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| MROE > SEC Filings for MROE > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
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 75 percent of the Bank's deposits are 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 38 of the 2008
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 2008 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 page 4 of the
consolidated financial statements as "Depreciation in directors' and
executives' deferred compensation plans." The activity in the rabbi trust
has no effect on the Company's net income, therefore, management believes a
more accurate comparison of current and prior year noninterest income and
noninterest expense can be made if the 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 second quarter of 2009 was $776,000, a 58.3 percent decrease
from net income of $1,860,000 for the same quarter last year. Basic and diluted
earnings per share for the second quarter of 2009 were $0.125, down 58.2 percent
from $0.299 per basic and diluted share for the second quarter of 2008.
Annualized return on average equity ("ROAE") for the second quarter of 2009
decreased to 5.53 percent compared to 13.26 percent for the second quarter of
2008. The annualized return on average assets ("ROAA") was 0.38 percent for the
second quarter of 2009 compared to 0.96 percent for the same period of 2008.
Net income for the first six months of 2009 was $1,882,000, a 45.5 percent decrease from net income of $3,453,000 for the same period last year. Basic earnings per share for the first six months of 2009 were $0.303, down 45.4 percent from $0.555 per share for the same period of 2008. Diluted earnings per share for the first six months of 2009 were $0.303, down 45.3 percent from $0.554 per share for the same period of 2008. Annualized ROAE for the six months ended June 30, 2009 decreased to 6.75 percent compared to 12.46 percent for the first six months of 2008. The annualized ROAA was 0.46 percent for the six months ended June 30, 2009 compared to 0.89 percent for the first six months of 2008.
The decline in net income resulted primarily from increases in the provision for loan losses and Federal Deposit Insurance Corporation ("FDIC") assessment expense. The provision for loan losses totaled $2,200,000 for the second quarter of 2009 compared to $1,050,000 for the same period of 2008. FDIC expense totaled $650,000 for the second quarter of 2009 compared to $156,000 for the same period of 2008. Net interest income for the second quarter of 2009, after the provision for loan losses, decreased $861,000, or 18.3 percent from the second quarter of 2008. The provision for loan losses totaled $4,800,000 for the six months ended June 30, 2009 compared to $1,930,000 for the same period of 2008. FDIC expense totaled $934,000 for the six months ended June 30, 2009 compared to $203,000 for the same period of 2008. Net interest income for the six months ended June 30, 2009, after the provision for loan losses, decreased by $2,515,000 or 25.9 percent compared to the same period in 2008.
The following items affected second quarter and year-to-date results:
o General Economic Conditions in the Real Estate Markets - Among the primary areas of management focus during 2008 and 2009 were managing the deterioration of asset quality resulting from slowing economic
activity and stresses affecting residential housing markets.
Nonperforming assets and 90-day past due loans totaled $22,959,000
(2.79 percent of total assets) at June 30, 2009 compared to
$17,289,000 (2.10 percent of total assets) at March 31, 2009 and
$16,472,000 (2.12 percent of total assets) at June 30, 2008. The
provision for loan losses for the six months ended June 30, 2009
totaled $4,800,000, a $2,870,000 increase over the $1,930,000
provision made during the same period of 2008 due to management's
assessment of potential losses in the Bank's loan portfolio.
o Securities Gains - Securities gains of $1,392,000 were realized from
sales of securities during the first six months of 2009 compared to
$579,000 in the same period of 2008.
o Compensation Expenses - Total compensation expenses (salaries,
incentive compensation and benefits) decreased by $386,000 or 6.0
percent to $6,035,000 for the first six months of 2009 compared to
$6,421,000 for the first six months of 2008 due primarily to a
reduction in staff levels and the reduction and elimination of certain
incentive plans.
o Gains on Loan Sales - Gains on the sale of loans totaled $745,000 for
the first six months of 2009, a 100.3 percent increase over the
$372,000 in the first six months of 2008 due to strong residential
mortgage loan refinancing activity.
o FDIC Assessment Expense - The Company experienced a $731,000 or 360.1
percent increase in deposit insurance expense in the first six months
of 2009 compared to the same period in 2008 related to the insurance
assessment methodology set forth in the Federal Deposit Insurance
Reform Act of 2005 ("FDIC Act"). The FDIC Act allocated credits to the
Bank that could be applied toward quarterly FDIC assessments. The
Bank's credits were depleted in the first quarter of 2008 which
contributed to the increased 2009 expense. In addition, a special FDIC
assessment of $379,000 was accrued in the second quarter of 2009 which
substantially increased expense in 2009 compared to 2008.
In February 2009, the Board of Directors of the Federal Deposit Insurance Corporation voted to amend the restoration plan for the Deposit Insurance Fund "DIF". The amended restoration plan extended the period of time to raise the DIF reserve ratio to 1.15 percent from five to seven years. The amended restoration plan also included a final rule that set assessment rates. Under this final rule which began on April 1, 2009, the FDIC premium assessed to the Company increased.
On May 22, 2009, the Board of Directors of the FDIC voted to levy a special assessment on insured institutions as part of the agency's efforts to rebuild the DIF and help maintain public confidence in the banking system. The final rule established a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment will be collected September 30, 2009. It is probable that an additional special assessment will be necessary in the fourth quarter of 2009, although the amount of such a special assessment is uncertain.
On July 17, 2009, $13 million of Tier 2 capital was raised through the issuance of Subordinated Debentures. The Subordinated Debentures were issued as the result of a public offering. The Subordinated Debentures carry an interest rate of 10.0% and will mature on June 30, 2019. The Company has the right to call the Subordinated Debentures at any time after three years. The Subordinated Debentures were issued pursuant to the prospectus filed as part of the Company's registration statement under the Securities Act of 1933. On July 23, 2009, the Company's Board of Directors voted to provide $10 million of the net proceeds of the offering to the Bank as additional capital with the remaining proceeds to be used by the Company for general corporate purposes.
Net Interest Income / Net Interest Margin
The following table presents information to assist in analyzing net interest
income. The table of Average Balance Sheets and Interest Rates presents the
major components of interest-earning assets and interest-bearing liabilities,
related interest income and expense and the resulting yield or cost. 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
---------------------------------------------------------------------
Six Months Ended June 30, 2009 Six Months Ended June 30, 2008
--------------------------------- ---------------------------------
Average Average Rate Average Average Rate
Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Interest earning assets
Securities
Taxable ......................................... $ 78,696 $ 1,066 2.73% $ 79,511 $ 1,869 4.73%
Tax-exempt (1) .................................. 29,134 661 4.57% 39,160 1,017 5.22%
--------- --------- --------- ---------
Total securities ........................... 107,830 1,727 3.23% 118,671 2,886 4.89%
Loans (2) ............................................ 630,843 17,007 5.44% 586,783 19,060 6.53%
FHLB Stock ........................................... 2,333 8 0.69% 2,312 62 5.39%
Federal funds sold ................................... 21,532 16 0.15% 7,184 110 3.07%
Interest-earning deposits ............................ 6,262 23 0.74% 9,667 114 2.37%
--------- --------- --------- ---------
Total interest earning assets ............ 768,800 18,781 4.93% 724,617 22,232 6.17%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ............................. (12,305) (7,130)
Premises and equipment & other assets ................ 55,571 47,615
Cash and due from banks .............................. 14,428 13,420
--------- ---------
Total assets ............................... $ 826,494 $ 778,522
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ...................... $ 594,482 5,863 1.99% $ 561,039 9,035 3.24%
Borrowed funds ....................................... 84,560 704 1.68% 73,805 1,181 3.22%
--------- --------- --------- ---------
Total interest-bearing liabilities .............. 679,042 6,567 1.95% 634,844 10,216 3.24%
--------- --------- --------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits .................. 81,300 77,367
Other liabilities .................................... 9,942 10,584
Shareholders' equity ................................. 56,210 55,727
--------- ---------
Total liabilities and shareholders' equity $ 826,494 $ 778,522
========= =========
Interest margin recap
Net interest income and interest rate spread
Net interest margin .................................. 3.14% 3.23%
Tax-equivalent net interest income spread ............ 12,214 2.98% 12,016 2.93%
Tax-equivalent net interest margin as a percent of
total average earning assets .................. 3.20% 3.33%
Tax-equivalent adjustment (1) ............................. 227 384
--------- ---------
Net interest income ................................. 11,987 11,632
========= =========
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Average Balance Sheets and Interest Rates
---------------------------------------------------------------------
Three Months Ended June 30, 2009 Three Months Ended June 30, 2008
--------------------------------- ---------------------------------
Average Average Rate Average Average Rate
Balance Interest (annualized) Balance Interest (annualized)
------- -------- ------------ ------- -------- ------------
ASSETS
Interest earning assets
Securities
Taxable ......................................... $ 79,879 $ 470 2.36% $ 76,315 $ 882 4.65%
Tax-exempt (1) .................................. 25,086 277 4.43% 39,864 510 5.14%
--------- --------- --------- ---------
Total securities ........................... 104,965 747 2.86% 116,179 1,392 4.82%
Loans (2) ............................................ 628,831 8,495 5.42% 591,310 9,057 6.16%
FHLB Stock ........................................... 2,353 13 2.22% 2,312 34 5.96%
Federal funds sold ................................... 26,975 9 0.13% 3,907 23 2.39%
Interest-earning deposits ............................ 4,752 8 0.68% 9,733 49 2.03%
--------- --------- --------- ---------
Total interest earning assets ............ 767,876 9,272 4.84% 723,441 10,555 5.87%
--------- --------- --------- ---------
Noninterest earning assets
Allowance for loan losses ............................. (12,784) (7,375)
Premises and equipment & other assets ................ 55,095 47,956
Cash and due from banks .............................. 16,090 12,567
--------- ---------
Total assets ............................... $ 826,277 $ 776,589
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Total interest-bearing deposits ...................... $ 589,895 2,774 1.89% $ 554,065 4,077 2.96%
Borrowed funds ....................................... 86,081 358 1.67% 76,056 533 2.82%
--------- --------- --------- ---------
Total interest-bearing liabilities .............. 675,976 3,132 1.86% 630,121 4,610 2.94%
--------- --------- --------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits .................. 83,321 79,062
Other liabilities .................................... 10,724 10,986
Shareholders' equity ................................. 56,256 56,420
--------- ---------
Total liabilities and shareholders' equity $ 826,277 $ 776,589
========= =========
Interest margin recap
Net interest income and interest rate spread
Net interest margin .................................. 3.16% 3.20%
Tax-equivalent net interest income spread ............ $ 6,140 2.98% $ 5,945 2.93%
Tax-equivalent net interest margin as a percent of
total average earning assets .................... 3.21% 3.31%
Tax-equivalent adjustment (1) ............................. 95 189
--------- ---------
Net interest income ....................... $ 6,045 $ 5,756
========= =========
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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 3.14 percent for the first six months of 2009, down from 3.23 percent for the same period in 2008 and was 3.16 percent for the second quarter of 2009, down from 3.20 percent for the same period in 2008. 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 3.20 percent for the first six months of 2009, down from 3.33 percent for the same period last year and was 3.21 percent for the quarter ended June 30, 2009, down from 3.31 percent for the same quarter last year. The thirteen basis point drop in the tax-equivalent net interest margin during the first six months of 2009 compared to the same period in 2008 and the ten basis point drop in the second quarter of 2009 compared to 2008 were primarily the result of higher balances of nonperforming assets and fixed assets during the first six months of 2009 and significantly higher loan fees during the first six months of 2008.
Net interest income was $11,987,000 for the six months ended June 30, 2009 compared to $11,632,000 for the same period in 2008, an increase of 3.1 percent. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP Financial Measures" section, tax-equivalent net interest income was $12,214,000 for the six months ended June 30, 2009 compared to $12,016,000 for the same period in 2008, an increase of 1.6 percent.
Net interest income was $6,045,000 for the three months ended June 30, 2009 compared to $5,756,000 for the same period in 2008, an increase of 5.0 percent. Adjusting for tax-exempt income and expense, as discussed in the "Non-GAAP Financial Measures" section, tax-equivalent net interest income was $6,140,000 for the three months ended June 30, 2009 which was $195,000 more than the $5,945,000 in the same period in 2008.
Noninterest Income / Noninterest Expense
Total noninterest income for the first six months of 2009 was $6,448,000
compared to $5,388,000 for the same period in 2008. Excluding the effect of the
Company's deferred compensation plan, discussed in the "Non-GAAP Financial
Measures" section, noninterest income for the six months ended June 30, 2009 was
$6,358,000 compared to $5,622,000 for the same period of 2008, an increase of
$736,000 or 13.1 percent. The effect of the Company's deferred compensation plan
for the first six months of 2009 was a $90,000 increase in noninterest income
compared to a $234,000 decrease in the same period of 2008.
Significant changes in noninterest income occurred primarily in the following areas:
o Securities gains of $1,392,000 were realized from sales of securities
during the first six months of 2009 compared to $579,000 in the same
period of 2008.
o Gains on the sale of loans totaled $745,000 for the first six months
of 2009, a 100.3 percent increase over the $372,000 in the first six
months of 2008 due to strong residential mortgage loan refinancing
activity.
Total noninterest income for the second quarter of 2009 was $3,186,000, a $162,000 or 5.4 percent increase from $3,024,000 for the same period in 2008. Excluding the effect of the Company's deferred compensation plan, discussed in the "Non-GAAP Financial Measures" section, noninterest income totaled $2,964,000 for the second quarter of 2008 compared to $3,066,000 for the same period of 2008, a decrease of $102,000 or 3.3 percent.
Significant changes in noninterest income occurred primarily in the following areas:
o Other operating income decreased $151,000 in the second quarter of
2009 compared to the same period in 2008 primarily because losses on
the sale of repossessions and foreclosed assets (included as an offset
to Other operating income) totaled $102,000 in the second quarter of
2009 compared to losses of $8,000 in the second quarter of 2008. This
decrease to income resulted primarily from declines in market values
in the residential housing market and declining general economic
conditions during the Company's holding period for these assets.
o Gains on the sale of loans totaled $454,000 for the three months ended
June 30, 2009, a 159.4 percent increase over the $175,000 for the same
period of 2008 due to strong residential mortgage loan refinancing
activity.
For the six months ended June 30, 2009, total noninterest expense was $11,346,000 compared to $10,762,000 for the same period in 2008. Excluding the effect of the Company's deferred compensation plan, discussed in the "Use of Non-GAAP Financial Measures" section, total noninterest expense for the first . . .
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