ITEM 1. Business.
GENERAL -------
Monroe Bancorp (the "Company") is a one-bank holding company formed under Indiana law in 1984. At December 31, 2003, on a consolidated basis the Company had total assets of $589.3 million, total loans of $424.5 million and total deposits of $436.7 million. The Company holds all of the outstanding stock of Monroe Bank (the "Bank"), which was formed in 1892. The Bank is the primary business activity of the Company.
The Bank, with its primary office located in Bloomington, Indiana, conducts business from sixteen locations in Monroe, Hendricks, Jackson and Lawrence counties in Indiana. Approximately 80 percent of the Bank's business is in Monroe County and is concentrated in and around the city of Bloomington. However, the Company's continued expansion into Hendricks County is expected to gradually reduce this concentration.
The Company, as a bank holding company, engages in commercial banking through the Bank. The Company may also engage in certain non-banking activities closely related to banking and own certain other business companies that are not banks, subject to applicable laws and regulations, although it has no current plans to do so.
As of December 31, 2003, the Bank had 193 full-time equivalent employees. As a community bank, management believes that the Bank must continue to promote community involvement and leadership among Bank employees.
The Bank is a traditional community bank, which provides a variety of financial services to its customers, including:
o accepting deposits; o making commercial, mortgage and installment loans; o originating fixed rate residential mortgage loans for sale into the secondary market; o providing personal and corporate trust services; o providing investment advisory and brokerage services; and o providing fixed and variable annuities.
The majority of the Bank's revenue is derived from interest and fees on loans and investments, and the majority of its expense is interest paid on deposits and general and administrative expenses related to its business.
Prior to 2003, the Company's operation has yielded eleven consecutive years of earnings growth. In 2003, after-tax net income was $5.1 million, down $1.0 million from 2002. The decline in net income is largely the result of a specific provision of $2.3 million that was added to the provision for loan losses as a result of the Bank's analysis of collateral values and other factors involving loans to a real estate developer, who filed bankruptcy, and to parties affiliated with the developer. Efforts to resolve the loans that led to the increase in the provision contributed to a $432,000 increase in legal expenses. These expenses were
partially offset by increases in several noninterest income categories, most notably gains on the sale of loans, service fees and trust fees.
The Company has increased its annual dividend each year for 16 years. Based upon a closing price of $14.25 for the Company's stock on December 31, 2003, (MROE; listed on NASDAQ), the Company's $.49 dividend provided a dividend yield of 3.44 percent.
Management believes that the Company's culture of community involvement, outstanding service quality, and customer focus has played a significant role in the Company's growth and success. Management also believes that other significant factors contributing to the Company's growth include, but are not limited to; the attractiveness of the Company's primary markets, an involved Board that sets high performance standards and the increased use of incentive and commission compensation plans.
The Company focused much of its effort during 2003 in three areas. The first area of focus was asset quality, in particular, on efforts to resolve nonperforming assets and to strengthen the Bank's credit review process. The second area of focus was residential mortgage lending. The interest rate environment for most of 2003 was favorable for the origination and sale of fixed rate mortgages. The Company shifted internal resources to this area of opportunity and as a result, revenues from the origination and sale of fixed rate mortgages increased by 59.7 percent to $1.7 million. The third area of focus was enhancing the Bank's ability to originate commercial real estate and other business loans within markets in central Indiana. Efforts in this area resulted in the hiring of a regional president and the addition of two experienced lenders to the personnel based in Hendricks County.
The addition of the personnel noted above contributed to the significant growth of the Company's three Hendricks County branch offices. Loans originated at these locations increased by $24.8 million, or 75.1 percent, during 2003. Deposits at these locations grew by $21.8 million, or 64.1 percent, during 2003.
Company Goals - ------------- The Company's business strategies are focused on four major areas:
o increasing the growth rate of net interest income, o improving credit processes to ensure strong credit quality, o increasing the ratio of noninterest income to net interest income, and o increasing operating efficiency.
Management will measure its overall success in terms of earnings per share growth rate, return on equity, the ratio of nonperforming loans to total loans, service quality and staff retention rates.
The Company, as a bank holding company, engages in commercial banking through the Bank. The Company may also engage in certain non-banking activities closely related to banking and own certain other business companies that are not banks, subject to applicable laws and regulations, although it has no current plans to do so.
Competition - ----------- The Company's market area is highly competitive. In addition to competition from commercial banks (including certain larger regional banks) and savings associations, the Company also competes with numerous credit unions, finance companies, insurance companies, mortgage companies, securities and brokerage firms, money market mutual funds, loan production offices and other providers of financial services. The Company competes with these firms in terms of pricing, delivery channels, product features, service quality, responsiveness and other factors.
The Company also competes directly with a large number of financial service providers who do not have a physical presence in our markets (e.g., Citicorp) but have been successful in selling their services using technology and sophisticated target marketing techniques. We fully expect these companies to increase their future efforts to attract business from our very best customers.
The Company's success in view of the substantial competition is felt to be the result of factors such as its history of community involvement and support, commitment to outstanding customer service, awareness of and responsiveness to customer needs, and its attractive mix of high touch and high tech delivery channels. The impact of these factors can be seen in the success the Company has had in increasing its share of deposits in Monroe County.
The Company has been able to increase its deposit market share in the Monroe County market through competitive pricing, marketing and an emphasis on service. All FDIC insured deposits held by financial institutions in Monroe County grew by $143.9 million, or 13.3 percent, during the five-year period between June 30, 1998 and June 30, 2003. During the same period, the Company was able to grow its deposits within the County by $83.7 million (33.0 percent) and increase its market share from 23.5 percent in 1998 to 27.6 percent in 2003. Like many financial institutions, deposit growth over the last five years has not kept pace with the Company's growth in loans. The Company has addressed short-term liquidity needs by borrowing federal funds (short-term borrowings from other banks) and longer term advances from the Federal Home Loan Bank of Indianapolis (FHLB).
REGULATION AND SUPERVISION --------------------------
Both the Company and the Bank operate in highly regulated environments and are subject to supervision and regulation by several governmental regulatory agencies, including the Federal Reserve Board, The Federal Deposit Insurance Corporation (the "FDIC") and the Indiana Department of Financial Institutions (the "DFI"). The laws and regulations established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws, regulations, governmental policies, income tax laws and accounting principles may have a material effect on our business and prospects. The following summary is qualified by reference to the statutory and regulatory provisions discussed.
MONROE BANCORP - --------------
The Bank Holding Company Act. Because the Company owns all of the outstanding capital stock of the Bank, it is registered as a bank holding company under the federal Bank Holding Company Act of 1956 and is subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require.
Investments, Control, and Activities. With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or acquiring more than five percent of the voting shares of a bank (unless it already owns or controls the majority of such shares).
Bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks. They are also prohibited from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for their subsidiaries, and other subsidiaries engaged in activities which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be incidental to these
operations. The Bank Holding Company Act does not place territorial restrictions on the activities of such nonbanking-related activities.
Effective as of March 11, 2001, the Gramm-Leach-Bliley Act allows bank holding companies which met certain management, capital and CRA standards and which have elected to become a finance holding company to engage in a substantially broader range of nonbanking activities than was previously permissible, including insurance underwriting and agency, and underwriting and making merchant banking investments in commercial and financial companies. This act also removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies.
The Company does not currently plan to engage in any activity other than owning the stock of the Bank.
Dividends. The Federal Reserve's policy is that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Source of Strength. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so.
MONROE BANK - -----------
General Regulatory Supervision. The Bank is an Indiana-chartered banking corporation subject to examination by the DFI. The DFI and the FDIC regulate or monitor virtually all areas of the Bank's operations. The Bank must undergo regular on-site examinations by the FDIC and DFI and must submit annual reports to the FDIC and the DFI.
Lending Limits. Under Indiana law, the total loans and extensions of credit by an Indiana-chartered bank to a borrower outstanding at one time and not fully secured may not exceed 15 percent of the bank's capital and unimpaired surplus.
Deposit Insurance. Deposits in the Bank are insured by the FDIC up to a maximum amount, which is generally $100,000 per depositor subject to aggregation rules. The Bank is subject to deposit insurance assessment by the FDIC pursuant to its regulations establishing a risk-related deposit insurance assessment system, based upon the institution's capital levels and risk profile. The Bank is also subject to assessment for the Financial Corporation (FICO) to service the interest on its bond obligations. The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. Increases in deposit insurance premiums or changes in risk classification will increase the Bank's cost of funds, and we may not be able to pass these costs on to our customers.
Transactions with Affiliates and Insiders. The Bank is subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid the taking of low quality assets. The
Bank is also prohibited from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank to its executive officers, directors, certain principal shareholders, and their related interests must:
o be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties; and o not involve more than the normal risk of repayment or present other unfavorable features.
Dividends. Under Indiana law, the Bank may pay dividends from its undivided profits in an amount declared by its Board of Directors, subject to prior approval of the DFI if the proposed dividend, when added to all prior dividends declared during the current calendar year, would be greater than the current year's "net profits" and retained "net profits" for the previous two calendar years.
Federal law generally prohibits the Bank from paying a dividend to the Company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice.
Branching and Acquisitions. Branching by the Bank requires the prior approval of the FDIC and the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other states. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch.
Community Reinvestment Act. The Community Reinvestment Act requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank.
Capital Regulations. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk-weighted categories of 0 percent, 20 percent, 50 percent, or 100 percent, with higher levels of capital being required for the categories perceived as representing greater risk. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios in excess of the minimums. Neither the Company nor the Bank has received any notice indicating that either is subject to higher capital requirements.
The federal bank regulatory authorities have also implemented a leverage ratio to supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base.
The Bank is also subject to the FDIC's "prompt corrective action" regulations, which implement a capital-based regulatory scheme designed to promote early intervention for troubled banks. This framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." As of December 31, 2002, the Bank was qualified as "well capitalized." It should be noted that a bank's capital category is determined solely for the purpose of applying the FDIC's "prompt corrective action" regulations and that the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects. The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decreases, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be required to boost the institutions' capital and to partially guarantee the institutions' performance.
Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank's loan operations are also subject to federal laws applicable to credit transactions, such as the:
o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of the Bank also are subject to the:
o Customer Information Security Guidelines. The federal bank regulatory agencies have adopted final guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
o Electronic Funds Transfer Act, and Regulation E. The Electronic Funds Transfer Act, which is implemented by Regulation E, governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking service.
USA Patriot Act. The United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") is intended to strengthen the ability of U. S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to
implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting; and currency crimes.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate and accounting scandals that have occurred during the past year. The Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight board; o auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; o additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; o the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; o increase the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors; o requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; o requirement that companies disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the Securities and Exchange Commission) and if not, why not; o expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; o a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; o disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; o mandatory disclosure by analysts of potential conflicts of interest; and o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.
Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions and certain "institution-affiliated parties," including management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs. In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the regulator to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
FORWARD-LOOKING STATEMENTS --------------------------
Portions of the information in this Form 10-K include certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning the intent, belief, outlook, estimate or expectations of the Company and its subsidiaries, its directors, or its officers primarily with respect to future events or the future operations, performance, financial condition and likelihood of success of the Company and the Bank. You can identify these statements by use of terms such as "expect," "believe," "goal," "plan," "intend," "estimate," "may," "will" or similar words. These forward-looking statements are not guarantees of future events or performance and are based upon assumptions rather than historical or current facts. The forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in the forward-looking statements. The factors which could cause a difference between actual results and those in the forward looking statements include changes in interest rates; loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.
Statistical Data. Selected Financial Data -----------------------
Financial Highlights (dollar amounts in thousands, except share and per share data)
(1) Net income divided by average total assets (2) Net income divided by average equity (3) Dividends per share divided by net income per share (4) Average equity divided by average total assets
NET INTEREST INCOME -------------------
The table on the following page presents information to assist in analyzing net interest income. The table of Average Balance Sheets and Interest Rates presents the major components of interest-earning assets and interest-bearing liabilities, related interest income and expense and the resulting yield or cost. For analytical purposes, interest income presented in the table has been adjusted to a tax equivalent basis assuming a 40 percent tax rate for the period after securities were transferred to the Delaware subsidiary in 2002 and 34 percent tax rate for all other periods. The tax equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets.
Average Balance Sheets and Interest Rates (dollar amounts in thousands) - --------------------------------------------------------------------------------
(1) Interest income on tax-exempt securities has been adjusted to a tax equivalent basis using a marginal income tax rate of 40% for the period after investments were transferred to the Delaware subisdiary and at 34% for all other periods. (2) Nonaccrual loans are included in average loan balances and loan fees are included in interest income. (3) Interest income adjustment to convert tax-exempt investment securities interest to fully tax equivalent basis using a marginal rate of 34% in 2001. Tax equivalent adjustment in 2002 increased to 40% for effect of out of state investment subsidiary.
The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average balance or average interest rate for both earning assets and interest-bearing liabilities. The volume differences were computed as the difference in volume between the current and prior year times the interest rate of the prior year, while the interest rate changes were computed as the difference in rate between the current and prior year items times the volume of the prior year. Volume/rate variances have been allocated on the basis of the absolute relationship between volume variances and rate variances. Nonaccrual loans were included in the average loan balances used in determining the yields.
Volume / Rate Analysis (dollar amounts in thousands) - --------------------------------------------------------------------------------
(1) The tax equivalent adjustment is based on a marginal income tax rate of 40% for the period in 2002 after investments were transferred to the Delaware subsidiary and at 34% for all other periods.
Allowance for Loan Loss and Asset Quality -----------------------------------------
The following table presents activity in the allowance for loan losses during the years indicated. The Company's policy is to charge off loans when, in Management's opinion, the loan is deemed uncollectible, although concerted efforts are made to maximize future recoveries.
Analysis of Allowance for Loan Losses (dollar amounts in thousands) - --------------------------------------------------------------------------------
The allocation of the allowance for loan losses along with the percentage of each loan type to total loans outstanding is illustrated in the following table. The Company regards the allowance as a general allowance which is available to absorb losses from all loans. The allocation of the allowance as shown in this table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will occur in these amounts.
Allocation of the Allowance for Loan Losses (dollar amounts in thousands) - --------------------------------------------------------------------------------
Nonperforming assets and their relative percentages to loan balances are presented in the table on the following page. The level of nonperforming loans and leases is an important element in assessing asset quality and the relevant risk in the credit portfolio. Nonperforming loans include nonaccrual loans, restructured loans and loans delinquent 90 days or more and still accruing.
Loans are evaluated for nonaccrual status when payments are past due over 90 days. Current year interest previously recorded but not deemed collectible is reversed and charged against current income. Interest income on these loans is then recognized when collected. Loans significantly past due, not well secured and in the process of collection are generally placed on nonaccrual status. Restructured loans are loans for which the contractual interest rate has been reduced or other concessions are granted to the borrower because of deterioration in the financial condition of the borrower resulting in the inability of the borrower to meet the original contractual terms of the loans. Another element associated with asset quality is other real estate owned (OREO), which represents properties acquired by the Company through loan defaults by customers.
Nonperforming Assets (dollar amounts in thousands) - --------------------------------------------------------------------------------
Interest income of $103,000 for the year ended December 31, 2003, was recognized on the nonaccruing and restructured loans listed in the table above, whereas, interest income of $336,000 would have been recognized under their original terms.
Potential Problem Loans In addition to loans classified for regulatory purposes, management also designates certain loans for internal monitoring purposes in a watch category. Loans may be placed on management's watch list as a result of delinquent status, concern about the borrower's financial condition, or the value of the collateral securing the loan, substandard classification during regulatory examinations, or simply as a result of management's desire to monitor more closely a borrower's financial condition and performance. Watch category loans may include loans with loss potential that are still performing and accruing interest and may be current under the terms of the loan agreements; however, management may have a significant degree of concern about the borrowers' ability to continue to perform according to the terms of the loans. Loss exposure on these loans is typically evaluated based primarily upon the estimated liquidation value of the collateral securing these loans. Also, watch category loans may include credits which, although adequately secured and performing, have past delinquency problems or where unfavorable financial trends are exhibited by borrowers.
All watch list loans are subject to additional scrutiny and monitoring. The Company's philosophy encourages loan officers to identify borrowers that should be monitored in this fashion and believes this process ultimately results in the identification of problem loans in a more timely fashion.
Management has identified $8.9 million and $14.0 million of loans on its watch list which were not included in impaired or nonperforming loans at December 31, 2003 and 2002, respectively. The majority of the year-over-year decrease is a result of the following items. At December 31, 2002, loans totaling $2.5 million to vendors and other parties related to the aforementioned real estate developer who declared bankruptcy were included on the watch list but were not yet considered to be impaired or nonperforming, while at December 31, 2003, these loans were nonperforming. Also one large loan that was on the watch list at December 31, 2002 paid off during 2003 and another large loan on the watch
list at December 31, 2002 is now current and is no longer classified.
Noninterest Income and Expense ------------------------------
A comparative table and complete discussion of noninterest income and expense is contained in the 2003 Annual Report to Shareholders - Managements Discussion and Analysis on pages 23 to 25 under the caption "Other Income and Expense."
Financial Condition -------------------
Securities ----------
Held-to-maturity securities are those which the Company has both the positive intent and the ability to hold to maturity. They are reported at amortized cost. Available-for-sale securities are those which the Company may decide to sell if needed for liquidity, asset/liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses included in other comprehensive income, net of tax.
Trading securities consist of investments in various mutual funds held in grantor trusts formed by the Company related to the Monroe Bancorp Directors' Deferred Compensation Plan. The Company's obligations under the deferred compensation plan change in concert with the performance of the investments.
The tables on the following page summarize the carrying values of securities from December 31, 2001 through December 31, 2003. The maturity distribution of securities at December 31, 2003 is summarized by classification. Yields on tax-exempt securities are adjusted to a tax equivalent basis using a marginal federal tax rate of 40 percent after the securities were transferred to the Delaware subsidiary in 2002 and 34 percent for all other periods.
Securities (dollar amounts in thousands) - --------------------------------------------------------------------------------
December 31, ------------------------------ 2003 2002 2001 -------- -------- -------- Available for sale - ------------------ U.S. Treasury & government agencies $ 48,471 $ 26,672 $ 16,110 States and political subdivisions . 4,998 3,489 1,475 Mortgage-backed & asset-backed .... 9,600 9,283 Equity securities ................. 3,303 3,589 236 -------- -------- --------
Total available for sale .... 66,372 43,033 17,821
Held to Maturity - ---------------- U.S. Treasury & government agencies 22,617 35,643 39,172 States and political subdivisions . 17,170 22,269 28,375 Mortgage-backed & asset-backed .... 10 17 22 -------- -------- --------
Total held to maturity ...... 39,797 57,929 67,569
Trading securities - ------------------ Mutual funds ..................... 3,329 2,817 3,060 -------- -------- -------- Total trading securities .... 3,329 2,817 3,060 -------- -------- --------
Total Securities ........ $109,498 $103,779 $ 88,450 ======== ======== ========
Securities Maturity Schedule at December 31, 2003 - -------------------------------------------------
(1) Mortgage-backed and asset-backed securities maturities are based on average life at the projected prepayment speed. (2) Equity securities and mutual funds have no maturities but may be sold at any time
The majority of the securities portfolio is comprised of U.S. Treasury and government agency securities, and state and municipal securities (tax-exempt). Trading securities consist solely of mutual funds held in a grantor trust, established for the Monroe Bancorp Directors' Deferred Compensation Plan.
The securities portfolio carries varying degrees of risk. Investments in U.S. Treasury and federal agency securities have little or no credit risk. Obligations of states and political subdivisions and corporate securities are the areas of highest potential credit exposure in the portfolio. This risk is minimized through the purchase of high quality investments. The Company's investment policy requires that general obligations of other states and political subdivisions and corporate bonds must have a rating of A or better when purchased. In-state general obligation municipals must be rated Baa or better. In-state revenue municipals must be rated A or better and out-of-state revenue municipals must be rated AA or better at the time of purchase. The vast majority of these investments maintained their original ratings at December 31, 2003. No securities of an individual issuer, excluding the U.S. Government and its agencies, exceed 10 percent of the Company's shareholders' equity as of December 31, 2003. The Company does not use off-balance sheet derivative financial instruments. As of December 31, 2003 and December 31, 2002, the securities portfolio held no structured notes.
Loans -----
The loan portfolio constitutes the major earning asset of the Company, and offers the best alternative for maximizing interest spread above the cost of funds. The Company's loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any credit which exceeds the authority of the loan officer, but is under $2 million is forwarded to the Company's Officers' Loan Committee for approval. This committee is comprised of the President/CEO, the Senior Vice President of Loans and several experienced loan officers. Individual credits exceeding $2 million are forwarded to the Board of Directors' loan committee for approval. This loan committee is comprised of seven board members, one of whom is the President/CEO. The loan committee not only acts as an approval body to ensure consistent application of the Company's loan policy, but also provides valuable insight through communication and pooling of knowledge, judgment, and experience of its members.
The Company's primary lending area generally includes Monroe, Lawrence, Jackson, Hendricks and contiguous counties in South Central Indiana. The Company extends out-of-area credit only to borrowers who are considered to be low risk, and then, only on a limited basis.
The following table reflects outstanding balances by loan type.
Loans Outstanding (dollar amounts in thousands) - -------------------------------------------------------------------------------- At December 31, 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Commercial and industrial $ 81,989 $ 76,301 $ 72,640 $ 66,233 $ 58,177 Agricultural ............ 1,028 1,322 1,084 639 784 Real estate: One-to-four-family ... 105,455 111,297 119,709 86,512 83,367 Multi-family ......... 43,682 44,640 41,941 37,656 34,078 Commercial ........... 108,871 88,661 71,057 42,424 40,782 Construction ......... 40,560 27,471 28,013 24,277 20,787 Home equity .......... 21,044 17,927 13,637 10,554 7,938 Farm land ............ 1,538 1,270 1,256 1,388 1,454 Installment ............. 20,344 22,426 22,463 27,076 26,527 -------- -------- -------- -------- -------- Total loans ..... $424,511 $391,315 $371,800 $296,759 $273,894 ======== ======== ======== ======== ========
The following table presents the composition of the loan portfolio expressed as a percent of total loans.
At December 31, ------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Commercial and industrial. 19.31 % 19.50 % 19.54 % 22.32 % 21.24 % Agricultural.............. 0.24 0.34 0.29 0.22 0.28 Real estate: One-to-four-family..... 24.84 28.44 32.20 29.14 30.44 Multi-family........... 10.29 11.41 11.28 12.69 12.44 Commercial............. 25.65 22.66 19.11 14.30 14.89 Construction........... 9.55 7.02 7.53 8.18 7.59 Home equity............ 4.96 4.58 3.67 3.56 2.90 Farm land.............. 0.36 0.32 0.34 0.47 0.53 Installment............... 4.79 5.73 6.04 9.12 9.69 -------- -------- -------- -------- -------- Total............ 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % ======== ======== ======== ======== ========
A discussion of each material line item set forth in the preceding tables follows:
o Commercial and Industrial Lending At December 31 2003, commercial and industrial loans totaled $82.0 million, or 19.3 percent of the total loan portfolio. This category is comprised of business loans and business lines of credit. Approximately 75 percent of commercial and industrial loans are secured by business assets; furniture and fixtures, inventory, accounts receivable or automobiles. Approximately 25 percent of these loans are unsecured, however, approximately 98 percent of these unsecured loans carry personal guarantees. At December 31, 2003, 16.2 percent of commercial and industrial loans were fixed rate and 83.8 percent were variable rate. Adjustable rate loans carry a maximum maturity of eight years. Fixed-rate loans carry a maximum maturity of five years. Lines of credit are normally written for a one-year term or less. Interest rates on variable rate loans are indexed to prime, and vary as the prime rate changes. These loans are made to a wide variety of businesses in our primary lending area, and there were no concentrations in any one industry.
o One-to-four-family Residential Real Estate Lending At December 31, 2003, one-to-four-family mortgages totaled $105.5 million, or 24.8 percent of the total loan portfolio. Indiana University's presence in the community provides a strong rental market, accordingly, a material amount of these loans were for other than single-family residences. At December 31, 2003, 4.2 percent of these loans were fixed rate and 95.8 percent were adjustable rate. Adjustable-rate mortgages (or ARMs) are offered with either a one-year, three-year, or five-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts annually. The Company uses an index tied to the one-year U.S. Treasury bill rate to reprice our ARM loans. These loans have a maximum maturity of 30 years. It is the Company's practice to sell essentially all of the fixed rate owner-occupied residential mortgages it originates on the secondary market. The Company obtains a commitment from the purchaser to buy these loans before they are closed, and does not retain servicing. Adjustable rate loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower's payment rises, increasing the potential for default. The payment history for these ARM loans has not varied significantly from that of fixed rate loans.
o Multi-family and Commercial Real Estate Lending These loans are secured primarily by multi-family (five or more) dwellings, small retail establishments, not-for-profit organizations' buildings and small office buildings located in the Company's primary lending area. At December 31, 2003, commercial and multi-family loans totaled $152.6 million, or 35.9 percent of the total loan portfolio. At December 31, 2003, 6.5 percent were fixed rate while 93.5 percent were adjustable rate. These loans generally require monthly payments and have maximum maturities of 25 years. The majority of the fixed-rate loans have maximum maturities of five years. The Company occasionally offers longer term fixed-rate commercial real estate loans, however, these are match funded with FHLB advances. The Company offers one-year, three-year and five-year multi-family and commercial ARMs. These loans are indexed to prime. Loans secured by multi-family and commercial real estate are underwritten based on the income-producing potential of the property and the financial strength of the borrower. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide periodic financial information. Because payments on loans secured by multi-family and commercial real estate are often dependent on the successful management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.
o Construction and Vacant Land Lending At December 31, 2003, construction and vacant land loans totaled $40.6 million, representing 9.6 percent of the total loan portfolio. The Company originates construction loans on commercial and residential properties located in its primary lending area. At December 31, 2003, 12.4 percent of these loans were fixed rate and 87.6 percent were variable rate. The vast majority of these loans have maturity dates of less than one year. The interest rates on these loans are indexed to prime. During the construction phase, the borrower generally pays interest only on a monthly basis. Loans to individuals for the construction of their residences may either be short-term construction financing or a construction/ permanent loan which automatically converts to a long-term mortgage consistent with our one-to-four family loan products. These loans involve many of the same risks inherent with commercial and multi-family loans discussed above and tend to be more sensitive to general economic conditions than many other types of loans.
o Home Equity Lending At December 31, 2003, home equity loans totaled $21.0 million, representing 5.0 percent of the total loan portfolio. All home equity loans are adjustable rate loans, and adjust after one year. Interest rates on these loans are tied to prime and increase as the loan-to-value ratio increases. These loans may be originated in amounts, together with the existing first mortgage, of up to 100 percent of the value of the property securing the loan. The maximum term of these loans is 30 years.
o Installment Lending This category is comprised of new and used automobile loans, mobile home loans, secured and unsecured personal loans, and personal lines of credit. At December 31, 2003, the balance of this account was $20.3 million, representing 4.8 percent of total loans. Installment loans, at December 31, 2003, were divided between the following categories: automobile loans 48.9 percent, secured personal loans 15.2 percent, lines of credit 12.3 percent, unsecured personal loans 17.1 percent, and mobile home loans 6.5 percent. The indirect lending function comprises approximately 25 percent of all personal loans. We originate auto loans, boat and recreational vehicle loans on both a direct and an indirect basis. We generally buy indirect auto loans on a rate basis, paying the dealer a cash payment for loans with an interest rate which is sometimes in excess of the rate we require. Any premium is amortized over the remaining life of the loan. Any prepayments are charged to future amounts owed that dealer.
We underwrite indirect auto loans using the Fair-Isaacs credit scoring system. We process the loan application using the same procedures as if we were making the loan directly to the customer, hence, we accept only the more qualified buyers based on our scoring. Upon purchasing the contract from the dealer, we assume all service and liability for the loan.
o Loan-to-value Limits The Company adheres to the FDIC guidelines for loan-to-value limits. These guidelines are as follows:
Loan Category Loan-to-Value Limit - ------------- ------------------- Real Estate: Raw land 65% Land development 75% Construction: Commercial, multi-family and non-residential 80% One-to-four-family residential 85% Improved property 85% Owner-occupied one-to-four-family 90% Home equity 100% Non-owner occupied 85% Commercial and Industrial (secured by): Accounts receivable 60 days or less past due 80% Inventory - raw materials 50% Inventory - finished goods 80% Equipment 100% Installment (automobile, RV, boat, etc.) 100%
Management believes the degree of risk assumed on any loan is commensurate with the interest rate assessed, and is thereby able to receive a higher rate of return on commercial and real estate construction loans as compared to residential real estate loans. Although these loan types usually possess increased elements of risk, the Company's lending practices, policies, and procedures that are in place are intended to mitigate certain risks associated with such loans. The Company's commercial and industrial loans are made to local businesses operating in diverse industries and the portfolio contains no specific industry concentrations, which mitigates certain risks. The real estate loan portfolio is strengthened by a stable local economy and by the strong rental market provided by Indiana University. Adjustable-rate loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower's payment rises, increasing the potential for default.
The following table reflects the maturity schedule of loans. Also indicated are fixed and variable rate loans maturing after one year.
Loan Liquidity (dollar amounts in thousands) - --------------------------------------------------------------------------------
Loan Maturities at December 31, 2003 ----------------------------------------- 1 Year 1 - 5 Over 5 and Less Years Years Total -------- -------- -------- -------- Commercial and industrial .......... $ 40,564 $ 31,483 $ 10,970 $ 83,017 Real estate: One-to-four-family ............ 4,144 2,453 98,858 105,455 Multi-family .................. -- 2,066 41,616 43,682 Commercial .................... 6,258 5,708 96,905 108,871 Construction .................. 28,588 7,421 4,551 40,560 Home equity ................... -- 96 20,948 21,044 Farm land ..................... 11 79 1,448 1,538 Installment ........................ 5,232 11,862 3,250 20,344 -------- -------- -------- -------- Total loans .............. $ 84,797 $ 61,168 $278,546 $424,511 ======== ======== ======== ========
Loans maturing after 1 year with: Fixed interest rates ........... $ 12,171 $ 34,442 Floating interest rates ........ 48,997 244,104 -------- -------- $ 61,168 $278,546 ======== ========
Deposits --------
The Company offers a wide variety of deposit products and services to individual and commercial customers, such as noninterest-bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. The deposit base provides the major funding source for earning assets.
The following table shows the average amount of deposits and average rates of interest paid thereon for the years indicated.
Deposit Information (dollar amounts in thousands) - --------------------------------------------------------------------------------
Certificates of deposit and other time deposits of $100,000 or more mature as follows:
at December 31, ------------------------------------------- CD's over $100,000 2003 2002 2001 -------- -------- -------- 3 months or less..... $ 14,030 $ 15,390 $ 16,391 3 through 6 months... 8,499 14,421 10,676 6 through 12 months.. 14,232 15,464 18,615 Over 12 months....... 26,143 24,735 14,498 -------- -------- -------- $ 62,904 $ 70,010 $ 60,180 ======== ======== ========
Borrowings ----------
A detailed schedule of short-term borrowings follows:
Short-term Borrowings (dollar amounts in thousands) - --------------------------------------------------------------------------------
Repurchase agreements are borrowings, the majority of which mature daily, and are secured by U.S. Treasury and government agency obligations.
The Bank became a member of the Federal Home Loan Bank of Indianapolis ("FHLB") in 1997 and has the authority of the Company's Board of Directors to borrow up to $57 million from the FHLB. All current and any future borrowings are secured by a blanket collateral pledge of the Bank's one-to-four family residential loans and multi-family loans. Other borrowings, consisting of FHLB advances and loans sold under repurchase agreements, were $44.5 million and $36.0 million, as of December 31, 2003 and 2002, respectively. The FHLB borrowings accounted for the vast majority of other borrowings. The Company had a net increase in borrowings from the FHLB of $8.9 million during 2003, because FHLB advances were used to help fund the growth of certain commercial loans that were made with rates fixed for five years and reprice annually thereafter. The Company expects to primarily use deposit growth in the future as a source of loan funding and for general liquidity, but may continue to supplement this with additional FHLB advances.
Liquidity ---------
A table detailing the maturity and repricing of the Company's assets accompanied by a discussion of the Company's interest rate sensitivity and liquidity is presented in the 2003 Annual Report to Shareholders - Management's Discussion and Analysis on pages 19 to 21 under the caption "Interest Sensitivity and Disclosures about Market Risk" and on pages 22 to 23 under the caption "Liquidity."
The following table details the main components of cash flows for the years ended December 31, 2003 and 2002.
Funding Uses and Sources (dollar amounts in thousands) - --------------------------------------------------------------------------------
Capital Adequacy ----------------
Management believes the Company and Bank met all the capital requirements as of December 31, 2003 and 2002, and the Bank was well-capitalized under the guidelines established by the banking regulators. To be well-capitalized, the Bank must maintain the prompt corrective action capital guidelines described in the "Capital Regulations" subsection of the "Regulation and Supervision" portion of this document. Consolidated capital amounts and ratios are presented in the following table. Bank capital levels are substantially similar.
At December 31, 2003 management was not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Company's consolidated liquidity, capital resources or operations.
Capital (dollar amounts in thousands) - -------------------------------------------------------------------------------- At December 31, --------------------- 2003 2002 --------- --------- Tier 1 capital Shareholders' equity .............................. $ 45,375 $ 44,263 Less: Intangibles ................................. -- -- Add / deduct: Unrealized (gain) loss on securities (406) (692) --------- --------- Total Tier 1 capital ......................... $ 44,969 $ 43,571 = ========= =========
Total risk-based capital Tier 1 capital .................................... $ 44,969 $ 43,571 Tier 2 capital .................................... 5,019 4,574 --------- --------- Total risk-based capital ..................... $ 49,988 $ 48,145 ========= =========
Risk weighted assets ................................... $ 413,624 $ 371,015
Quarterly average assets ............................... $ 574,811 $ 534,868
Risk-based ratios: Tier 1............................................. 10.87% 11.74%
Total risk-based capital........................... 12.09% 12.98%
Leverage ratios.................................... 7.82% 8.15%
ITEM 2.
ITEM 2. PROPERTIES.
The Company, through the Bank, currently operates its business from its main office in downtown Bloomington, Indiana and from fifteen additional branch locations in Monroe, Jackson, Hendricks and Lawrence Counties in Indiana. The Company also has an operations center. Information about those locations is set forth in the table on the following page.
- ------------------------------------------------------------------------------- NAME OF OFFICE LOCATION/TELEPHONE NUMBER OWNED/LEASED - ------------------------------------------------------------------------------- Downtown Main Office 210 East Kirkwood Avenue Owned Bloomington, IN 47408 (812) 336-0201 - ------------------------------------------------------------------------------- Ellettsville Banking Center 4616 West Richland Plaza Owned Bloomington, IN 47404 (812) 876-6044 - ------------------------------------------------------------------------------- Highland Village Banking Center 4191 West Third Street Owned Bloomington, IN 47403 (812) 331-3501 - ------------------------------------------------------------------------------- Kinser Crossing Banking Center 1825 North Kinser Pike Leased Bloomington, IN 47404 (812) 331-3518 - ------------------------------------------------------------------------------- Kirkwood Auto Branch 306 East Kirkwood Avenue Owned Bloomington, IN 47408 (812) 331-3510 - ------------------------------------------------------------------------------- Loan Center 111 South Lincoln Street Owned Bloomington, IN 47408 (812) 331-3555 - ------------------------------------------------------------------------------- Mall Road Banking Center 2801 Buick-Cadillac Blvd. Owned Bloomington, IN 47401 (812) 331-3507 - ------------------------------------------------------------------------------- Walnut Park Banking Center 2490 South Walnut Street Owned Bloomington, IN 47403 (812) 331-3514 - ------------------------------------------------------------------------------- Brownstown Banking Center 1051 West Spring Street Owned Brownstown, IN 47220 (812) 358-3171 - ------------------------------------------------------------------------------- Avon Banking Center 7517 Beechwood Centre Road, Suite 300 Leased Avon, IN 46123 (317) 272-7820 - ------------------------------------------------------------------------------- Brownsburg Banking Center 65 Garner Road, Suite 400 Leased Brownsburg, IN 46112 (317) 837-5201 - ------------------------------------------------------------------------------- Plainfield Banking Center 2059 Hadley Road Leased Plainfield, IN 46168 (317) 837-520 - ------------------------------------------------------------------------------- Bedford Banking Center Limestone Business Center, 2119 West Leased 16th Street Bedford, IN 47421 (812) 275-7800 - ------------------------------------------------------------------------------- Bell Trace Branch 800 Bell Trace Circle Leased Bloomington, IN 47408 (812) 331-3575 - ------------------------------------------------------------------------------- Meadowood Branch 2455 Tamarack Trail Leased Bloomington, IN 47408 (812) 353-7722 - ------------------------------------------------------------------------------- Redbud Hills Branch 3211 E. Moores Pike Leased Bloomington, IN 47401 (812) 353-7720 - ------------------------------------------------------------------------------- Operations Center 5001 North State Road 37-Business Leased Bloomington, IN 47404 - -------------------------------------------------------------------------------
The Company owns its main office. It owns seven of its branch locations and leases space for eight branches. The Company also leases its Operations Center. The main office contains approximately 18,656 square feet of space, and is occupied solely by the Company. The Company's data processing center, bookkeeping and deposit operations departments are located at the Operations Center.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than routine litigation incidental to the business of the Company or the Bank, to which the Company or the Bank is a party or of which any of its property is subject. Further, there is no material legal proceeding in which any director, officer, principal shareholder, or affiliate of the Company, or any associate of such director, officer or principal shareholder, is a party, or has a material interest, adverse to the Company.
None of the routine legal proceedings, individually or in the aggregate, in which the Company or the Bank are involved are expected to have a material adverse impact on the financial position or the results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2003 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock is quoted on the Nasdaq National Market under the symbol "MROE." The following table sets forth, for the periods indicated, the high and low sales prices for the Company's common stock as reported by the Nasdaq National Market:
Price Per Share Quarter High Low Dividends Declared - ----------------------------------------------------------------------------- 2003 2002 2003 2002 2003 2002 - -----------------------------------------------------------------------------
First Quarter $ 14.18 $ 12.25 $ 13.11 $ 10.72 $ .12 $ .12 Second Quarter 14.07 14.57 13.00 12.25 .12 .12 Third Quarter 14.50 14.00 13.46 13.23 .12 .12 Fourth Quarter 14.25 13.91 13.81 12.00 .13 .12
In each quarter during 2002 and 2003, the Company declared and paid the cash dividends listed in the above table for a per share total of $ .49 and $ .48 in 2003 and 2002, respectively. The Company has paid a regular cash dividend for over twenty-three consecutive years. The Company currently expects that comparable cash dividends will continue to be paid in the future.
Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined) for the current year plus those for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. Total shareholders' equity of the Bank at December 31, 2003 was $43,912,000 of which $40,516,000 was restricted from dividend distribution to the Company. The Company does not anticipate that this regulatory limitation will affect the future payment of dividends.
As of March 8, 2004, there were approximately 313 shareholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to pages 12 through 13 of the Company's 2003 Annual Report to Shareholders under the caption "Five-Year Financial Summary."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to pages 14 through 28 of the Company's 2003 Annual Report to Shareholders under the caption "Management's Discussion and Analysis."
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this item is incorporated by reference to pages 19 through 21 of the Company's 2003 Annual Report to Shareholders - Management's Discussion and Analysis under the caption "Interest Sensitivity and Disclosures about Market Risk."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are incorporated herein by reference to pages 30 through 49 of the Company's 2003 Annual Report to Shareholders.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-K, are effective.
(b) Changes in Internal Controls. There have been no significant changes in Monroe Bancorp's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses.
(c) Limitations on the Effectiveness of Controls. The Company's management, including its principal executive officer and principal financial officer, does not expect that the Company's disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there only can be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(d) CEO and CFO Certifications. Appearing as exhibits to this report are Certifications of Monroe Bancorp's principal executive officer and principal financial officer. The Certifications are required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In accordance with the provisions of General Instruction G to Form 10-K, the information required for the remainder of the required disclosures under Item 10 is not set forth herein because the Company intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2003 fiscal year, which Proxy Statement will contain such information. The information required by Item 10 is incorporated herein by reference to such Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
In accordance with the provisions of General Instruction G to Form 10-K, the information required for the remainder of the required disclosures under Item 11 is not set forth herein because the Company intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2003 fiscal year, which Proxy Statement will contain such information. The information required by Item 11 is incorporated herein by reference to such Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
In accordance with the provisions of General Instruction G to Form 10-K, the information required for the remainder of the required disclosures under Item 12 is not set forth herein because the Company intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2003 fiscal year, which Proxy Statement will contain such information. The information required by Item 12, with the exception of the table presented above, is incorporated herein by reference to such Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In accordance with the provisions of General Instruction G to Form 10-K, the information required for the remainder of the required disclosures under Item 13 is not set forth herein because the Company intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2003 fiscal year, which Proxy Statement will contain such information. The information required by Item 13 is incorporated herein by reference to such Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the provisions of General Instruction G to Form 10-K, the information required for the remainder of the required disclosures under Item 14 is not set forth herein because the Company intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2003 fiscal year, which Proxy Statement will contain such information. The information required by Item 14 is incorporated herein by reference to such Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Exhibit 13 Page Number -----------
(a) 1. Financial Statements: Independent accountants' report............................ 29 Consolidated balance sheets at December 31, 2003 and 2002............................. 30 Consolidated statements of income, years ended December 31, 2003, 2002 and 2001........................ 31 Consolidated statements of shareholders equity, years ended December 31, 2003, 2002 and 2001............ 32 Consolidated statements of cash flows, years ended December 31, 2003, 2002 and 2001........................ 33 Notes to consolidated financial statements.................. 34
(a) 2. Financial statement schedules:
All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit No: Description of Exhibit: - ------------ ----------------------
3 (i) Monroe Bancorp Articles of Incorporation are incorporated by reference to registrant's Form 10 filed November 14, 2001.
3 (ii) Monroe Bancorp Bylaws are incorporated by reference to registrant's Form 10 filed November 14, 2001.
10 (i)* 1999 Directors' Stock Option Plan of Monroe Bancorp is incorporated by reference to registrant's Form 10 filed November 14, 2001.
10 (ii)* 1999 Management Stock Option Plan of Monroe Bancorp is incorporated by reference to registrant's Form 10 filed November 14, 2001.
10 (iii)* Deferred Compensation Trust for Monroe Bancorp is incorporated by reference to registrant's Form 10 filed November 14, 2001.
10 (iv)* Monroe County Bank Agreement for Supplemental Death or Retirement Benefits is incorporated by reference to registrant's Form 10 filed November 14, 2001.
10 (v)* Monroe Bancorp Thrift Plan as Amended and Restated January 1, 2001 is incorporated by reference to registrant's Form 10-Q filed November 13, 2002.
10 (vi)* Monroe Bancorp Employee Stock Ownership Plan as Amended and Restated January 1, 2001 is incorporated by reference to registrant's Form 10-Q filed November 13, 2002.
10 (vii)* Third Amendment to the Monroe Bancorp Employee Stock Ownership Plan is filed as part of this Form 10-K.
10(viii)* Monroe Bancorp Directors' Deferred Compensation Plan as Amended and Restated Effective January 1, 1999 and First and Second Amendments are filed as part of this Form 10-K.
10(ix)* Monroe Bancorp Executives' Deferred Compensation Plan as Amended and Restated Effective January 1, 1999 and First, Second and Third Amendments are filed as part of this Form 10-K.
13 2003 Annual Report to Shareholders (except for the pages and information expressly incorporated by reference in this Form 10-K, the Annual Report to Shareholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K).
21 Subsidiaries of the Registrant.
31(i) Certification for Annual Report on Form 10-K by Principal Executive Officer.
31(ii) Certification for Annual Report on Form 10-K by Principal Financial Officer.
32(i) Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32 (ii) Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K:
Monroe Bancorp filed the following Forms 8-K:
Filed October 21, 2003, to report the release of a summary of third quarter earnings and a financial summary issued the same day.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of March 2004.
MONROE BANCORP
By: /s/Mark D. Bradford -------------------------------------------- Mark D. Bradford, President, Chief Executive Officer, (Principal Executive Officer)
By: /s/ Gordon M. Dyott -------------------------------------------- Gordon M. Dyott Executive Vice President, Chief Financial Officer, (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title/Capacity - --------- -------------- Date - ----
/s/ Mark D. Bradford President, Chief Executive Officer - -------------------------------- (Principal Executive Officer) and Director March 25, 2004 Mark D. Bradford
/s/ Gordon M. Dyott Executive Vice President, Chief Financial - -------------------------------- Officer (Principal Financial Officer) March 25, 2004 Gordon M. Dyott
/s/ Kathryn E. Burns Vice President, Director of Finance - -------------------------------- (Principal Accounting Officer) March 25, 2004 Kathryn E. Burns
/s/ David D. Baer Director, Chairman - -------------------------------- March 25, 2004 David D. Baer
/s/ Bradford J. Bomba, Jr., M.D. Director - -------------------------------- March 25, 2004 Bradford J. Bomba, Jr. M.D.
/s/ Steven R. Crider Director ------------------------------- March 25, 2004 Steven R. Crider
/s/ Timothy D. Ellis Director - -------------------------------- March 25, 2004 Timothy D. Ellis
/s/ Joyce Claflin Harrell Director - -------------------------------- March 25, 2004 Joyce Claflin Harrell
/s/ Harry F. McNaught, Jr. Director - -------------------------------- March 25, 2004 Harry F. McNaught, Jr.
/s/ Paul W. Mobley Director - -------------------------------- March 25, 2004 Paul W. Mobley
/s/ Richard P. Rechter Director - -------------------------------- March 25, 2004 Richard P. Rechter
/s/ Charles R. Royal, Jr. Director - -------------------------------- March 25, 2004 Charles R. Royal, Jr.