ................................... $ 451,055 $ 451,055 $ 411,762 $ 327,125 $ 287,485
Ratio of net loans charged off
to average loans .............................. 0.25% 0.77% 0.34% 0.22% 0.07%
15
The allocation of the allowance for loan losses along with the percentage of
each loan type to total loans outstanding is illustrated in the following table.
The Company regards the allowance as a general allowance which is available to
absorb losses from all loans.
Allocation of the Allowance for Loan Losses
(dollar amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Balance at December 31:
Commercial, industrial and agricultural $1,584 18.11 % $1,273 19.56 % $1,237 19.84 %
Real Estate ........................... 2,921 78.45 % 2,690 75.65 % 2,304 74.43 %
Installment ........................... 394 3.44 % 418 4.79 % 446 5.73 %
Unallocated ........................... 295 N/A % 638 N/A % 587 N/A %
------ ------ ------ ------ ------ -------
Total allowance for loan losses .. $5,194 100.00 % $5,019 100.00 % $4,574 100.00 %
====== ====== ====== ====== ====== =======
2001 2000
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Balance at December 31:
Commercial, industrial and agricultural $1,430 19.83 % $1,022 22.53 %
Real Estate ........................... 1,941 74.13 % 2,327 68.35 %
Installment ........................... 358 6.04 % 405 9.12 %
Unallocated ........................... 469 N/A % 119 N/A %
------ ------- ------ -------
Total allowance for loan losses .. $4,198 100.00 % $3,873 100.00 %
====== ======= ====== =======
Nonperforming assets and their relative percentages to loan balances are
presented in the table on the following page. The level of nonperforming loans
and leases is an important element in assessing asset quality and the relevant
risk in the credit portfolio. Nonperforming loans include nonaccrual loans,
restructured loans and loans delinquent 90 days or more and still accruing.
Loans are evaluated for nonaccrual status when payments are past due over 90
days. Current year interest previously recorded but not deemed collectible is
reversed and charged against current income. Interest income on these loans is
then recognized when collected. Loans significantly past due, not well secured
and in the process of collection are generally placed on nonaccrual status.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Another element associated with asset quality is other real estate owned (OREO),
which represents properties acquired by the Company through loan defaults by
customers.
16
Nonperforming Assets
(dollar amounts in thousands)
- ---------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Principal balance
- -----------------
Nonaccrual .................................. $3,283 $5,686 $3,612 $ 779 $ 332
Restructured ................................ 391 502 445 373 416
90 days or more past due and still accruing . 29 173 588 1,637 2,289
------ ------ ------ ------ ------
Total nonperforming loans ......... $3,703 $6,361 $4,645 $2,789 $3,037
====== ====== ====== ====== ======
Nonperforming loans as a percent of total
loans (including loans held for sale) ... 0.78% 1.50% 1.19% 0.75% 1.02%
Other real estate owned (OREO) .............. $ 350 $ 534 $ 110 $ 505 $ 362
OREO as a percent of total loans (including
loans held for sale) .................... 0.07% 0.13% 0.03% 0.14% 0.12%
Allowance as a percent of nonperforming loans 140.26% 78.90% 98.47% 150.52% 127.53%
Interest income of $78,000 for the year ended December 31, 2004, was recognized
on the nonaccruing and restructured loans listed in the table above, whereas,
interest income of $210,000 would have been recognized under their original
terms.
Potential Problem Loans
- -----------------------
In addition to loans classified for regulatory purposes, management also
designates certain loans for internal monitoring purposes in a watch category.
Loans may be placed on management's watch list as a result of delinquent status,
concern about the borrower's financial condition, or the value of the collateral
securing the loan, substandard classification during regulatory examinations, or
simply as a result of management's desire to monitor more closely a borrower's
financial condition and performance. Watch category loans may include loans with
loss potential that are still performing and accruing interest and may be
current under the terms of the loan agreements; however, management may have a
significant degree of concern about the borrowers' ability to continue to
perform according to the terms of the loans. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing these loans. Also, watch category loans may include credits
which, although adequately secured and performing, have past delinquency
problems or where unfavorable financial trends are exhibited by borrowers.
All watch list loans are subject to additional scrutiny and monitoring. The
Company's philosophy encourages loan officers to identify borrowers that should
be monitored in this fashion and believes this process ultimately results in the
identification of problem loans in a more timely fashion.
Management has identified $5.8 million and $8.9 million of loans on its watch
list which were not included in impaired or nonperforming loans at December 31,
2004 and 2003, respectively.
17
Noninterest Income and Expense
------------------------------
A comparative table and complete discussion of noninterest income and expense is
contained in the 2004 Annual Report to Shareholders - Financial Review -
Managements Discussion and Analysis on pages 14 to 15 under the caption "Other
Income and Expense."
Financial Condition
-------------------
Securities
----------
Held-to-maturity securities are those which the Company has both the positive
intent and the ability to hold to maturity. They are reported at amortized cost.
Available-for-sale securities are those which the Company may decide to sell if
needed for liquidity, asset/liability management, or other reasons.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses included in other comprehensive income, net of tax.
Trading securities consist of investments in various mutual funds held in
grantor trusts formed by the Company related to the Monroe Bancorp Directors'
Deferred Compensation Plan. The Company's obligations under the deferred
compensation plan change in concert with the performance of the investments.
The tables on the following page summarize the carrying values of securities
from December 31, 2002 through December 31, 2004. The maturity distribution of
securities at December 31, 2004 is summarized by classification.
18
Securities
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
December 31,
2004 2003 2002
-------- -------- --------
Available for sale
- ------------------
U.S. Treasury & government agencies $ 68,282 $ 48,471 $ 26,672
State and municipal ............... 10,148 4,998 3,489
Mortgage-backed & asset-backed .... 17,567 9,600 9,283
Equity securities ................. -- -- 102
-------- -------- --------
Total available for sale .... 95,997 63,069 39,546
Held to Maturity
- ----------------
U.S. Treasury & government agencies 4,025 22,617 35,643
State and municipal .............. 6,461 17,170 22,269
Mortgage-backed & asset-backed .... 6 10 17
-------- -------- --------
Total held to maturity ...... 10,492 39,797 57,929
Trading securities
- ------------------
Mutual funds ..................... 3,223 3,329 2,817
-------- -------- --------
Total trading securities .... 3,223 3,329 2,817
-------- -------- --------
Total Securities ........ $109,712 $106,195 $100,292
======== ======== ========
Securities Maturity Schedule at December 31, 2004
- -------------------------------------------------
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
--------------- -------------- -------------- -------------- --------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Available for sale
- ------------------
U.S. Treasury & government agencies $18,153 2.91% $50,128 3.04% $ -- $ -- $68,281 3.01%
State and municipal ............... 1,539 2.74% 8,610 3.33% -- -- 10,149 3.24%
Mortgage-backed & asset-backed (1) 2,450 4.53% 6,346 3.60% 8,771 3.96% -- 17,567 3.81%
------- ------- ------- ------- -------
Total available for sale .... $22,142 $65,084 $ 8,771 $ -- $95,997 3.18%
======= ======= ======= ======= =======
Held to Maturity
- ----------------
U.S. Treasury & government agencies $ 4,025 4.41% $ -- $ -- $ -- $ 4,025 4.41%
State and municipal ............... 5,078 5.59% 1,383 5.17% -- -- 6,461 5.50%
Mortgage-backed & asset-backed (1) -- 6 6.37% -- -- 6 6.37%
------- ------- ------- ------- -------
Total held to maturity ...... $ 9,103 $ 1,389 $ -- $ -- $10,492 5.08%
======= ======= ======= ======= =======
Trading Securities
- ------------------
Mutual funds (2) ................. $ 3,223 2.12% $ -- $ -- $ -- $ 3,223 2.12%
------- ------- ------- ------- -------
Total trading securities .... $ 3,223 $ -- $ -- $ -- $ 3,223 2.12%
======= ======= ======= ======= =======
(1) Mortgage-backed and asset-backed securities maturities are based on average
life at the projected prepayment speed.
(2) Equity securities and mutual funds have no maturities
19
Securities (continued)
----------------------
The majority of the securities portfolio is comprised of U.S. Treasury and
government agency securities, and state and municipal securities (tax-exempt).
Trading securities consist solely of mutual funds held in a grantor trust,
established for the Monroe Bancorp Directors' and Executives' Deferred
Compensation Plan.
The securities portfolio carries varying degrees of risk. Investments in U.S.
Treasury and federal agency securities have little or no credit risk.
Obligations of states and political subdivisions and corporate securities are
the areas of highest potential credit exposure in the portfolio. This risk is
minimized through the purchase of high quality investments. The Company's
investment policy requires that general obligations of other states and
political subdivisions and corporate bonds must have a rating of A or better
when purchased. In-state general obligation municipals must be rated Baa or
better. In-state revenue municipals must be rated A or better and out-of-state
revenue municipals must be rated AA or better at the time of purchase. The vast
majority of these investments maintained their original ratings at December 31,
2004. No securities of an individual issuer, excluding the U.S. Government and
its agencies, exceed 10 percent of the Company's shareholders' equity as of
December 31, 2004. The Company does not use off-balance sheet derivative
financial instruments. As of December 31, 2004 and December 31, 2003, the
securities portfolio held no structured notes.
Loans
-----
The loan portfolio constitutes the major earning asset of the Company, and
offers the best alternative for maximizing interest spread above the cost of
funds. The Company's loan personnel have the authority to extend credit under
guidelines established and approved by the Board of Directors. Any credit which
exceeds the authority of the loan officer, but is under $2 million is forwarded
to either the Company's Officers' Loan Committee or the Central Indiana Loan
Committee for approval. The committees are comprised of the President/CEO, the
Senior Vice President of Loans and several experienced loan officers. Individual
credits exceeding $2 million are forwarded to the Board of Directors' loan
committee for approval. This loan committee is comprised of seven board members,
one of whom is the President/CEO. The loan committee not only acts as an
approval body to ensure consistent application of the Company's loan policy, but
also provides valuable insight through communication and pooling of knowledge,
judgment, and experience of its members.
The Company's primary lending area generally includes Monroe, Lawrence, Jackson,
Hendricks and contiguous counties in South Central Indiana. The Company extends
out-of-area credit only to borrowers who are considered to be low risk, and
then, only on a limited basis.
20
The following table reflects outstanding balances by loan type.
Loans Outstanding
(dollar amounts in thousands)
- ----------------------------------------------------------------------------------------
December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Commercial and industrial $ 85,420 $ 81,989 $ 76,301 $ 72,640 $ 66,233
Agricultural ............ 992 1,028 1,322 1,084 639
Real estate:
One-to-four-family ... 105,339 105,455 111,297 119,709 86,512
Multi-family ......... 52,087 43,682 44,640 41,941 37,656
Commercial ........... 128,167 108,871 88,661 71,057 42,424
Construction ......... 61,828 40,560 27,471 28,013 24,277
Home equity .......... 25,390 21,044 17,927 13,637 10,554
Farm land ............ 1,450 1,538 1,270 1,256 1,388
Installment ............. 16,412 20,344 22,426 22,463 27,076
-------- -------- -------- -------- --------
Total loans ..... $477,085 $424,511 $391,315 $371,800 $296,759
======== ======== ======== ======== ========
The following table presents the composition of the loan portfolio expressed as
a percent of total loans.
December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Commercial and industrial 17.91 % 19.32 % 19.50 % 19.54 % 22.32 %
Agricultural ............ 0.21 % 0.24 % 0.34 % 0.29 % 0.22 %
Real estate:
One-to-four-family ... 22.08 % 24.84 % 28.44 % 32.20 % 29.14 %
Multi-family ......... 10.92 % 10.29 % 11.41 % 11.28 % 12.69 %
Commercial ........... 26.86 % 25.65 % 22.66 % 19.11 % 14.30 %
Construction ......... 12.96 % 9.55 % 7.02 % 7.53 % 8.18 %
Home equity .......... 5.32 % 4.96 % 4.58 % 3.67 % 3.56 %
Farm land ............ 0.30 % 0.36 % 0.32 % 0.34 % 0.47 %
Installment ............. 3.44 % 4.79 % 5.73 % 6.04 % 9.12 %
-------- -------- -------- -------- --------
Total .......... 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
======== ======== ======== ======== ========
A discussion of each material line item set forth in the preceding tables
follows:
o Commercial and Industrial Lending
At December 31 2004, commercial and industrial loans totaled $85.4 million, or
17.9 percent of the total loan portfolio. This category is comprised of business
loans and business lines of credit. The vast majority of business loans are
either secured by business assets (e.g. furniture and fixtures, inventory,
accounts
21
receivable or automobiles) or carry personal guarantees. At December 31, 2004,
11.5 percent of commercial and industrial loans were fixed rate and 88.5 percent
were variable or adjustable rate. Variable/adjustable rate loans carry a maximum
maturity of eight years. Fixed-rate loans carry a maximum maturity of five
years. Lines of credit are normally written for a one-year term or less.
Interest rates on variable rate loans are indexed to prime, and vary as the
prime rate changes. Interest rates on adjustable rate loans are indexed to
prime, and change annually. These loans are made to a wide variety of businesses
in our primary lending area, and there were no concentrations in any one
industry.
o One-to-four-family Residential Real Estate Lending
At December 31, 2004, one-to-four-family mortgages totaled $105.3 million, or
22.1 percent of the total loan portfolio. Indiana University's presence in the
community provides a strong rental market, accordingly, a material amount of
these loans were for other than single-family residences. At December 31, 2004,
7.1 percent of these loans were fixed rate and 92.9 percent were adjustable or
variable rate. Adjustable-rate mortgages (or ARMs) are offered with either a
one-year, three-year, or five-year term to the initial re-pricing date. After
the initial period, the interest rate for each ARM loan adjusts annually. The
Company uses an index tied to the one-year U.S. Treasury bill rate to re-price
its ARM loans. These loans have a maximum maturity of 30 years. It is the
Company's practice to sell essentially all of the fixed rate owner-occupied
residential mortgages it originates on the secondary market. The Company obtains
a commitment from the purchaser to buy these loans before they are closed, and
does not retain servicing. Adjustable rate loans generally pose different credit
risks than fixed rate loans, primarily because as interest rates rise, the
borrower's payment rises, increasing the potential for default. The payment
history for these ARM loans has not varied significantly from that of fixed rate
loans.
o Multi-family and Commercial Real Estate Lending
These loans are secured primarily by multi-family (five or more) dwellings,
small retail establishments, not-for-profit organizations' buildings and small
office buildings located in the Company's primary lending area. At December 31,
2004, commercial and multi-family loans totaled $180.3 million, or 37.8 percent
of the total loan portfolio. At December 31, 2004, 7.5 percent were fixed rate
while 92.5 percent were adjustable or variable rate. These loans generally
require monthly payments and have maximum maturities of 25 years. The majority
of the fixed-rate loans have maximum maturities of five years. The Company
occasionally offers longer term fixed-rate commercial real estate loans,
however, these are generally match funded with FHLB advances. The Company offers
one-year, three-year and five-year multi-family and commercial ARMs. These loans
are indexed to prime. Variable rate loans are also indexed to prime and vary as
the prime rate changes. Loans secured by multi-family and commercial real estate
are underwritten based on the income-producing potential of the property and the
financial strength of the borrower. In order to monitor the adequacy of cash
flows on income-producing properties, the borrower is required to provide
periodic financial information. Because payments on loans secured by
multi-family and commercial real estate are often dependent on the successful
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy.
o Construction and Vacant Land Lending
At December 31, 2004, construction and vacant land loans totaled $61.8 million,
representing 13.0 percent of the total loan portfolio. The Company originates
construction loans on commercial and residential properties located in its
primary lending area. At December 31, 2004, 10.4 percent of these loans were
fixed rate and 89.6 percent were variable rate. The vast majority of these loans
have maturity dates of less than one year. The interest rates on these loans are
indexed to prime. During the construction phase, the borrower generally pays
interest only on a monthly basis. Loans to individuals for the construction of
their residences may either be short-term construction financing or a
construction/permanent loan which automatically converts to a long-term mortgage
consistent with our one-to-four family loan products. These loans involve many
of the same risks inherent with commercial and multi-family loans discussed
above and tend to be more sensitive to general economic conditions than many
other types of loans.
22
o Home Equity Lending
At December 31, 2004, home equity loans totaled $25.4 million, representing 5.3
percent of the total loan portfolio. All home equity loans are adjustable rate
loans, and adjust after one year. Interest rates on these loans are tied to
prime and increase as the loan-to-value ratio increases. These loans may be
originated in amounts, together with the existing first mortgage, of up to 100
percent of the value of the property securing the loan. The maximum term of
these loans is 30 years.
o Installment Lending
This category is comprised of new and used automobile loans, mobile home loans,
secured and unsecured personal loans, and personal lines of credit. At December
31, 2004, the balance of this account was $16.4 million, representing 3.4
percent of total loans. Installment loans, at December 31, 2004, were divided
between the following categories: automobile loans 52.4 percent, secured
personal loans 18.3 percent, lines of credit 2.5 percent, unsecured personal
loans 19.7 percent, and mobile home loans 7.1 percent. The indirect lending
function comprises approximately 25 percent of all personal loans. We originate
auto loans, boat and recreational vehicle loans on both a direct and an indirect
basis. We generally buy indirect auto loans on a rate basis, paying the dealer a
cash payment for loans with an interest rate which is sometimes in excess of the
rate we require. Any premium is amortized over the remaining life of the loan.
Any prepayments are charged to future amounts owed that dealer.
We underwrite indirect auto loans using the Fair-Isaacs credit scoring system.
We process the loan application using the same procedures as if we were making
the loan directly to the customer, hence, we accept only the more qualified
buyers based on our scoring. Upon purchasing the contract from the dealer, we
assume all service and liability for the loan.
o Loan-to-value Limits
The Company adheres to the FDIC guidelines for loan-to-value limits. These
guidelines are as follows:
Loan Category Loan-to-Value Limit
- ------------- -------------------
Real Estate:
Raw land 65%
Land development 75%
Construction:
Commercial, multi-family and non-residential 80%
One-to-four-family residential 85%
Improved property 85%
Owner-occupied one-to-four-family 90%
Home equity 100%
Non-owner occupied 85%
Commercial and Industrial (secured by):
Accounts receivable 60 days or less past due 80%
Inventory - raw materials 50%
Inventory - finished goods 80%
Equipment 100%
Installment (automobile, RV, boat, etc.) 100%
Management believes the degree of risk assumed on any loan is commensurate with
the interest rate assessed, and is thereby able to receive a higher rate of
return on commercial and real estate construction loans as compared to
residential real estate loans. Although these loan types usually possess
increased elements of risk, the Company's lending practices, policies, and
procedures that are in place are intended to mitigate certain risks associated
with such loans. The Company's commercial and industrial loans are
23
made to local businesses operating in diverse industries and the portfolio
contains no specific industry concentrations, which mitigates certain risks.
Adjustable-rate loans generally pose different credit risks than fixed-rate
loans, primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default.
The following table reflects the maturity schedule of loans. Also indicated are
fixed and variable rate loans maturing after one year.
Loan Liquidity
(dollar amounts in thousands)
- -----------------------------------------------------------------------------------------
Loan Maturities at December 31, 2004
--------------------------------------------------
1 Year 1 - 5 Over 5
and Less Years Years Total
-------- -------- -------- --------
Commercial and industrial ....... $ 41,287 $ 35,303 $ 9,822 $ 86,412
Real estate:
One-to-four-family ......... 7,146 3,018 95,175 105,339
Multi-family ............... 2 5,281 46,804 52,087
Commercial ................. 11,507 9,166 107,494 128,167
Construction ............... 37,583 18,634 5,611 61,828
Home equity ................ -- 94 25,296 25,390
Farm land .................. 27 85 1,338 1,450
Installment ..................... 2,572 9,621 4,219 16,412
-------- -------- -------- --------
Total loans ........... $100,124 $ 81,202 $295,759 $477,085
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates ........ $ 12,348 $ 38,000
Adjustable interest rates ... 68,854 257,759
-------- --------
$ 81,202 $295,759
======== ========
24
Deposits
--------
The Company offers a wide variety of deposit products and services to individual
and commercial customers, such as noninterest-bearing and interest-bearing
checking accounts, savings accounts, money market accounts, and certificates of
deposit. The deposit base provides the major funding source for earning assets.
The following table shows the average amount of deposits and average rates of
interest paid thereon for the years indicated.
Deposit Information
(dollar amounts in thousands)
- -------------------------------------------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
Noninterest bearing .......... $ 75,506 $ 66,249 $ 59,079
Interest bearing demand ...... 161,365 0.65% 155,386 0.66% 133,553 1.22%
Savings deposits ............. 24,284 0.29% 26,011 0.57% 20,328 1.03%
Time ......................... 198,610 2.70% 177,732 3.02% 179,829 3.87%
-------- -------- --------
Total average deposits $459,765 1.69% $425,378 1.82% $392,789 2.64%
======== ======== ========
Certificates of deposit and other time deposits of $100,000 or more mature as
follows:
At December 31,
-----------------------------
CD's over $100,000 2004 2003 2002
------- ------- -------
3 months or less .. $35,910 $14,030 $15,390
3 through 6 months 12,462 8,499 14,421
6 through 12 months 17,851 14,232 15,464
Over 12 months .... 19,635 26,143 24,735
------- ------- -------
$85,858 $62,904 $70,010
------- ------- -------
25
Borrowings
----------
A detailed schedule of short-term borrowings follows:
Short-term Borrowings
(dollar amounts in thousands)
- --------------------------------------------------------------------------------------------------
December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Repurchase agreements outstanding ............................. $41,761 $48,507 $39,158
Federal funds purchased ....................................... 17,000 8,900 10,050
------- ------- -------
Total short-term borrowings ................................... $58,761 $57,407 $49,208
======= ======= =======
Average federal funds purchased during the year ............... $11,131 $ 1,483 $ 2,252
Average repurchase agreements during the year ................. $42,762 $42,835 $39,247
Maximum month-end repurchase agreements ....................... $46,916 $48,507 $44,392
YTD Average interest rate on repurchase agreements ............ 0.84% 0.60% 0.96%
Average interest rate at end of period on repurchase agreements 1.65% 0.49% 0.74%
Repurchase agreements are borrowings, the majority of which mature daily, and
are secured by U.S. Treasury and government agency obligations.
The Bank became a member of the Federal Home Loan Bank of Indianapolis ("FHLB")
in 1997 and has the authority of the Company's Board of Directors to borrow up
to $57 million from the FHLB. All current and any future borrowings are secured
by a blanket collateral pledge of the Bank's one-to-four family residential
loans and multi-family loans. Other borrowings, consisting of FHLB advances and
loans sold under repurchase agreements, were $38.6 million and $44.5 million, as
of December 31, 2004 and 2003, respectively. The FHLB borrowings accounted for
the vast majority of other borrowings. The Company had a net decrease in
borrowings from the FHLB of $5.8 million during 2004. No FHLB advances were
taken in 2004. The Company expects to primarily use deposit growth in the future
as a source of loan funding and for general liquidity, but may continue to
supplement this with additional FHLB advances.
26
Liquidity
---------
A table detailing the maturity and repricing of the Company's assets accompanied
by a discussion of the Company's interest rate sensitivity and liquidity is
presented in the 2004 Annual Report to Shareholders - Financial Review -
Management's Discussion and Analysis on pages 10 to 12 under the caption
"Interest Rate Sensitivity and Disclosures about Market Risk" and on pages 13 to
14 under the caption "Liquidity."
The following table details the main components of cash flows for the years
ended December 31, 2004 and 2003.
Funding Uses and Sources
(dollar amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004 Year Ended December 31, 2003
------------------------------------ ------------------------------------
Increase/(Decrease) Increase/(Decrease)
Average ---------------------- Average ----------------------
Balance Amount Percent Balance Amount Percent
------- ------ ------- ------- ------ -------
Funding Uses
- ------------
Loans, net of unearned income ......... $451,055 $ 39,293 9.54 % $411,762 $ 30,636 8.04 %
Taxable securities .................... 88,848 11,724 15.20 % 77,124 6,925 9.86 %
Tax-exempt securities ................. 17,855 (5,500) (23.55)% 23,355 (2,838) (10.83)%
Interest-bearing deposits ............. 3,743 (1,055) (21.99)% 4,798 3,175 195.63 %
FHLB stock ............................ 2,393 205 9.37 % 2,188 318 17.01 %
Federal funds sold .................... 752 (7,582) (90.98)% 8,334 2,212 36.13 %
-------- -------- -------- --------
Total uses .................. $564,646 $ 37,085 7.03 % $527,561 $ 40,428 8.30 %
======== ======== ======== ========
Funding Sources
- ---------------
Noninterest bearing deposits .......... $ 75,506 $ 9,257 13.97 % $ 66,249 $ 7,170 12.14 %
Interest bearing demand, savings & time 384,259 25,130 7.00 % 359,129 25,419 7.62 %
Short-term borrowings ................. 53,893 9,575 21.61 % 44,318 2,819 6.79 %
Other borrowings ...................... 41,069 (1,655) (3.87)% 42,724 5,168 13.76 %
-------- -------- -------- --------
Total sources ............... $554,727 $ 42,307 8.26 % $512,420 $ 40,576 8.60 %
======== ======== ======== ========
Capital Adequacy
----------------
Management believes the Company and Bank met all the capital requirements as of
December 31, 2004 and 2003, and the Bank was well-capitalized under the
guidelines established by the banking regulators. To be well-capitalized, the
Bank must maintain the prompt corrective action capital guidelines described in
the "Capital Regulations" subsection of the "Regulation and Supervision" portion
of this document. Consolidated capital amounts and ratios are presented in the
following table. Bank capital levels are substantially similar.
At December 31, 2004 management was not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on the Company's
consolidated liquidity, capital resources or operations.
27
Capital
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
At December 31,
---------------------
2004 2003
--------- ---------
Tier 1 capital
Shareholders' equity .............................. $ 47,384 $ 45,375
Less: Intangibles ................................. -- --
Add / deduct: Unrealized (gain) loss on securities 198 (406)
--------- ---------
Total Tier 1 capital ......................... $ 47,582 $ 44,969
= ========= =========
Total risk-based capital
Tier 1 capital .................................... $ 47,582 $ 44,969
Tier 2 capital .................................... 5,194 5,019
--------- ---------
Total risk-based capital ..................... $ 52,776 $ 49,988
========= =========
Risk weighted assets ................................... $ 460,648 $ 413,624
Quarterly average assets ............................... $ 627,666 $ 574,811
Risk-based ratios:
Tier 1 ............................................ 10.33% 10.87%
Total risk-based capital .......................... 11.46% 12.09%
Leverage ratios ................................... 7.58% 7.82%
28
ITEM 2. PROPERTIES.
The Company, through the Bank, currently operates its business from its main
office in downtown Bloomington, Indiana and from fifteen additional branch
locations in Monroe, Jackson, Hendricks and Lawrence Counties in Indiana. The
Company also has an operations center. Information about those locations is set
forth in the table on the following page.
29
- -------------------------------------------------------------------------------------------------
NAME OF OFFICE LOCATION/TELEPHONE NUMBER OWNED/LEASED
- -------------------------------------------------------------------------------------------------
Downtown Main Office 210 East Kirkwood Avenue Owned
Bloomington, IN 47408
(812) 336-0201
- -------------------------------------------------------------------------------------------------
Ellettsville Banking Center 4616 West Richland Plaza Owned
Bloomington, IN 47404
(812) 876-6044
- -------------------------------------------------------------------------------------------------
Highland Village Banking Center 4191 West Third Street Owned
Bloomington, IN 47403
(812) 331-3501
- -------------------------------------------------------------------------------------------------
Kinser Crossing Banking Center 1825 North Kinser Pike Leased
Bloomington, IN 47404
(812) 331-3518
- -------------------------------------------------------------------------------------------------
Kirkwood Auto Branch 306 East Kirkwood Avenue Owned
Bloomington, IN 47408
(812) 331-3510
- -------------------------------------------------------------------------------------------------
Loan Center 111 South Lincoln Street Owned
Bloomington, IN 47408
(812) 331-3555
- -------------------------------------------------------------------------------------------------
Mall Road Banking Center 2801 Buick-Cadillac Blvd. Owned
Bloomington, IN 47401
(812) 331-3507
- -------------------------------------------------------------------------------------------------
Walnut Park Banking Center 2490 South Walnut Street Owned
Bloomington, IN 47403
(812) 331-3514
- -------------------------------------------------------------------------------------------------
Brownstown Banking Center 1051 West Spring Street Owned
Brownstown, IN 47220
(812) 358-3171
- -------------------------------------------------------------------------------------------------
Avon Banking Center 7517 Beechwood Centre Road, Suite 300 Leased
Avon, IN 46123
(317) 272-7820
- -------------------------------------------------------------------------------------------------
Brownsburg Banking Center 65 Garner Road, Suite 400 Leased
Brownsburg, IN 46112
(317) 837-5201
- -------------------------------------------------------------------------------------------------
Plainfield Banking Center 2059 Hadley Road Leased
Plainfield, IN 46168
(317) 837-520
- -------------------------------------------------------------------------------------------------
Bedford Banking Center Limestone Business Center, 2119 West 16th Street Leased
Bedford, IN 47421
(812) 275-7800
- -------------------------------------------------------------------------------------------------
Bell Trace Branch 800 Bell Trace Circle Leased
Bloomington, IN 47408
(812) 331-3575
- -------------------------------------------------------------------------------------------------
Meadowood Branch 2455 Tamarack Trail Leased
Bloomington, IN 47408
(812) 353-7722
- -------------------------------------------------------------------------------------------------
Redbud Hills Branch 3211 E. Moores Pike Leased
Bloomington, IN 47401
(812) 353-7720
- -------------------------------------------------------------------------------------------------
Operations Center 5001 North State Road 37-Business Leased
Bloomington, IN 47404
- -------------------------------------------------------------------------------------------------
30
The Company owns its main office. It owns seven of its branch locations and
leases space for eight branches. The Company also leases its Operations Center.
The main office contains approximately 18,656 square feet of space, and is
occupied solely by the Company. The Company's data processing center,
bookkeeping and deposit operations departments are located at the Operations
Center.
ITEM 3. LEGAL PROCEEDINGS.
Except as set forth below, there are no material pending legal proceedings,
other than routine litigation incidental to the business of the Company or the
Bank, to which the Company or the Bank is a party or of which any of its
property is subject. Further, there is no material legal proceeding in which any
director, officer, principal shareholder, or affiliate of the Company, or any
associate of such director, officer, principal shareholder or affiliate is a
party, or has a material interest, adverse to the Company.
The Bank is a plaintiff in an action to recover amounts due on mortgage loans to
a real estate developer and related entities. The borrower is in bankruptcy
proceedings and has recently been indicted by a federal grand jury. The trustee
in the borrower's bankruptcy petition has filed an action against the Bank and
other defendants for damages from fraudulent transfer and preference payments,
and to set aside certain mortgages granted to the Bank by the borrower.
Furthermore, on February 17, 2005, the loan officer who made the loans related
to the legal proceedings was indicted by a federal grand jury. Based upon
current facts and circumstances, it is not possible at this time to predict the
effect that these proceedings will have on the financial statements of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2004 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITES.
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "MROE." The following table sets forth, for the periods indicated, the
high and low sales prices for the Company's common stock as reported by the
Nasdaq National Market:
Price Per Share
-----------------------------------
2004 2003 Dividends Declared
--------------- ----------------- ------------------
Quarter High Low High Low 2004 2003
-------------------------------------------------------------------------
First Quarter $ 16.45 14.09 $ 14.18 $ 13.11 $ .13 $ .12
Second Quarter 16.89 15.80 14.07 13.00 .13 .12
Third Quarter 17.00 15.89 14.50 13.46 .13 .12
Fourth Quarter 18.44 16.19 14.25 13.81 .13 .13
31
In each quarter during 2004 and 2003, the Company declared and paid the cash
dividends listed in the above table for a per share total of $ 0.52 and $ 0.49
for 2004 and 2003, respectively. The Company has paid a regular cash dividend
for over twenty-four consecutive years. The Company currently expects that
comparable cash dividends will continue to be paid in the future.
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net profits (as defined) for the current year plus
those for the previous two years. The Bank normally restricts dividends to a
lesser amount because of the need to maintain an adequate capital structure.
Total shareholders' equity of the Bank at December 31, 2004 was $47,173,000 of
which $43,148,000 was restricted from dividend distribution to the Company. The
Company does not anticipate that this regulatory limitation will affect the
future payment of dividends.
As of March 7, 2005, there were approximately 303 shareholders of record.
During 2004, several directors exercised stock options. On March 31, 2004 the
Company sold 5,000 shares of common stock at $8.25 per share, or an aggregate of
$41,250, to Mark D. Bradford, pursuant to the exercise by Mr. Bradford of a
stock option. On April 19, 2004 the Company sold 5,000 shares of common stock at
$13.25 per share, or an aggregate of $66,250, to Timothy D. Ellis, pursuant to
the exercise by Mr. Ellis of a stock option. On May 6, 2004 the Company sold
5,000 shares of common stock at $13.25 per share, or an aggregate of $66,250, to
Charles R. Royal, Jr., pursuant to the exercise by Mr. Royal of a stock option.
These shares were sold in a private placement pursuant to Section 4(2) of the
Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to pages 2
through 3 of the Company's 2004 Annual Report to Shareholders - Financial Review
under the caption "Five-Year Financial Summary."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to pages 4
through 18 of the Company's 2004 Annual Report to Shareholders - Financial
Review under the caption "Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The information required under this item is incorporated by reference to pages
19 through 21 of the Company's 2004 Annual Report to Shareholders - Financial
Review - Management's Discussion and Analysis under the caption "Interest Rate
Sensitivity and Disclosures about Market Risk."
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are
incorporated herein by reference to pages 20 through 39 of the Company's 2004
Annual Report to Shareholders - Financial Review.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended) based on their
evaluation of these controls and procedures as required by Rule 13a-15(b)
as of the end of the period covered by this Form 10-K are effective.
(b) Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation thereof,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
(c) Limitations on the Effectiveness of Controls. The Company's management,
including its principal executive officer and principal financial officer,
does not expect that the Company's disclosure controls and procedures and
other internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there only can be
reasonable assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
(d) As permitted by the order of the SEC issued in Release No. 50754, dated
November 30, 2004 (the "Order") the Company intends to file its
"Management's annual report on internal control over financial reporting"
and the related "Attestation report of the registered public accounting
firm" by an amendment to this Form 10-K within the time period specified in
the Order.
33
ITEM 9B. OTHER INFORMATION.
On December 6, 2004, the Company set the 2005 annual base salaries of the named
executive officers and established the criteria under the Senior Officer
Incentive Compensation Plan. Salaries as established for the named executive
officers and a summary of the Senior Officer Incentive Compensation Plan for
2005 are included as Exhibit 10(xii) to this Form 10-K. The Company also
established the compensation to be paid to Directors for the year 2005. These
amounts are set forth on Exhibit 10(xi) to this Form 10-K.
On December 6, 2004, the Company also approved the bonus amounts payable to the
named executive officers for 2004 under the Senior Officer Incentive
Compensation Plan. These amounts were $27,096 for Mr. Bradford; $33,952 for Mr.
Christy; $17,147 for Mr. Dyott; $36,452 for Mr. Krupka; and $35,253 for Mr.
Walters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 10
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2004 fiscal year, which Proxy
Statement will contain such information. The information required by Item 10 is
incorporated herein by reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 11
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2004 fiscal year, which Proxy
Statement will contain such information. The information required by Item 11 is
incorporated herein by reference to such Proxy Statement.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
- -----------------------------------------------------------------------------------------------------------
Number of Number of securities remaining
securities to be available for future issuance
Plan Category issued upon Weighted-average under equity compensation
exercise of exercise price of plans-excluding securities
outstanding options outstanding options reflected in the first column
- -----------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by shareholders 122,500 $ 13.42 339,500
- -----------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 0 0 0
shareholders
- -----------------------------------------------------------------------------------------------------------
Totals 122,500 $ 13.42 339,500
- -----------------------------------------------------------------------------------------------------------
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 12
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2004 fiscal year, which Proxy
Statement will contain such information. The information required by Item 12,
with the exception of the table presented above, is incorporated herein by
reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 13
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2004 fiscal year, which Proxy
Statement will contain such information. The information required by Item 13 is
incorporated herein by reference to such Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the provisions of General Instruction G to Form 10-K, the
information required for the remainder of the required disclosures under Item 14
is not set forth herein because the Company intends to file with the Securities
and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days following the end of its 2004 fiscal year, which Proxy
Statement will contain such information. The information required by Item 14 is
incorporated herein by reference to such Proxy Statement.
35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Page Number
(a) 1. Financial Statements:
Independent accountants' report.......................... 19
Consolidated balance sheets at
December 31, 2004 and 2003...................... 20
Consolidated statements of income, years ended
December 31, 2004, 2003 and 2002................ 21
Consolidated statements of shareholders equity,
years ended December 31, 2004, 2003 and 2002.... 22
Consolidated statements of cash flows, years ended
December 31, 2004, 2003 and 2002................ 23
Notes to consolidated financial statements............... 24
(a) 2. Financial statement schedules:
All schedules are omitted because they are not applicable or
not required, or because the required information is included
in the consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit No: Description of Exhibit:
- ------------ ----------------------
3 (i) Monroe Bancorp Articles of Incorporation are
incorporated by reference to registrant's Form 10
filed November 14, 2001.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference
to registrant's Form 10 filed November 14, 2001.
10 (i)* 1999 Directors' Stock Option Plan of Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (ii)* 1999 Management Stock Option Plan of Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (iii)* Deferred Compensation Trust for Monroe Bancorp
is incorporated by reference to registrant's Form 10
filed November 14, 2001.
10 (iv)* Monroe County Bank Agreement for Supplemental Death
or Retirement Benefits is incorporated by reference
to registrant's Form 10 filed November 14, 2001.
10 (v)* Monroe Bancorp Thrift Plan as Amended and Restated
January 1, 2001 is incorporated by reference to
registrant's Form 10-Q filed November 13, 2003.
36
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 Employee Stock
Ownership Plan is incorporated by reference to the
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 and Second Amendments are incorporated by
reference to the 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 the registrant's Form 10-K filed
March 29, 2004.
10 (x)* Form of agreement under the 1999 Management Stock
Option Plan of Monroe Bancorp are filed as part of
this Form 10-K.
10 (xi)* Schedule of Directors Compensation Arrangements are
filed as part of this Form 10-K.
10 (xii)* Schedule of Executive Officers Compensation
Arrangements are filed as part of this Form 10-K.
13 2004 Annual Report to Shareholders (except for the
pages and information expressly incorporated by
reference in this Form 10-K, the Annual Report to
Shareholders is provided solely for the information
of the Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-K).
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting
Firm.
31(i) Certification for Annual Report on Form 10-K by
Principal Executive Officer.
31(ii) Certification for Annual Report on Form 10-K by
Principal Financial Officer.
32(i) Certification of Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32 (ii) Certification of Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement
(b) Exhibits.
See the list of exhibits in Item 15(a)(3).
(c) Financial Statement Schedules.
All schedules are omitted as the required information either is not applicable
or is included in the 2004 Annual Report to Shareholders or related notes.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of March
2005.
MONROE BANCORP
By: /s/Mark D. Bradford
----------------------------
Mark D. Bradford, President, Chief Executive
Officer, (Principal Executive Officer)
By: /s/ Gordon M. Dyott
----------------------------
Gordon M. Dyott
Executive Vice President, Chief Financial
Officer, (Principal Financial Officer)
38
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title/Capacity
- --------- --------------
Date
- ----
/s/ Mark D. Bradford President, Chief Executive Officer
- -------------------------------- (Principal Executive Officer) and Director
Mark D. Bradford
March 14, 2005
/s/ Gordon M. Dyott Executive Vice President, Chief Financial
- -------------------------------- Officer (Principal Financial Officer)
Gordon M. Dyott
March 14, 2005
/s/ Kathryn E. Burns Vice President, Director of Finance
- -------------------------------- (Principal Accounting Officer)
Kathryn E. Burns
March 14, 2005
/s/ David D. Baer Director, Chairman
- --------------------------------
David D. Baer
March 9, 2005
Director
- --------------------------------
James D. Bremner
/s/ Bradford J. Bomba, Jr., M.D. Director
- --------------------------------
Bradford J. Bomba, Jr. M.D.
March 9, 2005
/s/ Steven R. Crider Director
- --------------------------------
Steven R. Crider
March 9, 2005
/s/ Timothy D. Ellis Director
- --------------------------------
Timothy D. Ellis
March 10, 2005
/s/ Joyce Claflin Harrell Director
- --------------------------------
Joyce Claflin Harrell
March 9, 2005
/s/ Harry F. McNaught, Jr. Director
- --------------------------------
Harry F. McNaught, Jr.
March 10, 2005
/s/ Paul W. Mobley Director
- --------------------------------
Paul W. Mobley
March 9, 2005
/s/ Charles R. Royal, Jr. Director
- --------------------------------
Charles R. Royal, Jr.
March 9, 2005
39