Total equity was $40.4 million at March 31, 2007 compared to $40.0 million at December 31, 2006. This represents 13.9% and 13.8% of total assets at March 31, 2007 and December 31, 2006, respectively. Increases in equity primarily resulted from $494,000 in year-to-date net income and a $41,000 decrease in other comprehensive loss arising from a reduction in the unrealized loss on securities. Decreases in equity for the three months ended March 31, 2007 included $177,000 in dividend payments. Management considers its equity position to be strong.
As of April 25, 2007, the previously disclosed reverse merger transaction will result in a repurchase of approximately 123,000 shares totaling approximately $1.7 million.
Net interest income before the provision for loan losses for the quarter ended March 31, 2007 decreased $42,000 compared to the same period one year ago. The decrease came primarily from a $486,000 increase in deposit interest expense offset by a $395,000 increase in interest income on loans, investment securities, federal funds sold and overnight deposits combined, and a $49,000 decrease in interest expense on FHLB advances. The Bank’s net interest margin decreased to 3.20% for the quarter ended March 31, 2007 from 3.46% for the quarter ended March 31, 2006 as our change in deposit yield increased more than our change in loan yield.
Our net interest margin decreased primarily from offering certificates of deposit and money market accounts at high interest rates that increased the Bank’s cost of funds. Interest income from loans represented 92.1% of total interest income for the quarter ended March 31, 2007 compared to 92.4% for the same period in 2006. The Bank’s ability to maintain its net interest margin is heavily dependent on future loan demand and its ability to attract core deposits to offset the effect of higher cost certificates of deposit and borrowings.
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made.
Provision for Loan Losses
The Bank recorded a $225,000 provision for loan losses for the quarter ended March 31, 2007 whereas the Bank recorded no provision for loan losses for the quarter ended March 31, 2006. The level of non-performing assets, net charge-offs and additional loan impairment were primary considerations in determining the need for the provision. Net charge-offs for the quarter ended March 31, 2007 totaled $151,000 compared to $102,000 for the quarter ended March 31, 2006. The level of non-performing assets slightly increased (see table to follow), and total loan impairment increased $80,000 on a downgraded commercial loan and $31,000 on two other substandard commercial loans on the Bank’s watch list. If the level of non-performing assets and/or net charge-offs significantly increases and/or asset quality does not continue to stabilize, additional provisions for loan losses may be needed.
The following table presents non-performing assets and certain asset quality ratios at March 31, 2007 and December 31, 2006.
| | March 31, 2007 | | December 31, 2006 | |
| | (Dollars in thousands) | |
Non-performing loans | | $ | 772 | | $ | 468 | |
Real estate in judgment | | | 684 | | | 895 | |
Foreclosed and repossessed assets | | | 775 | | | 785 | |
Total non-performing assets | | $ | 2,231 | | $ | 2,148 | |
| | | | | | | |
Non-performing loans to total loans | | | 0.34 | % | | 0.20 | % |
Non-performing assets to total assets | | | 0.77 | % | | 0.74 | % |
Allowance for loan losses to non-performing loans | | | 271.76 | % | | 432.48 | % |
Allowance for loan losses to net loans receivable | | | 0.93 | % | | 0.88 | % |
The Bank had 8 non-performing loan relationships as of March 31, 2007 compared to 10 non-performing loan relationships as of December 31, 2006. The stabilization of our asset quality remains a high priority for management.
Non-interest Income
Non-interest income increased $248,000 or 33.0%, to $1.0 million for the quarter ended March 31, 2007 as compared to $752,000 for the quarter ended March 31, 2006. Fees and service charges increased to $600,000 from $458,000 for the same period a year ago primarily due to a $74,000 increase in loan related fees (from $208,000 to $282,000) and a $62,000 increase in deposit related fees (from $367,000 to $429,000). Loan related fees increased primarily as a result of the Bank developing new mortgage banking relationships with six brokerage companies since the end of June 2006 which led to $57,000 in brokerage fee income for the quarter with other increases in loan related fees coming from a $10,000 increase in construction loan fees and a $7,000 increase in all other loan related fees. The increase in deposit related fees was a result of a $51,000 increase in NSF fees (from $251,000 to $302,000), a $5,000 increase in ATM/Debit Card income, and a $6,000 increase in all other deposit related fee income.
Gain on sale of loans increased $125,000 (from $68,000 to $193,000) for the same quarter a year ago as mortgage banking activities sharply increased in the last six months. The Bank sold 61 loans for the quarter ended March 31, 2007 compared to 28 for the quarter ended March 31, 2006 due to increased management focus on secondary market lending. Other income decreased $13,000 for the quarter ended March 31, 2007 compared to the same period in 2006 primarily due to a $19,000 loss on the sale of securities as management replaced two federal agency securities and one taxable municipal security with three federal agency securities earning higher interest rates. Management expects to recover this loss with the increase in interest income from the new securities by the end of 2007.
Non-interest Expense
Non-interest expense decreased $272,000 or 11.0%, for the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006. Salaries and employee benefits decreased $173,000 as a result of downsizing certain department staffing levels in the fourth quarter of 2006. The Bank has 79 full-time equivalent employees as of March 31, 2007 compared to 95 full-time equivalent employees as of March 31, 2006. Professional services expense decreased $16,000 primarily from reduced regulatory examination expense. Repossessed property expense decreased $34,000 for the quarter ended March 31, 2007 compared to the same period in 2006 as the level of foreclosed properties decreased from $2.5 million as of March 31, 2006 to $1.4 million as of March 31, 2007. Amortization of core deposit intangible decreased $18,000 for the quarter ended March 31, 2007 as amortization of this asset continues to slow from year to year. Management expects to continue to see an expense of approximately $18,000 per month for the remainder of 2007 compared to approximately $23,000 for the first quarter of 2007. Other general and administrative expense decreased $31,000 primarily due to a $30,000 reduction in advertising and promotion expense where modifications to the Bank’s marketing strategy were made for 2007. Expense control and revenue enhancement continue to be priorities for management as efforts continue on improving efficiency.
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Federal Income Tax Expense
The Company’s provision for federal income taxes increased $89,000 for the quarter ended March 31, 2007 compared to the same period in 2006 as our net income before taxes increased $253,000. The effective tax rate for the quarter ended March 31, 2007 was 24.9% of income before tax as compared to 18.5% for the same period in 2006. The difference between the effective tax rates and the federal corporate income tax rate of 34% is attributable to the low income housing credits available to the Bank from the investment in the limited partnership as well as fluctuation of permanent book and tax differences such as non-taxable income and non-deductible expenses.
LIQUIDITY
The Bank’s liquidity, represented by cash, overnight funds and investments, is a product of our operating, investing, and financing activities. The Bank’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans, and funds provided from operations. While scheduled payments from the amortization of loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank also generates cash through borrowings. The Bank utilizes Federal Home Loan Bank advances to leverage its capital base and provide funds for its lending and investment activities, and to enhance its interest rate risk management.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Bank maintains a strategy of investing in various investments and lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals and to fund loan commitments. Certificates of deposit scheduled to mature in one year or less at March 31, 2007 totaled $82.7 million. Management believes that a significant portion of these certificates of deposit will remain with the Bank provided the Bank pays a rate of interest that is competitive both in the local and national markets.
If necessary, additional funding sources include additional deposits and Federal Home Loan Bank advances. Deposits can be obtained in the local market area and from out of market sources; however, this may require the Bank to offer interest rates higher than those of the competition. At March 31, 2007 and based on current collateral levels, the Bank could borrow an additional $21.7 million from the Federal Home Loan Bank at prevailing interest rates. This borrowing capacity can be increased in the future if the Bank pledges additional collateral to the Federal Home Loan Bank. The Company anticipates that it will continue to have sufficient funds, through deposits and borrowings, to meet its current commitments.
The Bank’s total cash and cash equivalents increased by $4.2 million during the quarter ended March 31, 2007 compared to a $1.2 million increase for the same period in 2006. The primary sources of cash for the quarter ended March 31, 2007 were $7.8 million in proceeds from the sale of mortgage loans, $3.3 million of principal collections net of loan originations, $2.9 million in purchases of available-for-sale investment securities, $2.5 million in proceeds from FHLB advances, and a $0.9 million increase in deposits compared to a $10.7 million increase in deposits, $3.0 million in proceeds from the sale of mortgage loans, and $2.7 million in proceeds from maturities of available-for-sale investment securities for the quarter ended March 31, 2006. The primary uses of cash for the quarter ended March 31, 2007 were $8.4 million of mortgage loans originated for sale, $3.8 million in purchases of available-for-sale securities, and $2.5 million in repayments of FHLB advances compared to $6.1 million in loan originations in excess of principal collections, $5.4 million in repayments of FHLB advances, $3.3 million in loans originated for sale, and $2.0 million in purchases of available-for-sale investment securities for the quarter ended March 31, 2006. Management expects future cash flows for the remainder of 2007 to have a similar pattern to what occurred in the first quarter.
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CONTRACTUAL OBLIGATIONS
The Corporation has certain obligations and commitments to make future payments under contracts. At March 31, 2007, the aggregate contractual obligations and commitments are:
Contractual Obligations | | Payments Due by Period |
| | | | Less than | | 1-3 | | 3-5 | | After |
| | Total | | 1 year | | years | | years | | 5 years |
| | (Dollars in Thousands) |
Certificates of deposit | | $ | 110,444 | | $ | 81,122 | | $ | 20,851 | | $ | 8,353 | | $ | 118 |
FHLB advances | | | 54,476 | | | 19,146 | | | 14,813 | | | 10,342 | | | 10,175 |
| | | | | | | | | | | | | | | |
Total | | $ | 169,856 | | $ | 100,268 | | $ | 35,664 | | $ | 18,695 | | $ | 10,293 |
Other Commitments | | Amount of commitment expiration per period |
| | | | Less than | | 1-3 | | 3-5 | | After |
| | Total | | 1 year | | years | | years | | 5 years |
| | (Dollars in Thousands) |
Commitments to grant loans | | $ | 4,942 | | $ | 4,942 | | $ | — | | $ | — | | $ | — |
Unfunded commitments under HELOCs | | | 17,125 | | | 1,134 | | | 4,225 | | | 4,364 | | | 7,402 |
Unfunded commitments under Commercial LOCs | | | 1,681 | | | 762 | | | 570 | | | 349 | | | — |
Letters of credit | | | 12 | | | 12 | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
Total | | $ | 23,760 | | $ | 6,850 | | $ | 4,795 | | $ | 4,713 | | $ | 7,402 |
Commitments to grant loans are governed by the Bank’s credit underwriting standards, as established by the Bank’s Loan Policy. The Bank’s policy is to grant Home Equity Lines of Credits (HELOCs) for periods of up to 15 years.
CAPITAL RESOURCES
The Bank is subject to various regulatory capital requirements. As of March 31, 2007, the Bank met the regulatory standards to be classified as “well capitalized.” The Bank’s regulatory capital ratios as of March 31, 2007 were as follows: Tier 1 leverage ratio 10.35%, Tier 1 risk-based capital ratio 14.18%; and total risk-based capital, 15.22%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. Management considers the Bank’s capital to be adequate to support anticipated growth and does not anticipate needing to seek additional capital in the foreseeable future.
ITEM 3. | QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK |
The Corporation’s primary market risk exposure is interest rate risk (“IRR”). Interest rate risk refers to the risk that changes in market interest rates might adversely affect the Corporation’s net interest income or the economic value of its portfolio of assets, liabilities, and off-balance sheet contracts. Interest rate risk is primarily the result of an imbalance between the price sensitivity of the Corporation’s assets and its liabilities (including off-balance sheet contracts). Such imbalances can be caused by differences in the maturity, repricing and coupon characteristics of assets and liabilities, and options, such as loan prepayment options, interest rate caps and floors, and deposit withdrawal options. These imbalances, in combination with movement in interest rates, will alter the pattern of the Corporation’s cash inflows and outflows, affecting the earnings and economic value of the Corporation.
The Corporation’s primary tool for assessing IRR is a model that uses scenario analysis to evaluate the IRR exposure of the Bank by estimating the sensitivity of the Bank’s portfolios of assets, liabilities, and off-balance sheet contracts to changes in market interest rates. To measure the sensitivity of the Bank’s NPV to changes in interest rates, the NPV model estimates what would happen to the economic value of each type of asset, liability, and off-balance sheet contract under six different interest rate scenarios. The model estimates the NPV that would result following instantaneous, parallel shifts in the Treasury yield curve of -300, -200, -100, +100, +200, +300 basis points. The levels, from least risk to most risk, are; minimal, moderate, significant, high and imminent threat. Data from the model, as of March 31, 2007, December 31, 2006, and March 31, 2006 indicates that the Bank’s IRR level remains minimal.
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ITEM 4. | CONTROLS AND PROCEDURES |
An evaluation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2007 was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and several other members of the Corporation’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Corporation intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Corporation’s business. While the Corporation believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Corporation to modify its disclosure controls and procedures.
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PART II-OTHER INFORMATION
The Corporation and the Bank are from time-to-time involved in legal proceedings arising out of, and incidental to, their business. Management, based on its review with counsel of all actions and proceedings affecting the Corporation and the Bank, has concluded that the aggregate loss, if any, resulting from the disposition of these proceedings should not be material to the Corporation’s financial condition or results of operations.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Corporation. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
Not applicable
See the index to exhibits.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MONARCH COMMUNITY BANCORP, INC. |
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Date: May 4, 2007 | By: /s/ Donald L. Denney |
| Donald L. Denney |
| President and Chief Executive Officer |
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Date: May 4, 2007 | And: /s/ William C. Kurtz |
| William C. Kurtz |
| Senior Vice President, Chief Operations Officer and |
| acting Chief Financial Officer |
| (Principal Financial Officer) |
| |
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INDEX TO EXHIBITS
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