Monroe Bancorp was fiercely independent for most of its 118 years of existence. As recently as early this year, “Monroe’s board of directors had concluded that Monroe’s shareholders, customers and employees were best served by Monroe remaining an independent financial institution,” a regulatory filing shows.
But the fact that Monroe, a 15-branch bank headquartered in Bloomington, now is days away from completing its sale to Evansville-based Old National Bancorp shows how devastating loan problems have become for Hoosier financial institutions that used to be rock-solid.
Monroe has an enviable franchise with the top market share in the college town of Bloomington and a presence in the growing Indianapolis suburbs of Avon, Brownsburg, Plainfield and Noblesville.
But it also has a mess of bad loans, many of them doled out in the Indianapolis market. Regulatory filings submitted in connection with Monroe’s $84 million sale to Old National show that, as loan woes worsened early last year, the institution began exploring ways to bolster capital, ultimately raising $13 million through the sale of notes that July.
It wasn’t enough. In April of this year, as the bank’s management and board pressed to increase capital and improve performance, Monroe entered an informal memorandum of understanding with state and federal banking regulators that put it under heightened scrutiny.
By July, independence no longer seemed so important. That month, the board hired an investment banking firm and began contacting potential buyers. The Old National deal, which Monroe shareholders will vote on Dec. 16, values their stock at more than twice where it traded before the deal’s unveiling in October.
Bob Jones, CEO of Old National, downplayed the severity of Monroe’s loan problems. “Monroe broke their arm, [but] they were not in triage,” he said on a conference call. At the same time, Old National protected itself by negotiating terms that allow it to cut the price or even walk away if loan delinquencies increase more than anticipated.
Because Old National avoided the severe loan problems experienced by many of its peers, Jones is in the enviable position of having the firepower to make acquisitions when few others can.
“I think the deal we did with Monroe is symbolic of what you’re going to start to see more of,” he said on the call.
“What we hear day in and day out from many of our potential partners is that their boards are very, very tired right now. Management teams are very, very tired right now. As they look forward ... they don’t see a lot of relief coming.”
A new normal
Many banks across Indiana have loan woes on a scale similar to Monroe’s. Its nonperforming assets as a percentage of total assets rose from 4.1 percent in the first quarter to 4.5 percent in the second and 4.8 percent in the third.
By historical standards, those numbers are horrific, said John Reed, president of David A. Noyes & Co.’s Investment Banking Group and a veteran observer of Hoosier financial institutions.
“Banks like that would have been shut down without blinking three or four years ago. [Regulators] can’t afford to shut them down now because there are too many of them,” he said. “The new average is yesterday’s god-awful sick.”
In the old days, banks with the most pristine balance sheets had nonperforming assets of only 0.1 percent or 0.2 percent, Reed said. “And if a bank was much over 1 percent, I was pretty concerned.”
Reed said the widespread loan problems have taken much of the shine off serving as a bank director. And plenty of boards would be eager to sell—if only they could find a buyer. But many of the institutions are too small, and lack a strong enough market position, to draw out suitors.
“There are a lot that are going begging,” he said. “They would love to have Old National tap them on the shoulder, but it’s not going to happen.”
Bring in the lawyers
The Old National-Monroe deal has given the Indianapolis legal community a nice boost at a time M&A activity overall has been slow.
Regulatory filings show that locally based Krieg DeVault initially represented both Monroe and Old National. After Old National submitted an “initial expression of interest,” the two banks agreed Monroe would have to hire alternative counsel, and it chose locally based Barnes & Thornburg. Total fees for the firms aren’t disclosed.•