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| MROE > SEC Filings for MROE > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
General
Monroe Bancorp is a one-bank holding company formed under Indiana law in 1984.
The Company holds all of the outstanding stock of Monroe Bank, which was formed
in 1892. Banking is the primary business activity of the Company.
The Bank, with its primary offices located in Bloomington, Indiana, conducts business from eighteen locations in Monroe, Jackson, Lawrence, Hendricks and Hamilton counties in Indiana. Approximately 70 percent of the Bank's business is in Monroe County and is concentrated in and around the city of Bloomington.
The Bank is a traditional community bank which provides a variety of financial services to its customers, including:
o accepting deposits;
o making commercial, mortgage and personal loans;
o originating fixed and variable rate residential mortgage loans for
sale into the secondary market;
o providing personal and corporate trust services;
o providing investment advisory and brokerage services; and
o providing annuities and other investment 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.
Critical Accounting Policies
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements on pages 37 to 39 of the 2007
Annual Report to Shareholders. Certain of these policies are important to the
portrayal of the Company's financial condition, since they require management to
make difficult, complex or subjective judgments, some of which may relate to
matters that are inherently uncertain. Management has identified these policies
in the Critical Accounting Policies section of the Management's Discussion and
Analysis on pages 22 to 23 of the 2007 Annual Report to Shareholders. There have
been no changes in these critical accounting policies to date.
Non-GAAP Financial Measures
In January 2003, the United States Securities and Exchange Commission ("SEC")
issued Regulation G, "Conditions for Use of Non-GAAP Financial Measures." A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles ("GAAP"). Regulation G requires companies that present non-GAAP
financial measures to disclose a numerical reconciliation to the most directly
comparable measurement using GAAP as well as the reason why the non-GAAP measure
is an important measure.
Management has used the following non-GAAP financial measures throughout this quarterly report on Form 10-Q.
o In the "Net Interest Income / Net Interest Margin" section, the discussion
is focused on tax-equivalent rates and margin. Municipal bond and municipal
loan interest has been converted to a tax-equivalent rate using a federal
tax rate of 34 percent. Management believes a discussion of the changes in
tax-equivalent rates and margin is more relevant because it better explains
changes in after-tax net income.
o In the "Noninterest Income / Noninterest Expense" section of this document,
we report noninterest income and noninterest expense without the effect of
unrealized gains and losses on securities in a grantor trust ("rabbi trust")
which is a non-GAAP financial measure. Other income includes realized and
unrealized securities gains and losses and capital gain dividends on trading
securities (mutual funds) held in a rabbi trust in connection with the
Company's Directors' and Executives' Deferred Compensation Plans. These
securities are held as trading securities, and hence, unrealized gains and
losses are recognized on the income statement. Any unrealized or realized
loss on securities held in the rabbi trust net of any dividend, interest and
capital gain dividend income earned on the securities in the rabbi trust
(included in net interest income) are directly offset by a decrease to
directors' fee/deferred executive compensation expense (included in other
expense), and conversely, any net realized or unrealized gain combined with
interest, dividends and capital gain dividends earned on the securities in
the trust are directly offset by an increase to directors' fee/deferred
executive compensation expense. These offsets are included in the line item
identified on pages 4 and 5 of the consolidated financial statements as
"Appreciation (depreciation) on directors' and executives' deferred
compensation plans." The activity in the rabbi trust has no effect on the
Company's net income, therefore, management believes a more accurate
comparison of current and prior year noninterest income and noninterest
expense can be made if the rabbi trust realized and unrealized gains,
losses, capital gain dividends and offsetting appreciation (depreciation) on the deferred compensation plans and trustee fees are removed.
Results of Operations
Overview
Net income for the third quarter of 2008 was $735,000, a 63.2 percent decrease
from net income of $1,998,000 for the same quarter last year. Basic and diluted
earnings per share for the third quarter of 2008 were $0.118, down 63.2 percent
from $0.321 per basic share and down 63.0 percent from $0.319 per diluted share
for the third quarter of 2007. Annualized return on average equity (ROAE) for
the third quarter of 2008 decreased to 5.20 percent compared to 15.27 percent
for third quarter of 2007. The annualized return on average assets (ROAA) was
0.37 percent for the third quarter of 2008 compared to 1.05 percent for the same
period of 2007.
Net income for the first nine months of 2008 was $4,188,000, a 32.5 percent decrease from net income of $6,200,000 for the same period last year. Basic earnings per share for the first nine months of 2008 were $0.674, down 31.3 percent from $0.981 per share for the same period of 2007. Diluted earnings per share for the first nine months of 2008 were $0.673, down 31.1 percent from $0.977 per share for the same period of 2007. Annualized ROAE for the nine months ended September 30, 2008 decreased to 10.01 percent compared to 15.80 percent for the first nine months of 2007. The annualized ROAA was 0.71 percent for the nine months ended September 30, 2008 compared to 1.11 percent for the first nine months of 2007.
The decline in net income resulted primarily from an increase in the provision for loan losses. The provision for loan losses totaled $2,800,000 for the third quarter of 2008 compared to $345,000 for the same period of 2007. Net interest income for the third quarter of 2008, after the provision for loan losses, decreased $2,179,000, or 40.7 percent from the third quarter of 2007. The provision for loan losses totaled $4,730,000 for the nine months ended September 30, 2008 compared to $885,000 for the same period of 2007. Net interest income for the nine months ended September 30, 2008, after the provision for loan losses, decreased by $3,522,000 or 21.5 percent compared to the same period in 2007.
The following items affected third quarter and year-to-date results:
o General Economic Conditions in the Real Estate Markets - Among the
primary areas of management focus during 2008 were managing the
deterioration of asset quality resulting from slowing economic
activity and stresses in the multi-family residential housing markets.
Nonperforming assets and 90-day past due loans totaled $14,565,000
(1.78 percent of total assets) at September 30, 2008 compared to
$16,472,000 (2.12 percent of total assets) at June 30, 2008 and
$5,159,000 (0.68 percent of total assets) at September 30, 2007. The
provision for loan losses for the nine months ending September 30,
2008 totaled $4,730,000, a $3,845,000 increase over the $885,000
provision made during the same period of 2007. The provision for loan
losses for the third quarter of 2008 was $2,800,000, a $1,750,000
increase over the $1,050,000 provision made in the second quarter of
2008 due to management's assessment of potential losses in the Bank's
loan portfolio.
o Securities Gains - Securities gains of $789,000 were realized from
sales of securities during the first nine months of 2008 compared to
$44,000 in the same period of 2007.
o Benefit Expenses - Benefit expenses increased by $353,000 or 25.6
percent to $1,732,000 for the first nine months of 2008 compared to
$1,379,000 for the first nine months of 2007. The increase in benefit
expenses resulted primarily from an increase in the cost of the
Company's health insurance plan which totaled $686,000 for the first
nine months of 2008, $299,000 greater than the $387,000 expense for the
same period of 2007. The increase was largely due to higher claims
experienced in 2008.
o Federal Deposit Insurance Corporation (FDIC) Assessment Expense - The
Company experienced a $292,000 or 572.5 percent increase in deposit
insurance expense in the first nine months of 2008 related to the
Federal Deposit Insurance Reform Act of 2005.
o Occupancy Expense - The Company opened three new full-service banking centers, one in December of 2007, the second in January of 2008, and the third in September of 2008, all of which contributed to the $212,000 or 9.1 percent increase in occupancy expense in the first nine months of 2008 compared to the same period in 2007.
The Company successfully opened its first full-service banking center in Noblesville in Hamilton County on September 2, 2008, which marks the first step of the Company's growth plans in the northeast area of the Indianapolis metro region. This followed the opening of a new full-service banking center in Avon in Hendricks County on January 14, 2008 and the opening on December 11, 2007 of a new banking center in Plainfield, also in Hendricks County. The Company previously opened a new full-service banking center in Brownsburg, Indiana (also in Hendricks County) in January 2006, which replaced a limited-service office opened in 2002. Management is pleased with the progress of its Hendricks County banking centers. Average deposits for the month of September 2008 at the Brownsburg banking center were $40,134,000 compared to $50,813,000 for September 2007 and $37,346,000 for September 2006. The $10,679,000 decrease in deposits from September 2007 to September 2008 was primarily due to a decrease in retail CD deposits greater than $100,000 and a decrease in money market savings balances. Average deposits for the month of September 2008 at the Plainfield and Avon banking centers were $16,593,000 and $16,970,000, respectively. The opening of the Avon Banking Center completes the Company's transition from less visible, limited service branches in Hendricks County to more visible, strategically located full-service banking centers.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law, giving the Department of the Treasury broad authority to implement certain actions to help restore stability and liquidity to U.S. financial markets. On October 14, 2008, the Department of the Treasury and the federal banking regulators jointly announced a number of new programs, including the Voluntary Capital Purchase Program (the "CPP") under the EESA, and the Temporary Liquidity Guarantee Program (the "TLGP") under a systemic risk exception to the FDIC Act.
Under the CPP, the Department of the Treasury will purchase up to $250 billion of senior preferred stock from certain U.S. bank holding companies, savings and loan holding companies, and banks or savings associations not controlled by a holding company. In conjunction with the purchase of preferred stock, the Department of the Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred stock investment in the participating financial institution. During such time as the Department of the Treasury holds securities issued under the CPP, the participating financial institutions will be required to comply with the Department of the Treasury's standards for executive compensation and corporate governance. Financial institutions that intend to participate in the CPP must apply prior to November 14, 2008.
Under the TLGP, the FDIC will temporarily (i) guarantee a participating financial institution's newly issued senior unsecured debt, and (ii) fully guarantee the non-interest bearing deposit transaction accounts held at the institution. A financial institution may choose to opt out of either or both components of the program. The full guarantee of the non-interest bearing deposit transaction accounts began on October 14, 2008, and will, unless a financial institution opts out, expire on December 31, 2009. Financial institutions that do not intend to intend to participate in the TLGP must affirmatively opt out prior to December 5, 2008.
It is not clear at this time what impact the EESA, the CPP, the TLGP, and other programs developed by the Department of the Treasury and the federal bank regulators will have on the financial markets generally and the Corporation specifically. The Corporation is assessing its participation in both the CPP and the TLGP but has not yet made a definitive decision as to whether it will participate.
Net Interest Income / Net Interest Margin
The two tables on the following pages 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. Interest income presented in the table has been adjusted to a
tax-equivalent basis assuming a 34 percent tax rate. The tax-equivalent
adjustment recognizes the income tax savings when comparing taxable and
tax-exempt assets.
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------------
Nine Months Ended September 30, 2008 Nine Months Ended September 30, 2007
------------------------------------ ------------------------------------
Average Average Rate Average Average Rate
Balance Interest (annualized) Balance Interest (annualized)
ASSETS ------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable........................................... $ 76,414 $ 2,668 4.66% $ 86,919 $ 2,998 4.61%
Tax-exempt (1).................................... 37,192 1,444 5.19% 34,984 1,389 5.31%
-------- -------- -------- --------
Total securities.............................. 113,606 4,112 4.83% 121,903 4,387 4.81%
Loans (2)............................................ 594,304 28,312 6.36% 561,184 31,791 7.57%
FHLB Stock........................................... 2,312 92 5.32% 2,312 78 4.51%
Federal funds sold................................... 7,851 162 2.75% 11,661 481 5.51%
Interest-earning deposits............................ 11,352 192 2.25% 2,888 111 5.13%
-------- -------- -------- --------
Total interest earning assets................. 729,425 32,870 6.02% 699,948 36,848 7.04%
-------- -------- -------- --------
Noninterest earning assets
Allowance for loan losses............................ (7,461) (6,348)
Premises and equipment & other assets................ 47,563 40,893
Cash and due from banks.............................. 13,631 14,521
-------- --------
Total assets.................................. $783,158 $749,014
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits...................... $564,251 12,985 3.07% $528,588 16,125 4.08%
Borrowed funds....................................... 74,286 1,724 3.10% 81,017 2,920 4.82%
-------- -------- -------- --------
Total interest-bearing liabilities................. 638,537 14,709 3.08% 609,605 19,045 4.18%
-------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits.................. 78,730 78,686
Other liabilities.................................... 9,988 8,269
Shareholders' equity................................. 55,903 52,454
-------- --------
Total liabilities and shareholders' equity.... $783,158 $749,014
======== ========
Interest margin recap
Net interest income and interest rate spread
Tax-equivalent net interest income spread............ 18,161 2.94% 17,803 2.86%
Tax-equivalent net interest margin as a percent of
total average earning assets..................... 3.33% 3.40%
Tax-equivalent adjustment (1)........................... 550 515
-------- --------
Net interest income 17,611 $ 17,288
======== ========
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(1) Interest income on tax-exempt securities has been adjusted to a tax equivalent basis using a marginal income tax rate of 34%.
(2) Nonaccrual loans are included in average loan balances and loan fees are included in interest income.
Average Balance Sheets and Interest Rates
---------------------------------------------------------------------------
Three Months Ended September 30, 2008 Three Months Ended September 30, 2007
------------------------------------- -------------------------------------
Average Average Rate Average Average Rate
Balance Interest (annualized) Balance Interest (annualized)
ASSETS ------- -------- ------------ ------- -------- ------------
Interest earning assets
Securities
Taxable........................................... $ 70,286 $ 799 4.52% $ 87,336 $ 1,038 4.72%
Tax-exempt (1).................................... 33,299 427 5.10% 35,712 479 5.32%
-------- -------- -------- --------
Total securities.............................. 103,585 1,226 4.71% 123,048 1,517 4.89%
Loans (2)............................................ 609,184 9,252 6.04% 560,590 10,619 7.51%
FHLB Stock........................................... 2,312 30 5.19% 2,312 26 4.46%
Federal funds sold................................... 9,161 52 2.25% 15,837 219 5.49%
Interest-earning deposits............................ 14,685 78 2.11% 1,894 27 5.70%
-------- -------- -------- --------
Total interest earning assets................. 738,927 10,638 5.73% 703,681 12,408 7.00%
-------- -------- -------- --------
Noninterest earning assets
Allowance for loan losses............................. (8,116) (6,432)
Premises and equipment & other assets................ 47,458 42,710
Cash and due from banks.............................. 14,058 14,318
-------- --------
Total assets.................................. $792,327 $754,277
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits...................... $570,606 3,949 2.75% $538,614 5,622 4.14%
Borrowed funds....................................... 75,238 543 2.87% 75,409 906 4.77%
-------- -------- -------- --------
Total interest-bearing liabilities................ 645,844 4,492 2.77% 614,023 6,528 4.22%
-------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits.................. 81,425 80,001
Other liabilities.................................... 8,816 8,367
Shareholders' equity................................. 56,242 51,886
-------- --------
Total liabilities and shareholders' equity.... $792,327 $754,277
======== ========
Interest margin recap
Net interest income and interest rate spread
Tax-equivalent net interest income spread............ $ 6,146 2.96% $ 5,880 2.78%
Tax-equivalent net interest margin as a percent of
total average earning assets.............................. 3.31% 3.31%
Tax-equivalent adjustment (1).................................. 166 176
-------- --------
Net interest income.................................. $ 5,980 $ 5,704
======== ========
|
(1) Interest income on tax-exempt securities has been adjusted to a tax equivalent basis using a marginal income tax rate of 34%.
(2) Nonaccrual loans are included in average loan balances and loan fees are included in interest income.
Net Interest Income / Net Interest Margin (continued)
Net interest income is the primary source of the Company's earnings. It is a
function of the net interest margin and the volume of average earning assets.
The net interest margin as a percent of average earnings assets was 3.23 percent
for the first nine months of 2008, down from 3.30 percent for the same period in
2007 and was 3.22 percent for the third quarter of 2008, equivalent to 3.22
percent for the same period in 2007. Adjusting for tax-exempt income and
expense, as discussed in the "Non-GAAP Financial Measures" section, the
tax-equivalent net interest margin as a percent of average earning assets was
3.33 percent for the first nine months of 2008, down from 3.40 percent for the
same period last year and was 3.31 percent for the quarter ended September 30,
2008, equivalent to 3.31 percent for the same quarter last year. The seven basis
point drop in the tax-equivalent net interest margin during the first nine
months of 2008 compared to the same period in 2007 was primarily the result of
higher balances of nonperforming assets and fixed assets.
Net interest income was $17,611,000 for the nine months ended September 30, 2008 compared to $17,288,000 for the same period in 2007, an increase of 1.9 percent. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP Financial Measures" section, tax-equivalent net interest income was $18,161,000 for the nine months ended September 30, 2008 compared to $17,803,000 for the same period in 2007, an increase of 2.0 percent.
Net interest income was $5,980,000 for the three months ended September 30, 2008 compared to $5,704,000 for the same period in 2007, an increase of 4.8 percent. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP Financial Measures" section, tax-equivalent net interest income was $6,146,000 for the three months ended September 30, 2008 compared to $5,880,000 for the same period in 2007, an increase of 4.5 percent.
Noninterest Income / Noninterest Expense
Total noninterest income for the first nine months of 2008 was $7,937,000
compared to $7,783,000 for the same period in 2007. Excluding the effect of the
Company's deferred compensation plan, discussed in the "Non-GAAP Financial
Measures" section, noninterest income for the nine months ended September 30,
2008 was $8,393,000 compared to $7,561,000 for the same period of 2007, an
increase of $832,000 or 11.0 percent. The effect of the Company's deferred
compensation plan for the nine months ended September 30, 2008 was a $456,000
decrease in noninterest income compared to a $222,000 increase in the same
period of 2007.
Significant changes in noninterest income occurred primarily in the following areas:
o Securities gains of $789,000 were realized from sales of securities
during the first nine months of 2008 compared to $44,000 in the same
period of 2007.
o Trust fees grew $195,000 or 11.9 percent to $1,834,000 for the nine
months ended September 30, 2008 compared to $1,639,000 for the same
period of 2007. The increase in trust fees was driven by a fee schedule
increase that was implemented during April of 2007. Trust assets under
management were $326,947,000 at September 30, 2008, decreasing 6.2
percent, or $21,706,000 from the September 30, 2007 total of
$348,653,000. The decrease in trust assets under management is largely
the result of year over year decreases in stock market prices.
Total noninterest income for the third quarter of 2008 was $2,549,000, a $102,000 or 3.8 percent decrease from $2,651,000 for the same period in 2007. Excluding the effect of the Company's deferred compensation plan, discussed in . . .
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