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 June 30, 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 Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Maryland 20-4649880
(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)
Monadnock Community Bancorp, Inc.
(Former name of former address, if changed since last report)
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 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 August 1, 2006, there were 1,293,608 shares issued and outstanding
of the issuer's common stock.
Transitional Small Business Disclosure Format (check one) Yes ( ) No (X)
INDEX
Monadnock Bancorp, Inc. and Subsidiary
Part I Financial Information Page
--------------------- ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2006
(unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Controls and Procedures 19
Part II. Other Information
-----------------
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
2
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, December 31,
ASSETS 2006 2005
- ------ -------- ------------
(Unaudited)
Cash and due from banks $ 1,081,017 $ 668,055
Interest-bearing demand deposits with other banks 2,833 1,971
Federal funds sold 3,060,000 185,000
----------- -----------
Total cash and cash equivalents 4,143,850 855,026
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 26,939,959 27,520,401
Federal Home Loan Bank stock, at cost 970,000 1,220,400
Loans, net of allowance for loan losses of $312,768 as of
June 30, 2006 and $311,250 as of December 31, 2005 49,371,459 44,481,338
Premises and equipment 809,254 810,954
Goodwill 132,293 132,293
Core deposit intangible 92,708 104,208
Accrued interest receivable 342,251 319,038
Other assets 391,273 257,310
----------- -----------
Total assets $83,293,047 $75,800,968
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 6,149,119 $ 5,268,981
Interest-bearing 51,814,294 47,968,935
----------- -----------
Total deposits 57,963,413 53,237,916
Federal Home Loan Bank advances 15,277,022 17,481,950
Other liabilities 373,804 127,264
----------- -----------
Total liabilities 73,614,239 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 10,000,000 shares at
June 30, 2006 of Monadnock Bancorp, Inc. stock and 18,000,000 shares at
December 31, 2005 of Monadnock Community Bancorp, Inc. stock;
1,293,608 and 944,631 shares issued and outstanding at June 30, 2006
and December 31, 2005, respectively 12,936 9,446
Paid-in capital 7,724,073 2,814,032
Retained earnings 2,582,778 2,553,142
Unearned compensation - ESOP (248,020) (114,570)
Unearned compensation - Recognition and Retention Plan (154,560) (154,560)
Accumulated other comprehensive loss (238,399) (153,652)
----------- -----------
Total stockholders' equity 9,678,808 4,953,838
----------- -----------
Total liabilities and stockholders' equity $83,293,047 $75,800,968
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2006 2005 2006 2005
---------- --------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $ 789,055 $ 521,348 $1,506,358 $1,026,150
Interest on investments-taxable 260,807 309,311 521,953 550,917
Other interest income 19,381 18,566 44,339 35,127
---------- --------- ---------- ----------
Total interest and dividend income 1,069,243 849,225 2,072,650 1,612,194
---------- --------- ---------- ----------
Interest expense:
Interest on deposits 415,895 265,740 740,810 494,395
Interest on Federal Home Loan Bank advances 149,573 154,450 324,895 287,005
---------- --------- ---------- ----------
Total interest expense 565,468 420,190 1,065,705 781,400
---------- --------- ---------- ----------
Net interest and dividend income 503,775 429,035 1,006,945 830,794
(Benefit) provision for loan losses (725) (20,000) 12,282 (20,000)
---------- --------- ---------- ----------
Net interest and dividend income
after (benefit) provision for loan losses 504,500 449,035 994,663 850,794
---------- --------- ---------- ----------
Noninterest income:
Service charges on deposits 50,364 33,578 103,281 63,579
Net gain on sales of available-for-sale securities 13,627
Net gain on sales of loans 37,740
Loan commissions 1,586 3,642
Other income 17,218 14,089 30,272 27,573
---------- --------- ---------- ----------
Total noninterest income 67,582 49,253 133,553 146,161
---------- --------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 282,477 282,882 545,258 560,733
Occupancy expense 37,823 40,800 76,464 78,785
Equipment expense 21,237 16,686 44,232 32,655
Data processing 48,995 44,465 98,774 87,435
Blanket bond insurance 4,988 5,511 10,499 11,021
Professional fees 29,136 34,448 64,143 95,875
Supplies and printing 9,636 13,754 19,465 18,607
Telephone expense 13,186 12,536 25,816 23,548
Marketing expense 17,039 22,480 32,136 45,194
Postage expense 10,129 10,792 19,585 21,526
Other expense 84,240 69,894 156,531 139,506
---------- --------- ---------- ----------
Total noninterest expense 558,886 554,248 1,092,903 1,114,885
---------- ------- ---------- ----------
Income (loss) before income tax expense (benefit) 13,196 (55,960) 35,313 (117,930)
Income tax expense (benefit) 726 (22,132) 5,677 (42,912)
---------- --------- ---------- ----------
Net income (loss) $ 12,470 $ (33,828) $ 29,636 $ (75,018)
========== ========= ========== ==========
Shares used in computing net income (loss) per share:
Basic 941,640 922,718 936,006 922,718
Diluted 949,504 922,718 943,092 922,718
Net income (loss) per share - basic $ 0.01 $ (0.04) $ 0.03 $ (0.08)
Net income (loss) per share - diluted $ 0.01 $ (0.04) $ 0.03 $ (0.08)
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
2006 2005
----------- ------------
Cash flows from operating activities:
Net income (loss) $ 29,636 $ (75,018)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Net gains on sales of available-for-sale securities (13,627)
Net amortization of securities 39,460 51,108
Change in deferred loan origination costs, net (50,949) (7,041)
Provision (benefit) for loan losses 12,282 (20,000)
Net gains on sales of loans (37,740)
Depreciation and amortization 53,183 40,500
Increase in accrued interest receivable (23,213) (88,154)
Amortization of core deposit intangible 11,500 13,000
Increase in other assets (17,040) (65,037)
Decrease (increase) in loan servicing rights and interest-only strips, net 3,610 (5,945)
(Increase) decrease in prepaid expenses (69,541) 1,913
Deferred tax benefit (1,127)
Decrease (increase) in taxes receivable 5,719 (42,912)
Increase in accrued ESOP and Recognition and Retention Plan 16,916 9,015
Increase in accrued expenses 95,420 56,703
(Decrease) increase in accrued interest payable (8,068) 8,207
Increase in other liabilities 8,822 1,238
----------- ------------
Net cash provided by (used in) operating activities 106,610 (173,790)
----------- ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,395,103) (14,700,357)
Proceeds from sales of available-for-sale securities 3,212,446
Principal payments received on available-for-sale securities 3,795,753 5,785,466
Redemption of Federal Home Loan Bank stock 250,400
Loan originations and principal collections, net (2,906,975) (1,537,008)
Loans purchased (1,944,536) (137,235)
Recoveries of previously charged off loans 59 3,808
Proceeds from sales of loans 536,264
Payments received relating to other real estate owned 2,606
Capital expenditures - premises and equipment (51,483) (109,303)
----------- ------------
Net cash used in investing activities (4,251,885) (6,943,313)
----------- ------------
Cash flows from financing activities:
Net decrease in demand deposits, savings and NOW deposits (1,471,755) (1,359,309)
Net increase in time deposits 6,197,252 8,070,351
Net change on short-term advances from Federal Home Loan Bank (2,500,000)
Long-term advances from Federal Home Loan Bank 1,610,411 4,709,742
Payments on long-term advances from Federal Home Loan Bank (3,815,339) (1,947,145)
Liquidation of Monadnock Mutual Holding Company 50,000
Recognition of stock option expense 10,579
Net proceeds from issuance of common stock (total proceeds
of $5,661,448, less offering costs of $808,497) 4,852,951
----------- ------------
Net cash provided by financing activities 7,434,099 6,973,639
----------- ------------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Six Months Ended June 30, 2006 and 2005
---------------------------------------
(UNAUDITED)
(continued)
2006 2005
----------- ------------
Net increase (decrease) in cash and cash equivalents 3,288,824 (143,464)
Cash and cash equivalents at beginning of period 855,026 1,777,798
----------- ------------
Cash and cash equivalents at end of period $ 4,143,850 $ 1,634,334
=========== ============
Supplemental disclosures:
Interest paid $ 1,073,773 $ 773,193
Income taxes paid 2,456 456
Commitment to purchase 17,000 ESOP shares 133,450
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1. - Financial Statements
Condensed Notes to Unaudited Consolidated Financial Statements
--------------------------------------------------------------
June 30, 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 and Stock
Issuance, the Bank became a federally chartered stock bank and wholly-owned
subsidiary of Monadnock Community Bancorp, Inc., a federally chartered stock
holding company. Monadnock Community Bancorp, Inc. became a majority owned
subsidiary of Monadnock Mutual Holding Company, a federally chartered mutual
holding company. On June 28, 2006, in accordance with a Plan of Conversion and
Reorganization, the Bank became the wholly-owned subsidiary of Monadnock
Bancorp, Inc. (the "Company"), a Maryland chartered stock holding company.
Further, Monadnock Mutual Holding Company sold its ownership interest in
Monadnock Community Bancorp, Inc. to the public in a "second step" offering and
ceased to exist. 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, 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 and six month periods ended June
30, 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 June 30, 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. Adoption of Plan to Convert Mutual Holding Company to Stock Form
On February 9, 2006 and as amended on April 25, 2006, the Boards of
Directors of Monadnock Mutual Holding Company, Monadnock Community Bancorp,
Inc., and the Bank adopted a Plan of Conversion and Reorganization pursuant to
which Monadnock Mutual Holding Company would convert from the mutual holding
company form of organization into the stock holding company form of
organization. The Plan of Conversion and Reorganization involved 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,
Monadnock Bancorp, Inc. offered for sale shares of its common stock to the
Bank's depositors, members of the community, stockholders of Monadnock Community
Bancorp, Inc., members of the general public and the Bank's employee stock
ownership plan. The Plan of Conversion and Reorganization further provided for
the exchange of shares of Monadnock Community Bancorp, Inc. common stock
currently owned by public stockholders
7
for shares of the new holding company. The conversion was subject to approval by
the Office of Thrift Supervision, the members of Monadnock Mutual Holding
Company and stockholders of Monadnock Community Bancorp, Inc.
On June 28, 2006, the Plan of Conversion and Reorganization was ratified
by the Company and was completed. The Company sold 707,681 shares, or the
maximum of the offering range, to the public raising approximately $4.85 million
in net proceeds. As part of the conversion, existing public stockholders of
Monadnock Community Bancorp, Inc. received 1.3699 shares of Company common stock
in exchange for each of their existing shares of Monadnock Community Bancorp,
Inc. common stock. At June 30, 2006, the employee stock ownership plan had
commitments to purchase 17,000 shares of common stock for $133,450, or $7.85 per
share. Early in the third quarter, the employee stock ownership plan completed
its purchase of 42,460 shares, for an aggregate value of $331,531, or $7.81 per
share. All employee stock ownership plan shares, comprising 6% of the total
shares sold in the offering, were purchased in the open market.
Note 3. 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 4. 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 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.
The amortized cost and estimated market value of securities at June 30,
2006 (unaudited) and December 31, 2005 are as follows:
Amortized Estimated
Cost Basis Market Value
---------- ------------
June 30, 2006:
U. S. Government agency obligations $ 3,000,000 $ 2,939,063
Mortgage-backed securities:
FNMA 2,815,651 2,796,187
FHLMC 4,213,048 4,107,959
GNMA 17,306,025 17,096,750
----------- -----------
Total mortgage-backed securities 24,334,724 24,000,896
----------- -----------
Total investments in available-for-sale securities $27,334,724 $26,939,959
=========== ===========
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
=========== ===========
8
Note 5. Loans
Loans consist of the following at:
June 30, December 31,
2006 2005
----------- ------------
(unaudited)
One- to four-family residential $25,390,463 $23,597,196
Home equity 5,683,486 5,794,179
Commercial real estate 9,103,619 8,429,921
Multifamily 587,863 597,323
Construction and land development loans 1,346,389 479,786
Commercial loans 5,493,154 4,339,644
Consumer loans 1,820,855 1,347,091
----------- -----------
49,425,829 44,585,140
Allowance for loan losses (312,768) (311,250)
Deferred costs, net 258,398 207,448
----------- -----------
Net loans $49,371,459 $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.
Changes in the allowance for loan losses are as follows:
Six months ended
June 30,
---------------------
2006 2005
-------- --------
(unaudited)
Balance at beginning of period $311,250 $324,502
Provision (benefit) for loan losses 12,282 (20,000)
Recoveries of loans previously charged off 59 3,808
Charge offs (10,823) (500)
-------- --------
Balance at end of period $312,768 $307,810
======== ========
Information with respect to impaired loans consisted of the following at:
June 30, December 31,
2006 2005
----------- ------------
(unaudited)
Recorded investment in impaired loans $ 0 $350,022
======= ========
Impaired loans with allowances for credit losses $ 0 $350,022
======= ========
Allowance for credit losses on impaired loans $ 0 $ 13,126
======= ========
9
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 $154,000 and $489,000 for
the six months ended June 30, 2006 and 2005, respectively. During the three and
six months ended June 30, 2006 and 2005, the Company recognized no income on
impaired loans.
Note 6. Deposits
Interest-bearing deposits consisted of the following at:
June 30, December 31,
2006 2005
----------- ------------
(unaudited)
NOW accounts $ 2,802,073 $ 3,193,844
Savings accounts 2,642,425 2,779,991
Money market deposit accounts 9,312,196 11,134,752
Time certificates 37,057,600 30,860,348
----------- -----------
$51,814,294 $47,968,935
=========== ===========
10
Monadnock Bancorp, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 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 Bancorp, Inc. and its wholly owned subsidiary,
Monadnock Community 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 and principal payments on 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 service charges on deposit accounts,
merchant fee income and any gain on sale of loans and investments. Noninterest
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, Federal Home Loan Bank dividend
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.
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 a new office,
either by acquisition or by exploring opportunities in our market area although
we currently have no arrangements or understandings regarding any specific
transaction. In the fourth quarter of 2004, we completed the acquisition of our
Winchendon, Massachusetts branch
11
from another financial institution. At the time of the acquisition, the branch
had $5.4 million in deposits. By June 30, 2006, we were successful in growing
the branch to $10.7 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 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
$49.4 million at June 30, 2006, or a 60.9% increase. We plan to continue to grow
our loan portfolio with the net proceeds raised in our recently completed stock
offering.
Expanding Market Presence Through New Offices. Total assets have grown
$39.6 million, or 90.6%, from $43.7 million at December 31, 2003 to $83.3
million at June 30, 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
and our recently completed 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 a potential new
office 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 deposits
through branch acquisitions, and the establishment of a new office although we
currently have no arrangements or understandings regarding any specific
transaction. Our deposits increased $23.6 million, or 68.6%, to $58.0 million at
June 30, 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 $134,000 during the first two quarters of
2006 from $95,000 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 June 30, 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 proceeds from our recently
completed stock 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.
12
Changes in Financial Condition from December 31, 2005 to June 30, 2006
General. Our total assets increased by $7.5 million, or 9.9%, to $83.3
million at June 30, 2006 compared to $75.8 million at December 31, 2005. The
increase primarily reflected growth in our net loan portfolio of $4.9 million to
$49.4 million at June 30, 2006 from $44.5 million at December 31, 2005, an
increase in cash and cash equivalents of $3.3 million, partially offset by a
decrease in our investment portfolio of $580,000. The increase in assets was
funded by an increase in deposits of $4.7 million and an increase in
stockholders' equity of $4.7 million, partially offset by a decrease in Federal
Home Loan Bank advances of $2.2 million.
Cash and cash equivalents. Cash and cash equivalents increased $3.3
million to $4.1 million at June 30, 2006 from $855,000 at December 31, 2005.
Cash and due from banks increased $413,000 to $1.1 million at June 30, 2006 from
$668,000 at December 31, 2005 and interest-bearing demand deposits in other
financial institutions, including Federal funds sold, increased $2.9 million to
$3.1 million at June 30, 2006 from $187,000 at December 31, 2005. 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 Federal Home Loan Bank advances fluctuate. Interest-bearing 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
the Company's depository bank accounts that settled subsequent to the end of the
reporting period. The increase in interest-bearing deposits is primarily due to
the stock offering which provided net proceeds of approximately $4.9 million at
the end of the second quarter of 2006.
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 at June 30, 2006 and December 31, 2005.
Our investment portfolio decreased $580,000, or 2.1%, to $26.9 million at
June 30, 2006 from $27.5 million at December 31, 2005. The decrease was
primarily due to $3.8 million in principal paydowns of mortgage-backed
securities, partially being offset by $3.4 million in purchases of
mortgage-backed securities in the second quarter of 2006.
At June 30, 2006, the weighted average maturity of mortgage-backed
securities available for sale is 311 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 weighted average to next repricing adjustment for
mortgage-backed securities is thirteen months on average.
Loans. Our net loan portfolio increased $4.9 million, or 11.0%, from $44.5
million at December 31, 2005 to $49.4 million at June 30, 2006. Included in this
increase is $1.9 million of purchased loans of which $959,000 related to the
purchase of five-to-seven year adjustable rate mortgages, $471,000 related to a
construction participation and $515,000 related to mobile home loans which are
classified as consumer loans. One- to four-family residential loans increased
$1.8 million to $25.4 million at June 30, 2006 from $23.6 million at December
31, 2005. Commercial and commercial real estate loans increased $1.2 million and
$674,000, respectively, while construction and land development loans increased
$867,000 to $1.3 million at June 30, 2006 from $480,000 at December 31, 2005.
Consumer loans increased $474,000 to $1.8 million at June 30, 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
approximately 85 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 $4.8 million, or 9.0%, to $58.0
million at June 30, 2006 from $53.2 million at December 31, 2005.
Interest-bearing deposits increased $3.8 million, to $51.8 million at June 30,
2006 from $48.0 million at December 31, 2005, while non-interest-bearing
deposits increased $880,000 to $6.1 million at June 30, 2006 from $5.3 million
at December 31, 2005. The increase in interest-bearing deposits is attributable
to time certificates which increased $6.2 million, partially offset by decreases
in money market, NOW and savings accounts of $1.8 million, $392,000 and
$138,000, 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 all other interest-bearing accounts is primarily
the result of customers transferring money out of these 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 5.25% at the end of the second
13
quarter of 2006. The increase in deposits for the quarter was used to fund loan
growth and pay off matured and putable Federal Home Loan Bank advances.
Borrowings. Federal Home Loan Bank advances decreased $2.2 million to
$15.3 million at June 30, 2006 from $17.5 million at December 31, 2005.
Principal payments due on other borrowings after June 30, 2006 are $3.2
million in 2006, $1.7 million in 2007, $425,000 in 2008, $3.9 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 $4.0 million of borrowings during 2006 if the
three-month LIBOR exceeds specified rates; $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 June 30, 2006, the three month LIBOR was at 5.48%. In addition, the
Federal Home Loan Bank has called 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 increased $4.7 million to
$9.7 million at June 30, 2006 from $5.0 million at December 31, 2005. The
increase in stockholders' equity of $4.7 million was attributable to our raising
approximately $4.9 million of net proceeds in the stock offering completed at
the end of the second quarter of 2006. As a result, our equity to assets ratio
was 11.63% at June 30, 2006 compared to 6.54% at December 31, 2005.
Comparison of Results of Operations for the Three Months Ended June 30, 2006
and 2005.
General. We recorded net income of $13,000 for the three months ended
June 30, 2006 compared with a net loss of $34,000 for the three months ended
June 30, 2005. The increase in earnings for the three months ended June 30,
2006 compared with the same period a year earlier is primarily attributable to
an increase in net interest and dividend income of $75,000, an increase in
noninterest income of $18,000, partially offset by an increase in noninterest
expense of $5,000 and a decrease in the benefit for loan losses of $19,000. Net
income for the second quarter was $9,000 ($14,000 on a pre-tax basis) lower
than anticipated as a result of a change in the Federal Home Loan Bank ("FHLB")
dividend schedule. The FHLB of Boston has indicated that it expects to pay a
half year dividend in the third quarter rather than a quarterly dividend in
each of the second and third quarters of 2006.
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 improved from 115.9% for the three months
ended June 30, 2005 to 97.8% for the three months ended June 30, 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 June 30, 2006 was 2.63% as
compared to 2.30% for the three months ended June 30, 2005 and 2.72% for the
three months ended March 31, 2006. The increase in net interest margin period to
period is attributable to a change in the asset mix from 48.4% of
interest-earning assets in loans for 2005 to 63.2% for 2006 as well as an
increase in interest-earning average assets by $2.0 million during this period.
In the event we are unable to generate continued commercial and residential
volume for the remainder of 2006, or become reliant on investment 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 $75,000, or 17.5%, to $504,000 for the three months ended June 30,
2006 compared to $429,000 for the three months ended June 30, 2005, reflecting
a $220,000, or 25.9%, increase in interest and dividend income, and a $145,000,
or 34.5%, increase in interest expense. Our interest rate spread was 2.23% for
the three months ended June 30, 2006 compared to 2.03% for the three months
ended June 30, 2005 and 2.40% for the three months ended March 31, 2006. 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 seventeen 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. In addition, the delay in
the declaration of the FHLB dividend for the second quarter noted above
resulted in a decrease in the interest rate spread and net interest margin of 7
and 8 basis points, respectively, for the quarter ended June 30, 2006.
14
Interest and Dividend Income. Total interest and dividend income increased
by $220,000, or 25.9%, to $1.1 million for the three months ended June 30, 2006
compared with $849,000 for the three months ended June 30, 2005. The increase of
$220,000 relates to an increase in the yields on interest-earning assets from
4.56% for the three months ended June 30, 2005 to 5.59% for the three months
ended June 30, 2006 coupled with an increase in average assets of $2.0 million,
or 2.7%, to $76.7 million for the three months ended June 30, 2006 from $74.7
million for the same period in 2005. Interest income on loans increased
$268,000, or 51.4%, to $789,000 for the quarter ended June 30, 2006 from
$521,000 for the same period in 2005, primarily due to a $12.3 million increase
in average loans from $36.2 million for the quarter ended June 30, 2005 to $48.5
million for the same period in 2006, and to a lesser extent an increase in loan
yields from 5.78% for the quarter ended June 30, 2005 to 6.53% for the same
period in 2006. The increase in average loans is attributable to a $7.8 million
increase in one- to four-family residential and home equity loans, a $3.8
million increase in commercial, commercial real estate and short-term
construction loans as well as a $1.0 million increase in consumer loans. The
increase in average loan yields from 5.78% for the quarter ended June 30, 2005
to 6.53% for the same period 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 425 basis points.
Interest and dividend income on investment securities, Federal Home Loan
Bank stock and interest-earning deposits with other financial institutions
decreased $48,000 for the three months ended June 30, 2006 to $280,000 from
$328,000 for the three months ended June 30, 2005. The decrease was primarily
the result of a decrease in the average balance of the investment portfolio by
$10.3 million to $28.2 million for the quarter ended June 30, 2006, from $38.5
million for the same period in 2005, the reduction of $14,000 in anticipated
income due to the change in the FHLB dividend schedule as noted above, partially
offset by an increase in the overall yield on total investments from 3.41% for
the quarter ended June 30, 2005 to 3.99% for the same period in 2006. 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.
Interest Expense. Total interest expense increased by $145,000 to $565,000
for the three months ended June 30, 2006 from $420,000 for the three months
ended June 30, 2005. The increase of $145,000 relates primarily to an increase
in the average overall cost of interest-bearing liabilities to 3.36% for the
quarter ended June 30, 2006 from 2.53% for the same period in 2005. Interest
expense on deposits increased $150,000 to $416,000 for the quarter ended June
30, 2006 from $266,000 for the same period in 2005. The increase was primarily
the result of an increase in the average balances of time certificates of $6.2
million to $34.9 million for the quarter ended June 30, 2006 from $28.7 million
for the same period in 2005, coupled with an increase in the average costs of
time certificates to 4.18% for the quarter ended June 30, 2006 from 3.11% for
the same period in 2005. Average time certificates comprised 69.2% of
interest-bearing deposits for the quarter ended June 30, 2006 compared with
62.2% for the same period 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 $1.9 million to $15.5 million for the quarter ended June 30, 2006 from
$17.4 million for the same period in 2005, partially offset by an increase in
costs on these deposits from 1.00% for the quarter ended June 30, 2005 to 1.35%
for the same period in 2006. The decrease in savings deposits is primarily
attributable to customers transferring these deposits to more attractive
short-term time certificates.
Allowance for Loan Losses. The benefit for loan losses was $1,000 for the
three months ended June 30, 2006 compared with $20,000 for the three months
ended June 30, 2005. The benefit of $1,000 related specifically to an overdraft
program which was initiated in December 2005 for consumer and business checking
customers. The benefit of $20,000 for 2005 was primarily the result of the
payoff of nonperforming assets and special mention assets in the second and
third quarter of 2005, partially offset by the downgrade of loans in the second
quarter of 2005. Total nonperforming assets decreased $481,000 to $0 or 0.00% of
total assets at June 30, 2006 compared to $481,000 ($353,000 of which was
guaranteed by the United States Small Business Administration), or 0.62% of
total assets at June 30, 2005. The allowance for loan losses as a percent of
total loans was 0.63% for June 30, 2006 compared with 0.83% at June 30, 2005.
The mix of the loan portfolio continues to be weighted in one- to four-family
residential and home equity loans which accounted for 62.9% and 63.8% of total
loans at June 30, 2006 and 2005, respectively. These loans generally have a
lower credit risk allocation and the portfolio has reduced levels of criticized
and classified loans. Our methodology for analyzing the allowance for loan
losses consists of specific and general components. The specific components
relates to loans that are classified as doubtful, substandard or special
mention. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on
historical loss experience for consumer and commercial loans and peer group loss
experience for real estate loans, adjusted for qualitative and quantitative
factors. Peer group loss experience, adjusted for qualitative and quantitative
factors unique to the Bank, is used in arriving at our general components for
residential real estate loans since our historical loss experience has been
minimal. 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.
15
Total Noninterest Income. Noninterest income increased $18,000, or 36.7%,
to $67,000 for the three months ended June 30, 2006 from $49,000 for the three
months ended June 30, 2005. The increase for the three months ended June 30,
2006 compared to 2005 was primarily attributable to an increase in service
charges on deposits of $17,000. 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 increased slightly by
$5,000 to $559,000 for the three months ended June 30, 2006 compared to $554,000
for the three months ended June 30, 2005. The increase is attributable to $9,000
in expense related to stock option and recognition and retention plans for 2006,
increased costs related to equipment depreciation and maintenance contracts on
data processing equipment, partially offset a decrease in professional,
marketing and supplies and printing expense, as well as an increase in deferrals
of loan origination costs for 2006 compared with 2005.
Comparison of Results of Operations for the Six Months Ended June 30, 2006 and
2005.
General. We recorded net income of $30,000 for the six months ended June
30, 2006 compared with a net loss of $75,000 for the six months ended June 30,
2005. The increase in earnings for the six months ended June 30, 2006 compared
with the same period a year earlier is primarily attributable to an increase in
net interest and dividend income of $176,000, a decrease in noninterest expense
of $22,000, partially offset by a decrease in noninterest income of $13,000 and
an increase in the provision for loan losses of $12,000 as compared to a benefit
of $20,000 for the prior comparable period. Net income for the six months ended
June 30, 2006 was $9,000 ($14,000 on a pre-tax basis) lower than anticipated as
a result of a change in the Federal Home Loan Bank ("FHLB") dividend schedule.
The FHLB of Boston has indicated that it expects to pay a half year dividend in
the third quarter rather than a quarterly dividend in each of the second and
third quarters of 2006.
Net Interest and Dividend Income. Net interest and dividend income
increased $176,000, or 21.2%, to $1.0 million for the six months ended June 30,
2006 compared to $831,000 for the six months ended June 30, 2005, reflecting a
$460,000, or 28.5%, increase in interest and dividend income, and a $284,000, or
36.4%, increase in interest expense. Our interest rate spread was 2.32% for the
six months ended June 30, 2006 compared to 2.06% for the six months ended June
30, 2005. 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
seventeen 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. In addition, the delay in the declaration of
the FHLB dividend for the second quarter noted above resulted in a decrease in
the interest rate spread and net interest margin of 3 basis points,
respectively, for the six months ended June 30, 2006.
Interest and Dividend Income. Total interest and dividend income
increased by $460,000, or 28.5%, to $2.1 million for the six months ended June
30, 2006 compared with $1.6 million for the six months ended June 30, 2005. The
increase of $460,000 relates to an increase in the yields on interest earning
assets from 4.51% for the six months ended June 30, 2005 to 5.51% for the six
months ended June 30, 2006 coupled with an increase in average assets of $3.7
million, or 5.1%, to $75.8 million for the six months ended June 30, 2006 from
$72.1 million for the same period in 2005. Interest income on loans increased
$480,000, or 46.8%, to $1.5 million for the six months ended June 30, 2006 from
$1.0 million for the same period in 2005, primarily due to a $11.2 million
increase in average loans from $36.1 million for the six months ended June 30,
2005 to $47.3 million for the same period in 2006, and to a lesser extent an
increase in loan yields from 5.74% for the six months ended June 30, 2005 to
6.43% for the same period in 2006. The increase in average loans is
attributable to a $7.6 million increase in one-to-four family residential and
home equity loans, a $2.6 million increase in commercial, commercial real
estate and short-term construction loans as well as a $1.0 million increase in
consumer loans. The increase in average loan yields from 5.74% for the six
months ended June 30, 2005 to 6.43% for the same period 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 425 basis
points.
Interest Expense. Total interest expense increased by $284,000 to $1.1
million for the six months ended June 30, 2006 from $781,000 for the six months
ended June 30, 2005. The increase of $284,000 relates primarily to an increase
in the average overall cost of interest-bearing liabilities to 3.20% for the six
months ended June 30, 2006 from 2.45% for the same period in 2005, and to a
lesser extent, an increase of $3.0 million in average interest-bearing
liabilities to $67.3 million for the six months ended June 30, 2006 from $64.3
million for the same period in 2005. Interest expense on deposits increased
$247,000 to $741,000 for the six months ended June 30, 2006 from $494,000 for
the same period in 2005. The increase was primarily the result of an increase in
the average balances of time certificates of $5.7 million to $32.6 million for
the six months ended June 30, 2006 from $26.9 million for the same period in
2005, coupled with an increase in the average costs of time certificates to
3.94% for the six months ended June 30, 2006 from 3.06% for the same period in
2005. Average time certificates comprised 66.8% of interest-bearing deposits for
the six months ended June 30, 2006 compared with 60.3% for
16
the same period 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 $1.6
million to $16.1 million for the six months ended June 30, 2006 from $17.7
million for the same period in 2005, partially offset by an increase in costs on
these deposits from 0.98% for the six months ended June 30, 2005 to 1.31% for
the same period 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 FHLB advances increased $38,000 to $325,000 for the
six months ended June 30, 2006 from $287,000 for the six months ended June 30,
2005. The increase was primarily due to an increase in average borrowing costs
to 3.54% for the six months ended June 30, 2006 from $287,000 for the six months
ended June 30, 2005, partially offset by a decrease in the average balances of
FHLB advances of $1.1 million to $18.5 million for the six months ended June 30,
2006 from $19.6 million for the same period in 2005.
Allowance for Loan Losses. The Company recorded a provision for loan
losses of $12,000 for the six months ended June 30, 2006 compared with a benefit
for loan losses of $20,000 for the six months ended June 30, 2005. The provision
for loan losses of $12,000 is entirely related to an overdraft program which was
initiated in December 2005 for consumer and business checking customers. The
benefit of $20,000 for 2005 was primarily the result of the payoff of
nonperforming assets and special mention assets in the second and third quarter
of 2005, partially offset by the downgrade of loans in the second quarter of
2005. The allowance for loan losses as a percent of total loans was 0.63% at
June 30, 2006 and 0.83% at June 30, 2005, respectively. 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 $13,000 to $133,000
for the six months ended June 30, 2006 from $146,000 for the same period in
2005. The decrease for the period was attributable to a decrease 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
$40,000. The decrease in net gains on sales of loans is due to the sale of
$499,000 of United States Small Business Administration guaranteed loans during
the six months ended June 30, 2005 compared with $0 for the same period 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 $22,000, or
2.0%, to $1.1 million for the six months ended June 30, 2006 and June 30, 2005,
respectively. The decrease is attributable to a reduction in expenses related to
professional, marketing and reduction in salaries and benefits, partially offset
by increased costs related to equipment depreciation and maintenance contracts
on data processing equipment. The reduction in salaries and benefits expense is
primarily due to increased deferrals in loan origination costs for 2006 compared
with 2005, partially offset by the recording of $18,000 in stock option and
recognition and retention plan expense for 2006 compared with $0 for 2005.
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 June 30, 2006. The
nonperforming loans shown below carry a guarantee by the Small Business
Administration covering $262,000 at December 31, 2005.
As shown in the following table, nonperforming assets as a percentage of
total assets were 0.00% and 0.46%, as of June 30, 2006 and December 31, 2005,
respectively.
June 30, 2006 December 31, 2005
------------- -----------------
($ in Thousands)
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%
17
Liquidity and Commitments
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. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained.
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 June 30, 2006, the total approved loan commitments unfunded
amounted to $7.9 million, which includes the unadvanced portion of loans of $6.8
million. Certificates of deposits and advances from the Federal Home Loan Bank
of Boston scheduled to mature in one year or less at June 30, 2006, totaled
$27.4 million and $4.4 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 June 30, 2006, we had total collateral available to support an
additional $24.8 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 $15.9 million in borrowing
capacity at June 30, 2006.
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 $9.7 million or
11.63% of total assets at June 30, 2006 compared to 6.54% of total assets at
December 31, 2005.
As of June 30, 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 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 June 30, 2006
were as follows: total risk-based capital - 20.69%, Tier I risk based - 19.96%
and Tier I leverage (core capital) - 10.11%. 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.
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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.
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.
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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 June 30, 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
Our registration statement on Form SB-2 (333-132548) was declared
effective by the Securities and Exchange Commission on May 12, 2006. We
registered 1,487,813 shares for an aggregate offering price of $11,902,504. Ryan
Beck & Co., Inc. was the underwriter on the stock offering. We completed our
stock offering at the end of the second quarter of 2006. We sold 707,681 shares
of common stock, par value of $0.01 per share at a price of $8.00 per share and
had total proceeds of $5,661,448. Our total expenses paid and accrued to date
are approximately $809,000. The net proceeds of approximately $4.9 million have
been invested in short-term instruments such as federal funds sold and
adjustable rate mortgage-backed securities. We anticipate to deploy this capital
into loans during the next three years.
Item 3. Defaults Upon Senior Securities
Not applicable
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Item 4. Submission of Matters to a Vote of Security Holders
On June 20, 2006, the Company held its Annual Meeting of Stockholders. The
matters which were submitted to a vote of the security holders and the results
of the voting at such meeting were as follows:
Results of Stockholder Vote
---------------------------------------------
Abstentions
and Broker
Matter Submitted For Against Withheld Non-Votes
- ---------------- --- ------- -------- -----------
1) Election of the following directors for three years
or until their successors are elected and qualified:
A) Samuel J. Hackler 879,274 N/A 4,000 N/A
B) Edward J. Shea 881,184 N/A 2,090 N/A
1) Election of the following directors for two years
or until their successors are elected and qualified:
A) Nancy L. Carlson 881,184 N/A 2,090 N/A
2) Approval of the Plan of Conversion and
Reorganization to convert Monadnock Mutual
Holding Company to a Capital Stock State-
Chartered Holding Company 782,172 9,670 1,300 90,132
3) Ratification of Shatswell, MacLeod & Company, P.C.
as the Company's auditors for the fiscal year ended
December 31, 2006 878,124 5,150 N/A N/A
Directors Samuel J. Hackler, Edward J. Shea and Nancy L. Carlson continued
in office in their current terms.
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 Bancorp, Inc.
Date: August 10, 2006 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: August 10, 2006 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
22