Attached files
Exhibit 13 - 2009 Annual Report
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Table of Contents
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Five-year Financial Summary 5
Management's Discussion and Analysis 7
Report of Independent Registered Public Accounting Firm 22
Consolidated Financial Statements 23
Notes to Consolidated Financial Statements 27
Five-year Total Shareholder Return 48
Shareholder Information Inside back cover
Five-Year Financial Summary
(dollar amounts in thousands, except share and per share data)
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At or for the Years Ended December 31,
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2009 2008 2007 2006 2005
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Summary of Operations
Interest income - tax equivalent .......... $ 36,736 $ 43,179 $ 49,170 $ 45,275 $ 35,156
Interest expense .......................... 12,604 18,861 25,435 21,978 14,055
---------- ---------- ---------- ---------- ----------
Tax-equivalent net interest income ........ 24,132 24,318 23,735 23,297 21,101
Less: tax-equivalent adjustment (1) ...... 295 717 696 632 277
---------- ---------- ---------- ---------- ----------
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
Other noninterest income .................. 11,983 10,033 10,251 9,492 9,258
Other noninterest expenses ................ 21,930 20,732 20,626 20,098 18,054
---------- ---------- ---------- ---------- ----------
Income before income taxes ................ 2,040 4,022 10,629 10,859 10,888
Income tax expense ........................ 65 43 2,823 3,273 3,665
---------- ---------- ---------- ---------- ----------
Net income ................................ $ 1,975 $ 3,979 $ 7,806 $ 7,586 $ 7,223
========== ========== ========== ========== ==========
Per Share Data
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
Dividends per common 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
Total cash dividends declared ............. $ 996 $ 3,232 $ 3,061 $ 3,150 $ 3,132
Average common and common equivalent
shares outstanding ................... 6,222,700 6,224,951 6,320,317 6,596,772 6,623,616
Selected Year-end Balances
Total assets .............................. $ 802,451 $ 819,799 $ 778,080 $ 748,193 $ 713,060
Earning assets ............................ 746,705 769,102 718,512 691,156 654,324
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
Allowance for loan losses ................. 15,256 11,172 6,654 6,144 5,585
Total deposits ............................ 634,254 665,179 619,717 589,328 576,181
Borrowings ................................ 106,056 93,203 96,421 98,079 76,762
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
Earning assets ............................ 766,456 736,903 703,675 681,999 618,092
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
Allowance for loan losses ................. 12,939 8,103 6,354 5,891 5,500
Total deposits ............................ 662,565 649,540 611,907 582,762 521,235
Borrowings ................................ 93,327 76,802 80,759 87,429 85,104
Shareholders' equity ...................... 56,614 55,940 52,774 52,001 48,387
2009 Annual Report 5
Five-Year Financial Summary (continued)
(dollar amounts in thousands, except share and per share data)
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At or for the Years Ended December 31,
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2009 2008 2007 2006 2005
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Performance Ratios
Average loans to average deposits ............. 93.36 % 92.66 % 92.25 % 94.29 % 95.83 %
Allowance to period end portfolio loans ....... 2.61 1.77 1.14 1.10 1.07
Average equity to average assets .............. 6.87 7.06 7.00 7.12 7.30
Return on assets .............................. 0.24 0.50 1.04 1.04 1.09
Return on equity .............................. 3.49 7.11 14.79 14.59 14.93
Dividend payout ratio (2) ..................... 50.43 81.23 39.21 41.52 43.36
Efficiency ratio (3) .......................... 59.60 60.50 59.78 60.33 58.75
Reconciliation of GAAP Net Interest Margin to
Non-GAAP Net Interest Margin on a
Tax-Equivalent Basis
Net interest income ........................... $ 23,837 $ 23,601 $ 23,039 $ 22,665 $ 20,824
Tax equivalent adjustment ..................... 295 717 696 632 277
--------- --------- --------- --------- ---------
Net interest income - tax equivalent .......... $ 24,132 $ 24,318 $ 23,735 $ 23,297 $ 21,101
========= ========= ========= ========= =========
Average earning assets ........................ $ 766,456 $ 736,903 $ 703,675 $ 681,999 $ 618,092
Net interest margin ........................... 3.11 % 3.20 % 3.27 % 3.32 % 3.37 %
Net interest margin - tax equivalent .......... 3.15 3.30 3.37 3.42 3.41
Financial Impact on Net Income of Deferred
Compensation Plan
Interest and dividend income .................. $ 60 $ 106 $ 117 $ 106 $ 82
Realized and unrealized gains (losses) ........ 317 (829) 66 129 87
Other income .................................. -- 30 99 79 31
--------- --------- --------- --------- ---------
Total income from plan ........................ $ 377 $ (693) $ 282 $ 314 $ 200
========= ========= ========= ========= =========
Change in deferred compensation liability ..... $ 364 $ (707) $ 267 $ 301 $ 187
Trustee fees .................................. 13 14 15 13 13
--------- --------- --------- --------- ---------
Total expense of plan ......................... $ 377 $ (693) $ 282 $ 314 $ 200
========= ========= ========= ========= =========
Net impact of plan ............................ $ -- $ -- $ -- $ -- $ --
Reconciliation of GAAP Noninterest Income &
Expense to Noninterest Income & Expense Without
the Financial Impact of the Deferred
Compensation Plan
Total noninterest income ...................... $ 11,983 $ 10,033 $ 10,251 $ 9,492 $ 9,258
Income of deferred compensation plan included
in noninterest income ...................... (317) 799 (165) (208) (118)
--------- --------- --------- --------- ---------
Adjusted noninterest income ................... $ 11,666 $ 10,832 $ 10,086 $ 9,284 $ 9,140
========= ========= ========= ========= =========
Total noninterest expense ..................... $ 21,930 $ 20,732 $ 20,626 $ 20,098 $ 18,054
Expense of deferred compensation plan ......... (377) 693 (282) (314) (200)
--------- --------- --------- --------- ---------
Adjusted noninterest expense .................. $ 21,553 $ 21,425 $ 20,344 $ 19,784 $ 17,854
========= ========= ========= ========= =========
(1) Interest income has been adjusted to convert the interest income on
tax-exempt investment securities to a fully tax equivalent basis using a
marginal income tax rate of 34%.
(2) Dividends declared on common shares divided by net income available to
shareholders.
(3) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income, on a tax-equivalent basis, and noninterest
income. Rabbi trust income and expense have been excluded from this
calculation, as the effect of these items on net income is zero.
6 Monroe Bancorp
Management's Discussion and Analysis
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This Management's Discussion and Analysis should be read with the consolidated
financial statements included in this Annual Report. The financial statements
reflect the consolidated financial condition and results of operations of Monroe
Bancorp ("Company") and its wholly owned subsidiary, Monroe Bank ("Bank") and
the Bank's wholly owned subsidiaries, Sycamore Property Investments, LLC (formed
in 2009 to manage certain troubled real estate loans and foreclosed properties),
HIE Enterprises, LLC and MB Portfolio Management, Inc. and MB Portfolio
Management's majority owned subsidiary, MB REIT, Inc.
Portions of the information in this Management's Discussion and Analysis 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.
Executive Overview
Monroe Bancorp is a one-bank holding company formed under Indiana law in 1984.
The Company holds all of the outstanding stock of Monroe Bank, which was formed
in 1892. The Bank is the primary business of the Company. The Bank, with its
primary office located in Bloomington, Indiana, conducts business from 18
locations in Monroe, Hamilton, Hendricks, Jackson and Lawrence Counties,
Indiana. Approximately 78 percent of the Company's deposits are in Monroe County
and are concentrated in and around the city of Bloomington. This concentration
may decline as the Company increases its business development efforts in
Hendricks County, Hamilton County and other markets in the greater Indianapolis
area. The Bank had a 30.9 percent share of deposits within its core market of
Monroe County as of June 30, 2009, holding the largest market share in Monroe
County for the tenth consecutive year according to data published annually by
the Federal Deposit Insurance Corporation ("FDIC").
Competitive Advantage and Focus: The Bank provides a full line of banking
services and operates with a focus on relationship building, community
involvement and a commitment to exceptional customer service. Management
believes that the Company's culture of community service and support, its
commitment to being responsive to customer needs, its sales culture and its
focus on consistently providing outstanding service quality are keys to its past
and future success.
Significant Matters Concerning 2009 Results: 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.
2009 Annual Report 7
Management's Discussion and Analysis (continued)
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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 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
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. The results of these and other actions
are discussed in greater detail later in the Interest Rate Sensitivity and
Disclosures about Market Risk section on page 13.
Total loans (including loans held for sale) at December 31, 2009 were
$587,365,000 which was $45,726,000 or 7.2 percent less than the December 31,
2008 balance of $633,091,000. Conversely, the Company experienced loan growth
rate in 2008 over 2007 of 4.5 percent. The majority ($28,277,000) of the 2009
decline in loan balances took place in loans originated out of the Company's
Monroe County offices while the remainder ($17,449,000) occurred in loans
originated out of the Company's offices in Hendricks and Hamilton Counties. At
year-end 2009, the Bank had total loans of $154,519,000 at its Central Indiana
locations (Hendricks and Hamilton Counties).
The Company's and Bank's capital strength continues to exceed regulatory
minimums and the Bank is considered "well-capitalized" as defined by its
regulatory agencies. At December 31, 2009, the Bank had a Tier 1 risk-based
capital ratio of 12.1 percent and a total risk-based capital percentage of 13.3
percent with $19.6 million of excess total capital above the regulatory total
risk-based capital ratio of 10.0 percent required to be considered
"well-capitalized".
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.
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.
The Company earned $0.317 per basic and $0.317 per diluted common share during
2009 as compared to $0.640 per basic and $0.639 per diluted share for 2008.
Return on average shareholders' equity for 2009 was 3.49 percent, compared to
7.11 percent for the year ended December 31, 2008. Return on average assets for
the year ended December 31, 2009 was 0.24 percent, compared to 0.50 percent for
the year ended December 31, 2008.
Economic or Industry-wide Factors Relevant to Future Performance: Management
expects unfavorable economic conditions and weakness in the housing market to
continue to adversely affect the performance of the Company in 2010. Conditions
are likely to keep the provision for loan losses, non-performing loans, other
real estate owned balances and workout related expenses elevated above historic
norms during this period. Other factors relevant to future performance include
the level of interest rates, the shape (i.e., amount of slope) of the yield
curve and liquidity issues affecting the banking industry.
Challenges and Opportunities On Which Management is Focused: As discussed
earlier, Management's primary focus is asset quality and working to return asset
quality measures to more normal levels. Success in this area will have a greater
impact on the Company's future performance than any other Management initiative.
Nonetheless, Management will also pursue activities such as cost management and
attracting new banking relationships to its new banking centers. At the same
time, Management will continue to focus on credit processes that will help
ensure a high level of asset quality is maintained overall. Other challenges
include accelerating the growth of low cost core deposits, managing interest
rate risk in an uncertain and difficult interest rate environment,
8 Monroe Bancorp
Management's Discussion and Analysis (continued)
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continuing growth of the Company's Wealth Management Group, growing other
sources of noninterest income, and ensuring that operating controls and
procedures are appropriate and effective as the Company grows and becomes more
complex.
Management recognizes, and is focused on, controlling the short- and long-term
risks created by the interaction of: (1) maintaining a stable level of loans,
(2) attracting stable funding that provides the desired net interest margin, and
(3) maintaining an interest rate risk profile that is as close to neutral as
possible or prudent. Presently, loan demand is soft, short term investment
opportunities are unattractive, low yielding liquidity is high, and deposit
customers are showing a strong liquidity preference due to the low level of
interest rates and their expectation for higher rates in the future. The
successful management of these factors will be significant to our 2010 results
and how well we will be positioned for the possibility of rising rates later
this year.
Management believes the Company has significant opportunities as a result of the
following:
o attractiveness of its new locations in the high growth markets near
Indianapolis,
o shortness of the Company's investment portfolio and the size of its
liquidity position leaves the Company well positioned in the event of
a steepening of the yield curve,
o limited loan growth opportunities allows Management to fund a higher
percentage of the Company's assets with attractive core deposits,
o strong wealth management capabilities, and
o improved retail and commercial sales skills resulting from our
continuing focus on the sales and service process.
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.
Management will continue to measure the Company's 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.
Critical Accounting Policies
Generally accepted accounting principles require Management to apply significant
judgment to certain accounting, reporting and disclosure matters. Management
must use assumptions and estimates to apply those principles where actual
measurement is not possible or practical. For a complete discussion of the
Company's significant accounting policies, see Note 1 to the consolidated
financial statements (pages 27-28) and discussion throughout this Management's
Discussion and Analysis. Following is a discussion of the Company's critical
accounting policies. These policies are critical because they are highly
dependent upon subjective or complex judgments, assumptions and estimates.
Changes in such estimates may have a significant impact on the Company's
financial statements. Management has reviewed the application of these policies
with the Company's Audit Committee.
Allowance for Loan Losses: The allowance for loan losses represents Management's
estimate of probable losses inherent in the Company's loan portfolios. In
determining the appropriate amount of the allowance for loan losses, Management
makes numerous assumptions, estimates and assessments.
The Company's strategy for credit risk management includes conservative,
centralized credit policies, uniform underwriting criteria for all loans and
establishing a customer-level lending limit. The strategy also emphasizes
diversification on an industry and customer level, and regular credit quality
reviews of loans experiencing deterioration of credit quality.
Importantly, Management's approach to credit risk management avoided direct
exposure to sub-prime residential mortgages in the form of whole loans or
investment securities (the Company's mortgage backed securities are all agency
issued and secured). The sub-prime residential mortgage crisis has contributed
to a general weakening of 1-4 family residential lending markets, which in turn
creates stress for loan customers involved with residential development. The
Company is actively monitoring its exposure to this market segment as part of
its overall credit management strategy.
The Company's allowance for loan losses consists of three components: probable
losses estimated from individual reviews of specific loans, probable losses
estimated from historical loss rates, and probable losses resulting from
economic or other deterioration above and beyond what is reflected in the first
two components of the allowance.
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on Management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Company. Included in the review of individual
loans are those that are impaired. Any allowances for impaired loans are
determined by the present value of expected future cash flows discounted at the
loan's effective interest rate or fair value of the underlying collateral. The
future cash flows are based on Management's best estimate and are not guaranteed
to equal actual future performance of the loan. The Company evaluates the
collectibility of both principal and interest when assessing the need for a loss
accrual. Historical loss rates are applied to other commercial loans not subject
to specific reserve allocations.
2009 Annual Report 9
Management's Discussion and Analysis (continued)
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Homogenous loans, such as consumer installment and residential mortgage loans
are risk graded and standard credit scoring systems are used to assess credit
risks. Reserves are established for each pool of loans based on the expected net
charge-offs for one year. Loss rates are based on the average net charge-off
history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in Management's judgment, reflect the impact of any
current conditions on loss recognition. Factors that Management considers in the
analysis include the effects of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs and non-accrual loans),
changes in mix, credit score migration comparisons, asset quality trends, risk
management and loan administration, changes in the internal lending policies and
credit standards, collection practices and examination results from bank
regulatory agencies and the Company's internal loan review.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans. Allowances on individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.
The Company's primary market areas for lending are Monroe, Hamilton, Hendricks,
Jackson, Lawrence Counties and the surrounding counties in Indiana. When
evaluating the adequacy of allowance, consideration is given to this regional
geographic concentration and the closely associated effect changing economic
conditions have on the Company's customers.
The Company has not substantively changed any aspect of its overall approach to
determining the allowance for loan losses but the weight placed on various risk
components used in our approach has changed as deemed appropriate with economic
conditions and other factors such as recent trends.
Valuation of Securities: The Company's available for sale and trading security
portfolio is reported at fair value. The fair value of a security is determined
based on quoted market prices. If quoted market prices are not available, fair
value is determined based on quoted prices of similar instruments. Available for
sale and held to maturity securities are reviewed quarterly for possible
other-than-temporary impairment. The review includes an analysis of the facts
and circumstances of each individual investment such as the length of time the
fair value has been below cost, the expectation for that security's performance
including expected cash flows, the credit worthiness of the issuer and the
Company's ability to hold the security to maturity. The credit portion of a
decline in value that is considered to be other-than temporary is recorded as a
loss within other operating income in the consolidated statements of income.
Non-GAAP Financial Measures
In January 2003, the United States Securities and Exchange Commission ("SEC")
issued Regulation G, "Conditions for Use of Non-GAAP Financial Measures." A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles ("GAAP"). Regulation G and Item 10 to Regulation SK require companies
that present non-GAAP financial measures in filed documents to disclose (i) with
equal or greater prominence, the most directly comparable GAAP financial
measure, (ii) quantitative reconciliation to the most directly comparable GAAP
financial measure, (iii) a statement of the reasons why Management believes the
non-GAAP measure provides useful information to investors about financial
condition or results of operations of the Company, and (iv) any additional
purposes for which Management uses the non-GAAP measure. Management has used the
following non-GAAP financial measure throughout this Management's Discussion and
Analysis:
o In the "Net Interest Income" section, the discussion is focused on
tax-equivalent rates and margin. Municipal bond and municipal loan
interest has been converted to a tax-equivalent rate using a federal
tax rate of 34 percent. Management believes a discussion of the
changes in tax-equivalent rates and margin is more relevant because it
better explains changes in after-tax net income.
o In the "Five-Year Financial Summary" section of this Annual Report
(page 6), we report noninterest income and noninterest expense without
the effect of unrealized gains and losses on securities in a grantor
trust ("rabbi trust") which is a non-GAAP financial measure. Other
income includes realized and unrealized securities gains and losses
and capital gain dividends on trading securities (mutual funds) held
in a rabbi trust in connection with the Company's Directors' and
Executives' Deferred Compensation Plans. These securities are held as
trading securities, and hence, unrealized gains and losses are
recognized on the income statement. Any unrealized or realized loss on
securities held in the rabbi trust net of any dividend, interest and
capital gain dividend income earned on the securities in the rabbi
trust (included in net interest income) are directly offset by a
decrease to directors' fee/deferred executive compensation expense
(included in other expense), and conversely, any net realized or
unrealized gain combined with interest, dividends and capital gain
dividends earned on the securities in the rabbi trust are directly
offset by an increase to directors' fee/deferred executive
compensation expense. These offsets are included in the line item
identified on page 24 of the consolidated financial statements as
"Appreciation in directors' and executives' deferred compensation
plans." The activity in the rabbi trust has no effect on the Company's
net income, therefore, Management believes a more accurate comparison
of current and prior year noninterest income and noninterest expense
can be made if the trustee fees and rabbi trust realized and
unrealized gains, losses, capital gain dividends and offsetting
appreciation (depreciation) are removed.
10 Monroe Bancorp
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Results of Operations
---------------------
Year Ended December 31,
---------------------------------------------------------------------------------
$ Change % Change $ Change % Change
from from from from
Summary of Operations 2009 2008 2008 2008 2007 2007 2007
---------------------------------------------------------------------------------
Net interest income before provision $23,837 $ 236 1.00 % $23,601 $ 562 2.44 % $23,039
Provision for loan losses .......... 11,850 2,970 33.45 8,880 6,845 336.36 2,035
Net interest income after provision 11,987 (2,734) (18.57) 14,721 (6,283) (29.91) 21,004
Other income ....................... 11,983 1,950 19.44 10,033 (218) (2.13) 10,251
Other expense ...................... 21,930 1,198 5.78 20,732 106 0.51 20,626
Net income ......................... 1,975 (2,004) (50.36) 3,979 (3,827) (49.03) 7,806
Per Common Share
Basic earnings per share ........... $ 0.317 $(0.323) (50.47)% $ 0.640 $(0.600) (48.39)% $ 1.240
Fully diluted earnings per share ... 0.317 (0.322) (50.39) 0.639 (0.596) (48.26) 1.235
Cash dividends per share ........... 0.16 (0.36) (69.23) 0.52 0.03 6.12 0.49
Ratios Based on Average Balances
Return on assets ................... 0.24 % N/A (52.00)% 0.50 % N/A (51.92)% 1.04 %
Return on equity ................... 3.49 N/A (50.91) 7.11 N/A (51.93) 14.79
------------------------------------------------------------------------------------------------------------------------
Net Income
2009 Compared to 2008
The following discussion relates to the information presented in the preceding
table. In 2009, net income decreased $2,004,000 or 50.4 percent from 2008.
Management determined the following significant factors affected 2009 net
income:
o Provision for Loan Losses. The provision for loan losses was
$11,850,000 in 2009, an increase of $2,970,000 or 33.5 percent over
2008. With the current economic problems, most notably the continued
weakness in the housing market, an increase in the provision expense
was necessary to insure adequate coverage of probable losses inherent
in the Bank's loan portfolio.
o Declines in loans, deposits and net interest margin. Loans, excluding
loans held for sale, were $584,139,000 at December 31, 2009, a
decrease of $45,563,000, or 7.2 percent, over year-end 2008. Total
deposits declined $30,925,000, or 4.6 percent, of which $36,641,000
was a decline in interest-bearing deposits. Noninterest-bearing
deposits increased $5,716,000 or 6.8 percent. The tax-equivalent net
interest margin as a percent of average interest-earning assets
decreased to 3.15 percent in 2009 from 3.30 percent in 2008.
o Federal Deposit Insurance Corporation assessment. Federal Deposit
Insurance Corporation assessment expense increased $1,004,000, or
208.7 percent related to the new insurance assessment methodology set
forth in the Federal Deposit Insurance Reform Act of 2005 ("FDIC
Act"). The FDIC Act allocated credits to the Bank that could be
applied toward quarterly FDIC assessments. The Bank's credits were
depleted in the first quarter of 2008 which resulted in the increased
expense.
2008 Compared to 2007
The following discussion relates to the information presented in the preceding
table. In 2008, net income decreased $3,827,000 or 49.0 percent from 2007.
Management determined the following significant factors affected 2008 net
income:
o Provision for Loan Losses. The provision for loan losses was
$8,880,000 in 2008, an increase of $6,845,000 or 336.4 percent over
2007. With the current economic problems, most notably the downturn in
the housing market, an increase in the provision expense was necessary
to insure adequate coverage of probable incurred losses inherent in
the Bank's loan portfolio.
o Loan and deposit growth and decline in the net interest margin. Loans,
excluding loans held for sale, were $629,702,000 at December 31, 2008,
an increase of $47,845,000, or 8.2 percent, over year-end 2007. Total
deposits grew $45,462,000, or 7.3 percent, with $41,687,000 of growth
in interest-bearing deposits. Noninterest-bearing deposits increased
$2,775,000 or 3.4 percent. The Company's Hendricks and Hamilton County
offices accounted for 13.1 percent of the overall loan growth in 2008
while their deposits decreased by $9,186,000 in 2008. The
tax-equivalent net interest margin as a percent of average
interest-earning assets decreased to 3.30 percent in 2008 from 3.37
percent in 2007.
2009 Annual Report 11
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Net Interest Income
Net interest income is the primary source of the Company's earnings. It is a
function of net interest margin and the level of average earning assets.
The table below summarizes the Company's asset yields, interest expense, and net
interest income as a percent of average earning assets for each year of the
three-year period ended December 31, 2009. Unless otherwise noted, interest
income and expense is shown as a percent of average earning assets on a fully
tax-equivalent basis.
Tax- Tax-
equivalent equivalent Tax- Net Interest
Interest Interest Net Interest Earning Net Interest equivalent Income (not
Income Expense Margin Assets Income Adjustment Tax-equivalent)
------------------------------------------------------------------------------------------
2009 4.79% 1.64% 3.15% $766,456 $ 24,132 $ 295 $ 23,837
2008 5.86% 2.56% 3.30% $736,903 $ 24,318 $ 717 $ 23,601
2007 6.99% 3.62% 3.37% $703,675 $ 23,735 $ 696 $ 23,039
2009 Compared to 2008
The net interest margin decreased to 3.11 percent in 2009 from 3.20 percent in
2008. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP
Financial Measures" section and detailed in the "Reconciliation of GAAP Net
Interest Margin to Non-GAAP Net Interest Margin on a Tax-Equivalent Basis" on
page 6, the tax-equivalent net interest margin decreased to 3.15 percent in 2009
from 3.30 percent in 2008. The fifteen basis point 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 margin by approximately eight basis points and three
basis points, respectively, in 2009. The change in tax-equivalent net interest
margin in 2008 (3.30 percent) from 2007 (3.37 percent) was a seven basis point
decrease.
Overall decreases in rates on interest bearing assets compared to decreases in
rates on interest bearing liabilities were not evenly matched. In 2009, the
tax-equivalent yield on interest-earning assets decreased 107 basis points while
the cost of interest-bearing liabilities decreased 92 basis points, resulting in
a fifteen basis point decrease in the net interest margin as a percent of
average earning assets. Yields on loans decreased by 76 basis points, yields on
securities decreased 196 basis points and yields on interest-bearing deposits
and borrowings decreased by 104 basis points.
2008 Compared to 2007
The net interest margin decreased to 3.20 percent in 2008 from 3.27 percent in
2007. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP
Financial Measures" section and detailed in the "Reconciliation of GAAP Net
Interest Margin to Non-GAAP Net Interest Margin on a Tax-Equivalent Basis" on
page 6, the tax-equivalent net interest margin decreased to 3.30 percent in 2008
from 3.37 percent in 2007. The seven basis point decrease in the tax-equivalent
net interest margin in 2008 is similar to the five basis point decrease that
took place between 2006 (3.42 percent) and 2007 (3.37 percent). The
tax-equivalent net interest margin was affected in 2008 by the increase in loans
being placed on non-accrual during the year.
Overall decreases in rates on interest bearing assets compared to decreases in
rates on interest bearing liabilities were not evenly matched. In 2008, the
tax-equivalent yield on interest-earning assets decreased 113 basis points while
the cost of interest-bearing liabilities decreased 106 basis points, resulting
in a seven basis point decrease in the net interest margin as a percent of
average earning assets. Yields on loans decreased by 132 basis points, yields on
securities decreased eight basis points and yields on interest-bearing deposits
and borrowings decreased by 122 basis points.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
The primary assets and liabilities of the Company are monetary in nature.
Consequently, interest rates generally have a more significant impact on
performance than the effects of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services. In a period of rapidly rising interest rates, the
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels. The Company
constantly monitors the liquidity and maturity structure of its assets and
liabilities, and believes active asset/liability management has been an
important factor in its ability to record consistent earnings growth through
periods of interest rate volatility.
12 Monroe Bancorp
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Interest Rate Sensitivity and Disclosures about Market Risk
The Company's interest-earning assets are primarily funded by interest-bearing
liabilities. These financial instruments have varying levels of sensitivity to
changes in market interest rates resulting in market risk. We are subject to
interest rate risk to the extent that our interest-bearing liabilities with
short and intermediate-term maturities reprice more rapidly, or on a different
basis, than our interest-earning assets.
Management uses several techniques to measure interest rate risk. Interest rate
risk exposure is measured using an interest rate sensitivity analysis to
determine the change in the net economic value (Economic Value of Equity or EVE)
of its cash flows from assets and liabilities in the event of hypothetical
changes in interest rates. Management also forecasts the net interest income
that the Company's current balance sheet would yield over the next twelve months
assuming the same hypothetical changes in interest rates. A third method used by
the Company to measure interest rate risk is an interest rate sensitivity gap
analysis. The gap analysis is utilized to quantify the repricing characteristics
of the Company's assets and liabilities.
Management believes that its forecast of changes in net interest income under
various rate shocks is the more valuable and easiest to interpret interest rate
risk measurement technique. Management believes that interested parties will
derive a better understanding of how the Company's intermediation activities
will perform under different rate scenarios from its presentation of projected
net interest income under various rate shocks. This should help users of the
information form clearer opinions of the Company's interest rate sensitivity.
The following charts summarize the results of Management's forecast of net
interest income that would be generated by the Company's December 31, 2009 and
December 31, 2008 balance sheets under a variety of sudden and sustained
interest rate changes (shocks). The 2008 analysis includes shocks that range
from an increase of two percent (200 basis points) to a decrease of two percent
(200 basis points). Due to current economic conditions, Management felt that
more extreme upward rate shocks should be performed as part of the December 2009
analysis. Accordingly, the December 2009 analysis includes the shocks that were
performed for year-end 2008 and adds both a three and four percent (300 and 400
basis point) upward rate shock. In all cases, the shocks do not reflect any
steps that Management might take to counteract that change.
The Company's Board of Directors adopted an interest rate risk policy which
established a 20 percent maximum increase or decrease in net interest income in
the event of a sudden and sustained two percent (200 basis point) increase or
decrease in interest rates.
Projected Change in Net Interest Income - December 31, 2009
--------------------------------------------------------------------------------
Projected Net Interest $ Change
Income Over the in Net Interest % Change in
Change in Interest Next Twelve Months Income Net Interest
Rate (basis points) (in thousands) (in thousands) Income
--------------------------------------------------------------------------------
+400 $ 19,907 $ (2,658) (11.78)%
+300 20,610 (1,955) (8.66)
+200 21,317 (1,248) (5.53)
+100 21,814 (751) (3.33)
0 22,565 0 0
-100 22,813 248 1.10
-200 22,303 (262) (1.16)
Projected Change in Net Interest Income - December 31, 2008
--------------------------------------------------------------------------------
Projected Net Interest $ Change
Income Over the in Net Interest % Change in
Change in Interest Next Twelve Months Income Net Interest
Rate (basis points) (in thousands) (in thousands) Income
--------------------------------------------------------------------------------
+200 $ 24,437 $ (1,438) (5.56)%
+100 24,867 (1,008) (3.90)
0 25,875 0 0
-100 26,449 574 2.22
-200 26,465 590 2.28
The analysis of the two periods indicates that the Company's balance sheet
continues to have a relatively low interest rate risk.
2009 Annual Report 13
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
While many balance sheet and interest rate factors contribute to the modeled
results, the primary factors are the relative level of interest rates and the
fact that the Company remains liability sensitive. The liability sensitivity can
be seen in the difference in interest bearing assets and liabilities that are
subject to repricing over the twelve-month horizon. The gap between assets and
liabilities that reprice within one year was $118,513,000 at December 31, 2009
and $206,409,000 at December 31, 2008. Being liability sensitive suggests that
the Company's net interest income would decline if rates were to rise over the
next twelve months. The reason the decline is fairly minimal (5.53 percent if
rates increase 200 basis points) is because many of the Company's repricing
liabilities have rates that are administratively set by the Company as opposed
to being tied to a specific index.
Interest Rate Sensitivity
At December 31, 2009
--------------------------------------------------------------------------
1 - 90 Days 91 - 365 Days 1 - 5 Years Over 5 Years Total
--------------------------------------------------------------------------
Rate-Sensitive Assets:
Federal funds sold ................. $ 14,154 $ -- $ -- $ -- $ 14,154
Investment securities .............. 33,758 868 66,685 19,939 121,250
Loans .............................. 189,589 127,666 252,480 17,630 587,365
Federal Home Loan Bank stock ....... 2,353 -- -- -- 2,353
Interest-earning deposits .......... 21,583 -- -- -- 21,583
--------- --------- --------- --------- ---------
Total rate-sensitive assets .... $ 261,437 $ 128,534 $ 319,165 $ 37,569 $ 746,705
--------- --------- --------- --------- ---------
Rate-Sensitive Liabilities:
Interest-bearing deposits .......... $ 313,167 $ 133,226 $ 97,418 $ 410 $ 544,221
Borrowings ......................... 61,942 149 24,200 19,765 106,056
--------- --------- --------- --------- ---------
Total rate-sensitive liabilities $ 375,109 $ 133,375 $ 121,618 $ 20,175 $ 650,277
--------- --------- --------- --------- ---------
Interest rate sensitivity gap by period $(113,672) $ (4,841) $ 197,547 $ 17,394 $ 96,428
Cumulative rate sensitivity gap ........ (113,672) (118,513) 79,034 96,428 --
Cumulative rate sensitivity gap ratio
(as a percentage of earning assets)
at December 31, 2009 ............... (15.22)% (15.87)% 10.58 % 12.91 %
Management believes that it has the ability to have many of its administratively
set deposit rates lag behind an upward movement in market rates. As a result,
Management believes that rising rates would have less of an impact than
otherwise would be expected in light of the Company's liability sensitivity.
However, this result is wholly dependent upon the validity of Management's
assumptions concerning its ability to have the rates paid on certain deposit
accounts lag changes in market rates, changes to the slope of the yield curve
and customer-driven changes in the Company's deposit mix.
Computations of prospective effects of hypothetical interest rate changes are
based on a number of assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-off rates, and should not be relied upon
as indicative of actual results. These computations do not contemplate any
actions Management or Bank customers may undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of computing projected net
interest income. Actual results may differ from that information presented in
the preceding tables should market conditions vary from the assumptions used in
preparation of the table information. If interest rates remain at or decrease
below current levels, the proportion of adjustable rate loans in the loan
portfolio could decrease in future periods due to refinancing activity. Also, in
the event of an interest rate change, prepayment and early withdrawal levels
would likely be different from those assumed in the table. Lastly, the ability
of many borrowers to repay their adjustable rate debt may decline during a
rising interest rate environment.
Liquidity
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
Cash Requirements
Management believes that the Company has adequate liquidity and adequate sources
for obtaining additional liquidity if needed. Short-term liquidity needs
resulting from normal deposit/withdrawal functions are provided by the Company
retaining a portion of cash generated from operations and through utilizing
federal funds and repurchase agreements. Long-term liquidity and other liquidity
needs are provided by the ability of the Company to borrow from the Federal Home
Loan Bank of Indianapolis ("FHLB") and to obtain brokered certificates of
deposit. FHLB advances were $17,371,000 at December 31, 2009 compared to
$25,523,000 at December 31, 2008. At December 31, 2009, the Company had excess
borrowing capacity at the FHLB of $48,660,000 based on
14 Monroe Bancorp
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
collateral. In terms of managing the Company's liquidity, Management's primary
focus is on increasing deposits to fund future growth. The Company also uses
brokered certificates of deposit as a source of longer-term funding. At December
31, 2009, the Company had $46,201,000 of brokered certificates of deposit on its
balance sheet compared to $66,101,000 at December 31, 2008.
In 2006, the Company formed Monroe Bancorp Capital Trust I ("Capital Trust").
The Capital Trust issued 3,000 shares of Fixed/Floating Rate Capital Securities
with a liquidation amount of $3,000,000 in a private placement, and 93 Common
Securities with a liquidation amount of $1,000 per Common Security to the
Company for $93,000. The aggregate proceeds of $3,093,000 were used by the
Capital Trust to purchase $3,093,000 in Fixed/Floating Rate Junior Subordinated
Debentures from the Company. On March 20, 2007, the Company formed Monroe
Bancorp Statutory Trust II ("Statutory Trust"). The Statutory Trust issued 5,000
shares of Fixed/Floating Rate Capital Securities with a liquidation amount of
$5,000,000 in a private placement, and 155 Common Securities with a liquidation
amount of $1,000 per Common Security to the Company for $155,000. The aggregate
proceeds of $5,155,000 were used by the Statutory Trust to purchase $5,155,000
in Fixed/Floating Rate Junior Subordinated Debentures from the Company. The
Debentures and the Common and Capital Securities have a term of 30 years and may
be called without a penalty after five years. It bears interest at the annual
rate of 6.5225 percent for five years and thereafter bears interest at the rate
of the three-month LIBOR plus 1.60 percent. The Company has guaranteed payment
of amounts owed by the Statutory Trust to holders of the Capital Securities. The
Company's internal Asset/Liability Committee ("ALCO") meets regularly to review
projected loan demand and discuss appropriate funding sources to adequately
manage the Company's gap position and minimize interest rate risk.
The following table shows contractual obligations of the Company.
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
--------------------------------------------------------------------------------------------------------------
Time deposits .......................... $279,193 $181,365 $ 88,216 $ 9,202 $ 410
Long-term debt obligations (1) ......... 44,127 162 8,386 7,566 28,013
Capital lease obligations (2) .......... -- -- -- -- --
Operating lease obligations ............ 497 296 160 41 --
Purchase obligations ................... 1,189 555 634 --
Other long-term liabilities reflected on
the balance sheet under GAAP (2) ... -- -- -- -- --
-------- -------- -------- -------- --------
Total ............................. $325,006 $181,823 $ 97,317 $ 17,443 $ 28,423
======== ======== ======== ======== ========
(1) FHLB advances, loans sold under repurchase agreements, trust preferred
debenture and subordinated debenture
(2) None
At the bank holding company level, the Company primarily uses cash to pay
dividends to shareholders. Historically, the main source of funding for the
holding company is dividends from the Bank. During 2009, 2008 and 2007 the Bank
declared dividends to the holding company of $2,266,000, $3,568,000 and
$4,769,000, respectively. As of January 1, 2010, the amount of dividends the
Bank can pay to the parent company without prior regulatory approval was
$1,368,000, versus $4,317,000 at January 1, 2009. As discussed in Note 12 to the
consolidated financial statements and Item 1 of Form 10-K, the Bank is subject
to regulation and, among other things, may be limited in its ability to pay
dividends or transfer funds to the holding company. Accordingly, consolidated
cash flows as presented in the Consolidated Statements of Cash Flows on page 26
may not represent cash immediately available to the holding company.
To provide temporary liquidity and as an alternative to borrowing federal funds,
the Company will acquire, from time to time, large-balance certificates of
deposit, generally from public entities, for short-term time periods. At
December 31, 2009, the Company had $817,000 of short-term public fund
certificates of deposit compared to $28,388,000 of these deposits as of December
31, 2008.
The Company determined a higher level of liquidity was prudent during 2009 and
maintained an average balance of $27,388,000 in Fed Funds sold (funds invested
overnight with correspondent banks) during 2009 compared to $8,754,000 during
2008. The average yield on Fed Funds sold for 2009 was 0.14 percent. The Company
maintained an elevated Fed Funds position in 2009 due to uncertainties in the
banking industry but anticipates a positive impact when the position is lowered
as financial market conditions stabilize.
The Company opened two full-service banking centers in Plainfield and Avon
(Hendricks County) in December 2007 and January 2008, respectively. The cost
(building, furniture, equipment and land) of the Plainfield and Avon banking
centers were $2,656,000 and $2,598,000, respectively. The Company also opened a
full-service banking center in Noblesville (Hamilton County) in September 2008
at a cost (building, furniture, equipment and land) of $2,891,000. The Company
did not purchase any additional land in 2009 and does not anticipate buying land
in 2010 but may purchase parcels of land for new banking centers in Central
2009 Annual Report 15
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Indiana in the future. The Company anticipates using existing capital resources
to purchase any additional parcels of land or build future banking centers, and
does not expect the outlays to significantly affect liquidity.
Sources and Uses of Cash
The following discussion relates to the Consolidated Statements of Cash Flows
(page 26). During 2009, $7,756,000 of cash was provided by operating activities,
compared to $13,007,000 during the same period in 2008. The decrease in cash
provided in 2009 was primarily a result of the net change in interest receivable
and other assets. During 2009, $37,722,000 was provided by investing activities,
compared to $55,756,000 used in investing activities in 2008. The increase in
cash provided in 2009 primarily resulted from net loan reductions. In 2009,
$19,068,000 of cash was used in financing activities, primarily from decreases
in certificates of deposit offset by increases in noninterest-bearing,
interest-bearing demand and savings deposits compared to $40,830,000 provided in
2008, primarily from increases in certificates of deposit and net proceeds from
Federal Home Loan Bank advances. Overall, net cash and cash equivalents
increased $26,410,000 in 2009 compared to a decrease of $1,919,000 in 2008.
Other Income and Expense
-----------------------
Year Ended December 31,
------------------------------------------------------------
% Change % Change
2009 from 2008 2008 from 2007 2007
------------------------------------------------------------
Other Income
Service charges and fees on deposit accounts .... $ 3,477 (8.40)% $ 3,796 3.15 % $ 3,680
Fiduciary activities ........................... 2,313 (3.10) 2,387 6.42 2,243
Commission income .............................. 872 (0.23) 874 (3.96) 910
Gains on sales of available for sale securities 2,146 125.66 951 95,000.00 1
Gains (losses) on sales of trading securities .. (201) (1,646.15) 13 (72.92) 48
Unrealized gains (losses) on trading securities 518 (161.45) (843) (5,058.82) 17
Net gains on loan sales ........................ 1,364 94.03 703 (13.95) 817
Debit card interchange ......................... 1,178 7.29 1,098 15.58 950
Net gain (loss) on foreclosed assets ........... (906) 300.88 (226) (3,328.57) 7
Other operating income ......................... 1,222 (4.53) 1,280 (18.88) 1,578
-------- -------- --------
Total other income ...................... $ 11,983 19.44 $ 10,033 (2.13) $ 10,251
======== ======== ========
Other Expense
Salaries and employee benefits ................. $ 11,562 (5.93)% $ 12,291 1.31 % $ 12,132
Occupancy and equipment ........................ 3,652 8.27 3,373 8.81 3,100
Advertising .................................... 536 (25.97) 724 8.55 667
Appreciation (depreciation) in directors' and
executives' deferred compensation plans ........ 364 151.49 (707) (364.79) 267
Legal fees ..................................... 435 (23.14) 566 -- 566
Federal Deposit Insurance Corporation assessment 1,485 208.73 481 597.10 69
Other .......................................... 3,896 (2.70) 4,004 4.68 3,825
-------- -------- --------
Total other expense ..................... $ 21,930 5.78 $ 20,732 0.51 $ 20,626
======== ======== ========
Other Income
2009 Compared to 2008
Other income increased $1,950,000, or 19.4 percent, to $11,983,000 compared to
$10,033,000 in 2008. This increase occurred primarily due to the following
reasons:
o Gains of $2,146,000 were realized from sales of available for sale
securities during 2009 compared to $951,000 in 2008. There was
$518,000 of unrealized gains in the directors' and executives' rabbi
trust deferred compensation plan in 2009 compared to $843,000 of
unrealized losses in 2008. The rabbi trust is discussed in greater
detail on page 10.
o Net gains on loan sales increased by $661,000, or 94.0 percent during
2009. This increase resulted primarily from strong residential
mortgage refinancing activity due to the low interest rate market.
The increases noted above more than offset the increased losses on repossessions
and foreclosed assets (included as an offset to Other Income) which totaled
$906,000 in 2009 compared to losses of $226,000 in 2008. This decrease to income
resulted primarily from declines in market values in the residential housing
market and declining general economic conditions during the Company's holding
period for these assets.
16 Monroe Bancorp
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
2008 Compared to 2007
Other income decreased $218,000, or 2.1 percent, to $10,033,000 compared to
$10,251,000 in 2007. This decrease occurred primarily due to the following
reasons:
o Gains of $951,000 were realized from sales of available for sale
securities during 2009 compared to $1,000 in 2008. These gains were
offset by unrealized losses of $843,000 in the directors' and
executives' rabbi trust deferred compensation plan compared to
unrealized gains of $17,000 in 2007. The rabbi trust is discussed in
greater detail on page 10.
o Losses on the sale of repossessions and foreclosed assets (included as
an offset to Other Income) totaled $226,000 in 2008 compared to gains
of $7,000 in 2007. This decrease to income resulted primarily from
declines in market values in the residential housing market and
declining general economic conditions during the Company's holding
period for these assets.
o Official check fee income (included in Other Income) decreased by
$142,000, or 65.1 percent during 2008. This decrease resulted from a
decline in the reimbursement rate that the Company received from its
official check provider. Due to this decline and other market
considerations, the Company initiated a change of its official check
fee process in December 2008.
o Net gains on loan sales decreased by $114,000, or 14.0 percent during
2008. This decrease resulted from a decline in the residential
mortgage activity due to the depressed housing market.
The decreases mentioned above more than offset a $148,000, or 15.6 percent
increase in income from debit card fee income due to increased debit card use
and a $116,000, or 3.2 percent increase in service charges on deposit accounts
primarily due to increased overdraft activity.
Other Expense
2009 Compared to 2008
Other expense increased $1,198,000, or 5.8 percent, to $21,930,000 for 2009
compared to $20,732,000 for 2008. The increase in other expense occurred
primarily due to the following reasons:
o Federal Deposit Insurance Corporation assessment expense increased
$1,004,000, or 208.7 percent related to the new insurance assessment
methodology set forth in the FDIC Act.
o Appreciation in the value of the directors' and executives' rabbi
trust deferred compensation plan was $364,000 in 2009 compared to a
decline in value of $707,000 in 2008. The rabbi trust is discussed in
greater detail on page 10.
o Occupancy expense increased $279,000, or 8.3 percent largely due to
the full year impact of a new full-service banking center opened in
September of 2008 and increased property taxes.
These increases were partially offset by a $729,000, or 5.9 percent decrease in
salaries and employee benefits due to a reduction in staff levels and the
reduction and elimination of certain incentive plans.
2008 Compared to 2007
Other expense increased $106,000, or 0.5 percent, to $20,732,000 for 2008
compared to $20,626,000 for 2007. The increase in other expense occurred
primarily due to the following reasons:
o Federal Deposit Insurance Corporation assessment expense increased
$412,000, or 597.1 percent related to the new insurance assessment
methodology set forth in the FDIC Act.
o Occupancy expense increased $273,000, or 8.8 percent due to the
opening of three new full-service banking centers, one in December
2007, the second in January 2008, and the third in September 2008.
o Salaries and employee benefits increased by $159,000, or 1.3 percent.
Benefits expense increased $302,000, or 48.5 percent primarily due to
a $299,000 increase in the expense of the Company's health insurance
plan due to an increase in claims compared to 2007. Salary expense
increased by $122,000 (1.4 percent), primarily the result of adding
staff for the new Plainfield, Avon and Noblesville full-service
banking centers. Commissions and incentives decreased by $257,000, or
15.4 percent because the net income threshold necessary to trigger
various bonus payments was not met.
These increases were partially offset by a $707,000 decline in the value of the
directors' and executives' rabbi trust deferred compensation plan, discussed in
greater detail on page 10.
Income Taxes
The Company records a provision for income taxes currently payable, along with a
provision for those taxes payable in the future. Such deferred taxes arise from
differences in timing of certain items for financial statement reporting rather
than income tax reporting. The major differences, detailed in Note 9 on page 34
of the Notes to the Consolidated Financial Statements, between the effective tax
rate applied to the Company's financial statement income and the federal and
state statutory rate of approximately 40
2009 Annual Report 17
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
percent are interest on tax-exempt securities, the Bank's investment in CBAI CDE
III, LLC, and the increase in cash surrender value of the Bank's owned life
insurance.
The deferred tax assets and liabilities represent decreases or increases in
taxes expected to be paid in the future because of future reversals of temporary
differences in the bases of assets and liabilities as measured by tax laws and
their bases as reported in the financial statements. Deferred tax assets are
also recognized for tax attributes such as net operating loss carryforwards and
tax credit carryforwards. The net deferred tax asset was $6,019,000 at December
31, 2009, an increase of $1,808,000 or 42.9% compared to $4,211,000 at December
31, 2008. The increase in the net deferred tax asset was primarily due to timing
differences in the amount of provision for loan loss that was expensed in 2009
compared to the charge-offs experienced. Management estimates charge-offs in
future periods will exceed provision for loan loss expense and the Company's
projected future taxable income will enable the Company to utilize the net
deferred tax asset. In 2009, the Company recorded a deferred tax asset valuation
allowance of $179,000 to reduce deferred state tax assets to the amount
Management concluded was expected to be utilized in future periods. The Company
adjusts its unrecognized tax benefits as necessary when additional information
becomes available. The reassessment of the Company's unrecognized tax benefits
may have a material impact on its effective tax rate in the period in which it
occurs.
The Company's effective tax rate was 3.2 percent, 1.1 percent, and 26.6 percent
in 2009, 2008 and 2007, respectively. The tax rate decreased in 2009 and 2008
because tax-exempt income has become an increasingly larger percentage of total
pre-tax income.
Off-Balance Sheet Arrangements
The Company incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of its customers. These risks derive from
commitments to extend credit and standby letters of credit. Off-balance sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. See Note 11 to the Consolidated Financial
Statements for additional details on the Company's off-balance sheet
arrangements.
Financial Condition
Overview
Total assets decreased to $802,451,000 at December 31, 2009, a 2.1 percent
decrease from $819,799,000 at December 31, 2008, with the majority of this
decline occurring in the loan portfolio.
Securities
Securities (trading and investment) owned by the Company decreased to
$121,250,000 at December 31, 2009, from $121,530,000 at December 31, 2008, a
decrease of $280,000, or 0.2 percent.
Loans
Loans (excluding loans held for resale) decreased to $584,139,000 at December
31, 2009, which was $45,563,000, or 7.2 percent lower than at December 31, 2008.
The largest decreases occurred in the commercial construction and land
development portfolio which decreased $16,989,000, or 22.3 percent and the
commercial line of credit portfolio which decreased $12,029,000, or 24.7
percent. Central Indiana market loans decreased $17,449,000 during 2009, while
loans in the Bank's core market of Monroe County and its surrounding counties
decreased by $28,114,000. Commercial real estate loans are the largest segment
of the loan portfolio. During 2009, the Company sold $93,490,000 of fixed- and
variable-rate mortgages compared to $44,230,000 in 2008.
Asset Quality and Provision for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge against earnings. The amount provided for loan losses
and the determination of the appropriateness of the allowance are based on a
continuous review of the loan portfolio, including an internally administered
loan "watch list" and an independent loan review provided by an outside
accounting firm. The evaluation takes into consideration identified credit
problems from individually evaluated loans, as well as historical loss
experience, adjusted for relevant qualitative environmental factors, for loans
evaluated collectively and Management's estimation of probable incurred losses
in the loan portfolio. Qualitative environmental factors considered during the
analysis include: national and local economic trends, trends in delinquencies
and charge-offs, trends in volume and terms of loans (including concentrations
within industries), recent changes in underwriting standards, experience and
depth of lending staff and industry conditions. A complete discussion of this
process is contained in the Critical Accounting Policies on pages 9-10 and Note
1 of the Notes to Consolidated Financial Statements on pages 27-28.
Loans on the watch list tend to be more dependent on collateral if the
borrower's repayment capacity is diminished and the Bank devotes additional
attention to revaluing the collateral as appropriate in assessing the
probability of loss. When a loan is downgraded and placed on the watch list, a
new valuation is completed. This valuation is generally an externally prepared
appraisal from a licensed appraiser, but in some cases it may be an internal
evaluation based on market comparables, tax assessment data, or for income
producing properties, internal value estimates based on net operating income
with a capitalization rate appropriate for the property type and location.
18 Monroe Bancorp
Management's Discussion and Analysis (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
12/31/2009 12/31/2008
------------------------
Total Loans (including loans held for sale) $ ..... $587,365 $633,091
Number of Watch List Customers .................... 69 52
Total Watch List Loans $ .......................... 76,208 59,172
Total Watch List $ > 30 Days Past Due ............. 32,728 14,751
Total Watch List $ Customers Secured by Real Estate 71,450 55,507
Total Watch List $ Secured by Non R/E ............. 3,103 3,268
Total Watch List $ Unsecured ...................... 1,655 397
As of December 31, 2009, 57.1 percent of the watch list exposure was less than
thirty days past due, compared to 75.1 percent as of December 31, 2008. Of the
$76,208,000 of loans on the watch list on December 31, 2009, $55,303,000 (72.6
percent) were originated out of the Central Indiana (greater Indianapolis)
offices.
The chart that follows provides details of watch list loans by collateral type.
Total Bank % on Total $
Owned Watch Watch Non > 30 Days
Balance List List Accrual Late
-------------------------------------------------------
Total Loans at 12/31/09 ................................ $587,365 $ 76,208 13.0% $ 20,603 $ 38,843
Participations Sold and Loans in Process ............... 5,572 -- -- -- --
-------- -------- -------- --------
Loans Analyzed Below: ............................... $581,793 $ 76,208 13.1% $ 20,603 $ 38,843
======== ======== ======== ========
Secured by Real Estate
----------------------
Construction & Development
Spec 1-4 Residential Construction ..................... $ 13,435 $ 8,414 62.6% $ 2,214 $ 3,234
Pre Sold 1-4 Residential Construction .................. 1,402 861 61.4% -- 738
Land Development Residential ........................... 32,312 25,679 79.5% 5,453 5,453
-------- -------- -------- --------
Total 1-4 Residential Construction and Development: .. 47,149 34,954 74.1% 7,667 9,425
-------- -------- -------- --------
Other CRE Owner Occupied Construction .................. 1,471 -- -- -- --
Other CRE Non-Owner Occupied Construction .............. 10,790 -- -- -- --
Land Development Commercial ............................ 1,450 328 22.6% 328 328
-------- -------- -------- --------
Total Commercial Construction and Development: ....... 13,711 328 2.4% 328 328
-------- -------- -------- --------
Total Construction and Development: ................ 60,860 35,282 58.0% 7,995 9,753
-------- -------- -------- --------
1-4 Family
1-4 Family Owner Occupied .............................. 77,596 1,744 2.2% 132 1,618
1-4 Family Non-Owner Occupied (Rental & Other) ......... 50,471 3,711 7.4% 602 3,613
-------- -------- -------- --------
Total 1-4 Family: .................................... 128,067 5,455 4.3% 734 5,231
-------- -------- -------- --------
Multi Family - Other than Construction ................. 87,288 4,891 5.6% 2,902 4,696
-------- -------- -------- --------
Other CRE Owner Occupied - Other Than Construction ..... 95,591 11,265 11.8% 607 2,349
Other CRE Non-Owner Occupied - Other Than Construction . 111,821 11,726 10.5% 6,934 11,985
Other CRE Non-Development Land - Other Than Construction 10,894 2,831 26.0% 1,127 1,208
-------- -------- -------- --------
Total Other CRE Loans - Other Than Construction: ..... 218,306 25,822 11.8% 8,668 15,542
-------- -------- -------- --------
-------- -------- -------- --------
Total Secured by Real Estate: .................... $494,521 $ 71,450 14.4% $ 20,299 $ 35,222
======== ======== ======== ========
Other Secured Loans
-------------------
Business Assets ........................................ $ 51,627 $ 3,076 6.0% $ 279 $ 2,798
Consumer Products ...................................... 10,416 27 0.3% 25 198
Financial Assets ....................................... 10,702 -- 0.0% -- 237
-------- -------- -------- --------
Total Other Secured Loans: ........................... $ 72,745 $ 3,103 4.3% $ 304 $ 3,233
======== ======== ======== ========
Unsecured Loans
---------------
Unsecured Loans ........................................ $ 14,527 $ 1,655 11.4% $ -- $ 388
======== ======== ======== ========
2009 Annual Report 19
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
As of December 31, 2009, the Company had little or no exposure to option
adjustable rate mortgage products, subprime loans or purchase money loans with
teaser rates. In addition, the Company's exposure to junior mortgages is
generally limited to products secured by Owner Occupied 1-4 Family Residential
properties. This exposure consists of $22,446,000 in funded balances with an
additional unfunded commitment of $13,185,000 of which $457,000 of the funded
balance was on the watch list and $245,000 was greater than thirty days past due
as of December 31, 2009. As a matter of policy, the Company does not make loans
in excess of supervisory limits except under unusual circumstances with a higher
level of internal oversight and approval required.
At December 31, 2009, impaired loans totaled $25,141,000, a significant increase
from $16,449,000 at December 31, 2008. An allowance for losses was not deemed
necessary for impaired loans totaling $14,610,000 because full repayment of
principal and interest was expected, but an allowance of $3,075,000 was recorded
for the remaining balance of impaired loans of $10,531,000.
Net loans charged off during 2008 were $7,766,000 or 1.26 percent of average
loans compared to $4,362,000 or 0.72 percent of average loans in 2008. At
December 31, 2008, non-performing assets (non-accrual loans, restructured loans,
90-day past due loans still accruing and other real estate owned) were
$25,424,000, or 3.17 percent of total assets, a $6,644,000 increase from
$18,780,000, or 2.29 percent of total assets at December 31, 2008.
At December 31, 2009, the allowance for loan losses was $15,256,000, up from
$11,172,000 at year-end 2008. The 2009 provision for loan losses was
$11,850,000, a $2,970,000 increase from the $8,880,000 provision taken in 2008.
Factors taken into consideration when determining the amount taken to the
reserve for loan losses include, but are not limited to: local and national
economic conditions, the Company's entrance into a new market in Central
Indiana, and trends in volume and concentrations within the loan portfolio. The
Company's ratio of allowance for loan losses to total portfolio loans at
year-end 2009 was 2.61 percent, up from 1.77 percent at December 31, 2008.
Management believes the reserve is adequate to cover the loss exposure inherent
to the loan portfolio. Additional details of the allowance for loan losses are
disclosed in Note 5 on pages 31-32 of the Notes to the Consolidated Financial
Statements.
Other Real Estate Owned
Other real estate owned ("OREO") was $3,768,000 at December 31, 2009, an
increase of $511,000, or 15.7 percent compared to $3,257,000 at December 31,
2008. The year-end 2009 OREO balance was comprised of $2,985,000 of commercial
and residential real estate development, $323,000 of 1-4 family non-owner
occupied residential real estate and $460,000 of commercial real estate. Gains
or losses on sales and adjustments of the fair market value of OREO due to
subsequent appraisals are included as a gain or loss on foreclosed assets in
Other Income.
Deposits
Deposits were $634,254,000 at December 31, 2009, a decrease of $30,925,000, or
4.6 percent compared to $665,179,000 on December 31, 2008. Year-end balances can
skew the reduction in deposits, so changes in average December balances will be
discussed. Average deposits for December 2009 were $647,640,000 compared to
$680,661,000 in December 2008, a decrease of $33,021,000. Average retail and
public certificates of deposits ($100,000 and over) were $88,081,000 in December
2009 compared to $127,336,000 in December 2008, a decrease of $39,255,000.
Average brokered CDs decreased $19,900,000 from an average of $66,101,000 in
December 2008 to an average of $46,201,000 in December 2009. Average NOW and
money market deposits were $260,089,000 in December 2009 compared to 229,280,000
in December 2008, an increase of $30,809,000. The Company introduced the
Certificate of Deposit Account Registry Service ("CDARS") program in September
2008. This program offers customers access to multi-million dollar FDIC
insurance on their certificate of deposit balances up to $50 million per
customer. This program has been beneficial to customers who have sought
alternative ways to insure funds that exceed FDIC maximums. Average CDARS
deposits were $7,352,000 in December 2009, a decrease of $10,288,000 from the
$17,640,000 average in December 2008. While generating core deposits remains a
priority, Management uses the brokered CD market as an alternative source of
funding. Interest-bearing deposit accounts remain the largest single source of
the Company's funds. Complete details of growth by account type are disclosed in
Note 7 on page 33 of the Notes to the Consolidated Financial Statements.
Borrowings
Aside from the core deposit base and large denomination certificates of deposit
(including brokered CDs) mentioned previously, the remaining funding sources
include short-term and long-term borrowings. Borrowings consist of federal funds
purchased from other financial institutions on an overnight basis, retail
repurchase agreements, which mature daily, FHLB advances, a trust preferred
debenture, a Subordinated Debenture and loans sold under agreements to
repurchase.
At December 31, 2009, repurchase agreements were $61,929,000, compared to
$59,404,000 at December 31, 2008. FHLB advances totaled $17,371,000 at December
31, 2009 compared to $25,523,000 at December 31, 2008. The Company issued trust
preferred securities during 2007 and the aggregate proceeds of $5,155,000 were
used by the Statutory Trust to purchase $5,155,000 in Fixed/Floating Rate Junior
Subordinated Debentures from the Company. The Company also issued trust
preferred securities during 2006 and the aggregate proceeds of $3,093,000 were
used by the Trust to purchase $3,093,000 in Fixed/Floating Rate Junior
Subordinated Debentures from the Company. In 2009, the Company raised
$13,000,000 through the issuance of Subordinated Debentures of which $10,000,000
was provided to the Bank as additional capital with the remaining proceeds to be
used by the Company for general corporate purposes.
20 Monroe Bancorp
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
Capital
The Company's and Bank's capital strength continues to exceed regulatory
minimums and the Bank is considered to be "well-capitalized" as defined by its
regulatory agencies. The Company's Tier 1 capital-to-average assets ratio
(leverage ratio) was 7.5 percent at December 31, 2009 and 7.7 percent at
year-end 2008. At December 31, 2009, the Company had a Tier 1 risk-based capital
ratio of 10.4 percent and total risk-based capital percentage of 13.9 percent.
Regulatory capital guidelines require a Tier 1 risk-based capital ratio of 4.0
percent and a total risk-based capital ratio of 8.0 percent. Complete details of
the Company's capital ratios are disclosed in Note 13 on pages 37-38 of the
Notes to the Consolidated Financial Statements.
On July 17, 2009, $13,000,000 of Tier 2 capital was raised 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. The Subordinated
Debentures were issued pursuant to the prospectus filed as part of the Company's
registration statement under the Securities Act of 1933. 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.
Refer to the Liquidity section (pages 14-16) of this Management's Discussion and
Analysis for a discussion of the Company's 2009 and planned 2010 building and
remodeling projects. Management believes the Company can maintain its
"well-capitalized" rating over a range of reasonable asset growth rates, net
income growth rates and dividend payout ratios for the next several years.
Management will regularly forecast and evaluate capital adequacy and take action
to modify its capital level as required by changing circumstances and
opportunities.
2009 Annual Report 21
Report of Independent Registered Public Accounting Firm
--------------------------------------------------------------------------------
Audit Committee, Board of Directors and Stockholders
Monroe Bancorp
Bloomington, Indiana
We have audited the accompanying consolidated balance sheets of Monroe Bancorp
as of December 31, 2009, and 2008, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2009. The Company's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting in 2009. Our 2009 audit included consideration
of internal control over financial reporting as a basis for designing auditing
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. Our audits
also included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Monroe Bancorp as of
December 31, 2009, and 2008, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2009, in
conformity with accounting principles generally accepted in the Unites States of
America.
BKD, LLP
Indianapolis, Indiana
March 15, 2010
22 Monroe Bancorp
Consolidated Balance Sheets
(dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
December 31,
-----------------------
2009 2008
-----------------------
Assets
Cash and due from banks ........................................ $ 14,394 $ 11,552
Federal funds sold ............................................. 14,154 8,663
Interest-earning deposits ...................................... 21,583 3,506
--------- ---------
Total cash and cash equivalents ........................... 50,131 23,721
Trading securities, at fair value .............................. 3,385 2,981
Investment securities
Available for sale ........................................ 110,813 113,495
Held to maturity (fair value of $7,059 and $5,135) ........ 7,052 5,054
--------- ---------
Total investment securities .......................... 117,865 118,549
Loans .......................................................... 584,139 629,702
Less: Allowance for loan losses .......................... (15,256) (11,172)
--------- ---------
Loans, net of allowance for loan losses .............. 568,883 618,530
Loans held for sale ............................................ 3,226 3,389
Premises and equipment ......................................... 19,879 20,750
Federal Home Loan Bank of Indianapolis stock, at cost .......... 2,353 2,312
Other assets ................................................... 36,729 29,567
--------- ---------
Total Assets ............................. $ 802,451 $ 819,799
========= =========
Liabilities
Deposits
Noninterest-bearing ....................................... $ 90,033 $ 84,317
Interest-bearing .......................................... 544,221 580,862
--------- ---------
Total deposits ....................................... 634,254 665,179
Borrowings ..................................................... 106,056 93,203
Other liabilities .............................................. 5,939 5,496
--------- ---------
Total Liabilities ........................ 746,249 763,878
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized, 18,000,000 shares
Issued and outstanding - 6,227,550 shares .................. 137 137
Additional paid-in capital ..................................... 4,391 4,419
Retained earnings .............................................. 51,607 50,628
Accumulated other comprehensive income ......................... 89 817
Unearned ESOT shares ........................................... (22) (80)
--------- ---------
Total Shareholders' Equity ............... 56,202 55,921
--------- ---------
Total Liabilities and Shareholders' Equity $ 802,451 $ 819,799
========= =========
See notes to consolidated financial statements.
2009 Annual Report 23
Consolidated Income Statements
(dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
2009 2008 2007
-------------------------------------------
Interest Income
Loans receivable .................................................................... $ 33,602 $ 37,194 $ 42,358
Investment securities
Taxable ........................................................................ 2,116 3,561 4,051
Tax exempt ..................................................................... 562 1,240 1,241
Trading ........................................................................ 60 106 117
Federal funds sold .................................................................. 37 177 599
Other interest income ............................................................... 64 184 108
----------- ----------- -----------
Total interest income ........................................... 36,441 42,462 48,474
----------- ----------- -----------
Interest Expense
Deposits ............................................................................ 10,496 16,692 21,639
Borrowings .......................................................................... 2,108 2,169 3,796
----------- ----------- -----------
Total interest expense .......................................... 12,604 18,861 25,435
----------- ----------- -----------
Net Interest Income ............................................................ 23,837 23,601 23,039
Provision for loan losses ........................................................... 11,850 8,880 2,035
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses ............................ 11,987 14,721 21,004
----------- ----------- -----------
Other Income
Fiduciary activities ................................................................ 2,313 2,387 2,243
Service charges on deposit accounts ................................................. 3,477 3,796 3,680
Commission income ................................................................... 872 874 910
Gains on sales of available for sale securities ..................................... 2,146 951 1
Gains (losses) on sales of trading securities ....................................... (201) 13 48
Unrealized gains (losses) on trading securities ..................................... 518 (843) 17
Net gains on loan sales ............................................................. 1,364 703 817
Debit card interchange .............................................................. 1,178 1,098 950
Bank owned life insurance (BOLI) .................................................... 641 552 489
Net gain (loss) on foreclosed assets ................................................ (906) (226) 7
Other income ........................................................................ 581 728 1,089
----------- ----------- -----------
Total other income .............................................. 11,983 10,033 10,251
----------- ----------- -----------
Other Expenses
Salaries and employee benefits ...................................................... 11,562 12,291 12,132
Net occupancy and equipment expense ................................................. 3,652 3,373 3,100
Director and committee fees ......................................................... 171 184 195
Appreciation (depreciation) in directors' and executives' deferred compensation plans 364 (707) 267
Legal fees .......................................................................... 435 566 566
Advertising ......................................................................... 536 724 667
Federal Deposit Insurance Corporation assessment .................................... 1,485 481 69
Other expense ....................................................................... 3,725 3,820 3,630
----------- ----------- -----------
Total other expenses ............................................ 21,930 20,732 20,626
----------- ----------- -----------
Income before income tax ...................................................... 2,040 4,022 10,629
Income tax expense .................................................................. 65 43 2,823
----------- ----------- -----------
Net Income ..................................................................... $ 1,975 $ 3,979 $ 7,806
=========== =========== ===========
Basic Earnings Per Share ....................................................... $ 0.317 $ 0.640 $ 1.240
Diluted Earnings Per Share ..................................................... $ 0.317 $ 0.639 $ 1.235
Weighted-Average Shares Outstanding-Basic ...................................... 6,222,700 6,218,353 6,294,519
Weighted-Average Shares Outstanding-Diluted .................................... 6,222,700 6,224,951 6,320,317
See notes to consolidated condensed financial statements.
24 Monroe Bancorp
Consolidated Statements of Shareholders' Equity
(dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Unearned
Accumulated Employee
Common Stock Additional Other Stock
Shares Paid in Comprehensive Retained Comprehensive Ownership
Outstanding Amount Capital Income Earnings Income (Loss) Trust Shares Total
-----------------------------------------------------------------------------------------------
Balances, January 1, 2007 ....... 6,515,342 $ 137 $ 9,284 $ 45,136 $ (818) $ (234) $ 53,505
Comprehensive Income:
Net income ................... $ 7,806 7,806 7,806
Other comprehensive
income - unrealized gains
on securities, net of tax
and reclassification
adjustment .............. 1,041 1,041 1,041
-------
Comprehensive Income ............ $ 8,847
=======
ESOT shares earned .............. 60 96 156
Stock option compensation
expense ................. 67 67
Repurchase of stock, at cost .... (287,792) (5,062) (5,062)
Cash dividend ($0.49 per share) . (3,061) (3,061)
------------------------------- -----------------------------------------------
Balances, December 31, 2007 ..... 6,227,550 $ 137 $ 4,349 $ 49,881 $ 223 $ (138) $ 54,452
Comprehensive Income:
Net income ................... $ 3,979 3,979 3,979
Other comprehensive
income - unrealized gain
on securities, net of tax
and reclassification
adjustment .............. 594 594 594
-------
Comprehensive Income ............ $ 4,573
=======
ESOT shares earned .............. 11 58 69
Stock option compensation
expense ................. 59 59
Cash dividend ($0.52 per share) . (3,232) (3,232)
------------------------------- -----------------------------------------------
Balances, December 31, 2008 ..... 6,227,550 $ 137 $ 4,419 $ 50,628 $ 817 $ (80) $ 55,921
Comprehensive Income:
Net income ................... $ 1,975 1,975 1,975
Other comprehensive
income - unrealized gain
on securities, net of tax
and reclassification
adjustment .............. (728) (728) (728)
-------
Comprehensive Income ............ $ 1,247
=======
ESOT shares (forfeited) earned .. (17) 58 41
Stock options forfeited, net of
expense ................. (11) (11)
Cash dividend ($0.16 per share) . (996) (996)
------------------------------- -----------------------------------------------
Balances, December 31, 2009 ..... 6,227,550 $ 137 $ 4,391 $ 51,607 $ 89 $ (22) $ 56,202
=============================== ===============================================
See notes to consolidated financial statements.
2009 Annual Report 25
Consolidated Statements of Cash Flows
(dollar amounts in thousands except share and per share data)
--------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
2009 2008 2007
-------------------------------------
Operating Activities
Net income .............................................................. $ 1,975 $ 3,979 $ 7,806
Items not requiring cash:
Provision for loan losses ....................................... 11,850 8,880 2,035
Depreciation and amortization ................................... 1,213 1,178 1,077
Deferred income tax ............................................. (1,435) (1,843) (152)
Investment securities accretion, net ............................ (17) (25) (45)
Available for sale securities gains including redemptions ....... (2,146) (951) (1)
Trading securities (gains) losses including redemptions ......... 201 (13) (48)
Net change in trading securities ................................ (605) 680 (42)
(Gain)/Loss on disposal of premises and equipment ............... 12 (6) (65)
Origination of loans held for sale .............................. (93,327) (44,645) (58,918)
Proceeds from sale of loans held for sale ....................... 94,854 44,933 59,306
Gain on sale of loans held for sale ............................. (1,364) (703) (817)
ESOT shares earned .............................................. 41 69 156
Loss on foreclosed assets ....................................... 858 146 6
Stock-based compensation expense (forfeiture) ................... (11) 59 67
Net change in:
Interest receivable and other assets ....................... (4,845) 2,751 (2,598)
Interest payable and other liabilities ..................... 502 (1,482) (128)
--------- --------- ---------
Net cash provided by operating activities ........ 7,756 13,007 7,639
--------- --------- ---------
Investing Activities
Purchases of securities available for sale .............................. (348,619) (109,463) (46,963)
Proceeds from maturities of securities available for sale ............... 255,319 53,814 42,143
Proceeds from sales of securities available for sale .................... 97,047 65,035 249
Purchases of securities held to maturity ................................ (2,000) (4,050) --
Proceeds from maturities of securities held to maturity ................. -- -- 647
Net change in loans ..................................................... 35,764 (57,881) (27,235)
Purchase of premises and equipment ...................................... (413) (2,411) (5,282)
Proceeds from sale of premises and equipment ............................ -- 6 223
Proceeds from foreclosed asset sales .................................... 665 1,294 65
Purchase of bank owned life insurance (BOLI) ............................ -- (2,100) --
Purchase of FHLB stock .................................................. (41) -- --
--------- --------- ---------
Net cash provided (used) by investing activities . 37,722 (55,756) (36,153)
--------- --------- ---------
Financing Activities
Net change in:
Noninterest-bearing, interest-bearing demand and savings deposits 38,755 (13,377) (12,102)
Certificates of deposit ......................................... (69,680) 58,839 42,492
Borrowings ...................................................... 8,005 (8,650) (5,657)
Proceeds from Federal Home Loan Bank advances ........................... 10,000 43,000 --
Repayments of Federal Home Loan Bank advances ........................... (18,152) (35,750) (1,157)
Proceeds from trust preferred debentures ................................ -- -- 5,155
Proceeds from subordinated debentures ................................... 13,000 -- --
Repurchase of common stock .............................................. -- -- (5,062)
Cash dividends paid ..................................................... (996) (3,232) (3,061)
--------- --------- ---------
Net cash provided (used) by financing activities . (19,068) 40,830 20,608
--------- --------- ---------
Net Change in Cash and Cash Equivalents .............................................. 26,410 (1,919) (7,906)
Cash and Cash Equivalents, Beginning of Year ......................................... 23,721 25,640 33,546
--------- --------- ---------
Cash and Cash Equivalents, End of Year ............................................... $ 50,131 $ 23,721 $ 25,640
========= ========= =========
Additional Cash Flows Information
Interest paid ........................................................... $ 13,337 $ 19,094 $ 24,995
Income tax paid ......................................................... 450 2,700 2,925
Real estate acquired in settlement of loans ............................. 2,033 3,856 771
See notes to consolidated financial statements.
26 Monroe Bancorp
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1: Nature of Operations and Summary of Significant Accounting Policies
---------------------------------------------------------------------------
The accounting and reporting policies of Monroe Bancorp ("Company") and its
wholly-owned subsidiary, Monroe Bank ("Bank") and the Bank's wholly owned
subsidiaries, Sycamore Property Investments, LLC (formed in 2009 to manage
certain troubled real estate loans and foreclosed properties), HIE Enterprises,
LLC and MB Portfolio Management, Inc. ("MB") and MB's majority owned subsidiary
MB REIT, Inc., conform to accounting principles generally accepted in the United
States of America and reporting practices followed by the banking industry. The
more significant of the policies are described below.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the Bank. The Bank operates under a state bank charter and
provides full banking services, including trust services. As a state bank, the
Bank is subject to regulation by the Department of Financial Institutions, State
of Indiana, and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Monroe, Hamilton, Hendricks, Jackson and
Lawrence Counties in Indiana. The Bank's loans are generally secured by specific
items of collateral including real property, consumer assets and business
assets.
Consolidation - The consolidated financial statements include the accounts of
the Company, Bank and MB after elimination of all material inter-company
transactions.
Cash Equivalents - The Company considers all liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 2009
and 2008, cash equivalents consisted of money market accounts with brokers,
certificates of deposit and federal funds sold.
One or more of the financial institutions holding the Company's cash accounts
are participating in the FDIC's Transaction Account Guarantee Program. Under the
program, through June 30, 2010, all noninterest-bearing transaction accounts at
these institutions are fully guaranteed by the FDIC for the entire amount in the
account.
For financial institutions opting out of the FDIC's Transaction Account
Guarantee Program or interest-bearing cash accounts, the FDIC's insurance limits
increased to $250,000, effective October 3, 2008. The increase in federally
insured limits is currently set to expire December 31, 2013. At December 31,
2009, the Company's cash accounts exceeded federally insured limits by
approximately $36,996,000.
Trading Activities are engaged in by the Company and consist of investments in
various mutual funds held in grantor trusts formed by the Company in connection
with a deferred compensation plan. Securities that are held principally for
resale in the near term are recorded in the trading assets account at fair
value. Gains and losses, both realized and unrealized, are included in other
income. Interest and dividends are included in net interest income.
Quoted market prices, when available, are used to determine the fair value of
trading instruments. If quoted market prices are not available, then fair values
are estimated using pricing models, quoted prices of instruments with similar
characteristics, or discounted cash flows.
Investment Securities - Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity or included in the trading account
and marketable equity securities not classified as trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in accumulated other
comprehensive income, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Loans held for sale are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in Management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
Allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when Management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
2009 Annual Report 27
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
Note 1: Nature of Operations and Summary of Significant Accounting Policies
(continued)
---------------------------------------------------------------------------
The allowance for loan losses is evaluated on a regular basis by Management and
is based upon Management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreements. Factors considered by Management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable
market price or the fair value of the collateral.
Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify smaller
balance consumer and residential loans for impairment and disclosure.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using primarily the straight-line method based
principally on the estimated useful lives of the assets. Maintenance and repairs
are expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Foreclosed assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Comprehensive income consists solely of net income and unrealized gains and
losses on securities available for sale, net of tax.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
In January 2007, the Financial Accounting Standards Board ("FASB") issued new
accounting guidance on a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Guidance is also provided on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Management has determined the adoption of
this guidance did not identify any uncertain tax positions that it believes
should be recognized in the Company's financial statements.
Stock options - At December 31, 2009, the Company had a stock-based employee
compensation plan, which is described more fully in Note 16.
Earnings per share have been computed based upon the weighted-average common and
common equivalent shares outstanding during each year. Unearned ESOT shares have
been excluded from average shares outstanding.
Reclassifications of certain amounts in the 2008 and 2007 consolidated financial
statements have been made to conform to the 2009 presentation.
Note 2: Significant Estimates and Concentrations
------------------------------------------------
Current Economic Conditions
The current protracted economic decline continues to present financial
institutions with circumstances and challenges, which in some cases have
resulted in large and unanticipated declines in the fair values of investments
and other assets, constraints on liquidity and capital and significant credit
quality problems, including severe volatility in the valuation of real estate
and other collateral supporting loans.
At December 31, 2009, the Company held $219,309,000 in loans collateralized by
commercial real estate including $66,740,000 in the Greater Indianapolis
geographic area, and $13,711,000 in loans collateralized by commercial
construction and development real estate including $10,966,000 in the Greater
Indianapolis geographic area. At December 31, 2009, the Company held $47,149,000
in loans collateralized by residential construction and development real estate
including $34,965,000 in the Greater Indianapolis geographic area. Due to
national, state and local economic conditions,
28 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 2: Significant Estimates and Concentrations (continued)
------------------------------------------------------------
values for commercial and development real estate have declined significantly,
and the market for these properties is depressed.
At December 31, 2009, the Company held $14,783,000 in loans in the hospitality
industry, including $7,541,000 in the Greater Indianapolis geographic area. Due
to national, state and local economic conditions, values for commercial real
estate and, specifically, hotel properties, have declined significantly and the
market for these properties is depressed.
The accompanying financial statements have been prepared using values and
information currently available to the Company.
Given the volatility of current economic conditions, the values of assets and
liabilities recorded in the financial statements could change rapidly, resulting
in material future adjustments in asset values, the allowance for loan losses,
capital that could negatively impact the Company's ability to meet regulatory
capital requirements and maintain sufficient liquidity.
Note 3: Restriction on Cash and Due From Banks
----------------------------------------------
Banks are required to maintain reserve funds in cash and/or on deposit with the
Federal Reserve Bank. The reserve required at December 31, 2009 was $748,000.
Note 4: Investment Securities
-----------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
December 31, 2009
Available for Sale
Federal Agencies ............. $ 71,996 $ 59 $ 48 $ 72,007
Corporate Bonds .............. 1,000 -- -- 1,000
State and municipal .......... 1,843 2 -- 1,845
Mortgage-backed securities ... 32,831 260 117 32,974
Marketable equity securities . 3,013 -- 26 2,987
-------- -------- -------- --------
Total available for sale .. 110,683 321 191 110,813
-------- -------- -------- --------
Held to Maturity
Federal Agencies ............. 1,002 61 -- 1,063
State and municipal .......... 6,050 36 90 5,996
-------- -------- -------- --------
Total held to maturity .... 7,052 97 90 7,059
-------- -------- -------- --------
Total investment securities $117,735 $ 418 $ 281 $117,872
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
December 31, 2008
Available for Sale
Federal Agencies ............. $ 28,088 $ 67 $ -- $ 28,155
Corporate Bonds .............. 2,529 -- 126 2,403
State and municipal .......... 32,098 661 3 32,756
Mortgage-backed securities ... 46,536 694 14 47,216
Marketable equity securities . 3,013 -- 48 2,965
-------- -------- -------- --------
Total available for sale .. 112,264 1,422 191 113,495
-------- -------- -------- --------
Held to Maturity
Federal Agencies ............. 1,003 81 -- 1,084
State and municipal .......... 4,050 -- -- 4,050
Mortgage-backed securities ... 1 -- -- 1
-------- -------- -------- --------
Total held to maturity .... 5,054 81 -- 5,135
-------- -------- -------- --------
Total investment securities $117,318 $ 1,503 $ 191 $118,630
======== ======== ======== ========
2009 Annual Report 29
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 4: Investment Securities (continued)
------------------------------------------
The amortized cost and fair value of securities available for sale and held to
maturity at December 31, 2009, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------
Within one year ............ $ 27,383 $ 27,386 $ 980 $ 998
One to five years .......... 47,456 47,466 2,022 2,101
Five to ten years .......... -- -- 4,050 3,960
Over ten years ............. -- -- -- --
-------- -------- -------- --------
74,839 74,852 7,052 7,059
Mortgage-backed securities . 32,831 32,974 -- --
Marketable equity securities 3,013 2,987 -- --
-------- -------- -------- --------
Totals .................. $110,683 $110,813 $ 7,052 $ 7,059
======== ======== ======== ========
Securities with a carrying value of $85,854,000 and $75,882,000 were pledged at
December 31, 2009 and 2008 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of securities available for sale during 2009, 2008 and 2007
were $97,047,000, $65,035,000 and $249,000. Gross gains of $2,137,000 and
$948,000 were realized on the 2009 and 2008 sales and there were no gross gains
realized in 2007. During 2009, 2008 and 2007, the Bank realized gains of $9,000,
$3,000 and $1,000 on redeemed available for sales securities.
There were no sales of held to maturity securities during the three years in the
period ended December 31, 2009.
Trading securities, which consist of mutual funds held in a rabbi trust
associated with the directors' and executives' deferred compensation plans, are
recorded at fair value. Unrealized holding gains on trading securities of
$518,000 and $17,000 were included in earnings in 2009 and 2007, respectively,
and unrealized holding losses of $843,000 were included in earnings in 2008.
Certain investments in debt and marketable equity securities are reported in the
financial statements at an amount less than their historical cost. Total fair
value of these investments at December 31, 2009 and 2008, was $51,162,000 and
$22,821,000, which is approximately 43.4 percent and 19.2 percent respectively,
of the Company's available for sale and held to maturity investment portfolio.
Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, Management believes the declines in fair value for these
securities are temporary.
Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting credit
portion of the loss recognized in net income in the period the
other-than-temporary impairment is identified.
The table on the following page shows our investments' gross unrealized losses
and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at
December 31, 2009 and 2008:
30 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 4: Investment Securities (continued)
------------------------------------------
December 31, 2009
--------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
--------------------------------------------------------------------
Unrealized Unrealized Unrealized
Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
U.S. government agencies ............ $37,649 $ (48) $ -- $ -- $37,649 $ (48)
Mortgage-backed securities .......... 6,566 (117) -- -- 6,566 (117)
State and political subdivisions .... 3,960 (90) -- -- 3,960 (90)
Marketable equity securities ........ -- -- 2,987 (26) 2,987 (26)
------- ------- ------- ------- ------- -------
Total temporarily impaired securities $48,175 $ (255) $ 2,987 $ (26) $51,162 $ (281)
======= ======= ======= ======= ======= =======
December 31, 2008
--------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
--------------------------------------------------------------------
Unrealized Unrealized Unrealized
Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
U.S. government agencies ............ $ 9,055 $ -- $ -- $ -- $ 9,055 $ --
Corporate bonds ..................... 1,471 (61) 932 (65) 2,403 (126)
Mortgage-backed securities .......... 7,950 (14) -- -- 7,950 (14)
State and political subdivisions .... 448 (3) -- -- 448 (3)
Marketable equity securities ........ -- -- 2,965 (48) 2,965 (48)
------- ------- ------- ------- ------- -------
Total temporarily impaired securities $18,924 $ (78) $ 3,897 $ (113) $22,821 $ (191)
======= ======= ======= ======= ======= =======
Note 5: Loans and Allowance
---------------------------
December 31,
-----------------------
2009 2008
-----------------------
Commercial and industrial loans ................................ $ 79,325 $ 102,837
Real estate loans .............................................. 424,930 427,809
Construction loans ............................................. 62,351 80,917
Agricultural production financing and other loans to farmers ... 1,557 1,658
Individuals' loans for household and other personal expenditures 15,722 16,134
Tax-exempt loans ............................................... 254 347
--------- ---------
584,139 629,702
Allowance for loan losses ...................................... (15,256) (11,172)
--------- ---------
Loans, net of allowance for loan losses ........................ $ 568,883 $ 618,530
========= =========
2009 Annual Report 31
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 5: Loans and Allowance (continued)
----------------------------------------
Year Ended December 31,
----------------------------------
2009 2008 2007
----------------------------------
Allowance for Loan Losses
Balances, January 1 ................................... $ 11,172 $ 6,654 $ 6,144
Provision for losses .................................. 11,850 8,880 2,035
Recoveries on loans ................................... 326 351 580
Loans charged off ..................................... (8,092) (4,713) (2,105)
-------- -------- --------
Balances, December 31 ................................. $ 15,256 $ 11,172 $ 6,654
======== ======== ========
Information on impaired loans is summarized below
Impaired loans with an allowance ......................... $ 10,531 $ 9,094 $ 3,377
Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan 14,610 7,355 5,143
-------- -------- --------
Total impaired loans ............................... $ 25,141 $ 16,449 $ 8,520
======== ======== ========
Allowance for impaired loans (included in the Company's
allowance for loan losses) ............................ $ 3,075 $ 1,375 $ 246
Average balance of impaired loans ........................ 19,340 12,368 5,315
Interest income recognized on impaired loans ............. 225 182 354
Cash-basis interest included above ....................... 171 77 338
Note 1 (Nature of Operations and Summary of Significant Accounting Policies)
defines impaired loans. A specific allowance is made for impaired loans when
Management believes the discounted cash flows or collateral value does not
exceed the carrying value of the loan.
At December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled
$1,053,000 and $1,194,000, respectively. Non-accruing loans at December 31, 2009
and 2008 were $20,603,000 and $14,329,000, respectively.
Note 6: Premises and Equipment
-------------------------------
December 31,
---------------------
2009 2008
---------------------
Land ................... $ 5,485 $ 5,485
Buildings .............. 17,215 17,176
Equipment .............. 8,496 9,100
-------- --------
Total cost ......... 31,196 31,761
Accumulated depreciation (11,317) (11,011)
-------- --------
Net ................. $ 19,879 $ 20,750
======== ========
32 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 7: Deposits
-----------------
December 31,
--------------------
2009 2008
--------------------
Noninterest-bearing deposits ........................... $ 90,033 $ 84,317
NOW and money market deposits .......................... 246,577 215,370
Savings deposits ....................................... 18,451 16,619
Certificates and other time deposits of $100,000 or more 95,159 127,589
Other certificates and time deposits ................... 184,034 221,284
-------- --------
Total deposits ...................................... $634,254 $665,179
======== ========
Certificates and other time deposits maturing in years ending December 31:
2010 .................................................. $181,365
2011 .................................................. 63,251
2012 .................................................. 24,965
2013 .................................................. 8,871
2014 .................................................. 331
Thereafter ............................................ 410
--------
$279,193
========
In 2005, the Bank began using brokered certificates of deposit as a source of
funding. The balance of brokered deposits was $46,201,000, or 7.3 percent of
total deposits at December 31, 2009 and $66,101,000, or 9.9 percent of total
deposits at December 31, 2008.
Note 8: Borrowings
-------------------
December 31,
--------------------
2009 2008
--------------------
Federal Home Loan Bank advances ........... $ 17,371 $ 25,523
Subordinated debentures ................... 21,248 8,248
Securities sold under repurchase agreements 61,929 59,404
Loans sold under repurchase agreements .... 5,508 28
-------- --------
Total borrowings ....................... $106,056 $ 93,203
======== ========
Securities sold under agreements to repurchase ("repurchase agreements") consist
of obligations of the Company to other parties. All obligations mature daily.
The obligations are secured by investment securities and such collateral is held
by the Company. The maximum amount of outstanding agreements at any month-end
during 2009 and 2008 totaled $67,345,000 and $59,404,000 and the daily average
of such agreements totaled $59,046,000 and $45,686,000.
At December 31, 2009, two companies had repurchase agreement balances exceeding
10 percent of total equity capital. The balances in these accounts were
$11,562,000 and $10,039,000. These obligations mature on a daily basis. The
Federal Home Loan Bank advances at rates ranging from 3.59 percent to 5.64
percent are secured by first-mortgage loans and the guaranteed portion of SBA
loans totaling $105,293,000. Advances may be subject to restrictions or
penalties in the event of prepayment. The repurchase agreements allow the
Company, at its option, to call the loans at any time.
2009 Annual Report 33
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 8: Borrowings (continued)
-------------------------------
On July 24, 2006, the Company formed Monroe Bancorp Capital Trust I ("Capital
Trust"). The Capital Trust issued 3,000 shares of Fixed/Floating Rate Capital
Securities with a liquidation amount of $3,000,000 in a private placement, and
93 Common Securities with a liquidation amount of $1,000 per Common Security to
the Company for $93,000. The aggregate proceeds of $3,093,000 were used by the
Capital Trust to purchase $3,093,000 in Fixed/Floating Rate Junior Subordinated
Debentures from the Company. The Debentures and the Common and Capital
Securities have a term of 30 years and may be called without a penalty after
five years. It bears interest at the annual rate of 7.1475 percent for five
years and thereafter bears interest at the rate of the three-month LIBOR plus
1.60 percent. The Company has guaranteed payment of amounts owed by the Capital
Trust to holders of the Capital Securities.
On March 20, 2007, the Company formed Monroe Bancorp Statutory Trust II
("Statutory Trust"). The Statutory Trust issued 5,000 shares of Fixed/Floating
Rate Capital Securities with a liquidation amount of $5,000,000 in a private
placement, and 155 Common Securities with a liquidation amount of $1,000 per
Common Security to the Company for $155,000. The aggregate proceeds of
$5,155,000 were used by the Statutory Trust to purchase $5,155,000 in
Fixed/Floating Rate Junior Subordinated Debentures from the Company. The
Debentures and the Common and Capital Securities have a term of 30 years and may
be called without a penalty after five years. It bears interest at the annual
rate of 6.5225 percent for five years and thereafter bears interest at the rate
of the three-month LIBOR plus 1.60 percent. The Company has guaranteed payment
of amounts owed by the Statutory Trust to holders of the Capital Securities.
On July 17, 2009, $13,000,000 of Tier 2 capital was raised 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.
Maturities of FHLB advances, securities sold under repurchase agreements and
loans sold under repurchase agreements in years ending December 31:
Loans
Federal Home Sold Under
Loan Bank Repurchase
Advances Agreements
--------------------------
2010 .................... $ 162 $ --
2011 .................... 4,169 --
2012 .................... 4,191 26
2013 .................... 7,127 --
2014 .................... 439 --
Thereafter .............. 1,283 5,482
------- -------
$17,371 $ 5,508
======= =======
Note 9: Income Tax
-------------------
Year Ended December 31,
--------------------------------
2009 2008 2007
--------------------------------
Currently payable .................... $ 1,500 $ 1,886 $ 2,975
Deferred ............................. (1,435) (1,843) (152)
------- ------- -------
Total income tax expense ........ $ 65 $ 43 $ 2,823
======= ======= =======
Federal statutory income tax at 34% .. $ 693 $ 1,367 $ 3,614
Tax-exempt interest .................. (181) (460) (455)
Effect of state income taxes ......... -- (446) (62)
Cash surrender value of life insurance (224) (194) (174)
New markets tax credit ............... (194) (194) (173)
Other ................................ (29) (30) 73
------- ------- -------
Actual tax expense .............. $ 65 $ 43 $ 2,823
======= ======= =======
34 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 9: Income Tax (continued)
-------------------------------
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
December 31,
-------------------
2009 2008
-------------------
Assets
Allowance for loan losses ............................... $ 5,996 $ 4,391
Deferred loan fees ...................................... 71 107
Executive management & directors' deferred
compensation plans .................................. 1,398 1,253
Net unrealized losses on trading securities ............. -- 209
Nonqualified stock options .............................. 43 46
Unrealized gains - mortgage loans held for sale ......... 18 15
Other real estate owned ................................. 371 --
Other ................................................... 50 --
------- -------
Total assets .................................... 7,947 6,021
------- -------
Liabilities
Depreciation ............................................ (1,136) (1,007)
FHLB stock dividends .................................... (86) (86)
Change in prepaid expenses .............................. (160) (138)
Unrealized gains - trading accounts ..................... (326) --
Unrealized gains - available for sale ................... (41) (414)
Other ................................................... -- (165)
------- -------
Total liabilities ............................... (1,749) (1,810)
------- -------
Net deferred tax asset before valuation allowance $ 6,198 $ 4,211
------- -------
Valuation allowance
Beginning balance ............................... -- --
Increase during the period ...................... (179) --
------- -------
Ending balance .................................. (179) --
------- -------
Net deferred tax asset .......................... $ 6,019 $ 4,211
======= =======
The tax expense applicable to realized securities gains for years ending
December 31, 2009, 2008 and 2007 was $656,000, $331,000 and $20,000,
respectively.
Note 10: Other Comprehensive Income (Loss)
-------------------------------------------
2009
-----------------------------------
Before-Tax Tax Net-of-Tax
Amount Expense Amount
-----------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year ................. $ 1,045 $ 354 $ 691
Less: reclassification adjustment for gains realized in net income 2,146 727 1,419
------- ------- -------
Net unrealized gains ......................................... $(1,101) $ (373) $ (728)
======= ======= =======
2009 Annual Report 35
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 10: Other Comprehensive Income (Loss) (continued)
-------------------------------------------------------
2008
--------------------------------
Before-Tax Tax Net-of-Tax
Amount Expense Amount
--------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year ................. $1,856 $ 637 $1,219
Less: reclassification adjustment for gains realized in net income 951 326 625
------ ------ ------
Net unrealized gains ......................................... $ 905 $ 311 $ 594
====== ====== ======
2007
--------------------------------
Before-Tax Tax Net-of-Tax
Amount Expense Amount
--------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year ................. $1,585 $ 543 $1,042
Less: reclassification adjustment for gains realized in net income 1 -- 1
------ ------ ------
Net unrealized gains ......................................... $1,584 $ 543 $1,041
====== ====== ======
Note 11: Commitments and Contingent Liabilities
-----------------------------------------------
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Company's exposure to credit loss, in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit, is represented by the contractual or notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
2009 2008
--------------------
Commitments to extend credit ............... $ 4,841 $ 14,397
Unused lines of credit and letters of credit 91,745 106,411
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on Management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.
The Bank leases operating facilities under operating lease arrangements expiring
April 30, 2010 through November 1, 2013. Rental expense included in the
consolidated statements of income for the years ended December 31, 2009 and 2008
was $328,000 and $330,000.
36 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 11: Commitments and Contingent Liabilities (continued)
-----------------------------------------------------------
Future minimum lease payments under the leases are:
2010...................................... $ 296
2011...................................... 101
2012...................................... 59
2013...................................... 41
2014...................................... --
Thereafter................................ --
------
Total minimum lease payments........ $ 497
======
The Company and Bank are from time to time subject to other claims and lawsuits
which arise primarily in the ordinary course of business. It is the opinion of
Management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
Note 12: Dividend and Capital Restrictions
-------------------------------------------
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.
Note 13: Regulatory Capital
----------------------------
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically under-capitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 2009 and 2008,
the Company and the Bank are categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since December
31, 2009 that Management believes have changed the Company's or Bank's
classification.
2009 Annual Report 37
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 13: Regulatory Capital (continued)
----------------------------------------
The actual and required capital amounts and ratios are as follows:
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------
As of December 31, 2009
Total capital(1) (to risk-weighted assets)
Consolidated .............................. $82,066 13.86 % $47,367 8.00 % N/A N/A
Bank ...................................... 78,436 13.33 47,063 8.00 $58,828 10.00 %
Tier I capital(1) (to risk-weighted assets)
Consolidated .............................. 61,568 10.40 23,684 4.00 N/A N/A
Bank ...................................... 70,985 12.07 23,531 4.00 35,297 6.00
Tier I capital(1) (to average assets)
Consolidated .............................. 61,568 7.47 32,957 4.00 N/A N/A
Bank ...................................... 70,985 8.65 32,822 4.00 41,027 5.00
As of December 31, 2008
Total capital(1) (to risk-weighted assets)
Consolidated .............................. $71,214 11.34 % $50,224 8.00 % N/A N/A
Bank ...................................... 70,498 11.28 49,999 8.00 $62,499 10.00 %
Tier I capital(1) (to risk-weighted assets)
Consolidated .............................. 63,326 10.09 25,112 4.00 N/A N/A
Bank ...................................... 62,644 10.02 25,000 4.00 37,499 6.00
Tier I capital(1) (to average assets)
Consolidated .............................. 63,326 7.74 32,734 4.00 N/A N/A
Bank ...................................... 62,644 7.69 32,600 4.00 40,750 5.00
(1) As defined by regulatory agencies
Note 14: Employee Benefit Plans
--------------------------------
The Bank maintains an employee stock ownership plan and related trust ("trust")
that covers substantially all full-time employees and invests primarily in
Company stock.
The trust has borrowed funds from the Company which were used to acquire a total
of 112,077 shares of the Company's stock (55,000 shares in 2001, 2,077 shares in
2000 and 55,000 shares in 1996). Accordingly, the stock acquired by the trust is
reflected as a reduction to shareholders' equity. As the debt is repaid, shares
are released and allocated to participants' accounts based on their level of
compensation during the year. The difference between the cost of shares earned
and their fair value is reflected as a change in additional paid-in capital when
committed to be released to participant accounts. Dividends paid on allocated
shares reduce retained earnings. Dividends paid on unreleased shares are
allocated to participants and recorded as compensation expense. Trust expense
includes the fair value of shares earned and discretionary cash contributions.
Information about trust shares and expense for 2009, 2008 and 2007 is as
follows:
2009 2008 2007
--------------------------------
Shares allocated to participants' accounts .............. 266,507 262,628 273,300
Shares earned during the year and released for allocation 5,499 5,499 9,200
Unreleased shares ....................................... 2,102 7,601 13,100
Fair value of unreleased shares ......................... $ 13 $ 61 $ 210
Total trust expense ..................................... $ 42 $ 75 $ 167
The Company maintains a deferred-compensation plan that enables directors to
elect to defer receipt of directors' fees and certain members of Management to
defer compensation. The Company has established rabbi trusts which were funded
with an amount equal to the accrued liability under the plan. Those funds, as
well as elective deferrals from 1999 forward, are invested in various mutual
funds and can be invested in Monroe Bancorp stock, at the participants'
direction. The amount payable under the plan is related to the performance of
the funds. The change in fair value of the mutual funds is recognized as trading
gain or loss and anoffsetting expense or benefit is recognized as directors'
compensation. The asset and corresponding liability recognized under this plan
at December 31, 2009 and 2008 was $3,385,000 and $2,981,000, respectively.
38 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 14: Employee Benefit Plans (continued)
--------------------------------------------
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. For the first six months of 2009, the Company matched
employees' contributions at the rate of 100 percent for the first 3 percent and
50 percent of the next 2 percent of base salary contributed by participants.
Beginning on July 1, 2009, the Company began matching employees' contributions
at the rate of 50 percent for the first 5 percent of base salary contributed by
participants. The Company's expense for the plan was $233,000 for 2009, $307,000
for 2008, and $292,000 for 2007.
Note 15: Related Party Transactions
------------------------------------
The Bank has entered into transactions with certain directors, executive
officers and significant shareholders of the Company and the Bank and their
affiliates or associates ("related parties"). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
Management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, January 1, 2009 .................. $ 4,685
Change in composition ...................... --
New loans, including renewals .............. 18,203
Payments, etc., including renewals ......... (18,809)
--------
Balances, December 31, 2009 ................ $ 4,079
========
Deposits from related parties held by the Bank at December 31, 2009 and 2008
totaled approximately $15,871,000 and $8,289,000, respectively.
Note 16: Stock Option Plan
---------------------------
The Company's incentive stock option plan ("Plan"), which is shareholder
approved, permits the grant of share options to certain employees for up to
638,000 shares of common stock. The Company believes that such awards better
align the interests of its employees with those of its shareholders. Option
awards are generally granted with an exercise price equal to or greater than the
market price of the Company's stock at the date of grant; those option awards
generally vest based on three to four years of continuous service and have
ten-year contractual terms. Certain option awards provide for accelerated
vesting if there is a change in control (as defined in the Plan). The Company
generally issues shares from its authorized shares to satisfy option exercises.
The fair value of each option award is estimated on the date of grant using a
binomial option valuation model that uses the assumptions noted in the following
table. Expected volatility is based on historical volatility of the Company's
stock and other factors. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. The expected term
of options granted is derived from the output of the option valuation model and
represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the
option is based on the U. S. Treasury yield curve in effect at the time of the
grant.
2009 2008 2007
-----------------------
Risk-free interest rates .................................. 2.97% -- 5.16%
Dividend yields ........................................... 1.83% -- 2.93%
Volatility factors of expected market price of common stock 21.88% -- 13.26%
Weighted-average expected life of the options ............. 7 years -- 7 years
2009 Annual Report 39
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 16: Stock Option Plan (continued)
--------------------------------------
A summary of option activity under the Plan as of December 31, 2009, and changes
during the year then ended, is presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Options Shares Exercise Price Term (Years) Intrinsic Value
-----------------------------------------------------------------------------------------
Outstanding, beginning of year 371,250 $ 18.25
Granted ...................... 30,000 6.00
Exercised .................... -- --
Forfeited or expired ......... (133,250) (15.30)
-------- ---------
Outstanding, end of year ..... 268,000 $ 18.34 6.2 7
======== ========= ======== =========
Exercisable, end of year ..... 228,000 $ 20.03 5.7 --
======== ========= ======== =========
The weighted-average grant-date fair value of options granted during 2009 and
2007 was $1.37 and $2.93, respectively. There were no stock option grants during
2008. There were no stock options exercised during 2009, 2008 and 2007.
As of December 31, 2009, 2008 and 2007, there was $39,000, $35,000 and $94,000,
respectively, of total unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 1.9 years.
For the year ended December 31, 2009, the Company recognized $11,000 of stock
options forfeited resulting in $5,000 of tax expense. During the years ended
December 31, 2008 and 2007, the Company recognized $59,000 and $67,000,
respectively, of stock-based compensation expense and $24,000 and $27,000,
respectively, of tax benefit related to the stock-based compensation expense.
40 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 17: Earnings Per Share
---------------------------
Earnings per share ("EPS") were computed as follows:
Weighted- Per Share
Income Average Shares Amount
---------------------------------------
Year Ended December 31, 2009
----------------------------
Net income ..................................... $ 1,975 6,222,700
Basic earnings per share
Income available to common stockholders ... $ 0.317
==========
Effect of dilutive securities
Stock options ............................. -- --
--------- ---------
Diluted earnings per share
Income available to common stockholders and
assumed conversions .................... $ 1,975 6,222,700 $ 0.317
========= ========= ==========
Year Ended December 31, 2008
Net income ..................................... $ 3,979 6,218,353
Basic earnings per share
Income available to common stockholders ... $ 0.640
==========
Effect of dilutive securities
Stock options ............................. -- 6,598
--------- ---------
Diluted earnings per share
Income available to common stockholders and
assumed conversions .................... $ 3,979 6,224,951 $ 0.639
========= ========= ==========
Year Ended December 31, 2007
Net income ..................................... $ 7,806 6,294,519
Basic earnings per share
Income available to common stockholders ... $ 1.240
==========
Effect of dilutive securities
Stock options ............................. -- 25,798
--------- ---------
Diluted earnings per share
Income available to common stockholders and
assumed conversions .................... $ 7,806 6,320,317 $ 1.235
========= ========= ==========
Options to purchase 30,000 shares at $6.00 per share, 5,500 shares at $10.12 per
share, 16,500 shares at $12.73 per share, 11,000 shares at $14.73 per share,
25,000 shares of common stock at $16 per share, and 170,000 shares of common
stock at $22 per share, and 10,000 shares of common stock at $16.83 were
outstanding at December 31, 2009, but were not included in the computation of
diluted EPS because the options were antidilutive.
Options to purchase 30,000 shares of common stock at $16 per share, and 210,000
shares of common stock at $22 per share, and 13,000 shares of common stock at
$16.83 were outstanding at December 31, 2008, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
Options to purchase 210,000 shares of common stock at $22 per share and 13,000
shares of common stock at $16.83 were outstanding at December 31, 2007, but were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares.
2009 Annual Report 41
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
Note 18: Disclosures About Fair Value of Financial Instruments
---------------------------------------------------------------
Effective January 1, 2008, the Company adopted FASB Accounting Standards
Codification ("ASC") Topic 820. ASC Topic 820 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. ASC Topic 820 has been applied prospectively as of the beginning
of the period.
ASC Topic 820 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC Topic 820 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1: Quoted prices in active markets for identical assets or
liabilities,
Level 2: Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in active markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities,
Level 3: Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
Below is a description of the valuation methodologies used for instruments
measured at fair value on a recurring and non-recurring basis and recognized in
the accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Trading and Available for Sale Securities
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities include
highly liquid government bonds, mortgage products and exchange traded equities.
If quoted market prices are not available, then fair values are estimated by
using pricing models, certain market information, and quoted prices of
securities with similar characteristics or discounted cash flows. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the
bond's term and conditions. Level 2 securities include certain collateralized
mortgage and debt obligations and certain municipal securities. In certain cases
where Level 1 or Level 2 inputs are not available, securities are classified
within Level 3 of the hierarchy. At this time the Company has no securities
classified as Level 3 securities. The Company obtains fair value measurements
from an independent pricing service.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal
and interest due according to contractual terms are measured for impairment.
Allowable methods for determining the amount of impairment include estimating
fair value include using the fair value of the collateral for collateral
dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value
method of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of
the fair value hierarchy when impairment is determined using the fair value
method.
Other Real Estate Owned
Other real estate owned are reported at fair value less cost to sell and are
measured using Level 3 inputs within the fair value hierarchy. Level 3 inputs
for other real estate owned included third party appraisals adjusted for cost to
sell.
The following table presents the fair value measurements of assets and
liabilities recognized in the accompanying balance sheet measured at fair value
on a recurring and non-recurring basis and the level within the ASC Topic 820
fair value hierarchy in which the fair value measurements fall:
42 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 18: Disclosures About Fair Value of Financial Instruments (continued)
---------------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
----------------------------------------------------
As of December 31, 2009
-----------------------
Fair value measured on a recurring basis
Trading securities ......................... $ 3,385 $ 3,385 $ -- $ --
Available for sale securities
Federal agencies ....................... 72,006 33,692 38,314 --
Corporate bonds ........................ 1,000 -- 1,000 --
State and municipal .................... 1,845 -- 1,845 --
Mortgage-backed securities ............. 32,975 6,986 25,989 --
Marketable equity securities ........... 2,987 2,987 -- --
-------- -------- -------- --------
Total .............................. $110,813 $ 43,665 $ 67,148 $ --
======== ======== ======== ========
Fair value measured on a non-recurring basis
Impaired loans (collateral dependent), net
of specific allowance ................... $ 12,287 $ -- $ -- $ 12,287
Other real estate owned .................... 3,080 -- -- 3,080
As of December 31, 2008
-----------------------
Fair value measured on a recurring basis
Trading securities ......................... $ 2,981 $ 2,981 $ -- $ --
Available for sale securities
Federal agencies ....................... 28,155 9,055 19,100 --
Corporate bonds ........................ 2,403 -- 2,403 --
State and municipal .................... 32,756 -- 32,756 --
Mortgage-backed securities ............. 47,216 3,946 43,270 --
Marketable equity securities ........... 2,965 2,965 -- --
-------- -------- -------- --------
Total .............................. $113,495 $ 15,966 $ 97,529 $ --
======== ======== ======== ========
Fair value measured on a non-recurring basis
Impaired loans (collateral dependent), net
of specific allowance ................... $ 9,821 $ -- $ -- $ 9,821
The following methods and assumptions were used to estimate the fair value of
all other financial instruments not recognized in the accompanying balance
sheet:
Cash and Cash Equivalents - The fair value of cash and cash equivalents
approximates carrying value.
Held-to-maturity Securities - The fair value is based on quoted market prices,
if available. If a quoted price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans - The fair value for loans is estimated using discounted cash flow
analyses that use interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable - The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock - Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits - The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
2009 Annual Report 43
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 18: Disclosures About Fair Value of Financial Instruments (continued)
---------------------------------------------------------------------------
Borrowings - The fair value of Federal Home Loan Bank advances are estimated
using a discounted cash flow calculation, based on current rates for similar
debt. Other borrowings consist of federal funds purchased, securities sold under
repurchase agreements, a trust preferred subordinated debenture and loans sold
under repurchase agreement. The rates at December 31, 2009, approximate market
rates, thus the fair value approximates carrying value.
Off-Balance Sheet Commitments - Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair value of
such commitments is based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as follows:
2009 2008
--------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------
Assets
Cash and cash equivalents .............. $ 50,131 $ 50,131 $ 23,721 $ 23,721
Trading account securities ............. 3,385 3,385 2,981 2,981
Investment securities available for sale 110,813 110,813 113,945 113,945
Investment securities held to maturity . 7,052 7,059 5,054 5,135
Loans including loans held for sale, net 572,109 574,568 621,919 599,766
Interest receivable .................... 2,402 2,402 3,087 3,087
Stock in FHLB .......................... 2,353 2,353 2,312 2,312
Liabilities
Deposits ............................... 634,254 613,354 665,179 650,897
Borrowings ............................. 106,056 99,511 93,203 92,893
Interest payable ....................... 918 918 1,651 1,651
Off-Balance Sheet Commitments ................ -- -- -- --
44 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 19: Condensed Financial Information (Parent Company Only)
---------------------------------------------------------------
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheets
------------------------
December 31,
------------------
2009 2008
------------------
Assets
Cash ......................................... $ 2,496 $ 139
Interest earning deposits .................... 30 30
------- -------
Cash and cash equivalents ................ 2,526 169
Investment in common stock of subsidiaries ... 73,505 63,735
Available for sale securities ................ 6 9
Trading securities ........................... 3,385 2,981
Other ........................................ 1,478 320
------- -------
Total Assets ............................. $80,900 $67,214
======= =======
Liabilities
Borrowings
Subordinated Debenture ....................... $21,248 $ 8,248
------- -------
Total Borrowings ......................... 21,248 8,248
Other Liabilities
Deferred compensation ........................ 3,385 2,981
Other ........................................ 65 64
------- -------
Total Other Liabilities .................. 3,450 3,045
------- -------
Total Liabilities ........................ 24,698 11,293
Shareholders' Equity ............................... 56,202 55,921
------- -------
Total Liabilities and Shareholders' Equity $80,900 $67,214
======= =======
Condensed Statements of Income
------------------------------
Year Ended December 31,
-------------------------------
2009 2008 2007
-------------------------------
Income
Dividends from subsidiary ........................... $ 2,266 $ 3,568 $ 4,769
Other income ........................................ 399 (666) 318
------- ------- -------
Total income .................................... 2,665 2,902 5,087
Expenses .................................................. 1,619 53 999
------- ------- -------
Income before income tax and equity in undistributed income
of subsidiary ........................................... 1,046 2,849 4,088
Income tax benefit .................................. (417) (274) (257)
------- ------- -------
Income before equity in undistributed income of subsidiary 1,463 3,123 4,345
Equity in undistributed income of subsidiary .............. 512 856 3,461
------- ------- -------
Net Income ................................................ $ 1,975 $ 3,979 $ 7,806
======= ======= =======
2009 Annual Report 45
Notes to Consolidated Financial Statements (continued)
(table dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------
Note 19: Condensed Financial Information (Parent Company Only) (continued)
---------------------------------------------------------------------------
Condensed Statements of Cash Flows
----------------------------------
Year Ended December 31,
----------------------------------
2009 2008 2007
----------------------------------
Operating Activities
Net income ................................................ $ 1,975 $ 3,979 $ 7,806
Items not requiring cash:
Equity in undistributed income ........................ (512) (856) (3,461)
Other adjustments ..................................... (1,169) (202) (293)
-------- -------- --------
Net cash provided by operating activities ......... 294 2,921 4,052
-------- -------- --------
Investing Activities
Investment in trust preferred stock ....................... -- -- (155)
Investment in subsidiaries ................................ (10,000) -- --
Investment in available for sale securities ............... -- -- (13)
Pay down ESOT loan ........................................ 58 58 97
-------- -------- --------
Net cash provided by (used in) investing activities (9,942) 58 (71)
-------- -------- --------
Financing Activities
Dividends paid ............................................ (995) (3,232) (3,061)
Proceeds from trust preferred debenture ................... -- -- 5,155
Proceeds from subordinated debentures ..................... 13,000 -- --
Net change in borrowings .................................. -- -- (800)
Repurchase of common stock ................................ -- -- (5,062)
-------- -------- --------
Net cash provided by (used in) financing activities 12,005 (3,232) (3,768)
-------- -------- --------
Net Change in Cash .............................................. 2,357 (253) 213
Cash at Beginning of Year ....................................... 169 422 209
-------- -------- --------
Cash at End of Year ............................................. $ 2,526 $ 169 $ 422
======== ======== ========
Note 20: Quarterly Results of Operations for the Years Ended December 31, 2009
and 2008 (Unaudited)
-------------------------------------------------------------------------------
Weighted Average
Shares Outstanding Net Income Per Share
Quarter Interest Interest Net Interest Provision for ------------------ --------------------
Ended Income Expense Income Loan Losses Net Income Basic Diluted Basic Diluted
------------------------------------------------------------------------------------------------------------------------
2009
March ..... $ 9,378 $ 3,436 $ 5,942 $ 2,600 $ 1,107 6,220,637 6,220,637 $ 0.178 $ 0.178
June ...... 9,177 3,132 6,045 2,200 776 6,222,012 6,222,012 0.125 0.125
September . 9,175 3,091 6,084 2,200 710 6,223,387 6,223,387 0.114 0.114
December .. 8,711 2,945 5,766 4,850 (618) 6,224,762 6,224,762 (0.099) (0.099)
-------- ------- -------- -------- -------
$ 36,441 $12,604 $ 23,837 $ 11,850 $ 1,975 6,222,700 6,222,700 0.317 0.317
======== ======= ======== ======== =======
2008
March ..... $ 11,483 $ 5,607 $ 5,876 $ 880 $ 1,593 6,215,650 6,231,278 $ 0.256 $ 0.256
June ...... 10,366 4,610 5,756 1,050 1,860 6,218,050 6,228,079 0.299 0.299
September . 10,472 4,492 5,980 2,800 735 6,220,450 6,221,187 0.118 0.118
December .. 10,141 4,152 5,989 4,150 (209) 6,219,262 6,219,262 (0.034) (0.034)
-------- ------- -------- -------- -------
$ 42,462 $18,861 $ 23,601 $ 8,880 $ 3,979 6,218,353 6,224,951 0.640 0.639
======== ======= ======== ======== =======
During the fourth quarter of 2009 Management augmented the Company's allowance
for loan loss by $4,850,000, which is a significant increase when compared to
the three prior quarters of 2009. The increase in the Company's allowance for
loan losses resulted from Management's regular assessment of asset quality
(e.g., level of non-performing assets and loan delinquencies), evaluation of
specific credits, economic trends and other factors. Management feels this
increase will mitigate future issues with loans that are currently being
criticized.
46 Monroe Bancorp
Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
Note 21: Future Accounting Pronouncements
------------------------------------------
In April 2009, the FASB issued new accounting guidance on determining fair value
when the volume and level of activity for an asset or liability have
significantly decreased and identifying transactions that are not orderly. This
guidance emphasizes that even if there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. This new guidance requires a reporting
entity to disclose in interim and annual periods the inputs and valuation
technique(s) used to measure fair value and a discussion of changes in valuation
techniques and related inputs, if any, during the period. This guidance shall be
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. Management has determined the adoption of
this guidance did not have a material effect on the Company's financial position
or results of operations.
In April 2009, the FASB issued new accounting guidance for recognition and
presentation of other-than-temporary impairments. This new guidance amended the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This new guidance does not amend existing recognition
and measurement guidance related to other-than-temporary impairments of equity
securities. An entity shall disclose information for interim and annual periods
that enables users of its financial statements to understand the types of
available-for-sale and held-to maturity debt and equity securities held,
including information about investments in an unrealized loss position for which
an other-than-temporary impairment has or has not been recognized. In addition,
for interim and annual periods, an entity shall disclose information that
enables users of financial statements to understand the reasons that a portion
of an other-than-temporary impairment of a debt security was not recognized in
earnings and the methodology and significant inputs used to calculate the
portion of the total other-than-temporary impairment that was recognized in
earnings. The new guidance is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. Management has determined the adoption of this guidance
did not have a material effect on the Company's financial position or results of
operations.
In April 2009, the FASB issued new accounting guidance requiring interim
disclosures about fair value of financial instruments. This guidance requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements
and to require those disclosures in summarized financial information at interim
reporting periods. This guidance shall be effective for interim reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. Management has determined the adoption of this
guidance did not have a material effect on the Company's financial position or
results of operations.
In June 2009, the FASB issued new accounting guidance related to accounting for
transfers of financial assets. The Board's objective in issuing this new
guidance is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor's continuing involvement, if any, in transferred financial assets.
This guidance is effective as of the beginning of the first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. This guidance must be applied to
transfers occurring on or after the effective date. Management has determined
the adoption of this guidance did not have a material effect on the Company's
financial position or results of operations.
In June 2009, the FASB issued new accounting guidance on consolidation of
variable interest entities, which include: 1) the elimination of the exemption
for qualifying special purpose entities, 2) a new approach for determining who
should consolidate a variable interest entity, and 3) changes to when it is
necessary to reassess who should consolidate a variable interest entity. This
new guidance is effective as of the beginning of the first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. Management has determined the
adoption of this guidance did not have a material effect on the Company's
financial position or results of operations.
In June 2009, the FASB issued an accounting standard which established the
Codification to become the single source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities, with the exception of guidance
issued by the SEC and its staff. All guidance contained in the Codification
carries an equal level of authority. The Codification is not intended to change
GAAP, but rather is expected to simplify accounting research by reorganizing
current GAAP into approximately 90 accounting topics. The Company adopted this
accounting standard in preparing the Consolidated Financial Statements for the
period ended September 30, 2009. The adoption of this accounting standard, which
was subsequently codified into ASC Topic 105, "Generally Accepted Accounting
Principles," had no impact on retained earnings and will have no impact on the
Company's financial position or results of operations.
2009 Annual Report 47
Five-Year Total Shareholder Return
--------------------------------------------------------------------------------
The indexed graph below indicates Monroe Bancorp's total return to its
shareholders on its common stock for the past five years, assuming dividend
reinvestment, as compared to total returns for the Russell 2000 Index and the
Bancorp's peer group index (which is a line-of-business index prepared by an
independent third party consisting of banks with assets between $500 million and
$1 billion). The comparison of total return on investment for each of the
periods assumes that $100 was invested on January 1, 2005 in each of Monroe
Bancorp, the Russell 2000 Index, and the peer group index.
The values for Monroe Bancorp's stock are the year-end closing price per share
as reported by NASDAQ.
MONROE BANCORP
[TOTAL RETURN PERFORMANCE CHART APPEARS HERE]
Period Ending
----------------------------------------------------------
Index 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
--------------------------------------------------------------------------------
Monroe Bancorp ..... 100.00 100.05 107.99 106.15 55.58 44.18
Russell 2000 ....... 100.00 104.55 123.76 121.82 80.66 102.58
SNL Bank $500M-$1B . 100.00 104.29 118.61 95.04 60.90 58.00
Board of Directors
Name Employment
--------------------------------------------------------------------------------------------------------------------------------
Charles R. Royal, Jr., Chairman President/Dealer/Principal, Royal Mazda., an automobile dealership.
Bradford J. Bomba, Jr., M.D. Physician, Internal Medicine Associates.
Mark D. Bradford President, Chief Executive Officer, Monroe Bank and Monroe Bancorp.
James D. Bremner President, BremnerDuke Healthcare Real Estate, a national healthcare real estate
development and management firm.
James G. Burkhart Chief Executive Officer, American Senior Communities, LLC, a senior housing company.
Steven R. Crider Vice President, Crider & Crider, Inc., a highway/site development contractor.
Joyce Claflin Harrell President, Claflin Enterprise, LLC, a company that markets home healthcare products,
and President, Claflin Enterprise, Inc., d/b/a Home Instead Senior Care, a provider
of home care services.
Harry F. McNaught, Jr. President, Denison Properties, Inc., a commercial real estate development company.
Paul W. Mobley Chairman and Chief Executive Officer, Noble Roman's, Inc., which sells and services
franchises for Noble Roman's Pizza and Tuscano's Italian Style Subs.
48 Monroe Bancorp
COMMON STOCK INFORMATION
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
SHAREHOLDER INFORMATION
COMMON STOCK LISTING Visit monroebank.com for online information on annual
Monroe Bancorp common stock is traded on the NASDAQ Global reports, quarterly earnings releases, press releases, and a
Market under the trading symbol MROE (Cusip #6103-13-108). At link to SEC filings.
the close of business on March 12, 2010, there were 6,227,656 shares
outstanding held by 251 shareholders of record. CORPORATE INFORMATION
Monroe Bancorp is an independent bank holding company
MARKET MAKERS headquartered in Bloomington, Indiana, with Monroe Bank
Barclays Capital, Inc. as its wholly owned subsidiary. The Bank is locally owned
Citadel Derivatives Group, LLC and managed, and offers a full range of financial, trust and
Citigroup Global Markets, Inc. investment services through banking centers located in
FIG Partners, LLC Monroe, Lawrence, Jackson, Hendricks and Hamilton
Hill Thompson Magid & Co., Inc. Counties.
Howe Barnes Hoefer & Arnett, Inc.
J.J.B. Hilliard, W.L. Lyons, Inc. ANNUAL MEETING
Knight Equity Markets, L.P. The Annual Meeting of Shareholders will be held on Thurs-
Lime Brokerage, LLC day, April 29, 2010, at 10:00 a.m. at the Bloomington/Monroe
Merrill Lynch & Co., Inc. County Convention Center, 302 South College Avenue,
Morgan Stanley & Co., Inc. Bloomington, Indiana.
Penson Financial Services, Inc.
Raymond James and Associates, Inc. CORPORATE HEADQUARTERS
UBS Securities, LLC Monroe Bancorp
Wedbush Morgan Securities, Inc. 210 East Kirkwood Avenue
Bloomington, IN 47408
GENERAL STOCKHOLDER INQUIRIES (812) 336-0201, monroebank.com
Stockholders and interested investors may obtain information
about the Company upon written request or by calling: This statement has not been reviewed, or confirmed for
Mark D. Bradford accuracy or relevance, by the Federal Deposit Insurance
President and Chief Executive Officer Corporation.
Monroe Bancorp
210 E. Kirkwood Avenue
Bloomington, IN 47408
(812) 336-0201, bradford@monroebank.com
STOCK TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company Front Cover Photographs, top left to bottom right:
10 Commerce Drive David M. Snyder, VP, Trust Officer, presenting one of
Cranford, New Jersey 07016 several wealth management seminars; Erin M. Gerth,
(800) 368-5948, frodriguez@rtco.com AVP, Marketing Officer, (facing) and Sharon R. Clark,
Commercial Loan Administrative Assistant II,
FORM 10-K AND FINANCIAL INFORMATION providing volunteer services at United Way's Day of
Monroe Bancorp, upon request and without charge, will furnish Action; Michelle J. McManus, AVP, Manager of Monroe
shareholders, security analysts and investors a copy of Form Bank's Kirkwood Avenue Banking Center in Bloom-
10-K filed with the Securities and Exchange Commission. ington; Kathleen Madison, Senior Executive Assistant,
Please contact: examining a fiber artwork at a Monroe Bank Art Gallery
David T. Meier exhibition; Mark D. Bradford, President and CEO of
Vice President, Director of Finance Monroe Bank, welcoming Monroe Bank Prime Time Club
Monroe Bancorp customers to a holiday function; Monroe Bank's newest
210 E. Kirkwood Avenue banking center located in Noblesville, Hamilton County;
Bloomington, IN 47408 and a Monroe Bank sponsored animal micro-chipping
(812) 336-0201, meierd@monroebank.com. day at the Noblesville Banking Center.
