UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number: 000-50810
Monadnock Community Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Federal 42-1634975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Jaffrey Road, Peterborough, NH 03458
(Address of Principal Executive Offices) (Zip Code)
(603) 924-9654
(Registrant's Telephone Number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the preceding
twelve months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such requirements for the
past 90 days. Yes (X) No ( )
As of May 1, 2005, there were 939,631 shares issued and outstanding
of the Registrant's Common Stock.
INDEX
Monadnock Community Bancorp, Inc. and Subsidiary
Part I Financial Information Page
--------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004 1
Consolidated Statements of Income for the
Three Months Ended March 31, 2005 and 2004 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 3
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Controls and Procedures 16
Part II. Other Information
-----------------
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
i
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, December 31,
ASSETS 2005 2004
- ------ --------- ------------
(Unaudited)
<s> <c> <c>
Cash and due from banks $ 708,699 $ 1,258,440
Federal Home Loan Bank overnight deposit 390,447
Interest-bearing demand deposits with other banks 905 128,911
----------- -----------
Total cash and cash equivalents 709,604 1,777,798
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 36,317,970 30,687,265
Federal Home Loan Bank stock, at cost 1,220,400 1,220,400
Loans, net of allowance for loan losses of $326,642 as of March 31, 2005
and $324,502 as of December 31, 2004 35,743,169 35,602,177
Premises and equipment 791,963 731,496
Other real estate owned 12,500 12,500
Goodwill 132,293 132,293
Core deposit intangible 123,083 129,583
Accrued interest receivable 249,081 218,416
Other assets 286,056 164,415
----------- -----------
Total assets $75,686,119 $70,776,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 4,386,670 $ 4,417,945
Interest-bearing 44,278,725 41,678,721
----------- -----------
Total deposits 48,665,395 46,096,666
Federal Home Loan Bank advances 21,849,499 19,364,354
Other liabilities 145,239 102,401
----------- -----------
Total liabilities 70,660,133 65,563,421
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 2,000,000 shares;
issued and outstanding none
Common stock, par value $.01 per share; authorized 18,000,000 shares;
939,631 shares issued and outstanding at March 31, 2005 and
December 31, 2004 9,396 9,396
Paid-in capital 2,783,101 2,783,101
Retained earnings 2,542,255 2,583,445
Unearned compensation ESOP (135,304) (135,304)
Accumulated other comprehensive loss (173,462) (27,716)
----------- -----------
Total stockholders' equity 5,025,986 5,212,922
----------- -----------
Total liabilities and stockholders' equity $75,686,119 $70,776,343
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three Months Ended
March 31,
---------------------
2005 2004
---- ----
(Unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $504,802 $438,643
Interest on investments-taxable 241,606 73,109
Other interest income 16,561 3,972
-------- --------
Total interest and dividend income 762,969 515,724
-------- --------
Interest expense:
Interest on deposits 228,655 126,410
Interest on Federal Home Loan Bank advances 132,555 54,846
-------- --------
Total interest expense 361,210 181,256
-------- --------
Net interest and dividend income 401,759 334,468
Provision for loan losses
-------- --------
Net interest and dividend income after provision for loan losses 401,759 334,468
-------- --------
Noninterest income:
Service charges on deposits 30,001 13,775
Net gain on sales of available-for-sale securities 13,627
Net gain on sales of loans 37,740 8,704
Loan commissions 2,056 8,692
Other income 13,484 8,112
-------- --------
Total noninterest income 96,908 39,283
-------- --------
Noninterest expense:
Salaries and employee benefits 277,851 193,382
Occupancy expense 37,985 25,599
Equipment expense 15,969 11,336
Data processing 42,970 31,078
Blanket bond insurance 5,510 5,485
Professional fees 61,427 22,373
Supplies and printing 4,853 4,751
Telephone expense 11,012 6,681
Marketing expense 22,714 4,342
Postage expense 10,734 6,189
Other expense 69,612 37,762
-------- --------
Total noninterest expense 560,637 348,978
-------- --------
(Loss) income before income tax (benefit) expense (61,970) 24,773
Income tax (benefit) expense (20,780) 8,423
-------- --------
Net (loss) income $(41,190) $ 16,350
======== ========
Shares used in computing net earnings per share:
Basic 922,718 N/A
Diluted 922,718 N/A
Net loss per share - basic $ (0.04) N/A
Net loss per share - diluted $ (0.04) N/A
The accompanying notes are an integral part of these consolidated financial
statements.
2
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended
March 31,
-----------------------------
2005 2004
---- ----
Cash flows from operating activities: (Unaudited)
<s> <c> <c>
Net (loss) income $ (41,190) $ 16,350
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Net gains on sales of available-for-sale securities (13,627)
Net amortization of securities 23,802 12,806
Change in deferred loan origination costs, net 4,521 (9,185)
Net gains on sales of loans (37,740) (8,704)
Depreciation and amortization 19,733 14,578
Increase in accrued interest receivable (30,665) (23,940)
Amortization of core deposit intangible 6,500
Increase in other assets (16,277) (79,246)
(Increase) decrease in loan servicing rights and interest-only strips, net (7,995) 771
Decrease in prepaid expenses 19,006 1,769
(Increase) decrease in taxes receivable (20,780) 11,166
Increase (decrease) in accrued expenses 36,803 (10,867)
Increase in accrued interest payable 3,458 520
Increase (decrease) in other liabilities 2,577 (17,945)
------------ -----------
Net cash used in operating activities (51,874) (91,927)
------------ -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (11,686,070) (2,218,842)
Proceeds from sales of available-for-sale securities 3,212,446
Principal payments received on available-for-sale securities 2,591,403 789,440
Loan originations and principal collections, net (509,442) (764,999)
Loans purchased (137,235)
Recoveries of previously charged off loans 2,640 1,209
Proceeds from sales of loans 536,264 134,371
Capital expenditures - premises and equipment (80,200) (17,824)
------------ -----------
Net cash used in investing activities (6,070,194) (2,076,645)
------------ -----------
Cash flows from financing activities:
Net decrease in demand deposits, savings and NOW deposits (1,223,647) (393,304)
Net increase (decrease) in time deposits 3,792,376 (485,590)
Net change on short-term advances from Federal Home Loan Bank 1,538,000
Long-term advances from Federal Home Loan Bank 1,447,145 1,924,515
Payments on long-term advances from Federal Home Loan Bank (500,000)
------------ -----------
Net cash provided by financing activities 5,053,874 1,045,621
------------ -----------
3
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended March 31, 2005 and 2004
------------------------------------------
(continued)
2005 2004
---- ----
(Unaudited)
<s> <c> <c>
Net decrease in cash and cash equivalents (1,068,194) (1,122,951)
Cash and cash equivalents at beginning of period 1,777,798 1,822,623
------------ -----------
Cash and cash equivalents at end of period $ 709,604 $ 699,672
============ ===========
Supplemental disclosures:
Interest paid $ 357,752 $ 180,736
Income taxes paid (received) 456 (2,743)
The accompanying notes are an integral part of these consolidated financial
statements.
4
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1. - Financial Statements
Condensed Notes to Unaudited Consolidated Financial Statements
--------------------------------------------------------------
March 31, 2005
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business: Prior to June 28, 2004, Monadnock Community Bank
(the "Bank") was a federally chartered mutual savings bank. On June 28,
2004, in accordance with a Plan of Mutual Company Reorganization, the Bank
became a federally chartered stock bank and wholly-owned subsidiary of
Monadnock Community Bancorp, Inc. (the "Company"), a federally chartered
stock holding company. The Bank provides a variety of financial services
to corporations and individuals from its offices in Peterborough, New
Hampshire and Winchendon, Massachusetts. The Winchendon, Massachusetts
location was acquired through a branch purchase which became effective
October 15, 2004. The Bank is engaged principally in the business of
attracting deposits from the general public and investing those deposits in
residential and commercial real estate loans, and in consumer and small
business loans.
Basis of Presentation: The consolidated financial statements
presented in this quarterly report include the accounts of the Company and
the Bank. The consolidated financial statements of the Company have been
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and
predominant practices followed by the financial services industry, and are
unaudited. Interim statements are subject to possible adjustment in
connection with the annual audit of the Company for the year ending
December 31, 2005. In the opinion of the Company's management, all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of the financial condition and results of operations for the
interim periods included herein have been made.
The results of operations for the three month period ended March 31,
2005 are not necessarily indicative of the results of operations that may
be expected for any other interim period or for the year ending December
31, 2005. Certain information and note disclosures normally included in
the Company's annual financial statements have been condensed or omitted.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 2004.
Use of Estimates: The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements and thus actual results could differ from the amounts reported
and disclosed herein. The Company considers the allowance for loan losses,
the amortization of loan purchase premiums and amortization of mortgage-
backed purchase premiums on investment securities to be critical accounting
estimates.
At March 31, 2005, there were no material changes in the Company's
significant accounting policies or critical accounting estimates from those
disclosed in the Company's annual report on Form 10-KSB for the year ended
December 31, 2004.
Note 2. Earnings Per Share
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. For the three months ended March 31,
2004, earnings per share was not applicable since the Company completed its
initial public offering on June 28, 2004.
Note 3. Investments
The Company classifies its investments in debt securities as
securities held to maturity, securities available for sale or trading
securities. Securities held to maturity are carried at amortized cost,
securities available for sale are carried at fair value with unrealized
gains and losses shown in accumulated other comprehensive income (loss) as
a separate component of stockholders' equity, net of related tax effects,
and trading securities are carried at fair value
5
with unrealized gains and losses reflected in earnings. The Company had no
securities classified as trading securities during 2005 or 2004.
The amortized cost and fair value of securities at March 31, 2005 and
December 31, 2004 are as follows:
Amortized Fair
Cost Basis Value
---------- -----
<s> <c> <c>
March 31, 2005:
US Government agency obligations $ 3,500,000 $ 3,480,050
Mortgage-backed securities:
FHLMC 5,763,261 5,661,315
GNMA 27,341,944 27,176,605
----------- -----------
Total mortgage-backed securities 33,105,205 32,837,920
----------- -----------
Total investments in available for sale securities $36,605,205 $36,317,970
=========== ===========
December 31, 2004:
Mortgage-backed securities:
FHLMC $ 2,613,985 $ 2,602,706
GNMA 28,119,174 28,084,559
----------- -----------
Total mortgage-backed securities 30,733,159 30,687,265
----------- -----------
Total investments in available for sale securities $30,733,159 $30,687,265
=========== ===========
At March 31, 2005, all of the U.S. Government Agency Obligations with
a fair value of $3,480,000 were callable at the discretion of the issuers
without penalty, of which $1,490,000 was callable in the second quarter of
2005 at a yield of 3.30% and $1,990,000 was callable during 2006 at a yield
of 4.05%.
Note 4. Loans
Loans consist of the following at:
March 31, December 31,
2005 2004
--------- ------------
<s> <c> <c>
Commercial real estate $ 9,496,387 $ 9,573,005
Consumer real estate 22,918,994 22,498,004
Construction loans 146,027 219,661
Commercial loans 2,782,645 3,117,667
Consumer loans 548,057 336,120
----------- -----------
35,892,110 35,744,457
Allowance for loan losses (326,642) (324,502)
Deferred costs, net 177,701 182,222
----------- -----------
Net loans $35,743,169 $35,602,177
=========== ===========
Real estate mortgage loans and other loans are stated at the amount
of unpaid principal, plus deferred costs less the allowance for loan
losses.
Interest on loans is accrued and credited to operations based upon
the principal amount outstanding. When management determines that
significant doubt exists as to the collectibility of principal or interest
on a loan, the loan is placed on nonaccrual status. In addition, loans
past due 90 days or more as to principal or interest are placed on
nonaccrual status, except for those loans which, in management's judgment,
are fully secured and in the process of collection. Interest accrued but
not received on loans placed on nonaccrual status is reversed and charged
against current operations. Interest subsequently received on nonaccrual
loans is either applied against principal or recorded as income according
to management's judgment as to the collectibility of principal.
Loans considered to be uncollectible are charged against the
allowance for loan losses. The allowance is increased by charges to
current operations in amounts sufficient to maintain the adequacy of the
allowance. The adequacy of the allowance is determined by management's
evaluation of the extent of losses inherent in the loan portfolio and
prevailing economic conditions.
6
Changes in the allowance for loan losses are as follows:
Three months ended
March 31,
------------------
2005 2004
---- ----
<s> <c> <c>
Balance at beginning of period $324,502 $319,592
Recoveries of loans previously charged off 2,640 1,210
Charge offs (500)
-------- --------
Balance at end of period $326,642 $320,802
======== ========
Information with respect to impaired loans consisted of the following
at:
March 31, December 31,
2005 2004
--------- ------------
<s> <c> <c>
Recorded investment in impaired loans $669,839 $198,758
======== ========
Impaired loans with allowances for credit losses $669,839 $198,758
======== ========
Allowance for credit losses on impaired loans $ 25,119 $ 6,397
======== ========
The Company's policy for interest income recognition on an impaired
loan is to recognize income on a cash basis when the loan is both current
and the collateral on the loan is sufficient to cover the outstanding
obligation to the Company; if these factors do not exist, the Company will
not recognize income. The average recorded investment in impaired loans
was $460,000 and $94,000 for the three months ended March 31, 2005 and
2004, respectively. During the three months ended March 31, 2005 and 2004,
the Company recognized no income on impaired loans.
Note 5. Deposits
Interest bearing deposits consisted of the following at:
March 31, December 31,
2005 2004
--------- ------------
<s> <c> <c>
NOW accounts $ 3,228,560 $ 3,439,498
Savings accounts 2,707,020 3,316,897
Money market deposit accounts 11,509,808 11,881,365
Time certificates 26,833,337 23,040,961
----------- -----------
$44,278,725 $41,678,721
=========== ===========
Note 6. Adoption of Accounting Policies
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payments" ("SFAS 123R"). This Statement revises FASB
Statement No. 123, "Accounting for Stock Based Compensation" and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. SFAS 123R requires that the cost
resulting from all share-based payment transactions be recognized in the
consolidated financial statements. It establishes fair value as the
measurement objective in accounting for share-based payment arrangements
and requires all entities to apply a fair-value based measurement method in
accounting for share-based payment transactions with employees except for
equity instruments held by employee share ownership plans. This Statement
is effective for the Company as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005. The Company
does not believe the adoption of this Statement will have a material impact
on the Company's financial position or results of operations.
7
Monadnock Community Bancorp, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 2005
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking
statements, which are based on assumptions and describe future plans,
strategies and expectations of Monadnock Community Bancorp, Inc. (the
"Company") and its wholly owned subsidiary, Monadnock Community Bank (the
"Bank"). These forward-looking statements are generally identified by use
of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar words. Our ability to predict results or the actual
effect of future plans or strategies is uncertain. Factors which could
have a material adverse effect on our operations include, but are not
limited to, changes in interest rates, general economic conditions,
economic conditions in the state of New Hampshire and Massachusetts,
legislative and regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, fiscal policies of the New Hampshire and Massachusetts State
Governments, the quality or composition of our loan or investment
portfolios, demand for loan products, competition for and the availability
of loans that we purchase for our portfolio, deposit flows, competition,
demand for financial services in our market areas and accounting principles
and guidelines, acquisitions and the integration of acquired businesses,
asset-liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.
The Company wishes to advise readers that the factors listed above could
affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current
statements. The Company does not undertake and specifically declines any
obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
General
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Company. The
information contained in this section should be read in conjunction with
other sections of management discussion and analysis, including the
consolidated financial statements.
As a community based financial institution, our principal business
has historically consisted of attracting deposits from the general public
and the business community and making loans secured by various types of
collateral, including residential and commercial real estate and general
business assets. Deposit flows are influenced by a number of factors,
including interest rates paid on competing investments, account maturities,
fee structures, and the level of personal income and savings. Lending
activities are influenced by the demand for funds, interest rate levels,
the number and quality of lenders, and regional economic cycles. Our
sources of funds for lending activities include deposits, borrowings,
payments on loans, maturities of securities and income provided from
operations.
Our earnings are primarily dependent upon our net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans and investment securities, and interest
expense on interest-bearing liabilities, which principally consist of
deposits and borrowings. Our results of operations also are affected by
the level of our provisions for loan losses, noninterest income and
noninterest expenses. Noninterest income consists primarily of commissions
we receive on loans we refer to a mortgage banking company, service charges
on deposit accounts, ATM fees and charges and any gain on sale of loans and
investments. Noninterest expense consists primarily of salaries and
employee benefits, and occupancy, equipment, data processing, and ATM
costs. Our results of operations may also be affected significantly by
general and local economic and competitive conditions, changes in market
interest rates, governmental policies and actions of regulatory
authorities. In addition, as interest rates rise, our loan volume is
likely to decrease due to reduced borrower demand, thereby reducing our
interest and fee income.
As we have transitioned from a credit union, we have put into place
the operations and personnel structure to serve as a community-based
financial institution. Our profitability has been marginal due to our high
fixed operating costs in relation to the amount of net interest income and
noninterest income we generated and our comparatively low net interest
margin (net interest income divided by average interest earning assets).
We have had to rely on sales of securities in our investment portfolio,
sales of loans and other one-time items to generate earnings. As noted in
other sections of this discussion, we are not
8
likely to be able to generate such gains in the future. Additional
anticipated costs from the proposed issuance of restricted stock awards and
stock options combined with additional federal securities laws compliance
costs as well as costs associated with having an additional branch
location, may further reduce our limited earnings that have been generated
over the last few years and may cause us to report negative earnings for
most if not all of the year for 2005.
Management Strategy
Our strategy is to operate as an independent financial institution
dedicated to serving the needs of customers in our market area, which
consists of Hillsborough and Cheshire counties in New Hampshire and
Worcester County in Massachusetts. We intend to continue to attract retail
deposits, with the goal of expanding the deposit base and to rely on
organic growth. This growth is anticipated to include the establishment of
new branches, either by acquisition or by exploring opportunities in our
market area.
Our commitment is to provide a reasonable range of products and
services to meet the needs of our customers. Our goal is to grow the
Company while providing cost effective services to our market area and
leveraging our infrastructure.
Financial highlights of our strategy include:
Continuing Asset Growth and Expanding Market Presence. As a credit
union, by law, we served a specific group of customers. As a result of our
May 1996 conversion to a federal savings bank, our base of possible
customers expanded such that we could, for the first time, broadly target
individuals and businesses in our market area. Total assets have grown
$64.8 million, or 594.5%, from $10.9 million at April 30, 1996 to $75.7
million at March 31, 2005, as a result of our efforts to expand and market
our product lines to appeal to a wide base of prospective customers. Our
ability to grow at the same pace in the future may be limited by our
current capital position.
Continuing to be a Diversified Lender. On a measured pace, since our
1996 conversion from a credit union to a savings bank, we have diversified
our loan products beyond offering commercial real estate loans. We are now
able to better serve the needs of our community. As a result of expanding
our product lines, one-to-four family residential loans comprised 54.7% of
our loan portfolio at March 31, 2005. We intend to continue to concentrate
on home and business lending, offering one-to-four family residential,
commercial business, commercial real estate, home equity, and to a lesser
extent, multi-family residential and consumer loans.
Continuing Our Strong Asset Quality. The new loan product lines
mentioned above were introduced only when we were confident that our staff
had the necessary expertise and we had sound underwriting and collection
procedures in place. In addition to these conservative lending practices,
we invest in investment grade securities. Our high asset quality is
reflected in our ratio of non-performing assets to total assets, which was
0.90% and 0.37% at March 31, 2005 and 2004, respectively. Although non-
performing assets increased during this period, 73.6% of the non-performing
assets carried a SBA government guaranty for March 31, 2005 compared with
58.9% for March 31, 2004.
Capital Position. As a result of our conservative risk management,
we have consistently maintained capital in excess of regulatory
requirements. As a result of the completion of our stock offering in June
2004, our equity to total assets ratio increased to 6.6% at March 31, 2005
from 5.6% at March 31, 2004.
Building Core Deposits. As a credit union, our deposits were
concentrated in regular savings accounts. Since 1997, we have been
offering a wide range of deposit accounts. We have tried to increase our
core deposits, including checking accounts, NOW accounts and savings
accounts, which generally are lower cost sources of funds than certificates
of deposits and are less sensitive to withdrawal when interest rates
fluctuate. We intend to continue to offer a broad range of deposits and to
try to increase our core deposits through branch acquisitions such as the
Winchendon branch acquisition that was completed in the fourth quarter of
2004 as well as the establishment of an additional branch in New Hampshire
which may open in 2006. The acquisition of the Winchendon branch has
increased our operating costs in comparison to the same period a year ago
in the form of salaries and benefits for the branch personnel, to increased
occupancy and equipment costs of maintaining a branch as well as increased
other expenses such as postage, supplies, courier and marketing initiatives
with having a presence outside of our Peterborough location.
All of these initiatives are designed to improve our profitability in
future years.
9
Changes in Financial Condition from December 31, 2004 to March 31, 2005
General. Our total assets increased by $4.9 million, or 6.9%, to
$75.7 million at March 31, 2005 compared to $70.8 million at December 31,
2004. The increase primarily reflected growth in our investment portfolio
of $5.6 million to $36.3 million at March 31, 2005 from $30.7 million at
December 31, 2004, partially offset by a decrease in cash and cash
equivalents of $1.1 million. The increase in assets was funded by an
increase in deposits of $2.6 million and an increase in Federal Home Loan
Bank ("FHLB") advances of $2.4 million.
Cash and cash equivalents. Cash and cash equivalents decreased $1.1
million to $710,000 at March 31, 2005 from $1.8 million at December 31,
2004. Cash and due from banks decreased $550,000 to $709,000 at March 31,
2005 from $1.3 million at December 31, 2004 and interest bearing demand
deposits in other financial institutions, including FHLB overnight
deposits, decreased $518,000 to $1,000 at March 31, 2005 from $519,000 at
December 31, 2004. The level of interest bearing deposits, which are short-
term overnight investments, fluctuates as investments are made in other
earnings assets such as loans and investments, and as balances of interest
bearing liabilities such as deposits and FHLB advances fluctuate. Interest
bearing deposits are also used to fund cash and due from bank requirements.
The decrease in cash and due from banks is due to a decrease in the amount
of items processed through the Company's depository bank accounts that
settled subsequent to the end of the reporting period.
Investments. The Company classifies its investments in debt
securities as securities held to maturity, securities available for sale or
trading securities. Securities held to maturity are carried at amortized
cost, securities available for sale are carried at fair value with
unrealized gains and losses shown in accumulated other comprehensive income
(loss) as a separate component of stockholders' equity, net of related tax
effects, and trading securities are carried at fair value with unrealized
gains and losses reflected in earnings. The Company had no securities
classified as trading securities at March 31, 2005 and December 31, 2004.
Our investment portfolio increased $5.6 million, or 18.2%, to $36.3
million at March 31, 2005 from $30.7 million at December 31, 2004. The
increase was primarily due to the purchase of $11.7 million of mortgage-
backed and U.S. Government Agency securities during the period, partially
offset by $5.8 million of proceeds received on sales and principal paydowns
of mortgage-backed securities. The funding of these securities was mainly
driven by an increase in deposits and an increase in the level of FHLB
advances. At March 31, 2005, all of the U.S. Government Agency Obligations
with a fair value of $3.5 million were callable at the discretion of the
issuers without penalty, of which $1.5 million was callable during the
second quarter of 2005 at a yield of 3.30% and $2.0 million was callable
during 2006 at a yield of 4.05%. Based on the current interest rate
environment, the likelihood that these securities will be called is
unlikely.
At March 31, 2005, the weighted average maturity of mortgage-backed
securities available for sale is 317 months, based upon their final
maturities. However, normal principal repayments and prepayments of
mortgage-backed securities are received regularly, substantially reducing
their weighted average maturities. The majority of our mortgage-backed
securities are one year adjustable rate securities with the weighted
average to next repricing adjustment being 10 months on average.
Loans. Our net loan portfolio increased $141,000, or 0.40%, from
$35.6 million at December 31, 2004 to $35.7 million at March 31, 2005. The
largest increase was in consumer real estate loans which includes one-to-
four family residential, home equity and multi-family loans. Consumer real
estate loans increased $421,000, or 1.87%, to $22.9 million at March 31,
2005 from $22.5 million at December 31, 2004. The increase in volume
continued to be at a slower pace as compared to 2003 as many residential
real estate borrowers had refinanced into historically lower interest rates
on 15 and 30 year loans then were available to these borrowers in 2004 or
2005. While interest rates remain at relatively attractive levels on long-
term fixed loans, adjustable rate loans are becoming less attractive due to
the Federal Reserve Board increasing short term interest rates since the
end of June 2004 seven times totaling 175 basis points. Commercial loans
decreased $335,000 while commercial real estate loans decreased $77,000
primarily due to the Company selling $287,000 and $208,000, respectively,
of SBA Government guaranteed loans during the quarter. In addition, if
short term interest rates continue to increase as a result of Federal
Reserve Board actions for the remainder of 2005, the Company may find that
loan volume is likely to decrease due to reduced borrower demand, thereby
reducing our interest and fee income.
Deposits. Our total deposits increased $2.6 million, or 5.6%, to
$48.7 million at March 31, 2005 from $46.1 million at December 31, 2004.
Interest-bearing deposits increased $2.6 million, to $44.3 million at March
31, 2005 from $41.7 million at December 31, 2004, while noninterest-bearing
deposits remained constant at $4.4 million for March 31, 2005 and December
31, 2004, respectively. The increase in interest-bearing deposits is
primarily attributable to time certificates which increased $3.8 million,
partially offset by decreases in savings, money market and NOW accounts of
$610,000, $372,000 and $211,000, respectively. The increase in time
certificates is the direct result of our marketing initiatives in this area
as well as
10
paying competitive rates on this product. The decrease in savings accounts
is primarily attributable to an internal movement of our Winchendon
customers from savings to money market in an effort to align our product
offerings as well as a shift of some customers into shorter term
certificates of deposits. The decrease in money market deposit accounts is
primarily the result of customers transferring money out of money market
accounts into more attractive shorter term certificates of deposits,
partially offset by the transfer of accounts noted above. The movement of
customers into attractive rate time certificates is the direct result of
the Federal Reserve Board actions which have increased the federal funds
rate from a historic low of 1.0% in the second quarter of 2004 to 2.75% at
the end of the first quarter of 2005. The increase in deposits for the
quarter was used to fund investment growth.
Borrowings. FHLB advances increased $2.4 million to $21.8 million at
March 31, 2005 from $19.4 million at December 31, 2004. The proceeds of
borrowings from the FHLB were primarily used to fund investments in
available for sale securities.
Principal payments due on FHLB advances after March 31, 2005 are $7.3
million in 2005, $7.5 million in 2006, $1.7 million in 2007, $425,000 in
2008, $4.0 million in 2009 and $1.0 million in years thereafter. The FHLB
has the option to put and require the repayment of $4.0 million of
borrowings during 2005; $1.0 million of which is at an interest rate of
3.15% maturing in 2009 if the three month LIBOR exceeds 5.00%; $3.0 million
of which is at a weighted average interest rate of 3.04% maturing in 2009
if the three month LIBOR exceeds 6.50%. Additionally, the FHLB has the
option to put and require the repayment of $1.0 million of borrowings
during 2006 if the three month LIBOR exceeds 6.50% of which borrowings is
at an interest rate of 3.99% maturing in 2014. As of March 31, 2005, the
three month LIBOR was at 3.12%. Should the FHLB require repayment of the
putable borrowings on the put dates, the interest cost to replace such
borrowings would likely increase.
Stockholders' equity. Total stockholders' equity decreased by $187,000,
or 3.6%, to $5.0 million at March 31, 2005 from $5.2 million at December 31,
2004. Our equity to assets ratio was 6.6% at March 31, 2005 compared to 7.4%
at December 31, 2004. The decrease in total stockholders' equity was
primarily attributable to a decrease in other comprehensive loss of $146,000,
and a net loss of $41,000 for the quarter ended March 31, 2005.
Comparison of Results of Operations for the Three Months Ended March 31,
2005 and 2004.
General. We recorded a net loss of $41,000 for the three months
ended March 31, 2005 compared with net income of $16,000 for the three
months ended March 31, 2004. The decrease in earnings is primarily
attributable to an increase in noninterest expense of $212,000, partially
offset by an increase in net interest income of $67,000 and noninterest
income of $58,000.
Our profitability has been marginal during the last few years
primarily due to our high fixed operating costs in relation to the amount
of net interest income and noninterest income we generated and our
comparatively low net interest margin (net interest income divided by
average interest earning assets). Noninterest expense (consisting
primarily of salaries and employee benefits) divided by net interest income
plus noninterest income, commonly referred to as our efficiency ratio, was
112.4% and 93.4% for the three months ended March 31, 2005 and March 31,
2004, respectively. The existing operating platform we have in place
relative to the size of our customer base and asset base has tended to
negatively impact our profitability. Additional anticipated costs from the
proposed issuance of restricted stock awards and stock options combined
with additional federal securities laws compliance costs as well as costs
associated with having an additional branch location, may further reduce
our limited earnings that have been generated over the past couple of years
and may cause us to report negative earnings for most if not all of the
year for 2005. Our net interest margin for the three months ended March
31, 2005 was 2.34% as compared to 3.07% for the three months ended March
31, 2004 and 2.64% for the three months ended December 31, 2004. The
decrease in net interest margin year over year is attributable to a change
in the asset mix from 72.0% of interest earning assets in loans for 2004 to
51.7% for 2005 as well as an increase in the mix of liabilities to more
higher cost of funding in the form of time certificates and FHLB advances.
Should we be unable to generate continued commercial and residential loan
volume in 2005, or be reliant on investments in securities, or become more
reliant on certificates of deposit or Federal Home Loan Bank borrowings,
our net interest margin may become further compressed which will have a
negative impact on our net interest margin and net earnings potential.
Net Interest Income. Net interest income increased $68,000, or
20.4%, to $402,000 for the three months ended March 31, 2005 compared to
$334,000 for the three months ended March 31, 2004, reflecting a $247,000,
or 47.9%, increase in interest income, and a $180,000, or 99.4%, increase
in interest expense. Our interest rate spread decreased to 2.1% for the
three months ended March 31, 2005 compared to 2.9% for the three months
ended March 31, 2004 and 2.4% for the three months ended December 31, 2004.
As mentioned above, the compression in interest rate spread is a
combination of a change
11
in the mix of assets to lower yielding securities thereby reducing the
overall yield on interest-earning assets compounded by a change in the mix
of liabilities to more interest rate sensitive products such as time
certificates and FHLB advances thereby increasing the overall cost of
interest-bearing liabilities. In addition, the ratio of average interest-
earning assets to average interest-bearing liabilities increased to 112.3%
for the three months ended March 31, 2005 compared to 110.7% for the three
months ended March 31, 2004.
Interest Income. Total interest income increased by $247,000, or
47.9%, to $763,000 for the three months ended March 31, 2005 from $516,000
for the three months ended March 31, 2004. The increase of $247,000
relates primarily to an increase of $25.9 million, or 59.4%, in average
interest-earning assets to $69.5 million in 2005 from $43.6 million in
2004, partially offset by a decrease in the overall yield on interest-
earning assets to 4.45% in 2005 from 4.75% in 2004 based on a change in the
mix of assets to lower yielding investment securities. The increase in
volumes is primarily attributable to an increase in the average balances of
investment securities of $21.2 million and to a lesser extent, an increase
of $4.5 million in loans. Interest income on loans increased $66,000, or
15.0%, to $505,000 in 2005 from $439,000 in 2004, primarily due to a $4.5
million increase in average loans from $31.4 million in 2004 to $35.9
million in 2005, and to a lesser extent an increase in loan yields from
5.61% in 2004 to 5.70% in 2005. The increase in average loans is primarily
attributable to an increase of $3.3 million in consumer real estate and
$1.2 million in commercial real estate and commercial loans. The low
interest rate environment through the first half of 2004, encouraged
consumers into home equity loans and businesses into commercial real estate
and commercial loans. The increase in average loan yields from 5.61% in
2004 to 5.70% in 2005 is primarily the result of Federal Reserve Board
actions since the end of the second quarter of 2004 which have resulted in
an increase in the Prime rate of 175 basis points during this time,
partially offset by the mix of loans to lower yielding residential loans
which comprised 63.2% of average loans in 2005 compared to 61.8% in 2004.
Interest income on investment securities, Federal Home Loan Bank
stock and interest-bearing deposits with other financial institutions
increased $181,000 for the three months ended March 31, 2005 to $258,000
from $77,000 for the three months ended March 31, 2004. The increase was
primarily the result of an increase in the average balance of the portfolio
by $21.4 million to $33.6 million in 2005, from $12.2 million in 2004,
coupled with an increase in the overall yield on total investments from
2.54% in 2004 to 3.12% in 2005. The increase in the average balances in
the investment portfolio is the direct result of the Company leveraging the
balance sheet with an increase in funding with FHLB advances and deposits.
The majority of investment securities are invested in one year adjustable
rate securities which are expected to reprice upward during 2005.
Interest Expense. Total interest expense increased by $180,000 to
$361,000 for the three months ended March 31, 2005 from $181,000 for the
three months ended March 31, 2004. The increase of $180,000 relates
primarily to an increase of $22.5 million in average interest bearing
liabilities to $61.9 million in 2005 from $39.4 million in 2004, coupled
with an increase in the average overall cost of interest bearing
liabilities to 2.37% in 2005 from 1.85% in 2004. The increase in volumes
and costs is primarily attributable to the Bank increasing its leverage by
investing in securities and funding this leverage primarily with time
certificates and FHLB advances. Interest expense on deposits increased
$103,000 to $229,000 in 2005 from $126,000 in 2004. The increase was
primarily the result of an increase in the average balances of time
certificates of $10.8 million to $25.2 million in 2005 from $14.4 million
in 2004, coupled by an increase in the average costs of time certificates
to 3.00% in 2005 from 2.65% in 2004. Average time certificates comprised
58.2% of interest bearing deposits in 2005 compared with 45.6% in 2004.
The increase in average balances of time certificates is the direct result
of the Company offering competitive rates on time certificates and to a
lesser extent, the acquisition of a branch in Winchendon, Massachusetts
which became effective October 15, 2004. Average savings deposits
increased $848,000 to $18.1 million in 2005 from $17.2 million in 2004,
coupled with an increase in costs on these deposits from 0.73% in 2004 to
0.96% in 2005. The increase in savings deposits is primarily attributable
to the branch acquisition in Winchendon, Massachusetts in the fourth
quarter of 2004, partially offset by a reduction in savings deposits being
transferred to short-term time certificates.
Interest expense on FHLB advances increased $78,000 to $133,000 for
the three months ended March 31, 2005 from $55,000 for the three months
ended March 31, 2004. The increase was primarily the result of an increase
in the average balances of FHLB advances of $10.8 million to $18.6 million
in 2005 from $7.8 million in 2004, coupled by an increase in the average
borrowing costs to 2.89% in 2005 from 2.84% in 2004. The Company used the
additional funding of FHLB advances to increase its position in investment
securities.
Allowance for Loan Losses. There was no benefit or provision for
loan losses for the three months ended March 31, 2005 and March 31, 2004.
The allowance for loan losses as a percent of total loans remained constant
at 0.91% at March 31, 2005 and March 31, 2004, respectively. The mix of
the loan portfolio continues to be weighted in one-to-four family
residential real estate loans which accounted for 54.7% and 53.2% of total
loans at March 31, 2005 and 2004, respectively. These loans generally have
a lower credit risk allocation and the portfolio has reduced levels of
criticized and classified loans. We also take into consideration peer
group loss experience for residential loans since our historical loss
experience has been
12
minimal. Total nonperforming assets increased $514,000 to $682,000, or
0.90% of total assets at March 31, 2005 compared to $168,000, or 0.37% of
total assets at March 31, 2004. The nonperforming assets carried a
guarantee by the Small Business Administration covering $502,000 and
$99,000, respectively at March 31, 2005 and March 31, 2004. During the
second quarter of 2005, we settled a nonperforming asset in the amount of
$199,000 which would have reduced our nonperforming assets to $483,000, or
0.64% of total assets at March 31, 2005. Based on the above discussion, we
believe that our allowance for loan losses covers known identifiable loan
losses as well as estimated losses inherent in the portfolio for which the
losses are probable but not specifically identifiable.
Total Noninterest Income. Noninterest income increased $58,000 to
$97,000 in 2005 from $39,000 in 2004. The increase in 2005 compared to
2004 was attributable to increases in net gains on sales of available-for-
sale securities of $14,000, net gains on sales of loans of $29,000, service
charges on deposits of $16,000, other income of $5,000, partially offset by
decreases in loan commissions of $7,000. The increase in net gains on
sales of loans is due to the sale of $536,000 of SBA government guaranteed
loans in 2005 compared with $134,000 in 2004. The increase in service
charges is primarily related to the increase in new accounts opened
throughout the year and the increase related to new accounts from the
branch acquisition in the fourth quarter of 2004. The increase in other
income is primarily the result of increased merchant activity as a result
of new business accounts. The decrease in loan commissions is the result
of the Company having less volume of residential real estate loans in 2005
compared with 2004 that were originated and kept by the mortgage banking
company that the Company uses to generate mortgage loans. Fees received
and paid on loans that are closed by the mortgage banking company and
placed in our portfolio are deferred and amortized as an adjustment of
yield.
Total Noninterest Expenses. Noninterest expenses increased $212,000,
or 60.7%, to $561,000 for the three months ended March 31, 2005 compared to
$349,000 for the three months ended March 31, 2004. The increase during
2005 was primarily due to increased salaries and employee benefits expense
of $85,000, increased professional fees of $39,000, increased other expense
of $32,000, increased marketing expense of $19,000, increased occupancy
expense of $12,000 and increased data processing expense of $12,000.
Salaries and employee benefits expense represented 49.6% and 55.4% of
total non-interest expense for the three months ended March 31, 2005 and
2004, respectively. Total salaries and employee benefits expense increased
$85,000, or 44.0%, to $278,000 for the three months ended March 31, 2005
from $193,000 for the same period in 2004. The increase is primarily
attributable to an increase in average full time equivalent employees from
16 in 2004 to 23 in 2005, normal salary increases and increases in health
care costs. The increase in average full time equivalent employees is
primarily attributable to the Company acquiring a branch along with
personnel in Winchendon, Massachusetts in the fourth quarter of 2004.
Occupancy expense increased $12,000, or 46.2%, to $38,000 in 2005
from $26,000 in 2004. The increase is primarily associated with the costs
of acquiring an additional branch in Winchendon, Massachusetts in the
fourth quarter of 2004.
Data processing expense increased $12,000, or 38.7%, to $43,000 in
2005 from $31,000 in 2004 primarily due to increased costs for maintenance
contracts on data processing equipment, increased service bureau costs
related to additional accounts being opened throughout the period as well
as new accounts acquired as a result of the Winchendon branch acquisition
in the fourth quarter of 2004 as well as costs associated with the Company
commencing the rental of eight ATM machines with the Monadnock Community
Bank label in the third quarter of 2004.
Professional fees increased $39,000 to $61,000 in 2005 from $22,000
in 2004 primarily associated with increased legal, audit, consultant and
shareholder related expenses as a result of the Bank reorganizing to a
stock based mutual holding company during the second quarter of 2004.
Marketing expense increased $19,000 to $23,000 in 2005 from $4,000 in
2004 as the Company advertised more heavily in the first quarter of 2005 in
an effort to bring in new deposit and loan accounts in the Peterborough
market as well as the Winchendon and surrounding town market as a result of
the Company acquiring a branch in the fourth quarter of 2004.
Other expense increased $32,000 to $70,000 in 2005 from $38,000 in
2004 due to increased costs related to having a second branch including the
amortization of core deposit intangible, costs associated with preparation
for the Company's annual meeting in 2005 and increased collection expense
related to a nonperforming loan which was settled in the second quarter of
2005.
Income tax benefit for the three months ended March 31, 2005 was
$21,000 compared with income tax expense of $8,000 for the three months
ended March 31, 2004. This represents effective tax rates (benefit) of
(33.5%) for 2005 and 34.0% in 2004.
13
Risk Elements
Total nonperforming loans increased from $199,000 or 0.56% of total
loans at December 31, 2004, to $670,000 or 1.87% of total loans at March
31, 2005. The nonperforming loans shown below carry a guarantee by the
Small Business Administration covering $502,000 and $149,000, respectively,
at March 31, 2005 and December 31, 2004. As noted in the allowance
section, we settled a $199,000 nonperforming asset in the second quarter
which would have reduced our nonperforming assets to $483,000.
As shown in the following table, nonperforming assets as a percentage
of total assets were 0.90% and 0.30%, as of March 31, 2005 and December 31,
2004, respectively.
March 31, 2005 December 31, 2004
-------------- -----------------
($ in Thousands)
<s> <c> <c>
Loans 90 days or more past due and still accruing $ 0 $ 0
===== =====
Total nonperforming loans and nonperforming assets $ 682 $ 212
===== =====
Nonperforming loans as a percent of total loans 1.87% 0.56%
Nonperforming assets as a percent of total assets 0.90% 0.30%
Liquidity and Commitments
Prior to the passage of the Financial Regulatory Relief and Economic
Efficiency Act of 2000 in December 2000, we were required to maintain
minimum levels of investments that qualify as liquid assets under Office of
Thrift Supervision regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, we have
maintained liquid assets at levels above the minimum requirements formerly
imposed by Office of Thrift Supervision regulations and above levels
believed to be adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is maintained.
Our liquidity, represented by cash and cash equivalents and mortgage-
backed and related securities, is a product of our operating, investing and
financing activities. Our primary sources of funds are deposits,
amortization, prepayments and maturities of outstanding loans and mortgage-
backed securities, and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-backed related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. In addition, we invest excess
funds in short-term interest-earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings. We
utilize Federal Home Loan Bank advances to leverage our capital base and
provide funds for our lending and investment activities, and enhance our
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, we
maintain a strategy of investing in various lending products such as
residential, commercial and consumer loans. We use our sources of funds
primarily to meet ongoing commitments, to pay maturing time deposits and
savings withdrawals, to fund loan commitments and to maintain our portfolio
of mortgage-backed and related securities. At March 31, 2005, the total
approved loan commitments unfunded amounted to $5.0 million, which includes
the unadvanced portion of loans of $3.9 million. Certificates of deposits
and advances from the Federal Home Loan Bank of Boston scheduled to mature
in one year or less at March 31, 2005, totaled $19.3 million and $9.9
million, respectively. Based on historical experience, we believe that a
significant portion of maturing deposits will remain with the Bank. We
anticipate that we will continue to have sufficient funds, through deposits
and borrowings, to meet our current commitments.
At March 31, 2005, we had total collateral available to support an
additional $21.1 million in additional advances from the Federal Home Loan
Bank of Boston, but the Bank's internal policy limits Federal Home Loan
Bank advances to 40% of total assets which amounts to an additional $6.7
million in borrowing capacity at March 31, 2005.
14
Capital
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution
in accordance with regulatory standards. Total equity totaled $5.0 million
or 6.64% of total assets at March 31, 2005 compared to 7.37% of total
assets at December 31, 2004.
As of March 31, 2005, the most recent notification from the OTS
categorized the Bank as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, the
subsidiary bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios of 10%, 6% and 5%, respectively. The Bank's
regulatory capital ratios at March 31, 2005 were as follows: total risk-
based capital 16.85%, Tier I risk based 15.71% and Tier I leverage (core
capital) 5.92%. There have been no conditions or events since that
notification that management believes would cause a change in the Bank's
categorization.
Impact of Inflation
The financial statements presented in this 10-QSB have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). These principles require the
measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on our performance
than the effects of general levels of inflation. Interest rates, however,
do not necessarily move in the same direction or with the same magnitude as
the price of goods and services, since such prices are affected by
inflation. In a period of rapidly rising interest rates, the liquidity and
maturity structure of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of
interest rates, on earnings is in the area of non-interest expense. Such
expense items as employee compensation, employee benefits and occupancy and
equipment costs may be subject to increases as a result of inflation. An
additional effect of inflation is the possible increase in the dollar value
of the collateral securing loans that we have made. We are unable to
determine the extent, if any, to which properties securing our loans have
appreciated in dollar value due to inflation.
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn
on assets and pay on liabilities generally are established contractually
for a period of time. Market interest rates change over time. Our loans
generally have longer maturities than our deposits. Accordingly, our
results of operations, like those of other financial institutions, are
impacted by changes in interest rates and the interest rate sensitivity of
our assets and liabilities. The risk associated with changes in interest
rates and our ability to adapt to these changes is known as interest rate
risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our
attempt to manage our exposure to changes in interest rates and comply with
applicable regulations, we monitor our interest rate risk. In monitoring
interest rate risk we continually analyze and manage assets and liabilities
based on their payment streams and interest rates, the timing of their
maturities, and their sensitivity to actual or potential changes in market
interest rates.
In order to minimize the potential for adverse effects of material
and prolonged increases in interest rates on our results of operations, we
have adopted asset/liability and funds management policies to better match
the maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends
the asset and liability and funds management policies of the Bank, which
are implemented by the asset/liability management committee.
The purpose of the asset/liability management committee is to
communicate, coordinate and control asset/liability management consistent with
our business plan and board approved policies. The committee establishes and
monitors the volume and mix of assets and funding sources taking into
account relative costs and spreads, interest rate sensitivity and liquidity
needs. The objectives are to manage assets and funding sources to produce
results that are consistent with liquidity, capital adequacy, growth, risk
and profitability goals.
15
The asset/liability management committee generally meets quarterly to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated
changes in the volume and mix of assets and liabilities and interest rate
risk exposure limits versus current projections using a net present value
of portfolio equity analysis and income simulations. The asset/liability
management committee recommends appropriate strategy changes based on this
review.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
* Purchasing adjustable rate securities
* Originating and purchasing adjustable rate loans,
* Originating a reasonable volume of fixed rate mortgages,
* Managing our deposits to establish stable deposit
relationships,
* Using Federal Home Loan Bank advances and pricing on fixed-term
non-core deposits to align maturities and repricing terms, and
* Limiting the percentage of fixed-rate loans in our portfolio.
At times, depending on the level of general interest rates, the
relationship between long- and short-term interest rates, market conditions
and competitive factors, the asset/liability management committee may
determine to increase our interest rate risk position somewhat in order to
maintain our net interest margin.
The asset/liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate
environments on net interest income and market value of portfolio equity,
which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and
market value of portfolio equity that are authorized by the board of
directors of the Bank.
ITEM 3. Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-
15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act
of 1934) occurred during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
There were no significant changes made in our internal controls
during the period covered by this report or, to our knowledge, in other
factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of business. At March
31, 2005, we were not involved in any legal proceedings, the outcome of
which would be material to our financial condition, results of operations,
or cash flows.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Monadnock Community Bancorp, Inc.
Date: May 6, 2005 /s/ William M. Pierce, Jr.
------------------------------------
William M. Pierce, Jr.
President and Chief Executive
Officer
Date: May 6, 2005 /s/ Karl F. Betz
------------------------------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
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