Attached files
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, 2009 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:
Common Stock, No Par Value NASDAQ Global Market
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(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value (not necessarily a reliable indication of the price
at which more than a limited number of shares would trade) of the voting stock
held by non-affiliates of the registrant was $39,811,000 on June 30, 2009,
computed by reference to the closing price as reported by the NASDAQ Global
Market system.
As of March 12, 2010, there were 6,227,656 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
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Portions of the 2009 Annual Report to Shareholders Part II
Portions of the Definitive Proxy Statement for the Annual Meeting
of Shareholders to be held April 29, 2010 Part III
FORM 10-K TABLE OF CONTENTS Form 10-K
Page Number
Part I
Item 1 - Business............................................................4
Item 1A - Risk Factors.......................................................31
Item 1B - Unresolved Staff Comments..........................................36
Item 2 - Properties.........................................................36
Item 3 - Legal Proceedings..................................................38
Item 4 - Reserved...........................................................38
Part II
Item 5 - Market for the Registrant's Common Equity,
Related Shareholder Matters and Issuer Purchases of Equity
Securities.......................................................38
Item 6 - Selected Financial Data............................................39
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................39
Item 7A - Quantitative and Qualitative Disclosures about Market Risk.........39
Item 8 - Financial Statements and Supplementary Data........................39
Item 9 - Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..............................39
Item 9A - Controls and Procedures............................................40
Item 9B - Other Information..................................................41
Part III
Item 10 - Directors, Executive Officers and Corporate Governance.............41
Item 11 - Executive Compensation.............................................41
Item 12 - Security Ownership of Certain Beneficial
Owners and Management and Related Shareholder Matters............41
Item 13 - Certain Relationships and Related Transactions, and Director
Independence.....................................................42
Item 14 - Principal Accountant Fees and Services.............................42
Part IV
Item 15 - Exhibits, Financial Statement Schedules............................43
Signatures..............................................................................46
3
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, 2009, on a consolidated
basis the Company had total assets of $802,451,000, total loans including loans
held for sale of $587,365,000 and total deposits of $634,254,000. 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, headquartered in Bloomington, Indiana, conducts business from 18
locations in Monroe, Hamilton, Hendricks, Jackson and Lawrence Counties in
Indiana. Approximately 78 percent of the Bank's deposits are in Monroe County
and are concentrated in and around the city of Bloomington. However, the
Company's anticipated continued development of its existing and additional
banking business in Hamilton County, Hendricks County and other counties in the
greater Indianapolis area, 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, 2009, the Bank had 204 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 residential mortgage loans that are generally sold 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.
Based upon a closing price of $6.24 for the Company's stock on December 31,
2009, the Company's $0.16 dividend per share provided a dividend yield of 2.56
percent. The Company's stock trades on the NASDAQ Global Market under the symbol
MROE.
Management believes that the Company's culture of community involvement, service
quality, and customer focus has played a significant role in the Company's
growth and success over the years. Management also believes that other
significant factors contributing to the Company's growth include, but are not
limited to, the attractiveness of the Company's primary markets, an involved
Board that sets high performance standards and the increased use of incentive
and commission compensation plans.
4
The primary issue that affected the Company in 2009 was the continued weakness
of the economy and related stress in residential housing markets. The Company
focused much of its efforts on managing asset quality issues resulting from the
effect that economic conditions had on loans made primarily to residential real
estate development related projects. The increase in the Company's provision for
loan losses ($11,850,000 in 2009 compared to $8,880,000 in 2008) was largely
asset quality issues related to this market segment.
Management's efforts focused on developing methodologies to identify potentially
weak credits as early as possible, which enabled a proactive and aggressive
approach to managing these credits and the development of workout strategies as
appropriate. Nonetheless, loans 30 days past due increased from $17,319,000 (2.7
percent of total loans) at December 31, 2008 to $38,843,000 (6.6 percent of
total loans) at December 31, 2009. Past due loans increased during this period
by $21,524,000 or 124.3 percent. During the same period, non-performing loans
(non-accrual loans and troubled debt restructuring) increased from $14,329,000
(2.3 percent of total loans) to $20,603,000 (3.5 percent of total loans) at
December 31, 2009. Of the non-performing loans outstanding at December 31, 2009,
$20,299,000 or 98.5 percent were secured by real estate (net of any charge-downs
previously taken). The increase in past due loans and non-performing loans was
driven by loans internally defined as Residential Real Estate Development,
Residential Speculative Construction, Unimproved Land and loans secured by 1-4
Family Non-Owner Occupied Residential Properties. Management believes the
presence of real estate collateral mitigates the level of expected loss though
the level of mitigation is uncertain due to the difficulty ascertaining real
estate values at this time. Residential Real Estate Development, Residential
Speculative Construction, Unimproved Land and loans secured by 1-4 Family
Non-Owner Occupied Residential Properties that were 30 days or more past due at
year-end 2009 totaled $13,038,000.
A second area of focus was the growth of noninterest income. The Company
experienced significant noninterest income growth during the year, primarily in
gains on sales of available for sale securities, net gains on loan sales and
debit card interchange fees. Gains on sales of available for sale securities
were $2,146,000 in 2009, compared to $951,000 in 2008, an increase of 125.7
percent primarily due to the quality and increased value of the Company's
investment portfolio. Net gains on loan sales were $1,364,000 in 2009, compared
to $703,000 in 2008, an increase of 94.0 percent largely due to strong
residential mortgage refinancing activity. The Company does not anticipate
security gains and net gains on loan sales to continue at the same rate in 2010.
Debit card interchange fees were $1,178,000 in 2009, compared to $1,098,000 in
2008, an increase of 7.3 percent primarily due to increased debit card usage.
A third area of Management focus was staff efficiency and cost management.
Excluding the effect of the directors' and executives' rabbi trust deferred
compensation plan and the $1,004,000 increase in Federal Deposit Insurance
Corporation (the "FDIC") assessment, the Company reduced all other operating
expenses in 2009 by $876,000, or 4.2 percent compared to 2008. The reduction in
expenses was largely due to a $729,000 decrease in salaries and employee
benefits largely driven by a reduction in the average number of employees from
225 in 2008 to 210 in 2009. A reduction in advertising expenditures also
contributed to the decline in operating expense. Advertising expense decreased
$188,000, or 26.0 percent in 2009 compared to 2008 due to the Company's cost
management efforts.
A fourth area of Management focus was pricing discipline and other strategies to
offset pressure on the Company's net interest margin created by the interest
expense for the subordinated debt issuance in July 2009 and the increase in
non-accrual loans. To combat this and other adverse factors, Management's
efforts to improve its net interest margin included the development of a loan
pricing model, establishing floors on variable rate loan products, increased
efforts to attract lower cost checking accounts and increased use of
competitively priced brokered certificates of deposit. Despite these and other
actions, the Company's tax-equivalent net interest margin decreased to 3.15
percent for 2009 compared to 3.30 percent for 2008. The fifteen basis point (100
basis points equals 1 percent) decline was largely a result of the $624,000 of
interest expense for the subordinated debt issued in July 2009 and the increase
in non-accrual loan balances, which decreased the tax-equivalent net interest
5
margin by approximately eight basis points and three basis points, respectively,
in 2009. Non-accrual loans totaled $20,603,000 at year-end 2009 compared to
$14,329,000 at year-end 2008, an increase of $6,274,000 or 43.8 percent. The
increase in non-accrual loans resulted from slowing economic activity and
stresses in the residential housing market.
In addition to the areas of focus discussed above, Management took steps in 2009
to reduce interest rate risk associated with the increasing possibility of
rising rates or a yield curve with increasing slope. To this end, Management
reduced its liability sensitivity by adding short term assets that shortened the
average life of the Company's investment portfolio and by adding interest rate
floors to many new and renewing loans.
Company Goals
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The Company's business strategies are focused on five major areas:
o improving asset quality and strengthening credit processes;
o increasing the Company's net interest margin;
o managing interest rate risk;
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 continued
moderate loan and deposit growth from the Bank's initiatives in Hendricks County
and Hamilton County, two attractive markets in the greater Indianapolis area, 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 non-performing 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 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., Capital One,
Wells Fargo) 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 customers.
The Company's success, in view of the substantial competition, is felt to be a
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.
According to data published annually by the FDIC, all FDIC insured deposits held
by financial institutions in Monroe County grew by $407,856,000, or 31.8
percent, during the five-year period between June 30, 2004 and June 30, 2009.
During the same period, the Company was able to grow its deposits within Monroe
County by $170,830,000 (48.5 percent) and increase its market share from 27.5
percent in 2004 to 30.9 percent in 2009. Deposit growth over the last five years
6
has been consistent with the Company's growth in loans. In 2009, the Company
addressed short-term liquidity needs by borrowing federal funds (short-term
borrowings from other banks) and acquiring brokered and short-term public fund
certificates of deposit.
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. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information
concerning issuers that file electronically with the SEC, and the Company's
filings are accessible on the SEC's web site at www.sec.gov. The public may read
and copy any materials filed by the Company with the SEC at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, DC 20549-0213. The public may
obtain information on the operations of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
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 Board of Governors of the Federal Reserve (the "Federal
Reserve"), 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, is subject to periodic examination by
the Federal Reserve, and is required to file periodic reports of our operations
and any additional information that the Federal Reserve may require.
Investments, Control, and Activities. With some limited exceptions, the Bank
Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before acquiring another bank holding company or
acquiring more than five percent of the voting shares of a bank (unless it
already owns or controls the majority of such shares).
Bank holding companies are prohibited, with certain limited exceptions, from
engaging in activities other than those of banking or of managing or controlling
banks. They are also prohibited from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiary companies furnishing
services to or performing services for their subsidiaries, and other
subsidiaries engaged in activities which the Federal Reserve Board determines to
be so closely related to banking or managing or controlling banks as to be
incidental to these 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 financial 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.
7
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.
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.
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).
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system whereby FDIC-insured depository institutions pay
insurance premiums at rates based on their risk classification. An institution's
risk classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators.
In February 2009, the Board of Directors of the Federal Deposit Insurance
Corporation voted to amend the restoration plan for the Deposit Insurance Fund
"DIF". The amended restoration plan extended the period of time to raise the DIF
reserve ratio to 1.15 percent from five to seven years. The amended restoration
plan also included a final rule that set assessment rates. Under this final rule
which began on April 1, 2009, the FDIC premium assessed to the Company
increased.
8
On May 22, 2009, the Board of Directors of the FDIC voted to levy a special
assessment on insured institutions as part of the agency's efforts to rebuild
the DIF and help maintain public confidence in the banking system. The final
rule established a special assessment of five basis points on each FDIC-insured
depository institution's assets, minus its Tier 1 capital, as of June 30, 2009.
The special assessment which totaled $378,000 was due on September 30, 2009 and
was collected by the FDIC via electronic Automated Clearing House payment on
October 1, 2009.
On September 29, 2009, the FDIC Board of Directors adopted a Notice of Proposed
Rulemaking ("NPR") that would require insured institutions to prepay their
estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012. This regulation became effective on November 17,
2009. The FDIC Board also voted to adopt a uniform three-basis point increase in
assessment rates effective on January 1, 2011, and extend the restoration period
from seven to eight years.
Deposits in the Bank are insured by the FDIC up to a maximum amount, which is
generally $250,000 (in effect until December 31, 2013) per depositor subject to
aggregation rules. 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 it may not be
able to pass these costs on to its customers. During 2007, the FDIC began
collecting deposit insurance premiums in arrears. The last payment in the amount
of $4,334,000 was made by the Bank on December 30, 2009, for the quarter ended
September 30, 2009 and prepayment of the quarter ending December 31, 2009 and
for all of 2010, 2011 and 2012.
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 and insiders 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.
9
Branching and Acquisitions. Branching by the Bank requires the prior approval of
the FDIC and the DFI. Under current law, Indiana chartered banks may establish
branches throughout the state and in other states. Congress authorized
interstate branching, with certain limitations, beginning in 1997. Indiana law
authorizes an Indiana bank to establish one or more branches in states other
than Indiana through interstate merger transactions and to establish one or more
interstate branches through de novo branching or the acquisition of a branch.
Community Reinvestment Act. The Community Reinvestment Act requires that the
FDIC evaluate the record of the Bank in meeting the credit needs of its local
community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could result in
the imposition of additional requirements and limitations on the Bank.
Capital Regulations. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and account for
off-balance sheet items. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk-weighted
categories of 0 percent, 20 percent, 50 percent, or 100 percent, with higher
levels of capital being required for the categories perceived as representing
greater risk. The guidelines are minimums, and the federal regulators have noted
that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios in excess of the minimums. Neither the Company nor the Bank has
received any notice indicating that either is subject to higher capital
requirements.
The federal bank regulatory authorities have also implemented a leverage ratio
to supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank
holding company may leverage its equity capital base.
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, 2009, 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.
The Company took several actions in 2009 to preserve and increase capital. On
April 27, 2009, the Company announced it would preserve capital by reducing its
quarterly dividend from $0.13 per share to $0.01 per share and announced its
plan to issue Subordinated Debentures. On July 17, 2009, $13,000,000 of Tier 2
capital was raised by the Company through the issuance of Subordinated
Debentures. The Subordinated Debentures were issued as the result of a public
offering. The Subordinated Debentures carry an interest rate of 10 percent and
will mature on June 30, 2019. The Company has the right to call the Subordinated
Debentures at any time after three years. On July 23, 2009, the Company's Board
of Directors voted to provide $10,000,000 of the net proceeds of the offering to
the Bank as additional capital with the remaining proceeds to be used by the
Company for general corporate purposes.
10
The Company did not participate in the U. S. Treasury's Troubled Asset Relief
Program ("TARP") Capital Purchase Program ("CPP") based upon the Board's
conclusion that it was not in the best long term interest of the Company to do
so.
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 and state laws applicable
to credit transactions, such as the:
o Truth-In-Lending Act and state consumer protection laws, governing
disclosures of credit terms and prohibitive certain practices with regard
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 and other fair lending laws, prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit;
o Fair Credit Reporting Act of 1978 and Fair and Accurate Transactions Act of
2003, governing the use and provision of information to credit reporting
agencies;
o Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection agencies; and
o rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
o Customer Information Security Guidelines. The federal bank regulatory
agencies have adopted final guidelines (the "Guidelines") for safeguarding
confidential customer information. The Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of
Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer
information, protect against any anticipated threats or hazards to the
security or integrity of such information; and protect against unauthorized
access to or use of such information that could result in substantial harm
or inconvenience to any customer.
o Electronic Funds Transfer Act, and Regulation E. The Electronic Funds
Transfer Act, which is implemented by Regulation E, governs automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking service.
Enforcement Powers. Federal regulatory agencies may assess civil and criminal
penalties against depository institutions and certain "institution-affiliated
parties," including management, employees, and agents of a financial
institution, as well as independent contractors and consultants such as
attorneys and accountants and others who participate in the conduct of the
financial institution's affairs. In addition, regulators may commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, regulators may issue cease-and-desist orders to, among other
things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the regulator to be appropriate.
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
11
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.
Recent Legislative and Regulatory Initiatives to Address Financial and Economic
Crises. Congress, the United States Department of the Treasury ("Treasury") and
the federal banking regulators, including the FDIC, have taken broad action
since early September 2008 to address volatility in the U.S. banking system and
financial markets.
In October 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was
enacted. The EESA authorizes Treasury to purchase from financial institutions
and their holding companies up to $700 billion in mortgage loans,
mortgage-related securities and certain other financial instruments, including
debt and equity securities issued by financial institutions and their holding
companies in the Troubled Asset Relief Program ("TARP"). The purpose of TARP is
to restore confidence and stability to the U.S. banking system and to encourage
financial institutions to increase their lending to customers and to each other.
As part of TARP, Treasury has allocated $250 billion towards the Capital
Purchase Program ("CPP"). Under the CPP, Treasury will purchase debt or equity
securities from participating institutions. Participants in the CPP are subject
to executive compensation limits and are encouraged to expand their lending and
mortgage loan modifications.
EESA also increased FDIC deposit insurance on most accounts from $100,000 to
$250,000. This increase is in place until the end of 2013 and is not covered by
deposit insurance premiums paid by the banking industry.
Following a systemic risk determination, on October 14, 2008, the FDIC
established a Temporary Liquidity Guarantee Program ("TLGP"). The TLGP includes
the Transaction Account Guarantee Program ("TAGP"), which provides unlimited
deposit insurance coverage for noninterest-bearing transaction accounts
(typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts. As originally enacted, the TAGP expired on
December 31, 2009, and banks participating in the TAGP paid a 10 basis point fee
(annualized) on the balance of each covered account in excess of $250,000, while
the extra deposit insurance is in place. On October 1, 2009, the FDIC extended
the TAGP for six months until June 30, 2010. Any insured depository institution
that was participating in the TAGP program as of October 1, 2009 was permitted
to continue in the TAGP during the extension period. The annual assessment rate
that applies to participating institutions during the extension period is either
15 basis points, 20 basis points or 25 basis points, depending on the "Risk
Category" assigned to the institution under the FDIC's risk-based premium
system. Any institution participating in the TAGP program as of October 1, 2009
that desired to opt out of the TAGP extension was required to submit its opt-out
election to the FDIC on or before November 2, 2009.
The TLGP also includes the Debt Guarantee Program ("DGP"), under which the FDIC
guarantees certain senior unsecured debt of FDIC-insured institutions and their
holding companies. The unsecured debt must be issued on or after October 14,
2008 and not later than June 30, 2009, and the guarantee is effective through
the earlier of the maturity date or June 30, 2012. The DGP coverage limit is
generally 125 percent of the entity's eligible debt outstanding on September 30,
2008 and scheduled to mature on or before June 30, 2009 or, for certain insured
institutions, 2 percent of their total liabilities as of September 30, 2008.
Depending on the term of the debt maturity, the nonrefundable DGP fee ranges
from 50 to 100 basis points (annualized) for covered debt outstanding until the
earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all
12
eligible entities, unless the entity opted out on or before December 5, 2008.
The Company did not opt out of the TAGP or the DGP, although it does not have
any eligible debt and therefore does not currently anticipate paying any premium
associated with the DGP.
On February 17, 2009, President Barack Obama signed the American Recovery and
Reinvestment Act of 2009 ("ARRA"), more commonly known as the economic stimulus
or economic recovery package. ARRA includes a wide variety of programs intended
to stimulate the economy and provide for extensive infrastructure, energy,
health and education needs. In addition, ARRA imposes new executive compensation
and corporate governance limits on current and future participants in the
Treasury's Capital Purchase Program, which would include the Company if it
participates the Capital Purchase Program, which are in addition to those
previously announced by Treasury. The new limits remain in place until the
participant has redeemed the preferred stock sold to Treasury, which is now
permitted under ARRA without penalty and without the need to raise new capital,
subject to Treasury's consultation with the recipient's appropriate federal
regulator.
On May 20, 2009, the Helping Families Save Their Homes Act of 2009, which
extended the temporary increase in the standard maximum deposit insurance amount
provided by the FDIC to $250,000 per depositor through December 31, 2013, was
signed into law. This extension of the temporary $250,000 coverage limit
(pursuant to EESA) became effective immediately upon the President's signature.
The legislation provides that the standard maximum deposit insurance amount
provided by the FDIC will return to $100,000 on January 1, 2014.
On October 22, 2009, the Federal Reserve issued a comprehensive proposal on
incentive compensation policies (the "Incentive Compensation Proposal") intended
to ensure that the incentive compensation policies of banking organizations do
not undermine the safety and soundness of such organizations by encouraging
excessive risk-taking. This guidance sets expectations for banking organizations
concerning their incentive compensation arrangements and related
risk-management, control and governance processes. The Incentive Compensation
Proposal, which covers all employees that have the ability to materially affect
the risk profile of an organization, either individually or as part of a group,
is based upon three primary principles: (i) balanced risk-taking incentives,
(ii) compatibility with effective controls and risk management, and (iii) strong
corporate governance. Any deficiencies in compensation practices that are
identified may be incorporated into the organization's supervisory ratings,
which can affect its ability to make acquisitions or perform other actions. In
addition, under the Incentive Compensation Proposal, the Federal Reserve in
appropriate circumstances may take enforcement action against a banking
organization.
On January 14, 2010, the current administration announced a proposal to impose a
fee (the "Financial Crisis Responsibility Fee") on those financial institutions
that benefited from recent actions taken by the U.S. government to stabilize the
financial system. If implemented as initially proposed, the Financial Crisis
Responsibility Fee will be applied to firms with over $50 billion in
consolidated assets, and, therefore, by its terms would not apply to the
Corporation. The Financial Crisis Responsibility Fee would be collected by the
Internal Revenue Service and would be approximately fifteen basis points, or
0.15 percent, of an amount calculated by subtracting a covered institution's
Tier 1 capital and FDIC-assessed deposits (and/or an adjustment for insurance
liabilities covered by state guarantee funds) from such institution's total
assets. The Financial Crisis Responsibility Fee, if implemented as proposed by
the current administration, would go into effect on June 30, 2010 and remain in
place for at least ten years. The U.S. Treasury would be asked to report after
five years on the effectiveness of the Financial Crisis Responsibility Fee as
well as its progress in repaying projected losses to the U.S. government as a
result of TARP. If losses to the U.S. government as a result of TARP have not
been recouped after ten years, the Financial Crisis Responsibility Fee would
remain in place until such losses have been recovered.
13
FORWARD-LOOKING STATEMENTS
--------------------------
Portions of information in this Form 10-K contain forward-looking statements
about the Company which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. This document contains certain
forward-looking statements with respect to the financial condition, results of
operations, plans, objectives, future performance and business of the Company.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words "believe,"
"expect," "anticipate," "intend," "plan," "estimate" or words of similar
meaning, or future or conditional verbs such as "will," "would," "should,"
"could" or "may" or words of similar meaning. These forward-looking statements,
by their nature, are subject to risks and uncertainties. There are a number of
important factors that could cause future results to differ materially from
historical performance and these forward-looking statements. Factors that might
cause such a difference include, but are not limited to: (1) changes in
competitive pressures among depository institutions; (2) changes in the interest
rate environment; (3) changes in prepayment speeds, charge-offs and loan loss
provisions; (4) changes in general economic conditions, either national or in
the markets in which the Company does business; (5) legislative or regulatory
changes adversely affecting the business of the Company; (6) changes in real
estate values or the real estate markets; (7) unexpected and/or adverse outcomes
in pending or future litigation; and (8) the Company's business development
efforts in new markets in and around Hendricks and Hamilton Counties.
14
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,
-------------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
Summary of operations
Net interest income ................................ $ 23,837 $ 23,601 $ 23,039 $ 22,665 $ 20,824
Less: Provision for loan losses .................... 11,850 8,880 2,035 1,200 1,140
-------- -------- -------- -------- --------
Net interest income, after provision for loan losses 11,987 14,721 21,004 21,465 19,684
Noninterest income ................................. 11,983 10,033 10,251 9,492 9,258
Noninterest expense ................................ 21,930 20,732 20,626 20,098 18,054
Net income ......................................... 1,975 3,979 7,806 7,586 7,223
Per common share
Basic earnings per share ........................... $ 0.317 $ 0.640 $ 1.240 $ 1.154 $ 1.094
Diluted earnings per share ......................... 0.317 0.639 1.235 1.150 1.091
Cash dividends per share ........................... 0.1600 0.5200 0.4900 0.4800 0.4745
Book value per common share ........................ 9.03 8.99 8.76 8.24 7.64
Selected year-end balances
Total assets ....................................... $802,451 $819,799 $778,080 $748,193 $713,060
Total securities ................................... 121,250 121,530 125,658 120,250 119,244
Total loans - including loans held for sale ........ 587,365 633,091 584,831 559,463 525,466
Total deposits ..................................... 634,254 665,179 619,717 589,328 576,181
Shareholders' equity ............................... 56,202 55,921 54,452 53,505 50,514
Selected average balances
Total assets ....................................... $823,991 $792,004 $753,683 $730,137 $662,806
Total securities ................................... 106,587 114,067 122,736 117,553 111,778
Total loans - including loans held for sale ........ 618,590 601,875 564,483 549,463 499,503
Total deposits ..................................... 662,565 649,540 611,907 582,762 521,235
Shareholders' equity ............................... 56,614 55,940 52,774 52,001 48,387
Ratios based on average balances
Return on assets (1) ............................... 0.24% 0.50% 1.04% 1.04% 1.09%
Return on equity (2) ............................... 3.49% 7.11% 14.79% 14.59% 14.93%
Dividend payout ratio (3) .......................... 50.43% 81.23% 39.21% 41.52% 43.36%
Equity to assets ratio (4) ......................... 6.87% 7.06% 7.00% 7.12% 7.30%
(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
15
Net Interest Income
-------------------
The table which follows 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 (as discussed on page 12 of the Company's 2009 Annual
Report to Shareholders under the caption "Management's Discussion and Analysis")
assuming a 34 percent tax rate. The tax-equivalent adjustment recognizes the
income tax savings when comparing taxable and tax-exempt assets. Management
believes a table of the changes in tax-equivalent rates and margin is more
relevant because it better explains changes in after-tax net income.
16
Average Balance Sheets and Interest Rates
(dollar amounts in thousands)
Years Ended December 31,
---------------------------------------------------------------------------------------
2009 2008 2007
---------------------------- ---------------------------- ---------------------------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-earning assets
Taxable securities .................... $ 86,542 $ 2,136 2.47% $ 77,448 $ 3,550 4.58% $ 87,238 $ 4,063 4.66%
Tax-exempt securities (1) ............. 20,045 851 4.25% 36,619 1,879 5.13% 35,498 1,880 5.30%
--------- --------- --------- --------- --------- ---------
Total securities .................... 106,587 2,987 2.80% 114,067 5,429 4.76% 122,736 5,943 4.84%
Commercial loans ........................ 95,130 4,741 4.98% 99,353 6,048 6.09% 99,841 8,324 8.34%
Real estate loans ....................... 507,519 27,703 5.46% 484,841 29,822 6.15% 446,144 32,554 7.30%
Installment loans ....................... 15,941 1,164 7.30% 17,681 1,372 7.76% 18,498 1,494 8.08%
--------- --------- --------- --------- --------- ---------
Total loans (2) .................... 618,590 33,608 5.43% 601,875 37,242 6.19% 564,483 42,372 7.51%
Interest-earning deposits ............... 11,548 64 0.55% 9,895 214 2.16% 3,042 151 4.95%
FHLB Stock ............................. 2,343 40 1.71% 2,312 117 5.06% 2,312 105 4.54%
Federal funds sold ...................... 27,388 37 0.14% 8,754 177 2.02% 11,102 599 5.40%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets .......... 766,456 36,736 4.79% 736,903 43,179 5.86% 703,675 49,170 6.99%
--------- --------- --------- --------- --------- ---------
Noninterest-earning assets
Allowance for loan losses ............... (12,939) (8,103) (6,354)
Premises and equipment & other assets ... 56,761 49,298 41,646
Cash and due from banks ................. 13,713 13,906 14,716
--------- --------- ---------
Total assets ........................ $ 823,991 $ 792,004 $ 753,683
========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
-------------------------------------------
Total interest-bearing deposits ......... $ 578,457 10,496 1.81% $ 570,037 16,692 2.93% $ 534,182 21,639 4.05%
Borrowed funds:
Short-term borrowings ............... 59,377 88 0.15% 48,835 776 1.59% 51,968 2,350 4.52%
Other borrowings .................... 33,950 2,020 5.95% 27,967 1,393 4.98% 28,791 1,446 5.02%
--------- --------- --------- --------- --------- ---------
Total borrowed funds ........... 93,327 2,108 2.26% 76,802 2,169 2.82% 80,759 3,796 4.70%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ...... 671,784 12,604 1.88% 646,839 18,861 2.92% 614,941 25,435 4.14%
Noninterest-bearing liabilities
Noninterest-bearing demand deposits ..... 84,108 79,503 77,725
Other liabilities ....................... 11,485 9,722 8,243
Shareholders' equity .................... 56,614 55,940 52,774
--------- --------- ---------
Total liabilities and
shareholders' equity .................. $ 823,991 12,604 $ 792,004 18,861 $ 753,683 25,435
========= --------- ========= --------- ========= ---------
Interest margin recap
Tax-equivalent net interest income margin
and interest rate spread ............. 24,132 2.91% 24,318 2.94% 23,735 2.85%
Tax-equivalent net interest income margin
as a percent of total average earning
assets................................ 3.15% 3.30% 3.37%
Less: Tax-equivalent adjustment (3) ..... 295 717 696
--------- --------- ---------
Net interest income ............. $ 23,837 $ 23,601 $ 23,039
========= ========= =========
(1) Interest income on tax-exempt securities has been adjusted to a
tax-equivalent basis using a marginal income tax rate of 34%.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
(3) Interest income adjustment to convert tax-exempt investment securities
interest to fully tax equivalent basis using a marginal rate of 34%.
17
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. Non-accrual
loans were included in the average loan balances used in determining the yields.
Volume / Rate Analysis
(dollar amounts in thousands)
--------------------------------------------------------------------------------------------------------------------------------
2009 Compared to 2008 2008 Compared to 2007 2007 Compared to 2006
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------- --------------------------- ---------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest income
---------------
Loans ............................... $ 1,058 $(4,692) $(3,634) $ 2,942 $(8,072) $(5,130) $ 1,096 $ 1,847 $ 2,943
Securities:
Taxable .......................... 457 (1,871) (1,414) (447) (66) (513) (1) 519 518
Tax-exempt ....................... (613) (415) (1,028) 60 (61) (1) 273 77 350
------- ------- ------- ------- ------- ------- ------- ------- -------
Total securities interest ..... (156) (2,286) (2,442) (387) (127) (514) 272 596 868
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest-earning deposits ............ 41 (190) (149) 493 (430) 63 (13) 5 (8)
FHLB stock .......................... 2 (80) (78) -- 12 12 (11) (5) (16)
Federal funds sold .................. 621 (761) (140) (167) (255) (422) 116 (8) 108
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income ....... 1,566 (8,009) (6,443) 2,881 (8,872) (5,991) 1,460 2,435 3,895
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest expense
----------------
Interest-bearing deposits ........... 250 (6,446) (6,196) 1,531 (6,478) (4,947) 1,077 2,557 3,634
Short-term borrowings ............... 197 (885) (688) (151) (1,423) (1,574) (201) 19 (182)
Long-term debt ...................... 328 299 627 (41) (12) (53) (160) 165 5
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ...... 775 (7,032) (6,257) 1,339 (7,913) (6,574) 716 2,741 3,457
------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income
(fully tax-equivalent basis) $ 791 $ (977) (186) $ 1,542 $ (959) 583 $ 744 $ (306) 438
======= ======= ======= ======= ======= =======
Tax-equivalent adjustment (1) ......... 422 (21) (64)
------- ------- -------
Change in net interest income $ 236 $ 562 $ 374
======= ======= =======
(1) Interest income on tax-exempt securities has been adjusted to a
tax-equivalent basis using a marginal income tax rate of 34%.
18
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,
-----------------------------------------------------------------
2009 2008 2007 2006 2005
--------- --------- --------- --------- ---------
Balance at beginning of year .................... $ 11,172 $ 6,654 $ 6,144 $ 5,585 $ 5,194
Loans charged off
Commercial and industrial ..................... (1,071) (276) (274) (142) (353)
Real estate ................................... (6,449) (3,762) (1,252) (320) (229)
Installment ................................... (572) (675) (579) (616) (428)
--------- --------- --------- --------- ---------
Total charge-offs ..................... (8,092) (4,713) (2,105) (1,078) (1,010)
--------- --------- --------- --------- ---------
Charge-offs recovered
Commercial and industrial ..................... 47 30 118 63 47
Real estate ................................... 56 61 183 47 81
Installment ................................... 223 260 279 327 133
--------- --------- --------- --------- ---------
Total recoveries ...................... 326 351 580 437 261
--------- --------- --------- --------- ---------
Net loans charged off ........................... (7,766) (4,362) (1,525) (641) (749)
Current year provision .......................... 11,850 8,880 2,035 1,200 1,140
--------- --------- --------- --------- ---------
Balance at end of year .......................... $ 15,256 $ 11,172 $ 6,654 $ 6,144 $ 5,585
========= ========= ========= ========= =========
Loans at year end (excluding loans held for sale) $ 584,139 $ 629,702 $ 581,857 $ 556,918 $ 524,158
Ratio of allowance to loans (excluding loans held
for sale) at period end .................... 2.61% 1.77% 1.14% 1.10% 1.07%
Average loans ................................... $ 618,590 $ 601,875 $ 564,483 $ 549,463 $ 499,503
Ratio of net loans charged off
to average loans .............................. 1.26% 0.72% 0.27% 0.12% 0.15%
19
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)
--------------------------------------------------------------------------------------------------------
2009 2008 2007
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
Balance at December 31:
Commercial, industrial and agricultural $ 1,272 16.55 % $ 1,031 16.55 % $ 1,148 17.89 %
Real Estate ........................... 12,986 80.90 % 9,517 80.90 % 5,217 78.98 %
Installment ........................... 468 2.55 % 393 2.55 % 289 3.14 %
Unallocated ........................... 530 N/A 231 N/A -- N/A
------- ------ ------- ------ ------- ------
Total allowance for loan losses .. $15,256 100.00 % $11,172 100.00 % $ 6,654 100.00 %
======= ====== ======= ====== ======= ======
2006 2005
------------------ ------------------
Amount Percent Amount Percent
------- -------- ------- --------
Balance at December 31:
Commercial, industrial and agricultural $ 1,482 17.38 % $ 1,511 17.38 %
Real Estate ........................... 4,202 78.84 % 3,607 78.84 %
Installment ........................... 342 3.78 % 410 3.78 %
Unallocated ........................... 118 N/A 57 N/A
------- ------ ------- ------
Total allowance for loan losses .. $ 6,144 100.00 % $ 5,585 100.00 %
======= ====== ======= ======
Non-performing assets and their relative percentages to loan balances are
presented in the table which follows. The level of non-performing loans is an
important element in assessing asset quality and the relevant risk in the credit
portfolio. Non-performing loans include non-accrual loans, restructured loans
and loans delinquent 90 days or more and still accruing.
Loans are evaluated for non-accrual status when payments are past due over 90
days or when management feels that there is a high probability that principal
and interest are not fully collectible. Current year interest previously
recorded but not deemed collectible is reversed and charged against current
income. Interest income on these loans is then recognized after principal is
collected. Loans significantly past due that are not well secured and in the
process of collection are generally placed on non-accrual 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.
20
Non-Performing Assets
(dollar amounts in thousands)
----------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------
2009 2008 2007 2006 2005
------- ------- ------- ------- -------
Principal balance
-----------------
Non-accrual .................................. $20,603 $14,329 $ 6,919 $ 1,670 $ 1,640
Restructured ................................. -- -- 19 42 293
90 days or more past due and still accruing .. 1,053 1,194 435 644 99
------- ------- ------- ------- -------
Total non-performing loans ......... $21,656 $15,523 $ 7,373 $ 2,356 $ 2,032
======= ======= ======= ======= =======
Non-performing loans as a percent of total
loans (including loans held for sale) .... 3.69% 2.45% 1.26% 0.42% 0.39%
Other real estate owned (OREO) ............... $ 3,768 $ 3,257 $ 841 $ 141 $ --
OREO as a percent of total loans (including
loans held for sale) ..................... 0.64% 0.51% 0.14% 0.03% --
Allowance as a percent of non-performing loans 70.45% 71.97% 90.25% 260.78% 274.85%
Interest income of $597,000 for the year ended December 31, 2009, was recognized
on the non-accruing and restructured loans listed in the table above, whereas,
interest income of $1,364,000 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 adequacy of the cash flow repaying the
loan or 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 on a
monthly or quarterly basis. 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 $52,778,000 and $42,480,000 of loans on its watch
list, which were not included in impaired or non-performing loans at December
31, 2009 and 2008, respectively.
21
Noninterest Income and Expense
------------------------------
A comparative table and complete discussion of noninterest income and expense is
contained in the 2009 Annual Report to Shareholders Managements Discussion and
Analysis on pages 16 to 17 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 and Monroe
Bancorp common stock 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 which follow summarize the carrying values of securities from
December 31, 2007 through December 31, 2009. The maturity distribution of
securities at December 31, 2009 is summarized by classification.
22
Securities
(dollar amounts in thousands)
--------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
2009 2008 2007
-------- -------- --------
Available for sale
------------------
Government agencies .......... $ 72,007 $ 28,155 $ 28,270
State and municipal .......... 1,845 32,756 37,832
Mortgage-backed & asset-backed 32,974 47,216 49,963
Corporate bonds .............. 1,000 2,403 1,981
Equity securities ............ 2,987 2,965 2,959
-------- -------- --------
Total available for sale 110,813 113,495 121,005
Held to Maturity
----------------
Government agencies .......... 1,002 1,003 1,005
State and municipal .......... 6,050 4,050 --
Mortgage-backed & asset-backed -- 1 1
-------- -------- --------
Total held to maturity . 7,052 5,054 1,006
Trading securities
------------------
Mutual funds ................ 3,385 2,981 3,647
-------- -------- --------
Total trading securities 3,385 2,981 3,647
-------- -------- --------
Total securities ... $121,250 $121,530 $125,658
======== ======== ========
Securities Maturity Schedule at December 31, 2009
-------------------------------------------------
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
------------------
Government agencies .............. $ 25,210 0.15% $ 46,797 1.79% $ -- $ -- $ 72,007 1.22%
State and municipal .............. 1,176 3.04% 669 3.64% -- -- 1,845 3.26%
Corporate bonds .................. 1,000 0.79% -- -- -- 1,000 0.79%
Mortgage-backed & asset-backed (1) 868 3.67% 16,217 1.79% 5,209 2.81% 10,680 3.34% 32,974 2.50%
Equity Securities (2) ............ 2,987 3.86% -- -- -- 2,987 3.86%
-------- -------- -------- -------- --------
Total available for sale ... $ 31,241 $ 63,683 $ 5,209 $ 10,680 $110,813 1.71%
======== ======== ======== ======== ========
Held to Maturity
----------------
Government agencies .............. $ -- $ 1,002 4.85% $ -- $ -- $ 1,002 4.85%
State and municipal .............. 980 1.75% 1,020 1.75% 4,050 1.02% -- 6,050 1.26%
-------- -------- -------- -------- --------
Total held to maturity ..... $ 980 $ 2,022 $ 4,050 $ -- $ 7,052 1.77%
======== ======== ======== ======== ========
Trading Securities
------------------
Mutual funds (2) ................ $ 3,385 1.72% $ -- $ -- $ -- $ 3,385 1.72%
-------- -------- -------- -------- --------
Total trading securities ... $ 3,385 $ -- $ -- $ -- $ 3,385 1.72%
======== ======== ======== ======== ========
(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.
23
Securities (continued)
----------------------
The majority of the securities portfolio is comprised of government agency
securities, and mortgage-backed obligations. Trading securities consist solely
of mutual funds and Monroe Bancorp stock 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
government agency and mortgage-backed 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,
2009. 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, 2009. The Company does not use off-balance sheet derivative
financial instruments. As of December 31, 2009 and December 31, 2008, 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 $2,000,000 is reviewed
by the Company's Officers' Loan Committee for approval. The committee is
comprised of the President/CEO, the Senior Vice President Chief Credit Officer
and several experienced loan officers. Aggregate relationships exceeding
$2,000,000 are reviewed by the Board of Directors' Loan Committee for approval.
This Loan Committee is comprised of six 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, Hamilton,
Hendricks, Jackson, Lawrence and contiguous Counties in Southern and 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.
24
The following table reflects outstanding balances by loan type.
Loans Outstanding
(dollar amounts in thousands)
--------------------------------------------------------------------------------
December 31,
----------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
Commercial and industrial $ 79,545 $103,121 $103,069 $ 92,528 $ 89,850
Agricultural ............ 1,557 1,658 1,542 1,384 1,427
Real estate:
One-to-four-family ... 97,213 110,242 91,530 94,817 99,180
Multi-family ......... 87,717 84,063 69,502 59,608 59,057
Commercial ........... 209,284 205,433 171,144 165,714 156,014
Construction ......... 62,351 80,917 101,011 97,006 68,066
Home equity .......... 31,332 28,976 25,222 26,515 28,792
Farm land ............ 2,644 2,547 3,462 3,195 3,216
Installment ............. 15,722 16,134 18,349 18,696 19,864
-------- -------- -------- -------- --------
Total loans ..... $587,365 $633,091 $584,831 $559,463 $525,466
======== ======== ======== ======== ========
The following table presents the composition of the loan portfolio expressed as
a percent of total loans.
December 31,
----------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
Commercial and industrial 13.54 % 16.29 % 17.62 % 16.54 % 17.11 %
Agricultural ............ 0.27 % 0.26 % 0.26 % 0.25 % 0.27 %
Real estate:
One-to-four-family ... 16.55 % 17.41 % 15.65 % 16.95 % 18.87 %
Multi-family ......... 14.93 % 13.28 % 11.89 % 10.65 % 11.24 %
Commercial ........... 35.63 % 32.45 % 29.27 % 29.62 % 29.69 %
Construction ......... 10.62 % 12.78 % 17.27 % 17.34 % 12.95 %
Home equity .......... 5.33 % 4.58 % 4.31 % 4.74 % 5.48 %
Farm land ............ 0.45 % 0.40 % 0.59 % 0.57 % 0.61 %
Installment ............. 2.68 % 2.55 % 3.14 % 3.34 % 3.78 %
-------- -------- -------- -------- --------
Total .......... 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
======== ======== ======== ======== ========
25
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, 2009
-----------------------------------------
1 Year 1 - 5 Over 5
and Less Years Years Total
-------- -------- -------- --------
Commercial, industrial and agricultural $ 37,995 $ 30,451 $ 12,656 $ 81,102
Real estate:
One-to-four-family ............... 3,496 8,510 85,207 $ 97,213
Multi-family ..................... 7,243 2,509 77,965 $ 87,717
Commercial ....................... 15,186 38,797 155,301 $209,284
Construction ..................... 33,197 25,675 3,479 $ 62,351
Home equity ...................... -- 661 30,671 $ 31,332
Farm land ........................ 123 111 2,410 $ 2,644
Installment ........................... 1,616 6,011 8,095 $ 15,722
-------- -------- -------- --------
Total loans ................. $ 98,856 $112,725 $375,784 $587,365
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates.......................... $ 77,323 $107,621
Adjustable interest rates..................... 35,402 268,163
-------- --------
$112,725 $375,784
======== ========
26
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)
-----------------------------------------------------------------------------------------
2009 2008 2007
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Noninterest-bearing .......... $ 84,108 $ 79,503 $ 77,725
Interest-bearing demand ...... 244,504 0.61% 235,005 1.62% 231,010 3.23%
Savings deposits ............. 18,173 0.23% 17,618 0.40% 17,940 0.50%
Time ......................... 315,780 2.84% 317,414 4.04% 285,232 4.94%
-------- -------- --------
Total average deposits $662,565 1.81% $649,540 2.93% $611,907 4.05%
======== ======== ========
Certificates of deposit and other time deposits of $100,000 or more mature as
follows:
CD's over $100,000
(dollar amounts in thousands)
--------------------------------------------------------------------------------
At December 31,
------------------------------
2009 2008 2007
-------- -------- --------
3 months or less .. $ 21,565 $ 51,527 $ 32,831
3 through 6 months 19,170 23,282 30,023
6 through 12 months 34,557 31,054 42,791
Over 12 months .... 19,867 21,726 22,957
-------- -------- --------
$ 95,159 $127,589 $128,602
======== ======== ========
Certificates of deposit of $100,000 or more totaled $95,159,000 at December 31,
2009, which was a decrease of $32,430,000 compared to December 31, 2008. The
Company began using brokered certificates of deposit as an alternative funding
source in 2005. While the Company's primary focus for 2010 will be on growing
core deposits, management anticipates it will continue to use brokered and
public fund certificates of deposit as an alternative funding source in the
future.
27
Borrowings
----------
A detailed schedule of short-term borrowings follows:
Short-term Borrowings
(dollar amounts in thousands)
--------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2009 2008 2007
------- ------- -------
Repurchase agreements outstanding ............................... $61,929 $59,404 $43,195
Federal funds purchased ......................................... -- -- 24,850
------- ------- -------
Total short-term borrowings ..................................... $61,929 $59,404 $68,045
======= ======= =======
Average federal funds purchased during the year ................. $ 331 $ 3,149 $ 2,085
Average repurchase agreements during the year ................... $59,046 $45,686 $49,884
Maximun month-end federal funds purchased ....................... $ -- $17,935 $24,850
Maximum month-end repurchase agreements ......................... $67,345 $59,404 $65,589
YTD average interest rate on federal funds purchased ............ 0.52% 3.25% 5.34%
Average interest rate at end of period on federal funds purchased 0.75% 0.28% 4.30%
YTD Average interest rate on repurchase agreements .............. 0.15% 1.47% 4.49%
Average interest rate at end of period on repurchase agreements . 0.16% 0.41% 3.73%
--------------------------------------------------------------------------------------------------
Repurchase agreements are borrowings which mature daily, and are secured by U.S.
government agency obligations.
The Bank became a member of the Federal Home Loan Bank of Indianapolis ("FHLB")
in 1997 and has excess borrowing capacity at the FHLB of $48,660,000 as of
December 31, 2009 based on pledged collateral. 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, loans sold under repurchase agreements and subordinated
debentures including two trust preferred debentures, were $44,127,000 and
$33,799,000, as of December 31, 2009 and 2008, respectively. The subordinated
debentures and FHLB borrowings accounted for the vast majority of other
borrowings. 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.
28
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 2009 Annual Report to Shareholders Management's Discussion and
Analysis on pages 13 to 14 under the caption "Interest Rate Sensitivity and
Disclosures about Market Risk" and on pages 14 to 16 under the caption
"Liquidity."
The following table details the main components of cash flows for the years
ended December 31, 2009 and 2008.
Funding Uses and Sources
(dollar amounts in thousands)
------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2009 Year Ended December 31, 2008
------------------------------- -------------------------------
Increase/(Decrease) Increase/(Decrease)
Average -------------------- Average --------------------
Balance Amount Percent Balance Amount Percent
------- -------- ------- ------- -------- -------
Funding Uses
------------
Loans, net of unearned income ......... $618,590 $ 16,715 2.78 % $601,875 $ 37,392 6.62 %
Taxable securities .................... 86,542 9,094 11.74 % 77,448 (9,790) (11.22)%
Tax-exempt securities ................. 20,045 (16,574) (45.26)% 36,619 1,121 3.16 %
Interest-earning deposits ............. 11,548 1,653 16.71 % 9,895 6,853 225.28 %
FHLB stock ............................ 2,343 31 1.34 % 2,312 -- -- %
Federal funds sold .................... 27,388 18,634 212.86 % 8,754 (2,348) (21.15)%
-------- -------- -------- --------
Total uses .................. $766,456 $ 29,553 4.01 % $736,903 $ 33,228 4.72 %
======== ======== ======== ========
Funding Sources
---------------
Noninterest-bearing deposits .......... $ 84,108 $ 4,605 5.79 % $ 79,503 $ 1,778 2.29 %
Interest-bearing demand, savings & time 578,457 8,420 1.48 % 570,037 35,855 6.71 %
Short-term borrowings ................. 59,377 10,542 21.59 % 48,835 (3,133) (6.03)%
Other borrowings ...................... 33,950 5,983 21.39 % 27,967 (824) (2.86)%
-------- -------- -------- --------
Total sources ............... $755,892 $ 29,550 4.07 % $726,342 $ 33,676 4.86 %
======== ======== ======== ========
29
Capital Adequacy
----------------
Management believes the Company and Bank met all the capital requirements as of
December 31, 2009 and 2008, 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 discussed 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, 2009 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.
Capital
(dollar amounts in thousands)
---------------------------------------------------------------------------------------
At December 31,
------------------------
2009 2008
--------- ---------
Tier 1 capital
Shareholders' equity .................................. $ 56,202 $ 55,921
Less: Intangibles ..................................... -- --
Add: Unrealized (gain)/loss on securities ............ (89) (817)
Add: Qualifying trust preferred securities ........... 8,248 8,248
Deduct: Disallowed deferred tax asset ................ (2,774) --
Deduct: Unrealized loss on available for sale equities (19) (26)
--------- ---------
Total Tier 1 capital ............................. $ 61,568 $ 63,326
========= =========
Total risk-based capital
Tier 1 capital ........................................ $ 61,568 $ 63,326
Tier 2 capital ........................................ 20,498 7,888
--------- ---------
Total risk-based capital ......................... $ 82,066 $ 71,214
========= =========
Risk weighted assets ....................................... $ 592,092 $ 627,795
Quarterly average assets ................................... $ 823,927 $ 818,353
Risk-based ratios:
Tier 1 capital (to risk-weighted assets) .............. 10.40% 10.09%
Total risk-based capital (to risk-weighted assets) .... 13.86% 11.34%
Leverage ratio (Tier 1 capital to average assets) ..... 7.47% 7.74%
30
ITEM 1A. RISK FACTORS
DIFFICULT CONDITIONS IN THE CAPITAL MARKETS AND THE ECONOMY GENERALLY MAY
MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our results of operations are materially affected by conditions in the capital
markets and the economy generally. The capital and credit markets have been
experiencing extreme volatility and disruption for more than twelve months at
unprecedented levels. In many cases, these markets have produced downward
pressure on stock prices of, and credit availability to, certain companies
without regard to those companies' underlying financial strength.
Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining U.S.
real estate market have contributed to increased volatility and diminished
expectations for the economy and the capital and credit markets going forward.
These factors, combined with volatile oil prices, declining business and
consumer confidence and increased unemployment, have precipitated an economic
slowdown and national recession. In addition, the fixed-income markets are
experiencing a period of extreme volatility which has negatively impacted market
liquidity conditions. Initially, the concerns on the part of market participants
were focused on the subprime segment of the mortgage-backed securities market.
However, these concerns have since expanded to include a broad range of
mortgage-and asset-backed and other fixed income securities, including those
rated investment grade, the U.S. and international credit and interbank money
markets generally, and a wide range of financial institutions and markets, asset
classes and sectors.
Factors such as consumer spending, business investment, government spending, the
volatility and strength of the capital markets, and inflation all affect the
business and economic environment and, ultimately, the amount and profitability
of our business. In an economic downturn characterized by higher unemployment,
lower family income, lower corporate earnings, lower business investment and
lower consumer spending, the demand for our financial products could be
adversely affected. Adverse changes in the economy could affect earnings
negatively and could have a material adverse effect on our business, results of
operations and financial condition. The current mortgage crisis and economic
slowdown has also raised the possibility of future legislative and regulatory
actions in addition to the recent enactment of EESA and ARRA that could further
impact our business. We cannot predict whether or when such actions may occur,
or what impact, if any, such actions could have on our business, results of
operations and financial condition.
THERE CAN BE NO ASSURANCE THAT ACTIONS OF THE U.S. GOVERNMENT, FEDERAL RESERVE
AND OTHER GOVERNMENTAL AND REGULATORY BODIES FOR THE PURPOSE OF STABILIZING THE
FINANCIAL MARKETS WILL ACHIEVE THE INTENDED EFFECT.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008 EESA was signed into law. Pursuant to EESA, the
Treasury was granted authority to utilize up to $700 billion to purchase
distressed assets from financial institutions or infuse capital into financial
institutions for the purpose of stabilizing the financial markets. The Treasury
announced the Capital Purchase Program under EESA pursuant to which it has
purchased and will continue to purchase senior preferred stock in participating
financial institutions such as the Company. There can be no assurance, however,
as to the actual impact that EESA, including the Capital Purchase Program and
the Treasury's Troubled Asset Relief Program, will have on the financial markets
or on us. The failure of these programs to help stabilize the financial markets
and a continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock.
31
The federal government, Federal Reserve and other governmental and regulatory
bodies have taken or are considering taking other actions to address the
financial crisis. There can be no assurance as to what impact such actions will
have on the financial markets, including the extreme levels of volatility
currently being experienced. Such continued volatility could materially and
adversely affect our business, financial condition and results of operations, or
the trading price of our common stock.
WE MAY BE REQUIRED TO PAY SIGNIFICANTLY HIGHER FEDERAL DEPOSIT INSURANCE
CORPORATION PREMIUMS IN THE FUTURE.
Recent insured institution failures, as well as deterioration in banking and
economic conditions, have significantly increased FDIC loss provisions,
resulting in a decline in the designated reserve ratio to historical lows. The
FDIC expects a higher rate of insured institution failures in the next few years
compared to recent years; thus, the reserve ratio may continue to decline. In
addition, EESA temporarily increased the limit on FDIC coverage to $250,000
through December 31, 2013. On May 22, 2009, the Board of Directors of the FDIC
voted to levy a special assessment on insured institutions as part of the
agency's efforts to rebuild the DIF and help maintain public confidence in the
banking system. The final rule established a special assessment of five basis
points on each FDIC-insured depository institution's assets, minus its Tier 1
capital, as of June 30, 2009.
Additionally, the FDIC adopted a final rule requiring insured depository
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid
assessments for these periods were collected on December 30, 2009, along with
the regular quarterly risk-based deposit insurance assessment for the third
quarter of 2009. This prepayment does not preclude the FDIC from changing
assessment rates or from further revising the risk-based assessment system
during the prepayment period or thereafter. As a result, we may also be required
to pay significantly higher FDIC insurance assessments premiums in the future.
These higher FDIC assessment rates and future special assessments could have an
adverse impact on our results of operations.
RECENT NEGATIVE DEVELOPMENTS IN THE FINANCIAL INDUSTRY AND THE CREDIT MARKETS
MAY SUBJECT US TO ADDITIONAL REGULATION.
As a result of the recent global financial crisis, the potential exists for new
federal or state laws and regulations regarding lending and funding practices
and liquidity standards to be promulgated, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in
examinations, including the expected issuance of many formal enforcement orders.
Negative developments in the financial industry and the domestic and
international credit markets, and the impact of new legislation in response to
those developments, may negatively impact our operations by restricting our
business operations, including our ability to originate or sell loans, and may
adversely impact our financial performance.
A SIGNIFICANT NUMBER OF THE LOANS IN OUR PORTFOLIO ARE SECURED BY REAL ESTATE,
AND A CONTINUED DOWNTURN IN THE ECONOMY WITHIN THE MARKETS WE SERVE COULD
SIGNIFICANTLY HURT OUR BUSINESS AND PROSPECTS FOR GROWTH.
As of December 31, 2009, real estate loans comprised $494,521,000 or
approximately 84.7 percent of our total loan portfolio (excluding loans held for
sale) and approximately 61.6 percent of our total assets. Of that amount,
$433,661,000 consisted of commercial and residential real estate loans and
$60,860,000 consisted of construction real estate loans. The market value of
real estate securing our real estate loans can fluctuate significantly in a
short period of time as a result of market conditions. Adverse developments
affecting real estate values in our primary market areas could increase the
credit risk associated with our loan portfolio.
32
In addition, the repayment of commercial real estate loans generally is
dependent, in large part, on sufficient income from the properties securing the
loans to cover operating expenses and debt service. Economic events or
governmental regulations outside of our control or that of the borrower could
negatively impact the future cash flow and market values of the affected
properties.
FURTHER DETERIORATION OF OUR NONPERFORMING LOANS OR AN INCREASE IN THE NUMBER OF
NON-PERFORMING LOANS MAY HAVE AN ADVERSE EFFECT ON OUR OPERATIONS.
Weakening economic conditions in the residential and commercial real estate
sectors have adversely affected, and may continue to adversely affect, our loan
portfolio. The ratio of nonperforming assets and 90 day past due loans to total
assets increased to 3.2 percent as of December 31, 2009, from 2.3 percent as of
December 31, 2008. It is likely that this ratio will increase over the next
several quarters as a result of the general economic environment as well as the
progression of certain delinquent loans to loans that are 90 days or more past
due. If loans that currently are non-performing further deteriorate or loans
that are currently performing become nonperforming, we may need to increase our
allowance for loan losses or charge-off those loans. Any increase or charge-off
would have an adverse impact on our financial condition and results of
operations.
THE GEOGRAPHIC CONCENTRATION OF OUR MARKETS MAKES OUR BUSINESS HIGHLY
SUSCEPTIBLE TO LOCAL ECONOMIC CONDITIONS.
Unlike larger banking organizations that are more geographically diversified,
our operations are currently concentrated in the Bloomington, Indiana and
Central Indiana markets. As a result of this geographic concentration, our
financial results depend largely upon economic conditions in these market areas.
Deterioration in economic conditions in one or all of these markets could result
in one or more of the following:
o an increase in loan delinquencies;
o an increase in non-performing loans and foreclosures;
o a decrease in the demand for our products and services; and
o a decrease in the value of collateral for loans, especially real
estate, in turn reducing customers' borrowing power, the value of
assets associated with problem loans and collateral coverage.
To date, the impact of the adverse economic conditions in our Central Indiana
market has been severe. As a result, we have experienced asset quality issues in
the Central Indiana market, and we expect to continue to experience higher
levels of problem assets in this market unless the economy greatly improves. If
current levels of market disruption and volatility continue in our Central
Indiana market, or if our Bloomington, Indiana market suffers increased levels
of market disruption and volatility, our problem assets may increase and the
demand for our products and services could be adversely affected, which could in
turn have a material adverse effect on our business, results of operations and
financial condition.
FUTURE GROWTH OR OPERATING RESULTS MAY REQUIRE THE COMPANY TO RAISE ADDITIONAL
CAPITAL BUT THAT CAPITAL MAY NOT BE AVAILABLE OR IT MAY BE DILUTIVE.
We are required by federal and state regulatory authorities to maintain adequate
levels of capital to support our operations. To the extent our future operating
results erode capital or we elect to expand through loan growth or acquisition
we may be required to raise capital. Our ability to raise capital will depend on
conditions in the capital markets, which are outside of our control, and on our
financial performance.
33
Accordingly, we cannot be assured of our ability to raise capital when needed or
on favorable terms. If we cannot raise additional capital when needed, we will
be subject to increased regulatory supervision and the imposition of
restrictions on our growth and business. These could negatively impact our
ability to operate or further expand our operations through acquisitions or the
establishment of additional branches and may result in increases in operating
expenses and reductions in revenues that could have a material adverse effect on
our financial condition and results of operations.
OUR ALLOWANCE FOR POSSIBLE LOAN LOSSES MAY BE INSUFFICIENT
We maintain an allowance for possible loan losses, which is a reserve
established through a provision for possible loan losses charged to expense that
represents management's best estimate of probable losses that have been incurred
within the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses and risks inherent
in the loan portfolio. The level of the allowance reflects management's
continuing evaluation of industry concentrations; specific credit risks; loan
loss experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. The determination of the appropriate level of the allowance for
possible loan losses inherently involves a high degree of subjectivity and
requires management to make significant estimates of current credit risks and
future trends, all of which may undergo material changes. In addition, bank
regulatory agencies periodically review our allowance for loan losses and may
require an increase in the provision for possible loan losses or the recognition
of further loan charge-offs, based on judgments different than those of
management. If charge-offs in future periods exceed the allowance for possible
loan losses, we will need additional provisions to increase the allowance for
possible loan losses. Any increases in the allowance for possible loan losses
will result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on our financial condition and results of operations.
SLOWER THAN ANTICIPATED GROWTH IN THE BANK'S NEW BANKING CENTERS COULD RESULT IN
REDUCED NET INCOME
We have placed a strategic emphasis on expanding the banking center network of
the Bank. We opened a full service banking center in Brownsburg, Hendricks
County, Indiana in January of 2006, opened a full service banking center in
Plainfield, Hendricks County, Indiana in December of 2007, opened a full service
banking center in Avon, Hendricks County, Indiana in January of 2008, and opened
a full service banking center in Noblesville, Hamilton County, Indiana in
September of 2008. Executing this strategy carries risks of slower than
anticipated growth in the new banking centers. New banking centers require a
significant investment of both financial and personnel resources. Lower than
expected loan and deposit growth in the new banking centers could result in
lower than expected revenues and net income generated by those investments.
Opening new banking centers could result in more additional expenses than
anticipated and divert resources from current core operations.
INABILITY TO HIRE OR RETAIN CERTAIN KEY PROFESSIONALS, MANAGEMENT AND STAFF
COULD ADVERSELY AFFECT OUR REVENUES AND NET INCOME
We rely on key personnel to manage and operate our business, including major
revenue generating functions such as the loan and deposit portfolios. The loss
of key staff may adversely affect our ability to maintain and manage these
portfolios effectively, which could negatively affect our revenues. In addition,
loss of key personnel could result in increased recruiting and hiring expenses,
which could cause a decrease in our net income.
WE ARE SUBJECT TO INTEREST RATE RISK
Our earnings and cash flows are largely dependent upon our net interest income.
Net interest income is the difference between interest income earned on
interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and policies of various governmental and
34
regulatory agencies. Changes in monetary policy, including changes in interest
rates, could influence not only the interest we receive on loans and securities
and the amount of interest we pay on deposits and borrowings, but such changes
could also affect our ability to originate loans and obtain deposits and the
fair value of our financial assets and liabilities. If the interest rates paid
on deposits and other borrowings increase at a faster rate than the interest
rates received on loans and other investments, our net interest income, and
therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other borrowings.
WE ARE SUBJECT TO ENVIRONMENTAL LIABILITY RISK ASSOCIATED WITH LENDING
ACTIVITIES
A significant portion of our loan portfolio is secured by real property. During
the ordinary course of business, the Company may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous
or toxic substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur
substantial expenses and may materially reduce the affected property's value or
limit our ability to use or sell the affected property. In addition, future laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial
condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION
We are subject to extensive federal and state regulation and supervision.
Banking regulations are primarily intended to protect depositors' funds, federal
deposit insurance funds and the banking system as a whole, not shareholders.
These regulations affect our lending practices, capital structure, investment
practices, dividend policy and growth, among other things. Congress and federal
regulatory agencies continually review banking laws, regulations and policies
for possible changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable ways. Such changes
could subject us to additional costs, limit the types of financial services and
products we may offer and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply
with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputation damage, which could have a
material adverse effect on our business, financial condition and results of
operations.
OUR CONTROLS AND PROCEDURES MAY FAIL OR BE CIRCUMVENTED
Management regularly reviews and updates our internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of our
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on our business,
results of operations and financial condition.
OUR INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY
We rely heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these systems could
result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan and other systems. While we have policies and
procedures designed to prevent or limit the effect of the failure, interruption
35
or security breach of our information systems, there can be no assurance that
any such failures, interruptions or security breaches will not occur or, if they
do occur, that they will be adequately addressed. The occurrence of any
failures, interruptions or security breaches of our information systems could
damage our reputation, result in a loss of customer business, subject us to
additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability, any of which could have a material adverse effect on our
financial condition and results of operations.
CHANGES IN TECHNOLOGY COULD BE COSTLY
The banking industry is undergoing technological innovation. In order to
maintain our competitive position, we must react to these innovations and
evaluate the technologies to enable it to compete on a cost-effective basis. The
cost of such technology, including personnel, may be high in both absolute and
relative terms. There can be no assurance, given the fast pace of change and
innovation, that our technology will meet or continue to meet our needs.
THE TRADING VOLUME IN OUR COMMON STOCK IS LESS THAN THAT OF OTHER LARGER
FINANCIAL SERVICES COMPANIES
Although our common stock is listed for trading on NASDAQ Global Market, the
trading volume in our common stock is less than that of other larger financial
services companies. A public trading market having the desired characteristics
of depth, liquidity and orderliness depends on the presence in the marketplace
of willing buyers and sellers of our common stock at any given time. This
presence depends on the individual decisions of investors and general economic
and market conditions over which we have no control. Given the lower trading
volume of our common stock, significant sales of our common stock, or the
expectation of these sales, could cause our stock price to fall.
WE MAY NOT BE ABLE TO PAY DIVIDENDS IN THE FUTURE IN ACCORDANCE WITH PAST
PRACTICES
We may not be able to pay dividends in accordance with past practice. We
traditionally pay a quarterly dividend to stockholder. The payment of dividends
is subject to legal and regulatory restrictions and, therefore, any payment of
dividends in the future will depend in large part on our earnings, capital
requirements, financial conditions and other factors considered relevant by our
Board of Directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The Company, through the Bank, currently operates its business from its main
office in downtown Bloomington, Indiana and from 17 additional locations in
Monroe, Hamilton, Hendricks, Jackson and Lawrence Counties in Indiana. The
Company opened banking centers (included in the aforementioned totals) in Avon,
Hendricks County, Indiana in January 2008, in Noblesville, Hamilton County,
Indiana in September 2008, and also has an operations center located in
Bloomington, Monroe County, Indiana. Information about those locations is set
forth in the table which follows.
36
---------------------------------------------------------------------------------------------------------
NAME OF OFFICE LOCATION OWNED/LEASED
---------------------------------------------------------------------------------------------------------
Downtown Main Office 210 East Kirkwood Avenue Owned
Bloomington, IN 47408
---------------------------------------------------------------------------------------------------------
Business Center 111 South Lincoln Street Owned
Bloomington, IN 47408
---------------------------------------------------------------------------------------------------------
Ellettsville Banking Center 4616 West Richland Plaza Owned
Bloomington, IN 47404
---------------------------------------------------------------------------------------------------------
Highland Village Banking Center 4191 West Third Street Owned
Bloomington, IN 47404
---------------------------------------------------------------------------------------------------------
Kinser Crossing Banking Center 1825 North Kinser Pike Leased
Bloomington, IN 47404
---------------------------------------------------------------------------------------------------------
Kirkwood Auto Branch 306 East Kirkwood Avenue Owned
Bloomington, IN 47408
---------------------------------------------------------------------------------------------------------
Mall Road Banking Center 2801 Buick-Cadillac Boulevard Owned
Bloomington, IN 47401
---------------------------------------------------------------------------------------------------------
Walnut Park Banking Center 2490 South Walnut Street Owned
Bloomington, IN 47403
---------------------------------------------------------------------------------------------------------
Brownstown Banking Center 1051 West Spring Street Owned
Brownstown, IN 47220
---------------------------------------------------------------------------------------------------------
Avon Banking Center 9720 East US Highway 36 Owned
Avon, IN 46123
---------------------------------------------------------------------------------------------------------
Brownsburg Banking Center 1490 North Green Street Owned
Brownsburg, IN 46112
---------------------------------------------------------------------------------------------------------
Indianapolis Commercial Center 7517 Beechwood Centre Road, Suite 300 Leased
Avon, IN 46123
---------------------------------------------------------------------------------------------------------
Plainfield Banking Center 802 Edwards Drive Owned
Plainfield, IN 46168
---------------------------------------------------------------------------------------------------------
Noblesville Banking Center 15941 Cumberland Road Owned
Noblesville, IN 46060
---------------------------------------------------------------------------------------------------------
Bedford Banking Center Limestone Business Center, 2119 West 16th Street Leased
Bedford, IN 47421
---------------------------------------------------------------------------------------------------------
Bell Trace Banking Center 800 Bell Trace Circle Leased
Bloomington, IN 47408
---------------------------------------------------------------------------------------------------------
Meadowood Banking Center 2455 Tamarack Trail Leased
Bloomington, IN 47408
---------------------------------------------------------------------------------------------------------
Redbud Hills Banking Center 3211 East Moores Pike Leased
Bloomington, IN 47401
---------------------------------------------------------------------------------------------------------
Operations Center 5001 North State Road 37-Business Leased
Bloomington, IN 47404
---------------------------------------------------------------------------------------------------------
37
The Company owns its main office. It owns 11 of its other banking center
locations and leases space for six banking centers. 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, loan operations and deposit operations departments are
located at the Operations Center.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than routine litigation
incidental to the business of the Company or the Bank, to which the Company or
the Bank is a party or of which any of its property is subject. Further, there
is no material legal proceeding in which any director, officer, principal
shareholder, or affiliate of the Company, or any associate of such director,
officer, principal shareholder or affiliate is a party, or has a material
interest, adverse to the Company.
ITEM 4. RESERVED.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock is quoted on the NASDAQ Global 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 Global Market:
Price Per Share
-----------------------------------
2009 2008 Dividends Declared
--------------- ----------------- ------------------
Quarter High Low High Low 2009 2008
--------------------------------------------------------------------------
First Quarter $ 9.23 $ 5.50 $ 16.25 $ 13.13 $ 0.13 $ 0.13
Second Quarter 9.50 7.16 14.83 11.75 0.01 0.13
Third Quarter 8.03 6.17 12.99 10.49 0.01 0.13
Fourth Quarter 7.75 5.50 12.00 6.00 0.01 0.13
In each quarter during 2009 and 2008, the Company declared and paid the cash
dividends listed in the table above for a per share total of $0.16 and $0.52 for
2009 and 2008, respectively. The Company has paid a regular cash dividend for
over 28 consecutive years. The Company currently expects, but can give no
assurance, that cash dividends will continue to be paid in the future or that
future dividends, if paid, will be comparable to the amounts paid in recent
years.
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, 2009 was $73,257,000 of
which $71,889,000 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 12, 2010, there were approximately 251 shareholders of record.
38
During 2009, no stock options were exercised and there were no sales of
unregistered securities.
Stock Repurchased During 2009
-----------------------------
None.
The stock repurchase plan was announced June 16, 2006. The total dollar amount
approved was $10,000,000. The plan has no expiration date, but the Board of
Directors may terminate the plan at anytime. The Board of Directors suspended
repurchase activities beginning in the fourth quarter of 2007 and as of December
31, 2009, the Board of Directors has not determined when stock repurchases will
recommence. The Company's most recent stock repurchase transaction took place on
August 7, 2007.
ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to pages 5
through 6 of the Company's 2009 Annual Report to Shareholders under the caption
"Five-Year Financial Summary."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to pages 7
through 21 of the Company's 2009 Annual Report to Shareholders under the caption
"Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The information required under this item is incorporated by reference to pages
13 through 14 of the Company's 2009 Annual Report to Shareholders under the
caption "Management's Discussion and Analysis - Interest Rate Sensitivity and
Disclosures about Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are
incorporated herein by reference to pages 23 through 47 of the Company's 2009
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
39
ITEM 9A. CONTROLS AND PROCEDURES.
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 as
of the end of the period covered by this Form 10-K are effective in ensuring
that information required to be disclosed by the Company in a report that it
files or submits under the Securities Exchange Act of 1934, it is recorded,
processed, summarized and reported within the time period specified by the rules
and forms of the Securities and Exchange Commission, and are accumulated and
communicated to the Company's management to allow timely decisions regarding
required disclosure.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2009. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment and those criteria, management concluded that
the Company maintained effective internal control over financial reporting as of
December 31, 2009.
The Company's independent registered public accounting firm has issued their
report on the effectiveness of the Company's internal control over financial
reporting. That report follows under the heading, Report of Independent
Registered Public Accounting Firm on Internal Control Over Financial Reporting.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
40
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
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 2009 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 2009 fiscal year, which Proxy
Statement will contain such information. The information required by Item 11 is
incorporated herein by reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
Equity Compensation Plan Information
-----------------------------------------------------------------------------------------------------------
Number of securities
remaining available
Number of securities for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
-----------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
securities holders 268,000 $ 18.3431 --
Equity compensation
plans not approved
by security holders -- -- --
--------------------------------------------------------------------------------
Total 268,000 $ 18.3431 --
================================================================================
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 2009 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.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
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 2009 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 2009 fiscal year, which Proxy
Statement will contain such information. The information required by Item 14 is
incorporated herein by reference to such Proxy Statement.
42
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Page Number *
-------------
(a) 1. Financial Statements:
Report of Independent Registered Public Accounting Firm.......22
Consolidated balance sheets at
December 31, 2009 and 2008................................23
Consolidated income statements, years ended
December 31, 2009, 2008 and 2007..........................24
Consolidated statements of shareholders' equity,
years ended December 31, 2009, 2008 and 2007............ 25
Consolidated statements of cash flows, years ended
December 31, 2009, 2008 and 2007..........................26
Notes to consolidated financial statements....................27
* The page numbers indicated refer to pages of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 2009, which is incorporated
herein by reference.
(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, 2000.
3(ii) Monroe Bancorp Amended and Restated By-laws, amended July 23,
2009, are incorporated by reference to registrant's Form 8-K
filed July 24, 2009.
4 Indenture dated as of July 17, 2009 by and between Wells Fargo
Bank, N.A., and Monroe Bancorp is incorporated by reference to
registrant's Form 8-K filed July 23, 2009.
10(i)* 1999 Directors' Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed November
14, 2000.
10(ii)* 1999 Management Stock Option Plan of Monroe Bancorp is
incorporated by reference to registrant's Form 10 filed November
14, 2000.
10(iii)* Deferred Compensation Trust for Monroe Bancorp is incorporated by
reference to registrant's Form 10 filed November 14, 2000.
10(iv)* Monroe County Bank Agreement for Supplemental Death or Retirement
Benefits is incorporated by reference to registrant's Form 10
filed November 14, 2000.
43
10(v)* Monroe Bancorp Thrift Plan as Amended and Restated January 1,
2001 is incorporated by reference to registrant's Form 10-Q filed
November 13, 2002.
10(vi)* Monroe Bancorp Employee Stock Ownership Plan as Amended and
Restated January 1, 2001 is incorporated by reference to
registrant's Form 10-Q filed November 13, 2002.
10(vii)* Third Amendment to the Monroe Bancorp Employees' Stock Ownership
Plan is incorporated by reference to registrant's Form 10-K filed
March 29, 2004.
10(viii)* Monroe Bancorp Directors' Deferred Compensation Plan as Amended
and Restated Effective January 1, 1999 and First and Second
Amendments are incorporated by reference to registrant's Form
10-K filed March 29, 2004.
10(ix)* Monroe Bancorp Executives' Deferred Compensation Plan as Amended
and Restated Effective January 1, 1999 and First, Second and
Third Amendments are incorporated by reference to registrant's
Form 10-K filed March 29, 2004.
10(x)* Form of agreement under the 1999 Management Stock Option Plan of
Monroe Bancorp is incorporated by reference to registrant's Form
10-K filed March 15, 2005.
10(xi)* Schedule of Director Compensation is incorporated by reference to
registrant's Form 8-K filed December 21, 2009.
10(xii)* Schedule of Executive Officer Compensation is incorporated by
reference to registrant's Form 8-K filed December 21, 2009.
10(xiii)* Fourth Amendment to the Monroe Bancorp Employees' Stock Ownership
Plan is incorporated by reference to Form 10-Q filed May 9, 2005.
10(xiv)* Monroe Bancorp Directors' 2005 Deferred Compensation Plan
incorporated by reference to Form 10-K filed March 14, 2006.
10(xv)* Monroe Bancorp Executives' 2005 Deferred Compensation Plan
incorporated by reference to Form 10-K filed March 14, 2006.
10(xvi)* Form of agreement under the Monroe Bancorp Directors' 2005
Deferred Compensation Plan incorporated by reference to Form 10-K
filed March 14, 2006.
10(xvii)* Form of agreement under the Monroe Bancorp Executives' 2005
Deferred Compensation Plan incorporated by reference to Form 10-K
filed March 14, 2006.
10(xviii)* First Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 9, 2006.
10(xix)* Second Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 9, 2006.
10(xx)* Third Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 9, 2006.
44
10(xxi)* Fourth Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 9, 2006.
10(xxii)* Fifth Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 9, 2006.
10(xxiii)* Sixth Amendment to the Monroe Bancorp Thrift Plan as Amended and
Restated January 1, 2001, incorporated by reference to Form 10-Q
filed May 8, 2007.
10(xxiv)* Seventh Amendment to the Monroe Bancorp Thrift Plan as Amended
and Restated January 1, 2001, incorporated by reference to Form
10-K filed March 13, 2008.
10(xxv)* Fifth Amendment to the Monroe Bancorp Employees' Stock Ownership
Plan is incorporated by reference to Form 10-K filed March 13,
2008.
13 Annual Report to Shareholders for the year ended December 31,
2009.
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 pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31(ii) Certification for Annual Report on Form 10-K by Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32(i) Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32(ii) Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement
(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 2009 Annual Report to Shareholders or related notes.
45
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 15th day of March
2010.
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)
46
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
Date: March 11, 2010
/s/ Gordon M. Dyott Executive Vice President, Chief Financial
--------------------------------- Officer (Principal Financial Officer)
Gordon M. Dyott
Date: March 11, 2010
/s/ David T. Meier Vice President, Director of Finance
--------------------------------- (Principal Accounting Officer)
David T. Meier
Date: March 10, 2010
/s/ Charles R. Royal, Jr. Director, Chairman
---------------------------------
Charles R. Royal, Jr.
Date: March 11, 2010
/s/ James D. Bremner Director
---------------------------------
James D. Bremner
Date: March 12, 2010
/s/ Bradford J. Bomba, Jr. M.D. Director
---------------------------------
Bradford J. Bomba, Jr. M.D.
Date: March 11, 2010
Director
---------------------------------
Steven R. Crider
/s/ James G. Burkhart Director
---------------------------------
James G. Burkhart
Date: March 15, 2010
/s/ Joyce Claflin Harrell Director
---------------------------------
Joyce Claflin Harrell
Date: March 11, 2010
/s/ Harry F. McNaught, Jr. Director
---------------------------------
Harry F. McNaught, Jr.
Date: March 11, 2010
/s/ Paul W. Mobley Director
---------------------------------
Paul W. Mobley
Date: March 10, 2010
4
