SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10
MONROE BANCORP
(Exact name of registrant as specified in its charter)
Indiana 35-1594017
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
210 East Kirkwood Avenue, Bloomington, Indiana 47408
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(Address of Principal Executive Officers) (Zip Code)
(812) 336-0201
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Registrant's telephone number including area code:
Securities Registered Pursuant to Section 12(b) of the Act: NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares, No Par Value
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(Title of Class)
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PART I
Item 1. Business.
Summary. Monroe Bancorp (the "Company") is a one-bank holding company
with a consistent history of growth during the past five years. The following
table summarizes recent performance.
<TABLE>
<CAPTION>
At or for the nine months
ended September 30, At or for the years ended December 31,
2000 1999 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 434,125 $ 397,542 $ 416,649 $ 375,418 $ 323,874 $ 293,091 $ 285,056
Net income 4,001 3,535 4,723 4,645 4,384 4,101 3,683
Basic and diluted
earnings per share 0.65 0.58 0.77 0.76 0.72 0.67 0.60
Dividends per share 0.30 0.24 0.34 0.32 0.27 0.22 0.17
Return on Equity 15.00% 14.27% 14.12% 15.08% 15.54% 15.96% 16.04%
</TABLE>
Management intends to accelerate asset and earnings growth by entering
select high growth markets in central Indiana. The market expansion plan will
commence in 2001 and will be targeted at acquiring high balance / low
transaction relationships. The market expansion plan will feature a creative use
of proven business development personnel and relatively low cost leased office
space in place of traditional branch banks.
Concurrently, Management will maintain its focus on the activities that
drive its success within its current market areas. Of specific importance are
the areas of maintaining asset quality, growing the Bank's Financial Management
Services business, and improving operating efficiency.
Overview. Monroe Bancorp (the "Company") is a one-bank holding company
formed under Indiana law in 1984. At September 30, 2000, on a consolidated basis
the Company had total assets of $434.1 million and total deposits of $338.4
million. The Company holds all of the outstanding stock of Monroe County Bank
(the "Bank"). The Bank is the primary business activity of the Company.
The Bank, with its primary office located in Bloomington, Indiana,
conducts business from fifteen locations in Monroe, Jackson and Lawrence
Counties, Indiana. This market area is highly competitive. In addition to
competition from commercial banks (including certain larger regional banks) and
savings associations, the Bank 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 generally. Approximately 85% of the Bank's
business is in Monroe County and is concentrated in and around the city of
Bloomington.
Primary Market. Monroe County, the Bank's primary area of operation, is
a rapidly growing market with a strong economy, as indicated by an unemployment
rate that has averaged 2.3% since 1998. Being the home of Indiana University,
the County's largest employer, the local economy benefits from the spending
patterns of the school's 37,000 students as well as the University's $803
million annual operating budget.
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The County's (Bloomington in particular) growing appeal as a retirement
community is another significant contributor to the market's overall economic
health. Bloomington was rated the sixth best place to retire by Money magazine,
the eighth best place to retire in Rand McNally's Retirement Places, and was
ranked in the "The Big 10 of College Towns" by the New York Times. The growth of
this attractive demographic segment provides a significant opportunity for the
Bank to grow its important asset management businesses.
Bank Activities. The Bank provides a variety of financial services to
its customers, including accepting deposits; making commercial and consumer
loans; originating mortgage loans; providing personal and corporate trust
services; providing investment advisory and brokerage services; and providing
fixed annuities and other insurance products. The majority of the Bank's revenue
is derived from interest and fees on loans and investments, and the majority of
its expense is interest paid on deposits and general and administrative expenses
related to its business. As a bank holding company, the Company engages in
commercial banking through its sole banking subsidiary, the Bank, and can 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.
Basis of Business Plan. The Bank's business plan is built upon five
critical success factors. First, the Bank must achieve and sustain an earnings
per share growth rate that places it in the top quartile of commercial banks in
its peer group. Second, the make-up of the Company's business mix must change in
response to the fact that the unit profitability (i.e., interest margin) of the
Bank's largest business (deposit gathering and lending) is shrinking. Third, the
Bank must build upon its primary competitive advantage; its dedication to
service quality in combination with a difficult to match blend of high touch and
high tech service delivery systems. Fourth, as a community based financial
institution, the Bank must continue to promote community involvement and
leadership. Fifth, the Bank must expand the Company's franchise into high-growth
communities outside its current market area. The Company's ability to stay
focused on these five issues is key to the accomplishment of its strategic
objectives.
Core Elements of Current Business Plan. The five activities described
below form the core of the Company's current business plan.
a. Entry into new high-growth markets. The Bank is planning to
expand into new markets during 2001. The Bank's entry into these
new markets will not involve building expensive traditional
branch offices. Instead, the strategy features relatively low
cost leased offices ranging between 2,000 and 2,500 square feet
in size and an aggressive courier-banking program. Key to this
plan's success will be the recruitment of proven loan officers
from within each market to lead the Bank's business development
initiatives. Lending activities will focus on commercial loans,
commercial real estate mortgages and residential mortgages.
Deposit acquisition activities will focus on high balance / low
transaction time and money market accounts. Due to the absence of
an expensive transaction-based infrastructure, Management
believes that its market expansion strategy has relatively low
implementation risk and an accelerated path to profitability.
b. Become less dependent on net interest margin growth. The Bank has
made the growth of Financial Management Services its highest
priority. This area includes the Bank's Trust, Asset Management,
Investment Services and Insurance Marketing programs. Success in
this area can be seen by the 40.38% increase in income from Trust
and Asset Management for the nine months ended September 30,
2000, compared to the same period in 1999. Platform-based and
brokerage investment
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sales produced commission income of $506,000 for the first nine
months of 2000, representing a 336.21% increase over the same
period in 1999.
c. Maintain excellent asset quality. Success in this area can be
seen in strong loan growth the Bank has experienced over the past
five years while maintaining an average loan charge-off rate of
only 0.17%.
d. Leverage existing infrastructure by maximizing growth in the
Bank's primary market area. Success in the primary market area
can be seen in the Bank's increasing share of Monroe County's
FDIC insured deposits. Monroe County's FDIC deposits grew by
$212.6 million, or 23.3%, during the five-year period between
June 30, 1994 and June 30, 1999. The Bank was able to capture 43%
of this growth and grew its deposit market share from 20.7% to
24.9%.
e. Pursue efficiency through the selective use of technology and by
pushing information and decision-making authorities to the point
of customer contact. A step in this direction was the Bank's
recent involvement in the Kirchman Company's (the Bank's software
provider) "Getting Better Quicker" process. This process is
intended to ensure that technology is being optimized and that as
much work as possible is shifted away from back office areas and
into the areas where it can most efficiently be accomplished.
Forward Looking Statements.
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Some of the information in this Form 10 includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These "forward looking statements" concern 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. The
Company and the Bank do not undertake any obligation to update or revise any
forward-looking statement subsequent to the date on which it is made.
SUPERVISION AND REGULATION
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Both Monroe Bancorp and Monroe County Bank operate in highly regulated
environments and are subject to supervision and regulation by several
governmental regulatory agencies, including the Federal Reserve Board, the FDIC,
and the Indiana Department of Financial Institutions. The laws and regulations
established by these agencies are generally intended to protect depositors, not
shareholders. Changes in applicable laws or regulations may have a material
effect on our business and prospects.
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Beginning with the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 and following with the FDIC Improvement Act of 1991,
numerous additional changes have been proposed. Moreover, the Company and the
Bank are also subject to changes in federal and state law, regulations,
governmental policies, income tax laws and accounting principles. Accordingly,
legislative changes and the policies of various regulatory authorities may
affect our operations. The following summary is qualified by reference to the
statutory and regulatory provisions discussed.
Monroe Bancorp
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Because Monroe Bancorp owns all of the outstanding capital stock of
Monroe County Bank, it is registered as a bank holding company under the federal
Bank Holding Company Act of 1956.
The Bank Holding Company Act. Under the Bank Holding Company Act,
Monroe Bancorp 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. Monroe Bancorp's activities
are limited to:
o banking, managing or controlling banks;
o furnishing services to or performing services for its
subsidiaries; and
o engaging in other activities that the Federal Reserve determines
to be so closely related to banking, managing, or controlling
banks as to be a proper incident thereto.
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:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or
control more than 5% of the voting shares of such bank (unless it
already owns or controls the majority of such shares) or
acquiring substantially all of the assets of any bank or savings
association; or
o merging or consolidating with another bank holding company.
In addition, and subject to some exceptions, the Bank Holding Company
Act and the Change in Bank Control Act, together with regulations thereunder,
require Federal Reserve approval prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more, but less than 25%, of any class of voting
securities and the company has registered securities under Section 12 of the
Securities Exchange Act of 1934 or no other person owns a greater percentage of
that class of voting securities immediately after the transaction. The
regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the Bank Holding Company Act, a bank holding company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has found those
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Bank Holding Company Act does not place
territorial restrictions on the activities of such nonbanking-related
activities. Some of the activities that the Federal Reserve Board has determined
by regulation to be proper incidents to the business of a bank holding company
include:
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o making or servicing loans and certain types of leases;
o engaging in certain insurance and discount brokerage activities;
o performing certain data processing services;
o acting in certain circumstances as a fiduciary or investment or
financial adviser;
o owning savings associates; and
o making investment in certain companies or projects designed
primarily to promote community welfare.
The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies. In the policy statement, the Federal
Reserve expressed its view 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,
Monroe Bancorp is expected to act as a source of financial strength to Monroe
County Bank and to commit resources to support Monroe County Bank in
circumstances in which Monroe Bancorp might not otherwise do so. Under the Bank
Holding Company Act, the Federal Reserve Board may require a bank holding
company to terminate any activity or relinquish control of a nonbank subsidiary,
other than a nonbank subsidiary of a bank, upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition.
Monroe County Bank
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The Bank is an Indiana-chartered banking Company subject to examination
by the Indiana Department of Financial Institutions. 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 Indiana Department of Financial
Institutions and the FDIC regulate or monitor virtually all areas of the Bank's
operations.
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% of such bank's capital and unimpaired surplus. Also,
regulations promulgated by the FDIC under the FDIC Improvement Act place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institution's normal market area.
Under the FDIC Improvement Act, all insured institutions must undergo
regular on site examinations by their appropriate banking agency and must submit
annual reports to the FDIC, their federal regulatory agency, and state
supervisor when applicable. The FDIC Improvement Act also requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating, among other things, to the following:
o internal controls;
o information systems and audit systems;
o loan documentation;
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o credit underwriting;
o interest rate risk exposure; and
o asset quality.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund and Savings Association Insurance Fund are
maintained for commercial banks and savings associations with insurance premiums
from the industry used to offset losses from insurance payouts when banks and
thrifts fail. In 1993, the FDIC adopted a rule which established a risk-based
deposit insurance premium system for all insured depository institutions. Under
this system, until mid-1995 depository institutions paid to the Bank Insurance
Fund or the Savings Association Insurance Fund from $0.23 to $0.31 per $100 of
insured deposits (depending on capital levels and risk profile, as determined by
the institution's primary federal regulator) on a semiannual basis. Once the
Bank Insurance Fund reached its legally mandated reserve ratio in mid-1995, the
FDIC lowered and eventually eliminated premiums for well-capitalized banks, with
a minimum semiannual assessment of $1,000. However, in 1996 Congress enacted the
Deposit Insurance Funds Act of 1996, which eliminated even this minimum
assessment. The annual insurance premium on bank deposits insured by the BIF
vary between $0.00 per $100 of deposits for banks classified in the highest
capital and supervisory evaluation categories to $0.27 per $100 of deposits for
banks classified in the lowest capital and supervisory evaluation categories.
The Deposit Insurance Funds Act of 1996 also separated the Financial Company
(FICO) assessment to service the interest on its bond obligations. The amount
assessed on individual institutions, including Monroe County 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 the
provisions of Section 23A of the Federal Reserve Act, which places limits 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. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the Bank's capital and surplus and, as to all affiliates combined, to 20% of
Monroe County Bank's capital and surplus. 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 subject to the provisions of Section 23B of Federal
Reserve Act which, among other things, prohibits an institution 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.
The Bank also is subject to certain restrictions on extensions of
credit to executive officers, directors, certain principal shareholders, and
their related interests. Such extensions of credit:
o must 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 must not involve more than the normal risk of repayment or
present other unfavorable features.
Dividends. As a state-chartered commercial bank organized 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 Indiana Department
of Financial Institutions if the proposed dividend, when added to all
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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.
The FDIC Improvement Act generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or paying
any management fee to its holding 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 is subject to the
jurisdiction, and requires the prior approval, of the FDIC and the Indiana
Department of Financial Institutions. Under current law, banks chartered by the
State of Indiana may establish branches throughout the state and in other
states. Congress authorized interstate branching, with certain limitations,
beginning in 1997. In 1996, the Indiana General Assembly adopted statutes
authorizing Indiana financial institutions 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.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 allows bank holding companies to acquire banks anywhere
in the United States subject to certain state restrictions, and permits an
insured bank to merge with an insured bank in another state without regard to
whether such merger is prohibited by state law. Additionally, an out-of-state
bank may acquire the branches of an insured bank in another state without
acquiring the entire bank; provided, however, that the law of the state where
the branch is located permits such an acquisition. Bank holding companies also
may merge existing bank subsidiaries located in different states into one bank.
An insured bank subsidiary may act as an agent for an affiliated bank
or savings association in offering limited banking services (receive deposits,
renew time deposits, close loans, service loans and receive payments on loans
obligations) both within the same state and across state lines.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the
Comptroller of the Currency, shall evaluate the record of each financial
institution 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.
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;
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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 Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of
financial records; and
o Electronic Funds Transfer Act, and Regulation E issued by the
Federal Reserve Board to implement that Act, which 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.
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. 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 current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a 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 minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
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The FDIC Improvement Act established a new capital-based regulatory
scheme designed to promote early intervention for troubled banks, which requires
the FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
Monroe County Bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. As of September
30, 2000, 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.
Under the FDIC Improvement Act regulations, the applicable agency can
treat an institution as if it were in the next lower category if the agency
determines, after notice and an opportunity for hearing, that the institution is
in an unsafe or unsound condition or is engaging in an unsafe or unsound
practice. 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. Institutions that fall into one
of the three undercapitalized categories may be required to do some or all of
the following:
o submit a capital restoration plan;
o raise additional capital;
o restrict their growth, deposit interest rates, and other
activities;
o improve their management;
o eliminate management fees; or
o divest themselves of all or a part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institutions'
performance under their capital restoration plans.
Failure to meet these capital requirements would mean that a bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
The FDIC Improvement Act requires the federal banking regulators to
revise the risk-based capital standards to provide for explicit consideration of
interest-rate risk, concentration of credit risk, and the risks of untraditional
activities. We are uncertain what effect these regulations would have.
Enforcement Powers. The Financial Institution Reform Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include 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. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as $1
million a day for such violations. Criminal penalties for some financial
institution crimes have been increased to twenty years. In addition, regulators
are provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated
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parties. Possible enforcement actions include the termination of deposit
insurance. Furthermore, banking agencies' power to issue cease-and-desist orders
were expanded. Such orders may, 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 ordering agency to be appropriate.
Recent Legislative Developments. On November 12, 1999, the President of
the United States signed into law the Financial Services Modernization Act of
1999, which contains a number of provisions that will fundamentally alter the
banking and financial services industries. The Financial Services Modernization
Act repeals Section 20 of the Banking Act of 1933, commonly known as the
Glass-Steagall Act, which generally has separated commercial from investment
banking. This new law will also, for the first time, allow banks, securities
firms and insurance companies to affiliate in a new financial holding company
structure.
Under the Financial Services Modernization Act, national bank
affiliates will be able to conduct a broad range of financial activities,
including providing insurance and securities services. However, the national
bank must be well-capitalized and well-managed. In addition, insurance and
securities activities will be functionally regulated. For example, the
Securities and Exchange Commission will regulate most national bank affiliates'
securities activities and the states will regulate their insurance activities.
This new law preserves the thrift charter, but bars new unitary thrift holding
companies from approval that were applied for after May 4, 1999.
Neither the Company nor the Bank can predict what impact the Financial
Services Modernization Act will have on financial institutions. One consequence
may be increased competition from large financial services companies that, under
this new law, will be permitted to provide many types of financial services to
customers.
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.
11
<PAGE>
Item 2. Financial Information.
Selected Financial Data
FINANCIAL HIGHLIGHTS
--------------------
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the nine months ended
September 30, For the years ended December 31,
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of operations
Net interest income $ 11,704 $ 11,006 $ 14,769 $ 14,101 $ 13,256 $ 12,465 $ 11,803
Noninterest income 2,955 2,539 3,852 3,079 2,275 1,996 1,862
Noninterest expense (8,143) (7,911) (11,052) (9,683) (8,416) (7,699) (7,409)
Net income 4,001 3,535 4,723 4,645 4,384 4,101 3,683
Per common share
Basic earnings per share $ 0.65 $ 0.58 $ 0.77 $ 0.76 $ 0.72 $ 0.67 $ 0.60
Cash dividends per share 0.30 0.24 0.34 0.32 0.27 0.22 0.17
Book value per common share 5.98 5.53 5.62 5.25 4.79 4.33 3.92
Selected year-end balances
Total assets $ 434,125 $ 397,542 $ 416,649 $ 375,418 $ 323,874 $ 293,091 $ 285,056
Total securities 100,863 104,823 109,237 83,309 62,360 59,836 48,476
Total loans 293,497 261,797 273,894 244,503 233,414 209,417 199,405
Total deposits 338,399 316,179 313,150 305,058 276,138 256,744 250,498
Shareholders' equity 36,721 33,905 34,444 32,138 29,284 26,411 24,114
Selected average balances
Total assets $ 426,853 $ 387,757 $ 393,225 $ 345,697 $ 310,647 $ 292,159 $ 262,737
Total securities 105,921 97,555 99,718 70,363 59,824 56,254 45,738
Total loans 284,418 249,634 254,397 239,611 222,744 201,268 188,420
Total deposits 335,239 311,857 314,769 288,204 269,147 254,978 231,671
Shareholders' equity 35,639 33,126 33,445 30,803 28,217 25,693 22,968
Ratios based on average balances
Return on assets 1.25% 1.22% 1.20% 1.34% 1.41% 1.40% 1.40%
Return on equity 15.00% 14.27% 14.12% 15.08% 15.54% 15.96% 16.04%
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
Introduction and Overview
-------------------------
This Management's discussion and analysis provides an analysis of the
major components of the Company's results of operations for the three years
ended December 31, 1999, 1998, and 1997, and the nine months ended September 30,
2000 and 1999, and financial condition as of December 31, 1999 and 1998 and
September 30, 2000. This information should be read in conjunction with the
accompanying consolidated financial statements and footnotes contained elsewhere
in this report.
Management believes the improvement in financial performance for the
nine months ended September 30, 2000 compared to the same period in 1999 is the
result of: 1) the Company's strategic focus which encompasses maintaining
excellent asset quality, becoming less dependent on interest margin growth,
establishing expense controls that maintain expense growth at a level below that
of
12
<PAGE>
earnings growth, pursuing efficiency through selective uses of technology and
growth in the Bank's primary market area; and 2) the new Management team's
ability to execute these new strategies.
Results of Operations
---------------------
The Company's historical operating results and financial condition are
summarized in the following table:
FIVE YEAR FINANCIAL SUMMARY
---------------------------
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
At or for the nine months
ended September 30, At or for the years ended December 31,
2000 1999 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of operations
Interest income - tax equivalent $ 23,967 $ 20,922 $ 28,277 $ 26,715 $ 24,785 $ 23,419 $ 21,597
Interest expense 11,658 9,270 12,650 11,900 10,893 10,366 9,286
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net interest income 12,309 11,652 15,627 14,815 13,892 13,053 12,311
Tax equivalent adjustment (1) (605) (646) (858) (714) (636) (588) (508)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net interest income 11,704 11,006 14,769 14,101 13,256 12,465 11,803
Provision for loan losses (540) (405) (585) (480) (450) (480) (630)
Noninterest income 2,955 2,539 3,852 3,079 2,275 1,996 1,862
Noninterest expenses (8,143) (7,911) (11,052) (9,683) (8,416) (7,699) (7,409)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income before income taxes 5,976 5,229 6,984 7,017 6,665 6,282 5,626
Income tax expense 1,975 1,694 2,261 2,372 2,281 2,181 1,943
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income $ 4,001 $ 3,535 $ 4,723 $ 4,645 $ 4,384 $ 4,101 $ 3,683
=========== =========== =========== =========== =========== =========== ==========
Basic earnings per share $ 0.65 $ 0.58 $ 0.77 $ 0.76 $ 0.72 $ 0.67 $ 0.60
Diluted earnings per share 0.65 0.58 0.77 0.76 0.72 0.67 0.60
Dividends per common share 0.30 0.24 0.34 0.32 0.27 0.22 0.17
Cash dividends declared $ 1,839 1,469 $ 2,081 $ 1,955 $ 1,647 $ 1,353 $ 1,066
Book value per common share 5.98 5.53 5.62 5.25 4.79 4.33 3.92
Average common shares outstanding 6,133,990 6,123,990 6,125,240 6,115,240 6,105,240 6,146,393 6,150,240
Selected period-end balances
Total assets $ 434,125 $ 397,542 $ 416,649 $ 375,418 $ 323,874 $ 293,091 $ 285,056
Earning assets 395,666 367,885 384,388 350,201 299,811 271,738 265,681
Total securities 100,863 104,823 109,237 83,309 62,360 59,836 48,476
Loans - net of unearned income 293,497 261,797 273,894 244,503 233,414 209,417 199,405
Allowance for loan losses 3,793 3,637 3,343 3,562 3,341 3,201 2,928
Total deposits 338,399 316,179 313,150 305,058 276,138 256,744 250,498
Short-term borrowings 46,175 31,676 46,694 22,967 8,718 6,355 7,053
Long-term debt 6,585 10,442 16,188 9,976 5,492 108 122
Shareholders' equity 36,721 33,905 34,444 32,138 29,284 26,411 24,114
Selected average balances
Total assets $ 426,853 $ 387,757 $ 393,225 $ 345,697 $ 310,647 $ 292,159 $ 262,737
Earning assets 394,215 359,645 364,115 322,006 291,668 274,570 246,470
Total Securities 105,921 97,555 99,718 70,363 59,824 56,254 45,738
Loans 284,418 249,634 254,397 239,611 222,744 201,268 188,420
Allowance for loan losses 3,588 3,610 3,572 3,380 3,297 3,206 2,711
Total deposits 335,239 311,857 314,769 288,204 269,147 254,978 231,671
Shareholders' equity 35,639 33,126 33,445 30,803 28,217 25,693 22,968
Performance Ratios
Average loans to average deposits 84.84% 80.05% 80.82% 83.14% 82.76% 78.94% 81.33%
Allowance to period end loans 1.29% 1.39% 1.22% 1.46% 1.43% 1.53% 1.47%
Average equity to average assets 8.35% 8.54% 8.51% 8.91% 9.08% 8.79% 8.74%
Return on assets 1.25% 1.22% 1.20% 1.34% 1.41% 1.40% 1.40%
Return on equity 15.00% 14.27% 14.12% 15.08% 15.54% 15.96% 16.04%
Dividend payout ratio (2) 45.96% 41.56% 44.06% 42.09% 37.57% 32.99% 28.94%
Efficiency ratio (3) 53.35% 55.75% 56.74% 54.11% 52.06% 51.16% 52.28%
</TABLE>
1) Tax equivalent basis was calculated using a 34% rate for all periods
presented.
2) Dividends declared on common shares divided by net income available to
common shares.
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.
13
<PAGE>
Net Interest Income
-------------------
Net interest income has historically been the most significant
component of the Bank's earnings. Net interest income is the difference between
interest and fees realized on earning assets, primarily loans and securities and
interest paid on deposits and other borrowed funds. The net interest margin is
this difference expressed as a percentage of average earning assets. Net
interest income is determined by several factors, including the volume of
earning assets and liabilities, the mix of earning assets and liabilities, and
the overall level of interest rates. Although there are a certain number of
these factors which can be controlled by management's policies and actions,
certain other factors, such as the general level of credit demand, Federal
Reserve Board monetary policy, and changes in tax laws are beyond the control of
management.
The following tables present 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 34% tax rate for all years. 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)
<TABLE>
<CAPTION>
9 Months Ended September 30, 9 Months Ended September 30,
2000 1999
----------------------------------------- ---------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Securities
Taxable $ 69,423 $ 2,998 5.77% $ 58,329 $ 2,475 5.67%
Tax-exempt (1) 36,498 1,736 6.35% 39,226 1,874 6.39%
------------- ------------ ----------- ------------- ----------- -----------
Total securities 105,921 4,734 5.97% 97,555 4,349 5.96%
Loans (2) 284,418 19,031 8.94% 249,634 16,097 8.62%
Time deposits with banks 34 1 3.93% 113 3 3.55%
FHLB Stock 1,232 75 8.13% 1,180 71 8.04%
Federal funds sold 2,610 126 6.45% 11,163 402 4.81%
------------- ------------ ----------- ------------- ----------- -----------
Total interest earning assets 394,215 23,967 8.12% 359,645 20,922 7.78%
----------- -----------
Noninterest earning assets
Allowance for loan losses (3,588) (3,610)
Premises and equipment 10,449 7,966
Cash and due from banks 17,458 16,155
Accrued interest and other assets 8,319 7,601
------------- -------------
Total assets $ 426,853 $ 387,757
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits $ 281,366 9,571 4.54% $ 260,421 7,975 4.09%
Borrowed funds
Short-term borrowings 38,764 1,592 5.49% 28,650 890 4.15%
Long-term debt 11,276 495 5.86% 9,390 405 5.77%
------------- ------------ ----------- ------------- ------------- -----------
Total borrowed funds 50,040 2,087 5.57% 38,040 1,295 4.55%
------------- ------------ ----------- ------------- ------------- -----------
Total interest-bearing liabilities 331,406 11,658 4.70% 298,461 9,270 4.15%
------------ ----------- ------------- -----------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 53,873 51,436
Other liabilities 5,935 4,734
Shareholders' equity 35,639 33,126
------------- -------------
Total liabilities and
shareholders' equity $ 426,853 $ 387,757
============= =============
Interest margin recap
Net interest income and
interest rate spread $ 12,309 3.42% $ 11,652 3.63%
============ ----------- ============= -----------
Net interest income margin 4.17% 4.33%
=========== ===========
</TABLE>
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
14
<PAGE>
Average Balance Sheets and Interest Rates (continued)
-----------------------------------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998
----------------------------------------- -------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
----------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Securities
Taxable $ 60,456 $ 3,431 5.68% $ 38,831 $ 2,328 6.00%
Tax-exempt (1) 39,262 2,495 6.35% 31,532 2,074 6.58%
------------- ------------ ----------- ------------- ----------- -----------
Total securities 99,718 5,926 5.94% 70,363 4,402 6.26%
Loans (2) 254,397 21,832 8.58% 239,611 21,643 9.03%
Time deposits with banks 95 3 3.16% 77 3 3.90%
FHLB Stock 1,180 94 7.97% 1,134 91 8.02%
Federal funds sold 8,725 422 4.84% 10,821 576 5.32%
------------- ------------ ----------- ------------- ----------- -----------
Total interest earning assets 364,115 28,277 7.76% 322,006 26,715 8.29%
----------- -----------
Noninterest earning assets
Allowance for loan losses (3,572) (3,380)
Premises and equipment 8,393 6,556
Cash and due from banks 16,604 14,017
Accrued interest and other assets 7,685 6,498
------------- -------------
Total assets $ 393,225 $ 345,697
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits $ 262,552 10,776 4.10% $ 239,603 10,819 4.52%
Borrowed funds
Short-term borrowings 30,226 1,300 4.30% 15,776 698 4.42%
Long-term debt 9,914 574 5.79% 6,135 383 6.24%
------------- ------------ ----------- ------------- ----------- -----------
Total borrowed funds 40,140 1,874 4.67% 21,911 1,081 4.93%
------------- ------------ ----------- ------------- ----------- -----------
Total interest-bearing liabilities 302,692 12,650 4.18% 261,514 11,900 4.55%
------------ ----------- ----------- -----------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 52,217 48,601
Other liabilities 4,871 4,779
Shareholders' equity 33,445 30,803
------------- -------------
Total liabilities and
shareholders' equity $ 393,225 $ 345,697
============= =============
Interest margin recap
Net interest income and
interest rate spread $ 15,627 3.58% $ 14,815 3.74%
============ ----------- =========== -----------
Net interest income margin 4.29% 4.60%
=========== ===========
Years ended December 31,
1997
--------------------------------------
Average Average
ASSETS Balance Interest Rate
--------------------------------------
<S> <C> <C> <C>
Interest earning assets
Securities
Taxable $ 32,250 $ 1,903 5.90%
Tax-exempt (1) 27,574 1,829 6.63%
------------- ----------- -----------
Total securities 59,824 3,732 6.24%
Loans (2) 222,744 20,534 9.22%
Time deposits with banks 26 3 11.54%
FHLB Stock 784 63 8.04%
Federal funds sold 8,290 453 5.46%
------------- ----------- -----------
Total interest earning assets 291,668 24,785 8.49%
-----------
Noninterest earning assets
Allowance for loan losses (3,297)
Premises and equipment 4,680
Cash and due from banks 12,181
Accrued interest and other assets 5,415
-------------
Total assets $ 310,647
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits $ 228,726 10,426 4.56%
Borrowed funds
Short-term borrowings 6,978 317 4.54%
Long-term debt 2,289 150 6.55%
------------- ----------- -----------
Total borrowed funds 9,267 467 5.04%
------------- ----------- -----------
Total interest-bearing liabilities 237,993 10,893 4.58%
----------- -----------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 40,421
Other liabilities 4,016
Shareholders' equity 28,217
-------------
Total liabilities and
shareholders' equity $ 310,647
=============
Interest margin recap
Net interest income and
interest rate spread $ 13,892 3.91%
=========== -----------
Net interest income margin 4.76%
===========
</TABLE>
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
15
<PAGE>
The following table depicts the dollar effect of volume and rate
changes from 1997 through September 30, 2000. Variances, which were not
specifically attributable to volume or rate, were allocated proportionately
between rate and volume using the absolute values of each as a basis for the
allocation. Nonaccrual loans were included in the average loan balances used in
determining the yields.
Volume / Rate Analysis
----------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, 2000 change from December 31, 1999 change December 31, 1998 change
September 30, 1999 due to from 1998 due to from 1997 due to
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 2,309 $ 624 $ 2,933 $ 1,372 $(1,183) $ 189 $ 1,580 $ (471) $ 1,109
Securities
Taxable 478 45 523 1,360 (257) 1,103 394 31 425
Tax-exempt (130) (8) (138) 524 (103) 421 265 (20) 245
------- ------- ------- ------- ------- ------- ------- ------- -------
Total securities interest 348 37 385 1,883 (359) 1,524 659 11 670
Time deposits with banks (2) (0) (2) 1 (1) 0 9 (9) 0
FHLB stock 3 1 4 4 (1) 3 28 (0) 28
Federal funds sold (328) 52 (276) (92) (62) (154) 142 (19) 123
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income 2,329 715 3,044 3,167 (1,605) 1,562 2,408 (478) 1,930
Interest expense
Interest-bearing deposits 671 925 1,596 1,085 (1,128) (43) 500 (107) 393
Short-term borrowings 367 335 702 657 (55) 602 410 (29) 381
Long-term debt 83 7 90 251 (60) 191 264 (31) 233
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 1,121 1,267 2,388 1,992 (1,242) 750 1,173 (166) 1,007
------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income $ 1,208 $ (552) $ 656 $ 1,174 $ (362) $ 812 $ 1,236 $ (313) $ 923
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Net interest income on a tax equivalent basis for the first nine months
of 2000 was 5.64% higher than the same period in 1999, while the net interest
margin was 16 basis points lower than the prior period. Net interest income on a
tax equivalent basis for year ended December 31, 1999 was 5.48% higher than
1998, while the net interest margin for 1999 was 4.29%, or 31 basis points lower
than the prior year. Tax-equivalent net interest income was 6.64% higher for
year ended December 31, 1998 compared to 1997, and the net interest margin
decreased 16 basis points to 4.60% from 4.76% in 1997.
Nine Months Ended September 30, 2000 Compared to Nine Months
Ended September 30, 1999
------------------------------------------------------------
Interest rates were stable for the first six months of 1999. From June
1999 to May 2000, the prime rate increased 175 basis points and has remained
stable since then. The increase in net interest income during the first nine
months of 2000 was mainly due to increased earning asset volume. The net
interest margin declined due to deposit growth occurring mainly in higher
yielding deposit accounts, and because deposits repriced more quickly than loans
and investment securities. The average loans to deposits ratio grew to 84.84% at
September 30, 2000, compared to 80.05% at September 30, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
---------------------------------------------------------------------
In comparing 1999 to 1998, there were a number of differences in the
interest rate environment in which the Company operated. The most noticeable
difference between the two years was that interest rates increased during the
last half of 1999, while interest rates declined during the last quarter of
1998.
Average loans, as a percent of average earning assets, declined to
69.87% for 1999 from 74.41% for 1998. Asset growth occurred proportionately more
in lower yielding securities than in loans, which
16
<PAGE>
resulted in a lower average yield on earning assets. Deposit growth occurred in
interest bearing demand deposit accounts, more specifically, high-yield money
market saving accounts. The Company also experienced strong growth in repurchase
agreements, which carry a relatively higher rate of interest. As interest rates
increased, the Bank's deposits repriced more quickly than its loans and
securities, therefore, the net interest margin decreased. To offset this
decrease in the margin, the Bank began to focus on growing other revenue
sources, on containing costs and on streamlining operations. Overall, the
increase in net-interest earning asset volume during the year compensated for
the general decline in yields, which resulted in higher net interest income, but
a lower net interest margin.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
The increase in 1998 net interest income was mainly due to increased
earning asset volume. The prime rate decreased during the last quarter of 1998.
This decline caused the average rate on interest-earning assets and
interest-bearing liabilities to decrease. An increase in local competition for
loans coupled with growth in higher yielding deposit accounts and repurchase
agreements caused the net interest margin to decline from 1997.
Provision for Loan Losses and Asset Quality
-------------------------------------------
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb anticipated losses in the loan
portfolio. Factors considered in establishing an appropriate allowance include:
an assessment of the financial condition of the borrower; a realistic
determination of the value and adequacy of underlying collateral; the condition
of the local economy and the condition of the specific industry of the borrower;
a comprehensive analysis of the levels and trends of loan categories; and a
review of delinquent and classified loans.
The Company maintains a comprehensive loan review program to evaluate
loan administration, credit quality, and loan documentation. This program also
includes a regular review of problem loan reports, delinquencies, and
charge-offs. The adequacy of the allowance for loan losses is evaluated
quarterly. This evaluation focuses on specific loan reviews, changes in the type
and volume of the loan portfolio given the current and forecasted economic
conditions, and historical loss experience. Any one of the following conditions
may result in the review of a specific loan: concern about whether the
customer's cash flow or net worth are sufficient to repay the loan; delinquent
status; the loan has been criticized in a regulatory examination; the accrual of
interest has been suspended; or other reasons including when the loan has other
special or unusual characteristics which suggest special monitoring is
warranted.
17
<PAGE>
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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
--------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,343 $ 3,562 $ 3,562 $ 3,341 $ 3,201 $ 2,928 $ 2,650
Loans charged off
Commercial, financial and agricultural (24) (157) (522) (17) (169) (55) (311)
Real Estate (55) (60) (143) (157) (52) (234) (67)
Installment (92) (154) (195) (153) (166) (184) (192)
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs (171) (371) (860) (327) (387) (473) (570)
--------- --------- --------- --------- --------- --------- ---------
Charge-offs recovered
Commercial, financial and agricultural 42 12 18 12 18 170 177
Real Estate 9 7 10 11 19 12 -
Installment 30 22 28 45 40 84 41
--------- --------- --------- --------- --------- --------- ---------
Total recoveries 81 41 56 68 77 266 218
--------- --------- --------- --------- --------- --------- ---------
Net loans charged off (90) (330) (804) (259) (310) (207) (352)
Current year provision 540 405 585 480 450 480 630
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period $ 3,793 $ 3,637 $ 3,343 $ 3,562 $ 3,341 $ 3,201 $ 2,928
========= ========= ========= ========= ========= ========= =========
Loans at period end $ 293,497 $ 261,797 $ 273,894 $ 244,503 $ 233,414 $ 209,417 $ 199,405
Ratio of allowance to loans
at period end 1.29% 1.39% 1.22% 1.46% 1.43% 1.53% 1.47%
Average loans $ 284,418 $ 249,634 $ 254,397 $ 239,611 $ 222,744 $ 201,268 $ 188,420
Ratio of net loans charged off
to average loans 0.03% 0.13% 0.32% 0.11% 0.14% 0.10% 0.19%
</TABLE>
18
<PAGE>
The allocation of the allowance for loan losses 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)
<TABLE>
<CAPTION>
September 30, December 31,
---------------- ----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 957 $1,085 $ 804 $ 979 $ 770 $ 992 $ 873
Real Estate 2,235 2,005 1,927 1,999 2,017 1,717 1,503
Installment 392 285 325 334 338 274 239
Unallocated 209 262 287 250 216 218 313
------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses $3,793 $3,637 $3,343 $3,562 $3,341 $3,201 $2,928
====== ====== ====== ====== ====== ====== ======
</TABLE>
Nonperforming assets and their relative percentages to loan balances
are presented in the following table. 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. Loans are evaluated for
nonaccrual status when payments are past due over 90 days. Loans significantly
past due and not well secured and in the process of collection are generally
placed on nonaccrual status. 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)
<TABLE>
<CAPTION>
September 30, December 31,
----------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal balance
Nonaccrual $ 383 $ 946 $ 389 $1,189 $1,362 $1,005 $ 315
Restructured 851 1,043 1,115 859 690 705 901
90 days or more past due and still accruing 1,944 1,171 849 1,363 831 1,169 682
------ ------ ------ ------ ------ ------ ------
Total nonperforming loans $3,178 $3,160 $2,353 $3,411 $2,883 $2,879 $1,898
====== ====== ====== ====== ====== ====== ======
Nonperforming loans as a percent of loans 1.08% 1.21% 0.86% 1.40% 1.24% 1.37% 0.95%
Other real estate owned $ 361 $ 320 $ 89 $ 497 $ 101 $ 213 $ -
OREO as a percent of loans 0.12% 0.12% 0.03% 0.20% 0.04% 0.10% 0.00%
Allowance as a percent of
nonperforming loans 119.35% 115.09% 142.07% 104.43% 115.89% 111.18% 154.27%
</TABLE>
During 1999, interest income recorded on nonperforming loans totaled
$82,000. Had these loans been accruing interest at their contractual rates,
interest income would have been $153,000 for 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months
Ended September 30, 1999
------------------------------------------------------------
Net charge-offs declined for the first nine months of 2000, and were
$90,000 compared to $330,000 for the first nine months of 1999. Management does
not anticipate any significant charge-offs during the remainder of 2000.
Nonaccrual loans declined 59.5% or $563,000 at September 30, 2000 compared to
September 30, 1999, mainly because five loans, portions of which were charged
off during the last quarter of 1999, were on nonaccrual status at September 30,
1999. Loans 90 days or more past due and
19
<PAGE>
still accruing increased 66.01% or $773,000, from September 30, 1999 to 2000.
Increases in the prime rate have been a factor in the increase in delinquencies
during 2000. Overall, total nonperforming loans increased only .56% from
September 30, 1999 to September 30, 2000. Nonperforming loans at September 30,
2000 have increased $825,000, or 35.06%, from December 31, 1999, however,
Management believes loss exposure on these loans is minimal.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
---------------------------------------------------------------------
Net charge-offs increased in 1999, mainly due $540,000 of charge-offs
during the last quarter of 1999 on five loans which had been monitored for
several years. The allowance, both in total dollars and as a percent of loans,
declined in 1999, due to the increase in net charge-offs and continued loan
growth. Management did not view the increase in charge-offs during the last
quarter of 1999 as the beginning of a trend. The provision was increased during
1999 to provide for the increased charge-offs.
While the restructured loan category increased during 1999, significant
decreases were realized in nonaccrual and 90 days or more past due balances
mainly due to the charge-offs mentioned above. As of December 31, 1999, loans 90
days or more past due had decreased $514,000, or 37.71%, from the prior year.
Commercial loan balances in this category increased $504,000, mortgage and
indirect installment loan balances declined $972,000 and $46,000, respectively.
Management believed six credits totaling approximately $1.1 million as
of December 31, 1999 met the criteria for an impaired loan. A specific reserve
allocation of $209,000 was made in the allowance for loan losses for the excess
of the loan balance over the present value of estimated future cash flows on
these loans. As of September 30, 2000, thirteen credits totaling approximately
$1.1 million met the criteria for an impaired loan. A specific reserve
allocation of $195,000 has been made in the allowance for loan losses for the
excess of the loan balance over the present value of the estimated future cash
flows on these loans.
Management believes any loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that are not included in
nonperforming or impaired loans do not represent or result from trends or
uncertainties which will have a material impact on future operating results,
liquidity, or capital resources.
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 the 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 the 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. The Company had
loans totaling $2.3 million and $1.1 million on its watch list which were not
included in impaired or nonperforming loans at September 30, 2000 and December
31, 1999, respectively.
20
<PAGE>
Noninterest Income and Expense
------------------------------
The following table presents the balances of noninterest income and
expense from 1997 through September 30, 2000 and the percentage changes between
periods.
Noninterest Income & Expense
----------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30, Years ended December 31,
------------------------------- ---------------------------------------------------
% change % change % change
2000 from '99 1999 1999 from '98 1998 from '97 1997
------- -------- ------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest Income
Deposit service charges and fees $ 1,122 18.35% $ 948 $ 1,354 19.82% $ 1,130 15.66% $ 977
Trust department income 598 40.38% 426 590 20.41% 490 26.29% 388
Commission income 506 336.21% 116 223 49.66% 149 61.96% 92
Security gains/(losses) (10) -118.87% 53 481 N/A - 0.00% 0
Realized gain on sale of real estate loans 148 -57.47% 348 394 -39.01% 646 126.67% 285
Other operating income 591 -8.80% 648 810 21.99% 664 24.58% 533
------- ------- ------- ------- ------ ------- ------ -------
Total noninterest income $ 2,955 16.38% $ 2,539 $ 3,852 25.11% $ 3,079 35.34% $ 2,275
======= ======= ======= ======= ====== ======= ====== =======
Nine months ended September 30, Years ended December 31,
------------------------------- ---------------------------------------------------
% change % change % change
2000 from '99 1999 1999 from '98 1998 from '97 1997
------- -------- ------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest Expense
Salaries and employee benefits $ 4,977 8.91% $ 4,570 $ 6,236 6.98% $ 5,829 15.77% $ 5,035
Occupancy and equipment 1,361 3.73% 1,312 1,744 24.31% 1,403 5.41% 1,331
Other 1,805 -11.04% 2,029 3,072 25.34% 2,451 19.56% 2,050
------- ------- ------- ------- ------ ------- ------ -------
Total noninterest expense $ 8,143 2.93% $ 7,911 $11,052 14.14% $ 9,683 15.05% $ 8,416
======= ======= ======= ======= ====== ======= ====== =======
</TABLE>
Nine Months Ended September 30, 2000 compared to Nine Months
Ended September 30, 1999
------------------------------------------------------------
Noninterest income increased 16.38% to $3.0 million for the first nine
months of 2000 compared to $2.5 million for the first nine months of 1999.
Financial Management Services, which consists of trust services, a full-service
brokerage operation offered through Raymond James Financial Services, Inc.,
member NASD/SIPC, and a platform-based annuity and mutual fund sales program has
experienced substantial growth. The platform-based, or branch-based, annuity
sales program began October 1999, and mutual funds were first sold March 2000.
Platform-based sales and brokerage operations have generated $506,000 of
commission income during the first nine months of 2000. As of September 30,
2000, the Bank has 2 employees who hold their Series 6 license and 8 employees
who hold their Series 7 license. In addition, 25 branch employees hold insurance
licenses and are able to sell fixed annuities. Branch personnel have received
extensive training and are coached on an ongoing basis to prepare them to work
in a sales focused environment.
The Trust Department also experienced significant growth during 2000.
The fair market value of assets managed by the Trust Department was $128.2
million at September 30, 2000 compared to $106.8 million at September 30, 1999.
Trustee fees grew 40.38% to $598,000 during the first nine months of 2000
compared to the same period in 1999.
Service fees on deposit accounts increased 18.35% to $1.1 million
during the first nine months of 2000 due to an increase in the fee structure in
August 1999. Other operating income decreased slightly for the nine months ended
September 30, 2000, primarily because the Company recognized a $49,000 gain on
the sale of a warehouse in August, 1999.
21
<PAGE>
Net losses on securities during the first nine months of 2000 primarily
represent unrealized losses on various mutual funds held in grantor trusts whose
performance is tied to the Monroe Bancorp Directors' Deferred Compensation Plan.
These losses are directly offset by a reduction in directors' deferred
compensation expense.
Non-interest expense increased only 2.93% for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999. The
bank has focused on containing costs and pursuing efficiency through the use of
technology and by pushing information and decision making authority to the point
of customer contact. The Company's efficiency ratio was 53.35% for the nine
months ended September 30, 2000 compared to 55.75% for the same period in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
---------------------------------------------------------------------
Noninterest income increased 25.11% to $3.9 million in 1999 compared to
$3.1 million in 1998. Service charges on deposit accounts increased 19.82% due
to an increase in the deposit fee structure, deposit base growth and more
accounts being assessed fees, predominately insufficient funds fees. Income from
trust fees increased 20.41% during 1999. The majority of the increase was
attributed to the following: the general increase in overall market values of
trust assets, an increase in the departmental fee structure, and an increase in
the number of high market value accounts obtained throughout the year. Also, in
October, the Bank began selling fixed annuities at its branches (platform-based)
and recognized commission income on these sales during the latter part of 1999.
This new activity, coupled with a strong increase in brokerage commissions
increased commission income by 49.66%, or $74,000, in 1999. The Bank made
significant investments in personnel and in fixed assets in Financial Management
Services during 1999 to position this area for further growth.
Security gains represent unrealized gains on trading securities (mutual
funds) held in grantor trusts whose performance is tied to the Monroe Bancorp
Directors' Deferred Compensation Plan. These gains are directly offset by a
charge to directors' deferred compensation expense. Other operating income rose
21.99% over the prior year primarily because the Bank outsourced its official
checks at the end of 1998, and was paid $96,000 in commissions on compensating
balances and float by the vendor during 1999.
In 1999, net gains from secondary market mortgage loan sales declined
39.01% compared to the prior year. Rising interest rates during the last half of
1999 significantly slowed the pace of mortgage refinancing. Although mortgage
volume was down, the Company retained its local market leadership by originating
$81.6 million of mortgage loans in Monroe County during 1999. Income from the
origination and sale of mortgage loans is extremely dependent upon the current
interest rate environment.
Total noninterest expense increased 14.14% in 1999 compared to 1998.
This increase is mainly attributed to the investments made in personnel and
fixed assets to position the Company for growth. Occupancy and equipment expense
increased 24.31% in 1999. Several factors contributed to this increase. A new,
larger, Mall Road Branch was completed in May 1998. The Bank also opened a new
Operations Center in a leased facility in March 1999. The Bank's Main Office was
also renovated during 1999. The square footage allocated to Financial Management
Services doubled during 1999 and their office space was substantially renovated
to position this area for further growth.
Other operating expenses increased $621,000, or 25.34%, in 1999.
Advertising expense increased $166,000, or 43.01%, as a result of the Company's
increased marketing and advertising campaigns. Appreciation on deferred
directors' fees increased 37.19% or $152,000. This occurred because the Monroe
Bancorp Directors' Deferred Compensation Plan was amended and the performance of
this Plan became tied to grantor trusts funded with mutual funds. The market
value of these mutual funds increased substantially in value during 1999,
resulting in an increase in the deferred portion of
22
<PAGE>
director compensation and benefits. This increase in expense is directly offset
by interest income, dividend income and unrealized gains on trading securities.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
Noninterest income increased 35.34% in 1998 compared to 1997. Net gains
on mortgage loan sales increased 126.67% over 1997. The lower interest rate
environment coupled with the strength in the local economy contributed to this
increase. Substantial growth in trust assets led to a 26.29% increase in income
from fiduciary activities. Deposit fees increased 15.66% due to deposit growth
and a higher number of accounts being assessed fees. Commission income increased
61.96% solely due to increases in brokerage service commissions. Other operating
income rose 24.58% during 1998 primarily as a result of a 30.89% increase in ATM
income due to a full year of charging a check card fee and ATM surcharges.
Total noninterest expense increased 15.05% in 1998 compared to 1997.
Salary and employee benefit expenses increased 15.77%. David Baer, former
President and CEO announced he would retire at the end of 1998, and Charles
Conville was hired in May 1998 to assume the duties of President and CEO. Mr.
Baer retained his position as Chairman of the Board, and remained a full time
employee of the Bank through December 1998. Several new positions were added
during 1998 and existing positions were upgraded to prepare for future growth.
Increases in commissions paid to secondary market loan originators also added to
this increase.
Other operating expenses increased by 19.56% or $401,000. Advertising
expenses increased $95,000, or 32.65%, as the Bank launched its increased
marketing campaign. Supplies expense increased $81,000, or 48.30% due to
increased deposit and loan activity, increased expense associated with upgrading
reporting to trust customers and additional supplies required to stock the new
larger Mall Road Branch. Earnings on the Directors' Deferred Compensation Plan
increased by 65.71%, or $161,000. During the first half of 1998, the value of
the Deferred Directors' Compensation Plan was tied to the value of the Company's
stock. The stock value increased substantially during that time period,
resulting in an increase in expense.
Income Taxes
------------
The Company records a provision for income taxes currently payable,
along with a provision for those taxes payable in the future. Such deferred
taxes arise from differences in timing of certain items for financial statement
reporting rather than income tax reporting. The major difference between the
effective tax rate applied to the Company's financial statement income and the
federal statutory rate of 34% is interest on tax-exempt securities and loans.
The Company's effective tax rate was 32.37%, 33.80%, and 34.22% in
1999, 1998, and 1997, respectively.
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. Securities available-for-sale 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 obligation under the
deferred compensation plan changes in concert with the performance of the
investments.
23
<PAGE>
The following tables summarize the carrying values of securities from December
31, 1997 through December 31, 1999 and at September 30, 1999 and 2000. The
maturity distribution of securities at September 30, 2000 is summarized by
classification. Yields on tax-exempt securities are adjusted to a tax equivalent
basis using a marginal federal tax rate of 34% for all years.
Securities
----------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at September 30 at December 31,
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury & U.S. Government agencies $ 16,244 $ 15,306 $ 17,083 $ 11,370 $ 8,039
States and political subdivisions 2,227 2,649 2,634 2,820 3,424
Equity securities 292 310 402 - -
Mortgage-backed and asset-backed - - - - -
--------------------------------------------------------
Total available for sale $ 18,763 $ 18,265 $ 20,119 $ 14,190 $ 11,463
Held to Maturity
U.S. Treasury & U.S. Government agencies $ 45,446 $ 43,954 $ 48,001 $ 31,498 $ 22,288
States and political subdivisions 32,439 37,449 35,879 34,694 25,664
Mortgage-backed and asset-backed 837 2,292 1,891 2,927 2,945
--------------------------------------------------------
Total held to maturity $ 78,722 $ 83,695 $ 85,771 $ 69,119 $ 50,897
Trading securities
Mutual funds $ 3,378 $ 2,863 $ 3,347 $ - $ -
--------------------------------------------------------
Total trading securities $ 3,378 $ 2,863 $ 3,347 $ - $ -
--------------------------------------------------------
Total Securities $100,863 $104,823 $109,237 $ 83,309 $ 62,360
========================================================
</TABLE>
SECURITIES MATURITY SCHEDULE
----------------------------
at September 30, 2000
<TABLE>
<CAPTION>
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
----------------- ----------------- --------------- --------------- ---------------
Available for sale Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------------------ -------- ------- -------- ------- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury & U.S. Government agencies $ 1,001 6.20% $15,243 5.80% $ - $ - $16,244 5.82%
State and municipal 510 6.64% 1,717 6.74% - - 2,227 6.72%
Equity securities 292 2.99% - - - 292 2.99%
Mortgage-backed and asset-backed - - - - - -
------- ------- ------- ------ ------- -----
Total available for sale $ 1,803 $16,960 $ - $ - $18,763 5.88%
======= ======= ======= ====== ======= =====
Held to Maturity
U.S. Treasury & U.S. Government agencies $ 8,505 5.96% $36,941 5.87% $ - $ - $45,446 5.89%
State and municipal 4,396 6.69% 26,962 6.22% 1,081 6.20% - 32,439 6.29%
Mortgage-backed and asset-backed 804 5.59% 33 7.06% - - 837 5.66%
------- ------- ------- ------ ------- -----
Total held to maturity $13,705 $63,936 $ 1,081 $ - $78,722 6.05%
======= ======= ======= ====== ======= =====
Trading Securities
Mutual funds $ 3,378 2.43% $ - $ - $ - $ 3,378 2.43%
------- ------- ------- ------ ------- -----
Total trading securities $ 3,378 $ - $ - $ - $ 3,378 2.43%
======= ======= ======= ====== ======= =====
</TABLE>
The majority of the securities portfolio is comprised of U.S. Treasury
and federal agency securities, and state and municipal securities (tax-exempt).
Trading securities consist solely of mutual funds held in grantor trusts,
established for the Monroe Bancorp Directors' Deferred Compensation Plan. During
1999, the Company also purchased stocks of nine financial institutions which are
classified as available-for-sale.
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
24
<PAGE>
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 September 30, 2000. No
securities of an individual issuer, excluding the U.S. Government and its
agencies, exceed 10% of the Company's shareholders' equity as of September 30,
2000. The Company does not use off-balance sheet derivative financial
instruments. As of September 30, 2000 and December 31, 1999 and 1998, the
securities portfolio held no structured notes.
September 30, 2000 Compared to September 30, 1999
-------------------------------------------------
Total securities were $100.9 million and $104.8 million at September 30, 2000
and 1999, respectively. The total portfolio decreased because loan growth
equaled deposit growth. Also, the growth in repurchase agreements, which must be
collateralized by Treasury or government agency securities, slowed considerably.
Proceeds from maturing securities have been used to make new loans or pay off
federal funds purchased. At September 30, 2000, available-for-sale securities
comprised 18.60% of the total portfolio, compared to 17.42% at September 30,
1999.
December 31, 1999 Compared to December 31, 1998
-----------------------------------------------
Total securities were $109.2 million and $83.3 million as of December 31, 1999
and 1998, respectively. In 1999, the total securities balance increased $25.9
million or 31.12% over 1998. This increase occurred because of the substantial
growth in repurchase agreements. Additional government agency securities were
purchased to pledge for the repurchase agreements. In addition, deposit growth
exceeded loan growth during the first half of 1999, and securities were
purchased with excess funds. In 1999, available-for-sale securities comprised
18.42% of the total portfolio, compared to 17.03% in 1998. Management
historically has not sold available-for-sale securities to provide liquidity or
fund growth in the loan portfolio.
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 Bank'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 six board members, one of whom is the President/CEO. The loan
committee not only acts as an approval body to ensure consistent application of
the Company's loan policy, but also provides valuable insight through
communication and pooling of knowledge, judgment, and experience of its members.
The Company's primary lending area generally includes Monroe, Lawrence,
Jackson 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.
25
<PAGE>
The following table reflects outstanding balances by loan type.
Loans Outstanding
-----------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at September 30, at December 31,
-------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 63,736 $ 54,446 $ 58,961 $ 50,920 $ 44,401 $ 40,467 $ 43,666
Real estate - mortgage (1-4 family) 85,424 78,503 83,367 76,731 80,031 72,831 61,374
Real estate - mortgage (other) 89,048 81,294 84,252 74,181 69,331 61,213 61,658
Real estate-construction 27,646 20,348 20,787 19,956 16,265 13,620 12,785
Installment 27,643 27,206 26,527 22,715 23,386 21,286 19,922
-------- -------- -------- -------- -------- -------- --------
Total loans $293,497 $261,797 $273,894 $244,503 $233,414 $209,417 $199,405
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table shows the composition of the loan portfolio, expressed as a
percent of total loans.
Composition of loan portfolio by type
-------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial 21.72% 20.80% 21.53% 20.83% 19.02% 19.33% 21.90%
Real estate - mortgage (1-4 family) 29.11% 29.99% 30.44% 31.38% 34.29% 34.78% 30.78%
Real estate - mortgage (other) 30.33% 31.05% 30.75% 30.34% 29.70% 29.23% 30.92%
Real estate-construction 9.42% 7.77% 7.59% 8.16% 6.97% 6.50% 6.41%
Installment 9.42% 10.39% 9.69% 9.29% 10.02% 10.16% 9.99%
------ ------ ------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ====== ======
</TABLE>
September 30, 2000 Compared to September 30, 1999
-------------------------------------------------
Total loans increased $31.7 million or 12.11% from September 30, 1999
to September 30, 2000. Strong growth was seen in commercial and industrial loans
and real estate loans. Commercial and industrial loans increased $9.3 million,
or 17.06% from September 30, 1999. Real estate loans increased 12.19%, or $22.0
million, during the same period, and continued to be the largest segment of the
loan portfolio. The growth in all areas can be attributed to the ongoing
economic expansion and prosperity the Greater Bloomington area continues to
experience and to the Bank's local market leadership in generating mortgage
loans. Indiana University's large student population also contributes to a
strong rental market and strong demand for real estate loans. Monroe County also
continues to enjoy one of the lowest unemployment rates in the state. As loan
balances have continued to escalate during the last few years, the loan
portfolio has remained diversified by loan type, borrower, and industry. As of
September 30, 2000 there were no concentrations of credit in excess of 10.0%.
December 31, 1999 Compared to December 31, 1998
-----------------------------------------------
Total loans increased $29.4 million or 12.02% in 1999, while in 1998
loans increased $11.1 million, or 4.75%. In 1999, total real estate loans
increased $17.5 million, or 10.26%. Real estate construction loans increased
$831,000, or 4.16%, over the prior year, 1-4 family residential loans increased
$6.6 million, or 8.65%, and all other real estate loans, primarily multi-family
residential and
26
<PAGE>
commercial real estate loans, increased $10.1 million, or 13.58%. As of December
31, 1999, there were no concentrations of credit in excess of 10.0%.
The real estate loan category remained the largest segment of the loan
portfolio as of December 31, 1999. These loans carry a lower degree of risk
because of the nature of the collateral for the loans. At December 31, 1999,
62.34% of all real estate loans were secured by first liens on residential
property: 44.25% were secured by 1-4 family properties and 18.09% were secured
by multi-family properties. Non-farm / non-residential loans comprised 22.51% of
all real estate loans. These loans were primarily secured by local business and
not-for-profit properties.
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 indirect lending function comprises
approximately 25% of the consumer loan portfolio. A specific policy pertaining
to these loan types, including separate reporting requirements, are in place for
monitoring purposes.
The following table reflects the maturity schedule of loans. Also
indicated are fixed and variable rate loans maturing after one year for the same
loan categories.
Loan Liquidity
--------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Loan maturities at September 30, 2000
--------------------------------------------
1 year 1 - 5 Over 5
and less years Years Total
--------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 32,907 $ 19,637 $ 11,192 $ 63,736
Real estate - mortgage (1 - 4 family) 2,942 1,365 81,117 85,424
Real estate - mortgage (other) 3,067 4,846 81,135 89,048
Real estate-construction 20,073 2,266 5,307 27,646
Installment 5,921 18,033 3,689 27,643
-------- -------- -------- --------
Total selected loans $ 64,910 $ 46,147 $182,440 $293,497
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates $ 27,580 $ 7,363
Floating interest rates 18,567 175,077
-------- --------
$ 46,147 $182,440
======== ========
</TABLE>
27
<PAGE>
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. Due to year-end Y2K issues, we believe a more meaningful
discussion about deposit growth can be achieved by examining the change in
average deposits rather than the change in year-end deposits (see "Average
Balance Sheets and Interest Rates" table in "Net Interest Income" section). All
year-end 1999 decreases in deposit balances due to Y2K activity were regained by
February 2000. Average deposits increased $23.4 million or 7.50% from September
30, 1999 to September 30, 2000. Average deposits increased $26.6 million, or
9.22% in calendar year 1999, compared to $19.1 million, or 7.08% in calendar
year 1998. The bulk of the growth in deposit accounts over the past two years
and nine months has occurred in interest bearing demand deposits, more
specifically, high yield money market savings accounts. Time deposits remain the
largest single source of the Company's funds.
Deposits by type and maturities of time deposits greater than $100,000
follows:
Deposit Information
-------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Deposits at September 30, Deposits at December 31,
------------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Noninterest bearing $ 62,733 $ 50,504 $ 48,201 $ 51,613 $ 45,805
Interest bearing demand 100,732 95,541 100,032 85,700 68,613
Savings deposits 21,123 20,351 19,307 20,356 19,566
Time 153,811 149,783 145,610 147,389 142,154
-------- -------- -------- -------- --------
Total deposits $338,399 $316,179 $313,150 $305,058 $276,138
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Maturity Ranges of Time Deposits with Balances of $100 or More at
-----------------------------------------------------------------
September 30, December 31,
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
3 months or less $17,982 $ 8,621 $11,164 $10,345 $ 7,658
3 through 6 months 7,598 10,869 8,566 8,977 7,406
6 through 12 months 14,560 20,579 11,648 13,079 6,568
over 12 months 11,590 8,062 8,716 8,717 15,397
-------- -------- -------- -------- --------
$51,730 $48,131 $40,094 $41,118 $37,029
======== ======== ======== ======== ========
</TABLE>
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. The Company had no such funds as of December 31, 1999, 1998, and 1997.
At September 30, 2000 and 1999, balances were $8.9 million and $6.7 million,
respectively.
Borrowings
----------
Aside from the core deposit base and large denomination certificates of
deposit mentioned above, the remaining funding sources include short-term and
long-term borrowings. Short-term borrowings consist of federal funds purchased
from other financial institutions on an overnight basis and retail repurchase
agreements which mature daily. The Company has seen substantial growth in daily
28
<PAGE>
repurchase agreements, which are primarily held by business customers. At
December 31, 1999, the Company had approximately $5.0 million in additional
federal funds purchased and had borrowed an additional $3.0 million from the
Federal Home Loan Bank of Indianapolis (FHLBI) to provide a Y2K liquidity
source.
At September 30, 2000, all the FHLBI Y2K borrowings outstanding at
December 31, 1999 have been repaid, and the Bank had $12.6 million federal funds
purchased. As the Bank's loan growth continues to outpace its core deposit
growth, short-term borrowings have become a more regular source of liquidity.
Borrowings
----------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------------- -------------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Repurchase agreements outstanding $33,543 $30,202 $29,164 $22,967 $ 8,718
Federal funds purchased 12,600 1,475 17,800 - -
Other 32 - - - -
------- ------- ------- ------- -------
Total short-term borrowings $46,175 $31,677 $46,964 $22,967 $ 8,718
======= ======= ======= ======= =======
Average repurchase agreements during the year $32,984 $28,245 $28,999 $15,776 $ 6,978
======= ======= ======= ======= =======
Maximum month-end repurchase agreements $37,973 $34,078 $34,078 $24,311 $ 8,718
======= ======= ======= ======= =======
YTD Average interest rate 5.35% 4.15% 4.30% 4.40% 4.50%
Average interest rate at end of period 5.80% 4.50% 3.80% 4.00% 4.60%
</TABLE>
The Bank became a member of the FHLBI in 1997 and has the authority of
the Board of Directors to borrow up to $23 million. All current and any future
borrowings are secured by a blanket collateral pledge of the Bank's one-to-four
family residential loans. Long-term debt, consisting of FHLBI borrowings and a
mortgage, as of December 31, 1999 and 1998 was $16.2 million and $10.0 million,
respectively. The FHLBI borrowings accounted for the majority of long-term debt.
The Company had a net increase in borrowings from the FHLBI of $6.2 million
during 1999. Approximately half of this increase was used to fund loan growth.
The other half provided year-end liquidity for Y2K purposes.
Long-term debt at September 30, 2000 and September 30, 1999 was $6.6
million and $10.4 million respectively, and continued to consist primarily of
FHLBI borrowings. The Company had a net decrease in FHLBI borrowings of $3.8
million during that period.
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk of the Company encompasses exposure to both liquidity risk
and interest rate risk and is reviewed quarterly by the asset/liability
committee ("ALCO") and the Board of Directors.
The Company's interest rate risk is measured by computing estimated
changes in net interest income and the net portfolio value ("NPV") of its cash
flows from assets and liabilities in the event of
29
<PAGE>
adverse movements in interest rates. Interest rate risk exposure is measured
using an interest rate sensitivity analysis to determine the change in NPV in
the event of hypothetical changes in interest rates. Another method also used to
enhance the overall process is interest rate sensitivity gap analysis. This
method is utilized to determine the repricing characteristics of the Company's
assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
market value of assets minus the market value of liabilities. This particular
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 1% - 3% increase and decrease in interest rates.
The Company's Board of Directors adopted an interest rate risk policy which
established a 10% minimum and maximum increase and decrease in the NPV in the
event of a sudden and sustained 2% increase or decrease in interest rates.
The following table represents the Company's projected change
in NPV for the various rate shock levels as of September 30, 2000.
<TABLE>
<CAPTION>
Net Portfolio Value
--------------------------------------------------------------------------------------
Dollar Amount
Change in Rates (in thousands) Dollar Change Percentage Change
-------------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
+300 $ 59,777 $ 1,701 2.93%
+200 59,286 1,210 2.08
+100 58,716 640 1.10
Base 58,076 --- ---
-100 57,355 (721) (1.24)
-200 56,366 (1,710) (2.95)
-300 54,942 (3,134) (5.40)
</TABLE>
The above table indicates that as of September 30, 2000, the Company's
estimated NPV would be expected to increase in the event of sudden and sustained
increases in prevailing interest rates. In the event of sudden and sustained
decreases in prevailing interest rates, the Company's estimated NPV would be
expected to decrease. As of September 30, 2000, the Company's estimated changes
in NPV were within the approved guidelines established by the Board of
Directors.
The following table represents the Company's projected change
in NPV for the various rate shock levels as of December 31, 1999.
<TABLE>
<CAPTION>
Net Portfolio Value
--------------------------------------------------------------------------------------
Dollar Amount
Change in Rates (in thousands) Dollar Change Percentage Change
-------------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
+300 $ 51,186 $ (730) (1.41)%
+200 51,456 (460) (0.89)
+100 51,705 (211) (0.41)
Base 51,916 --- ---
-100 52,086 170 0.33
-200 51,932 16 0.03
-300 51,520 (396) (0.76)
</TABLE>
The above table indicates that as of December 31, 1999, the Company's
estimated NPV would be expected to decrease slightly in the event of sudden and
sustained increases in prevailing interest rates. In the event of sudden and
sustained decreases of 100-200 basis points in prevailing interest rates, the
Company's estimated NPV would be expected to increase and at a sustained
decrease of 300 basis points, the Company's NPV would decrease. As of December
31, 1999, the Company's estimated changes in NPV were within the approved
guidelines established by the Board of Directors.
30
<PAGE>
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 decay rates, and should not
be relied upon as indicative of actual results. These computations do not
contemplate any actions management may undertake in response to changes in
interest rates. The NPV calculation is based on the net present value of
discounted cash flows utilizing certain prepayment assumptions and market
interest rates.
Certain shortcomings are inherent in the method of computing the
estimated NPV. Actual results may differ from that information presented in the
table above should market conditions vary from the assumptions used in
preparation of the table information. If interest rates remain or decrease below
current levels, the proportion of adjustable rate loans in the loan portfolio
could decrease in future periods due to refinancing activity. Also, in the event
of an interest rate change, prepayment and early withdrawal levels would likely
be different from those assumed in the table. Lastly, the ability of many
borrowers to repay their adjustable rate debt may decline during a rising
interest rate environment.
Used in conjunction with the NPV analysis is the interest rate
sensitivity gap analysis. This analysis monitors the relationship between the
maturity and repricing of interest-earning assets and interest-bearing
liabilities while maintaining an acceptable interest rate spread. Interest rate
sensitivity gap is defined as the difference between the amount of maturing or
repricing of interest-earning assets and interest-bearing liabilities within
specific and defined time frames. A positive gap occurs when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities. Conversely, a gap is considered negative when the amount of
interest rate sensitive liabilities exceed the interest rate sensitive assets.
Generally, during a time of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would enhance net
interest income. On the
31
<PAGE>
other hand, during a time period of falling interest rates, a negative gap would
increase net interest income, while a positive gap would decrease net interest
income. It is the ALCO's responsibility to maintain a reasonable balance between
the exposure to interest rate fluctuations and earnings.
Liquidity and Interest Rate Sensitivity
---------------------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at September 30, 2000
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 Years Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans $ 85,226 $ 105,024 $ 87,878 $ 15,369 $ 293,497
Securities held-to-maturity
Taxable 2,118 7,192 36,973 - 46,283
Tax-exempt 1,081 3,315 26,962 1,081 32,439
Securities available for sale
Taxable 292 1,001 15,243 - 16,536
Tax-exempt 340 170 1,717 - 2,227
Trading securities
Taxable 3,378 - - - 3,378
--------- --------- --------- --------- ---------
Total securities 7,209 11,678 80,895 1,081 100,863
--------- --------- --------- --------- ---------
Interest bearing deposits with banks 49 - - - 49
FHLB stock 1,257 - - - 1,257
Federal funds sold - - - - -
--------- --------- --------- --------- ---------
Total interest earning assets $ 93,741 $ 116,702 $ 168,773 $ 16,450 $ 395,666
========= ========= ========= ========= =========
Interest bearing liabilities
Interest-bearing demand deposits $ 100,732 $ - $ - $ - $ 100,732
Savings deposits 21,123 - - - 21,123
Time deposits 41,536 70,678 38,460 3,137 153,811
Short-term borrowings 46,175 - 46,175
Long-term debt 40 114 3,034 3,397 6,585
--------- --------- --------- --------- ---------
Total interest bearing liabilities $ 209,606 $ 70,792 $ 41,494 $ 6,534 $ 328,426
========= ========= ========= ========= =========
Rate sensitive gap $(115,865) $ 45,910 $ 127,279 $ 9,916 $ 67,240
Rate sensitive cumulative gap $(115,865) $ (69,955) $ 57,324 $ 67,240
Cumulative gap as a percentage of earning assets -29.28% -17.68% 14.49% 16.99%
</TABLE>
The liquidity of the parent company is dependent on the receipt of
dividends from the banking subsidiary. Management expects that in the aggregate,
the banking subsidiary will continue to have the ability to dividend adequate
funds to the parent company. The statements in this paragraph relating to the
parent company receiving dividends from the subsidiary bank are forward-looking
statements which may or may not be accurate due to the impossibility of
predicting future economic and business events.
The banking subsidiary's source of funding is predominantly core
deposits consisting of both commercial and individual deposits, maturities of
securities, repayments of loan principal and interest, federal funds purchased,
securities sold under agreements to repurchase, and long-term borrowings from
the FHLBI. The deposit base is diversified between individual and commercial
accounts, which helps
32
<PAGE>
avoid dependence on large concentrations of funds. The Company does not solicit
certificates of deposit from brokers. The following table details the main
components of cash flows for the nine months ended September 30, 2000 and 1999
and calendar years 1999 and 1998.
Funding Uses and Sources
------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended Year ended Year Ended
September 30, 2000 December 31, 1999 December 31, 1998
---------------------------- ----------------------------- -----------------------------
Increase/(decrease) Increase/(decrease) Increase/(decrease)
Average ------------------- Average ------------------- Average -------------------
Balance Amount Percent Balance Amount Percent Balance Amount Percent
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Funding Uses
Loans, net of unearned income $284,418 $ 30,021 11.80% $254,397 $ 14,786 6.17% $239,611 $ 16,867 7.57%
Taxable securities 69,423 8,967 14.83% 60,456 21,625 55.69% 38,831 6,581 20.41%
Tax exempt securities 36,498 (2,764) -7.04% 39,262 7,730 24.51% 31,532 3,958 14.35%
Federal funds sold 2,610 (6,115) -70.09% 8,725 (2,096) -19.37% 10,821 2,531 30.53%
-------- -------- ------ -------- -------- ------- -------- -------- ------
Total Uses $392,949 $ 30,109 8.30% $362,840 $ 42,045 13.11% $320,795 $ 29,937 10.29%
======== ======== ====== ======== ======== ======= ======== ======== ======
Funding Sources
Noninterest bearing deposits $ 53,873 $ 1,656 3.17% $ 52,217 $ 3,616 7.44% $ 48,601 $ 8,180 20.24%
Interest bearing demand,
savings & time 281,366 18,814 7.17% 262,552 22,949 9.58% 239,603 10,877 4.76%
Short-term borrowings 38,764 8,538 28.25% 30,226 14,450 91.59% 15,776 8,798 126.08%
Long-term debt 11,276 1,362 13.74% 9,914 3,779 61.60% 6,135 3,846 168.02%
-------- -------- ------ -------- -------- ------- -------- -------- ------
Total Sources $385,279 $ 30,370 8.56% $354,909 $ 44,794 14.44% $310,115 $ 31,701 11.39%
======== ======== ====== ======== ======== ======= ======== ======== ======
</TABLE>
Capital Adequacy
----------------
Management believes the Company and Bank met all the capital
requirements as of September 30, 2000 and December 31, 1999, 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" portion of this document.
Consolidated capital amounts and ratios are presented in the following table.
Bank capital levels are substantially similar.
Excluding unrealized gains/losses on securities, shareholders' equity
increased $2.8 million, or 8.30% in from September 30, 1999 to September 30,
2000. During calendar year 1999, equity increased $2.8 million, or 8.58%
compared to 1998. The amount of dividends paid by the Company increased to $2.1
million in 1999, or 6.45% above the prior year amount. The increased dollar
dividend payout reflects management's effort to increase the value and return of
each shareholder's investment in the Company.
At September 30, 2000, 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.
33
<PAGE>
Capital
-------
(Dollar amount in thousands)
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------------- ------------------------
Tier 1 capital 2000 1999 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shareholders' equity $ 36,721 $ 33,905 $ 34,444 $ 32,138
Less: Intangibles - - - -
Add: Unrealized loss on securities 212 226 369 -
Less: Unrealized gain on securities - - - (77)
--------- --------- --------- ---------
Total Tier 1 capital $ 36,933 $ 34,131 $ 34,813 $ 32,061
========= ========= ========= =========
Total risk-based capital
Tier 1 capital $ 36,933 $ 34,131 $ 34,813 $ 32,061
Tier 2 capital 3520 3,070 3,245 2,820
--------- --------- --------- ---------
Total risk-based capital $ 40,453 $ 37,201 $ 38,058 $ 34,881
========= ========= ========= =========
Risk weighted assets $ 281,327 $ 245,003 $ 259,580 $ 224,849
========= ========= ========= =========
Quarterly average assets $ 435,044 $ 396,325 $ 409,095 $ 368,460
========= ========= ========= =========
Risk-based ratios:
Tier 1 13.13% 13.93% 13.41% 14.26%
Total risk-based capital 14.38% 15.18% 14.67% 15.51%
Leverage ratios 8.49% 8.61% 8.50% 8.70%
</TABLE>
In 2001, the Bank expects to rebuild its Highland Village Branch
because a road-widening project will substantially reduce the existing branch's
customer parking. The Bank has an accepted offer to purchase the adjacent
property and will be building a larger branch on that property and demolishing
the existing branch. The bank will use existing capital resources to build this
branch.
As mentioned before, the Bank is also planning on entering at least one
new high-growth market area in 2001. The Bank anticipates leasing space for this
new branch, and does not anticipate incurring material capital expenditures.
Neither rebuilding the Highland Village Branch nor making leasehold improvements
at the new branch will cause the Bank's capital to drop below the level needed
to maintain its status as "well-capitalized".
Inflation
---------
For a financial institution, effects of price changes and inflation
vary considerably from an industrial organization. Changes in the prices of
goods and services are the primary determinant of an industrial company's
profit, whereas changes in interest rates have a major impact on a financial
institution's profitability. Inflation affects the growth of total assets, but
it is difficult to assess its impact because neither timing nor the magnitude of
the changes in the consumer price index directly coincide with changes in
interest rates.
During periods of high inflation there are normally corresponding
increases in the money supply. During such times, financial institutions often
experience above average growth in loans and deposits.
34
<PAGE>
Also, general increases in the price of goods and services will result in
increased operation expenses. Over the last few years the inflation rate has
been relatively low, and its impact on the balance sheets and increased levels
of income and expense has been nominal.
Item 3. Properties.
-------------------
The Company, through the Bank, currently operates from its main office
in downtown Bloomington and from fourteen additional locations in Monroe,
Jackson and Lawrence Counties in Indiana. Information about those locations is
set forth in the table below:
--------------------------------------------------------------------------
NAME OF OFFICE LOCATION/TELEPHONE NUMBER
--------------------------------------------------------------------------
Downtown Main Office 210 East Kirkwood Avenue
Bloomington, IN 47408
(812) 336-0201
--------------------------------------------------------------------------
Ellettsville Banking Center 4616 West Richland Plaza
Bloomington, IN 47404
(812) 876-6044
--------------------------------------------------------------------------
Highland Village Banking Center 4191 West Third Street
Bloomington, IN 47403
(812) 331-3501
--------------------------------------------------------------------------
Kinser Crossing Banking Center 1825 North Kinser Pike
Bloomington, IN 47404
(812) 331-3518
--------------------------------------------------------------------------
Kirkwood Auto Branch 306 East Kirkwood Avenue
Bloomington, IN 47408
(812) 331-3510
--------------------------------------------------------------------------
Loan Center 111 South Lincoln Street
Bloomington, IN 47408
(812) 331-3555
--------------------------------------------------------------------------
Mall Road Banking Center 2801 Buick-Cadillac Blvd.
Bloomington, IN 47401
(812) 331-3507
--------------------------------------------------------------------------
Walnut Park Banking Center 2490 South Walnut Street
Bloomington, IN 47403
(812) 331-3514
--------------------------------------------------------------------------
Brownstown Banking Center 1051 West Spring Street
Brownstown, IN 47220
(812) 358-3171
--------------------------------------------------------------------------
Freetown Branch 6711 North Union
Freetown, IN 47235
(812) 497-2239
--------------------------------------------------------------------------
Vallonia Branch 1937 South Main Street
Vallonia, IN 47281
(812) 358-3101
--------------------------------------------------------------------------
Bedford Banking Center Stone City Mall
3300 West 16th Street
Bedford, IN 47421
(812) 275-7800
--------------------------------------------------------------------------
Bell Trace Branch 800 Bell Trace Circle
Bloomington, IN 47408
(812) 331-3575
--------------------------------------------------------------------------
Meadowood Branch 2455 Tamarack Trail
Bloomington, IN 47408
(812) 353-7722
--------------------------------------------------------------------------
Redbud Hills Branch 3211 E. Moores Pike
Bloomington, IN 47401
(812) 353-7720
--------------------------------------------------------------------------
35
<PAGE>
The Bank owns its main office. It owns nine of its branch locations and
leases space for five branches. The Bank also leases its Operations Center. The
main office contains approximately 18,656 square feet of space, and is occupied
solely by the Bank. The Bank's data processing center, and proof and checking
departments are located at the Operations Center, 5001 N. Walnut St.,
Bloomington, IN. In October 2000, the Board of Directors of the Bank authorized
the closing of the office of the Bank in Vallonia, which is expected to occur in
February 2001.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
-----------------------------------------------------------------------
The following table contains information concerning individuals or
entities that, to the knowledge of the Company, beneficially owned on September
30, 2000 more than 5% of the common stock of the Company:
===============================================================================
Name and Address of Beneficial Shares Beneficially Owned Percent of Class
Owner
===============================================================================
Monroe Bancorp Employee Stock 312,101 5.07%
Ownership Trust
===============================================================================
Charles R. Royal, Jr. (1) 328,490 5.34%
===============================================================================
(1) Includes 5,000 shares which the named individual has the right to acquire
upon the exercise of an option granted in 1999.
The following table sets forth certain information as of September 30,
2000 with respect to the common stock of the Company beneficially owned by each
Director and named executive officer of the Company and by all executive
officers and directors as a group.
<TABLE>
<CAPTION>
Number of Shares
Name Beneficially Owned Percent of Class (1)
-------------------------------- ------------------ --------------------
<S> <C> <C>
David D. Baer (2) (3) 141,927 2.31%
Dr. Bradford J. Bomba, Jr. (2) 8,500 0.12%
Mark D. Bradford (4) 43,163 0.70%
Steven R. Crider (2) 10,675 0.17%
Gordon M. Dyott (5) 44,755 0.73%
Timothy D. Ellis (2) (3) 35,268 0.57%
Joyce Claflin Harrell (2) 34,322 0.59%
Paul W. Mobley (2)(3) 45,680 0.74%
Richard P. Rechter (2) 251,900 4.10%
Charles R. Royal, Jr. (2) 328,490 5.34%
R. Scott Walters (6) 72,547 1.18%
Directors and executive officers 1,058,003 17.12%
as a group (14 individuals) (7)
</TABLE>
Notes to Stock Ownership Table
(1) The information contained in this column is based upon information
furnished to the Company as of September 30, 2000, by the individuals named
above. The nature of beneficial ownership for shares shown in this column
represent sole or shared voting and investment unless otherwise noted. At
September 30, 2000, the Company had 6,150,240 shares of common stock
outstanding.
(2) Includes 5,000 shares which the named individual has the right to acquire
upon the exercise of an option granted in 1999.
(3) Includes shares held by the spouse of the listed individual.
(4) Includes 25,000 shares, which Mr. Bradford has the right to acquire upon
the exercise of options granted in 1999 and shares held for the benefit of
the children of Mr. Bradford. Also includes shares held in the ESOP for the
account of Mr. Bradford.
(5) Includes 20,000 shares, which Mr. Dyott has the right to acquire upon the
exercise of options granted in 1999. Also includes shares held in the ESOP
for the account of Mr. Dyott.
(6) Includes shares held for the benefit of the children of Mr. Walters and
held by the spouse of Mr. Walters. Also includes shares held in the ESOP
for the account of Mr. Walters and 10,000 shares, which Mr. Walters may
acquire upon the exercise of an option granted in 1999.
36
<PAGE>
(7) In addition to the named individuals, this amount includes shares
beneficial owned by Kathryn E. Burns, Robert D. Hamilton, and Carmen M.
Odle.
Item 5. Directors and Executive Officers.
------------------------------------------
The following table sets forth information concerning the Directors and
Executive Officers of the Company. Unless otherwise indicated in a footnote,
each person has held the same or a comparable position with his present employer
for the last five years. Effective in 1999, the Directors of the Company are
elected for a term of three years with one-third of the Directors elected in any
one year. The Directors of the Bank and the Officers of the Bank and the Company
are all elected for terms of one year.
<TABLE>
<CAPTION>
Positions Currently Director or
held with the Executive Other Principal
Name and Age Company and Bank Officer Since Occupation
------------ ---------------- ------------- ----------
<S> <C> <C> <C>
David D. Baer, 66 Director and Chairman of Company 1981 (7) Director and Chairman of
and Bank the Board of the Corp & Bank
Dr. Bradford J. Bomba, Jr., Director of Company and Bank 1996 Physician-Internal
39 Medicine Associates
Mark D. Bradford, 43 Director, President and CEO of the 1990(1) Director, President and CEO
Company and Bank of the Company
and Bank
Kathryn E. Burns, 42 Senior Vice President of Bank 1999 (6) Chief Financial Officer
Steven R. Crider, 42 Director of Company and Bank 1995 Vice President, Crider &
Crider, Inc.
Gordon M. Dyott, 47 Executive Vice Pres/Bank, Vice 1996 (2) Retail Banking, Opers &
President/Company Marketing
Timothy D. Ellis, 63 Director of Company and Bank 1996 Real Estate Broker and
Auctioneer for Tim Ellis
Realtor & Auctioneer
Joyce Claflin Harrell, 53 Director of Company and Bank 1983 Retired (8)
Robert D. Hamilton, 57 Senior Vice President/Bank 1984 (3) Loan Operations
Paul W. Mobley, 59 Director of Company and Bank 1978 Chairman, Noble Roman's,
Inc.
37
<PAGE>
Carmen M. Odle, 49 Senior Vice President/Bank 1994 (4) Human Resources Department
Richard P. Rechter, 61 Director of Company and Bank 1971 Chairman, Rogers Group, Inc.
Charles R. Royal, Jr., 68 Director of Company and Bank 1987 President/Dealer Principal
for Royal Chevrolet, Inc.
R. Scott Walters, 48 Senior Vice President/Bank 1985 (5) Financial Management
Secretary/Company Services
</TABLE>
1. Mark D. Bradford originally joined the Bank as a Senior Vice President /
CFO. He was named Executive Vice President / CFO in October 1998 and became
President and CEO on June 30, 1999. He was elected Secretary/Treasurer of
the Company in December 1997, and Vice President/Treasurer in December
1998. He was named President, CEO and a Director of the Company in June
1999.
2. Gordon M. Dyott originally joined the Bank as a Senior Vice President in
March 1996, and became Executive Vice President in October 1998. Prior to
his employment with the Bank, he was employed by Wilmington Savings Fund
Society, FSB as Executive Vice President of Retail Banking. He was elected
Vice President of the Company in December 1998.
3. Robert D. Hamilton originally joined the Bank as Vice President and became
Senior Vice President in October 1998.
4. Carmen M. Odle originally joined the Bank as a Vice President and became
Senior Vice President in October 1998.
5. R. Scott Walters originally joined the Bank as a Vice President and became
Senior Vice President in December 1990. He was elected Secretary of the
Company in December 1998.
6. Kathryn E. Burns originally joined the Bank in October 1998 as Vice
President / Controller and was promoted to Senior Vice President / CFO
December 1999. Prior to her employment with the Bank, she was a CPA with
Olive, LLP.
7. David D. Baer served as Chairman, President and CEO of the Bank and Company
until May 1998. He served as Chairman from May 1998 to December 1999, at
which time he retired from the Bank. He remained a Director of the Bank and
Company after his retirement, and was elected Chairman of the Company in
June 1999.
8. Joyce Claflin Harrell served as Senior Vice President / CFO of Indiana
University Foundation from April 1990 to April 1999. She is currently
retired.
Five-Year Total Shareholder Return
The following indexed graph indicates the Company's total return to its
shareholders on its common stock for the past five years, assuming dividend
reinvestment, as compared to total return for the Russell 2000 Index and the
peer group index (which is a line-of-business index prepared by an independent
third party consisting of banks with assets between $250 million and $500
million). The
38
<PAGE>
comparison of total return on investment for each of the periods assumes that
$100 was invested on January 1, 1995, in each of the Company, the Russell 2000
Index, and the peer group index. Shares of the common stock of the Company are
not traded on any national or regional exchange or in the over-the-counter
market and there is no established market for the common stock. As such, the
values for the Company's stock are based upon the trades of the stock of the
Company of which management is aware. Because there is not an established
trading market for the common stock, these prices may not reflect the actual
price which would have been paid for a share of the common stock in an active or
established trading market and should not necessarily be relied upon when
determining the value of a shareholder's investment.
Comparative 5-Year Cumulative Total Return
Among the Company,
Russell 2000 Index and Peer Group Index
Assumes $100 Invested on January 1, 1995
Assumes Dividends Reinvested
Fiscal Year Ended December 31, 1999
[COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURN APPEARS HERE]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company $100.00 $178.46 $188.05 $240.70 $298.78 $231.50
Peer Group Index 100.00 128.45 149.64 183.10 178.44 216.37
Russell 2000 Index 100.00 134.95 175.23 303.07 271.41 252.50
</TABLE>
Item 6. Executive Compensation.
--------------------------------
Compensation Committee Report
Decisions on compensation of the Company's executives are made by the
Executive Committee, which functions as the Compensation Committee. All
decisions of the Executive Committee relating to the compensation of the
Company's officers are reviewed by the full board. Set forth below is a report
submitted by the Executive Committee addressing the Company's compensation
policies for the fiscal year ended December 31, 1999 as they affected the
Company's executive officers.
Compensation Policies Toward Executive Officers.
-----------------------------------------------
The Executive Committee's executive compensation policies are designed
to provide competitive levels of compensation to the executive officers and to
reward officers for satisfactory
39
<PAGE>
individual performance and for satisfactory performance of the Company as a
whole. There are no established goals or standards relating to performance of
the Company which have been utilized in setting compensation of individual
employees.
Base Salary.
-----------
Each executive officer is reviewed individually by the Executive
Committee, which includes an analysis of the performance of the Company. In
addition, the review includes, among other things, an analysis of the
individual's performance during the past fiscal year, focusing primarily upon
the following aspects of the individual's job or characteristics of the
individual exhibited during the most recent fiscal year: quality and quantity of
work; supervisory skills; dependability; initiative; attendance; overall skill
level; and overall value to the Company.
Other Compensation Plans.
------------------------
At various times in the past the Company has adopted certain broad
based employee benefit plans in which the senior executives are permitted to
participate on the same terms as non-executive employees who meet applicable
eligibility criteria, subject to any legal limitations on the amount that may be
contributed or the benefits that may be payable under the plans.
Benefits.
--------
The Company provides medical and defined contribution plans to the
senior executives that are generally available to the other Company employees.
The amount of perquisites, as determined in accordance with the rules of the SEC
relating to executive compensation, did not exceed 10% of salary and bonus for
fiscal year 1999.
Chief Executive Officer's 1999 Compensation.
-------------------------------------------
Regulations of the Securities and Exchange Commission require that the
Compensation Committee disclose the Committee's basis for compensation reported
for any individual who served as the Chief Executive Officer during the last
fiscal year. The salary of the Company Chief Executive Officer is determined in
the same manner as discussed above for other senior executives. The Chief
Executive Officer did not participate in the deliberations of the Compensation
Committee with respect to his compensation level. See "Compensation Committee
Insider Participation."
Members of the 1999 Executive Committee:
David D. Baer, Mark D. Bradford, Steven R. Crider,
Richard P. Rechter, Charles R. Royal, Jr.
Compensation Committee Insider Participation
During the past fiscal year, Mr. Bradford, the current Chief Executive
Officer of the Company, served on the Executive Committee. Mr. Bradford did not
participate in any discussion or voting with respect to his salary as an
executive officer and was not present in the room during the discussion by the
Executive Committee of his compensation.
40
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation compensation
--------------------------------------- ----------------
Other Annual Securities All Other
Name and Principal Compensation Underlying Compensation
Position Year Salary Bonus (4)(5) Options (#) (7)
-------------------------- --------- ---------- ---------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Bradford, 12/31/99 $ 117,000 $ 49,079 $ 3,800 25,000 $ 12,350
President, CEO and 12/31/98 74,255 50,392 0 0 9,520
Director (1) 12/31/97 67,233 57,955 0 0 8,220
Gordon M. Dyott, Exec. 12/31/99 $ 107,000 $ 47,583 $ 0 20,000 $ 12,813
Vice President, Retail 12/31/98 72,056 48,797 0 0 10,452
Banking (2) 12/31/97 65,118 44,418 0 0 2,528
R Scott Walters, 12/31/99 $ 80,000 $ 48,263 $ 0 10,000 $ 10,504
Senior Vice President, 12/31/98 71,134 49,304 0 0 10,413
Financial Management 12/31/98 65,791 56,831 0 0 8,999
Services
Charles D. Conville (3) 12/31/99 $ 100,000 $ 50,000 $ 3,850 100,000 (6) $ 60,000 (8)
12/31/98 136,206 0 3,600 0 0
</TABLE>
(1) Mr. Bradford was promoted to President and CEO in June 1999.
(2) Mr. Dyott was promoted to from Senior Vice President to Executive Vice
President in 1998.
(3) Mr. Conville served as President and CEO of the Company from May 1998 until
June 1999.
(4) While officers enjoy certain perquisites, such perquisites do not exceed
the lesser of $50,000 or 10% of such officer's salary and bonus and are not
required to be disclosed by applicable rules of the SEC.
(5) Consists of Directors' fees paid to Mr. Bradford and to Mr. Conville for
the fiscal years indicated.
(6) These options were forfeited by Mr. Conville upon his resignation as
President and Chief Executive Officer in June 1999.
(7) Consists of matching contributions by the Company under the Company's
Thrift Plan and contributions by the Company under the Company's Employee
Stock Ownership Plan, except as otherwise noted.
(8) Consists of payments to Mr. Conville as severance compensation in
connection with the termination of his employment relationship with the
Company and the Bank in 1999.
41
<PAGE>
1999 Directors' Stock Option Plan
In 1999 the Board of Directors and the shareholders of the Company
approved and adopted the 1999 Directors' Stock Option Plan of Monroe Bancorp
(the "Directors' Plan") which provides for the grant of nonqualified stock
options (NSOs) to those individuals who serve as Directors of the Company. A
total of 153,000 shares of common stock of the Company have been reserved for
issuance under the Directors' Plan.
Each member of the Board of Directors of the Company is covered by the
Directors' Plan. Pursuant to the provisions of the Directors' Plan, on January
1, 1999, each Director was granted an option to acquire 5,000 shares of the
Company's common stock ("Company Stock") at a per share option price of $13.25.
Individuals elected to serve as Directors after January 1, 1999 who have not
been granted an option under the Directors' Plan will also receive grants to
acquire 5,000 shares of Company Stock, subject to the overall limits on the
number of shares which can be issued under the Plan.
The option price per share of common stock will be determined by the
Committee in its discretion; however, the per share option price will not be
less than the fair market value of one share of Company Stock on the date the
stock option is granted.
Options granted under the Directors' Plan will vest, and thereby become
exercisable, on the first anniversary of the date on which the options were
granted. In the event of a change in control of the Company (as defined) or the
permanent and total disability (as defined) or death of a Director, any option
granted under the Plan may be exercised in full without regard to any
restrictions on vesting. Each option automatically expires, and is no longer
exercisable, on the earliest to occur of the following: (i) 10 years after the
option is granted, (ii) 60 days after the individual who was granted an option
ceases to be a Director, other than due to permanent and total disability or
death, or (iii) 1 year following the permanent and total disability or death of
the Director. In no event will an option expire later than the date specified
under its terms.
The Directors' Plan will expire on December 31, 2009; after that date,
no options will be granted under the Directors' Plan. However, options granted
prior to that date will remain in effect in accordance with their terms.
1999 Management Stock Option Plan
In 1999 the Board of Directors and the shareholders of the Company
approved and adopted the 1999 Management Stock Option Plan of Monroe Bancorp
("Management Plan"). The Management Plan provides for the grant of (i) incentive
stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code ("Code") and (ii) nonqualified stock options ("NSOs") to officers and key
employees of the Company.
A total of 427,000 shares of common stock have been reserved for
issuance under the Management Plan. The number and kind of shares subject to
outstanding options, the purchase price for such shares and the number and kind
of shares available for issuance under the Management Plan is subject to
adjustment by the Committee in connection with the occurrence of mergers,
recapitalizations, stock dividends, stock splits and other significant corporate
events involving the Company.
Options may be granted under the Management Plan to officers and senior
management employees of the Company or any of its subsidiaries, as selected by
the Committee. The options may be ISOs, NSOs or a combination. The terms and
conditions of stock option grants, including the number of
42
<PAGE>
shares, vesting periods and other conditions on exercise will be determined by
the Committee. ISO grants will be made in accordance with Section 422 of the
Code.
The option price per share of Company Stock will be determined by the
Committee in its discretion; however, the per share option price will not be
less than the fair market value of one share of Company Stock on the date the
stock option is granted. In the event an optionee is a "shareholder-employee",
the purchase price per share of stock under each ISO will be not less than 110%
of the fair market value of the stock on the date on which the option is
granted.
All ISO's and NSO's will vest on and after the date on which the
shareholders of the Company approve and adopt the Plan, but in no event will any
ISO or NSO be exercisable later than 10 years after the date of grant or 5 years
after the date of grant of the ISO in the event the optionee is a
shareholder-employee. In addition, in the event of a change in control of the
Company (as defined) upon the death, permanent and total disability (as defined)
or retirement of an optionee on or after attaining age 65, any options granted
under the Management Plan to the optionee may be exercised in full.
If an optionee's employment terminates for any reason other than for
cause or his permanent and total disability, death or retirement, any
outstanding options will terminate 30 days after the optionee's employment
terminates. If the optionee's employment is terminated for cause, all
outstanding options will terminate on the date his employment terminates. If an
optionee's employment terminates due to permanent and total disability, death,
or retirement any outstanding options remain exercisable for 90 days after
termination of employment. If an optionee's employment terminates within 30 days
after a change in control of the Company, any outstanding ISOs will terminate
within such respective 30-day period. If an optionee's employment terminates
within one year after a change in control, any outstanding NSOs will terminate
within such respective one-year period. In no event will an option expire later
than the date specified under its terms.
The Management Plan will expire on December 31, 2009; after that date,
no options will be granted under the Management Plan. However, options granted
prior to that date will remain in effect in accordance with their terms.
Options Grants in Last Fiscal Year
The following table provides details regarding stock options granted to
Messrs. Bradford, Dyott, and Walters during the fiscal year ended December 31,
1999. Mr. Conville also received an option grant of 100,000 shares which were
forfeited upon his resignation as President and Chief Executive Officer in 1999.
In accordance with the rules of the Securities and Exchange Commission, there
are shown the hypothetical gains or "options spreads" that would exist for
respective options. These gains are based on assumed rates of annual compound
stock price appreciation of five percent (5%) and ten percent (10%) from the
date the options were granted over the full option term. Gains are reported net
of the option exercise price, but before any effect of taxes. In assessing these
values, it should be kept in mind that no matter what value is placed on a stock
option on the date of grant, its ultimate value will be dependent on the market
value of the Company's stock at a future date, and that value would depend on
the efforts of such executive to foster the future success of the Company for
the benefit of all shareholders. The amounts reflected in the table may not
necessarily be achieved.
43
<PAGE>
Individual Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Potential Realizable
Number of Total Market Value at Assumed Rated
Shares Options Excercise Price on of Stock Price
Underlying Granted to or Base Date of Appreciation for Option
Options Employees in Price Grant Expiration Term
Name Granted Fiscal Year (%) ($/Share) ($/Share) Date 5% ($) 10%($)
-------------------- ------------- --------------- ----------- ------------ -------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark D. Bradford 20,000 12.5% $13.25 $13.25 March 2009 $166,600 $422,400
Mark D. Bradford 5,000 (1) $11.00 $11.00 June 2009 $ 34,600 $ 87,650
Gordon M. Dyott 20,000 12.5% $13.25 $13.25 March 2009 $166,600 $422,400
R. Scott Walters 10,000 6.25% $13.25 $13.25 March 2009 $ 83,300 $211,200
</TABLE>
(1) These options were granted to Mr. Bradford in his capacity as a Director of
the Company under the 1999 Directors Stock Option Plan.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values
Neither Messrs. Bradford, Dyott, nor Walters exercised any options
during the last fiscal year. For purposes of this paragraph, the year-end price
of the stock was assumed to be $10.0625, which is the value of the last trade in
1999 of which management is aware. Because there is not an established trading
market for the Common Stock, the assumed price of $10.0625 may not reflect the
actual price which would be paid for shares of the Common Stock in an active or
established trading market and should not necessarily be relied upon when
determining the value of a shareholder's investment. Messrs. Bradford, Dyott,
and Walters have options for 25,000; 20,000; and 10,000 shares, respectively,
all of which are exercisable. However, the exercise price of the options held by
Messrs. Bradford (20,000 options exercisable at $13.25 and 5,000 options
exercisable at $11.00), and those held by Messrs. Dyott and Walters, which is
$13.25, exceeded the assumed year-end price of the stock of $10.0625.
Other Employee Benefit Plans
Thrift Plan.
-----------
The Company maintains a Thrift Plan in which substantially all
employees may participate. Under this plan, the Company contributes 100% of the
employee's contributions up to 3% and 50% of the next 2% of the employee's
contributions. The Company's expense for the Thrift Plan was $121,000 for the
fiscal year ended December 31, 1999.
44
<PAGE>
Employee Stock Ownership Plan.
-----------------------------
The Company maintains an Employee Stock Ownership Plan ("ESOP") in
which substantially all employees may participate. The ESOP invests primarily in
the stock of the Company. The amount of contributions by the Company to the
ESOP, when they are made, is determined by the Board of Directors of the
Company. Upon termination of employment, participants in the ESOP may require
the ESOP to repurchase shares allocated to their account for a limited period of
time. The Company's expense for the ESOP was $146,000 for the fiscal year ended
December 31, 1999.
Compensation of Directors
The Directors of the Company and the Bank, who are the same
individuals, are compensated for their services in the amount of $550 per board
meeting held, $550 for the organizational meeting of the Board held in March.
All Directors, other than inside Directors, also receive a fee of $200 for each
committee meeting attended. As Chairman of the Board of Directors, Mr. Baer
receives an annual fee of $20,000 and does not receive any additional
compensation for meetings attended. Directors may defer receipt of fees into a
grantor trust established by the Company. Amounts which are deferred are
invested in various mutual funds at the participant's direction. Each Director
also received a ten-year option for 5,000 shares of the Company's common stock
exercisable at $13.25 per share during 1999. Mr. Bradford received a ten-year
option for 5,000 shares of the Company's common stock exercisable at $11.00 per
share, which was the fair market value of the stock at the time he became a
Director (June 1999). Directors are also eligible to receive further grants of
options. See "1999 Directors' Stock Option Plan" discussed above.
Item 7. Certain Relationships and Related Transactions.
--------------------------------------------------------
The Company's officers and directors, as well as firms and companies
with which they are associated, have and will have banking transactions with the
Bank. It is the policy of the Bank that any credit extended to such persons,
firms and companies will be extended only in the ordinary course of business and
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons, and
will not involve more than the normal risk of collectibility or present other
unfavorable features.
Item 8. Legal Proceedings.
---------------------------
There are no material pending legal proceedings of a material nature to
which the Company or the Bank is a party or of which any of its property is
subject, other than routine litigation incidental to the normal business of the
Company and the Bank. There are also no material pending legal proceedings in
which a director, executive officer, principal shareholder or affiliate of the
Company, or any associate of any such director, executive officer, principal
shareholder or affiliate, is a party and has an interest adverse to the Bank.
None of the ordinary routine litigation in which the Company or the bank is
involved is expected to have a material adverse impact upon the financial
condition or results of operations of the Company.
45
<PAGE>
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
----------------------------------------------------------------------------
The common stock of the Company is traded on the OTC Bulletin Board
under the trading symbol of MROE (Cusip No. 6103-13-108). At the close of
business on September 30, 2000 there were 6,150,240 shares outstanding held by
353 shareholders of record.
Management does not have knowledge of the prices paid in all
transactions and has not verified the accuracy of those prices that have been
reported. Because of the lack of an established market for the Common Shares of
the Company, these prices would not necessarily reflect the prices which the
Shares would trade in an active market. The following table sets forth, for the
periods indicated, the high and low bid prices per share of which management is
aware. The bid prices represent prices between dealers, do not include retail
mark-up, mark-down, or commissions and may not represent actual transactions.
Price Per Share
High Low Dividend Declared
---------- ---------- ---------------------
2000
First Quarter $10.50 $9.00 $ .10
Second Quarter 10.62 8.27 .10
Third Quarter 10.25 8.75 .10
1999
First Quarter $15.29 $13.50 $ .08
Second Quarter 14.06 10.13 .08
Third Quarter 12.38 9.75 .08
Fourth Quarter 10.50 10.00 .10
1998
First Quarter $11.75 $11.13 $ .08
Second Quarter 12.88 10.45 .08
Third Quarter 12.75 12.50 .08
Fourth Quarter 13.25 12.63 .08
46
<PAGE>
Item 10. Recent sales of Unregistered Securities.
--------------------------------------------------
Not applicable.
Item 11. Description of Registrant's Securities to Be Registered.
------------------------------------------------------------------
General. The Company is authorized by its Articles of Incorporation to
issue an aggregate of 18,000,000 Shares. No other class of capital stock is
authorized. At September 30, 2000 approximately 6,150,240 Shares were issued and
outstanding. The following is a summary of certain of the rights and privileges
pertaining to the Shares.
Voting Rights. The holders of the Shares are entitled to one vote per
share on all matters submitted to a vote of the stockholders. There is no
provision for cumulative voting with respect to the election of directors.
Accordingly, the holders of more than 50% of the outstanding Shares, if they
choose to do so, can elect all of the directors.
Dividend Rights. All Shares are entitled to share equally in such
dividends as the Board of Directors may declare. The Company will be largely
dependent upon dividends from the Bank for funds to pay dividends on the Shares,
and dividends payable by the Bank are limited by law and by the need to maintain
adequate capital in the Bank.
Liquidation Rights. Upon liquidation or dissolution of the Company,
whether voluntary or involuntary, all Shares are entitled to share equally in
the assets available for distribution to common stockholders after payment of
all prior obligations of the Company.
Staggered Board of Directors. The Company's Articles of Incorporation
provide for a classified or staggered Board of Directors, which has the effect
of dividing the Board into three classes, each with approximately one-third of
the total directors, with terms of office expiring at different times. One class
of Directors is elected for a term of three years at each annual meeting of
shareholders. The Board believes that this provides greater continuity in
management policies because two-thirds of the Directors will have served on the
board for at least one year. The staggered board can protect the interests of
the deposit and loan customers of the Company by assuring that policy and
procedures do not abruptly change. In addition, an individual or entity
attempting to obtain control of the voting procedures of the Company would need
two elections before it could elect a majority of the Directors and thereby
effect any change in policy. This provision is designed to ensure that upon any
significant shift in share ownership of the Company, which is accompanied by an
attempt to "take over" the Company upon the terms the Board might deem not to be
in the best interests of all the shareholders, the entire Board could not be
replaced in one year. As a result, the staggered board may have the effect of
"repelling" suitors who are impatient to control operations of the Company.
"Supermajority" Vote Provisions. Indiana law generally requires the
approval of a majority of the board of directors and the approval of the holders
of a majority of the outstanding shares of an Indiana company to merge with
another corporation. The Company's Articles of Incorporation include what is
commonly called a "supermajority vote provision." This provision provides that
all proposed business combinations of the Company require the affirmative vote
of a majority of the outstanding common stock of the Corporation, subject to two
exceptions. First, if the proposed transaction was not approved by at least 80%
of the entire Board of Directors, the proposed transaction will require the
47
<PAGE>
approval of at least 70% of the shares entitled to vote on the proposed
transaction in order to be approved. Second, if (i) the proposed transaction is
proposed by an individual or entity which holds 15% or more of the then
outstanding common stock of the Company, and (ii) the proposal does not offer
all shareholders an amount for their shares which is at least equal to the
highest percent over market value paid by such person for the shares held at the
date of the proposal, then the proposed transaction also will require the
approval of at least 70% of the shares entitled to vote on the proposed
transaction in order to be approved. This provision may discourage a tender
offer for control because it may require a potential acquirer to purchase much
more than a simple majority of the outstanding shares in order to guarantee a
later business combination.
Indiana Law. Under the Indiana Business Corporations Law, several
provisions could affect the acquisition of the Common Stock or of control of the
Company. The Business Combinations Chapter of the Indiana Business Corporations
Law prohibits certain business combinations, including mergers, sales of assets,
recapitalizations and reverse stock splits, between certain Indiana corporations
and a 10% or greater shareholder for five years following the date on which the
shareholder obtained a 10% or greater ownership interest, unless the acquisition
was approved in advance of that date by the Board of Directors. In addition, if
prior approval is not obtained, the Company and such shareholder may not
consummate a business combination unless a majority of disinterested
shareholders approve the transaction or all shareholders receive a price per
share determined in accordance with the Business Combinations Chapter. The
statue only applies to a company if it has elected to be governed by the statute
in its articles of incorporation or if the company has a class of voting
securities registered under the Securities Exchange Act of 1934. Because the
Company Common Stock is being registered under the Securities Exchange Act of
1934, the Company will be subject to this statute.
In addition to the Business Combinations Chapter, the Indiana Business
Corporations Law also contains a Control Share Acquisition Chapter which,
although different in structure from the Business Combinations Chapter, may have
a similar effect of discouraging or making more difficult a hostile takeover of
an Indiana corporation. This provision, however, may also have the effect of
discouraging premium bids for outstanding shares. The Control Share Acquisition
Chapter provides that, unless otherwise provided in a corporation's articles of
incorporation or by-laws, shares acquired in certain acquisitions of the
corporation's stock will be accorded voting rights only if a majority of the
disinterested shareholders approves a resolution granting the potential acquirer
the ability to vote such shares. An Indiana corporation is subject to the
Control Share Acquisition Chapter if it has 100 or more shareholders and its
principal place of business is in Indiana. The Company is subject to the Control
Share Acquisition Chapter.
The Indiana Business Corporations Law specifically authorizes
directors, in considering the best interests of a corporation, to consider the
effects of any action on shareholders, employees, suppliers and customers of the
corporation on the communities in which offices or other facilities of the
corporation are located and any other factors the directors consider pertinent.
Directors are not required to approve a proposed business combination or other
corporate action if the directors determine in good faith, after considering and
weighing as they deem appropriate the effects of such action on the
corporation's constituents, that such approval is not in the best interest of
the corporation. In making these determinations, directors are not required to
consider the effects of a proposed corporation action on any particular
corporate constituent group or interest (including the amounts that might be
paid to shareholders) as a dominant or controlling factor. The Indiana Business
Corporations Law explicitly provides that the different or higher degree of
scrutiny imposed in Delaware and certain other jurisdictions upon director
actions taken in response to potential changes in control will not apply.
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the Indiana Business Corporations
48
<PAGE>
Law to consider both the short-term and long-term interests of the corporation
as well as interests of other constituencies and other relevant factors. Any
determination made with respect to the foregoing by a majority of disinterested
directors shall conclusively be presumed to be valid unless it can be
demonstrated that such determination was not made in good faith.
Because of the above provisions, the Board will have flexibility in
responding to unsolicited proposals to acquire the Company, and, accordingly, it
may be more difficult for an acquirer to gain control of the Company in a
transaction not approved by the Board.
Indiana law also imposes restrictions in connection with shareholder
derivative proceedings. The Indiana Business Corporations Law provides that if a
shareholder of a corporation files a derivative complaint, the corporation's
board of directors may establish a committee of disinterested directors or other
disinterested persons to investigate the complaint. The Indiana Business
Corporations Law authorizes a stay of any court proceedings on the complaint
until the investigation of such committee is completed. If the committee
determines that pursuit of the claim through the derivative proceeding would not
be in the best interests of the corporation, then the committee can terminate
the derivative proceeding. The conclusion of the committee is determinative
unless the shareholder who filed the complaint can demonstrate that the
committee was not disinterested or did not act in good faith.
Change in Bank Control. It is unlawful for a person to offer to buy
shares of the Common Stock, without the prior approval of the Federal Reserve
Board, if the purchase of such shares would give the purchaser control of the
Company. Control is defined to mean the direct or indirect power (1) to vote 25%
or more of the outstanding shares, or (2) to direct or cause the direction of
the management and policies of the Company, whether through ownership of voting
securities, by contract or otherwise; provided that no individual will be deemed
to control the Company solely on account of being a director, officer or
employee of the Company. Persons who directly or indirectly own or control 10%
or more of a company's outstanding shares will be presumed to control the
Company.
Other Matters. The holders of the Shares have no preemptive or
redemption rights or any preferred right to purchase or subscribe for any
authorized but unissued capital stock or any securities of the Company
convertible into Common Stock. The outstanding Shares are fully paid and
non-assessable.
Item 12. Indemnification of Directors and Officers.
----------------------------------------------------
The Company's Articles of Incorporation provide that the Company will
indemnify any person who is or was a director or officer of the Company or of
any other Company for which such director or officer is or was serving in any
capacity at the request of the Company against all liability and expense that
may be incurred in connection with any claim, action, suit or proceeding as set
forth in summary herein. A director or officer of the Company is entitled to be
indemnified as a matter of right with respect to those claims, actions, suits or
proceedings in which such director or officer has been wholly successful. In all
other cases, such director or officer shall be entitled to indemnification as a
matter of right unless (i) the director or officer has breached or failed to
perform the person's duties in good faith in a manner such director or officer
reasonably believed to be in, or not opposed to, the best interests of the
Company or such other Company and, with respect to any criminal action or
proceeding, in a manner in which the director or officer had no reasonable cause
to believe was unlawful, and (ii) such breach of failure to perform constituted
willful misconduct or recklessness as determined by the Board of Directors of
the Company, a committee of the Board of Directors, independent legal counsel,
or a committee of disinterested persons selected by the Board of Directors. The
foregoing is a summary of detailed provisions for indemnification found at
Article IX, Section 9 of the Articles of Incorporation of the Company which are
incorporated by reference into this Registration Statement as Exhibit 3.1.
49
<PAGE>
Item 13. Financial Statements and Supplementary Data.
------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Monroe Bancorp
Bloomington, Indiana
We have audited the accompanying consolidated balance sheets of Monroe Bancorp
and Subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as 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 and
Subsidiary as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
Crowe Chizek and Company LLP
Indianapolis, Indiana
January 19, 2000
50
<PAGE>
Consolidated Balance Sheets
Monroe Bancorp and Subsidiary
December 31, 1999 and 1998
($ in thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents........................................ $17,404 $35,430
Available-for-sale securities.................................... 20,119 14,190
Held-to-maturity securities
(fair value of $84,044 and $70,149).......................... 85,771 69,119
Trading securities............................................... 3,347 --
Loans, net of allowance ($3,343 and $3,562)...................... 270,551 240,941
FHLB stock, at cost.............................................. 1,183 1,171
Premises and equipment........................................... 10,362 7,109
Accrued interest receivable and other assets..................... 7,912 7,458
---------- ----------
Total assets............................................. $416,649 $375,418
========== ==========
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing deposits................................. $48,201 $51,613
Interest-bearing deposits.................................... 264,949 253,445
---------- ----------
Total deposits........................................... 313,150 305,058
Short-term borrowings............................................ 46,964 22,967
Long-term debt................................................... 16,188 9,976
Accrued interest payable and other liabilities................... 5,903 5,279
---------- ----------
Total liabilities........................................ 382,205 343,280
---------- ----------
Shareholders' equity
Common stock, no par value, 18,000,000 shares
authorized and 6,150,240 outstanding..................... 137 137
Additional paid-in capital................................... 3,343 3,322
Retained earnings............................................ 31,511 28,869
Accumulated other comprehensive income....................... (369) 77
Unearned ESOT shares......................................... (178) (267)
---------- ----------
Total shareholders' equity............................... 34,444 32,138
---------- ----------
Total liabilities and shareholders' equity............... $416,649 $375,418
========== ==========
</TABLE>
See accompanying notes.
51
<PAGE>
Consolidated Statements of Income
Monroe Bancorp and Subsidiary
Years ended December 31, 1999, 1998, and 1997
($ in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans, including related fees................................ $21,822 $21,634 $20,520
Securities:
Taxable.................................................. 3,451 2,422 1,969
Tax-exempt............................................... 1,647 1,369 1,207
Trading.................................................. 77 -- --
Federal funds sold........................................... 422 576 453
--------- --------- ---------
Total interest income................................. 27,419 26,001 24,149
--------- --------- ---------
Interest expense:
Deposits..................................................... 10,776 10,819 10,426
Short-term borrowings........................................ 1,300 698 317
Long-term debt............................................... 574 383 150
--------- --------- ---------
Total interest expense................................ 12,650 11,900 10,893
--------- --------- ---------
Net interest income................................... 14,769 14,101 13,256
Provision for loan losses........................................ 585 480 450
--------- --------- ---------
Net interest income after provision
for loan losses................................... 14,184 13,621 12,806
--------- --------- ---------
Other income:
Service charges on deposit accounts.......................... 1,354 1,130 977
Trust department income...................................... 590 490 388
Securities gains............................................. 481 -- --
Gain on sale of loans........................................ 394 646 285
Other........................................................ 1,033 813 625
--------- --------- ---------
Total other income.................................... 3,852 3,079 2,275
--------- --------- ---------
Other expenses:
Salaries and employee benefits............................... 6,236 5,829 5,035
Director fees................................................ 121 80 91
Appreciation on directors' deferred compensation plan........ 557 406 245
Occupancy and equipment...................................... 1,744 1,403 1,331
Advertising.................................................. 552 386 291
Other........................................................ 1,842 1,579 1,423
--------- --------- ---------
Total other expenses.................................. 11,052 9,683 8,416
--------- --------- ---------
Total before income taxes............................. 6,984 7,017 6,665
Income taxes..................................................... 2,261 2,372 2,281
--------- --------- ---------
Net income............................................ $4,723 $4,645 $4,384
========= ========= =========
Earnings per share............................................... $ .77 $ 76 $ 72
========= ========= =========
</TABLE>
See accompanying notes.
52
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
Monroe Bancorp and Subsidiary
Years ended December 31, 1999, 1998, and 1997
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Unearned
Accumulated Employee
Additional Other Stock Total
Common Paid-In Retained Comprehensive Ownership Shareholders'
Stock Capital Earnings Income Trust Shares Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997................. $137 $3,280 $23,442 $(2) $(445) $26,412
Comprehensive income:
Net income............................ 4,384 4,384
Change in net unrealized gain (loss).. 35 35
Total comprehensive income........ 4,419
ESOT shares earned......................... 11 89 100
Cash dividends paid ($ .27 per share)...... (1,647) (1,647)
----------- ------------- ------------ ------------- ------------ -------------
Balance at December 31, 1997............... 137 3,291 26,179 33 (356) 29,284
Comprehensive income:
Net income............................ 4,645 4,645
Change in net unrealized gain (loss).. 44 44
Total comprehensive income........ 4,689
ESOT shares earned......................... 31 89 120
Cash dividends paid ($ .32 per share)...... (1,955) (1,955)
----------- ------------- ------------ ------------- ------------ -------------
Balance at December 31, 1998............... 137 3,322 28,869 77 (267) 32,138
Comprehensive income:
Net income............................ 4,723 4,723
Change in net unrealized gain (loss).. (446) (446)
Total comprehensive income........ 4,277
ESOT shares earned......................... 21 89 110
Cash dividends paid ($ .34 per share)...... (2,081) (2,081)
----------- ------------- ------------ ------------- ------------ -------------
Balance at December 31, 1999............... $137 $3,343 $31,511 $(369) $(178) $34,444
=========== ============= ============ ============= ============ =============
</TABLE>
See accompanying notes.
53
<PAGE>
Consolidated Statements of Cash Flows
Monroe Bancorp and Subsidiary
Years ended December 31, 1999, 1998, and 1997
($ in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $4,723 $4,645 $4,384
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization......................... 548 471 555
Provision for loan losses............................. 585 480 450
Gain on sale of securities............................ (2) -- --
Net purchase of trading securities.................... (2,919) -- --
Net unrealized gain on trading securities............. (428) -- --
Net amortization on securities........................ 354 352 407
ESOT shares earned.................................... 110 120 100
Net change in:
Interest receivable and other assets..................... (231) (1,568) (505)
Accrued expenses and other liabilities................... 624 1,037 770
--------- --------- ---------
Net cash provided by operating activities............. 3,364 5,537 6,161
--------- --------- ---------
Cash flows from investing activities:
Proceeds from calls and maturities of:
Held-to-maturity securities.............................. 13,337 10,249 9,353
Available-for-sale securities............................ 1,100 3,862 2,565
Proceeds from sales of available-for-sale securitites........ 28 -- --
Purchase of held-to-maturity securities...................... (30,300) (28,783) (9,337)
Purchase of available-for-sale securities.................... (7,843) (6,550) (5,458)
Net change in loans made to customers........................ (30,195) (11,348) (24,256)
Purchase of FHLB stock....................................... (12) (138) (1,033)
Purchase of bank premises and equipment, net................. (3,725) (1,893) (1,782)
--------- --------- ---------
Net cash used in investing activities................. (57,610) (34,601) (29,948)
--------- --------- ---------
Cash flows from financing activities:
Net change in deposits....................................... 8,092 28,920 19,393
Net change in short-term borrowings.......................... 23,997 14,249 2,363
Dividends paid............................................... (2,081) (1,955) (1,647)
Proceeds from long-term debt................................. 9,000 5,500 5,400
Repayment of long-term debt.................................. (2,788) (1,016) (15)
--------- --------- ---------
Net cash provided by financing activities............. 36,220 45,698 25,494
--------- --------- ---------
Net change in cash and cash equivalents.......................... (18,026) 16,634 1,707
Cash and cash equivalents at beginning of year................... 35,430 18,796 17,089
--------- --------- ---------
Cash and cash equivalents at end of year......................... $17,404 $35,430 $18,796
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................. $12,825 $11,706 $10,790
Income taxes............................................. 2,261 2,655 2,490
</TABLE>
See accompanying notes.
54
<PAGE>
Notes to Consolidated Financial Statements
1. Significant Accounting Policies:
Description of Business
The consolidated financial statements include the accounts of Monroe Bancorp
(the Company) and its wholly owned subsidiary, Monroe County Bank (the Bank),
after elimination of all significant intercompany transactions and accounts.
The Company offers commercial and retail banking products and provides trust and
investment services to its customers from locations in Monroe, Jackson and
Lawrence counties in Indiana. The majority of the Company's revenue is derived
from commercial and real estate lending activities and substantially all loans
are collateralized by specific business or consumer assets.
Use of Estimates
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and the fair value of financial
instruments are particularly subject to change.
Securities
Securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when they might be sold before
maturity. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported in other comprehensive income.
Other securities such as Federal Home Loan Bank stock are carried at cost.
Trading securities, related to a deferred compensation plan, are carried at fair
value with unrealized holding gains and losses included in income.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are substantially past due. Payments received on such loans
are reported as principal reductions.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans, and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate, or at the fair value of
collateral if repayment is expected solely from the collateral.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
55
<PAGE>
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using primarily the straight-line method over the
estimated useful lives of the assets.
Long-term Assets
These assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at discounted amounts.
Repurchase Agreements
Substantially all repurchase agreement liabilities represent amounts advanced by
various customers. Securities are pledged to cover these liabilities, which
are not covered by federal deposit insurance.
Employee Stock Ownership Trust (ESOT)
The cost of shares issued to the ESOT, but not yet allocated to participants, is
shown as a reduction of shareholders' equity. Compensation expense is based on
the market price of shares as they are committed to be released to participant
accounts. Dividends on allocated ESOT shares reduce retained earnings; dividends
on unearned ESOT shares are recorded as compensation expense.
Income Taxes
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Financial Instruments
Financial instruments include credit instruments, such as commitments to make
loans and standby letters of credit, issued to meet customer financing needs.
The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay.
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully described below. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The fair value
estimates of existing on-and off-balance sheet financial instruments do not
include the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
Estimated fair value for securities is based on quoted market values for the
individual securities or for equivalent securities. Estimated fair value for
loans is based on the rates charged at year end for new loans with similar
maturities, applied until the loan is assumed to reprice or be paid. Estimated
fair value for time deposits is based on the rates paid at year end for new
deposits or borrowings, applied until maturity. Estimated fair values for cash
and cash equivalents, accrued interest, and repurchase agreements approximate
their carrying values. Estimated fair value for off-balance-sheet loan
commitments is considered nominal.
Earnings Per Share
Earnings per share is net income divided by the weighted average number of
common shares outstanding during the period. ESOT shares are considered
outstanding for this calculation unless unearned. Diluted earnings per share
further consider the dilutive effect of additional potential shares issuable
under the Company's stock option plan. Options granted during 1999 are
nondilutive and are not considered for 1999 earnings per share computations.
Earnings and dividends per share are restated for all stock splits and dividends
through the date of issue of the financial statements.
Cash Flows
Cash and cash equivalents include cash, amounts due from banks, and federal
funds sold. The Company reports net cash flows for customer loan and deposit
transactions and short-term borrowings.
56
<PAGE>
Industry Segment
Internal financial information is reported and aggregated in one line of
business, banking.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which is also recognized as a separate component of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the bank to the holding company or by the holding company to
shareholders.
2. Securities:
Year-end securities are as follows:
($ in thousands)
<TABLE>
<CAPTION>
Gross Gross
Available-for-sale securities Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies.... $17,610 $2 $(529) $17,083
States and political subdivisions 2,641 4 (11) 2,634
Equity securities................ 483 5 (86) 402
-------- ------- -------- --------
Totals................... $20,734 $11 $(626) $20,119
======== ======= ======== ========
1998
U.S. Treasury and U.S. Government
corporations and agencies.... $11,301 $126 $(57) $11,370
States and political subdivisions 2,760 60 -- 2,820
-------- ------- -------- --------
Totals................... $14,061 $186 $(57) $14,190
======== ======= ======== ========
Held-to-maturity securities
1999
U.S. Treasury and U.S. Government
corporations and agencies.... $48,001 $28 $(1,141) $46,888
States and political subdivisions 35,879 15 (623) 35,271
Mortgage-backed securities....... 1,891 -- (6) 1,885
-------- ------- -------- --------
Totals................... $85,771 $43 $(1,770) $84,044
======== ======= ======== ========
1998
U.S. Treasury and U.S. Government
corporations and agencies.... $31,498 $521 $-- $32,019
States and political subdivisions 34,694 507 (10) 35,191
Mortgage-backed securities....... 2,927 12 -- 2,939
-------- ------- -------- --------
Totals................... $69,119 $1,040 $(10) $70,149
======== ======= ======== ========
</TABLE>
57
<PAGE>
The amortized cost and fair value of securities at December 31, 1999, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
($ in thousands)
Available for Sale Held to Maturity
------------------------ -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Due in one year or less...... $ 1,735 $ 1,736 $10,891 $10,895
Due after one year
through five years..... 16,579 16,085 66,571 65,115
Due after five years
through ten years...... 1,937 1,896 6,418 6,149
Equity securities............ 483 402 -- --
Mortgage-backed securities... -- -- 1,891 1,885
-------- -------- -------- --------
$20,734 $20,119 $85,771 $84,044
======== ======== ======== ========
</TABLE>
Trading securities consist of investments in various mutual funds held in
grantor trusts formed by the Company related to the directors deferred
compensation plan. These investments are carried at fair value and, at year end
1999, include gross unrealized gains of $428,000.
Sales of available-for-sale securities during 1999 generated gross gains of
$2,000. There were no sales of securities in 1998 or 1997.
Securities gains reflected on the income statement include the unrealized gain
on trading securities, the gain on sale of available-for-sale securities and
$51,000 of capital gain distributions from the mutual funds referred to above.
Securities with an approximate carrying value of $62,305,000 and $36,756,000 at
December 31, 1999 and 1998, respectively, were pledged for public deposits and
repurchase agreements.
58
<PAGE>
3. Loans and Allowance for Loan Losses:
Loans at December 31 were as follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
--------- ---------
<S> <C> <C>
Commercial, financial, and agricultural..... $58,960 $50,920
Mortgage loans secured by:
1-4 family residences................... 83,367 76,731
Multi-family residences................. 34,079 33,807
Other properties........................ 70,961 60,330
Consumer, net............................... 26,527 22,715
--------- ---------
273,894 244,503
Allowance for loan losses................... (3,343) (3,562)
--------- ---------
$270,551 $240,941
========= =========
Information regarding impaired loans is as follows:
($ in thousands)
1999 1998
--------- ---------
Year-end loans with no allocated allowance
for loan losses......................... $451 $402
Year-end loans with allocated allowance
for loan losses......................... 674 1,847
--------- ---------
Total............................... $1,125 $2,249
========= =========
Amount of the allowance for loan losses allocated $209 $714
========= =========
Loans past due over 90 days still on accrual $849 $1,363
Average of impaired loans during the year... 1,103 1,287
Interest income recognized during impairment 154 103
Cash-basis interest income recognized....... 134 102
Activity in the allowance for loan losses is as follows:
($ in thousands)
1999 1998
--------- ---------
Balance at beginning of year................ $3,562 $3,341
Charge-offs................................. (860) (327)
Recoveries ................................. 56 68
Provision for loan losses................... 585 480
--------- ---------
Balance at end of year.......... $3,343 $3,562
========= =========
</TABLE>
The Bank, in the normal course of business, makes loans to directors, officers
and organizations and individuals with which they are associated. The aggregate
dollar amount of these loans, related to directors and officers who held
office at the end of the year, amounted to $5,705,000 at January 1, 1999. During
1999, advances of $24,792,000 and repayments of $23,425,000 were made for an
aggregate dollar amount of $7,072,000 outstanding at year end 1999.
59
<PAGE>
4. Premises and Equipment:
Year-end premises and equipment are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
---------- ----------
<S> <C> <C>
Land........................................ $1,714 $1,749
Buildings and improvements.................. 8,910 6,303
Furniture and equipment..................... 4,956 4,303
--------- ---------
15,580 12,355
Less accumulated depreciation...... (5,218) (5,246)
--------- ---------
$10,362 $7,109
========= =========
</TABLE>
5. Deposits:
Deposits at December 31 were as follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
--------- ---------
<S> <C> <C>
Noninterest-bearing checking................ $48,201 $51,613
NOW and money market........................ 100,032 85,700
Savings..................................... 19,307 20,356
Certificates of deposit of $100 or more..... 40,094 41,118
Other time.................................. 105,516 106,271
--------- ---------
$313,150 $305,058
========= =========
</TABLE>
At December 31, 1999, the scheduled maturities of time deposits are as follows:
($ in thousands)
2000........................................ $107,807
2001........................................ 27,160
2002........................................ 4,612
2003........................................ 3,464
2004........................................ 1,741
Thereafter.................................. 826
---------
$145,610
=========
60
<PAGE>
6. Short-Term Borrowings:
Short-term borrowings at year end 1999 consist of $17,800,000 of federal funds
purchased and $29,164,000 of repurchase agreements. Short-term borrowings at
year end 1998 consist solely of repurchase agreements.
Information concerning repurchase agreements is as follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
---------- ----------
<S> <C> <C>
Average balance during the year............. $28,999 $15,776
Average interest rate during the year....... 4.3% 4.4%
Maximum month-end balance during the year... $34,078 $24,311
Average interest rate at year end........... 3.8% 4.0%
</TABLE>
7. Long-Term Debt:
Year-end long-term debt consists of the following:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
---------- ----------
<S> <C> <C>
Mortgage loan............................... $59 $76
Federal Home Loan Bank (FHLB) advances...... 16,129 9,900
-------- --------
$16,188 $9,976
======== ========
</TABLE>
The mortgage loan matures in 2002, is secured by real estate, bears interest at
9% and requires monthly payments of $2,027.
The FHLB advances are secured by a blanket pledge of the Bank's mortgage loans,
bear interest at the weighted average rate of 5.9% and require monthly interest
payments. For certain advances, principal is due, in full, at maturity, while
others require annual principal payments. The following table presents
required principal payments on the FHLB advances:
($ in thousands)
2000........................................ $9,624
2001........................................ 347
2002........................................ 142
2003........................................ 655
2004........................................ 1,757
Thereafter.................................. 3,604
--------
$16,129
========
61
<PAGE>
8. Income Taxes:
Income tax expense was as follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable........................... $2,167 $2,661 $2,528
Deferred (benefit) liability................ 94 (289) (247)
-------- ------- -------
Income tax expense............... $2,261 $2,372 $2,281
</TABLE>
Income tax expense differs from the amount computed by applying the statutory
federal income tax rate of 34% to income before income taxes as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate applied to income
before income taxes..................... $2,375 $2,386 $2,266
Effect of:
Tax-exempt interest..................... (470) (399) (351)
State tax, net of federal income tax benefit 354 382 362
Other................................... 2 3 4
------- ------- -------
Income tax expense................ $2,261 $2,372 $2,281
======= ======= =======
</TABLE>
Year-end deferred tax assets and liabilities were due to the following factors:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets from:
Loan loss provision..................... $1,094 $1,181
Deferred compensation................... 1,494 1,175
Net unrealized losses on available-
for-sale securities................. 246 --
Deferred loan fees...................... -- 8
Accrued health insurance................ 34 33
Accrued vacation........................ 19 19
Other................................... 32 33
------- -------
2,919 2,449
------- -------
Deferred tax liabilities for:
Depreciation............................ (204) (83)
Unrealized gains-trading account........ (169) --
Net unrealized gains on available-
for-sale securities................. -- (52)
Deferred loan fees...................... (15) --
Other................................... (25) (12)
------- -------
(413) (147)
------- -------
Valuation allowance for deferred tax assets. -- --
------- -------
Net..................................... $2,506 $2,302
======= =======
</TABLE>
62
<PAGE>
9. Benefit Plans:
The Bank maintains an Employee Stock Ownership Plan and related ESOT that covers
substantially all full-time employees and invests primarily in Company stock.
The ESOT borrowed funds from the Company which were used to acquire 50,000
shares of the Company's stock. The loan requires annual principal payments,
which began in 1997, of $89,000, and matures in 2001. As the debt is repaid,
shares are released and allocated to participants' accounts based on their
level of compensation during the year. The difference between the cost of shares
earned and their fair value is reflected as an increase in additional paid-in
capital. Dividends paid on allocated shares reduce retained earnings. Dividends
paid on unreleased shares are allocated to participants' accounts and recorded
as compensation expense. ESOT expense includes the fair value of shares earned
and discretionary cash contributions. Upon termination of employment, ESOT
participants have the opportunity to require the ESOT to repurchase their shares
for a limited period of time.
Information about ESOT shares and expense for 1999, 1998, and 1997 is as
follows:
<TABLE>
<CAPTION>
($ in thousands)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Shares allocated to participants'
accounts............................ 300,977 357,573 365,854
Shares earned during the year and released
for allocation...................... 10,000 10,000 10,000
Unreleased shares....................... 20,000 30,000 40,000
Fair value of unreleased shares......... $205 $413 $430
Shares subject to repurchase obligation. 118,892 135,330 24,879
Fair value of shares subject to
repurchase.......................... $1,248 $1,861 $267
Total ESOT expense...................... $146 $155 $129
</TABLE>
The Company also has a Thrift Plan which allows for pretax employee
contributions and a matching contribution of 100% of the employees' contribution
up to 3% and one-half of the next 2% of employees' contributions. Expense
related to the plan was $121,000, $110,000 and $104,000 for 1999, 1998, and 1997
respectively.
The Bank maintains a deferred compensation plan that enables directors to elect
to defer receipt of directors' fees and certain members of management to defer
compensation. Through June 30, 1998, the amount earned by participants on
amounts deferred was tied to the change in the market value of the Company's
stock. Effective July 1, 1998, the plan was revised and the return to
participants tied to the three-year U.S. Treasury rate.
Effective January 1, 1999, the Company established grantor trusts which were
funded with an amount equal to the accrued liability, $2,526,000, under the
plan. Those funds, as well as 1999 elective deferrals, are invested in various
mutual funds, at the participants' direction. The amount payable under the plan
is tied to the performance of the funds. The change in fair value of the mutual
funds is recognized as trading gain or loss and an offsetting expense or benefit
is recognized as directors' compensation.
63
<PAGE>
Options to buy stock are granted to certain directors and officers under the
1999 Stock Option Plan, approved by shareholders on March 11, 1999, which
provided for issue of up to 580,000 shares. Exercise price is to be at least
equal to the market price at date of grant. The maximum option term is ten years
and the compensation committee establishes the terms of specific grants.
A summary of the activity in the plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average, per
Share, Exercise
Shares Price
---------- -----------------
<S> <C> <C>
Outstanding at beginning of year............ -- $ --
Granted..................................... 100,000 13.25
Exercised................................... -- --
Forfeited................................... -- --
-------- -------
Outstanding at end of year.................. 100,000 $13.25
======== =======
Options exercisable at year-end............. 60,000
========
Weighted-average fair value per share of options
granted during year..................... $1.11
========
</TABLE>
Options outstanding at year-end 1999 had an exercise price of $13.25 per share
and a remaining term of 9 years.
No expense was recorded as these options were granted at market price on the
date of grant. Had compensation cost for stock options been measured using the
fair value method, net income and earnings per share for 1999 would have been
$4,612,000 and $.75.
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
Risk-free interest rate..................... 4.56%
Expected option life........................ 5 years
Expected stock price volatility............. --
Dividend yield.............................. 2.57%
64
<PAGE>
10. Commitments, Off-Balance-Sheet Risks and Contingencies:
The Bank is required to maintain reserves consisting of noninterest-bearing
balances on deposit with the Federal Reserve Bank, or cash on hand. The required
reserve balance at December 31, 1999, was approximately $6,992,000.
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at year-end.
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
------------------------- ----------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Commitments to make loans
(at market rates)............ $-- $6,250 $-- $6,502
Unused lines of credit and
letters of credit............ -- 35,820 -- 32,414
</TABLE>
Commitments to make loans are generally made for periods of 90 days or less,
and, in many cases, allow the customer to select from one of several financing
options offered.
The Bank leases various branch, back-office and ATM locations. Lease expense was
$156,000, $56,000 and $69,000 in 1999, 1998 and 1997, respectively. Minimum
required payments for the next five years, 2000 through 2004, are $160,000,
$147,000, $138,000, $135,000 and $11,000.
65
<PAGE>
11. Capital Requirements:
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and additional discretionary action
by regulators that could have a direct material effect on the financial
statements. These guidelines and the regulatory framework for prompt corrective
action involve quantitative and qualitative measures of capital, assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. The prompt corrective action regulations establish five
classifications, ranging from well capitalized to critically undercapitalized,
and the Bank's designation under these regulations affects its deposit insurance
assessment rate and operations. Compliance with these regulations can limit
dividends paid by either entity.
At year end 1999 and 1998, the Bank and the Company met all applicable capital
requirements and the Bank was designated as "well capitalized." Actual and
minimum required capital levels at year end were as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(to Risk Weighted Assets)
Consolidated-1999..... $38,058 14.67% $20,759 8% NA NA
The Bank-1999......... $37,050 14.49% $20,452 8% $25,565 10%
Consolidated-1998..... $34,881 15.51% $17,988 8% NA NA
The Bank-1998......... $33,503 14.90% $17,988 8% $22,485 10%
Tier I risk-based capital
(to Risk Weighted Assets)
Consolidated-1999..... $34,813 13.41% $10,379 4% NA NA
The Bank-1999......... $33,853 13.24% $10,226 4% $15,339 6%
Consolidated-1998..... $32,061 14.26% $ 8,994 4% NA NA
The Bank-1998......... $30,683 13.65% $ 8,994 4% $13,491 6%
Tier I leverage capital
(to Average Assets)
Consolidated-1999..... $34,813 8.50% $16,378 4% NA NA
The Bank-1999......... $33,853 8.33% $16,248 4% $20,310 5%
Consolidated-1998..... $32,061 8.70% $14,738 4% NA NA
The Bank-1998......... $30,683 8.33% $14,738 4% $18,423 5%
</TABLE>
66
<PAGE>
12. Disclosures about Fair Value of Financial Instruments:
The following table shows fair values and the related carrying values of
financial instruments at year end. Items which are not financial instruments are
not included.
<TABLE>
<CAPTION>
($ in thousands)
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents... $17,404 $17,404 $35,430 $35,430
Available-for-sale securities 20,119 20,119 14,190 14,190
Held-to-maturity securities. 85,771 84,044 69,119 70,149
Trading securities.......... 3,347 3,347 -- --
Loans (net)................. 270,551 269,435 240,941 243,519
Accrued interest receivable. 3,619 3,619 3,105 3,105
Financial liabilities
Deposits.................... (313,150) (314,099) (305,058) (306,459)
Short-term borrowings....... (46,964) (46,964) (22,967) (22,967)
Long-term debt.............. (16,188) (15,679) (9,976) (10,017)
Accrued interest payable.... (1,028) (1,028) (1,203) (1,203)
</TABLE>
13. Earnings Per Share:
The number of shares used to compute basic and diluted earnings per share was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average shares outstanding.... 6,150,240 6,150,240 6,150,240
Average unearned ESOT shares........... (25,000) (35,000) (45,000)
---------- ---------- ----------
Shares used to compute basic and
diluted earnings per share.......... 6,125,240 6,115,240 6,105,240
========== ========== ==========
</TABLE>
67
<PAGE>
14. Parent Company Only Condensed Financial Information:
Condensed financial information of Monroe Bancorp follows:
Condensed Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents................ $328 $1,121
Available-for-sale securities............ 402 --
Trading securities....................... 3,347 --
ESOT note receivable..................... 178 267
Investment in bank subsidiary............ 33,534 30,760
-------- --------
Total assets......................... $37,789 $32,148
======== ========
Liabilities and Shareholders' Equity
Liabilities.......................... $3,345 $10
Shareholders' Equity..................... 34,444 32,138
-------- --------
Total liabilities and shareholders' equity $37,789 $32,148
======== ========
</TABLE>
Condensed Statements of Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dividends from banking subsidiary........ $1,630 $2,937 $1,531
Other income............................. 613 34 37
Other expense............................ (565) (7) (8)
------- ------- -------
Income before income tax
and undistributed income.......... 1,678 2,964 1,560
Income tax expense....................... (16) (9) (5)
Equity in undistributed income........... 3,061 1,690 2,829
------- ------- -------
Net income........................... $4,723 $4,645 $4,384
======= ======= =======
</TABLE>
68
<PAGE>
Condensed Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................... $4,723 $4,645 $4,384
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed income... (3,061) (1,690) (2,829)
Gain on sale of securities....... (2) -- --
Change in other assets........... (3,347) -- 5
Change in other liabilities...... 3,368 6 4
------- ------- -------
Net cash provided by operating
activities............... 1,681 2,961 1,564
------- ------- -------
Cash flows from investing activities:
Purchase of securities.............. (510) -- --
Sales of securities................. 28 -- --
Paydown ESOT loan................... 89 89 89
------- ------- -------
Net cash provided by (used in)
investing activities..... (393) 89 89
------- ------- -------
Cash flows from financing activities:
Dividends paid...................... (2,081) (1,955) (1,647)
------- ------- -------
Net cash used in financing
activities............... (2,081) (1,955) (1,647)
------- ------- -------
Net change in cash and cash
equivalents......................... (793) 1,095 6
Cash and cash equivalents at
beginning of year................... 1,121 26 20
------- ------- -------
Cash and cash equivalents at end of year $328 $1,121 $26
======= ======= =======
</TABLE>
69
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 22,944 $ 17,404
Trading securities 3,378 3,347
Investment securities
Available for sale 18,763 20,119
Held to maturity 78,722 85,771
----------------------
Total investment securities 97,485 105,890
Loans 293,497 273,894
Less: allowance for loan losses 3,793 3,343
----------------------
Net loans 289,704 270,551
Premises and equipment 10,471 10,362
Federal Home Loan Bank of Indianapolis stock, at cost 1,257 1,183
Interest receivable and other assets 8,886 7,912
----------------------
Total assets $ 434,125 $ 416,649
======================
Liabilities
Deposits
Noninterest-bearing $ 62,733 $ 48,201
Interest-bearing 275,666 264,949
----------------------
Total deposits 338,399 313,150
Short-term borrowings 46,175 46,964
Long-term debt 6,585 16,188
Interest payable and other liabilities 6,245 5,903
----------------------
Total liabilities 397,404 382,205
----------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Common stock, no-par value
Authorized - 18,000,000 shares
Issued and outstanding -6,150,240 shares 137 137
Additional paid-in capital 3,350 3,343
Retained earnings 33,673 31,511
Accumulated other comprehensive income (242) (369)
Unearned ESOT shares (197) (178)
----------------------
Total shareholders' equity 36,721 34,444
----------------------
Total liabilities and shareholders' equity $ 434,125 $ 416,649
======================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------
2000 1999
-------------------
<S> <C> <C>
Interest Income
Loans, including fees $ 19,015 $ 16,090
Investment securities
Taxable 3,015 2,494
Tax exempt 1,146 1,236
Trading 61 54
Other 126 402
-------------------
Total interest income 23,363 20,276
-------------------
Interest Expense
Deposits 9,571 7,975
Short-term borrowings 1,592 890
Long-term borrowings 496 405
-------------------
Total interest expense 11,659 9,270
-------------------
Net Interest Income 11,704 11,006
Provision for loan losses 540 405
-------------------
Net interest income after provision for loan losses 11,164 10,601
-------------------
Other Income
Trust fees 598 426
Service charges on deposit accounts 1,123 948
Commission income 506 116
Securities gains 6 0
Unrealized gains (losses) on trading securities (16) 53
Gain on sale of loans 148 348
Other operating income 590 648
-------------------
Total other income 2,955 2,539
-------------------
Other Expenses
Salaries and employee benefits 4,977 4,570
Premises and equipment 1,361 1,312
Advertising 318 395
Other operating expense 1,487 1,634
-------------------
Total other expenses 8,143 7,911
-------------------
Income Before Income Tax 5,976 5,229
Income tax expense 1,975 1,694
-------------------
Net Income $ 4,001 $ 3,535
===================
Basic earnings per share $ .65 $ .58
Diluted earnings per share .65 .58
</TABLE>
See notes to consolidated condensed financial statements
<PAGE>
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------
2000 1999
------------------
<S> <C> <C>
Interest Income
Loans, including fees $ 6,706 $ 5,469
Investment securities
Taxable 982 897
Tax exempt 366 424
Trading 22 18
Other 66 63
------------------
Total interest income 8,142 6,871
------------------
Interest Expense
Deposits 3,457 2,659
Short-term borrowings 611 368
Long-term borrowings 99 116
------------------
Total interest expense 4,167 3,143
------------------
Net Interest Income 3,975 3,728
Provision for loan losses 180 135
------------------
Net interest income after provision for loan losses 3,795 3,593
------------------
Other Income
Trust fees 207 140
Service charges on deposit accounts 374 359
Commission income 173 42
Securities (losses) (4) 0
Unrealized (losses) on trading securities (7) (88)
Gain on sale of loans 57 93
Other operating income 210 267
------------------
Total other income 1,010 813
------------------
Other Expenses
Salaries and employee benefits 1,695 1,474
Premises and equipment 445 443
Advertising 97 124
Other operating expense 492 495
------------------
Total other expenses 2,729 2,536
------------------
Income Before Income Tax 2,076 1,870
Income tax expense 678 611
------------------
Net Income $ 1,398 $ 1,259
==================
Basic earnings per share $ .23 $ .21
Diluted earnings per share .23 .21
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Common Stock Accumulated Employee
-----------------------Additional Other Stock
Shares Paid In Comprehensive Retained Comprehensive Ownership
Outstanding Amount Capital Income Earnings Income Trust Shares Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 2000 6,150,240 $ 137 $ 3,343 $31,511 $ (369) $ (178) $ 34,444
Comprehensive Income:
Net income for the
period $ 4,001 4,001 4,001
Unrealized gains on
securities 127 127 127
Cash dividend ($.30 per
share) (1,839) (1,839)
ESOT compensation 7 7
ESOT shares repurchased (19) (19)
-----------------------------------------------------------------------------------------------------
Balances, September 30, 2000 6,150,240 $ 137 $3,350 $ 4,128 $33,673 $ (242) $ (197) $36,721
=====================================================================================================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MONROE BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
--------------------
<S> <C> <C>
Operating Activities
Net income $ 4,001 $ 3,535
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 540 405
Depreciation and amortization 526 425
Investment securities amortization 236 272
Loss on sale of AFS investment securities 1 0
Gain on sale of loans (148) (348)
ESOT compensation (12) 4
Net change in:
Trading securities (31) (2,863)
Interest receivable and other assets (1,059) (1,055)
Interest payable and other liabilities 342 76
--------------------
Net cash provided by operating activities 4,396 451
--------------------
Investing Activities
Purchases of securities available for sale (128) (5,713)
Proceeds from sales of securities available for sale 265
Proceeds from paydowns and maturities of securities available 1,100
for sale 1,393
Purchases of securities held to maturity (2,003) (24,676)
Proceeds from paydowns and maturities of securities held to maturity 8,853 9,861
Net change in loans (19,545) (17,276)
Purchase of FHLB stock (74) (12)
Purchases of property and equipment (635) (2,515)
--------------------
Net cash used by investing activities (11,874) (39,231)
--------------------
Financing Activities
Net change in
Noninterest-bearing, NOW and savings deposits 17,048 8,726
Certificates of Deposit 8,201 2,395
Short-term borrowings (789) 8,709
Proceeds from long-term debt - 3,000
Repayment of long-term debt (9,603) (2,549)
Dividends paid (1,839) (1,469)
--------------------
Net cash provided by financing activities 13,018 18,812
--------------------
Net Change in Cash and Cash Equivalents 5,540 (19,968)
Cash and Cash Equivalents, Beginning of Period 17,404 35,430
--------------------
Cash and Cash Equivalents, End of Period $ 22,944 $ 15,462
====================
Supplemental cash flow disclosures
Interest paid $ 11,446 $ 9,511
Income tax paid 1,745 1,715
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MONROE BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
September 30, 2000
(Unaudited)
Note 1: Basis of Presentation
-----------------------------
The consolidated financial statements include the accounts of Monroe Bancorp
(the "Company") and its wholly owned subsidiary, Monroe County Bank, a state
chartered bank (the "Bank"). A summary of significant accounting policies is set
forth in Note 1 of Notes to Financial Statements included in the December 31,
1999, Annual Report to Shareholders. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at September 30, 2000, and for the
nine months and three months ended September 30, 2000 and 1999, have not been
audited by independent accountants, but reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2: Earnings Per Share
--------------------------
The number of shares used to compute basic and diluted earnings per share was as
follows:
Nine months ended
-----------------
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted average shares outstanding 6,150,240 6,150,240
Average unearned ESOT shares (16,250) (26,250)
---------- ----------
Shares used to compute basic and
diluted earnings per share 6,133,990 6,123,990
---------- ----------
Three months ended
------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted average shares outstanding 6,150,240 6,150,240
Average unearned ESOT shares (13,750) (23,750)
---------- ----------
Shares used to compute basic and
diluted earnings per share 6,136,490 6,126,490
---------- ----------
Unexercised option shares outstanding at September 30, 2000 and 1999 were not
included in the earnings per share calculation because the exercise price exceed
the market price.
<PAGE>
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-------------------------------------------------------------------------
The Company has appointed Olive, LLP ("Olive"), Indianapolis, Indiana,
as its independent accountants for the fiscal year ending December 31, 2000.
This is a change in accountants recommended by the Company's Audit Committee and
approved by the entire Board of Directors. Olive was engaged by registrant on
March 27, 2000. Crowe, Chizek and Company, LLP ("Crowe Chizek") has served as
registrant's independent accountants since July 1994.
The audit reports issued by Crowe Chizek with respect to the Company's
financial statements for 1999 and 1998 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified as to uncertainty, audit scope or
accounting principles. During 1999 and 1998 (and any subsequent interim period),
there have been no disagreements between the Company and Crowe Chizek on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Crowe Chizek, would have caused it to make a reference to the
subject matter of the disagreement in connection with its audit report.
Moreover, none of the events listed in Item 301(a)(1)(v) of Regulation S-K
occurred during 1999 or 1998 or any subsequent interim period.
Item 15. Financial Statements and Exhibits.
--------------------------------------------
(a) The following consolidated financial statements are included in Item 13:
o Independent Auditor's Report on Consolidated Financial Statements;
o Consolidated Balance Sheets at December 31, 1999 and 1998;
o Consolidated Statements of Income for the years ended December 31, 1999,
1998, and 1997;
o Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997;
o Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997; and
o Notes to consolidated financial statements.
o Consolidated Condensed Balance Sheet at September 30, 2000 and December 31,
1999;
o Consolidated Condensed Statement of Income for the 9 months ended September
30, 2000 and 1999;
o Consolidated Condensed Statement of Income for the 3 months ended September
30, 2000 and 1999;
70
<PAGE>
o Consolidated Condensed Statement of Shareholders' Equity for the 9 months
ended September 30, 2000;
o Consolidated Condensed Statement of Cash Flows for the 9 months ended
September 30, 2000 and 1999; and
o Notes to consolidated condensed financial statements.
(b) The following exhibits are filed with this Form 10:
(3)(i) Articles of Incorporation of Monroe Bancorp
(3)(ii) By-laws of Monroe Bancorp
(10)(i) 1999 Directors' Stock Option Plan of Monroe Bancorp
(10)(ii) 1999 Management Stock Option Plan of Monroe Bancorp
(10)(iii) Deferred Compensation Trust for Monroe Bancorp
(10)(iv) Monroe County Bank Agreement for Supplemental Death
or Retirement Benefits
(10)(v) Monroe Bancorp Thrift Plan
(10)(vi) Monroe Bancorp Employee Stock Ownership Plan
(16) Certification of Former Independent Accountant
(21) Subsidiaries of Monroe Bancorp
(27) Financial Statement Schedule
SIGNATURES
In accordance with the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Monroe Bancorp
(Registrant)
Date November 14, 2000 By: /s/ Mark D. Bradford
--------------------------------
Mark D. Bradford, President
