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, 2006
( ) 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 small business issuer 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
(Issuer's telephone number)
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 past twelve
months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is a Shell Company (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
As of May 1, 2006, there were 944,631 shares issued and outstanding of
the issuer's common stock.
Transitional Small Business Disclosure Format (check one) Yes ( )
No (X)
INDEX
Monadnock Community Bancorp, Inc. and Subsidiary
Part I Financial Information Page
--------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 3
Consolidated Statements of Income for the
Three Months Ended March 31, 2006 and 2005 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 18
Part II. Other Information
-----------------
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20
2
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, December 31,
ASSETS 2006 2005
- ------ ----------- ------------
(Unaudited)
<s> <c> <c>
Cash and due from banks $ 880,582 $ 668,055
Interest-earning demand deposits with other banks 243 1,971
Federal funds sold 920,000 185,000
----------- -----------
Total cash and cash equivalents 1,800,825 855,026
Interest-earning time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 25,577,498 27,520,401
Federal Home Loan Bank stock, at cost 1,220,400 1,220,400
Loans, net of allowance for loan losses of $319,894 as of March 31, 2006
and $311,250 as of December 31, 2005 47,090,761 44,481,338
Premises and equipment 826,627 810,954
Goodwill 132,293 132,293
Core deposit intangible 98,458 104,208
Accrued interest receivable 314,566 319,038
Other assets 471,488 257,310
----------- -----------
Total assets $77,632,916 $75,800,968
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 5,157,890 $ 5,268,981
Interest-bearing 49,969,981 47,968,935
----------- -----------
Total deposits 55,127,871 53,237,916
Federal Home Loan Bank advances 17,395,361 17,481,950
Other liabilities 159,224 127,264
----------- -----------
Total liabilities 72,682,456 70,847,130
----------- -----------
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;
944,631 shares issued and outstanding at March 31, 2006 and
December 31, 2005 9,446 9,446
Paid-in capital 2,814,032 2,814,032
Retained earnings 2,570,308 2,553,142
Unearned compensation - ESOP (114,570) (114,570)
Unearned compensation - Recognition and Retention Plan (154,560) (154,560)
Accumulated other comprehensive loss (174,196) (153,652)
----------- -----------
Total stockholders' equity 4,950,460 4,953,838
----------- -----------
Total liabilities and stockholders' equity $77,632,916 $75,800,968
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three Months Ended
March 31,
-----------------------
2006 2005
---- ----
(Unaudited)
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 717,303 $504,802
Interest on investments-taxable 261,146 241,606
Other interest income 24,958 16,561
---------- --------
Total interest and dividend income 1,003,407 762,969
---------- --------
Interest expense:
Interest on deposits 324,915 228,655
Interest on Federal Home Loan Bank advances 175,322 132,555
---------- --------
Total interest expense 500,237 361,210
---------- --------
Net interest and dividend income 503,170 401,759
Provision for loan losses 13,007
---------- --------
Net interest and dividend income after provision for loan losses 490,163 401,759
---------- --------
Noninterest income:
Service charges on deposits 52,917 30,001
Net gain on sales of available-for-sale securities 13,627
Net gain on sales of loans 37,740
Loan commissions 2,056
Other income 13,054 13,484
---------- --------
Total noninterest income 65,971 96,908
---------- --------
Noninterest expense:
Salaries and employee benefits 262,781 277,851
Occupancy expense 38,641 37,985
Equipment expense 22,995 15,969
Data processing 49,779 42,970
Blanket bond insurance 5,511 5,510
Professional fees 35,007 61,427
Supplies and printing 9,829 4,853
Telephone expense 12,630 11,012
Marketing expense 15,097 22,714
Postage expense 9,456 10,734
Other expense 72,291 69,612
---------- --------
Total noninterest expense 534,017 560,637
---------- --------
Income (loss) before income tax expense 22,117 (61,970)
Income tax expense (benefit) 4,951 (20,780)
---------- --------
Net income (loss) $ 17,166 $(41,190)
========== ========
Shares used in computing net income (loss) per share:
Basic 930,310 922,718
Diluted 936,601 922,718
Net income (loss) per share - basic $ 0.02 $ (0.04)
Net income (loss) per share - diluted $ 0.02 $ (0.04)
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended
March 31,
----------------------------
2006 2005
---- ----
Cash flows from operating activities: (Unaudited)
<s> <c> <c>
Net income (loss) $ 17,166 $ (41,190)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Net gain on sales of available-for-sale securities (13,627)
Net amortization of securities 19,657 23,802
Change in deferred loan origination costs, net (14,967) 4,521
Provision for loan losses 13,007
Net gain on sales of loans (37,740)
Depreciation and amortization 27,307 19,733
Decrease (increase) in accrued interest receivable 4,472 (30,665)
Amortization of core deposit intangible 5,750 6,500
Increase in other assets (187,765) (16,277)
Decrease (increase) in loan servicing rights and interest-only
strips, net 1,873 (7,995)
(Increase) decrease in prepaid expenses (14,033) 19,006
Increase in taxes receivable (778) (20,780)
Increase in accrued ESOP, Recognition and Retention Plan
and Stock Option expense 13,651 4,429
Increase in accrued expenses 16,801 32,374
(Decrease) increase in accrued interest payable (714) 3,458
Increase in other liabilities 2,222 2,577
----------- ------------
Net cash used in operating activities (96,351) (51,874)
----------- ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (11,686,070)
Proceeds from sales of available-for-sale securities 3,212,446
Principal payments received on available-for-sale securities 1,889,227 2,591,403
Loan originations and principal collections, net (1,602,110) (509,442)
Loans purchased (1,005,353) (137,235)
Recoveries of previously charged off loans 2,640
Proceeds from sales of loans 536,264
Capital expenditures - premises and equipment (42,980) (80,200)
----------- ------------
Net cash used in investing activities (761,216) (6,070,194)
----------- ------------
Cash flows from financing activities:
Net decrease in demand deposits, savings and NOW deposits (519,576) (1,223,647)
Net increase in time deposits 2,409,531 3,792,376
Net change on short-term advances from Federal Home Loan Bank 1,538,000
Long-term advances from Federal Home Loan Bank 1,610,411 1,447,145
Payments on long-term advances from Federal Home Loan Bank (1,697,000) (500,000)
----------- ------------
Net cash provided by financing activities 1,803,366 5,053,874
----------- ------------
5
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three Months Ended March 31, 2006 and 2005
------------------------------------------
(continued)
2006 2005
---- ----
(Unaudited)
<s> <c> <c>
Net increase (decrease) in cash and cash equivalents 945,799 (1,068,194)
Cash and cash equivalents at beginning of period 855,026 1,777,798
----------- ------------
Cash and cash equivalents at end of period $ 1,800,825 $ 709,604
=========== ============
Supplemental disclosures:
Interest paid $ 500,951 $ 357,752
Income taxes paid 2,456 456
The accompanying notes are an integral part of these consolidated financial
statements.
6
MONADNOCK COMMUNITY BANCORP, INC. AND SUBSIDIARY
------------------------------------------------
Part I - Financial Information
Item 1. - Financial Statements
Condensed Notes to Unaudited Consolidated Financial Statements
--------------------------------------------------------------
March 31, 2006
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 Holding 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 Company became a majority owned subsidiary of
Monadnock Mutual Holding Company, a federally chartered mutual 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 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, 2006. 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,
2006 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,
2006. 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, 2005.
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, 2006, 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, 2005.
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.
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 market 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 market value with unrealized gains and
losses reflected in earnings. The Company had no securities classified as
held-to-maturity or trading securities during 2006 or 2005.
7
The amortized cost and estimated market value of securities at March 31,
2006 and December 31, 2005 are as follows:
Amortized Estimated
Cost Basis Market Value
---------- ------------
<s> <c> <c>
March 31, 2006:
U. S. Government agency obligations $ 3,000,000 $ 2,950,625
Mortgage-backed securities:
FHLMC 4,444,422 4,358,296
GNMA 18,421,528 18,268,577
----------- -----------
Total mortgage-backed securities 22,865,950 22,626,873
----------- -----------
Total investments in available-for-sale securities $25,865,950 $25,577,498
=========== ===========
December 31, 2005:
U. S. Government agency obligations $ 3,000,000 $ 2,961,600
Mortgage-backed securities:
FHLMC 4,660,348 4,600,460
GNMA 20,114,486 19,958,341
----------- -----------
Total mortgage-backed securities 24,774,834 24,558,801
----------- -----------
Total investments in available-for-sale securities $27,774,834 $27,520,401
=========== ===========
At March 31, 2006, U.S. Government agency obligations with estimated
market values of $988,000 were callable at the discretion of the issuers
without penalty in the second quarter of 2006 at a yield of 4.00%.
Note 3. Loans
Loans consist of the following at:
March 31, December 31,
2006 2005
--------- ------------
<s> <c> <c>
One-to-four family residential $24,029,952 $23,597,196
Home equity 5,882,346 5,794,179
Commercial real estate 9,835,181 8,429,921
Multifamily 592,039 597,323
Construction and land development loans 1,008,183 479,786
Commercial loans 4,302,480 4,339,644
Consumer loans 1,538,059 1,347,091
----------- -----------
47,188,240 44,585,140
Allowance for loan losses (319,894) (311,250)
Deferred costs, net 222,415 207,448
----------- -----------
Net loans $47,090,761 $44,481,338
=========== ===========
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.
8
Changes in the allowance for loan losses are as follows:
Three months ended
March 31,
---------------------
2006 2005
---- ----
<s> <c> <c>
Balance at beginning of period $311,250 $324,502
Recoveries of loans previously charged off 2,640
Provision for loan losses 13,007
Charge offs (4,363) (500)
-------- --------
Balance at end of period $319,894 $326,642
======== ========
Information with respect to impaired loans consisted of the following
at:
March 31, December 31,
2006 2005
--------- ------------
<s> <c> <c>
Recorded investment in impaired loans $ 0 $350,022
======= ========
Impaired loans with specific loss allowances $ 0 $350,022
======= ========
Loss allowances reserved on impaired loans $ 0 $ 13,126
======= ========
The Company's policy for interest income recognition on impaired loans
is to recognize income on impaired loans on the cash basis when the loans
are 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 $309,000 and $460,000 for the three months ended March
31, 2006 and 2005, respectively. During the three months ended March 31,
2006 and 2005, the Company recognized no income on impaired loans.
Note 4. Deposits
Interest-bearing deposits consisted of the following at:
March 31, December 31,
2006 2005
--------- ------------
<s> <c> <c>
NOW accounts $ 3,407,004 $ 3,193,844
Savings accounts 2,728,438 2,779,991
Money market deposit accounts 10,564,660 11,134,752
Time certificates 33,269,879 30,860,348
----------- -----------
$49,969,981 $47,968,935
=========== ===========
9
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, 2006
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. (or the
"Company") and its wholly owned subsidiary, Monadnock Community Bank (or 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 states of New Hampshire or 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 or Massachusetts State Government, 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 these
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 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, non-interest income and non-
interest expenses. Non-interest income consists primarily of service
charges on deposit accounts, merchant fee income, commissions we receive on
loans we refer to a mortgage banking company, and any gain on sale of loans
and investments. Non-interest expense consists primarily of salaries and
employee benefits, occupancy, equipment and data processing. 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.
Due to the limitations of our capital base prior to our minority stock
offering in 2004, our ability to increase interest-earning assets was
constrained even though we otherwise had the resources to increase our
lending operations. Our profitability has been marginal over the past few
years and as a result, we also had to rely on sales of securities in our
investment portfolio to generate earnings. We have been able to increase
our interest-earning assets due to our increased capital base. Although we
had a net operating loss of $30,000 for the year ended December 31, 2005, we
had net income of $15,000 and $30,000 for the quarters ended September 30,
2005 and December 31, 2005, respectively. We also had net
10
income of $17,000 for the quarter ended March 31, 2006 which compares to a
net loss of $41,000 for the quarter ended March 31, 2005. We have used the
proceeds from our 2004 minority stock offering, and we now seek to raise
additional capital to continue our growth and to build our franchise.
Recent Events
On February 9, 2006 and as amended on April 25, 2006, the Boards of
Directors of Monadnock Mutual Holding Company, the Bank and the Company
adopted a Plan of Conversion and Reorganization pursuant to which the Bank
will convert from the mutual holding company form of organization into the
stock holding company form of organization. The Plan of Conversion and
Reorganization involves the formation of a new Maryland corporation to become
the holding company for the Bank. Pursuant to the Plan of Conversion and
Reorganization, the new holding company will offer for sale shares of its
common stock to the Bank's depositors, members of the community, current
stockholders of the Company and the Company's employee stock ownership plan.
The Plan of Conversion and Reorganization further provides for exchange of
shares of the Company's common stock currently owned by public stockholders
for shares of the new holding company. The conversion is subject to approval
by regulatory authorities and the members of the Monadnock Mutual Holding
Company and shareholders of the Company.
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 western Hillsborough, eastern Cheshire counties in New Hampshire
and northern Worcester county in Massachusetts. We intend to continue to
increase our loan portfolio and to attract retail deposits, with the goal of
expanding our deposit base. This growth is anticipated to include the
establishment of new branches, either by acquisition or by exploring
opportunities in our market area. In the fourth quarter of 2004, we
completed the acquisition of our Winchendon, Massachusetts branch from
another financial institution. At the time of the acquisition, the branch
had $5.4 million in deposits. By March 31, 2006, we were successful in
growing the branch to $9.9 million in deposits.
Our commitment is to provide a reasonable range of products and
services to meet the needs of our customers. Our goal is to grow Monadnock
Community Bancorp, Inc. while providing cost effective services to our
market area and leveraging our infrastructure.
Financial highlights of our strategy include:
Operating as a Community Savings Bank and Offering Personalized
Customer Service. We are committed to meeting the financial needs of the
communities in which we operate. We provide a broad range of individualized
consumer and business financial services. We believe that we can be more
effective in servicing our customers than many of our non-local competitors
because our employees and senior management are able to respond promptly to
customer needs and inquiries. Our ability to provide these services is
enhanced by the experience of our senior management, which has an average of
over 25 years' experience in the financial services industry.
Increasing Loan Production. Our strategy of increasing net income
includes increasing our loan production. Our business plan anticipates that
we will emphasize originating commercial real estate and commercial business
loans. Such loans provide higher returns than loans secured by one- to
four-family real estate. Commercial real estate and commercial business
loans, however, involve a greater degree of credit risk than one- to four-
family residential mortgage loans. Because payments on these loans are
often dependent on the successful operation or management of the properties
or business, repayment of such loans may be subject to adverse conditions in
the real estate market or the economy. Our net loan portfolio increased
from $30.7 million at December 31, 2003 to $47.1 million at March 31, 2006,
or a 53.4% increase. We plan to continue to grow our loan portfolio with the
net proceeds raised in the offering.
Expanding Market Presence Through New Offices. Total assets have grown
$33.9 million, or 77.6%, from $43.7 million at December 31, 2003 to $77.6
million at March 31, 2006, as a result of our efforts to expand and market
our product lines and using our increased capital base from our 2004 stock
offering to appeal to a wide base of prospective customers. The efforts to
increase our market presence have included the Winchendon branch acquisition
and evaluating potential new branches in the future. We currently do not
have any plans to establish a new office in 2006 but our business plan
contemplates opening a new office in 2007.
Building Core Deposits. We offer 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. In order to build our core deposit base, we intend to
continue to offer a broad range of deposit products and to increase our core
11
deposits through branch acquisitions, and the establishment of new branches.
Our deposits increased $20.7 million, or 60.2%, to $55.1 million at March
31, 2006 from $34.4 million at December 31, 2003.
Improving Non-Interest Income. Non-interest income consists primarily
of fees, service charges and gains from securities sales. We plan to target
programs to increase non-interest income such as the overdraft checking
program we instituted in December 2005. Our non-interest income from
sources other than securities and loan sales increased to $66,000 during the
first quarter of 2006 from $46,000 for the same period in 2005.
Maintaining Our Strong Asset Quality. Our high asset quality is
reflected in our ratio of non-performing assets to total assets, which was
0.00% and 0.46% at March 31, 2006 and December 31, 2005, respectively. We
have introduced new loan products only when we were confident that our staff
had the necessary expertise and sound underwriting and collection procedures
were in place. In addition to these lending practices, we invest in high
grade securities.
Improving Our Efficiency Ratio. Our infrastructure and fixed
operating costs can support a larger asset base. We believe the conversion
and offering described above will allow us to increase our asset base
through greater loan production which should help improve our efficiency
ratio (non-interest expense divided by net-interest income and non-interest
income) by generating additional income.
All of these initiatives are designed to improve our profitability in
future years.
Changes in Financial Condition from December 31, 2005 to March 31, 2006
General. Our total assets increased by $1.8 million, or 2.4%, to
$77.6 million at March 31, 2006 compared to $75.8 million at December 31,
2005. The increase primarily reflected growth in our net loan portfolio of
$2.6 million to $47.1 million at March 31, 2006 from $44.5 million at
December 31, 2005, an increase in cash and cash equivalents of $946,000,
partially offset by a decrease in our investment portfolio of $1.9 million.
The increase in assets was funded by an increase in deposits of $1.9
million.
Cash and cash equivalents. Cash and cash equivalents increased
$946,000 to $1.8 million at March 31, 2006 from $855,000 at December 31,
2005. Cash and due from banks increased $213,000 to $881,000 at March 31,
2006 from $668,000 at December 31, 2005 and interest earning demand deposits
in other financial institutions, including Federal funds sold, increased
$733,000 to $920,000 at March 31, 2006 from $187,000 at December 31, 2005.
The level of interest earning 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 Federal Home Loan Bank advances fluctuate.
Interest earning deposits are also used to fund cash and due from bank
requirements. The increase in cash and due from banks is due to an increase
in the amount of items processed through Monadnock Community Bancorp, Inc.'s
depository bank accounts that settled subsequent to the end of the reporting
period.
Investments. Monadnock Community Bancorp, Inc. 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
market 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 market
value with unrealized gains and losses reflected in earnings. Monadnock
Community Bancorp, Inc. had no securities classified as held-to-maturity or
trading securities at March 31, 2006 and December 31, 2005.
Our investment portfolio decreased $1.9 million, or 6.9%, to $25.6
million at March 31, 2006 from $27.5 million at December 31, 2005. The
decrease was primarily due to $1.9 million in principal paydowns of
mortgage-backed securities. The proceeds from these principal paydowns on
mortgage-backed securities were used to fund loans during the first quarter
of 2006. At March 31, 2006, U.S. Government Agency Obligations with
estimated market values of $988,000 were callable at the discretion of the
issuers without penalty in the second quarter of 2006 at a yield of 4.00%.
Based on the current interest rate environment, the likelihood that these
securities will be called is unlikely.
At March 31, 2006, the weighted average maturity of mortgage-backed
securities available for sale is 307 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 mortgage-backed
securities are one year adjustable rate securities with the weighted average
to next repricing adjustment being nine months on average.
Loans. Our net loan portfolio increased $2.6 million, or 5.8%, from
$44.5 million at December 31, 2005 to $47.1 million at March 31, 2006.
Included in this increase is $1.0 million of purchased loans of which
$435,000 related to five-
12
year adjustable rate mortgages, $331,000 related to a construction
participation and $239,000 related to mobile home loans which are classified
as consumer loans. The largest increase was in commercial real estate
loans, which increased $1.4 million to $9.8 million at March 31, 2006 from
$8.4 million at December 31, 2005. Construction and land development loans
increased $528,000 to $1.0 million at March 31, 2006 from $480,000 at
December 31, 2005. One-to-four family residential loans increased $433,000
to $24.0 million at March 31, 2006 from $23.6 million at December 31, 2005
while consumer loans increased $191,000 to $1.5 million at March 31, 2006
from $1.3 million at December 31, 2005. Our business plan anticipates that
loan originations will primarily be concentrated in commercial real estate
and commercial business loans. We also anticipate less mortgage loan
originations during 2006 as interest rates on 15- and 30-year mortgages have
risen nearly 50 basis points since December 31, 2005 and interest rates in
the short term continue to increase as a result of Federal Reserve Board
actions, thereby reducing borrower demand for these types of loans.
Deposits. Our total deposits increased $1.9 million, or 3.6%, to
$55.1 million at March 31, 2006 from $53.2 million at December 31, 2005.
Interest-bearing deposits increased $2.0 million, to $50.0 million at March
31, 2006 from $48.0 million at December 31, 2005, while non-interest-bearing
deposits decreased $111,000 to $5.2 million at March 31, 2006 from $5.3
million at December 31, 2005. The increase in interest-bearing deposits is
primarily attributable to time certificates which increased $2.4 million and
to a lesser extent NOW accounts which increased $213,000, partially offset
by decreases in money market and savings accounts of $570,000 and $52,000,
respectively. The increase in time certificates is the direct result of our
marketing initiatives in this area as well as paying competitive rates on
this product. 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. 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 4.75% at the
end of the first quarter of 2006. The increase in deposits for the quarter
was used to fund loan growth and an increase in cash and cash equivalents.
Borrowings. Federal Home Loan Bank advances decreased $87,000 to
$17.4 million at March 31, 2006 from $17.5 million at December 31, 2005.
Principal payments due on other borrowings after March 31, 2006 are
$4.3 million in 2006, $1.7 million in 2007, $425,000 in 2008, $4.9 million
in 2009, $1.3 million in 2010 and $4.7 million in years thereafter. The
Federal Home Loan Bank will require the repayment of $5.0 million of
borrowings during 2006 if the three-month LIBOR exceeds specified rates;
$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 Federal Home Loan Bank will 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, 2006, the three month LIBOR was at 5.00%. In
addition, the Federal Home Loan Bank has the right to call a $500,000
borrowing in the third quarter of 2006 of which borrowing is at an interest
rate of 3.90% maturing in 2013. Should the Federal Home Loan Bank require
repayment of the putable and callable borrowings on the put and call dates,
the interest cost to replace such borrowings would likely increase.
Stockholders' Equity. Total stockholders' equity remained level at
approximately $5.0 million at March 31, 2006 and December 31, 2005,
respectively. Our equity to assets ratio was 6.38% at March 31, 2006
compared to 6.54% at December 31, 2005.
Comparison of Results of Operations for the Three Months Ended March 31,
2006 and 2005.
General. We recorded net income of $17,000 for the three months ended
March 31, 2006 compared with a net loss of $41,000 for the three months
ended March 31, 2005. The increase in earnings is primarily attributable to
an increase in net interest and dividend income of $101,000, a reduction in
noninterest expense of $27,000, partially offset by a decrease in
noninterest income of $31,000 and an increase in the provision for loan
losses of $13,000.
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 non-interest income we generated and our
comparatively low net interest margin (net interest income divided by
average interest earning assets). Non-interest expense (consisting
primarily of salaries and employee benefits) divided by net interest income
plus non-interest income, commonly referred to as our efficiency ratio
improved from 112.43% for the three months ended March 31, 2005 to 93.83%
for the three months ended March 31, 2006. 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. Our net interest margin
for the three months ended March 31, 2006 increased to 2.72% as compared to
2.34% for the three months ended March 31, 2005. The increase in net
interest margin year over year is attributable to a change in the asset mix
from 51.7% of interest-earning assets in loans for 2005 to 61.4%
13
for 2006, the repricing of interest-earning assets more quickly than
interest-bearing liabilities as well as an increase in interest-earning
average assets by $5.5 million during this period. In the event we are
unable to generate continued commercial and residential loan volume in 2006,
or become reliant on investments in securities, certificates of deposit or
Federal Home Loan Bank borrowings, our net interest margin may be negatively
impacted along with our net earnings potential.
Net Interest and Dividend Income. Net interest and dividend income
increased $101,000, or 25.1%, to $503,000 for the three months ended March
31, 2006 compared to $402,000 for the three months ended March 31, 2005,
reflecting a $240,000, or 31.5%, increase in interest and dividend income,
and a $139,000, or 38.5%, increase in interest expense. Our interest rate
spread increased to 2.40% for the three months ended March 31, 2006 compared
to 2.09% for the three months ended March 31, 2005. As mentioned above, the
increase in interest rate spread is a combination of a change in the mix of
assets to higher yielding loans, coupled with an increase in the rate on
investment securities and other interest-earning assets as a result of 15
rate increases since June 2004 by the Federal Reserve Board, partially
offset by a change in the mix of liabilities to more interest rate sensitive
products such as time certificates.
Interest and Dividend Income. Total interest income increased by
$240,000, or 31.5%, to $1.0 million for the three months ended March 31,
2006 compared with $763,000 for the three months ended March 31, 2005. The
increase of $240,000 relates to an increase in the yields on interest
earning assets from 4.45% for the three months ended March 31, 2005 to 5.43%
for the three months ended March 31, 2006 coupled with an increase in
average assets of $5.5 million, or 7.9%, to $75.0 million in 2006 from $69.5
million in 2005. Interest income on loans increased $212,000, or 42.0%, to
$717,000 in 2006 from $505,000 in 2005, primarily due to a $10.1 million
increase in average loans from $35.9 million in 2005 to $46.0 million in
2006, and to a lesser extent an increase in loan yields from 5.70% in 2005
to 6.32% in 2006. The increase in average loans is primarily attributable
to an increase of $7.8 million in one-to-four family residential and home
equity loans. The increase in average loan yields from 5.70% in 2005 to
6.32% in 2006 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 375 basis points.
Interest income on investment securities, Federal Home Loan Bank stock
and interest-bearing deposits with other financial institutions increased
$28,000 for the three months ended March 31, 2006 to $286,000 from $258,000
for the three months ended March 31, 2005. The increase was primarily the
result of an increase in the overall yield on total investments from 3.12%
in 2005 to 4.01% in 2006, partially offset by a decrease in average balance
of the portfolio by $4.6 million to $29.0 million in 2006, from $33.6
million in 2005. The increase in overall yields is the result of the
Federal Reserve Board actions noted above. The decrease in the average
balances in the investment portfolio is the direct result of the Company
using the proceeds from the principal paydowns on mortgage-backed securities
to fund loan growth. Approximately 72.5% of investment securities are
invested in one year adjustable rate securities, which are expected to
reprice upward 1% during 2006 based on the current levels of interest
rates as of March 31, 2006.
Interest Expense. Total interest expense increased by $139,000 to
$500,000 for the three months ended March 31, 2006 from $361,000 for the
three months ended March 31, 2005. The increase of $139,000 relates
primarily to an increase in the average overall cost of interest bearing
liabilities to 3.03% in 2006 from 2.37% in 2005, coupled with an increase of
$5.1 million in average interest bearing liabilities to $67.0 million in
2006 from $61.9 million in 2005. The increase in costs and volume is
primarily attributable to the Bank increasing its interest-earning assets by
investing in loans and funding this growth primarily with higher costing
time deposits. Interest expense on deposits increased $96,000 to $325,000
in 2006 from $229,000 in 2005. The increase was primarily the result of an
increase in the average balances of time certificates of $5.0 million to
$30.2 million in 2006 from $25.2 million in 2005, coupled by an increase in
the average costs of time certificates to 3.65% in 2006 from 3.00% in 2005.
Average time certificates comprised 64.3% of interest bearing deposits in
2006 compared with 58.2% in 2005. The increase in average balances of time
certificates is the direct result of our advertising interest rate specials
and offering competitive rates on time certificates. Average savings
deposits decreased $1.3 million to $16.8 million in 2006 from $18.1 million
in 2005, partially offset by an increase in costs on these deposits from
0.96% in 2005 to 1.28% in 2006. The decrease in savings deposits is
primarily attributable to customers transferring these deposits to more
attractive short-term time certificates.
Interest expense on Federal Home Loan Bank advances increased $42,000
to $175,000 for the three months ended March 31, 2006 from $133,000 for the
three months ended March 31, 2005. The increase was primarily the result of
an increase in the borrowing costs to 3.55% in 2006 from 2.89% in 2005, and
to a lesser extent, the increase in average balances of Federal Home Loan
Bank advances of $1.4 million to $20.0 million in 2006 from $18.6 million in
2005. Monadnock Community Bank used the additional funding of Federal Home
Loan Bank advances to fund net loans.
14
Allowance for Loan Losses. The provision for loan losses was $13,000
for the three months ended March 31, 2006 compared with $0 for the three
months ended March 31, 2005. The provision of $13,000 related specifically
to an overdraft program which was initiated in December 2005 for consumer
and business checking customers. The allowance for loan losses as a percent
of total loans was 0.68% for March 31, 2006 compared with 0.91% at March 31,
2005. The mix of the loan portfolio continues to be weighted in one- to
four-family residential and home equity loans which accounted for 63.4% and
61.4% of total loans at March 31, 2006 and 2005, respectively. These loans
generally have a lower credit risk allocation and the portfolio has reduced
levels of criticized and classified loans. In establishing the allowance
for loan losses we follow standards established by the Office of Thrift
Supervision as modified by our historical loss experience to reflect reserve
levels that are appropriate for a particular loan or group of loans. We
also take into consideration peer group loss experience for residential
loans since our historical loss experience has been minimal. Total
nonperforming assets decreased $682,000 to $0 or 0.00% of total assets at
March 31, 2006 compared to $682,000 ($502,000 of which was guaranteed by the
United States Small Business Administration), or 0.90% 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 decreased $31,000, or
32.0%, to $66,000 for the three months ended March 31, 2006 from $97,000 for
the three months ended March 31, 2005. The decrease for the three months
ended March 31, 2006 compared to 2005 was attributable to decreases in net
gains on sales of available-for-sale securities of $14,000, net gains on
sales of loans of $38,000, partially offset by an increase in service
charges on deposits of $23,000. The decrease in net gains on sales of loans
is due to the sale of $536,000 of SBA government guaranteed loans in 2005
compared with $0 in 2006. The increase in service charges is primarily
related to a new product which began in December 2005 known as "Overdraft
Privilege Service" which provides our consumer and business customers with
overdraft checking account protection.
Total Noninterest Expenses. Noninterest expenses decreased $27,000,
or 4.8%, to $534,000 for the three months ended March 31, 2006 compared to
$561,000 for the three months ended March 31, 2005. The decrease during
2006 was primarily due to a decrease in professional fees of $26,000, a
decrease in salaries and employee benefits expense of $15,000, and a
decrease in marketing expenses of $8,000, partially offset by an increase in
equipment expense of $7,000 and an increase in data processing expense of
$7,000.
Salaries and employee benefits expense represented 49.2% and 49.6% of
total non-interest expense for the three months ended March 31, 2006 and
2005, respectively. Total salaries and employee benefits expense decreased
$15,000, or 5.4%, to $263,000 for the three months ended March 31, 2006 from
$278,000 for the same period in 2005. The decrease in salaries and employee
benefits is due to a reduced salary base for these time periods, an increase
in deferrals of loan origination costs, partially offset by the recording of
$9,000 in expense related to stock option and recognition and retention
plans for 2006.
Equipment expense increased $7,000, or 43.8%, to $23,000 for the three
months ended March 31, 2006 from $16,000 for the three months ended March
31, 2005 primarily due to increased costs related to equipment depreciation
on fixed assets acquired after the first quarter of 2005.
Data processing expense increased $7,000, or 16.3%, to $50,000 for the
three months ended March 31, 2006 from $43,000 for the three months ended
March 31, 2005 primarily due to increased costs for maintenance contracts on
data processing equipment and increased service bureau costs related to
additional accounts being opened throughout the period.
Professional fees decreased $26,000, or 42.6%, to $35,000 for the
three months ended March 31, 2006 from $61,000 for the three months ended
March 31, 2005. In 2005, we incurred $12,000 of expenses related to
consulting on a business strategy for Monadnock Community Bank. Also, we
incurred less in legal expenses related to nonperforming loans as well as
shareholder and public company related matters in 2006 than in 2005.
Marketing expenses decreased $8,000, or 34.8%, to $15,000 for the
three months ended March 31, 2006 from $23,000 for the three months ended
March 31, 2005 as we 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
Monadnock Community Bank acquiring a branch in the fourth quarter of 2004.
15
Risk Elements
Total nonperforming loans decreased from $350,000 or 0.79% of total
loans at December 31, 2005, to $0 or 0.00% of total loans at March 31, 2006.
The nonperforming loans shown below carry a guarantee by the Small Business
Administration covering $262,000 at December 31, 2005.
As shown in the following table, nonperforming assets as a percentage
of total assets were 0.00% and 0.46%, as of March 31, 2006 and December 31,
2005, respectively.
March 31, 2006 December 31, 2005
-------------- -----------------
($ in Thousands)
<s> <c> <c>
Loans 90 days or more past due and still accruing $ 0 $ 0
====== ======
Total nonperforming loans and nonperforming assets $ 0 $ 350
====== ======
Nonperforming loans as a percent of total loans 0.00% 0.79%
Nonperforming assets as a percent of total assets 0.00% 0.46%
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, 2006, the total
approved loan commitments unfunded amounted to $6.4 million, which includes
the unadvanced portion of loans of $5.9 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, 2006, totaled $24.4 million and $5.0
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, 2006, we had total collateral available to support an
additional $20.5 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 $11.9 million
in borrowing capacity at March 31, 2006.
Stockholders' Equity
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 6.38% of total assets at March 31, 2006 compared to 6.54% of total assets
at December 31, 2005.
16
As of March 31, 2006, 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, 2006 were as follows: total risk-
based capital 12.95%, Tier I risk based 12.16% and Tier I leverage (core
capital) 6.10%. 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.
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 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.
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
17
* 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, 2006, 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.
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
18
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) 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 12, 2006 /s/ William M. Pierce, Jr.
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William M. Pierce, Jr.
President and Chief Executive Officer
Date: May 12, 2006 /s/ Karl F. Betz
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Karl F. Betz
Senior Vice President and Chief
Financial Officer
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