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 September 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)
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 November 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 September 30, 2006
(unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 20
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 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
2
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
September 30, December 31,
ASSETS 2006 2005
- ------ ------------- ------------
(Unaudited)
Cash and due from banks $ 1,253,893 $ 668,055
Interest-bearing demand deposits with other banks 1,248 1,971
Federal funds sold 240,000 185,000
----------- -----------
Total cash and cash equivalents 1,495,141 855,026
Interest-bearing time deposit in other bank 100,000 100,000
Investments in available-for-sale securities (at fair value) 30,192,934 27,520,401
Federal Home Loan Bank stock, at cost 970,000 1,220,400
Loans, net of allowance for loan losses of $312,555 as of
September 30, 2006 and $311,250 as of December 31, 2005 52,829,849 44,481,338
Premises and equipment 798,507 810,954
Goodwill 132,293 132,293
Core deposit intangible 86,958 104,208
Accrued interest receivable 358,401 319,038
Other assets 299,858 257,310
----------- -----------
Total assets $87,263,941 $75,800,968
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 5,320,897 $ 5,268,981
Interest-bearing 55,225,938 47,968,935
----------- -----------
Total deposits 60,546,835 53,237,916
Federal Home Loan Bank advances 16,882,167 17,481,950
Other liabilities 212,422 127,264
----------- -----------
Total liabilities 77,641,424 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 September 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 September 30, 2006 and December 31, 2005, respectively 12,936 9,446
Paid-in capital 7,717,351 2,814,032
Retained earnings 2,619,114 2,553,142
Unearned compensation - ESOP (446,101) (114,570)
Unearned compensation - Recognition and Retention Plan (154,560) (154,560)
Accumulated other comprehensive loss (126,223) (153,652)
----------- -----------
Total stockholders' equity 9,622,517 4,953,838
----------- -----------
Total liabilities and stockholders' equity $87,263,941 $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 Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2006 2005 2006 2005
---------- -------- ----------- ----------
Interest and dividend income:
Interest and fees on loans $ 860,173 $589,650 $2,366,531 $1,615,800
Interest on investments-taxable 311,256 306,514 833,209 857,431
Other interest income 47,697 23,970 92,036 59,097
---------- -------- ---------- ----------
Total interest and dividend income 1,219,126 920,134 3,291,776 2,532,328
---------- -------- ---------- ----------
Interest expense:
Interest on deposits 495,817 301,425 1,236,627 795,820
Interest on Federal Home Loan Bank advances 151,775 152,555 476,670 439,560
---------- -------- ---------- ----------
Total interest expense 647,592 453,980 1,713,297 1,235,380
---------- -------- ---------- ----------
Net interest and dividend income 571,534 466,154 1,578,479 1,296,948
Provision (benefit) for loan losses 254 12,536 (20,000)
---------- -------- ---------- ----------
Net interest and dividend income
after provision (benefit) for loan losses 571,280 466,154 1,565,943 1,316,948
---------- -------- ---------- ----------
Noninterest income:
Service charges on deposits 47,697 27,502 150,978 91,081
Net gain on sales of available-for-sale securities 13,627
Net gain on sales of loans 37,740
Loan commissions 1,535 5,177
Other income 16,610 15,139 46,882 42,712
---------- -------- ---------- ----------
Total noninterest income 64,307 44,176 197,860 190,337
---------- -------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 313,503 247,493 858,761 808,226
Occupancy expense 37,950 37,941 114,414 116,726
Equipment expense 22,216 16,530 66,448 49,185
Data processing 51,064 43,880 149,838 131,315
Blanket bond insurance 4,727 5,510 15,226 16,531
Professional fees 40,683 20,775 104,826 116,650
Supplies and printing 9,802 12,776 29,267 31,383
Telephone expense 13,244 12,423 39,060 35,971
Marketing expense 9,353 15,162 41,489 60,356
Postage expense 9,237 8,241 28,822 29,767
Other expense 72,493 72,414 229,024 211,920
---------- -------- ---------- ----------
Total noninterest expense 584,272 493,145 1,677,175 1,608,030
---------- -------- ---------- ----------
Income (loss) before income tax expense (benefit) 51,315 17,185 86,628 (100,745)
Income tax expense (benefit) 14,978 2,661 20,655 (40,251)
---------- -------- ---------- ----------
Net income (loss) $ 36,337 $ 14,524 $ 65,973 $ (60,494)
========== ======== =========== ==========
Shares used in computing net income (loss) per share:
Basic 1,234,390 922,718 1,036,560 922,718
Diluted 1,240,743 922,718 1,043,397 922,718
Net income (loss) per share - basic $ 0.03 $ 0.02 $ 0.06 $ (0.07)
Net income (loss) per share - diluted $ 0.03 $ 0.02 $ 0.06 $ (0.07)
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)
Nine Months Ended
September 30,
------------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 65,973 $ (60,494)
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 56,165 80,784
Change in deferred loan origination costs, net (61,561) (28,155)
Provision (benefit) for loan losses 12,536 (20,000)
Net gains on sales of loans (37,740)
Depreciation and amortization 80,147 61,111
Writedown on other real estate owned 894
Increase in accrued interest receivable (39,363) (75,853)
Amortization of core deposit intangible 17,250 19,500
Increase in other assets (13,620) (17,661)
Decrease (increase) in loan servicing rights and interest-only strips, net 5,173 (3,537)
(Increase) decrease in prepaid expenses (72,010) 11,827
Deferred tax benefit (1,787)
Decrease (increase) in taxes receivable 23,027 (40,251)
Increase in accrued ESOP and Recognition and Retention Plan 25,106 13,119
Increase in accrued expenses 55,349 42,917
Increase in accrued interest payable 6,637 6,879
(Decrease) increase in other liabilities (3,255) 1,648
------=----- ------------
Net cash provided by (used in) operating activities 155,767 (58,639)
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (8,670,488) (14,874,703)
Proceeds from sales of available-for-sale securities 3,212,446
Principal payments received on available-for-sale securities 5,987,209 9,249,560
Redemption of Federal Home Loan Bank stock 250,400
Loan originations and principal collections, net (5,221,785) (4,500,488)
Loans purchased (3,079,519) (137,235)
Recoveries of previously charged off loans 1,818 4,811
Proceeds from sales of loans 536,264
Payments received relating to other real estate owned 2,606
Capital expenditures - premises and equipment (67,700) (135,714)
------------ ------------
Net cash used in investing activities (10,800,065) (6,642,453)
------------ ------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, savings and NOW deposits (2,388,412) 172,669
Net increase in time deposits 9,697,331 7,598,754
Net change on short-term advances from Federal Home Loan Bank (2,500,000)
Long-term advances from Federal Home Loan Bank 4,095,556 5,824,443
Payments on long-term advances from Federal Home Loan Bank (4,695,339) (4,416,321)
Liquidation of Monadnock Mutual Holding Company 50,000
Purchase of 42,460 shares for ESOP (331,531)
Recognition of stock option expense 16,113
Net proceeds from issuance of common stock (total proceeds of
$5,661,448, less offering costs of $820,753) 4,840,695
------------ ------------
5
MONADNOCK BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Nine Months Ended September 30, 2006 and 2005
---------------------------------------------
(UNAUDITED)
(continued)
2006 2005
------------ ------------
Net cash provided by financing activities 11,284,413 6,679,545
------------ ------------
Net increase (decrease) in cash and cash equivalents 640,115 (21,547)
Cash and cash equivalents at beginning of period 855,026 1,777,798
------------ ------------
Cash and cash equivalents at end of period $ 1,495,141 $ 1,756,251
============ ============
Supplemental disclosures:
Interest paid $ 1,706,660 $ 1,228,501
Income taxes paid 2,456 456
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
--------------------------------------------------------------
September 30, 2006
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business: 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. 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.
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 nine month periods ended
September 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 September 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 $4.8 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 September 30, 2006, the employee stock ownership plan had
completed its purchase of 42,460 shares of common stock for $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. Weighted average options to purchase 2,263 shares of common stock were
outstanding during the third quarter of 2006, but were not included in the
computation of weighted average common shares outstanding for purposes of
computing diluted earnings per share, because the effect would have been
antidilutive.
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 September
30, 2006 (unaudited) and December 31, 2005 were as follows:
Amortized Estimated
Cost Basis Market Value
---------- ------------
September 30, 2006:
U. S. Government agency obligations $ 3,000,000 $ 2,965,001
Mortgage-backed securities:
FNMA 4,247,398 4,268,267
FHLMC 4,027,301 3,964,917
GNMA 19,127,249 18,994,749
----------- -----------
Total mortgage-backed securities 27,401,948 27,227,933
----------- -----------
Total investments in available-for-sale securities $30,401,948 $30,192,934
=========== ===========
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 consisted of the following at:
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
One- to four-family residential $26,898,997 $23,597,196
Home equity 6,117,743 5,794,179
Commercial real estate 9,160,873 8,429,921
Multifamily 584,272 597,323
Construction and land development loans 1,602,397 479,786
Commercial loans 6,658,342 4,339,644
Consumer loans 1,850,771 1,347,091
----------- -----------
52,873,395 44,585,140
Allowance for loan losses (312,555) (311,250)
Deferred costs, net 269,009 207,448
----------- -----------
Net loans $52,829,849 $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 were as follows:
Nine months ended
September 30,
-----------------------
2006 2005
-------- --------
(unaudited)
Balance at beginning of period $311,250 $324,502
Provision (benefit) for loan losses 12,536 (20,000)
Recoveries of loans previously charged off 1,818 4,811
Charge offs (13,049) (2,062)
-------- --------
Balance at end of period $312,555 $307,251
======== ========
Information with respect to impaired loans consisted of the following at:
September 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 $102,000 and $378,000 for
the nine months ended September 30, 2006 and 2005, respectively. During the
three and nine months ended September 30, 2006 and 2005, the Company recognized
no income on impaired loans.
Note 6. Deposits
Interest-bearing deposits consisted of the following at:
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
NOW accounts $ 3,210,273 $ 3,193,844
Savings accounts 2,446,962 2,779,991
Money market deposit accounts 9,011,024 11,134,752
Time certificates 40,557,679 30,860,348
----------- -----------
$55,225,938 $47,968,935
=========== ===========
Note 7. Impact of Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB
Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specific situations.
Additionally, the servicing asset or servicing liability shall be initially
measured at fair value; however, an entity may elect the "amortization method"
or "fair value method" for subsequent balance sheet reporting periods. SFAS No.
156 is effective as of an entity's first fiscal year beginning after September
15, 2006. Early adoption is permitted as of the beginning of an entity's fiscal
year, provided the entity has not yet issued financial statements, including
interim financial statements, for any period of that fiscal year. The Company
does not expect the adoption of this statement to have a material impact on its
financial condition, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting
for Defined Benefit Pension and other Postretirement Plans - an amendment of
FASB Statements No 87, 88, 106 and 132(R)" (SFAS 158). SFAS 158 requires 1) the
recognition of an asset or liability for the over-funded or under-funded status
of a defined benefit plan, 2) the recognition of actuarial gains and losses and
prior service costs and credits in other comprehensive income, 3) measurement of
plan assets and benefit obligations as of the employer's balance sheet date,
rather than at interim measurement dates as currently allowed, and 4) disclosure
of additional information concerning actuarial gains and losses and prior
service costs and credits recognized in other comprehensive income. This
statement is effective for financial statements with fiscal years ending after
December 15, 2006. The Company does not believe the adoption of this Statement
will have a material impact on the Company's financial position or result of
operations.
10
Monadnock Bancorp, Inc. and Subsidiary
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations September 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 September 30, 2006, we were successful in
growing the branch to $10.6 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
$52.8 million at September 30, 2006, or a 72.0% increase. We plan to continue to
grow our loan portfolio with the net proceeds raised in the stock offering which
was completed on June 28, 2006.
Expanding Market Presence Through New Offices. Total assets have grown
$43.6 million, or 99.8%, from $43.7 million at December 31, 2003 to $87.3
million at September 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 $26.1 million, or 75.9%, to $60.5 million at
September 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 $198,000 during the first three quarters
of 2006 from $139,000 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 September 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 September 30, 2006
General. Our total assets increased by $11.5 million, or 15.2%, to $87.3
million at September 30, 2006 compared to $75.8 million at December 31, 2005.
The increase primarily reflected growth in our net loan portfolio of $8.3
million to $52.8 million at September 30, 2006 from $44.5 million at December
31, 2005 and to a lesser extent an increase in our investment portfolio of $2.7
million and an increase in cash and cash equivalents of $640,000. The increase
in assets for the nine months ended September 30, 2006 was funded by an increase
in deposits of $7.3 million and an increase in stockholders' equity of $4.6
million, partially offset by a decrease in Federal Home Loan Bank advances of
$600,000.
Cash and cash equivalents. Cash and cash equivalents increased $640,000 to
$1.5 million at September 30, 2006 from $855,000 at December 31, 2005. Cash and
due from banks increased $586,000 to $1.3 million at September 30, 2006 from
$668,000 at December 31, 2005 while interest-bearing demand deposits in other
financial institutions, including Federal funds sold, increased $54,000 to
$241,000 at September 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 earning 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 was 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.
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 September 30, 2006 and December 31,
2005.
Our investment portfolio increased $2.7 million, or 9.8%, to $30.2 million
at September 30, 2006 from $27.5 million at December 31, 2005. The increase was
primarily due to the purchase of $8.7 million in mortgage-backed securities
during the second and third quarters of 2006, partially being offset by $6.0
million in principal paydowns of mortgage-backed securities.
At September 30, 2006, the weighted average maturity of mortgage-backed
securities available for sale was 313 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 was fourteen months on average at September 30, 2006.
Loans. Our net loan portfolio increased $8.3 million, or 18.7%, to $52.8
million at September 30, 2006 from $44.5 million at December 31, 2005. Included
in this increase was $3.1 million of purchased loans of which $2.1 million
related to the purchase of three-to-seven year adjustable rate mortgages,
$500,000 related to a short-term construction participation and $475,000 related
to mobile home loans which are classified as consumer loans. One- to four-family
residential loans increased $3.3 million to $26.9 million at September 30, 2006
from $23.6 million at December 31, 2005. Commercial and commercial real estate
loans increased $2.3 million and $731,000, respectively, for the nine months
ended September 30, 2006 while construction and land development loans increased
$1.1 million to $1.6 million at September 30, 2006 from $480,000 at December 31,
2005. Consumer loans increased $504,000 to approximately $1.9 million at
September 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 the final quarter of 2006 due to the slowing housing market.
Deposits. Our total deposits increased $7.3 million, or 13.7%, to $60.5
million at September 30, 2006 from $53.2 million at December 31, 2005.
Interest-bearing deposits increased $7.2 million, to $55.2 million at September
30, 2006 from $48.0 million at December 31, 2005, while non-interest-bearing
deposits remained stable at $5.3 million for September 30, 2006 and December 31,
2005. The increase in interest-bearing deposits was attributable to time
certificates which increased $9.7 million, partially offset by decreases in
money market and savings accounts of $2.1 million and $333,000, respectively.
The increase in time certificates was the direct result of our marketing
initiatives in this area as well as paying competitive rates on this product.
The decrease in money market and savings accounts was primarily the result of
customers transferring money out of these accounts into more attractive shorter
term certificates of deposit. The movement of customers into attractive rate
time certificates was the direct result of Federal Reserve Board actions, which
has increased the federal funds rate from a historic low of 1.0% in the second
quarter of 2004 to 5.25% by the end of the second quarter of 2006. The increase
in deposits was used to fund loan growth.
13
Borrowings. Federal Home Loan Bank advances decreased $600,000 to $16.9
million at September 30, 2006 from $17.5 million at December 31, 2005.
Principal payments due on other borrowings after September 30, 2006 are
$2.8 million in 2006, $1.7 million in 2007, $425,000 in 2008, $3.9 million in
2009, $1.3 million in 2010 and $6.7 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 September 30, 2006, the three month LIBOR was at
5.37%. Should the Federal Home Loan Bank require repayment of the putable
borrowings on the put dates, the interest cost to replace such borrowings would
likely increase.
Stockholders' Equity. Total stockholders' equity increased $4.6 million to
$9.6 million at September 30, 2006 from approximately $5.0 million at December
31, 2005. The increase in stockholders' equity of $4.6 million was attributable
to our raising $4.8 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 11.03% at September 30, 2006 compared to 6.54% at December 31, 2005.
Comparison of Results of Operations for the Three Months Ended September 30,
2006 and 2005.
General. We recorded net income of $36,000 for the three months ended
September 30, 2006 compared with net income of $15,000 for the three months
ended September 30, 2005. The increase in earnings for the three months ended
September 30, 2006 compared with the same period a year earlier was primarily
attributable to an increase in net interest and dividend income of $105,000, an
increase in noninterest income of $20,000, partially offset by an increase in
noninterest expense of $91,000. Net income for the third quarter was $9,000
($14,000 on a pre-tax basis) higher than anticipated as a result of a change in
the Federal Home Loan Bank ("FHLB") dividend schedule. The FHLB declared and
paid 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 to 91.9% for the three months ended
September 30, 2006 from 96.6% for the three months ended September 30, 2005. 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 September 30, 2006 was 2.75%
as compared to 2.43% for the three months ended September 30, 2005. The increase
in net interest margin period to period was attributable to a change in the
asset mix to 62.7% of average interest-earning assets in loans for the three
months ended September 30, 2006 from 50.8% for the same period in 2005 as well
as an increase in average interest-earning assets by $6.2 million during this
period. In the event we are unable to generate continued commercial and
residential loan 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 $105,000, or 22.5%, to $571,000 for the three months ended September
30, 2006 compared to $466,000 for the three months ended September 30, 2005,
reflecting a $299,000, or 32.5%, increase in interest and dividend income, and a
$194,000, or 42.7%, increase in interest expense. Our interest rate spread was
2.15% for the three months ended September 30, 2006 compared to 2.14% for the
three months ended September 30, 2005. The declaration by the FHLB of a half
year dividend in the third quarter of 2006 resulted in an increase in the
interest rate spread and net interest margin of 7 basis points, respectively,
for the quarter ended September 30, 2006.
Interest and Dividend Income. Total interest and dividend income increased
by $299,000, or 32.5%, to $1.2 million for the three months ended September 30,
2006 compared with $920,000 for the three months ended September 30, 2005. The
increase of $299,000 related to an increase in yields on interest-earning assets
to 5.87% for the three months ended September 30, 2006 from 4.79% for the three
months ended September 30, 2005 coupled with an increase in average
interest-earning assets of $6.2 million, or 8.1%, to $82.4 million for the three
months ended September 30, 2006 from $76.2 million for the same period in 2005.
Interest income on loans increased $270,000, or 45.8%, to $860,000 for the
quarter ended September 30, 2006 from $590,000 for the same period in 2005,
primarily due to a $13.0 million increase in average loans to $51.7 million for
the quarter ended September 30, 2006 from $38.7 million for the same period in
2005, and to a lesser extent an increase in loan yields to 6.60% for the quarter
ended September 30, 2006 from 6.05% for the same period in
14
2005. The increase in average loans was attributable to a $6.9 million increase
in one- to four-family residential and home equity loans, a $5.2 million
increase in commercial, short-term construction and commercial real estate loans
as well as a $985,000 increase in consumer loans. The increase in average loan
yields to 6.60% for the quarter ended September 30, 2006 from 6.05% for the same
period in 2005 was due to a greater concentration of new loans in commercial,
commercial real estate and construction lending as well as an increase in the
prime rate of 200 basis points since June 2005.
Interest and dividend income on investment securities, Federal Home Loan
Bank stock and interest-bearing deposits with other financial institutions
increased $29,000 for the three months ended September 30, 2006 to $359,000 from
$330,000 for the three months ended September 30, 2005. The increase was
primarily the result of an increase in the overall yield on total investments to
4.64% for the quarter ended September 30, 2006 from 3.50% for the same period in
2005, partially offset by a decrease in the average balance of the investment
portfolio by $6.8 million to $30.7 million for the quarter ended September 30,
2006, from $37.5 million for the same period in 2005. The increase in yield was
due to the repricing of Ginnie Mae adjustable-rate mortgage-backed securities by
1% on their reset dates, the purchase of higher yielding securities as well as
the receipt of $14,000 in additional FHLB dividend due to the change in the FHLB
dividend schedule as noted above. The decrease in the average balances in the
investment portfolio was 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 $194,000 to $648,000
for the three months ended September 30, 2006 from $454,000 for the three months
ended September 30, 2005. The increase of $194,000 related primarily to an
increase in the average overall cost of interest-bearing liabilities to 3.72%
for the quarter ended September 30, 2006 from 2.65% for the same period in 2005.
Interest expense on deposits increased $195,000 to $496,000 for the quarter
ended September 30, 2006 from $301,000 for the same period in 2005. The increase
was primarily due to an increase in the average balances of time certificates of
$7.4 million to $38.6 million for the quarter ended September 30, 2006 from
$31.2 million for the same period in 2005, coupled with an increase in the
average costs of time certificates to 4.56% for the quarter ended September 30,
2006 from 3.21% for the same period in 2005. Average time certificates comprised
72.7% of interest-bearing deposits for the quarter ended September 30, 2006
compared with 64.1% for the same period in 2005. The increase in the average
balances of time certificates was the direct result of our advertising interest
rate specials and offering competitive rates on time certificates. Average
savings deposits decreased $3.0 million to $14.5 million for the quarter ended
September 30, 2006 from $17.5 million for the same period in 2005, partially
offset by an increase in costs on these deposits to 1.45% for the quarter ended
September 30, 2006 from 1.10% for the same period in 2005. The decrease in
savings deposits was primarily attributable to customers transferring these
deposits to more attractive short-term time certificates.
Allowance for Loan Losses. There was a $254 provision for loan losses for
the three months ended September 30, 2006 compared to no provision during the
same period of 2005. The provision for loan losses of $254 is entirely related
to an overdraft program which was initiated in December 2005 for consumer and
business checking customers. Total nonperforming assets decreased $9,000 to $0
or 0.00% of total assets at September 30, 2006 compared to $9,000, or 0.01% of
total assets at September 30, 2005. The allowance for loan losses as a percent
of total loans was 0.59% for September 30, 2006 compared with 0.77% at September
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 62.4% and
66.2% of total loans at September 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.
Total Noninterest Income. Noninterest income increased $20,000, or 45.5%,
to $64,000 for the three months ended September 30, 2006 from $44,000 for the
three months ended September 30, 2005. The increase for the three months ended
September 30, 2006 compared to the same period in 2005 was solely attributable
to an increase in service charges on deposits of $20,000. The increase in
service charges was 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.
15
Total Noninterest Expenses. Noninterest expenses increased $91,000, or
18.5%, to $584,000 for the three months ended September 30, 2006 compared to
$493,000 for the three months ended September 30, 2005. The increase was
primarily attributable to a $66,000 increase in salaries and benefits expense
and a $20,000 increase in professional fees. The increase in salaries and
employee benefits expense was related to an increase in average full-time
equivalent employees to 26 for the third quarter of 2006 from 22 for the same
period in 2005 and the related benefit costs. Also, the Company recorded $9,000
in expense related to stock option and recognition and retention plans for
employees and directors for the third quarter of 2006. The increase in
professional fees was related to a search fee for the anticipated hiring of a
new commercial loan officer as well as additional costs related to commercial
credit and loan review.
Comparison of Results of Operations for the Nine Months Ended September 30, 2006
and 2005.
General. We recorded net income of $66,000 for the nine months ended
September 30, 2006 compared with a net loss of $60,000 for the nine months ended
September 30, 2005. The increase in earnings for the nine months ended September
30, 2006 compared with the same period a year earlier was primarily attributable
to an increase in net interest and dividend income of $282,000, an increase in
noninterest income of $8,000, partially offset by an increase in noninterest
expense of $69,000 and an increase in the provision for loan losses of $13,000
as compared to a benefit of $20,000 for the prior comparable period.
Net Interest and Dividend Income. Net interest and dividend income
increased $282,000, or 21.7%, to $1.6 million for the nine months ended
September 30, 2006 compared to $1.3 million for the nine months ended September
30, 2005, reflecting a $760,000, or 30.0%, increase in interest and dividend
income, and a $478,000, or 38.7%, increase in interest expense. Our interest
rate spread was 2.26% for the nine months ended September 30, 2006 compared to
2.09% for the nine months ended September 30, 2005. The increase in interest
rate spread was a combination of a change in the mix of assets to higher
yielding loans, 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 and dividend income increased
by $760,000, or 30.0%, to $3.3 million for the nine months ended September 30,
2006 compared with $2.5 million for the nine months ended September 30, 2005.
The increase of $760,000 related to an increase in the yields on
interest-earning assets to 5.64% for the nine months ended September 30, 2006
from 4.61% for the nine months ended September 30, 2005 coupled with an increase
in average interest-earning assets of $4.5 million, or 6.1%, to $78.0 million
for the nine months ended September 30, 2006 from $73.5 million for the same
period in 2005. Interest income on loans increased $751,000, or 46.5%, to $2.4
million for the nine months ended September 30, 2006 from $1.6 million for the
same period in 2005, primarily due to a $11.9 million increase in average loans
to $48.8 million for the nine months ended September 30, 2006 from $36.9 million
for the same period in 2005, and to a lesser extent an increase in loan yields
to 6.49% for the nine months ended September 30, 2006 from 5.85% for the same
period in 2005. The increase in average loans was attributable to a $7.4 million
increase in one-to-four family residential and home equity loans, a $3.4 million
increase in commercial, short-term construction and commercial real estate loans
as well as a $1.0 million increase in consumer loans. The increase in average
loan yields to 6.49% for the nine months ended September 30, 2006 from 5.85% for
the same period in 2005 was the result of an increase in the prime rate of 200
basis points since June 2005 as well as the origination of new loans at higher
rates during this time period.
Interest Expense. Total interest expense increased by $478,000 to $1.7
million for the nine months ended September 30, 2006 from $1.2 million for the
nine months ended September 30, 2005. The increase of $478,000 related primarily
to an increase in the average overall cost of interest-bearing liabilities to
3.38% for the nine months ended September 30, 2006 from 2.52% for the same
period in 2005, and to a lesser extent, an increase of $2.3 million in average
interest-bearing liabilities to $67.8 million for the nine months ended
September 30, 2006 from $65.5 million for the same period in 2005. Interest
expense on deposits increased $441,000 to $1.2 million for the nine months ended
September 30, 2006 from $796,000 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 $34.6 million for the nine months ended September 30, 2006
from $28.4 million for the same period in 2005, coupled with an increase in the
average costs of time certificates to 4.17% for the nine months ended September
30, 2006 from 3.12% for the same period in 2005. Average time certificates
comprised 68.9% of interest-bearing deposits for the nine months ended September
30, 2006 compared with 61.7% for the same period in 2005. The increase in
average balances of time certificates was the direct result of our advertising
interest rate specials and offering competitive rates on time certificates.
Average savings deposits decreased $2.1 million to $15.6 million for the nine
months ended September 30, 2006 from $17.7 million for the same period in 2005,
partially offset by an increase in costs on these deposits to 1.35% for the nine
months ended September 30, 2006 from 1.02% for the same period in 2005. The
decrease in savings deposits was primarily attributable to customers
transferring these deposits to more attractive short-term time certificates.
16
Interest expense on FHLB advances increased $37,000 to $477,000 for the
nine months ended September 30, 2006 from $440,000 for the nine months ended
September 30, 2005. The increase was primarily due to an increase in average
borrowing costs to 3.61% for the nine months ended September 30, 2006 from 3.01%
for the nine months ended September 30, 2005, partially offset by a decrease in
the average balances of FHLB advances of $1.9 million to $17.6 million for the
nine months ended September 30, 2006 from $19.5 million for the same period in
2005.
Allowance (Benefit) for Loan Losses. The Company recorded a provision for
loan losses of $13,000 for the nine months ended September 30, 2006 compared
with a benefit for loan losses of $20,000 for the nine months ended September
30, 2005. The provision for loan losses of $13,000 was entirely related to an
overdraft program which was initiated in December 2005 for consumer and business
checking customers. The benefit of $20,000 in 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
0.59% at September 30, 2006 and 0.77% at September 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 increased $8,000 to $198,000
for the nine months ended September 30, 2006 from $190,000 for the same period
in 2005. The increase for the period was attributable to an increase in service
charges on deposits of $60,000, partially offset by a decrease in net gains on
sales of available for sale securities of $14,000 and net gains on sales of
loans of $38,000. The increase in service charges was 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. The decrease in net gains on sales of loans was due to the
sale of $499,000 of United States Small Business Administration guaranteed loans
during the nine months ended September 30, 2005 compared with $0 for the same
period in 2006.
Total Noninterest Expenses. Noninterest expenses increased $69,000, or
4.3%, to $1.7 million for the nine months ended September 30, 2006 from $1.6
million for the same period in 2005. The increase was primarily attributable to
a $51,000 increase in salaries and benefits expense, and to a lesser extent,
increased costs related to equipment depreciation and maintenance contracts on
data processing equipment, partially offset by a decrease in professional and
marketing expense. The increase in salaries and employee benefits expense was
related to an increase in average full-time equivalent employees to 24 for the
nine months ended September 30, 2006 from 22 for the same period in 2005 and the
related benefit costs, partially offset by an increase in deferrals of loan
origination costs for the nine months ended September 30, 2006 compared with the
same period in 2005. In addition, the Company recorded $28,000 in expense
related to stock option and recognition and retention plans for employees and
directors for the nine months ended September 30, 2006.
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 September 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 September 30, 2006 and December 31,
2005, respectively.
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars 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%
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
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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 September 30, 2006, the total approved loan commitments unfunded
amounted to $8.1 million, which includes the unadvanced portion of loans of $6.7
million. Certificates of deposit and advances from the Federal Home Loan Bank of
Boston scheduled to mature in one year or less at September 30, 2006, totaled
$31.3 million and $4.0 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 September 30, 2006, we had total collateral available to support an
additional $27.2 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 $15.8 million in borrowing
capacity at September 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 stockholders' equity totaled $9.6
million or 11.03% of total assets at September 30, 2006 compared to
approximately $5.0 million or 6.54% of total assets at December 31, 2005.
As of September 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
September 30, 2006 were as follows: total risk-based capital - 19.49%, Tier I
risk based - 18.79% and Tier I leverage (core capital) - 9.50%. 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:
o Purchasing adjustable rate securities,
o Originating and purchasing adjustable rate loans,
o Originating a reasonable volume of fixed rate mortgages,
o Managing our deposits to establish stable deposit relationships,
o Using Federal Home Loan Bank advances and pricing on fixed-term
non-core deposits to align maturities and repricing terms, and
o 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.
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 September 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
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Monadnock Bancorp, Inc.
Date: November 10, 2006 /s/ William M. Pierce, Jr.
--------------------------
William M. Pierce, Jr.
President and Chief Executive Officer
Date: November 10, 2006 /s/ Karl F. Betz
----------------
Karl F. Betz
Senior Vice President and Chief
Financial Officer
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